A revocable living trust can be a good choice for a wide range of people, but this type of trust does not satisfy every objective that someone may have.
Since a revocable living trust can be amended or revoked, you have the ability to dissolve the trust at any time, and you can walk away in direct possession of the property once again. For this reason, you are retaining incidents of ownership. As a result, it will not accomplish objectives that require you to give up ownership.
Estate tax savings would be one of these objectives (although it can provide some estate tax savings to married couples).
High net worth individuals must be aware of the taxes that can apply to asset transfers. Your wealth can be significantly eroded as it is being passed along to your loved ones after your death.
Though a living trust will not provide you with advanced estate tax protection because you are retaining incidents of ownership, there are other trusts that can.
Let’s look at the federal estate tax parameters that are in place at the present time before we examine wealth preservation trusts so you can determine whether or not your estate is going to be subject to taxation.
Estate Tax Exclusion
Under provisions contained within the Bush era tax cuts, the estate tax was repealed for the 2010 calendar year. It was scheduled to come back in 2011.
At the end of 2010, a tax relief act was passed that is now being called the the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Under provisions contained within this act, the estate tax exclusion was set at $5 million for 2011.
The credit or exclusion is the amount that can be transferred free of the estate tax. An adjustment to account for inflation increased the amount of the estate tax exclusion to $5.12 million for the 2012 calendar year.
At the end of 2012, another tax relief act was passed that is called the American Taxpayer Relief Act of 2012. This act retained the base exclusion that was put into place for 2011, but allowed for ongoing inflation adjustments.
In 2016, the adjusted federal estate tax exclusion sits at $5.45 million. This figure is likely to go up in 2017 after another inflation adjustment is added.
The maximum rate of the federal estate tax is 40 percent.
Unlimited Marital Deduction
There is an unlimited marital estate tax deduction. This deduction allows you to transfer any amount of property to your spouse free of the estate tax. You do not have to use any of your $5.45 million exclusion to leave assets to your spouse in a tax-free manner.
We should add a caveat to the above statement. To use the unlimited marital deduction, you must be married to a citizen of the United States.
The tax man is not being especially generous to allow this unlimited marital deduction. What’s going to happen if a surviving spouse is holding a taxable inheritance? The surviving spouse will be faced with estate tax exposure so the tax is still pending.
If a non-citizen spouse could use the unlimited marital deduction, he or she could return to his or her country of citizenship, tax-free inheritance in hand. The surviving spouse could spend the rest of his or her life in this country, and the IRS would never see any money.
Wealth Preservation Trusts
As we have pointed out, assets that have been conveyed into a revocable living trust would still be part of your estate for tax purposes. However, there are other types of trusts that can provide estate tax savings. These would be irrevocable trusts that cannot be dissolved or rescinded.
One of these trusts is the qualified personal residence trust. This type of trust can facilitate the transfer of your home at a tax discount. Others include grantor retained trusts, charitable trusts, and life insurance trusts. People also use generation-skipping trusts to reduce tax exposure.
These are some of the wealth preservation trusts that are often utilized. The best way to proceed will depend upon the nature of your assets, your specific objectives, and your family dynamic.
Schedule a Consultation
Now that you have digested all of this information about trusts, you may have questions formulating in your mind. We would be glad to provide you with answers, and we can help you decide on the trust that is right for you given your unique set of circumstances.
Our firm offers personal consultations so you can decide whether and what planning is right for you, and we provide each and every one of our clients with truly personalized attention. In Charlotte, you can call us at (704) 944-3245 to schedule an appointment. Our number in Ashland, KY is (606) 324-5516. You could also send us a message through our contact page regardless of your location.
John’s practice focuses on the use of Wills and Living Trusts in Estate Planning to help individuals protect their families and preserve their legacies after their deaths, but his practice also focuses on the critical issues of protecting individuals with dementia or other diminished capacity, assisting individuals in qualifying for Medicaid and other government benefits to offset the costs of long-term care, and providing special needs planning.
John is admitted to practice law in North Carolina, South Carolina, Kentucky, and Ohio, and he is accredited by the Department of Veterans Affairs.
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