How Can a Living Trust Help Me Control My Estate?
Living trusts enable you to control the
distribution of your estate, and certain trusts may enable you to
reduce or avoid many of the taxes and fees that will be imposed upon
your death. A trust is a legal arrangement under which one
person, the trustee, controls property given by
another person, the trustor, for the benefit of a
third person, the beneficiary. When you establish
a revocable living trust, you are allowed to be the trustor, the
trustee, and the beneficiary of that trust.
When you set up a living trust, you transfer
ownership of all the assets you’d like to place in the trust
from yourself to the trust. Legally, you no longer own any of the
assets in your trust. Your trust now owns these assets. But, as the
trustee, you maintain complete control. You can buy or sell as you see
fit. You can even give assets away.Upon your death, assuming that you
have transferred all your assets to the revocable trust, there
isn’t anything to probate because the assets are held in the
trust. Therefore, properly established living trusts completely avoid
probate. If you use a living trust, your estate will be available to
your heirs upon your death, without any of the delays or expensive
court proceedings that accompany the probate process. There
are some trust strategies that serve very specific estate needs. One of
the most widely used is a living trust with an A-B provision. An A-B
trust (also known as a bypass trust) enables a married couple to pass
on up to double the exemption amount to their heirs free of estate
taxes. However, with enactment of the 2010 Tax Relief Act,
some couples may no longer need an A-B trust to maximize the estate tax
exemption for both spouses. But before you make a decision about the
use of a bypass trust, there are a number of issues to consider.
First a little background on changes in the estate
tax as a result of the 2010 Tax Relief Act. The law increased the
applicable federal estate tax exemption amount to $5 million (indexed
for inflation after 2011) retroactively to January 1, 2010, with a 35
percent tax rate. The federal estate tax exemption is $5.12 million in
2012. The increased threshold alone eliminates many people from being
subject to the federal estate tax. An interesting new provision is
"portability" of the exemption to the surviving spouse, which allows
surviving spouses to use their spouses' unused exemption plus their
own, enabling a couple to exempt up to $10.24 million from federal
estate taxes in 2012. However, provisions of the 2010 Tax
Relief Act are in effect only through December 31, 2012, unless
Congress amends or extends the law. So in 2013, not only does the
portability provision expire but the federal estate tax exemption is
scheduled to fall from $5.12 million in 2012 to $1 million, which would
subject many more households to the federal estate tax. Furthermore,
many states have their own estate or inheritance tax, or both, and none
currently has portability provisions. This means that when married
couples leave all their assets to their spouses, the surviving spouse
will be able to use only his or her state exemption. Additional
considerations favoring a trust are the ability to shelter appreciation
of assets placed in the trust, to protect assets from creditors, to
benefit children from a previous marriage, and to preserve a married
couple's state estate tax exemptions.
When an A-B trust is implemented, two subsequent
trusts are created upon the death of the first spouse. The assets will
be allocated between the survivor’s trust, or
“A” trust, and the decedent’s trust, or
“B” trust. This will create two taxable entities,
each of which will be entitled to use a personal
exemption. The surviving spouse retains full control of his or
her trust. He or she can also receive income from the deceased
spouse’s trust and can even withdraw principal from it when
necessary for health, support, or maintenance.On the death of the
second spouse, the assets of both trusts pass directly to the heirs,
completely avoiding probate. If each of these trusts contains less than
the exemption amount, these assets will pass to the heirs free of
federal estate taxes.
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