Tag: estate planning

Putting Your Home in a Trust: Pros & Cons

Estate planning can be tricky, especially with the uncertainty of a rocky global economy. But that’s precisely why estate planning is so critical to ensuring a secure financial future for you and your family. One way to create this security is to put your home, and other high-value assets, into a trust. We’re covering exactly what a trust is, how it can be used, and the pros and cons of putting your assets in one. 

What is a Trust?

A trust is a fiduciary relationship in which one party, the trustor or grantor, gives the second party, the trustee, the right to hold assets/property for a third party, called the beneficiary. When the trustor dies, the trustee ensures that the assets are distributed according to the trustor’s wishes as spelled out in the trust’s rules. Those rules can also establish how the assets and money are used while the trustor is alive. Not only does a trust outline the trustor’s wishes, but it can also provide legal protection for the trustor’s assets; trust assets can avoid taxes and probate and protect assets from creditors.

Different kinds of trusts serve different purposes:

  • Revocable vsIrrevocable – A revocable trust can be changed or terminated by the trustor during their lifetime and can serve to benefit the trustor while they are alive. An irrevocable trust cannot be changed once established because ownership of the assets lies with the trust and not with the trustor. This is what allows an irrevocable trust to avoid estate taxes. A revocable trust typically becomes irrevocable upon the trustor’s death.
  • Living vs. Testamentary – A living trust determines how an individual’s assets can be used to the individual’s benefit during their lifetime. You can be the trustee of your own living trust and can name a co-trustee (for example, a spouse) to continue managing the assets in your trust. A testamentary trust outlines how an individual’s assets are designated after their death and can only be irrevocable.
  • Funded vs. Unfunded – A trust is funded when the individual titles assets in the name of the trust, whereas a trust is unfunded when assets are not titled in it. 

Pros & Cons

Now that you know what a trust is and what it can be used for, you need to weigh the benefits and disadvantages.

The Pros

There are many positives of putting your home and other assets in a trust, some of which are noted above. First and foremost, titling assets to a trust makes certain that your beneficiaries won’t get tied up in probate. This saves everyone time and money. Probate is the legal process ensuring you have no outstanding debt and that your assets are distributed according to the law. Assets in a will, for example, are subject to probate. 

Unfortunately, the probate process can be lengthy. The whole affair could take as few as five months, but standard cases generally take nine months to a year, and even longer for contested cases. And the family/beneficiaries of the item in probate must pay any legal fees, taxes, and extraneous fees associated with it before receiving the assets. Assets in a trust could be distributed in as little as a few weeks, all while avoiding expensive fees and taxes. 

If an individual owns assets in multiple states but does not put them in a trust, those assets are subject to the unique probate law of each state. So, the beneficiaries would have to navigate multiple probate courts to receive the assets. Titling your assets in a trust avoids the extensive probate process and accompanying fees in multiple states.

The probate process is public, meaning that anyone can see your estate and assets. Since trusts are not subject to probate, your estate remains a private matter. The contents of your trust are known only to your beneficiaries after your death.

Putting your assets in an irrevocable trust means that they are protected from creditors and steer clear of estate taxes. Assets in an irrevocable trust may not be seized by creditors and are not subject to estate taxes, which is beneficial as assets appreciate. 

A living revocable trust protects your assets from conservatorship if you become incapacitated. A conservatorship happens when the court appoints a guardian to manage the incapacitated individual’s finances. But a successor trustee (like the spouse of the trustor) chosen by the trustor can manage the finances and assets in a revocable living trust —unlike a guardian appointed by a judge—who steps up as the trustee if the trustor is incapacitated.

The Cons

While there are many benefits to putting your home in a trust, there are also a few disadvantages. For one, establishing a trust is time-consuming and can be expensive. The person establishing the trust must file additional legal paperwork and pay corresponding legal fees.

While accurate record-keeping can be a challenge, trusts are more complex so keeping up-to-date records is paramount, particularly for tax purposes. Taxes are relatively straightforward for a living trust if you are both grantor and trustee. On the other hand, moving assets in or out of the trust requires additional records. It can be easy to forget about recordkeeping if it’s been some time since you established the trust. After establishing a trust, you should regularly revisit your trust to ensure it is accurate and best serves your needs. Trustees are also obligated to account to the beneficiaries on a regular basis for the managed assets.

As alluded to earlier, in the case of a revocable trust, the assets in it are not removed from your taxable estate at the time of your passing. This is because in a revocable trust you still maintain ownership over the items in it. So your beneficiaries may still have to pay estate taxes on the assets in your revocable trust after your death.

And for the same reason that your estate is still taxable, assets in a revocable trust may also be seized by creditors. If this happens, the trust could be dissolved to compensate the creditor. 

While there are a few cons to putting your home in a trust, the benefits may  outweigh the drawbacks. Even though it can be costly and somewhat time-consuming on the front end, a trust ensures that your assets are distributed as you see fit to best benefit your family, without the lengthy public probate process and additional fees and taxes. 

Give us a call today if you are wondering if establishing a trust is the right estate planning move for you. 

4 Ways the Biden Administration Could Impact Estate Taxes

Despite some pending lawsuits from the Trump Campaign, Joe Biden is the presumed President-elect of the United States. As we look to a Biden Administration, you may have questions about how the tax code could change. Will you owe more or less in taxes? How will this affect you and your family? Especially for those with high accumulated wealth, changing estate taxes is a primary concern. We’re covering what you can expect under a Biden Administration and how to prepare.

1. The Biden Campaign proposed returning estate tax levels to “historical norms.” 

Currently under the TCJA, the federal estate-tax exemption is $11,580,000 ($23,160,000 per married couple). This means that you can transfer up to this amount during life or at death to a beneficiary without incurring federal estate or gift taxes. Any amount in excess of this exemption is subject to taxes. 

Although President-elect Biden has not yet clarified what “historical norms” exactly means, it could indicate a return to Obama-era tax levels. This could lead to a reduction of the estate tax exemption amount to $3,500,000 ($7,000,000 per married couple) and a reduction of the gift tax exemption amount to $1,000,000 ($2,000,000 per married couple). So any estate or gift amount in excess of the exemption amounts would be subject to estate or gift taxes.

Biden, according to the tax plan he released before the elec­tion, would raise taxes on individuals with incomes above $400,000. This would include raising individual-income, capital-gains, and payroll taxes. Biden would also raise taxes on corporations by raising the corporate income tax rate and im­po­sing a corporate-minimum book tax. Those who earn less than $400,000 per year would not see their taxes rise.

2. Biden returning estate tax levels to “historical norms” may also indicate that the top gift and estate tax rate could rise to 45%. 

Current estate-tax rates top out at 40%. But under Biden’s tax plan these levels could revert to 2009 levels at 45%. This, coupled with reducing estate and gift-tax exemptions, could mean that estates with assets exceeding the estate tax exemption level would owe more taxes. The Biden tax plan would not affect most taxpayers.

3. Biden has endorsed the removal of “Step-up in Basis.”

First, let’s figure out what “step-up in basis” means. When an asset is passed on to a beneficiary on the original owner’s death, the asset has often appreciated since the time the original owner obtained it. To avoid large capital-gains taxes, the asset receives a “stepped-up” cost basis. This cost basis is the market value of the asset at the time of the original owner’s death. Current policy taxes Capital-gain income on any amount that exceeds the cost basis. So, when an asset has a higher cost basis the capital gains taxes are much lower. 

For example, Clara purchases a home in 2000 for $300,000 but then passes it on to Ben at the time of her death in 2020; the house has now appreciated to $500,000. Since the market value of the home at the time of her death is $500,000, this is the new basis of the home. Later, when Ben sells the home for $550,000, the amount he is taxed on is $50,000—the difference, or the excess, between the selling price of the home and the cost basis ($550,000 – $500,000 = $50,000). So taxes are only due on any amount that the asset appreciated over the cost basis established at the time of the original owner’s death.

Biden has indicated that he may eliminate this benefit in his tax plan. This could mean that any unrealized appreciation of the asset could be taxed at the time of the original owner’s death. Alternately, this could mean that the cost basis for an asset is what the original owner paid. To use this application in our previous example, Ben would either owe capital gains taxes on the unrealized appreciation of the home ($200,000) or Ben would owe taxes on the asset if it were sold for any amount in excess of the original price/basis, which is $300,000.

4. If you have a high-value estate, be sure to review estate-planning strategies now.

The year is winding down and it is advisable to evaluate your current estate plans. Consider how to optimize the value of your estate before year-end should the tax code change. 

If you’re feeling confused about how potential changes in Federal Tax Code could impact your estate, we’re here to help! Contact us today to find out how estate planning could help you and beneficiaries of your estate.