Your living trust is much more than just a will that says which heirs get what percentage or which specific items that you leave behind should go to whom. A living trust details how and when heirs are to receive their inheritance, who is to take over any businesses in question, and many crucial issues of your estate. A living trust is very specific in how an estate is to be dealt with. Therefore, the choice of a trustee for your living trust is a very important decision in your estate planning process.
Living Trusts: Choosing a Trusted Friend
When choosing a person to be the trustee of your living will, you need to answer on question:
Who could step into my place and confidently act as I would in carrying out my wishes?
It is vitally important to choose someone that you have full faith and confidence in. You should feel at ease that he or she would carry out your requests as they are written in your estate planning documents. Some typical choices include a close family friend, close family member, child, or trusted nephew or niece.
While you may feel completely secure in trusting this huge responsibility for carrying out your wishes to a family member, there are several situations when that is not wise or possible. In that case, your estate planning wishes can be addressed by a trusted outsider.
Living Trusts: Choosing an Outside Trustee
If you do not have a close friend or relative that you feel comfortable leaving this job to, or if by selecting one of the heirs will cause conflict, then there are other options. You can hire an outside trustee like your bank, a trust company, your lawyer, or an expert estate planning attorney.
These professionals are well versed in what it requires to be a trustee and can often work more expediently and effectively, which saves the heirs money and time. While there are many benefits to not having a family member involved as the trustee of your living trust, there are also some drawbacks to using a bank or trust company as your trustee. For instance, you may find higher fees, and a minimal estate value of around $700,000.
No matter whom you choose, you want to be sure that you have full confidence in them to do exactly as you want, no matter what other people say. There may be heirs who are unhappy with the terms and conditions of the living trust and will try to sway your representative to do as they want. Knowing that you have a strong, trustworthy individual protecting your wishes will provide peace of mind.
A living trust can help you reduce your estate tax liability to Uncle Sam. To see how this tax reduction works, let's examine the following hypothetical case:
Client Family has an estate of $4 million. The husband dies in 2006, leaving his entire estate to his Wife.
Under the 2006 tax rate, each spouse is entitled to an exemption of $2 million (known as Unified Credit Amount), which is not subject to Federal Estate Tax. Any amount over $2 million is subject to taxation at a rate up to a maximum of 46%.
According to the current law, here is the likely scenario without a Living Trust. The husband is able to transfer his entire estate to his wife, and pay no taxes at his death. This transfer is referred to as the Unlimited Marital Deduction, and it allows the husband, upon his death, to transfer any amount to his wife, free from estate tax.
That sounds like a pretty good deal, until you learn why Uncle Sam supports it. Uncle Sam knows that he is not giving up his right to collect the Estate Tax, but merely postponing it. By postponing it, Uncle Sam can collect a higher rate of taxes than he can by taking it immediately because both spouses did not use their exemption.
The husband has transferred his entire estate to his wife, and she now has an estate of $4 million. When the wife dies, Uncle Sam will allow her to use her $2 million tax exemption, but the remainder is taxed up to a maximum rate of 46%.
The result is that the wife will pay nearly $900,000 in estate tax on the $2 million of her estate that is not excluded from the estate tax.
Why will the wife have to pay nearly a million dollars in estate taxes?
Remember that the $2 million exclusion is allocated to each spouse. When the husband died, he did not use his exemption, and therefore, it was not available to help his wife upon her death.
The Unified Credit is a ?use it or lose it? tax exemption. If you fail to use it at the first spouse's death, it is gone forever. Fortunately, this outcome can be avoided through some basic estate planning.
Let's examine what happens if Client Family has a Living Trust. At the husband's death, $2 million passes outright to his wife in the Marital trust. $2 million passes to a Bypass Trust. In this scenario, both Unified Credit exemptions are used. The wife's $2 million exemption is applied against the Marital trust, and her husband's $2 million exemption is applied against the Bypass Trust.
The result?
Client Family passes on $4 million to their children, and the children pay no estate tax. For the price of a Living Trust, Client Family saved nearly a million dollars in estate taxes.
Both Steven W Allen & John Erik Fraker, Esq. are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Steven W Allen has sinced written about articles on various topics from Legal Matters. Discover the Secrets of Wealth Preservation as expert attorney, Steven W. Allen, reveals the proven estate protecting strategies that have been used by. Steven W Allen's top article generates over 3600 views. to your Favourites.
John Erik Fraker, Esq. has sinced written about articles on various topics from Legal Matters. John Erik Fraker, Esq., is an estate planning attorney and managing partner of Ainer & Fraker, L.L.P., a Silicon Valley-based law firm specializing in estate planning, small business law and tax. The firm's web site is at. John Erik Fraker, Esq.'s top article generates over 3600 views. to your Favourites.