Trust attorney Scott N. Carter discusses the advantages of estate planning, setting up trusts and tax exemptions. He discusses lifetime exemptions; why estate planning is critical; and how setting up trusts can avoid estate and income tax on assets.
Trusts and Tax Exemptions | Lifetime Exemptions
The exemption applies to everyone. Whether I have a trust or not I get my lifetime exemption. It’s a lifetime exemption. What people don’t understand is that you can actually gift away your assets as well as pass away with them.
The advantage of the trust is to avoid the court process, avoid probate, and the conservatorship process. What is very important with people mistake that an exemption is so high that I don’t have to do estate planning and that is a very critical error. If you do not do any estate planning you are going to be in the court process when you pass away, that is probate. Worse, is going to be the conservatorship process. That is when you become incapacitated.
Avoid Probate and Conservatorship
If we don’t have a trust and we have someone that has become incapacitated, therefore we are going to have to go to court and have someone appointed as their conservator to handle all of their assets and their living expenses, payments, and debts, and everything. After one year, and every other year you are going to have to come back and report to a judge everything that you have done.
The advantage of the new type of trust that we are doing is that we have added a level that not only can we avoid the probate and conservatorship but our goal is to avoid both the estate tax and the income tax on assets.
A simple example would be if one spouse dies and we have a trust that splits, in the old way we ended up with assets that appreciated, which makes sense. On the survivor’s side, the assets appreciate but also on the decedent’s side. The problem that we had is if the assets were on the decedent’s side and they appreciated, when the survivor dies, the beneficiaries now get all of the assets without going to court but they have to pay capital gains tax on the appreciation on the decedent’s side if they sell the assets.
With the new rule of portability allowing me to use the deceased spouse’s unused exemption and to make both sides of the equation or both spouses’ assets taxable at the second death, even though they are below the exemption so I don’t have an estate tax, it allows me to get what we refer to as a step up in basis so that I don’t have an income tax.
Step Up In Basis
A simple example of step-up so that everyone understands step up is that if I buy a house for $100,000 and it grows to $500,000 we realize that what we have got is a gain of $400,000, the difference between the five and the one. That is our capital gain. If on the first death, we live in what we call a community property state, so we actually get a step up in basis to the fair market value on the date of death of the first spouse. That means this house that we bought for $100,000 but when one spouse dies is worth $500,000, we now have a new tax base of 500. If we sell it for $500,000 we do not have any gain.
This, of course, ignores the capital gains benefit for a spouse which is $250,000 per person, or $500,000 per couple. In this valley, we have had appreciation skyrocket and it could be much higher.
The advantage of portability is, say I have a rental, and we know the basis is $500,000 but we put it into the decedent’s side and now it grows to $1 Million. Now the surviving spouse dies and the decedent’s trust and the surviving spouse, both sides of the trust go to the kids.
Well now the surviving spouse gets that step up but I don’t get it on the decedent’s trust. Therefore, if those kids now sell the house for $1 Million, they actually incur a $500,000 capital gain.
If we use our new process where we can make the deceased spouse’s unused exemption portable and put it into a special type of trust we can now say, okay when the decedent dies, yes, the estate is below the exemption of both spouses so we do not have any estate tax and believe it or not we now get a step up in basis on both spouses assets.
This means my example of the house growing to $1 Million and the kids now sell it for $1 Million and they actually pay no estate tax they don’t pay any income tax.
Scott N. Carter is a partner in a boutique San Jose law firm, Carter, Dougherty & McGuire. The firm’s business principles are driven by the needs of its clients. They are certified specialists in taxation, probate, estate planning, and trust law. Scott can be reached at 408-241-2121.
Certified Probate Realtor
Kathleen Daniels believes it is important to hire an estate planning attorney who is a certified specialist who not only sets up trusts but can assist with trust administration tasks such as assisting in the preparation of the final trust tax return. Our clients ask up a lot of questions that are legal in nature. Even if we may know the answer, we are not attorneys licensed to practice law. Attorneys can answer questions such as:
- What is a trust fund?
- What is a trust account?
- How to get a trust tax ID?
With so many advantages of estate planning, setting up trusts and tax exemptions, it amazes us that more people don’t set up trusts and avoid probate.
If you inherit real estate and need to sell real property in probate or held in a trust hire a trained and certified probate and trust real estate professional.
Need Probate Help | Kathleen Daniels | Realtor