President Barack Obama and Congress have frequently discussed reforming the tax code. One reform sought by the president is to return the estate tax limits to 2009 levels and increase the effective estate tax rate on assets over the limit. While we wait to see what changes will occur to the tax code, a revocable trust (also known as a living trust) provides a means to limit tax exposure, avoid probate at death, provide for incapacity and maintain privacy for your estate.
From now through 2012, $5 million of an estate's value is excluded from taxation. Any assets in the estate over and above $5 million are taxed at a rate of 35 percent. President Obama has proposed reducing the asset limit to $3.5 million and increasing the tax rate for assets above the limit to 45 percent. However, major revisions are not likely to take effect until 2013 at the earliest.
Benefits of a Living Trust
A living trust is created and actually begins while the person who drafts the trust (settlor) is still living. A living trust should not be confused with a living will, which solely addresses removal of life support under certain circumstances.
One advantage of a living trust is that certain assets can be sheltered from taxation at the settlor's death. The Internal Revenue Service taxes both lifetime gifts and property passing after death if certain exemptions are exceeded (i.e. the $5 million dollar estate limit or $13,000 yearly tax-free gift to children). Several other benefits of a living trust are the ability to avoid probate and to provide for incapacity.
- Avoid Probate. Generally, the costs to place assets in a living trust prior to death can reduce estate settlement fees. For assets which require a rather lengthy or complex transfer process, the work can be completed during the settlor's lifetime. A living trust also reduces the involvement of a Probate Judge.
- Provide for Incapacity. With a living trust the onset of incapacity does not affect the ability of the trustee to manage property in the trust. However, if property remains in the settlor's name, a conservator may need to be appointed to that property. Without a living trust, a Conservator would need to be appointed by the Probate Court. The Probate Court would have to approve payment of all expenses paid by the Conservator.
A living trust can play a valuable role in your estate plan. Contact an experienced estate planning attorney to discuss whether you might benefit from a living trust.
