Nevada Corporate Services

My wife and I, age 78 and 80 respectively, have assets of approx $3.5 mil. Two major items are (a) my IRA of $800,000, and (b) a home valued at $2.0 mil. My wife owns the home outright and we both have revocable trusts. Should my wife put the home into her trust?

 Answer -

Revocable (or Living) trusts can do four things very well:

 1. Avoid probate, which is worth doing. Any assets in a properly setup and executed trust avoid probate. Assets outside the trust must go through probate. That would be a reason to put the house in the trust.

 2. Provide, in case you become incompetent, if the grantor become unable to administer their own affairs, the trust has already named someone (subsequent trustee) to manage the affairs.

 3. Provides for Specific distribution, despite televisions portrayal of the will being the final say in the distribution of the estate, the Will is only a list of "Suggestions" to the probate court. All wills are probated; Revocable Trust are not. If you wanted your great aunts hand knit afghan given to your niece Cindy, putting that in the trust will make it happen. A will only “allows” it to happen if no one objects.

 4. Maximizes the "prepaid Tax Credit" for married couples. That is the "estate tax free" portion passed to the next generation. If the estate tax credit is $1,000,000 per person, then an ABC trust will allow $2,000,000 to pass without a tax, the husband passes 1 million, and the wife passes 1 million. Normally, the first to die automatically passes everything to the spouse. There is no tax between spouses, so you can pass everything to your wife tax free, or she could pass it all to you pass free. The trust allows the assets of the first to die to be given to the next generation but held until the passing of the last to die. This passing to the next generation is what would normally be taxed. If you pass it all to your spouse, then her estate, when she dies, would be worth 2.8 million and 1.8 million would be subject to estate taxes of up to 55%. The trust could reduce the taxable amount to just $0.8 million.

 Revocable Trusts cannot do two things:

1.    Provide any asset protection, or

2.    Generate any income tax savings

These are the realm of corporations and as discussed later.

 The changes in the estate tax rules confuse many people.

 Most of the answers you receive will be prefaced with "It Depends". So, let me describe what it will depend on:

 In 2010, the estate tax will be completely eliminated...and in 2011 it may be reinstated using the original $600k unified credit. This little factoid may be the cause of many people passing away prematurely just to slip under the deadline. There have been numerous articles written that describe the possibility that children will encourage their parents to pass away so they don't lose money to estate taxes.

 A lesser-known fact is with the elimination of the estate tax the “step up” in basis to the next generation is also eliminated. This negatively affects the massive middle class; resulting in substantially larger tax payments substituting the income tax for the now eliminated estate tax.

 Take your $2m house as example; you probably did not pay $2m for the house, it likely appreciated over the years, and when sold you would be required to pay taxes on the gain.

 Let us suppose you purchased the home thirty years ago for $300,000. You would now have 1.7 million in gains. Without the estate tax process, your heirs assume your “basis” in the house requiring them to pay taxes on the gain when the house is sold. The estate process allows for the "Step Up" to fair market value as the basis for transferred assets, so that when sold, no gain is realized and therefore no tax.

 For a family that would normally fall under this "free" estate transfer, the estate tax elimination results in a huge tax burden when the heirs sell their parent’s house is sold because income taxes are due on the gain over the parent’s basis.

 Let me cover your question here and then let me go a bit further along the estate preservation line.

 Normally, a married couple sets up an A-B-C Living Trust. This allows more flexibility is dealing with the rigors of the estate process.

 The A part of the trust is set up for the first to die, assets of appreciating value may be placed in that part of the trust, and the amount placed in the trust can coincide with the current maximum available, that makes it more dynamic and flexible. The B part is then funded with other appreciable assets and other assets optimized for the current available maximums. The C part is funded with the excess. The surviving spouse lives out of the C portion first, since that is the amount that would be subject to estate tax, when that amount has been used up, he/she would live out of the B portion, and finally would use the A portion for their benefit and welfare if needed.

 If you have two separate trusts, it will be a little more difficult to accurately apportion your estate today and to take advantage of the tax code changes over time. One key variable is when you intend to pass away.

 The IRA, I assume, cannot be given directly to your heirs, because your wife will need it for her support.

There are ways to bypass the entire estate issue. Regardless of the value of assets involved, the fickleness of Congress or the drafting of your trust your entire estate can pass to your heirs with no tax, estate or income. You and your wife maintain total control over the assets and distributions. Moreover, you do it all without buying life insurance, annuities or getting charities involved.

Using corporations is the simple answer. The simple fact is corporations never die. Therefore, assets in a corporation never directly enter the estate process. When a corporate officer dies, the Board of Directs finds a replacement. The operations of the company continue uninterrupted. As stated, this is the simple answer but do not think it is a complete answer. Learn how holding assets corporately instead of personally can solve the estate issue. Find out if the trade-offs involved in doing so are acceptable. Remember, operating in the business realm is much easier than you think but requires effort. Give us a call and we can go into more detail.