Law Offices - Kenneth D. Sisco, Attorney - Personal Information
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Revocable Living TrustsFOR AVOIDANCE OF PROBATE AND REDUCTION OF ESTATE TAXESThere are two broad categories of persons who don't need to concern themselves with estate planning and asset protection. Those who don't own anything, and will never own anything; and those who know precisely when they will die or be named in a lawsuit. If you fall into either of those categories, you might want to go back to watching TV, because reading anymore of this, will be wasting your time. Now, it is a perfectly legitimate estate plan to have your will read, "being of sound mind, I spent it all." Unfortunately, (unless you fall into that second group of people that know precisely when they are going to die or be sued), in order to die a pauper, you must live a pauper; a most unpleasant prospect for most of us. Indeed, most us dream of basking in the glory of our accumulations right up to the last moment, and then passing a vast fortune on to our children, even if they don't deserve it, and would be better off if they had to earn it as we did. To choose to die a pauper, is one thing; to die a pauper because you failed to protect yourself, and your family, is quite another. Basically, there are three goals at which we aim, when establishing an asset protection and estate plan. First we try to protect our estate from lawsuits and creditors; second, we hope to reduce or eliminate estate taxes; and finally, we try to reduce income taxes along the way. Fortunately, there are dozens of tools that we can easily and inexpensively use to protect our estate, depending on our individual circumstances. In this article I will discuss the Revocable Living Trust – the cornerstone of any estate plan, aimed primarily at the problem of avoiding probate and reducing estate taxes. 1. Where there's a will there's a way. Before discussing the revocable living trust, however, often it is
productive to give some attention to the simplest of the estate planning
tools; the will. Unfortunately, there is a great deal of misunderstanding
surrounding both Wills and Trusts, and confusion about what each is designed
to accomplish. Having a will will not avoid probate. Not having a will, will
not result in all your property going to the state. Having learned those two
facts, many clients have wondered why they should have a will. In A will will allow you to name a guardian for your children; it will control the distribution of separate property; it will permit specific bequests and devises; and it will permit you to allow your executor to serve without posting a bond, which will , all by itself, usually save the estate the cost of preparing a will. 2. The Revocable Living Trust. By means of a will and perhaps a family limited partnership, we have gone a long way toward assuring that we will still have an estate when we pass on, and that it will be transferred to those we intend. Moreover, we have even taken some steps toward favorably reducing the size of our estate, thus avoiding some taxes and administrative expenses, and we may have even eliminated some income taxes along the way. But there is still more that can be done easily and inexpensively, by means of a revocable living trust. a. Avoidance of probate Probate is the settling of an estate through the court system. Whether you have a will or not, except for very small estates and a few other exceptions, like community property or property held in joint tenancy, all property in your name (and even some property not in your name) at the time of your death must go through probate to be properly transferred. The shuffling of paperwork, accounting for assets, income, and expenses of the estate, can take many months or even years. If there is a will contest by a disgruntled heir, the probate could take even longer. In the meantime, permission from the court must be obtained to sell or distribute the assets, and all of this is a public record, available to anyone that wants to go to the courthouse to look. Indeed, many attorneys make an excellent living doing little else than marching estates through the courts. Needless to say, its nice to avoid some of that. However, having said
that, it should also be pointed out that probate has one advantage that
should not be overlooked. As part of the probate procedure, at least in b. Maintenance of Privacy It was mentioned before that a probate is completely public. The other side of that coin, however, is that a trust is completely private; both before and after the death of the party creating the trust. There are several circumstances under which this is important. For example, suppose a father has four children, one of which has proven himself unworthy of an inheritance. The father can put the bulk of his estate in trust, which privately completely ignores the wayward son; but have a small estate pass under his public will that leaves his entire estate to his four children to be divided equally. c. Control from the grave A major concern of many persons attempting to plan the management of their estate, is the fear that the surviving spouse, because of age, mental or physical incapacity, or simply inexperience, will be taken advantage of. It is a simple matter to provide in the trust document that upon the death of the first spouse, an adult child or other trusted individual or corporation, will join the surviving spouse as successor trustee, to better manage the estate. An even greater concern of some estate planners is the fear that the surviving spouse will remarry, start a new family and then neglect the children of the first spouse. This is especially true if there are children from a previous marriage. It is an easy matter to draft the trust instrument so that at least, the assets of the exemption trust will go to children of the first spouse to pass away. d. Reduction of estate taxes At the risk of going beyond a mere introduction to estate planning, in order to understand how a revocable trust can reduce estate taxes, it is necessary to have some understanding as to how estates are taxed. A person's estate includes property held in his name; his share of property held along with others, such as community property or property in joint tenancy; the face value of life insurance owned; and any property over which the person has certain powers of disposition, such as property over which the person has a power of appointment or trust property. Upon death, a person's estate, in excess of $1,000,000, (increasing to $3,500,000 in 2009) is taxed at a rate beginning at 37% and going up to 48% percent. An exception to this scheme, is that a person can leave an unlimited amount to his or her spouse without any estate or gift tax at all. To focus on the problem we are trying to solve with a trust, let's look at what happens to a married couple that never quite gets around to setting up a trust. When the first spouse passes away, assuming he or she leaves everything to his or her spouse, there is no tax, because you can give an unlimited amount to your spouse tax free. But let's assume that the surviving spouse now has a combined estate worth in excess of the exemption. When the surviving spouse passes away, he or she will get the individual exemption, but the remaining estate, will incur a veru significant tax, not to mention administration fees.. Now notice what happens when a properly drafted trust has been put in place. Assume again that the couple has an estate worth in excess of the combined exemption. When the first spouse dies, the trust estate is divided into two halves. The first half is called the survivor's trust, and will consist of the surviving spouse's one half of the property. The surviving spouse will have complete and absolute control over this part, even to the extent that he or she can revoke the trust. The second half is called the exemption trust. Upon the death of the first spouse this trust becomes irrevocable, and will continue to be held in trust, usually for the children of the couple. However, the surviving spouse receives the income from this trust, and is usually the trustee, with all the powers that a trustee normally has over the trust property. For practical purposes, little changes. The surviving spouse continues to enjoy the property. What does change however, is the tax consequences. Assuming the value of the estate remains the same, upon the death of the surviving spouse, the amount, up to the amount of the exemption, in the survivor's trust will transfer tax free according to the wishes of the surviving spouse. Moreover, the amount remaining in the exemption trust, will transfer tax free, up to the amount of the exemption, because that amount by-passes the estate of the surviving spouse. The bottom line is a very significant estate tax savings, not to mention a savings in administration fees, with little loss of control. CLICK HERE For The Cost Of Establishing a Revocable Living Trust Copyright ©1998 |
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