Some of the techniques for estate planning most popular in the past are not nearly as helpful today and advisors should be aware of the changes in counseling their clients. For example, one of the standard building blocks of any estate plan for married persons was the credit shelter or bypass trust. This trust was very important to ensure the credit of each person was fully utilized to protect the maximum amount of assets from estate taxation. The changes in the federal estate tax laws, however, render this trust moot for many clients given the much higher individual exemption coupled with the portability of the exemption. Use of the exemption at first death, which resulted in the funding of the credit shelter or bypass trust, often is no longer necessary and clients can wait until second death to apply that exemption.
Unfortunately, many planners, and even some software developers, have not kept up with these changes in the law. Plans developed under prior law or utilizing software with a focus on the bypass or credit shelter trust may well be less effective in serving clients today. In smaller estates, a requirement that on first death a bypass trust should be fully funded may having a damaging impact where little or no assets are left to the survivor and state estate taxes may be higher than necessary with a different plan in place.
Another aspect of the estate plan that often gets little attention, particularly for those still using outdated approaches to the plan, may be the income tax liability. It will be important for planners and their clients to be aware of the income tax situation currently and at and after the first death. Careful planning can help minimize the income taxes which, in a multi-million dollar estate escaping any federal estate tax, can be significant.
The upshot is for clients and advisers not to get stuck in the rut of basic estate planning from five or ten years ago but to move forward and take advantage of the current laws and favored techniques.