LIVING TRUSTS
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Many people believe that everything a person owns should be placed into a living trust in order to avoid probate. Sadly, even professional tax planners and attorneys assert that this single vehicle is "all that a person needs to avoid probate". While this may be true for some it is NOT TRUE for everyone.
During our lifetimes we collect "stuff". I am not just talking about our collections of stamps, coins, bottle caps, baseball cards and the like. I am also talking about jewelry, furniture, vehicles, your personal residence and all of the other things that we surround ourselves with in life. In legal jargon, all this stuff is referred to as "personal property". Personal property is the most common "asset" people have to pass on to the generations that follow them. The most common way people have to pass these assets to the generations that follow us is through a will and a living trust.
You should use a LIVING TRUST ONLY for transferring furniture, collectables, personal effects, your personal residence, personal vehicles personal bank accounts, bank time deposits (CDs) and your retirement plans to your heirs upon your death.
REVOCABLE LIVING TRUST MYTHS:
MYTH: Living trusts protect assets held in the trust.
Revocable Living Trusts and Asset Protection (Or Lack Thereof): Living trusts provide NO asset protection at all for ANY asset held in the trust and all can be lost in a simple lawsuit. It is ignored for creditor purposes just as it is ignored for income tax purposes. In most states and for federal tax purposes, the law provides that if a Grantor has the right to revoke the trust, all of the assets held in the trust will be treated as if the Grantor still owns them. Therefore, asset protection requires additional measures in addition to a living trust to effectually eliminate the risk of loss due to a lawsuit.
MYTH: Living trusts can transfer estates of any amount to your heirs tax-free.
When the inevitable taxes and death intersect, the first order of business is to determine if the final estate owes any taxes. To understand estate taxes you must first determine just what an estate is. Basically, it is everything you own: your home and other real estate, bank accounts, investments, IRAs, insurance policies, collectibles and personal belongings. Add the value of these assets together, and then subtract your debts to arrive at the estate's value.
Depending on how much you own when you die, your estate may have to pay estate taxes before your assets can be fully distributed. Estate taxes are different from, and in addition to, probate expenses and final income taxes owed on income you receive in the year you die.
The federal estate tax is technically a tax on the transfer of property to others, generally to children of a decedent (the person who died). It was envisioned to prevent families from passing on huge fortunes and developing a type of royalty in America (but wait a minute, isn't this what the wealthy do and exactly what we want to do to?). The tax is levied on the deceased's estate as a whole, filed on a single estate tax return and paid out of the estate's funds.
NOTE If the tax is levied on the deceased's estate as a whole, what if the biggest part of the "estate" was not "owned" by the deceased when he/she died? The secret to wealth preservation is the separation of the major asset groups and income streams from the deceased's estate by placing them in different non-probated structures. By putting these major assets into separate trust vehicles they are not part of the deceased's estate and therefore can be passed in total to heirs without the fear of taxes, probate or anything else.
MYTH: Estates held in a Living trust will pay no state taxes when the estate is transferred to heirs upon the death of the Grantor.
State Estate or Death Taxes Paid by the Estate: A number of states impose estate (inheritance) taxes on any property including the personal property of deceased residents of the state. One tax rate may apply to all assets in the estate, or the rate may vary depending upon who receives what assets. For example, a state may impose a lower tax rate on assets left to a child, as compared to property left to a distant cousin. In states that have inheritance tax laws, taxes must be paid by the person who receives inherited property (as opposed to estate taxes which are paid by the decedent's estate).
Keep in mind that most states, (even if they technically have estate or inheritance tax laws), in practice follow what is known as a "pickup" system of taxation at the time of the decedent's death. Under this system, while a state tax return must be filed on behalf of the estate (or by a recipient who inherits property), the state's share of the tax comes out of what the estate is already paying the IRS. In other words, in most states no tax will need to be paid beyond the amount that is already being paid to the federal government.
MYTH: Once you create a living trust, all your assets automatically go to your heirs upon your death.
Warning regarding Transferring Assets to your trust: Your trust is only as effective as the steps taken to transfer assets to it. You need to know that if an asset is not transferred to your trust the provisions of your trust do not apply to that asset. Here again the prudent person would use different trust structures to hold different classes of assets and thereby avoid all potential probate concerns and tax traps altogether.
MYTH: Your real estate, stocks, money and all other assets including your business should be placed into a Living Trust.
Never put everything you own into a single Living Trust. Remember that everything YOU own is subject to inheritance taxes. Sadly, I see people put all their property in the same living trust (instead of employing different trust structures to hold different types of assets) only to see the "valuation" of their estate go beyond the exemption threshold. When this happens, the taxman is the heir that is first in line to receive your assets.
