One of the top estate planning tools has just gotten better!
by Harry W. Laughlin III Attorney At Law
Estate Planning Attorneys like me use Revocable Living Trusts (RLT) to help clients avoid Probate and save thousands of dollars and hours of stressful work for their loved ones. However, after a client dies, his RLT does result in added taxes and tax complications. In this article, I describe a new form of RLT, the Merging RLT, that can vastly cut time and costs for the surviving spouse.
An RLT is a Trust, a legal relationship under which you, the Grantor, give money or property to your Trustee, to manage for one or more Beneficiaries, usually family members. It is called “revocable” because you can change it. It is called a “living” Trust because you create it during your life.
An RLT is created with a trust agreement, which allows you to control trust operation. After your death, the Trustee manages the Trust property for children or others. Yet the RLT can avoid probate. So it avoids the cost of bonds, inventories and accountings, asset freezes, and publicity as long as no property remains in your name.
An RLT is a “grantor trust” so its income is taxed to the Grantor during his life, and the Trust need not file a tax return. At the grantor’s death, the Trust property is treated as part of his estate for death tax purposes. I can add various provisions to the Trust to reduce estate taxes.
The new federal estate tax laws exempt an estate unless it is valued at more than $5,000,000 (The Tennessee inheritance tax applies to an estate in excess of $1,000,000) With less tax worries, many of my clients concentrate on meeting personal goals. I have invented a new form of RLT, which I call a Merging RLT, which vastly simplifies the taxation of an RLT after the Grantor’s death.
Old. Traditionally, after the Grantor dies, his RLT continues in existence with the family as beneficiaries. The RLT must obtain an employer identification number and file its own tax return, a Form 1041, from then on. Trust taxation is complex and harsh. It requires a unique accounting system, and trusts pay higher income taxes than any other taxpayer. Trust “distributable net income” in excess of $11,150 that is not distributed to the beneficaries is taxed at 35%.
New: Merging RLT. Upon a Grantor’s death his Merging RLT merges itself into the surviving spouse’s RLT. The old RLT ceases to exist. The RLT of the surviving spouse is typically a “grantor trust” the income and property of which is taxed to the surviving spouse. No EIN. No arcane trust taxation or expensive trust returns to file. In short, life is just as simple as it was before the death. Of course, there are considerations that might cause an estate planning attorney to avoid the Merging RLT. For example, the surviving spouse’s creditors would now be able to access the property of the merging RLT. Consult me or your own estate planning attorney.
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1 Harry W. (Wis) Laughlin III is a 35 year practicing attorney, a former IRS attorney and an Accredited Estate Planner (AEP), a member of the National Association of Estate Planners & Councils (NAEPC) who the NAEPC determines meets stringent requirements of experience, knowledge, education, professional reputation, character, ethics and teamwork . See www.naepc.org