The Living Trust - Law - Living trust has two advantages - The AB living trust saves federal estate tax - Avoids probate - Legal forms
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The AB Living Trust Saves Taxes
Some people must consider federal estate tax when planning their finances. The estate tax occurs when someone dies owning a very large amount of property. Current figures for the estate tax exemption, which depend on the year of death, are as follows.
Year Estate tax exemption
2004-05 $1.5 million
2006-08 $2 million
2009 $3.5 million
2010 No estate tax
2011 $1 million unless repeal is extended
Consider creating a living trust if you expect that your estate or that of you and your spouse may owe the tax. A living trust has two advantages. It avoids probate and also saves on federal estate tax. Without the living trust, surviving spouse's estate will include his or her share of the couple's property plus the property inherited from the deceased spouse and thus incurs estate tax when he dies.
In order to allow your spouse to have the cake and your heirs to eat it too (instead of Uncle Sam), provide an AB trust, or living trust with marital life estate. Technically, this type of trust provides that the surviving spouse is financially secure during his lifetime but lets you pass the remaining value to your children after both spouses die.
To create a living trust, each spouse leaves most of his or her property to an AB trust. The surviving spouse can use that property. At the same time, he doesnt legally own the trust, so it is not subject to estate tax when he dies. When setting up an AB trust, each spouse names final beneficiaries who will receive the trust's property when the surviving spouse dies. Spouses often name the same people -- their children -- as final beneficiaries, but it's not mandatory.
For example, suppose you and your husband own $2 million together. If you each left your $1 million to the other, the surviving spouse would own $2 million, $500,000 of which would be taxable if that spouse died in 2004. To avoid this, you can each leave your $1 million in a living trust naming your children as final beneficiaries. Your $1 million goes into the trust for your husband but because the amount of the trust is less than the federal estate tax exemption, no tax is due.
Note that it is important that, in order to not be considered the legal owner of the trust property, the surviving spouse must stay within the limits of the powers extended by the IRS. The maximum powers, however, are extensive and provide that the surviving spouse:
- may use any amount of the trust property for his or her support and maintenance, in his or her accustomed manner of living, as well as for health and education
- receives all interest or other income from the trust property
- may use the property
The marital life estate trust property is distributed to the final beneficiaries designated in the original trust document, upon the death of the surviving spouse. The surviving spouse's property is also distributed to her beneficiaries at that time.
AB Trust Drawbacks
Since the living trust cannot be changed once one spouse dies, you should consider these possible drawbacks when considering whether you will create a living trust:
- Uncertainty about the tax laws. This Congress may change estate tax laws in the next four years. Depending on the outcome of estate tax legislation, you may want to change or revoke a living trust you create now.
- Assets tied up. Many younger people would prefer not to have their assets tied up if one spouse dies prematurely.
- Attorney and Accountant Fees. A surviving spouse will want to consider the most tax-efficient way to divide the couples assets between the irrevocable marital life estate trust and the surviving spouses revocable living trust. The help of a lawyer or accountant will most likely be required
- Trust tax returns. The surviving spouse will incur the burden of filing an obligatory annual trust income tax return and must get a taxpayer ID number for the marital life estate trust.
- Restrictions on the surviving spouse's use of the property. The use of the trust property carries limitations.
- Recordkeeping. The rules for using a marital life estate trust property include keeping separate records.
Couples who may not need or want an AB trust include:
- Couples where one spouse is considerably younger than the other. Since the younger spouse probably will live a long time, it may not be necessary to burden that spouse with the estate-tax-saving living trust.
- Younger couples. They may choose to create a basic probate-avoidance living trust. These couples typically revoke that living trust and replace it with an AB trust. And if one spouse unexpectedly dies sooner, the survivor will inherit everything free of estate tax anyway, and will have sufficient time to use the money and find another way to save estate tax.
- Many couples with children from prior marriages. Conflicts about how the trust should be used may arise between the surviving spouse who may need to use the assets, and the final beneficiaries who may want to save all the assets for themselves. It is important that those beneficiaries are aware that the purpose of the AB trust is to insure that their final inheritance is secured safe from estate tax.
"The AB Living Trust Saves Taxes"
All Articles
Please read more related legal information:
Living Trust Legal Information
Living Trust Frequently Asked Questions
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