When a person dies leaving gross assets in California in his/her name alone, and the aggregate value of such assets exceeds $100,000, those assets must be subject to probate. Many people avoid probate by creating and funding a revocable living trust. Thus, the first purpose of a revocable living trust is probate avoidance.
For married people with substantial combined net worth, the revocable living trust may have a second, and very valuable, function: the avoidance of Federal Estate Tax.
Under current law, the personal exemption from Federal Estate Tax is $3.5 million. That exemption will suffice for many of us, but read on, gentle reader, and weep: In 2010 the tax expires, then is renewed in 2011 with an exemption of only one million dollars.
Congress is almost certain to revisit the nature and extent of this tax, because it costs money to wage wars, run the country and bail out whomever, and dead people don’t have a very strong lobby in Congress.
For married people who face the possibility of Federal Estate Tax, the revocable living trust may include some special tax-avoidance bells and whistles: At the first death, the Trust assets are allocated among several subtrusts:
A. The Survivor’s Trust holds the surviving trustor’s separate property and share of community assets. The survivor may use these assets at he/she wishes.
B. The Residuary Bypass Exemption Trust, or Credit Shelter Trust, holds assets having a net value equal to the exemption then in effect. The surviving trustor gets the income from this subtrust and may ultimately spend down the entire principal.
C. A Marital Deduction Trust hold those additional assets that are not included in the above subtrusts.
Upon the death of the second spouse, the remaining assets in all the subtrusts are distributable to the beneficiaries. If these subtrusts are properly drafted and funded, the Trust estate may effectively enjoy the benefit of a double exemption from Federal Estate Taxes.
None of us knows what the exemption will be. Nevertheless, a review of our assets and a periodic consultation with tax and legal advisors may help us prepare for whatever tax law changes lurk around the corner.
Jerry Kessler practices law in Santa Clarita. He may be contacted at 661-255-1001.