The saying that nothing is certain except death and taxes is not accurate. The fact that taxes will increase is also a certainty, as is the fact that many people try to avoid paying taxes. Unfortunately, some attorneys take advantage of the public’s aversion to paying taxes and convince people that living trusts, also known as revocable trusts, offer the only means of avoiding estate taxes. That is simply not true.
When it comes to estate tax avoidance, a living trust does not provide any advantages over a last will and testament. That is because your estate tax liability is based upon the value of everything you own at the time of your death, not upon the document that controls how your assets are distributed. If you have control over an asset, for purposes of calculating your estate tax liability, you own the asset. This is true even if you are not the record owner of the property. For example, the death benefit of your life insurance policy is part of your estate for estate tax purposes if you own the policy and have the ability to change the beneficiary of the policy. The value of jointly held real property is part of your estate for estate tax purposes, even if it the property automatically passes to another individual upon your death. Even property you place in a revocable trust is part of your estate for estate tax purposes because, up to the time of your death, you can revoke the trust and control the disposition of the property. Consequently, whether your assets pass to beneficiaries under a will or pursuant to the terms of a living trust, your estate tax liability will be the same. That does not mean that paying estate taxes is unavoidable. It just means that you cannot avoid estate taxes by simply putting your assets in a living trust.
Fortunately, there are a number of ways for married couples to avoid some, if not all, estate taxes, depending on the size of their taxable estates. Regardless of whether you have your attorney prepare you a will or a living trust, estate taxes may be avoided by having the attorney incorporate into your estate planning document language creating a marital trust. There are different types of marital trusts designed to address the needs of all couples from those who have children from prior marriages to those that include a non-citizen spouse. Unlike a living trust which is funded during your lifetime, a marital trust designed to avoid estate taxes is created after your death. Some marital trusts are mandatory which means that the trust will be created after you die regardless of the wishes of the surviving spouse. Other marital trusts give the surviving spouse the ability to assess his/her financial situation and to fund the marital trust only if he/she faces a potential estate tax liability. Regardless of the type of marital trust you use, the language creating the marital trust can be included in either a will or a revocable trust. If you opt for a marital trust that is incorporated into your will, you not only avoid the need for transferring your assets into a revocable trust during your lifetime, but you avoid the additional costs incurred with creating and funding a living trust.
Although wanting to avoid estate taxes is not reason enough to have a living trust, under certain circumstances, a living trust is an ideal estate planning option. Before deciding whether a living trust is right for you, consult an attorney and be sure you understand the pros and cons and costs of all of your estate planning options.
This article first appeared in the September 9, 2010 issue of the Times Beacon Record Newspapers.
Linda M. Toga of The Law Offices of Linda M. Toga, P.C. is an East Setauket, New York attorney with a general law practice focusing on estate planning, real estate, marital planning, small business services and litigation.