When worded correctly, they do! While living trusts have nothing to do with real estate tax bills, they can be well designed to reduce these real estate taxes or avoid them altogether. A couple can transfer ownership of their property to a trust and then act as trustees of this document. Both husband and wife can act as co-trustees of the property, so that when one spouse dies, the other can still manage the living trust and; therefore, avoid costly estate tax bills.
Why is this so? Why won’t the other spouse pay taxes on the property your spouse has left you? The reason is that the couple’s property remains owned by the trust and not by the surviving spouse. With the death of a spouse who is also a joint trustee, there is still another joint trustee who can administer the living trust. Therefore, the property in question will have reduced taxes or no taxes at all, since the ownership of the property passes to the marital life trust or the so-called AB trust. If the amount listed in the AB trust is less than the federal estate tax threshold, the surviving spouse does not need to pay estate tax at all.
Here is an example. Let’s say a couple owns a property that is valued at $1,500,000. If a living trust was not established and one spouse is deceased, the surviving spouse can pay taxes of $825,000, which is equal to 55% of the total value of the property. However, where a living trust exists, the surviving spouse will not be required to pay this amount. This is because only half of the value of the property is subject to estate taxes, since this is the only part that belongs to the other spouse who died. This half, which is $750,000, falls within the $1,000,000 estate tax exemption bracket; therefore, it will not be necessary to pay taxes.
The surviving spouse can continue to manage the property and name your beneficiaries in the event of your death. When the surviving spouse dies, their $750,000 will also not be taxable, as this falls below the current tax-exempt threshold. However, tax exemption brackets can change over time, so it’s best to stay well informed about current tax laws.
In addition to reduced estate taxes, living trusts are created primarily for privacy, avoiding probate and estate planning when one dies or becomes disabled. Unlike a last will and testament, which is public, a living trust is private and will not go to trial. Only you and the beneficiaries will know; thus protecting the privacy of the family. Most importantly, costly probate hearings can be avoided with fully funded living trusts.
A living trust offers so many benefits not only to its creator’s beneficiaries but also to the creator/trustee himself. You may be able to plan your estate well and assign people to care for you in case of disability. Living trusts are one aspect of estate planning that provides a secure future for your loved ones. They help avoid estate taxes, take the hassle and expense out of probate hearings, and most importantly, plan your estate according to how you want things done.
