The first job of a revocable living trust is, as many of you already know, to avoid probate. For those who don’t know, that’s the court procedure whereby a decedent’s will is approved, a personal representative appointed, assets are identified and evaluated, creditors’ claims are approved and paid, and—after payment of administrative expenses—the balance of the decedent’s assets are distributed to his/her beneficiaries or heirs. Probate is expensive, time-consuming, and a matter of public record. So, avoiding probate is a good thing.
The second job of a revocable living trust, for some married couples, is the avoidance of Federal estate tax. Last year the exemption from such tax was $3.5 million per person. A properly drafted trust could effectively double the exemption to $7 million. That’s another good thing.
This year, there is no Federal estate tax. Unless Congress passes some legislation soon, with retroactive provisions, the most effective estate planning a wealthy taxpayer may do is to die during 2010. This writer is not trying to be trite or crass—only to demonstrate his command of the obvious.
In 2011, absent any further legislation, the Federal estate tax returns, with an exemption of $1 million per person.
So, if you promise to die in the right year, your friendly, neighborhood estate planner is promising that your estate will pay no Federal estate tax—unless Congress messes with the law again, in which all bets and promises are off.
What’s a poor (as in pitiable, not lacking in $$) taxpayer to do? A basic revocable living trust is still a must, if for no other reason than to avoid probate. As to married couples, depending on how assets are held, there’s usually no probate on the first death, but there is on the second. Whether to include the bells and whistles necessary to avoid Federal estate tax should be discussed with your tax advisor and your estate-planning attorney. The answer involves the projected size of your estate (on the death of the second spouse to die) and the possibility that Congress will increase the Federal estate tax exemption above $1 million—even if not all the way to $3.5 million.
Once any new tax law is passed, you may amend your trust, to add those appropriate tax-avoidance provisions not already included.
Jerry Kessler practices law in Santa Clarita. You may contact him at 661-255-1001.