Less than half of Americans—44%—have a will, according to a 2016 national Gallup poll survey, and that number has declined over the last decade. A burgeoning number of baby boomers are retiring or nearing retirement age, yet are unprepared for the many considerations that must be given to proper estate planning. Only 68% of adults 65+ and 56% between the ages of 50-64 have a will. Failing to have an estate plan is a dire mistake with consequences that can tear families apart and result in huge legal hassles. While you won’t be around when the time comes to divide up your assets, if you want to both ensure the government doesn’t decide who gets what and help maintain your family’s peace, it’s important you take steps now to ensure your property more easily transitions to your heirs.
While there are many vehicles for transferring estates and lessening the tax consequences, we’ll look at a couple of options you might consider if your estate planning goal is to avoid probate, protect assets, or reduce the size of your overall estate. Trusts—either revocable or irrevocable—can be a valuable means of helping you accomplish these goals, but it’s important to understand some of the differences and features each offers, in order to determine the best option for you.
Revocable trusts are commonly used in estate planning, and, as the name implies, the asset transfer doesn’t have to be permanent. When an asset is placed in a revocable trust, the grantor does not give up all rights to the asset. It is possible to take the asset back if you change your mind, resulting in the termination of the trust. Because of this, all assets held in revocable trusts are included in the overall value of your estate.
Since this technique doesn’t decrease the size of your estate, why are revocable trusts so popular in estate planning? There are a few reasons. Assets held inside revocable trusts are not subject to probate. At the grantor’s date of death, the revocable trust will become an irrevocable trust. The assets held in the trust will then pass directly to beneficiaries without going through the lengthy probate process. This allows for more privacy, as probate court proceedings are a matter of public record. Trust beneficiaries will receive a step-up in the asset’s basis at the grantor’s date of death. This step-up to fair market value is important, as it increases the basis of the asset in the hands of the beneficiary. This will lower any gain the beneficiary may recognize if they were then to sell the asset. The fully appreciated value of assets held in revocable trusts will be included when calculating the total value of the estate and may be subject to taxation at the estate level.
Unlike revocable trusts, when an asset is placed in an irrevocable trust, the title actually transfers to the trustee. This title transfer cannot be reversed. This approach decreases the overall value of your estate, while still providing asset protection for the property placed in the trust for your future designated beneficiaries. Since an ownership transfer takes place at the time an asset is transferred to an irrevocable trust, there can be gift tax implications, depending on the value of the property. It also is important to note that the property basis is established at the date of transfer; so, any future appreciation will be excluded from the estate. If you expect the property to appreciate after the date of transfer, it might be worth comparing the estate tax savings to the taxes the beneficiary could potentially incur on the gain if he or she sells the asset without receiving that step-up in basis.
Trusts are widely used to protect assets until you are ready for your beneficiaries to receive them. Understanding how each type affects the overall value of your estate, and the future property basis in the hands of your beneficiaries, will allow you to make the best decisions today for maximum tax savings. There are a multitude of other trust variants to consider as you go through the estate planning process. If you would like to discuss additional avenues of estate planning, and ways to mitigate the related tax consequences, contact one of our executives below, (800) 270-9629.
