Jim Porter: Last of the estate-planning columns … finally
December 10, 2015
Well the good news is that this is the last of our five estate planning columns. As boring as they may be, I received a surprisingly positive response from readers who now understand they and their parents need to plan their estates, even small-asset estates.
If you'd like all five columns sent by email, just ask.
Today's column (a reprint) is about revocable living trusts and charitable trusts.
Revocable Living Trusts
Revocable living trusts are a big part of our estate planning department practice. I will keep this simple, and believe me that is easy to do because I am way over my head when talking about trusts. Here is how Kelley Carroll and Brian Hanley explained it to me.
Husband and Wife put their assets in the name of the Family Trust. Nothing really changes but the title to real estate is deeded into the name of the Family Trust.
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Checking, savings, investment accounts, etc. are also changed into the name of the Family Trust.
Husband dies (why is it always husband first). At that point, generally one of two things happens. For couples not at risk for paying estate tax at the survivor's death, the trust continues for the survivor the same as before.
For couples with a greater net worth, generally half of the assets are put into the Husband's side of the Family Trust and the trust becomes irrevocable, meaning it's locked in.
This provides some protection from creditors and from the surviving spouse later giving Husband's half of the Family Trust to a new (much younger) husband.
As long as Husband's share is worth less than his federal estate tax credit ($5,430,000 for 2015, $5,450,000 for 2016) there is no tax payable.
Wife receives any income from Husband's half of the Family Trust and manages all of the family assets including the Husband's half, which is held in trust for her and the kids. Very effective.
Here's the advantage. For most of federal tax law history, without a trust, if Husband had left his entire half share to Wife, as is typical in a will or by joint tenancy, at her death all of the assets are exposed to tax (so Husband's half is taxed twice).
Another advantage to a revocable living trust: You almost always avoid the dreaded probate process.
Since California law requires a probate for any estate worth more than $150,000, even modest estates can benefit from being held in a revocable trust.
Administering the trust after death is generally much less expensive and quicker than probating a will.
Cute Little Jimmy
From personal experience I can tell you it works. A few months before my Dad unexpectedly died in 1979, my law school buddy set up the Porter Family Trust.
That saved my Dad's half of the modest Porter Family Estate from being taxed twice: When it went to my Mom and when it went from my Mom to the cute Porter kids, little Jimmy being the oldest and cutest.
Charitable trusts are designed to help you preserve and transfer wealth to your family and at the same time make a contribution to a nonprofit.
When we die the government can get a chunk of our hard earned money through the estate tax process.
The trick is to convert the part of your estate that Uncle Sam normally gets — some call it "social capital" — into donations that improve your community, and save taxes while doing it.
Charitable contributions aren't just for the rich. The tax breaks are significant–deductions of up to fifty percent of adjusted gross income, which looks pretty decent when compared to estate taxes as high as fifty-five percent after December 31.
Here's one version of how a charitable trust works. You have appreciated stock that if you sell will create a huge capital gains tax.
So you give stock to a charity through a trust; when the trust sells the same asset, it won't pay tax, so there's more to invest after the sale.
If you need cash flow, keep the income from the trust for yourself during your lifetime. You get a tax deduction at the market value of the stock less the value of the income you keep, if any.
You can take out a life insurance policy on yourself for your kid's benefit, perhaps funded by some of the income you get from the trust, to replace the value of the stock at your death.
You avoid paying capital gains tax, create an income for your life and dramatically reduce estate taxes, while making a sizeable donation to your favorite charity rather than the IRS.
Confer with an expert like Kelley Carroll or Brian Hanley, or talk to a CPA or a non-profit. When you do, I will stop writing these estate planning columns.
HERE'S TO A LOVELY CHRISTMAS AND A PEACEFUL, PROSPEROUS AND HEALTHY NEW YEAR.
Jim Porter is an attorney with Porter Simon licensed in California and Nevada, with offices in Truckee, Tahoe City and Reno. Jim's practice areas include: real estate, development, construction, business, HOAs, contracts, personal injury, mediation and other transactional matters. He may be reached at email@example.com or http://www.portersimon.com.