Most of the time, savings from
estate planning and living trusts comes from avoidance of
attorney's fees and probate expenses. However, there are
significant estate tax considerations as well. While living
trusts do not save estate taxes, in and of themselves, they do
provide a planning vehicle to fully utilize each individual's
estate tax exemption or estate tax credit. The estate tax
exemption as of January 1, 2011 shelters up to $5,000,000 from estate taxes per individual.
That's $10 million per married couple when planning is done
properly. For now, the estate tax exemption is so high
that it simply does not effect most of our clients. However, the
$5 million exemption is not permanent. It was set to return to
the 2001 amount of $1 million per individual, but Congress
delayed that for two years. It is a bit confusing, but for now
and through the end of 2012 the exemption is $5 million.
So how does a trust help? Other types of
estate planning like a will, joint tenancy, or no planning at
all may result in a married couple receiving only a single exemption
instead of the two they should receive.
However, if a
Living Trust with "A-B Provisions" is in place and one spouse
dies, the Living Trust splits into two separate trusts (commonly
referred to as an A-B Trust). In an A-B Trust, each of
the two separate trusts essentially represents each of the two
spouses and provides a planned way to capture both exemptions.
Again, with the exemption currently set for $5 million each,
this type of planning is not a concern for many, but if the
exemption resets to $1 million each in 2013, many more people
will be effected.
Proper Planning will Avoid
Capital Gains Taxes for your Heirs
Also important, but less
discussed, is the favorable stepped-up basis and probate
avoidance features of property when held in a living trust.
Especially if you own any appreciated real estate investments
like rental property. Many people use joint tenancy as a vehicle
to avoid probate. Unfortunately, it has proved to be a taxation
disaster for many because they focused on avoiding probate, but
not on avoiding capital gains taxes. In joint tenancy, when one
spouse passes away, the surviving spouse only receives a partial
stepped-up basis on investments. If the properties are sold, the
there can be significant amounts of capital gains taxes due
which were completely avoidable with proper planning. If you
own appreciated assets, especially real estate, it is absolutely
critical for you to do proper estate planning.