Tag Archives: federal estate tax exclusion

Should We Create a Living Trust?

houseDear Liza: We are a married couple in our early and mid 30s with a one year old son living in Southern California. I have been looking at setting up a trust and/or will for our little family but not sure what is needed in our scenario. My husband and I each own a home in our name (bought before we got married). 

 My husband and I plan to create a living trust for each of us and transfer the property in our respective name into the trust to avoid probate and create a will for everything else. Since both properties still have outstanding mortgage, how do we go about changing the title to a trust and will the lender allow this? Is the living trust the best way to go about with estate planning or do we need to look at another type of trust? Aside from the two properties, what else should be included in the trust? Do we need to create an ILIT for the life insurance policy to avoid estate tax and inheritance tax? What is the exemption limit in California? It sounds like you are thinking about all the right things (and on your way to owning a real estate empire). Yes, a living trust is a great idea for your family for these three reasons:
  1. A living trust will allow you to transfer your assets to your son without a probate proceeding.
  2. A living trust will allow you to set up a trust for your one-year old son so that an adult can manage his inheritance until your son is an adult.
  3. The transfer of your properties into a living trust will not affect your mortgage–there’s federal legislation that says such a transfer does not trigger any due on sale clause. Your lender doesn’t need to be notified, you just record a deed transferring your property to the trust.

You probably don’t need an insurance trust. That’s what people use to exclude the value of their insurance payouts from their taxable estate. But today’s exemption levels ($5.43 million in 2015) are so high, that most of us won’t have to pay any estate tax, even if our life insurance policies are included in our taxable estates.

Funding subtrusts after the death of the first spouse

Dear Liza: In settling an AB trust I understand that 50% of the estate is to be placed in each of the A and B trusts. However, in our estate our house is worth more than all of the other equity. How can the estate be settled? With percentages of the home? Put the home in which trust?  That’s not a question you can answer in the abstract.  Those decisions get made after the first spouse dies.  First, you can’t know, now, what assets you’ll own then.  Second, in an A/B trust, the assets of the deceased spouse are used to fund a trust, often called a “B” trust or a “Unified Credit Trust,” up to the amount of money that’s excluded from the federal estate tax in the year of the first spouse’s death.  In 2012, that’s $5.12 million, but at the end of this year, that number falls to $1 million, unless Congress enacts new law. So, it’s not always going to “half” of the total trust estate, that will entirely depend upon the tax code in effect at the time your spouse dies. But, to answer part of the question you asked, the B Trust can be funded with a percentage of the house, and often is when there aren’t other assets that can be used to do so.