Most of the time, savings from
estate planning and living trusts comes from avoidance of
attorney's fees and probate expenses. However, there are
significant estate tax considerations as well. While living
trusts do not save estate taxes, in and of themselves, they do
provide a planning vehicle to fully utilize each individual's
Unified Credit. The Unified Credit, as mandated by Congress,
shelters up to $2,000,000 from estate taxes. Other types of
estate planning like a will, joint tenancy, or no planning at
all usually results in a married couple receiving only a single
$2,000,000 exemption.
However, if a
Living Trust with "A-B Provisions" is in place and one spouse
dies, the Living Trust splits into two separate trusts (commonly
referred to as an A-B Trust).
In an A-B Trust, each of
the two separate trusts receives its own $2,000,000 exemption,
meaning a total of $4 million is sheltered from estate taxes. By
getting both exemptions on a $4 million estate, approximately
$900,000 in federal estate taxes are avoided.
Any amounts over that $4 million will still be subject to estate
taxes, with rates at 45%.
Proper Planning will Avoid
Capital Gains Taxes for your Heirs
Also important, but less
discussed, is the favorable stepped-up basis and probate
avoidance features of property when held in a living trust.
Especially if you own any appreciated real estate investments
like rental property. Many people use joint tenancy as a vehicle
to avoid probate. Unfortunately, it has proved to be a taxation
disaster for many because they focused on avoiding probate, but
not on avoiding capital gains taxes. In joint tenancy, when one
spouse passes away, the surviving spouse only receives a partial
stepped-up basis on investments. If the properties are sold, the
there can be significant amounts of capital gains taxes due
which were completely avoidable with proper planning. If you
own appreciated assets, especially real estate, it is absolutely
critical for you to do proper estate planning.
