AmeriEstate is pleased to announce that in keeping with long honored policies, all of its current legal plan members residing in Arizona, who are affected by the recent adoption of the Uniform Trust Code (”UTC”), governing all revocable and irrevocable trusts in Arizona, are being provided the necessary and important legal updates at no charge.  This represents a value of up to $500 to our members.

We are thankful to Provider Attorney Joseph Udall for all his help and efforts in making this invaluable service to our members possible.

Tags: Living Trusts, News by Greg Reese
No Comments »

NOTICE

The following sections discuss certain Internal Revenue issues. PLEASE NOTE THAT THIS IS FOR REFERENCE FOR OUR CLIENTS AND IS INTENDED TO BE A STARTING POINT FOR YOU IN YOUR DISCUSSIONS WITH YOUR TAX ADVISOR. This is not intended to be a comprehensive discussion but merely seeks to answer some basic questions which may arise.

SEE YOUR TAX ADVISOR!

When to Get a New Tax Identification Number
for a Revocable Living Trust

According to the Internal Revenue Service (IRS) the Trustee of a revocable trust should file annual income tax returns (Treas. Reg. 1.671-4), and obtain an employer identification number. (Rev. Rul. 63-178, 1963-2 C.B. 609) IRS Form 1041 when the trust is revocable.

HOWEVER, if the grantor or settlor of a revocable trust or his or her spouse is a trustee of that Trust, then the items of trust income and deduction are reported directly on the Settlor’s own tax return and the trust uses the Settlor’s Social Security Number rather than obtaining a separate taxpayer identification number for the trust. (Treas. Reg. 1.6012-3(a)(9)).

In general, if at least one of the Settlors are also the Trustee for the Trust, then the use of the Settlor’s Social Security Number is recommended.  If on the other hand someone other than the Settlor(s) is acting as Trustee (during one or more of the Settlor’s lifetimes), then the use of a separate employer identification number may be preferable.  Keep in mind that once a Revocable Living Trust becomes irrevocable, such as upon the death of the Settlors, that the Successor Trustee must usually obtain a  separate employer identification number.

Income Tax Considerations

In general, the creation of a revocable trust has no significant income tax consequences during the Settlor’s lifetime. Because the trust is revocable, its income is fully taxed to the Settlor under the grantor (Settlor) trust rules regardless of whether it is distributed or accumulated. (I.R.C. 676.) The transfer of property to a revocable trust generally does not constitute a taxable event or otherwise trigger the realization of gain.

Asset Holding Periods

The holding period of assets transferred to a revocable trust includes the holding period of the assets in the hands of the settlor. Once the trust ceases to be revocable (for example, on the settlor’s death), the holding period begins anew. (Rev. Rul. 73-209, 1973-1 C.B. 614)

Sale of Principal Residence

Generally, the tax advantages on the sale of settlor’s principal residence are retained even if the residence is held in a revocable trust. (I.R.C. 121, Rev, Rul. 66-159, 1966- C.B. 152; IRS Letter Ruling 8007050)

Deductibility of Attorney Fees

The costs of establishing and maintaining a funded revocable trust will be borne in part by the federal government because such fees are incurred for the management, conservation, or maintenance of property held for the production of income and are deductible for federal income tax purposes to a considerable extent. (I.R.C. 212) These costs are, of course, subject to the two percent floor on miscellaneous deductions, under the Tax Reform Act of 1986.

In addition, legal fees incurred in establishing a revocable trust should be deductible on the same basis as that on which trustee’s fees are deductible. In fact, it may not seem unreasonable to regard the entire charge made by the attorney as allocable to the establishment of an arrangement for the management, conservation, or maintenance of property held for the production of income, at least if the trust is to be presently funded.

Once again see your tax adviser.

Tags: Living Trusts by Greg Reese
No Comments »

The concerns over the high costs and long delays associated with Probate are often central to the discussions over why living trusts are far superior to wills as estate planning tools, even for relatively small estates. For strictly probate avoidance purposes however, a living trust may not always be needed. Most states have a minimum asset threshold before probate becomes mandatory, and for those falling under the line, a formal probate is not usually required. For example if you live in California and your estate holds no real estate and the total value of your assets is less than 100,000, then your estate will probably not need to go through probate. This threshold is usually much lower in other states though, often in the neighborhood of $20,000 to $50,000. If this is your situation, then you should at least create a will with an attorney and consider making individual beneficiary designations for your accounts at the bank.

Most of us would agree that probate should be avoided if at all possible. This is not, however the only reason a living trust surpasses a will. In my opinion, the only true benefit of having a will is having a plan in place for the distribution of your assets at death. This is all a will can do for you but is only half a plan. A better plan also has a strategy for dealing with; your incapacity, the care and support of minor children and/or grandchildren, beneficiaries with special needs, or beneficiaries with severe lack of financial acumen or maturity. Remember that a will can only go into effect after you die and cannot help you in these important areas.

Suppose you and your spouse bought a home. If you are like most of us, you need two incomes to be able to pay the mortgage. Then suppose that your spouse gets in a terrible accident that leaves him or her incapacitated. They can’t work any longer so their income stops. A will won’t help you because your spouse is not dead. Your life insurance policy won’t help you for the same reason. You decide you need to sell the house but both spouses are on title and any sale or refinance of your property will require both signatures. If your spouse is incapacitated, then you are likely to have to go to court and spend $5,000 to $10,000 to have your spouse declared legally incapacitated and have the court appoint a conservator. Then, the judge will let you know if you may or may not sell the house, and what you may or may not do with the proceeds. A properly prepared living trust will allow you to almost immediately take the actions you feel are in the best interest of you and your spouse, without interference from the courts.

Providing for your children is usually the most important goal of your estate plan. Do you have children who are minors or not yet mature enough to handle the estate you are about to leave to them? In most states if you have a will, or use the generic will that the state imposes when you don’t, your children must receive their inheritance when they turn 18. Do they have the maturity and experience at that age to be good stewards of your estate? With a living trust you can set a more appropriate age for them to have access to or manage your estate (e.g. age 25 or later). You can even set parameters for them to earn the right to receive or manage their inheritance. During the ‘maturation’ years, your trustee is empowered to provide for your children’s health, education and welfare. If minor children survive you, a will generally leads to a strict court-ordered and supervised guardianship of your estate until your children turn 18. These arrangements are costly and restrictive, and again, your children must receive your entire estate at age 18. With a living trust there is no need for the court to get involved. Your trust would stipulate how and for whose benefit your assets were to be used, and would grant full legal power and authority for your trustee to carry out your wishes.

Remember to use a qualified attorney to make sure your will or trust is properly prepared. Avoid generic ‘do it yourself’ kits and form books. They can’t and don’t address every family’s unique needs and can be disastrous in the end.

Tags: Living Trusts by Greg Reese
No Comments »