Estate planning documents that include built-in flexibility enabling an opt-in / opt-out approach to future changes in the law or circumstances are products of excellent work. The drafter needs to keep a crystal-ball perspective as to what might reasonably occur in the client’s future in order to move in the direction of this kind of excellent work. On the other hand, it is much easier to prepare an average, static, mediocre document.
There are dozens of reasons to maintain this crystal-ball perspective, and here is simply one important example:
As a broad proposition, I find no reason for using the old “By-Pass Trust” design for a married couple’s estate planning. This is the garden-variety “By-Pass Trust” that has been part of a married couple’s A-B trust estate plan for the past 30-plus years.
Rather, I prefer a QTIPable By-Pass Trust that provides essential income tax planning options not available with the above old By-Pass Trust design.
Why this importance of income tax options?
Because I am convinced our estate tax regime is continuing to move in the direction of the Canadian system where property gains will be taxed at death for income tax purposes, regardless of whether a person is over or under the threshold for estate tax. The QTIP trust likely will provide an optimal, effective response to reducing this income tax exposure.
As an example of these income tax headwinds we face, the federal government’s February 2015 “General Explanation of the Administration’s Fiscal Year 2016 Revenue Proposals” includes dozens of possible changes in the income tax law at death for certain taxable “deemed realization” events. Click here to see these 2016 revenue proposals.
Some practitioners by personality are simply not comfortable with the notion of change. Some also will continue to argue for the old-style By-Pass Trust as being necessary so that the surviving spouse’s children and descendants are included with the surviving spouse as beneficiaries of the trust. But, as an important aside, my 20+ years of lawyering make me conclude most children and descendants try and overreach whatever is available to them from the By-Pass Trust, especially when their mother is the surviving spouse. To the contrary, I prefer that the surviving spouse possess the utmost in independence and financial autonomy without this kind of overreaching.
But, again, my predominant objection to this 30-year old By-Pass Trust approach is that it simply does not provide income tax planning options.