Arden Dale for the Wall St Journal writes: Many estates are exempt from federal tax under rules that went into effect this year, so some of the trusts created to protect that wealth from taxes are no longer needed.
But terminating a trust without breaking the Internal Revenue Service's rules can get complicated. So can steering the assets in one trust to another, which is often what an adviser recommends.
Ohio adviser John E. Roessler has suggested to numerous clients that they terminate so-called AB trusts that were set up to avoid or postpone federal estate taxes. These involve two vehicles: an "A" trust, also known as the bypass trust, and a "B" trust, also called a survivor's trust. Together they shield the estate from estate taxes, let it grow while the surviving spouse is alive, and then be passed on to heirs.
The arrangement protects wealth up to the federal estate tax exemption, and now that that exemption is so high--$5.25 million ($10 million for couples)-- fewer people need it. They are also relatively easy to unwind when both spouses are still alive, because AB trusts are still considered legally revocable during that period. When a spouse dies and assets shift from A to B, that status changes to irrevocable.
One client couple of Mr. Roessler, a 71-year-old radiologist and his 72-year-old wife, has a total estate of about $7.5 million. They had an AB trust that they were planning to modify, but had put off those changes for a while. After Congress acted in March on new tax rules, the plan was changed.
"In this instance, the client's procrastination paid off, because they abandoned the AB trusts," says Mr. Roessler, a senior wealth manager at Budros, Ruhlin & Roe, an advisory firm in Columbus, Ohio, that manages around $1.8 billion.
The couple's wealth was moved to another kind of trust, called a contingent qualified terminable interest property trust, he says. These let the spouse who sets up the trust decide how his or her assets will be divided among heirs, rather than leaving those decisions to the surviving spouse. This can help ensure that children of a first marriage get their fair share. It also gives more power to an executor or trustee--more likely to be a tax professional--than to the surviving spouse.
In other cases, Mr. Roessler has recommended what is called a disclaimer trust. Also a kind of AB trust, this lets a surviving spouse "disclaim," or decline to accept, some property that would have gone into the survivor's trust, so that it instead goes directly to the bypass trust. This effectively gives the surviving spouse more control over the estate, and can also be useful in situations of second marriages.
In many cases these days, it's the client who is starting the conversation with their advisers on revamping their trust arrangements, says Ted Kutscher, a financial adviser in Seattle.
"People say 'I know it's time for us to look at our wills because I know the estate laws have changed and I need to brush up' -- that happens all the time," says Mr. Kutscher, a tax lawyer and principal at Kutscher, Rhodes and Benner, Inc., an advisory firm with about $300 million under management.
Many of his clients also have AB trusts, and he is encouraging some of them to use qualified terminable interest property trusts instead. "It removes the decision-making your spouse has to do and leaves it in the hands of the best advisers to make the right elections at the time," said Mr. Kutscher.
Many advisers and tax attorneys are dealing with terminating clients' qualified personal residence trusts, or QPRTs. These pass ownership of a home, often from a parent to a child, while the owner is alive. A lot of people created QPRTs earlier in the decade when the federal tax exemption was lower, to remove their homes from their estates for tax purposes.
Now, these homeowners may no longer need to worry about federal estate taxes since the exemption is so high. Indeed, some would save more tax by ending the trust before its stated term (often 10 or 15 years), so that the home goes back into their estate. That way, heirs would pay less capital gains when they sell the home eventually.
But the IRS will look closely at anyone who tries to terminate a QPRT before its term, according to numerous advisers. The agency might look suspiciously, for example, if the original owner lived rent-free in the home after the QPRT transferred ownership to someone else.
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