Living Trust Estate Probate by hip17229


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									                                                                          There are no gift tax
    Living Trusts                                                         consequences when a living
    Avoid the expense and delay of probate through the creation           trust is established. The
    of an inter vivos “living” trust.                                     transfer of property into the
                                                                          trust is not considered “a gift”
    Probate can be expensive. Not only that, but it can cause             because the grantor still
    lengthy delay when distributing property to heirs, and make           retains the right to revoke it.
    your death (and distributions) a public affair. Fortunately,
    these problems can be eliminated by creating an inter vivos           Neither are there any estate
    or living trust.                                                      tax benefits, unless the living
                                                                          trust includes A-B trust
    Living trusts are legal instruments that allow a party (called        provisions that will maximize
    the trustee) to hold property for the benefit of another party (a     your unified credit. Since a
    beneficiary). The trust creator (the grantor) transfers property      living trust is revocable, all
    to the trust and dictates how the trust works. Legal title in the     property held by the trust is
    transferred property passes from the grantor to the trustee,          included in the grantor‟s
    who also assumes fiduciary and managerial responsibility              estate, at death, for the
    over the trust. The trustee will then distribute income and           purpose of calculating
    principal to the beneficiaries according to the terms laid out in     federal estate tax liability.
    the trust. Since this is a “living trust” it is imperative that the
    grantor fund his living trust with assets while he is still living.   The advantages of a living
    In most states, nothing prevents you from being the grantor,          trust stem from streamlining
    the trustee, and the beneficiary at the same time. That means         the administrative aspects of
    that, in these states, you can create a trust, control it‟s           your estate. Through a living
    assets, and receive distributions from the trust.                     trust you can also control the
                                                                          timing of your asset
    Living trusts are revocable: they can be rewritten and altered,       distributions.
    even after its creation, by the grantor. The grantor can amend
    it or completely revoke it, retaining full possession of the trust    Because assets held in a
    assets. From the IRS‟ perspective, the grantor is still               living trust are not
    considered the owner of the trust property, and all income            considered part of the
    from that property is taxed on the grantor‟s tax return at the        grantor‟s probate assets
    grantor‟s tax rate. Usually, creating a living trust will not         (unless they specifically
    require an additional income tax return each year.                    revert back to the grantor‟s
                                                                          estate at death), they
                                                                          generally are not subject to
                                                                          probate administration or
                                                                          probate administration fees.
                                                                          Thus, by taking your
                                                                          property outside of probate,
                                                                          a living trust provides privacy
                                                                          in the administration and

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    distribution of assets, minimizes estate administration costs,      A-B Trust Provisions
    and avoids administrative delays.
                                                                        The A-B trust is designed to
    Maximize Your Unified Gift Credit                                   provide a surviving spouse
    The Unified Credit is the amount of money each and every            with access to the family‟s
    American can give away during their lifetime without any gift       accumulated wealth while
    taxes. While the Unified Credit can be used during one‟s            simultaneously minimizing
    lifetime, it is usually used when transferring assets to heirs at   the combined federal estate
    someone‟s death.                                                    tax bills due at the deaths of
                                                                        both spouses.
    In 2003, the Unified Credit is $1,000,000 per individual. In
    many cases, a married couple with only simple wills drafted         The A-B trust accomplishes
    will only use one Unified Credit between them. For instance,        this by utilizing both
    when the first spouse dies, that spouse‟s estate passes 100%        spouses‟ lifetime unified
    estate tax-free to the surviving spouse. Sounds good so far,        transfer credits (which,
    but when the second spouse dies, only one Unified Credit            together, currently shelter
    can be used. The remaining estate is then subject to estate         approximately $2,000,000
    taxes.                                                              from estate taxes), while
                                                                        currently taking advantage of
    A-B Living Trusts solve this problem and maximize the               the unlimited marital tax
    Unified Credit for couples. By dividing the estate into two         deduction, which provides
    separate shares when the first spouse dies, A-B Living Trusts       for completely tax-free
    maximize Unified Credit exemptions for each individual.             interspousal transfers of
    Having an A-B Living Trust can                                      property, both by lifetime gift
    slash your tax bill, and literally save heirs thousands of          and after death.
                                                                        There are two methods to
    The Unified Credit is not a static amount. In fact, only a few of   create an A-B trust: 1)
    years ago, the Unified Credit sheltered $600,000 in assets.         through a living trust, or 2)
    But EGTRRA of 2001 began raising the Unified Credit                 by a testamentary trust. If
    gradually through 2009 to $3.5 million. Here‟s a breakdown of       the grantors (husband and
    the proposed increases:                                             wife) create an A-B trust as
                   Year of Death/Gift        Exemption Amount           part of their living trust, the B
                   2002 & 2003               $1,000,000                 trust won‟t actually come into
                   2004                      $1,500,000                 play until the first spouse‟s
                   2005                      $1,500,000                 death. If the grantors create
                                                                        a testamentary A-B trust, this
                   2006-2008                 2,000,000                  simply means they have
                   2009                      3,500,000                  instituted it via their wills.
                   2010                      No estate tax              State law may determine
                   2011 +                    $1,000,000                 whether one method is more
                                                                        advantageous than the

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    other. In general, implementation through a living trust is        However, if the spouse does
    preferable, because assets held by a living trust are not          not implement his or her
    considered part of the probate estate, and thus are not            unified transfer credit, it is
    subject to probate administration fees.                            lost.
    The A-B trust, as the name implies, is actually two trusts; the    While the surviving spouse
    B trust, which is designed to hold an amount equal to one          has the right to spend the
    spouse‟s lifetime exemption, and the A trust, which is created     income from both the A and
    to hold the remaining estate assets, transferred at the death      B trusts, we strongly
    of the first spouse for the benefit of the surviving spouse,       recommend, in larger
    through the unlimited marital deduction.                           estates, that he or she
    The surviving spouse may control the A trust and have              exhaust both the income and
    complete access to both its income and its principal. The          principal of the A trust before
    surviving spouse also has access to the income from the B          depleting the B trust income.
    trust. However, his or her right to invade the B trust principal   The larger the pool of A trust
    is usually contingent upon exhaustion of the A trust assets,       assets remaining after the
    subject to the surviving spouse‟s access to the B trust            surviving spouse‟s death, the
    principal through a “five and five power”, which is a non-         greater the estate tax paid.
    cumulative right to withdraw each year the greater of 5% of        The income earned by the B
    the trust principal or $5,000. If the surviving spouse is the B    trust assets and their growth,
    trust trustee, an „ascertainable standard‟ clause will also        on the other hand, is not
    entitle him/her to invade the principal as needed for his/her      subject to estate taxes.
    health, education, maintenance and support.                        Therefore, the surviving
                                                                       spouse should shrink the A
    Significantly, the surviving spouse‟s limited access to the B      trust assets before invading
    trust assets prevents their inclusion in his or her estate at      the estate tax-free B trust
    death. The B trust assets are deemed passed from the first         assets.
    spouse directly to the children (or other designated heirs),
    bypassing the surviving spouse‟s estate. Therefore, the first      The B trust assets will
    spouse‟s lifetime unified transfer credit is used to shelter the   appreciate outside of both
    B trust asset from estate tax.                                     spouses‟ estates. Therefore,
                                                                       investments that are likely to
    The surviving spouse‟s lifetime unified transfer credit remains    show a significant
    available to shelter assets held by the A trust. Thus, each        appreciation are appropriate
    spouse can shelter up to $1,000,000 in assets from estate          B trust assets. Conversely,
    taxes. Furthermore, use of the unlimited marital deduction to      the B trust assets will be
    transfer assets to A trust for the benefit of the surviving        subject to income tax. Since
    spouse will ensure that no estate taxes are paid at the time of    the B trust is an irrevocable
    the first spouse‟s death.                                          trust, it is a separate tax
    Without the A-B trust arrangement, all of the assets belonging     paying entity. As such, it is
    to the first spouse could be transferred to the surviving          subject to the highest
    spouse by way of the unlimited marital deduction, thus             individual federal income tax
    avoiding any estate tax at the first spouse‟s death.
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    rate. The best way to address this problem is by funding the
    B trust with municipal bonds or any other investment that
    yields tax-free income. For example, an existing modified
    endowment contract (or MEC) is an ideal investment to place
    into a B trust. A MEC is similar to a life insurance policy in
    that the death benefit is paid to the beneficiary income tax
    free. MEC‟S are available with either a fixed return or a
    variable return, produced by all types of mutual fund equity
    investments. Like an annuity, the cash values of a MEC grow
    tax deferred. Thus, the B trust will not pay income tax on the
    growth. However, because a MEC can legally be funded
    much more quickly than a life insurance policy, the cash
    values and thus the death benefit of the MEC grow
    substantially faster, offering a tremendous return for the
    ultimate beneficiaries of the trust– your children.
    In summary, if both spouses wish to reduce the aggregate
    estate taxes payable at each death and defer the estate tax
    bill to the time of the second spouse‟s death, while at the
    same time allowing the surviving spouse full economic
    enjoyment of the families wealth, a living Trust with A-B
    provisions is a necessity.
    To learn more, contact Retirement Strategies Group toll-free
    at (800) 423-4891. Retirement Strategies Group is one of
    America‟s leaders in retirement planning and endorsed by
    many prestigious national associations and affinity groups.

         4225 Executive Square, Suite 1060, La Jolla, California 92037
                 Phone (800) 423-4891 Fax (858) 642-0171

  Insurance offered through RSG Partners Financial & Insurance Services, Inc.
     Securities offered through Brecek & Young Advisors, Inc., a registered
                   Investment Advisor, Broker/Dealer, Member

Call toll-free (800) 423-4891                                         
a, California 92037
                 Phone (800) 423-4891 Fax (858) 642-0171

  Insuranc e offered through RSG Partners Financial & Insurance S ervices, Inc.
      Securities offered through Brecek & Young Advisors, Inc., a registered
                    Investment Advisor, Broker/Dealer, Member

Call toll-free (800) 423-4891                                                     www.MyRetir

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