A wealth-transfer vehicle

Dec. 1, 1998
The most abused and least understood aspect of the estate-planning process is the revocable living trust. Death and taxes are inevitable, but paying huge amounts of estate taxes at death is not. The key to keeping estate taxes low is careful planning. I frequently recommend revocable living trusts to my clients for whom wealth transfer is an issue. Living trusts don`t reduce estate tax so much as retain assets in the estate.

Hugh F. Doherty, DDS, CFP

The most abused and least understood aspect of the estate-planning process is the revocable living trust. Death and taxes are inevitable, but paying huge amounts of estate taxes at death is not. The key to keeping estate taxes low is careful planning. I frequently recommend revocable living trusts to my clients for whom wealth transfer is an issue. Living trusts don`t reduce estate tax so much as retain assets in the estate.

How to avoid probate

Transfer your assets into a living trust and the expensive probate process becomes unnecessary, leaving more money for your heirs. Because a living trust is revocable, its provisions may be modified during the grantor`s lifetime. Moreover, the transfer of assets into the trust triggers no tax consequences - no gift tax, no capital gains on transferred assets, and no consumption of the unified credit. And living trusts are not taxpayers, so there is no additional tax reporting. The grantor pays income tax on the trust`s earnings, as if the assets had never been transferred to the trust.

The strategy

A living trust is nothing more than your alter ego. The only thing that changes is the title on your house and on your bank and brokerage accounts - "Doctor John Jones Revocable Trust," instead of "Dr. John Jones." At death, the value of the living trust is included in the decedent`s estate.

High-net-worth couples should establish separate living trusts for each spouse and divide their assets so each trust owns at least the unified-credit exemption amount (currently $625,000 and gradually increasing to $1 million by 2006). The only way you can fund the unified credit is if you own assets in your own name or in your own revocable trust. If you own assets jointly, you won`t get the unified-credit deduction on the first death. When the revocable trust is properly structured, you can fund a unified-credit shelter trust and preserve the estate-tax deduction on the first death. Both spouses are co-trustees of each living trust. If something happens to one, the other is there to continue managing the trust. A subsequent divorce doesn`t complicate spousal co-trustee arrangements. The individual who created the trust removes the spouse being divorced as co-trustee and appoints somebody else.

Your intentions carried out

Revocable living trusts can ensure that a client`s wealth-transfer intentions are carried out at death. One of the big mistakes I have seen is to have joint accounts, whereby many widows and widowers unwittingly use an adult child living nearby to help with banking and brokerage activities. With a joint tenancy, of course, the property automatically passes at death to the joint tenant. So, even if a widow`s or widower`s will dictates that the estate is to be divided among their three children, upon the parent`s death, a daughter who was joint tenant on the deceased`s bank account can say to her siblings: "This property automatically passed, by operation of law, to me. It`s my property, and I`m not going to give you any of it."

This happens many more times than it should. On the other hand, if the widow or widower had created a revocable trust and made the daughter trustee, then, at death, the daughter has a fiduciary obligation to carry out the terms of the trust which would state: "Divide the property among my three children."

Living trusts eliminate the need to go through an expensive guardianship proceeding should the trust`s grantor become incompetent. With a revocable trust, the co-trustee (or successor trustee) simply manages the trust for the benefit of the grantor. With people living longer, there`s a greater chance that at some point in their lives they no longer will be able to handle their affairs, so the revocable trust is going to become that much more important.

People at or near retirement are most interested in establishing revocable living trusts. These people know about the high cost of probate, and they understand about incompetence. While revocable living trusts do avert probate costs, clients will pay their lawyers more to set up a living trust than they would just to have a will drafted (roughly twice as much). I tell my clients: "You are making a small investment now to save a lot of money - the cost of probate - later."

Hugh F. Doherty, DDS, CFP, is a national lecturer, financial advisor to the health-care profession, and CEO of Doctor`s Financial Network. For personal financial consultations or to have Dr. Doherty speak to your study club or dental society, contact him at (800) 544-9653. E-mail: [email protected]. Web site: www.dr.hughdoherty.com.

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