living trust

Tax Considerations for Living Trusts

Tax Considerations for Living Trusts 600 600 Bernstein Financial Services

What Is A Living Trust?

A lot of people wonder why they might need a living trust? How does it save me on taxes? I don’t have a lot of assets, what does that mean? I do have a lot of assets, what does that mean?

There are several parts to a living trust, sometimes referred to as living trust package. Part of it relates to end of life decisions. Part of it relates to beneficiaries. It also relates to naming trustees to handle all of my affairs if I’m incapacitated or die. All these are different parts of living trust. And the “package” allows all of these items to be addressed.

A living trust is also referred to as a revocable living trust. The reason that they’re called that is because while you’re alive and feeling well, not incapacitated, you can revoke them and change them. 

The less assets you have, the less size family you have, the less you need it. But even single people need living trusts to ensure their affairs are properly protected if they become incapacitated.


Which Trust Is Right For My Family?

There are four main types of trusts. An A trust, an AB trust, a disclaimer trust and a ABQ-tip Trust.

The A Trust is for a single person or a married couple. For couples, when the first person passes away all the assets go to the second person. They avoid probate. However, if the first spouse dies, the assets go to the second spouse. And if the second spouse gets remarried and the assets somehow end up in the hands of the new spouse, the beneficiaries of the decedent a long time ago, may end up not getting the money.

Now, in the AB Trust, when it’s split, when I first die that half becomes irrevocable instead of revocable. And the remaining spouse is able to change their half to different beneficiaries different trustees, things like that. But they can’t change the irrevocable side. In other words, AB Trusts protect the first to die, making sure their money go where they expected it to go. Now most spouses, trust each other to do the right thing, but it’s someone the spouse s/he might meet when I’m gone that I don’t trust. So, the AB Trust at least preserves a portion of your assets.

The Disclaimer Trust is a little bit in between the A and the AB Trust. It allows the surviving spouse to construct the AB trust at that time, per their discretion. Do they usually? I don’t think so. Usually ends up all in their hands, they don’t want to mess with a B trust and doing a tax return once a year.

What is a Q-tip trust? Well q-tip trust (I won’t spend a lot of time on it) is an additional trust if you want certain assets over the exemption amount so that there’s no estate tax. So you achieve both goals. You achieve the goal of it still being the decedent’s trust for control and you see achieve in not being no estate tax on the first death. This Q-tip Trust, sometimes called the C Trust.

Funding a Living Trust

Think of your trust as a treasure chest for yourself if you’re incapacitated or for your children when you die. Your treasure chest will contain assets like real estate, bank accounts, investment accounts, business ownership of stock, an S-corp…

What about IRAs? Put trust as the beneficiary on those. Some attorneys like you to make individuals the beneficiaries bypassing the trust. The problem is if it’s a big IRA and you put the individuals as the beneficiaries, they’ll get it all at once. Do what they want with it and you may want the trustee handling it, thus leaving the trust as a beneficiary. The downside is you may end up getting a full distribution all at once to the trust after you die and could cause a little more tax at the front end. So get some advice. What about life insurance? I believe that the trust should be the beneficiary. That way the trustee can handle those assets in case of your income has to be your death.

Estate Taxes & Living Trusts

Estate taxes are taxes on the transfer of the estate of a deceased person, which applies to property worth over approximately $11.5 million, as of 2020.So, for example, if I have $8 million and I pass away, there’s no estate tax. If my wife and I have six million dollars together and I die, it’s three million my portion no estate tax.

What if our estate is worth $30 million? I know that’s not a lot of us out there. $15 million each. I’ll pay tax on the excess over $11.25 and the $32.5 million at 40%. Okay, how does a revocable living trust help us? Let’s say this is for $15 million and I die. Well if I do an AB trust, I can take half of that and apply my $11.5 to the $7.5 million. And then it stays being accounted for. And my spouse has the other $7.5 when she dies. Let’s say her house is worth $9 million, she’s still under $11.5 for her no estate tax. So it’s an AB Trust. There’s a way to do it without an AB Trust by using a tax tool called “portability” where you preserve your half of the $23 million.

Trust Beneficiaries

Let’s say, after you passed, your surviving spouse does not remarry, but one of your children passed. So should that child’s share go to their children or to the other sibling? You’ll indicate that in your trust, so it has to be thought out. It’s a little stressful at first to finish the trust but with the right explanation from an attorney you can make the proper choice. Obviously those choices will change based on the number of children, the size of the estate, the ages of the children, etc.

Now, when you’re designating beneficiaries, you’ll sometimes want to designate someone else in order to get it into the trust. So, for example, if you want an IRA or pension to go in to your trust, you can make the trust the beneficiary of that IRA and that goes to the trust. The trusted ministers that may pay the tax may distribute the income out, but it gets it or you can name the IRA the beneficiaries.

Same with life insurance. I mentioned before that you make the beneficiary of life insurance to trust and the trust will administer it because or need care yourself trust you will help with that.

Bernstein Financial Services Inc. provides a wide range of services to individuals and businesses in a variety of industries. We do not provide legal advice. These videos are for entertainment purposes only.