Trusts and Estate Taxes

In some states, probate is such a brutal, miserable affair that it is a serious mistake to not own the vast majority of your assets in trust.  If privacy is a big concern for you, then setting up a  trust should also be considered for this reason alone.  Probate is a public process and so anyone who desires can look up the assets of a deceased person.

However, owning your property in trust has some negative consequences such as making all of your financial transactions more complicated.  So this is something that needs to be weighed carefully with your adviser and attorney.

The larger your estate becomes, the more quickly discussions of trusts become important.  Most people who have their full Human Life Value insured with life insurance become a target of estate taxes when they die.  These are onerous.  The value of your estate where this would impact you is constantly changing.  In 2009 it is $3,500,000, with a top rate of 45%.  In 2010, there will not be an estate tax.  In 2011, the estate tax will kick in at $1,000,000 with a top rate of 55%.  We have no way of knowing what it will be in the future.

One strange quirk of the government’s system is that each person gets this exemption (whatever it is), but only if you ask for it.  Most never do, so after the first spouse dies, his/her exemption is gone.  A great way to get around this is to establish an A/B, or Pour-Over, or Spousal Trust.  (Different attorneys use different names for the same thing).  This trust does not exist when you are alive (and is therefore not a burden to be planned around), but instead springs into life at your death.  It is then filled with the full amount of your estate tax exemption of assets for the benefit of your spouse.

Let’s say, for example, that you die tomorrow and put $3.5M into a Spousal Trust this year.  That amount could grow to be $20,000,000 (or as large as he/she can grow it) by the time your spouse dies and can be passed on to your children estate tax free because it was already exempted.  During the years in between, your spouse can take assets/income from the trust for the reason of Health, Education, Maintenance, or Support –  pretty broad categories -which will cover most any need that he/she has.

For the entire history of our government, since the time of income taxes, it has assumed that private citizens are  better at taking care of the needs of their neighbors than the government.  The current Obama administration is the first to actually say that the government is better at it by suggesting (as of this writing) to not give full tax deduction credit to tax payers who give to charity.  But as of this writing, money given to charitable causes at death can save an enormous amount of taxes and then they are instead put  into the hands of a church, ministry, or other group that you are called to support.  With the proper strategies, you can give generously to charity, provide an amazing foundation for your children to build from, and pay the minimum amount of taxes that you would want at your death.  To some degree though, the more successful you are at acquiring wealth, the more taxes you are probably going to have to pay.  There are strategies for eliminating them, but the larger your estate, the more these strategies complicate your life.

Tomorrow, we’ll ask the question –  What about your kids?

This post is _Part 15_ in the series The Rock.  To continue with this series, click on Pt 16.  To use this as a growth tool, you might start by reading Pt 1, Pt 2, Pt 3, Pt 4, Pt 5, Pt 6, Pt 7, Pt 8, Pt 9, Pt 10, Pt 11, Pt 12, Pt 13 and Pt 14.

Photo credit: Scott Foy

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