The last thing anyone wants is to pay taxes. We have all just gone through another, sometimes grueling preparation of our 2012 Federal and State Tax Returns, which is what brought this subject to mind.
Estate planning is a way of avoiding taxes on your estate. You may believe you don’t have enough to worry about the Federal tax on estates, which begins at $1 million. However, when was the last time you had your assets appraised?
Remember your estate includes real estate, stock, bonds, and shares in investments of all kinds.
The good news is that you can protect your assets and avoid some or all of the taxes by creating a Marital Trust, or a Bypass Trust if you are married, an individual, if you are living with someone, or if you are a same sex couple.
A trust is an entity that exists only on paper, and is legally able to own property. Once the trust is created you can transfer property to it. You can name yourself the “trustee” of the trust and maintain control over the assets in the trust. The probate avoidance trust, or Bypass Trust, is the most commonly used trust. In the contents of the trust you can include many provisions guiding the Trustee upon your death (the successor trustee) as to what you want done with your assets. You can revoke the trust or amend it any time during your lifetime. The successor trustee will distribute the property to the beneficiaries you identified in the trust without the need for any probate proceedings.
For example, a married couple with $1.6 million worth of property could end up paying (or owing) $255,800 on their estate upon the death of the second spouse. With a Bypass Trust they could pay nothing. I am fairly certain that the beneficiaries of the last to die spouse will prefer to receive $255,800 over paying it to the IRS.
In summary, here’s how it works: First your property goes to your spouse, and then to your children or whatever beneficiaries you name. When the first death of a spouse occurs the portion of the trust owned by that spouse becomes irrevocable. That is, it imposes limits and restrictions on the survivor that cannot be changed. This should be carefully considered before creating a Bypass trust. A Bypass trust should be designed to give the surviving spouse the maximum legal rights the IRS allows over the deceased spouses property, while still gaining the estate tax advantages of a Bypass trust. With couples there may have been a prior marriage or relationship during which children were born. These children may be beneficiaries of their parent’s trust while the other spouse names different beneficiaries of their trust. This is not a problem but needs to be carefully drafted to get the desired results. Also, each of the spouses trusts needs to contain equal value to the other spouses trust with the exception of separate property. This may require the use of a CPA and an estate lawyer as there are considerations in the valuation that need to be taken into account.
So, start planning now to protect your loved ones, protect your assets and avoid taxes by meeting with your estate planning lawyer and maybe setting up a trust.
(Editor’s Note: Drue Morgan-Birch is a real estate and family attorney, practicing law for more than 30 years. The Tucson attorney can be reached at 620-9367, or at firstname.lastname@example.org.)