You may think you don’t need to make any estate planning moves because of the generous federal estate tax exemption of $12.92 million for 2023 (effectively $25.84 million if you’re married).
However, if you have significant assets, you should consider establishing a living trust to avoid probate. Probate is a court-supervised legal process intended to make sure a deceased person’s assets are properly distributed. However, going through probate typically means red tape, legal fees and your financial affairs becoming public information. You can avoid this with a living trust (also commonly called a family trust, grantor trust and revocable trust).
You establish the living trust and transfer legal ownership of assets for which you wish to avoid probate to it (such as your main home, a vacation property, antique furniture, etc.).
In the trust document, you name a trustee to be in charge of the trust’s assets after you die and specify which beneficiaries will get which assets.
You can be the trustee while you’re alive. After that, you can designate your attorney, CPA, adult child, sibling, faithful friend or financial institution to be the trustee.
Because a living trust is revocable, you can change its terms at any time, or even unwind it completely, while you’re alive and legally competent. That’s why it’s called a living trust.
For federal income tax purposes, the existence of the living trust is ignored while you’re alive. As far as the IRS is concerned, you still personally own the assets that are in the trust. So, you continue to report on your tax return any income generated by trust assets and any deductions related to those assets, such as mortgage interest on your home.
For state-law purposes, however, the living trust isn’t ignored. Done properly, it avoids probate. And that’s the goal.
When you die, the living trust assets are included in your estate for federal estate tax purposes. However, assets that go to your surviving spouse aren’t included in your estate, assuming your spouse is a U.S. citizen — thanks to the so-called unlimited marital deduction privilege.
As explained earlier, you probably don’t have to worry about a federal estate tax bill with today’s huge exemption. But the exemption is scheduled to go down drastically in 2026 unless Congress extends it. If Congress fails to do so, you may need to revisit your estate plan.
A living trust has several benefits, but mind these details or you won’t get the expected probate avoidance:
Living trusts do nothing to avoid or minimize the federal estate tax or state death taxes. If you have enough wealth to be exposed to these taxes, additional planning is required to reduce or eliminate them. Contact us for more information.