Stewart Ogilby

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An Overview of The Living Trust The purpose of this page is to provide a general overview, or synopsis, of the advantages of a Living Trust including those bearing on Federal Estate Taxes. The author has years of experience as an Independent Advisor with Henry Abts' organization and is not a lawyer. Having affiliated with several "hub attorneys" (and having helped to set up two of these) I now affiliate (in Florida) only with attorneys who limit their practice to estate planning matters. A Revocable Living Trust consists of a number of inter-related documents (the so-called Statement of Trust and its Ancillary Documents) created during life in which the grantor (the person who executes the trust) retains the right to revoke the trust, change its terms, and regain possession of the property in the trust. The grantor is typically the trustee of the trust (the person who manages the property in the trust) during his or her lifetime. The Advantages of a Living Trust A Living Trust minimizes administration and probate costs arising at the grantor's death, since property titled in the name of the trust avoids probate. Placing property in a Living Trust also avoids the necessity of a court-supervised conservatorship in the event of the grantor's mental incompetence. Upon death, the trust sets forth the terms for the grantor's spouse, children and grandchildren. The trust can protect the grantor's heirs from potential creditors, including divorced spouses. With properly designed documents a married couple can leave up to $2,000,000 estate tax free to their heirs. Disadvantages Bear in mind the facts that the grantor maintains total control over his or her assets and that all trust documents are amendable and revocable. It is up to the individual considering a living trust as to whether or not these facts offset the following three "disadvantages" (if they can be called such) of having a Living Trust prepared in place of simple Will(s): There is work required on the grantor's part to make certain that specific and appropriately personalized documents are drafted for his family. This can be accomplished with help provided by an estate-planning attorney in conjunction a knowledgable advisor. There is work required on the grantor's part to fund his living trust. The help of a competent advisor in properly funding the trust is strongly recommended. A comprehensive legally constructed living trust can be initially overwhelming. Assistance of a competent advisor is recommended to help trust clients properly understand their documents. Purposes of a Living Trust To avoid the delays, costs and publicity of probate. Make certain that your assets go to whom you want, when you want and how you want. To protect your heirs from their possible inability to plan, their potential disability, their creditors and their potential predators. For married persons, to take advantage of both spouse's $1 million Estate Tax Exemption. To defer all estate taxes until the death of the surviving spouse. To prevent intentional or unintentional disinheritance of children and grandchildren by a surviving spouse. To appoint who will manage the estate and be responsible for the distribution of its assets following the death or incapacity of the present trustee. To appoint a patient-advocate and to state one's intent regarding artificial life support. To designate (on a separate list) who is to receive items of personal property (jewelry, etc.). Taxes, taxes, taxes If you are sure that you will not die within the next few years, and that the government will not change the inheritance laws, and that your assets will not exceed the current federal estate tax exemption (whatever it may be when you die), then you can skip this section (which gives most people, including myself, a first-class headache). Every U.S. taxpayer is given a tax credit, known as the applicable credit amount which protects a portion of his/her assets from estate taxes, referred to as the estate tax applicable exclusion amount (the "exemption"). Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (the "Act"), the exemption for estate taxes increased to $1 Million in 2002 and then will gradually increase to $3.5 Million by 2009. The Act repeals the estate tax and generation skipping tax for only one year in 2010. In 2011, the estate and generation skipping taxes are reinstated, generally as they existed before the Act. For simplicity's sake, these examples and illustrations assume that both spouses die after December 31, 2010 and, therefore, the $1,000,000 exemption applies.   Fed. Estate Tax Gift Tax Calendar Year Exemption Highest Estate Tax Rate Exemption Highest Estate Tax Rate 2008 $2 Million 45% $1 Million 45% 2009 $3.5 Million 45% $1 Million 45% 2010 - 0 - - 0 - $1 Million 35% 2011 $1 Million 55% $1 Million 55% Gifting during lifetime is treated differently than bequests at death. The gift tax applicable exclusion amount (the "gift tax exemption") increased to $1 Million in 2002 and remains indefinitely at that amount. In 2010, the top gift tax rate will be the top income tax rate. The exemption available at death is reduced by the exemption used to make lifetime gifts. In addition, the law provides an unlimited marital deduction which allows married persons to leave any amount of property to their spouse (if a U.S. citizen) free from Federal estate and gift taxes. The unlimited marital deduction was not affected by the new Act. In 2010, the estate tax is repealed. The present rules, providing for a step-up to fair market value basis for property acquired from a decedent, are also repealed. For 2010, a carryover basis generally replaces the stepup basis for property acquired from a decedent. However, each decedent's estate generally is permitted to retain the step-up in basis for up to $1.3 million of assets transferred. In addition, the step-up in basis may be retained for an additional $3 million of property transferred to a surviving spouse. Because of the Congressional Budget Act of 1974, all provisions of the Act "sunset" (i.e., expire) on December 31, 2010, and the estate and gift tax rules in effect in 2001 are reinstated, with a $1 Million exemption. In other words, unless Congress acts before 2011 to extend the provisions of the Act, the estate and gift tax structure in effect prior to the Act will return. How the Living Trust works regarding Federal Estate Taxes A revocable Living Trust becomes irrevocable at death. A married person will often establish a revocable living trust in which the trust property is divided into two parts (Trust A and Trust B) at the first death. The exemption amount ($1,000,000) is placed in a Family Trust (B). The balance of the trust property is placed in a Marital Trust (A). Because the $1,000,000 exemption applies to the Family Trust there are no taxes due at the first death. The unlimited marital deduction applies to the Marital Trust. It is important to remember that the size of the estate is increased by the death proceeds of all life insurance owned by the decedent on his life. However, no estate or gift taxes are due on transfers to a spouse (who is a U.S. citizen) due to the unlimited marital deduction. The Marital - Family type of Trust is designed to make certain that both $1,000,000 tax exemptions (one of each spouse) is preserved, while allowing the surviving spouse to have use of all of the deceased spouse's assets during the remainder of his or her lifetime. The Family Trust (B) is generally not taxed at either death. The Marital Trust (A) is generally taxed at the surviving spouse's death. Following the second death, assets in the Family Trust pass estate tax free to the children (or other beneficiaries) under the terms established in the trust. Assets in the Marital Trust are taxable to the extent they exceed the surviving spouse's exemption. Therefore, a married couple can leave $2,000,000 to the surviving spouse's children federal estate tax free! The size of the estate is again increased by the death proceeds of all life insurance owned by the decedent on his life. It is worth mentioning at this point, without going into much detail, that a properly designed ILIT (Irrevocable Life Insurance Trust) may keep life insurance proceeds out of the taxable estate to provide immediate cash for paying estate taxes incurred by large estates that exceed the amount of the tax exemption. This device is frequently used to protect valuable family property (farms, businesses, etc.) from liquidation due to sizable estate taxes. Do you have a trust? Persons often execute a Living Trust without fully understanding it's provisions. Wherever you are located, if you currently have a Living Trust it is advisable to have your estate planning documents reviewed by an attorney whose primary focus is upon estate planning. There are too many provisions to consider on this single page. However, if you have an existing trust, here are a few things a good attorney may advise you to look for: Do your Marital and Family Trusts give the surviving spouse a testamentary limited power to appoint trust property for distribution among children and grandchildren? If not, flexibility to reduce the beneficiaries' income and estate taxes is lost. Does your Family Trust permit the "sprinkling" of income to children and grandchildren? If not, the opportunity to shift income to lower tax brackets is lost. Does your trust permit the trustee to postpone distributions to beneficiaries (beyond the distribution dates) for good cause? If not, it may be impossible to protect trust assets from the beneficiaries' creditors as well as from divorced spouses. Is the Marital Trust a QTIP (Qualified Terminal Income Preservation) Trust? If not, a surviving spouse can disinherit children intentionally or unintentionally. "What do I do next?" Whether or not your estate is big enough to involve estate taxes, if you have only Wills or no Wills in place, or your present documents (including any trust) are inadequate or outdated, feel free to contact me. For logistical reasons, I work throughout Florida. However, I will attempt to locate for you an Estate PlanTM attorney and/or advisor in your home state.

I will be happy to mail you a free informative booklet, What the IRS and Most Attorneys Don't Want You to Know. Call or email me today. Include your name, postal mailing-address and telephone number.
Stewart Ogilby Independent Advisor — The Estate PlanTM All our Florida trusts are prepared by an attorney who specializes in estate planing.	Referrals nation-wide Email: WiseBird@pobox.com Toll-free     1-800-998-2523

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This material is not intended to be legal advice and should not be considered to be legal advice. It does not constitute the recommendation of any legal document for any specific client. It is educational material summarized from books that are widely available in public libraries and in books and other publications that are sold in every state through retail outlets.