Recently, the “American Taxpayer Relief Act,” was enacted, which has permanently enlarged the estate tax exemption to $5,250,000 per person (for 2013). It also permits a married couple to effectively double their exemption even without special estate tax planning.
By comparison, before this, when you created your trust the estate tax exemption was much smaller, and special tax planning was required to minimize estate taxes. I usually would have recommended a form of trust, usually a Living Trust with a Bypass Sub-Trust built into it, which would have paid attention to the lower estate tax exemption. A Bypass Sub-Trust has also been known as a “B Trust,” an "Exemption Trust", a "Family Trust", and/or a "Credit Shelter Trust".
Bypass Trusts typically require that, on the death of the first spouse, a share of the couple’s assets be transferred into an irrevocable sub-trust called the “Bypass Trust”, rather than to the survivor directly. This preserves the first spouse’s estate tax exemption for later use at the survivor’s death. Without the Bypass, the first spouse’s exemption could potentially be unclaimed and lost and all trust assets at the survivor’s death would be sheltered by only the survivor’s one exemption and the excess (if any) was exposed to an estate tax at a rate as high as 55%. Understandably, couples went to great lengths to avoid that tax.
However, Bypass Trusts often presented its own set of issues, such as: (1) not taking into consideration change in family circumstances, and the Bypass Trust would prevent the survivor to lose the right to make any changes despite this; (2) restrictions on the survivor’s access to the Bypass assets; (3) problematic when applying for cerain long-term care benefits; and (4) it usually required the preparation of separate accounting and income tax returns during the lifetime of the survivor. Thereby, surviving spouses typically found the restrictions overly burdensome.
Two important new developments arrived with the new law: (a) as of 2013, the amount of the estate tax exemption has now permanently increased to $5,250,000 per person, to be annually adjusted for inflation, and (b) the unused portion of the first spouse’s full exemption is now preserved for use by the second spouse even without the use of the restrictive Bypass Trust, effectively doubling the exemption for most couples.
In view of these new developments, couples with Bypass Trusts created for estate tax purposes under the old law should have their trusts reviewed and, where appropriate, consider eliminating the mandatory funding feature at the first spouse’s death. Instead, they might now consider plans which give the survivor the option of doing postmortem planning after the first death, e.g. by funding a portion of trust assets into an optional Disclaimer Trust. The Disclaimer Trust would then operate as a tax-saving Bypass Trust if that later appeared necessary due to the increase in value of the couple’s estate.
In that sense, I suppose you could say that the Bypass Trust has gone the way of the Dinosaur for most middle income estate plans, where it is unlikely that the couple’s estate would ever exceed two exemptions, i.e. $10,500,000 (for persons dying in 2013), and inflation indexed thereafter.
An exception to the above recommendation: The use of the mandatory Bypass Trust is still useful for non-tax purposes, e.g. in situations involving second marriages. Here, each spouse usually wishes to provide financial security for the survivor, but also wishes to preserve a portion of assets for his/her own children. Under these circumstances, a Bypass Trust can still help these couples achieve their estate planning goals.
Did you know that individuals who are 70½ or older are able to make special gifts to charity without taxes on their distibution from their IRA? Congress just passed legislation to extend the IRA charitable rollover for 2012 and 2013. This permits individuals who took a taxable distribution from their IRA in December 2012 a way to avoid taxes on that distribution by making a gift to a charity in January 2013. So you can convertyour taxable IRA distribution and potentially reduce your taxes, while hepling your favorite charity! Wonderful!!!
1. Why do I need an estate plan?
Most of us spend a considerable amount of time and energy in our lives accumulating wealth. With this, there comes a time to preserve wealth both for enjoyment and future generations. A solid, effective estate plan ensures that your hard-earned wealth will remain intact as it passes to your beneficiaries, instead of being siphoned off to government processes and bureaucrats.
2. What if I don't create an estate plan, won't the government provide one for me?
YES. But your family may not like it. The government's estate plan is called "Intestate Probate" and guarantees government interference in the disposition of your estate. Documents must be filed and approval must be received from a court to pay your bills, pay your spouse an allowance, and account for your property--and it all takes place in the public's view. If you fail to plan your estate, you lose the opportunity to protect your family from an impersonal, complex governmental process that can become a nightmare. Then there is the matter of the federal government's death taxes. There is much you can do in planning your estate that will reduce and even eliminate death taxes, but you don't suppose the government's estate plan is designed to save your estate from taxes, do you? While some estate planners favor Wills and others prefer a Living Trust as the Estate Plan of Choice, all estate planners agree that dying without an estate plan should be avoided at all costs.
3. When do I need a Living Trust, and not just a Will?
A Will is a legal document that describes how your assets should be distributed in the event of death. The actual distribution, however, is controlled by a legal process called probate, which is Latin for "prove the Will." Upon your death, the Will becomes a public document available for inspection by all comers. And, once your Will enters the probate process, it's no longer controlled by your family, but by the court and probate attorneys. Probate can be cumbersome, time-consuming, expensive, and emotionally traumatic during a family's time of grief and vulnerability. Con artists and others with less-than-pure financial motives have been known to use their knowledge about the contents of a will to prey on survivors. A Living Trust avoids probate because your property is owned by the trust, so technically there's nothing for the probate courts to administer. Whomever you name as your "successor trustee" gains control of your assets and distributes them exactly according to your instructions. There is one other crucial difference: A Will doesn't take effect until your death, and is therefore no help to you during lifetime planning, an increasingly important consideration since Americans are now living longer. A Living Trust can help you preserve and increase your estate while you're alive, and offers protection should you become mentally disabled.
4. Who will take care of me I have a disabling injury or illness or become mentally disabled and have no estate plan or just a Will?
Unfortunately, you would be subject to "living probate," also known as a conservatorship or guardianship proceeding. If you become mentally disabled before you die, the probate court will appoint someone to take control of your assets and personal affairs. These "court-appointed agents" must file a strict accounting of your finances with the court. The process is often expensive, time-consuming and humiliating.
5. How can I set up a Living Trust and be my own trustee?
Most people act as their own trustees. If you are married, you and your spouse can act as co-trustees. And you will have absolute and complete control over all of the assets in your trust. In the event of a mentally disabling condition, your hand-picked successor trustee assumes control over your affairs, not the court's appointee.
6. Will a Living Trust avoid income taxes?
NO. The purpose of creating a Living Trust is to avoid living probate, death probate, and reduce or even eliminate federal estate taxes. It's not a vehicle for reducing income taxes. In fact, if you're the trustee of your Living Trust, you will file your income tax returns exactly as you filed them before the trust existed. There are no new returns to file and no new liabilities are created.
7. Can I transfer real estate into a Living Trust?
YES. In fact, all real estate should be transferred into your Living Trust. Otherwise, upon your death, depending on how you hold the title, there will be a death probate in every state in which you hold real property. When your real property is owned by your Living Trust, there is no probate anywhere.
8. Is the Living Trust some kind of loophole the government will eventually close down?
NO. Living Trusts have been recognized a legal instrument for centuries. The government really has no interest in making you or your family suffer a probate that will only further clog up the legal system. A Living Trust avoids probate so that your estate is settled exactly according to your wishes.
9. Isn't a Living Trust only for the rich?
NO. A Living Trust can help anyone protect his or her family from unnecessary probate fees, attorney's fees, court costs and federal estate taxes. In certain circumstances even individuals with small estates can derive meaningful benefits
10. Can any attorney create a Living Trust?
YES, but you would be better off choosing an attorney whose practice is focused on estate planning.