The Living Trust is the foundation of many clients’ estate plans, and rightfully so. There are numerous probate-avoidance, tax and property management reasons justifying the establishment of a Living Trust (by the way, please don’t get confused by the terminology… the names “Living Trust”, “Revocable Trust”, “Revocable Grantor Trust”, etc. are all references to the same popular estate planning tool). However, one of the most important aspects of a Living Trust that we stress with our clients is the necessity for proper “trust funding” after signing the document in order for the trust to operate in accordance with its design.
So, what do we mean by “trust funding”? Well, the trust funding component of a client’s estate plan involves a detailed analysis of that client’s particular assetholdings and the form of legal ownership by which they are held. The property management and distribution terms of a client’s trust will apply only to the assets actually owned by the trust. Some common examples of “trust funding” include but are not limited to the following:
- • Transference of legal title to a bank, CD or brokerage account from the individual name of the client (John Doe) to “John Doe, as Trustee of the John Doe Living Trust dated 10/01/2011”
- • When appropriate, the designation of “The Trustee in office of the John Doe Living Trust dated 10/01/2011” as beneficiary of a life insurance policy, annuity or “payable on death” bank or brokerage account
- • As for real estate interests (when appropriate), a deed from John Doe transferring legal title to the property to “John Doe, as Trustee of the John Doe Living Trust dated 10/01/2011”
Please understand, however, that every case is unique. It is important to confer with your attorney to ascertain the trust funding actions that best suit your needs given your asset portfolio and overall estate planning objectives (often times, tax considerations come into play and warrant careful analysis). All clients having Living Trusts must carefully consider “trust funding” in order to effectively utilize their Trust and to allow it to operate as intended. We suggest that individuals and couples having Living Trusts periodically review their trusts and the assets comprising the same… if we can assist you, please don’t hesitate to ask.
To compare that young boy’s disappointment in Shoeless Joe Jackson with our Congress’ recent failure to act regarding the estate tax is, admittedly, a stretch of poetic license. However, “say it ain’t so” most accurately summarizes my reaction last New Year’s Day when it became clear that the estate planning practice had been thrown into a quagmire, the likes of which have not been seen for generations!
In a nutshell, the consequences of Congress’ adjournment last year without extending the then existing estate, gift and generation-skipping transfer (GST) tax laws are as follows:
- There is no Federal estate tax applicable to the estates of persons dying in 2010, irrespective of a decedent’s total net worth;
- Similarly, all wealth transfers ordinarily subject to the Federal GST tax are exempt in 2010;
- BUT, the gift tax is applicable to all 2010 irrevocable gratuitous wealth transfers (in excess of exemption amounts) at the rate of 35%;
- Assets inherited from estates of persons dying in 2010 receive only a limited “step-up” in tax basis, causing recordkeeping complications and making subsequent sales of those assets by the heirs problematic from the standpoint of capital gains taxes; and
- As if all that’s not troublesome enough, the estate and GST taxes are scheduled to return in 2011, with the higher rates and lower exemptions that applied roughly ten years ago.
Oh, and one other point to mention … it’s very possible that the entire estate, gift and GST tax system as we know it (or, should I say, knew it) will be re-enacted in 2010 retroactive to January 1st!
We will continue to monitor this situation, which Senate Finance Committee Chairman, Max Baucus described as “massive, massive confusion”. Meanwhile, for those of you who have implemented estate planning documents consisting of “credit shelter” and “marital” trusts, most estate tax formula clauses will be rendered inoperable for 2010 decedents; this could result in unintended asset allocations among beneficiaries. Accordingly, we recommend a prompt review of those governing instruments to determine their overall effectiveness in the context of current legislative turbulence and your long-term estate planning objectives. Please feel free to contact any of the attorneys in the Blalock Walters estate planning group should you wish us to assist you in that review.
