One reason for a living trust for a married couple is the opportunity to pass on their estates to their children in the most tax-efficient manner. When the first spouse dies, the surviving spouse is allowed to make use of all available tax benefits. This can be the difference between leaving your children the wealth you have accumulated and leaving them with barely enough to pay for funeral expenses.
Can’t I just leave everything to my spouse?
Typically, when one spouse dies, they leave all of their assets to the surviving spouse. Although this seems logical, it actually prevents the use of the deceased spouse’s estate tax exemption. Currently, the estate tax exemption is $5.34 million (it will increase to $5.43 million in 2015), which means that much of your estate can be transferred tax free. How is the tax exemption lost? Because the assets are transferred into the name of the surviving spouse, and when that spouse later dies, the only exemption available is his or her own. On the other hand, the estate tax exemption is “portable.” This means that if the estate tax exemption is not used by the first spouse, it can be passed on to the surviving spouse. So, the surviving spouse could potentially have an exemption of $10.68 million (or $10.86 million in 2015).
How does a living trust work?
If you place your assets into a living trust, the assets and income will remain available to the surviving spouse after the death of the first spouse. When the surviving spouse dies, none of the assets from the first spouse are included in the surviving spouse’s estate because they are in the trust. The benefit of the trust comes when the surviving spouse dies, and the estate passes on to the children without the assets ever being subjected to federal estate taxes. Under current laws, almost $11 million of assets can pass to the next generation federal estate tax free.
Are there other benefits in creating a living trust?
When one spouse dies, having his or her assets in a living trust, the surviving spouse will retain access to the income and the principal assets for certain life-sustaining needs, as well as the right to withdraw up to 5 percent of the value of the trust each year. The surviving spouse is also allowed to gift assets to the children from the trust and determine how to disburse the remaining assets at his or her death.
Although living trusts are one of the most versatile, effective and commonly used estate planning tools, they can be complicated and confusing to those unfamiliar with how they should work. If you have questions regarding living trusts, or any other estate planning needs, feel free to contact our office.