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Living Trusts – Do They Reduce Estate Taxes?

When properly drafted they do! While living trusts have nothing to do with one’s real estate tax bills, they can be well crafted to reduce these estate taxes or avoid them entirely. A couple can transfer the ownership of their property into a trust and then act as the trustees of this document. Both the husband and the wife can serve as co-trustees of the property so that when one spouse dies, the other can still be able to manage the living trust and; thus, avoid expensive estate tax bills.

Why is this so? Why won’t the other spouse be taxed for the property that his/her spouse has left him? The reason is that the property of the couple is in fact still owned by the trust and not the surviving spouse. With the death of one spouse who is also one co-trustee, there is still another co-trustee who can manage the living trust. Therefore, the property in question will either have reduced or no taxes at all since ownership of the property goes into the marital life estate trust or the so-called AB trust. If the amount indicated in the AB trust is less than the federal estate tax threshold, the surviving spouse doesn’t need to pay the estate tax at all.

Here is one example. Say a couple owns a property that is valued at $1,500,000. If a living trust wasn’t established and one spouse died, the surviving spouse may be taxed for $825,000 which is equivalent to 55% of the total value of the property. However, when a living trust is in place, the surviving spouse won’t be asked to pay for this amount. This is because only half of the property value is subject to estate taxes since this is the only part owned by the other spouse who died. This half which is $750,000 is within the estate tax exemption bracket of $1,000,000; thus, no taxes will need to be paid.

The surviving spouse can continue to manage the property and name its beneficiaries in the event of her death. When the surviving spouse dies, her $750,000 won’t also be taxed since this falls under the current tax exemption threshold. However, tax exemption brackets may change over time so it is best to keep yourself well-informed about the current tax laws.

Apart from reduced estate taxes, living trusts are primarily created for privacy, avoiding probate, and estate planning when one dies or becomes disabled. Unlike the last will and testament that is public, a living trust is private and won’t be brought to court. Only you and the beneficiaries will know about it; thus, protecting the family’s privacy. Most importantly, expensive probate hearings can be avoided with fully funded living trusts.

A living trust offers so many benefits not only to its creator’s beneficiaries but also to the creator/trustee himself. He can be able to plan his assets well and assign people who will take care of him in the event of disability. Living trusts are one aspect of estate planning that provides a secure future for your loved ones. They help avoid estate taxes, do away with the hassles and expense of probate hearings and most importantly plan your property according to how you want things done.

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