Estate

Asset Protection Business Estate Financial Planning Tax

Living Trusts 101

A trust, like a corporation, is an entity that exists only on paper but is legally capable of owning property. However, a live person called the trustee must be in charge of the property. Further, you can actually be the trustee of your own living trust, keeping full control over all property legally owned by the trust.

Note: Property held in trust that is actually “owned” by the trustees of the trust, subject to the rights of the beneficiaries. The trust itself doesn’t actually own anything.

There are many kinds of trusts. A living trust (also called an inter vivos trust) is simply a trust you create while you’re alive, rather than one that is created upon your death under the terms of your will.

All living trusts are designed to avoid probate. Some also help you save on estate taxes, while others let you set up long-term property management.

Do I need a living trust?
Property you transfer into a living trust before your death doesn’t go through probate. The successor trustee, the person you appointed to handle the trust after your death, simply transfers ownership to the beneficiaries you named in the trust.

In many cases, the whole process takes only a few weeks and there are no attorney or court fees to pay. When the property has all been transferred to the beneficiaries, the living trust ceases to exist.

Is it expensive to create a living trust?
The cost of creating a living trust depends on what you want to achieve. The more complicated a living trust is, the more expensive it will be. Also important to note is that while the fees associated with creating a living will are paid upfront a living trust actually saves you money and time by avoiding probate court.

Is a trust document ever made public, like a will?
A will becomes a matter of public record when it is submitted to a probate court, as do all the other documents associated with probate – inventories of the deceased person’s assets and debts, for example. The terms of a living trust, however, need not be made public.

Does a trust protect property from creditors?
Holding assets in a revocable trust does not shelter those assets from creditors. A creditor who wins a lawsuit against you can go after the trust property just as if you still owned it in your own name.

After your death, however, property in a living trust can be quickly and quietly distributed to the beneficiaries (unlike property that must go through probate). That complicates matters for creditors; by the time they find out about your death, your property may already be dispersed, and the creditors have no way of knowing exactly what you owned (except for real estate, which is always a matter of public record). It may not be worth the creditor’s time and effort to try to track down the property and demand that the new owners use it to pay your debts.

On the other hand, probate can offer a kind of protection from creditors. During probate, known creditors must be notified of the death and given a chance to file claims. If they miss the deadline to file, they’re out of luck forever.

Do I need a trust if I’m young and healthy?
Probably not. At this stage in your life, your main estate planning goals are probably making sure that in the unlikely event of your premature death, your property is distributed how you want it to be and, if you have young children, that they are cared for. You don’t need a trust to accomplish those ends; writing a will, and perhaps buying some life insurance is sufficient.

Can a living trust save taxes?
A simple probate-avoidance living trust has no effect on either income or estate taxes. More complicated living trusts, however, can greatly reduce your federal estate tax bill if you expect your estate to owe estate tax at your death.

If you’re wondering whether you need a living trust give us a call and we’ll help you figure out the answer.

 

Estate Tax

Gift Taxes

In 2011, if you give any one person gifts such as cash or property valued at more than $13,000, you must report the total gifts to the Internal Revenue Service. You may have to pay tax on the gifts, but the person who receives your gift does not have to report the gift to the IRS or pay gift or income tax on its value.

Gifts include both cash and property, including the use of property, without expecting to receive something of equal value in return. For example, if you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift.

There is a lifetime maximum of $5 million and there are some exceptions to the tax rules on gifts. The following gifts do not count against the annual limit of $13,000 in 2011:

  • Tuition or medical expenses that you pay directly to an educational or medical institution for someone’s benefit
  • Gifts to your spouse
  • Gifts to a political organization
  • Gifts to qualifying charities (also deductible on your tax forms for the value of the gifts made)

If you are married, both you and your spouse can give separate gifts of up to the annual limit of $13,000 each or a total of $26,000 in 2011 to the same person without making it a taxable gift.

If you’re confused about gift taxes or need more information,we can help clear up the confusion. Contact our office today.

Asset Protection Estate Financial Planning Tax

Five Hidden Reasons You Need a Will

Most people don’t appreciate the full importance of a will, especially if they think their estate is too small to justify the time and expense of preparing one. And even people who recognize the need for a will often don’t have one, perhaps due to procrastination or a disinclination to broach this sensitive subject with loved ones.

The truth is, almost everyone should have a will. Here are the five basic reasons why:

Reason 1. To Choose Beneficiaries

The intestate succession laws of the state in which you live determine how your property will be distributed if you die without a valid will. For example, in most states the property of a married person with children who dies intestate (i.e., without a will) generally will be distributed one-third to the spouse and two-thirds to the children, while the property of an unmarried, childless person who dies intestate generally will be distributed to his or her parents (or siblings, if the parents are deceased).

These distributions may be contrary to what you want. In effect, by not having a will, you are allowing the state to choose your beneficiaries. Further, a will allows you to specify not only who will receive the property, but how much each beneficiary will receive.

Note: If you wish to leave property to a charity, a will may be needed to accomplish this goal.

Reason 2. To Minimize Taxes

Many people feel they do not need a will because their taxable estate does not exceed the amount allowed to pass free of federal estate tax. These assumptions, however, should be reviewed given the current state of change in the federal estate tax laws. It is important to review and update your will on a regular basis. Most wills were written with the existence of a federal estate tax at a certain level.

Further, your taxable estate may be larger than you think. For example, life insurance, qualified retirement plan benefits, and IRAs typically pass outside of a will or estate administration. But retirement plan benefits and IRAs (and sometimes life insurance) are still part of your federal estate and can cause your estate to go over the threshold amount. Also, in some states, the estate or inheritance tax differs from the federal laws. A properly prepared will is necessary to implement estate tax reduction strategies.

Tip: Changes in the estate tax laws and in the size of your estate may warrant a re-examination of your estate plan.

Reason 3. To Appoint a Guardian

If for no other reason, you should prepare a will to name a guardian for minor children in the event of your death without a surviving spouse. While naming a guardian does not bind either the named guardian or the court, it does indicate your wishes, which courts generally try to accommodate.

Reason 4. To Name an Executor

Without a will, you cannot appoint someone you trust to carry out the administration of your estate. If you do not specifically name an executor in a will, a court will appoint someone to handle your estate, perhaps someone you might not have chosen. Obviously, there is peace of mind in selecting an executor you trust.

Reason 5. To Help Establish Domicile

You may wish to firmly establish domicile (permanent legal residence) in a particular state, for tax or other reasons. If you move frequently or own homes in more than one state, each state in which you reside could try to impose death or inheritance taxes at the time of death, possibly subjecting your estate to multiple probate proceedings. To lessen the risk of this, you should execute a will that clearly indicates your intended state of domicile.

If you need guidance with your will, just give us a call.

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