Introduction to Revocable Living Trusts

What is a Trust?

A trust is a device that allows you to transfer legal title of your property to another person or to yourself as trustee to hold for the benefit of yourself and/or another person. A trust gives the trustee legal authority to manage and distribute the assets based on the terms of the trust. No court is involved. No public notice of death is required as it is with a will. All that is required is a death certificate and a trust document that describes how things are to be distributed through the trust. Because a trust bypasses the court system, or probate, there are no court fees.

A revocable living trust is established while the maker is alive. It can be changed, amended or revoked. The assets in the trust are managed by you. As long as you're alive and capable, you have full control over your assets. Upon death, it becomes irrevocable, so the terms can't be changed, and your wishes, as expressed in the trust, will be followed without modification. At your death, or in the event you become incapacitated, your successor trustee takes over. Your assets will be managed and distributed according to the trust instructions. No conservator will be court-appointed, saving considerable expense and court involvement.

How can a Living Trust help me avoid estate taxes?

A Revocable Living Trust can dramatically reduce or even help you avoid paying estate tax. In 2006, under the unified tax credit each spouse is entitled to an exemption of $2 million. The unified credit is excluded from federal estate tax. Amounts above the unified tax credit are taxed up to 50%.

Through the unlimited marital deduction, one spouse is able to transfer his or her entire estate to the other spouse, and pay no estate tax upon death. Sounds great, but the IRS is not giving up the right to collect federal estate tax. Taxation is merely postponed while the value of the marital estate increases.

In a typical example, without a Living Trust, the Husband passes away and his estate is transferred to his Wife through the unlimited marital deduction. Upon the Husband's death the assets of both spouses are combined for tax purposes. Thus, for our example, the Husband's total estate at death is combined and valued at $3 million. If the Wife also dies in 2006, a $2 million tax exemption is allowed for her estate. However, the remaining $1.0 million is taxed at 41%.

A Living Trust avoids this outcome. Each spouse can preserve their unlimited deduction and unified credit by setting up and Living Trust. The unified credit and the unlimited marital deduction fund both a Marital Trust and a Bypass Trust, thereby preserving the exemption for each spouse, effectively paying NO ESTATE TAX.

This is just a basic introduction to a very complex legal and tax topic, with the potential for serious financial consequences. Please contact us today!

Nothing on this website is to be considered as the rendering of legal advice. The contents are intended for educational and informational purposes only and are limited to the State of California. Readers are responsible for obtaining legal advice from their own legal counsel.

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