Living Trust

A Living Trust is simply a written Declaration of trust much like a contract, entered into between the persons who establish the Trust, called the "Trustors" and the persons or bank who manage the Trust assets, called the "Trustee" or "Trustees". Generally, the husband and wife initially act as their own trustees. Living Trusts are also known as Revocable Trusts and Family Trusts.

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To achieve the maximum benefits available from a Living Trust, the couple must do several other things in addition to signing the Declaration of Trust. Any assets they wish to put into the Trust must be re-registered into the names of the Trustees. Registrations would typically be in the names of "JOHN DOE and MARY DOE, Trustees, the DOE FAMILY TRUST, updated March 19, 2007.

  • Quitclaim Deeds are recorded to transfer any real estate that the couple owns into Trust. This transfer does not result in either a reassessment of the property taxes or the imposition of a documentary transfer tax.
  • Securities must be physically transferred and re-registered into the Trustees' names.
  • Bank accounts, savings and loan accounts, and brokerage accounts, must be individually changed.
  • Limited partnership interests are re-registered, and Deeds of Trust are assigned to the Trustees.
  • Life insurance and employee benefits covering either spouse are not changed in terms of ownership. However, a change of beneficiary is made, naming the Trust as either primary or contingent recipient of the benefits at death.

It is important to physically transfer assets into the Trustee's names since assets not so transferred lose most of the benefits otherwise available through a Living Trust.

Revocable Trust

While the husband and wife are alive and competent, they serve as Trustees of the revocable Living Trust. During their joint lifetimes, they can revoke the Trust and remove all or any portion of the Trust assets. The Trust is also fully amendable so that any of its conditions or terms can be changed.

Any community property transferred into the Trust retains its character as community property. Any separate property of either spouse remains the separate property of that spouse.

The couple as Trustees manage the Trust assets. They can sell and purchase Trust assets, receive all of the income and as much of the principal as they wish, remove, any assets from the Trust, or add any additional assets to the Trust.

Record Keeping

After the Trust is established it is important that the Trustees keep records, just as if they were Trustees of a Trust for the benefit of another. These records should be kept on individual sheets and should itemize in detail all receipts of the Trustees (dividends, interest, rent), all disbursements, all sales of Trust assets, all purchases of Trust assets, and any assets removed from or added to the Trust after its creation.

The Declaration of Trust has attached to it Schedules that reflect the original assets placed in the Trust. These Schedules change as assets are transferred in and out of the Trust after the Trust is created.

Tax Returns

Since 1981, one is no longer required to either obtain a tax identification number or file Trust tax returns for a revocable living trust while both spouses are alive and at least one is serving as Trustee. Although title is changed, the Social Security number of either spouse continues to be used for Trust assets. All gains, losses, income and expenses are reported on the spouses' personal income tax return just as was done prior to the establishment of the Trust.

Avoidance of Probate

Normally, most of the spouses' major assets are transferred into the Trust. What is not transferred is normally held in joint tenancy and passes to the survivor upon the death of the first spouse by operation of law. Although they avoid probate, asset kept out of the Trust in joint tenancy cannot take advantage of the Estate Tax Savings provisions contained in the Trust.

Personal property having a value less than $150,000 does not have to be probated even if not contained in the Trust. Normally, furniture, furnishings and automobiles are not put into Trust, but are left outright to the surviving spouse at death, then to the children, since these assets are not suitable assets to be held in Trust.

Status of Federal Estate and Gift Taxes

The uncertainty as to the status of the federal estate, gift and generating skipping transfer taxes was resolved by Congress on Jan. 1, 2013. The new provisions are now permanent rather than temporary. The exemption from these taxes as of 2015 is $5,430,000 and is indexed for inflation with adjustments taking place in January of each year. The tax rate where the taxable estate or cumulative taxable gifts exceed the applicable exemption has been increased from 35 percent to 40 percent. The annual gift tax exclusion has been increased to $14,000 per donee and is also indexed for inflation. In addition, the concept of "portability" first adopted in 2011, which allows the unused exemption following the death of the first spouse to be used by the surviving spouse is likewise included in the new legislation.

Death of the First Spouse

Provisions to minimize potential estate tax would be integrated into the trust if it were anticipated that, at the death of the surviving spouse, the combined assets of both spouses would exceed the estate tax exemption equivalent. In such case, at the death of the first spouse, the Trust would be divided into two sub trusts, usually designated as Trust "A" and Trust "B." Trust "A" is sometimes referred to as the "Survivors Trust," and Trust "B", the "Bypass Trust." The division is based on the value of all of the assets as of the date of division. Assets do not have to be physically divided down the middle but are divided by way of total value. Depending upon the value of the estate and in accordance with the clients' desire, in some cases the Trust may be divided into three or more trusts and in other cases, it may not be divided but continue on as only one trust (Trust A).

TRUST 'A'

Trust "A" represents the survivor's portion of the assets. Trust "A" consists of the survivor's half of the couple's total community property, all of the survivor's separate property, and generally an additional amount equal to the excess of the value of the decedent's share of the assets over and above the amount of the then current federal estate tax exemption equivalent.

The surviving spouse receives all the benefits of Trust "A," having the unfettered right to as much income and principal as desired as well as the ability to at any time remove any assets or add assets to Trust "A." Furthermore, Trust "A" remains fully amendable or revocable by the surviving spouse during life.

The surviving spouse has the right to specifically designate in writing the recipients of any portion or all of Trust "A." If the survivor fails to so designate a recipient, upon the death of the surviving spouse the Trust "A" assets are added to Trust "B," to follow the disposition of Trust "B."

Trust "A" is not taxed when the first spouse dies, but is taxed to the survivor when the survivor dies. The assets in Trust "A" are not subject to probate upon the death of either spouse.

TRUST 'B'

Trust "B" represents the decedent's portion of the assets not given to the spouse or placed in Trust "A." Trust "B" assets are fully taxed for Federal Estate purposes upon the first spouse's death. Normally, there would be no Federal Estate Tax due because Trust "B" would contain assets whose total value does not exceed the maximum amount which can be left tax free.

Thereafter, all of the income (interest, dividends and net rental income) is paid to the surviving spouse. If the Trust so provides, the surviving spouse can be given the power to withdraw each calendar year from the principal of Trust "B" the greater of 5 percent of the net value of the Trust "B" assets of $5,000. This power of withdrawal, if granted in the Trust, can be exercised by the surviving spouse for any purpose whatsoever. In addition, any amount of principal from Trust "B" can be used for the benefit of the surviving spouse, for the surviving spouse's health, support, maintenance and education, in accordance with the normal standard of living as determined at the time of the death of the first spouse.

Investments

The surviving spouse as the Trustee has the right to determine Trust investments. The Trustee can sell or buy Trust assets for each Trust. As long as the investments are "prudent" and not highly speculative, the Trust "B" investments can be virtually anything desired. No one watches over the Trustee, and the only persons who can object are those who ultimately are to receive the Trust assets — such as the couple's children. The Trustee can lend Trust funds to children or grandchildren so long as the loan bears a reasonable rate of interest.

Death of Second Spouse

Upon the death of the surviving spouse, Trust "A" terminates. The Trust "A" assets pass to whomever the surviving spouse has specifically designated, or in the absence of such designation, pass to Trust "B" to follow the disposition of Trust "B." The assets in Trust "A," however, are subject to Federal Estate Taxes. Of course, the surviving spouse is also entitled to a Federal Estate Tax exemption in an amount in accordance with the above schedule.

The Trust "B" assets are neither taxed upon the death of the surviving spouse nor subjected to probate. They can then be distributed outright in whole or in part or continue as part of the Trust. Through careful drafting of the Trust's dispositive provisions one can control not only who ultimately is to receive his or her assets but how and when such distributions are to occur.

In sum, a Revocable Living Trust is a very useful and powerful estate planning tool that can preserve and protect your assets both before and after death and at the same time provide an orderly and hassle-free transfer of these assets to your designated beneficiaries under terms and conditions expressly chosen by you.

Contact us at 925-947-1333 for a free, initial consultation with estate planning attorney Elliott Abrams to learn how we can put our in-depth knowledge of estate planning to work for you.