Posts Tagged ‘estate planning’

The “Revocable Trust”

zacharias-legal-document-collection-by-idt-downtown-campusA Revocable Trust is an instrument that can help you avoid probate.  Probate is the process where a court oversees the distribution of your assets at your death (i.e., the property/money that belonged to you at the time of your death).  Probate can be a very expensive process depending on the size of your estate and the expense of an attorney.

You can revoke or amend your Revocable Trust at anytime, which means you can take back the property held in trust or you can change the terms of the Trust.  Please understand that because you have total control over the property in the Trust your creditors can get to the property during your life, though it may be more difficult for the creditors to reach the property because a legal action must be initiated by the creditor.

For a Revocable Trust to be effective in avoiding probate, you must transfer assets to the Trust during your lifetime, as the Trust must be the legal owner of the assets at your death, not you.  Many people create Revocable Trusts, but never transfer their assets to them; therefore, making the Trust ineffective for probate avoidance purposes.

Another benefit to a Revocable Trust is its ability to provide creditor and spouse protection for the beneficiaries.  If you have children and are worried about their spouse or their debts a Revocable Trust could be a very useful tool to protect the property held in Trust from the beneficairy’s spouse and creditors.

Another very important aspect of a Revocable Trust is Privacy!!  A Will becomes public record when you die.  Also, a Revocable Trust lets you plan for your disability whereas a Will is only effective at your death.

legal-research-by-gwilmore(Please see my blogpost “Why You Need a Will”. Usually when planning with a Revocable Trust, we also draft a Pour Over Will to make sure any assets that remained outside the Trust are transferred to the Trust at your death and the Will also controls the guardianship of your minor children).

Flickr credits: IDT Downtown Compus Library and  gwilmore

Federal Transfer Taxes

irs3Federal Transfer Taxes include the estate tax, gift tax and generation skipping transfer tax (the “Three-Part Transfer Tax System”). Changes were made to the Three-Part Transfer Tax system by the Economic Growth and Tax Relief Reconciliation Act of 2001 (the “Act”), which was signed into law by President Bush on June 7, 2001. The Act had the effect of reducing transfer taxes (by decreasing the rate of tax and increasing the exemption amount) from December 31, 2001 through December 31, 2009, with a “repeal” of the estate tax and generation skipping transfer tax in 2010. The repeal will only be effective for deaths occurring during calendar year 2010, i.e., no estate or generation skipping transfer (“GST”) tax will be due for persons dying in year 2010.

For calendar years after 2010, the estate and GST tax system in effect prior to the Act will be reinstated. However, the gift tax will not be repealed, but rather the exemption for lifetime gifts made after December 31, 2001 is increased to $1 million and remains at that level for all future years. The following is an explanation of the Three-Part Transfer Tax ystem “pre-Act” and “post-Act”; an explanation of both systems is necessary, because the pre-Act law will be reinstated as of January 1, 2011 unless a new Act is signed into law by President-elect, Obama.

irs21Pre-Act Law:

The Three-Part Transfer Tax System is based on the value of property and money transferred to others, either during lifetime or at death. Two components of this Three-Part System Transfer Tax System, the gift tax and the estate tax, are part of a unified method of transfer taxation whereby the aggregate value of both lifetime and death-time gifts was subject to a single graduated tax. Viewed as a unified system, the federal gift tax begins at 18% on the first $10,000 of taxable gifts and increases to 55% for the aggregate value of transfers in excess of $3 million. The “unified credit” permits an individual to make taxable transfers by gift during life or at death to the extent of $1 million in value without having to pay the federal gift and/or estate tax on such transfers. However, the first dollar subject to the payment of the gift or estate tax would be taxed at a rate of 37%.

Any federal gift tax payable on lifetime transfers generally must be paid by April 15thirs4 of the year following the year of the gift, or, with respect to federal estate taxes, within nine months after the date of death. Extensions to filing the transfer tax return are permitted upon a showing of reasonable cause.

In addition to federal gift and estate taxes, the third component of the Three-Part System Transfer Tax System is the generation-skipping transfer tax (“GST” tax). The GST tax is imposed on a transfer of property from one generation to another generation that is two or more generations below the transferor’s generation. For example, if you give assets directly to your grandchild, such gift would be subject to the GST tax. The GST tax is a flat 55% and it is in addition to the gift tax imposed on lifetime gifts or the estate tax imposed on bequests made at death. The GST tax was designed to prevent individuals from avoiding federal estate tax on each generation by only providing family members with life interests in a perpetual trust. Similar to the unified credit for the gift and estate tax, there is a separate lifetime exemption of $1 million from the GST tax for each individual.

Post-Act Law: A summary of the changes to the Three-Part Transfer Tax System is provided in the following chart (please note the exemption for federal gift tax has not changed, it is and will remain $1,000,000):


Estate Tax and GST Tax Exemption for Death Time Transfers

Maximum Estate, Gift and GST Tax Rate





Estate & GST taxes repealed

highest individual income tax rate will apply for gift tax only




Due to these changes, your estate planning documents IRS Building should be reviewed every few years as the exemption amounts change to ensure that the tax planning contained therein continues to apply to your individual situation. President-elect Obama has indicated his desire to maintain the $3,500,000 exemption for estate and GST Tax. Please note the estate and gift tax are still unified, e.g., if you make 1 million dollars of lifetime gifts and use your entire $1,000,000 gift tax exemption, then you will only have 2.5 million of the estate tax exemption remaining at your death.

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