Post about "Estate Plan Trusts"

Think You Don’t Need Estate Planning Because Everything is Owned Jointly?

I can’t tell you how many people tell me that they are not worried about estate planning because they own everything jointly with their spouse, so it doesn’t really matter.WRONG!Here are a few reasons why that kind of thinking costs thousands of dollars (at least):1. What if you both die at the same time?If you and your spouse die in the same accident and you have no planning in place, you’re looking at spending a heck of a lot in probate fees. We estimate right now that probate costs approximately five (5) percent of your gross estate value. So (to give a little perspective) if all you own is a house worth $500,000, you’re paying $25,000 to the court and your personal representative, possibly more when you take attorney’s fees into account.And that’s not all. If you have minor children when you die without any planning in place, your kids are each going to get their share of inheritance when they turn 18. Yes, the law requires this! The law also does not discriminate with age when it comes to inheritance. So, your 20-year-old son and your 2-year-old son will inherit the same amount of money! Not what most parents would have wanted.2. You could miss out on certain tax advantages only afforded married couples.When you plan for death with joint ownership, what you effectively do is delay tax payment. What you lose when you plan this way is the tax benefit that married couples are afforded. Each person has a certain tax exemption when it comes to paying estate taxes ($3.5M for 2009, No tax in 2010, then $1M in 2011 and beyond). But with joint ownership planning, you lose one of those exemptions all for the sake of delaying payment. Each married couple should be planning for two tax exemptions. It might not be worth it in your case to lose that all for the sake of delaying any payment.3. Your assets are not protected after your death.If you die before your spouse and own everything jointly, you’re leaving an unprotected estate to your spouse and kids. If your spouse has creditors, they can reach all of the estate. If your spouse remarries then divorces, he or she may lose some of your estate to the ex. Or, if your spouse remarries and dies, there’s no guarantee your kids will see any of that inheritance. Even if your spouse doesn’t remarry, if he or she doesn’t do any further estate planning, after his or her death, your children will receive their inheritance outright and unprotected. So, your child’s creditors or ex-spouse may have a claim to it.4. You lose the benefit of stepped-up basis.Many married couples don’t plan for taxes, maybe because their estate is not taxable for estate purposes. But what happens when one spouse dies and the survivor needs or wants to sell the family home to pay for new expenses or just to downsize?Normally, when you sell property, you are taxed on the gain – the difference between the sale price and the “basis” price (usually the amount you paid for the property). When people own property as tenants by the entirety or as joint tenants with right of survivorship, they receive a stepped-up basis on half the property, but retain the same basis on the other half.Here’s an example based on one from the book The Living Trust, by Henry Abts. (The book is really written for non-lawyers to understand the benefits of planning with a Living Trust.)A couple buys a piece of land for $20,000 and holds title as Tenants by the Entirety. By the time the wife dies many years later, the property is worth $1,000,000 because they built their dream home on it and it’s in a great location. The husband’s half of the property retains a $10,000 basis, but the wife’s receives a stepped-up basis at her death – $500,000. So, let’s say that the husband decides that he can no longer live in this beautiful house that he and his wife built together and spent so many happy years in. He sells it for $1,000,000. With a basis of $510,000, his taxable gain is $490,000. However, he does still get the personal residence exclusion of $250,000, so his taxable gain is $240,000. At 15%, husband would pay $36,000 in taxes.By contrast, had the couple put their home into a community property living trust, the home would have received the entire stepped-up basis at the time of the wife’s death, and the husband would have had no taxable gains.
(By the way, the situation is even worse if the husband had decided to rent out the home for a few years before selling it, because he couldn’t have claimed the personal residence exemption, but this would have been a non-issue if the home had been held in a living trust.)(Another by the way: A living trust is especially necessary when you have multiple properties, because you can only claim one as your personal residence for the exemption.)Planning with a Revocable Living Trust is a far better way to go. You retain lifetime control over your assets, but leave a much cleaner situation for those you leave behind.