have to do anything to make my trust “work”?
that the trust instrument will govern only those assets which you actually
place in your trust. The process of putting property into your trust is
called funding. If you have a trust but fail to fund it fully
by placing all of your assets in it, whatever assets remain outside the trust
upon your death or incapacity may be subject to probate and/or conservatorship
proceedings. Funding is simply a matter
of changing title to your real estate, your bank accounts, and whatever else
you own into the name of your trustee.
Usually, your attorney will prepare the deeds for your real estate and
can help with transferring the rest of your assets, but you can handle a good
part of the funding yourself and save yourself some legal fees.
have a revocable living trust, do I still need a will?
YES. First, what
if you fail to have all of your assets transferred into your trust before your
death? This could happen for a variety
of reasons, some of which are beyond your control. Unless you have a so-called “pourover will” (one
that says “please put everything into my trust”), your non-trust assets will
pass according to whatever law is in effect for people who do not have
wills. Dying without a will is called
dying intestate. The laws that govern how an intestate estate
is passed on to the decedent’s survivors are called intestate succession statutes.
The intestate succession statutes that cover your estate may actually
frustrate your overall estate plan by requiring that assets pass in ways that
you would not want them to pass. Also,
remember that each State in the
own intestate succession statute, so if you have assets in more that one State,
different rules may apply to different assets.
So why not go for the certainty of having a safety net to catch your
non-trust assets and pour them into your trust?
Another reason to have a will even if you have a trust
is that your will is where you typically name guardians for minor children (or
incapacitated adult children or an incapacitated spouse). If you fail to name a guardian, the Court
will pick somebody, and that somebody may not be your first choice. Your will also names your personal representative (also known as
an executor), who is the person who
will deal with claims by or against your estate and with the IRS. There may be no need for a guardian or a
personal representative to be named after you are gone, but nobody will know that
until after you are gone; and then it will be too late to do anything about
it. Again, why not go for the certainty
of stating your choice rather than leaving these important matters to chance?
Will a revocable living trust help to avoid taxes?
In and of themselves, trusts do not avoid estate taxes, but they help to carry out good
estate tax planning. As far as
income taxes go, revocable living trusts are “tax neutral.” During your lifetime, your trust will not
need to file its own income tax returns.
The taxpayer identification number for your trust is your Social
Security Number, and you simply report all trust income on your individual
Federal and State income tax returns.
How does the repeal of the estate tax affect my estate
What a mess Congress has created! We are now in a year where there is no
federal estate tax – but hold the cheers.
Congress has substituted another method of taxation that will collect
more taxes from many of our clients and families than the estate tax. Additionally, as has been reported in the local
and national press, these
changes will, for some, greatly alter the planned for and anticipated
distributions among family members and heirs.
A brief review of the law will help explain why this
is so significant. The 2001 tax act,
signed into law by President George W. Bush, gradually reduced the maximum rate
of the federal estate tax (and the equally onerous generation-skipping transfer
tax on transfers to grandchildren) from 55% to 45%. It also gradually increased the amount of
property that you could pass free of federal estate tax from $675,000 per
person in 2001 to $3.5 million per person in 2009. That means that with basic estate planning, a
married couple could pass up to $7 million free of federal estate tax, if they
both died in 2009.
Then, in 2010
only, the 2001 tax act repeals the estate tax. But like a horror film character who just
won’t die, under the existing law the estate tax returns again on January 1,
2011 – only at a much lower $1 million exemption and a higher maximum 55% tax
rate! This strange “now it’s gone, no it
isn’t” effect is the result of a rule in Congress that attempts to limit budget
Estate Tax Repeal. To pay for this one-year vacation from the
estate tax, Congress replaced the estate tax with an increased income tax. Before 2010, any assets that pass to someone
when you die would be valued at fair market value at the date of death. Thus after death, when a surviving spouse or
heirs sold any assets (like securities or a home) that had increased in value,
they would not have to pay capital gain tax on any of the growth that occurred
during your life. (This is referred to
as a “step-up in basis.”) For many
heirs, this means huge tax savings, oftentimes tens of thousands of dollars or
But in 2010, property that passes at death does not
automatically receive this step-up in basis.
Instead, each individual has a limited amount of property that can be
“stepped-up” in value at the time of death.
Property that does not receive this step-up value will be subject to tax
on all increase in value from the date
you first acquired the property.
This means that the property could be exposed to tens of thousands of
dollars of income tax liability for your heirs!
Not surprisingly, these rules are convoluted and in
many cases very different from the old law.
In fact, Congress attempted to institute a similar tax structure in the
1980s and it was repealed, retroactively, because it was too difficult to administer. Because of past experience as well as the
anticipated difficulties in calculating such a tax, the common belief was that
Congress would change the law before January 1, 2010. But it didn’t.
How You Are
Affected? This law can affect you in several ways. For married couples as well as single
clients, we need to first make sure that your property will be divided
according to your desires, and not by
the dictates of Congress. For more than
50 years, it has been common to use a written mathematical formula to divide
the assets of a married couple when the first spouse dies to maximize estate
tax savings. Likewise, formulas have
been used to provide funds for charitable causes and to benefit family and
friends. Now, in 2010, when there is no
estate tax, these formulas will not work.
If a spouse is not your sole beneficiary (for example, if you have
children from a prior marriage), the existing formula could result in the
disinheritance or substantial reduction of resources provided for the surviving
You Do? We encourage you to meet with your trusted advisors as
soon as possible to review your estate plan and make any changes that are
necessary. You need to ensure that your
property is positioned to receive the maximum step-up in basis increase
available under current law. This is a
time that demands a new approach to your planning with new thinking and
building in flexibility to see that your wishes are fulfilled no matter what
Congress throws at us this year or next.
We can offer solutions that will meet your planning objectives with the
least amount of tax impact.
Once my spouse and I set up our trusts, how should we
hold title to our assets?
We recommend that assets be split
between two revocable living trusts, one in the husband’s name and the other in
the wife’s. You should not be concerned that you will lose control
over those assets, as husband and wife can be co-trustees of both trusts. They can also be the sole trustees of their
respective trusts, if they prefer.
the assets may seem unusual to you, since it is very common for married couples
to own all of their assets jointly. Holding
assets jointly makes a great deal of sense on one level, since joint tenancy
assures that, at the death of the first spouse to die, title to the joint assets
will vest in the survivor without probate (by virtue of the way title is held)
and without tax (by virtue of the unlimited marital deduction). However, in
many cases, joint tenancy is a trap waiting to be sprung. It makes you lose the opportunity to build
significant tax and asset preservation components into your estate plan, and it
sets up the surviving spouse’s estate for probate.
Can a married couple own assets in a way that protects
Yes, a married couple can protect
assets by holding property as tenants by
the entirety. Notwithstanding all the bad stuff we just
reviewed about joint tenancy, there is a very special kind of joint tenancy
between spouses which has important benefits.
It is called tenancy by the
entirety. Among the characteristics
of property owned in tenancy by the entirety are that: (1) one spouse, acting alone, cannot convey
any interest in the property (in other words, both spouses have to sign a deed in order to transfer the property
to someone else); (2) the property automatically
passes to the surviving spouse upon the death of the first to die; and (3) the creditors of one spouse cannot reach
tenancy by the entirety property.
The latter characteristic was defined in the Hawaii
Supreme Court case of Sawada v. Endo,
57 Haw. 608, 561 P.2d 1291 (1977). In
that case, the defendant, Mr. Endo, had been involved in a car accident; he was
sued, and a judgment requiring him to pay money to the plaintiffs was entered
against him. At the time of the
accident, Mr. Endo and his wife owned their home as tenants by the
entirety. When the plaintiffs tried to
force the sale of the Endos’ home in order to collect their judgment, the court
refused to allow them to do so. The
court reasoned that, since one spouse, acting alone, cannot convey away an
interest in tenancy by the entirety property, the creditors of one spouse
cannot satisfy their claims out of such property. The court said that
by the very nature of the estate by the entirety as we
view it, and as other courts of our sister jurisdictions have viewed it, “[a]
unilaterally indestructible right of survivorship, an inability of one spouse
to alienate his interest, and importantly for this case, a broad immunity from
claims of separate creditors remain among its vital incidents.”
Endo is actually a bit more
convoluted than explained above, but the bottom line is that the case upholds a
very important benefit of tenancy by the entirety – creditor protection.
spouse and I own property as tenants by the entirety in our trusts?
language can be included in your trust instruments to try to preserve the
protections afforded by tenancy by the entirety. One
implication of Sawada is that, when the spouses divide their property
between their trusts, they may lose the creditor protection afforded by tenancy
by the entirety. If one spouse were
to have a car accident or a business setback or otherwise incurred substantial
debt, the property in that person’s trust might be subject to creditors’ claims. This result might have been avoided if the
couple had held all of their property in tenancy by the entirety. Thus, there may be a serious downside to
dividing tenancy by the entirety property between a husband’s and wife’s
trusts. Accordingly, we attempt to
preserve the protection afforded by tenancy by the entirety through provisions
in our trust agreement that track the spousal rights afforded by tenancy by the
Is there a downside to tenancy by the entirety?
TWO WARNINGS about tenancy by the entirety:
whose claims are not clearly foreseeable, at the time that the tenancy was
established. You cannot put assets into tenancy by the
entirety after a debt or liability arises and expect those assets to be safe
from being consumed by the debt or liability.
creditor protection afforded by tenancy by the entirety can backfire if the
non-debtor spouse dies first. In other
words, if you have a huge debt, the person you owe money cannot get at property
you hold in tenancy by the entirety with your spouse, but only as long as your spouse is alive. If your spouse should die before you, you
would end up as sole owner of the (formerly tenancy by the entirety) property,
and your creditor would be in a position to try to take it away from you.
Can I own assets other than my home in tenancy by the
you to hold any kind of property in tenancy by the entirety—not just
real estate. Thus, if tenancy by the
entirety protection is appealing to you, you can probably use it to shelter a
lot more than just your house from potential creditors. The reason we say “probably” here is that a
recent Bankruptcy Court decision indicated that tenancy by the entirety
protection, for bankruptcy purposes, may extend only to a primary residence.
What about protecting my other beneficiaries?
In an age of a 50% divorce rate and
liability seemingly waiting around every corner, it makes sense to wonder
whether the things you leave behind to children, grandchildren, and other
beneficiaries might be snatched away from them.
Trusts are very effective in protecting your loved ones in these
One approach is for your trust agreement
to provide that, after you are gone, your trust divides up into as many trusts
as you would like. In other words,
rather than passing assets to your beneficiaries, you pass them trusts that
contain the assets. This way, you can
achieve significant creditor protection without sacrificing the beneficiaries’
enjoyment of their inheritance. The beneficiary
for whom each trust is created may be given the power to choose the trustee of
his or her trust, and each of them can be given a certain amount of discretion
as to when and whether to withdraw assets from his or her trust. When each beneficiary dies, he or she can
have the power to direct where the assets go, or, if the power is not
exercised, your trust instrument can say that the assets go to that person’s
See Estate-Tax Repeal Means Some Spouses Are
Left Out, January 2, 2010 Wall Street Journal and A Bizarre Year for the Estate Tax Will Require Extra Planning,
January 8, 2010 New York Times.