What is a Living Trust?
Living trusts are important components of estate plans. A living trust is a part of estate planning document prepared while someone is still alive. For a trust to work the way it is designed to work, a person must transfer most assets to a living trust. Title to some assets cannot be transferred to a trust. For example, IRA accounts cannot be transferred. While a person is alive, that person is the trustee of the trust. Since that person is the trustee, they manage the daily operations of the trust while they are alive and well. Usually, while a person is alive and has the capacity, the trust is revocable. Revocable means that they have full control over the assets and that they can revoke the trust, amend or change the terms of the trust, cancel the trust, or change the beneficiaries of the trust. A successor must be selected for trustees in the trust. The successor trustee is the person(s) who manage the trust after the living trustee is no longer able to do so.
Why prepare a Trust?
In the event the trustee becomes incapacitated or dies, the successor trustee steps in and manages the trust. If properly funded, the selection of the successor trustee is an extremely useful estate planning tool in avoiding a conservatorship proceeding. The primary successor trustee is usually the spouse/married. For most unmarried persons, the successor trustee can be a child, a bank, or another person. The successor Trustee can give income and principal for the trustee benefit while the trustee is still alive.
Tax Planning Opportunity
For people that are married, the trust can take advantage of what is called a marital deduction and can save a substantial amount of estate taxes if appropriately arranged. Each person(s) is allowed a transfer a limit amount if funds during their lifetime(s), or after their death, tax free. In 2007 and 2008, the amount that could pass without federal estate tax was $2,000,000. In 2009, this amount was increased to $3,500,000.
These exemptions are called exemption equivalent amounts or unified credits. This means that if a married couple's trust is created properly, a couple can transfer up to $4,000,000 by using the marital deduction which is not taxed. If the married couple does not take advantage of the marital deduction and that estate plan is not drafted properly by leaving all of estate to him or her to the other spouse, then that couple loses one of their unified credits. Doing so can result in a $2,000,000 loss and can cause a substantial amount of estate tax. This is just another reason why it is critical to hire a qualified lawyer to assist with estate planning.
To take advantage of both exemption equivalent amounts (previously named unified credit), a married couple can create an AB trust. When both spouses are alive and well, the A and the B Trust are totally revocable. The income would be paid to both spouses. When one spouse dies, the trust would be separated into two subtrusts. One trust is called a decedent's trust and the other is called the survivor's trust. The decedent's trust contains the deceased spouse's marital share of the assets. The decedent's trust becomes irrevocable on the death of the first spouse. The principal of the decedent's trust is available to the surviving spouse if he or she needs it for his or her health, education, support or maintenance. To protect the decedent spouse's wishes, the surviving spouse cannot change this aspect of the trust. However, all income of the decedent's trust will usually be distributed to the surviving spouse. When the surviving spouse dies, the balance of each subtrust is distributed to the beneficiaries of that trust.
The surviving spouse's portion or share is referred to as the survivor's trust. The survivor's subtrust remains revocable by the surviving spouse. The surviving spouse can use all the assets in the survivor's trust, change/edit/amend that subtrust, change beneficiaries, and cancel (revoke) the trust. All of the income and principal of the subtrust would be given or paid to the surviving spouse. When the surviving spouse is deceased, the remaining balance of the survivor's trust would then be distributed to the beneficiaries of the survivor's trust.
A benefit of AB Trust planning is that both spouses can use the exemption equivalent amount and thus take advantage of significant tax savings.
In many cases, the biggest advantage of carefully created trust planning is avoiding probate. Heirs can benefit by saving between two and ten percent of the gross estate the use of proper estate planning. In addition, the estate plan can eliminate a substantial amount of time taken in probate administration.
The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.
Copyright © 2010 by Law Offices of Dawn Getty Sutphin. All rights reserved. You may reproduce materials available at this site for your own personal use and for non-commercial distribution. All copies must include this copyright statement.