Millions of Americans die each year without any type of estate plan in place, and this forces their families into the court system, where they experience the high cost and time delay characteristic of probate proceedings. In fact, more than 50 percent of Americans don’t even have a will or any type of estate plan. So does everybody need to be scared into a revocable living trust (RLT)? Certainly not!
There are three main reasons to implement an RLT:
1. You have provisions you may want to implement for minor children or children that act like minors and have special needs for managing their finances;
2. You wish for your family to avoid probate because you own a personal residence, business, or rental properties; or
3. You wish to minimize estate tax with a marital bypass trust.
A quality estate plan typically includes an RLT, as well as a number of ancillary documents such as a will, powers of attorney for finances and health care, an advance medical directive or living will, burial instructions, a directive for organ donation, final instructions, etc.
One of the key reasons for using an RLT is to avoid probate, which means avoiding attorneys, judges, courts, and the state sticking their noses into the family affairs. Probate is essentially the court’s process of determining if the will is valid, then executing its provisions. If there isn’t a will, then the court distributes the assets according to state law.
In addition to helping your family avoid probate, the RLT becomes the instruction manual for how the estate is to be distributed among the beneficiaries. The process is administered by the trustee you appoint and avoids a tremendous amount of wasted time and money spent going through court.
In order to make sure the trust does its job, it needs to be funded by holding title to four main assets:
1. Real estate (typically your personal residence),
2. Entities (such as corporations and LLCs for rentals),
3. Investment accounts (including retirement accounts with see-through provisions), and
4. Life insurance (so that minor children receive it constructively).
In the late hours of December 31, 2012, lawmakers in Washington, DC, passed the American Taxpayer Relief Act of 2012. Under the “fiscal cliff legislation,” as it came to be known, the estate and gift tax exemption was set at $5 million. This means that the first $5 million of an individual’s estate may be inherited (at death) or gifted (during life) before any estate or gift tax is due. This exemption amount is adjusted each year for inflation, and Bloomberg BNA projects it will edge up to $5.43 million each in 2015, making the total exemption for a married couple a whopping $10.86 million.
With a marital bypass trust, often referred to as an A-B Trust, a married couple can take advantage of both personal exemptions, thus doubling how much they can leave to their family without estate tax. This is a special trust that creates two subsequent trusts upon the death of the first spouse, thereby doubling the estate tax exemption of approximately $5.5 million. This is typically only undertaken when a family’s net worth is more than $5 million.
Many parents and grandparents don’t realize how creative they can be in distributing their assets upon their passing. Here are a few options to consider:
If you have a child whom you’d like to disinherit from your estate, don’t just leave their name out of the will and think this will accomplish your goals, as the laws in most states will presume you intended to have them inherit unless you specifically state otherwise. Following your spouse, your children are the presumed heirs to your estate by law in the absence of an estate plan. As a result, it's important to include a complete list of your children in the estate plan and to specifically mention any child who will not be an heir by stating something like, “It is the intention of the settlor [you] to disinherit the following child from the estate.” It’s that simple; just clearly indicate in writing that you specifically intend them not to inherit your estate, and they’re out.