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Coronita.
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October 4, 2012 at 9:42 AM #20165October 4, 2012 at 10:03 AM #752190
livinincali
ParticipantDepends on what you’re trying to avoid. There’s currently a federal estate tax exemption up to $5,000,000 so your estate appears to be too small to go through the trouble of setting up an irrevocable trust to avoid estate taxes. I suppose that amount could change, or that tax law could change, but as of right now it doesn’t appear to make sense.
October 4, 2012 at 10:26 AM #752191Coronita
Participantinquirying minds want to know too. But sounds like you need to talk to a trust attorney or at least do some due diligence on it.
BTW: if you haven’t done some research already on it….For married couples, there is something called an A-B trust… That would be approximately double of what you can pass through, subject to certain rules. So you probably want to have a trust attorney make sure what you do really follows the rules… You don’t want to mess this up…
Basically, the “B” part of the A-B trust is a bypass trust…It is funded when the first spouse dies. When the second spouse dies, the B trust passes through without estate taxes…
I guess the premise of this works based on one spouse dying before the other. I wonder what happens if both spouses die at the same time (say in a car accident)…
http://wills.about.com/od/overviewoftrusts/a/abtrust.htm
Married couples can maximize the use of both of their federal exemptions from estate tax by using AB Trusts as part of their estate plan. The AB Trust system can be set up under the couples’ Last Will and Testaments or Revocable Living Trusts. The “A Trust” is also commonly referred to as the “Marital Trust,” “QTIP Trust,” or “Marital Deduction Trust.” The “B Trust” is also commonly referred to as the “Bypass Trust,” “Credit Shelter Trust,” or “Family Trust.”(snip… The fine print)
How AB Trust Planning Works
Here is how the AB Trust system works to maximize the use of both spouses’ estate tax exemptions:
The couple includes the appropriate AB Trust language in their Last Will and Testaments or Revocable Living Trusts. Note that this should not be attempted without the assistance of a qualified estate planning attorney.
The couple divides their assets so that each spouse has about the same value of assets in his or her individual name or in his or her Revocable Living Trust. This is an important step and must be done in order for the AB Trust system to work. Many times couples leave their assets in joint accounts and this completely voids the use of the AB Trust system since the joint assets will pass outright to the surviving spouse instead of through the deceased spouse’s Last Will or Revocable Living Trust.
If the first spouse dies in 2011, then the first $5,000,000 of his or her assets will be funded into the B Trust; if the first spouse dies in 2012, then the first $5,120,000 of his or her assets will be funded into the B Trust. This effectively uses the first spouse’s $5,000,000 or $5,120,000 federal exemption from estate taxes that is available for deaths occurring during these respective years. The B Trust can be relatively flexible and used for the benefit of the surviving spouse and descendants or other beneficiaries.
If the deceased spouse’s assets exceed $5,000,000 in 2011 or $5,120,000 in 2012, then the excess is funded into the A Trust. This will defer the payment of estate taxes on the assets above the deceased spouse’s $5,000,000 or $5,120,000 exemption until after the surviving spouse’s death. Because of this estate tax deferment, the A Trust is less flexible and can only be used for the benefit of the surviving spouse. In addition, the surviving spouse is required to receive all of the income from the A Trust.
When the surviving spouse later dies, the surviving spouse will still have his or her own estate tax exemption. If the exemption is $5,120,000 when the surviving spouse dies, then the first $5,120,000 of the surviving spouse’s separate assets will pass estate tax free to the final beneficiaries. Anything over $5,120,000 will be taxed.
The assets remaining in the B Trust pass estate tax free to the final beneficiaries. This is because the B Trust used up the $5,000,000 or $5,120,000 exemption of the first spouse to die, so anything left in the B Trust will pass estate tax free. This can provide a significant windfall to the final beneficiaries if the surviving spouse doesn’t need to use the assets from the B Trust and they continue to grow in value during the surviving spouse’s remaining lifetime.
The assets remaining in the A Trust will be taxed as part of the surviving spouse’s estate. As mentioned above, the estate tax on the A Trust is effectively deferred until after the surviving spouse dies.
The balance of the A Trust that remains after the estate tax bill is paid passes to the final beneficiaries. Note that the beneficiaries of the A and B Trusts can be different.
As illustrated above, effective use of the AB Trust system allows married couples to pass on up to $10,240,000 to their final beneficiaries, free from any federal estate taxes. AB Trust planning also allows married couples to minimize estate taxes while insuring that the their separate estates will ultimately pass to the beneficiaries of their choice and in the manner of their choice.
October 4, 2012 at 10:39 AM #752192Coronita
ParticipantBTW:
Unless some miracle from congress to repeal or reinstate 2011/2012 estate tax exemptions…
2013 will be a really bad year for someone to die…
The estate tax exemption resets back to $1million…
That means single people have a $1million exemption, and married couples have a $2million exemption if they setup something similar to A-B trust (short of any other stategy)…Well, at least for married couples, you can wait to see what the exemption will be for the surviving spouse’s estate when the deceased spouse’s assets rolls into the survivor….Heirs of single survivors…royally screwed…http://wills.about.com/od/understandingestatetaxes/a/estatetaxchart.htm
http://wills.about.com/od/understandingestatetaxes/a/futureoftax.htm
Don’t die that year, please…Because if you do, a good portion of your assets that you worked so hard for will be nicely redistributed, robin hood style…
October 4, 2012 at 11:53 AM #752194bigwavedave
ParticipantIMO a trust is the way to go. Will probably cost $2500 to $4000 to set up, but prevents your heirs from spending multiples of that on probate fees. I’m a recent beneficiary of an A-B trust. No probate, no estate tax
Every situation is different so you should consult an attorney that specializes in these things before making any rash decisions. Consultations are almost always free. I think by simply putting your kids name on title would be interpreted as a gift and then subject you and/or them to the gift tax.
If you sell the houses before you die (living in them for at least two out of five years before the sale) the accumulated depreciation would reduce the cost basis, but the $250K/$500K exclusion would apply. In your case the accumulated depreciation looks to give you below zero cost basis, so it looks likely you would be above the exclusion limits.
October 4, 2012 at 12:46 PM #752195sdduuuude
Participant[quote=bigwavedave]IMO a trust is the way to go. [/quote]
+1 on the trust. There are many more reasons other than this to get one, also.
Mine cost $1300.
Suggest a workshop put on by lawyers as a sales tool. Was very useful.
Try Walters & Ward in RB for a schedule.
October 4, 2012 at 1:05 PM #752196UCGal
Participant+2 on the trust.
And we paid around 1800- but had some extra stuff done at the same time as part of that price.Well worth it. Our attorney was able to make the language clear, yet flexible… so if we had more children, for example, we didn’t need to rewrite it.
October 4, 2012 at 4:05 PM #752201EconProf
ParticipantWhy give everything to your kids? Big inheritances can stifle incentives and spoil your offspring. If you are going to have a big estate, better to carve out enough for you and your spouse to live on, designate some gifts for your children (and maybe their children’s education), and the rest to worthy charities where it can really do good for humanity. This assumes, of course, that you have enough to take care of those first priorities.
October 4, 2012 at 4:17 PM #752202Coronita
Participant[quote=EconProf]Why give everything to your kids? Big inheritances can stifle incentives and spoil your offspring. If you are going to have a big estate, better to carve out enough for you and your spouse to live on, designate some gifts for your children (and maybe their children’s education), and the rest to worthy charities where it can really do good for humanity. This assumes, of course, that you have enough to take care of those first priorities.[/quote]
Better than giving to an irresponsible person who HELOCED there home to death, skipped a decent education, bought a bunch of bling on credit, can’t afford to make payments, blames the government/banks for their decisions and problems and life, and then expects everyone else to make them whole.
Also, by passing money on to certain heirs, one can essentially ensure said kid(s) with possible health issues are taken care of and not count on or further tack on public money for things like public insurance….
October 5, 2012 at 12:06 PM #752230birmingplumb
Participantfrom cool website
You general plan of moving into each house for two years prior to selling may or may not work anymore due to a fairly recent tax change that took effect in 2009 that impacts how taxes are calculated on real estate that for some time are not a primary residence.Your alternate plan of transferring ownership of the house to your kids should be compared to other possibilities such as holding onto the properties until death and letting the houses pass to your heirs by way of inheritance, or selling the houses yourself. Each has slightly different tax treatments. By working through these scenarios you and your tax adviser can figure out which tactic will work best for each property.
William Perez
Guide to Tax Planning
taxes.about.com
About.com | Guidance. Not Guesswork.October 5, 2012 at 12:20 PM #752231Coronita
Participant[quote=birmingplumb]from cool website
You general plan of moving into each house for two years prior to selling may or may not work anymore due to a fairly recent tax change that took effect in 2009 that impacts how taxes are calculated on real estate that for some time are not a primary residence.Your alternate plan of transferring ownership of the house to your kids should be compared to other possibilities such as holding onto the properties until death and letting the houses pass to your heirs by way of inheritance, or selling the houses yourself. Each has slightly different tax treatments. By working through these scenarios you and your tax adviser can figure out which tactic will work best for each property.
William Perez
Guide to Tax Planning
taxes.about.com
About.com | Guidance. Not Guesswork.[/quote]I think they changed the rules on recognizing what is a primary home.
http://www.nolo.com/legal-encyclopedia/avoid-capital-gains-tax-selling-home-29901.html
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