Is There a Trap Lurking in the Language of Your Will?

Have you checked your will lately–or your spouse’s? If not, there may be a trap lurking in the language that could cause an unintended calamity after death.   That’s according to the Wall Street Journal.

Here’s why. Since 2001 the federal estate tax exemption has stepped up from $675,000 to its current level of $3.5 million per individual or, with planning, $7 million per couple.

Customarily, lawyers have put a “credit shelter” or “bypass” trust provision into the will of each partner in a married couple. This allows the couple to take full advantage of both individual exemptions. At the death of the first spouse, some assets go into a bypass trust that the other can draw on if necessary. These assets escape tax at the second spouse’s death and pass directly to heirs.

When the estate tax exemption was $2 million and below, bypass trusts were especially important to those who were affluent but not hugely wealthy. Used properly, they helped shelter the greater part of a couple’s assets from estate tax. If each spouse instead left all his or her assets outright to the other, in many cases the value of one exemption was lost and unnecessary taxes had to be paid upon the death of the second spouse.

The current trap mainly affects those couples who benefited most from bypass trusts in the past—those with up to, say, $4 million in assets. The problem lies in the wording of many wills drafted even a few years ago, which often directs that the “full amount” of the estate tax exemption go into the bypass trust when the first spouse dies. If the language of the will hasn’t changed while the exemption has grown, the bulk of a couple’s assets could in some cases wind up in a bypass trust after the death of the first spouse, leaving the survivor with little or nothing outright.  Now that’s a scary thought.

Click on the link below to read this article in its entirety.

http://online.wsj.com/article/SB10001424052748704107204574475191568801238.html