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dlr1234 June
2008 ago

I understand a Living Trust can help avoid probate

I understand a Living Trust can help avoid probate when one dies. But can it also help reduce estate taxes? I have received mixed information on this issue. So if it can in fact help with estate taxes, what are the specific aspects and requirements of a Living Trust that will in fact help reduce estate taxes?

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theLegalGuy June
2008 ago Report Abuse

A simple probate-avoidance living trust has no effect on taxes. The main advantage of a living trust, which it shares with some other estate plans, is that it avoids probate.

According to Wikipedia, "Probate is the legal process of settling the estate of a deceased person; specifically, distributing the decedent's property." A basic revocable living trust does not reduce estate taxes; its only purpose is to keep your property out of probate court after you die.

More complicated living trusts, however, can greatly reduce the federal estate tax bill for people who own a lot of valuable assets. You may want to look into an A / B trust.

The AB trust -- which is revocable as long as both you and your wife are alive -- may in fact be just what you want. It avoids taxes by leaving property to your children, but allowing your surviving wife to use it (and any income it produces) during her lifetime. That way, she does not legally own the property, and it is not subject to estate tax at her death.
http://www .austinlivingtrust.com/taxtrust.html

The New York State Attorney General's site has a great page on living trusts, and you should read it detail for advice.
http://www .oag.state.ny.us/seniors/living_trust.html

"Perhaps the biggest advantage of a living trust is that it does not have to
go through probate, as does a will. However, there are other estate planning
devices which avoid probate, such as a joint tenancy, a life insurance policy,
and in-trust-for bank account (also known as a Totten Trust), and individual
retirement, pension or Keogh accounts.

In addition, living trust salespeople often overstate the cost of probate and
the length of time it takes to probate a simple will."

To your main concern about estate taxes, the above site states the following:

"With proper training, a living trust can be a valuable estate and tax planning
device. However, there is no inherent estate tax advantage to using a living
trust. While a trust may contain provisions taking effect at death which do
save on taxes, the identical tax savings can be contained in the grantor's will
instead of a living trust.
...
There are no substantive income tax advantages in the use of a living trust.
The grantor is treated as the owner of the trust for income tax purposes, and
must report all trust income on his or her personal return under the 'grantor
trust' income tax rules."

So, we see that a living trust, on its own, is not going to let you avoid any
estate tax. The Nolo website has a great resource on their "Estate and Gift
Tax FAQ" page, as it lists some ways to avoid or reduce estate tax.

"Will my estate have to pay taxes after I die?"
http://www .nolo.com/article.cfm/Obj ectID/DAC2BB31-35E4-43B2- 9BDFA70AD3775418/catID/25 7899BC-C5FA-435D-BA9BCC08 3F55357E/309/126/FAQ /

"It depends. The federal government imposes estate tax at your death only if
your property is worth more than a certain amount, which depends on the year of
death. But all property left to a spouse is exempt from the tax, as long as the
spouse is a U.S. citizen."

The Nolo site also outlines a way of reducing estate tax through the process
of gifting.

"Can't I just give all my property away before I die and avoid estate taxes?"
http://www .nolo.com/article.cfm/pg/ 4/objectId/DAC2BB31-35E4- 43B2-9BDFA70AD3775418/cat Id/257899BC-C5FA-435D-BA9 BCC083F55357E/309/126/FAQ /

"Making gifts of $12,000 or less, however, can yield substantial estate tax
savings if you keep at it for several years. Some other kinds of gifts are
exempt from the gift/estate tax as well. You can give an unlimited amount of
property to your spouse, unless your spouse is not a U.S. citizen, in which
case you can give away up to $120,000 per year free of gift tax."

You should read all of the "Estate and Gift Tax FAQ" for other tips.

There are other ways, such as a "Qualified Personal Residence Trust" (QPRT)
which can be used to reduce estate tax. The Asset Protection Law Center site
has an outline of the QPRT process.
http://www .rjmintz.com/qualified-residence-trust.html

"The Qualified Personal Residence Trust (QPRT) is a grantor-type of
trust, specifically permitted under the Internal Revenue Code. You or
you and your spouse can be the trustees of the trust. As such, you
have full power to buy, sell, or refinance the property."

You should read the above article in detail for the full picture.

There are yet other ways to reduce the estate tax, but these can get rather
detailed, so the best advice I

daver June
2008 ago Report Abuse

A Living Trust can be used to avoid or reduce probate, but also can help reduce estate taxes for some individuals or families.

A Living Trust is a legal arrangement, usually drafted by an estate attorney, which creates a separate entity from the individual(s) involved. A Living Trust is called that simply because it is created while you're alive (as opposed to a "testamentary" trust created after death).
The Living Trust document itself names three different parties. The individual (or couple) that establishes the Trust is named the Grantor (also referred to as the Trustor). The Trustee is the person named by the Trust as the controller of the Trust's assets (and in many cases, the Trustees are the same people as the Grantors). On the receiving end, the Beneficiaries are the heirs that will benefit from the Trust once the Grantor's have passed away.

Who Needs A Living Trust?

Almost anyone with an estate of $100,000 or more could benefit from having a living trust. Estates of $100,000 or more are often subjected to probate in their state of residence, which can cost anywhere from 2%-4% of the estate's value in court and legal fees.
The living trust also is useful for individuals subject to estate taxes. Through a living trust, a couple is able to maximize their Marital Exemption to its fullest (more on this later).
Advanced living trusts can be structured for complicated family situations. Re-married spouses, with children from a previous marriage, can use an advanced revocable trust to ensure kids receive their proper inheritance.

Probate

Living Trusts avoid probate, since they are completely private. Because a trust is recognized as a separate legal entity, distributions can be made by a Trustee to named beneficiaries without any involvement from the courts.
The courts maintain no control over the Trust's assets, and do not tie up the assets in a lengthy (and costly) probate process. The Trustee simply distributes assets to named heirs, but only if those assets have actually been placed inside the Trust.

Funding a Living Trust

Once established, almost anything can be placed in a trust: savings accounts, stocks, bonds, real estate, life insurance, and personal property. In "funding" the trust, you simply change the name or title on your assets to the name of your Trust. Many people worry about losing control of assets; however, that is not the case within a carefully-constructed Living Trust.
Because the Trust is essentially controlled by one individual (the Trustee), that person can carry out your wishes when you're not able to. For instance, if you have children from a previous marriage and wish to leave them an inheritance, specific instructions to the Trustee will ensure that they receive what you had requested.
If you're institutionalized or unable to care for yourself anymore, the Trust can still function and make distributions as needed. The Trustee has a fiduciary responsibility to see that your requests are fulfilled exactly. He or she can even provide care and protection for disabled relatives or handicapped children in accordance with your wishes.

Estate Taxes

The Living Trust also minimizes estate taxes by fully utilizing every individual's Marital Exemption. The Estate Tax Credit, as mandated by Congress, currently shelters up to $2 million from estate taxes. With only a will in place, a married couple will receive a single $2 million exemption.
However, if a Living Trust with "A-B Provisions" is in place and one spouse dies, the Living Trust separates into two separate trusts (commonly referred to as an A-B Trust).
In an A-B Trust, each of the two separate trusts receives its own $2 million exemption, meaning a total of $4 million is sheltered from estate taxes.

Any amounts over that $4 million will be subject to estate taxes, with rates climbing as high as 46%.
Living Trusts are easy to start-up and require little on-going maintenance. They afford an extra measure of protection against loss of control, and ensure that your assets remain out of the public record even after your death. However, they do not provide protection against creditors or divorce, and do not reduce estate taxes for estates over $2 million in value ($4 million if married). Each family's situation is different. Some will benefit from a living trust, while others may not.
If you are married or have assets over $100,000, you owe it to your family to investigate the best means to preserve your hard-earned wealth. And for estates over $2 million, you may want to combine a living trust with another advanced estate planning technique.

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