The benefits of a revocable living trust are priceless. With a revocable living trust, parents can rest easier knowing their estate will be dispersed in a manner in which they desire. There are also tremendous probate court cost savings if you have a revocable living trust.
Every parent's responsibility is to try to give their children as many opportunities in life as possible. As a result, we get life insurance, set up a 529 plan, establish a will, invest for their future, and spend as much time with them as possible before they fly away.
There is a lot of angst and anxiety amongst parents today due to globalization, declining meritocracy, and hyper-competition. Establishing a revocable living trust helps allay some fears we have for our children.
The Origination Of Trusts
Trusts may have originated in the 8th century but became more common during the times of the crusades. Knights would travel to far off lands, fighting for their church and king. These men left their families for months if not years with little communication back home.
They left wives and children to tend to the home not knowing if they would return until they either showed up at the front door or the other knights came home and told their families they didn’t make it home from the battle.
If there was no trust in that day, the Crown could claim any property belonging to the knight under royal rights and the wife and children carry on penniless.
Fortunately, we aren’t as archaic today but there are still benefits of a trust, especially for those with a high net worth.
Revocable Living Trust Key Definitions
In order to know what we are talking about, we need to define some terms.
The basic goal of a trust is to provide a responsible person (or firm) for the assets of someone else.
The settlor (also sometimes called trustor, grantor or donor) is the person with the assets.
The trustee is responsible for those assets. The trustee acts for the benefit of the people receiving the assets once the settlor is dead or incapacitated.
The beneficiaries are the people receiving the assets.
High income earners with a large net worth and especially those with children should look into the benefits of a revocable living trust to see if it's right for them.
With President Biden looking to eliminate the stepped-up basis and raise the capital gains tax rate, having a revocable living trust is more important than ever.
Differences Between A Will And A Trust
A will only kicks in after you die. A trust can help transfer assets before and after you die.
A will requires probate. Probate is a process in which the court proves that a deceased person’s will is valid. It can be pretty simple or a real pain in the you-know-what depending on the estate. Probate court is also more expensive.
A will is public. A trust is private.
A will completely distributes your assets to your beneficiaries after your death if they are of the age of majority. If you have minor beneficiaries the guardian of the beneficiaries (children) don't get anything to help raise your kids from the inheritance.
With a trust, your assets can stay in the trust and the trustee can distribute assets as your instructions dictate. That means you can give money to the children incrementally to help the guardians care for them.
Another important document you should create and share is a Death File. A Death File has all your usernames and passwords. With the average person having over 100 digital accounts, a death file with some instructions is a must.
Privacy Benefits Of A Revocable Living Trust
If you don’t want some busybody knowing your assets and worth, a trust can help keep that confidential. It isn’t 100% full proof because disgruntled family members can still challenge the trust in court and then the assets of the trust become public record.
However, a revocable living trust is still more private than a will since the will becomes public knowledge automatically.
Some people get pissed off when their attorney includes personal information in a will. This could include social security numbers, birthdays and children's names.
Related: Adopt Stealth Wealth Into Your Life
Lower Potential Cost To Administer Estate With A Trust
When the settlor dies, all his assets transfer over to the trust. All assets should be titled in the name of the trust while the settlor is alive but if you include a “pour over” will, even those titled in the settlor name should eventually end up in the trust.
For example, the pour-over will could cover a car not titled in the name of the trust, but the settlor name.
The assets covered by the pour-over will are still public and they still have to go through probate, so if privacy is a big concern, make sure you transfer title to the trust.
Cost Of Probate Is More Expensive Than A Trust
In Henry Abts III’s book The Living Trust, he estimates the cost of probate between 5-15% but this is highly situation specific. Fees include court filing fee, personal representation fee, posting a probate bond, publication of legal notices, tax preparation fees, property appraisal fees and attorney fees.
If the family starts a heated legal battle over a will’s legitimacy, the heirs might be left with very little once the courts get their cut. Just look at how Elvis' estate was fleeced.
Fees will vary by state but some states have standardized fees. Just check out California:
Probate fees are ABSURD if you don't have a revocable living trust
This is a handy probate calculator for Californians. Talk about a ridiculous amount of money in fees. So who gets the fees? Attorneys, accountants, the court costs, a probate bond fee, paperwork, filing taxes at the end of the year, brokerage transfer fees. it all adds up.
The government only gets you if you are above the estate tax limit. As long as the estate is below 1.58 million (for 2021) you are good there. Some states might have different estate tax rates so you have to watch that.
Cost To Establish A Revocable Living Trust
When we established our revocable living trust, it cost $1500. That was about 5 years ago. The estate planning attorney I used streamlined the process. We had an initial hour consultation that if we decided to proceed with the trust, he included in the overall price.
Then he forwarded us a long worksheet that helped my wife and I think through the process and convey our wishes. I bet we spend four or five hours going over that worksheet. It was a long discussion but also very good for us to hash out all our wishes if the worst happens.
He then gave us another 20-30 minute phone consultation to review our wishes and clarify any questions he had. A few days later he had all the documents emailed to us for review.
After we reviewed everything, he sent us the documents for notarization and witnessing. We did that and the document should be legally binding after all that.
Revocable Living Trusts Are Also For The Living
If you become incapacitated and unable to care for yourself, without a trust, your heirs are sitting around waiting for you to die before they can receive your assets.
Depending on your family relationships, that might cloud some judgment on whether or not they want to continue medical care or other life changing decisions.
On the other hand, if you have a trust your beneficiaries might be clamoring to have you declared incompetent if they can request information from the trustee and see what they are due to get from the trust.
The bottom line is hopefully your beneficiaries like you for more than your money.
Related: Three Things My Estate Planner Suggested Everyone Should Do
Deciding How Much to Give To The Kids
Here is where a trust has an advantage over a will. There are a million and one ways to decide how much and what to give to your kids. It's situation specific but here is the train of thought on how and what I decided to give to my kids.
1) Figure Out Your Estate's Value
This could include a life insurance policy, investment accounts, real estate, commodities, basically everything of value. Remember to factor in the costs to sell real estate and other poorly liquid assets.
You might not need to sell the assets, like rental property or stocks. The trustee can manage these until the time comes to fund other expenses of the beneficiaries.
2) Prioritize your Goals for your Beneficiaries
What do you want first for your heirs when you're gone? Topics I thought about were basic needs of life, first home purchase, education, life experiences, and wedding costs.
3) Decide on Guardians
My wife and I figure out who we wanted to take care of our kids. Our primary choice is my brother and sister-in-law. Our second choice is our best friends. Of course, we asked these folks if they would take that responsibility. We also discussed how we planned to compensate them for caring for our kids. That is a must.
4) Pick a Trustee
We decided to use a family member as our trustee. We are fortunate that we have a trusted brother, knowledgeable in personal finance, willing to take on the responsibility. Being a trustee of a large estate is no easy task. Make sure your trustee know what he is getting into when he agrees.
Others will choose a lawyer or other professional. The trustee is entitled to compensation and depending on the complexity of the trust or the needs of the beneficiaries, fees due to the trustee could be equivalent whether it’s a family member or lawyer fulfilling the duty.
5) Make Goals For Your Beneficiaries
Then you have to make some assumptions and the goals you want for your beneficiaries, in my case, our kids.
Our assumptions include the yearly cost of raising a child to age 18. As of right now between our 5 kids, we have 35 more kid raising years to get them to age 18. If the average cost to raise a child is ~$233,610 then that is about $13,000 a year.
$13,000 X 35 = $455,000
Depending on the cost of living in your area or where your potential guardians live, you can adjust this up or down.
Related: Two Retirement Philosophies Will Determine Your Safe Withdrawal Rate
6) Help With The Cost Of Education
Some of you may send your kids to private school. Remember to factor in tuition costs. We homeschool our kids. They would go to public school if our selected guardians took custody so we haven’t factored in this cost.
If I’m not around I would still like to give them the advantage of getting a head start on their financial independence. This includes paying for college. The average state tuition with room and board in my location is $26,322 per year.
If I wanted to fund a full ride for each of my five kids I would need 4 x 26,322 indexed to inflation. You could also only fund a percentage.
For my 6-year-old projected college cost for the average state school are $203,742 at a 5% inflation rate. Here are the rest:
- 6 year old $203,742
- 10 year old $167,619
- 12 year old $152,035
- 13 year old $144,796
- 16 year old $125,080
Total = $793,272
Here is the calculator I used to find those tuition costs.
Along with basic living costs, we are up to $1,248,272.
Another consideration was helping with their first home purchase.
We instructed the trustee to distribute $100,000 for each child toward a downpayment on their first homes.
Add another $500,000 in my case.
We didn't want to distribute all the funds as soon as they turn 18 and decided to delay it to when they turn 30 years old. We felt that was old enough for them to establish a career or start a business.
In addition to my financial education, we hope that the delay in the distribution of any other assets from the estate will encourage them to become productive members of society and not depend on Mom and Dad's money to support them.
You can include tolerance bands as well for the various expenses you want to fund. For example, you could fund the average state university tuition but add an extra 10-20% as needed for the situation.
Related: Everything You Wanted To Know About The 529 College Savings Plan
Revocable Living Trust: Putting it Together
If I want to do all these things, I need $1,7248,272 to get my kids through college and buy a decent home in Texas.
My net worth isn’t quite there yet plus a lot of my assets are illiquid. I don’t want my trustee scrambling to sell everything to fund my beneficiaries’ lives. The 529 plan is one of the best ways to transfer wealth tax-efficiently between generations. Take advantage.
What About Life Insurance?
I don't want my wife to worry about finances when I'm gone. I bought enough life insurance to cover her ability to invest and live off the profits.
She and I are the first beneficiaries of the trust but if we both die, we want the kids covered financially. If that requires more life insurance, then you should buy enough to cover the greater set of expenses.
My wife was able to double her life insurance policy for less with PolicyGenius. The pandemic reminded us that having mismatched life insurance coverage made no sense since we were equal partners in raising our children.
I highly recommend you get life insurance coverage if you have dependents and/or debt. Term life insurance is cheap. The best age to get life insurance based on logic is around 30.
Of course, you don’t have to do anything I did. But I figure if I can guide my kids to adulthood and encourage higher education even after I’m dead, I’ve done my job. Hopefully, I’ll give them a lot more than that by living a long life.
You could get really creative and put in a provision that any child who wins a Nobel Prize automatically gets a $100,000 bonus. Maybe you want to inspire physical fitness. If so, give a yearly $10,000 bonus for anyone that can maintain a sub 90-minute half marathon.
You could also disincentivize behavior. For example, if your beneficiary fails a drug test, he gets nothing. The options available through a trust are only limited by your imagination.
Updating The Revocable Living Trust
There's no standard time interval to make changes to your trust documents. You should review it every year or so. Here are some things that could trigger a need to revise the documents.
- Divorce (you or your beneficiaries)
- New Marriage (you or your beneficiaries)
- Birth of another child
- Death or incapacitation of a beneficiary or trustee
- Moving to a new residence
- Financial windfall or setback
- Tax law changes that impact assets classes within the trust
Advantages Of A Trust Owning Multiple Properties
This is where you real estate moguls eyes light up. One of the huge advantages of a revocable living trust is owning multiple properties in multiple states. If you create a trust and actually take the time to title each property to the trust, you could avoid probate through multiple states.
This depends on the state because different states have different rules. But if you are developing a real estate portfolio, this may save some time and money if the properties were ever transferred to your beneficiaries through the trust.
Related: Buy Utility, Rent Luxury: The Key To Real Estate Wealth And Happiness
Minimizing Taxes With A Revocable Living Trust
This depends on what kind of trust we are talking about but a revocable living trust doesn’t avoid taxes. The main concern a lot of us could have is the estate tax.
Right now if your estate is worth more than $12.92 million per parent you have to pay a progressive levels of estate taxes depending on how much you go over the $12.92 million estate tax exemption threshold.
There is an unlimited transfer of wealth to a surviving spouse but you have to file a special form with the IRS. It's not a simple task so if you don't need to do it, I wouldn't.
Some people get in trouble when the second spouse dies by not filing Form 706. It's 31 pages long the instructions are 54 pages. This form has to be filed the year the first spouses passes to take advantage of the exemption, otherwise, you don't get the combined amount.
For example, let’s say your estate is worth 9 million dollars. You can transfer all your wealth to your spouse. Then she/he can file Form 706 and have 10.98 million available for transfer to heirs without paying tax.
Related: How To Pay Little To No Taxes For The Rest Of Your Life
Life Insurance Trust (ILIT)
If you have an estate worth more than that, you could separate out your life insurance into an Irrevocable Life Insurance Trust (ILIT). This entails placing your life insurance into this trust. As long as you don’t die within three years of establishing the ILIT, it's not considered part of the estate.
Upon death, the ILIT receives the insurance money and the beneficiaries can get distributions. While alive, you must transfer enough money to the ILIT to support the insurance premiums and that money is subject to the gift tax rules. (maximum $16,000 per person per year in 2022)
Other Types Of Trusts
Other trusts such as Qualified Personal Residence Trusts, Grantor Retained Annuity Trusts, Charitable Remainder Trusts and Charitable Lead Trusts can also help you reduce the estate tax.
If you find that you're swimming in more money than you know what to do with, you could always give $17,000 per beneficiary per year to reduce your estate tax while you're alive. $17,000 is the current gift tax exemption amount.
Between my wife and I we could give $32,000 a year per kid. If each child has a spouse, we could double the giving to $64,000 a year starting in 2022.
Over 10 years that’s another $320,000 – $640,000 we could shelter from estate taxes, saving us $128,000 – $256,000 in estate taxes at a 40% effective rate. That is also assuming the yearly allowable gift amount doesn’t rise. Unfortunately, the estate tax threshold might decline on President Biden.
Unless you're certain you'll end up above the lifetime exemption, all these hoops may not be worth jumping through. If we retire with several million dollars in our 40’s or 50’s it’s entirely possible to be bumping up or exceeding the exemption level if we live another 40 or 50 years.
The Bottom Line: Establish A Revocable Living Trust
If you have people you care about that could inherit your wealth, a trust could be the best way to allow your wealth to transfer constructively with relatively low costs.
With our trust, if anything ever happened to my wife and me, we would have the kids covered financially and give them a head start toward adulthood.
Don't let laziness or ignorance prevent you from establishing a revocable living trust. Once you do, you will feel more at peace and less anxious. As a result, you'll better be able to focus on living!
Recommendation For Life And Estate Protection
Life insurance should be an integral part of your estate planning process. A life insurance payout is usually tax-free and serves to financially support your loved ones after you're gone.
Check out PolicyGenius, my favorite life insurance marketplace. You can get customized quotes all in one place from competing carriers. The pandemic has reminded all of us that life is ephemeral.
My wife was able to double her life insurance coverage for less money using PolicyGenius. For eight years, she thought she was getting the best rate. PolicyGenius helps shine a light on opaque life insurance pricing.
Everyone with kids needs to set up a revocable living trust and get life insurance.
Join 60,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. Everything is written based off firsthand experience.
60 thoughts on “The Benefits Of A Revocable Living Trust”
I like that you talked about how a revocable living trust is more private than a will since wills become public knowledge automatically. It seems my grandfather is currently arranging some matters regarding his properties but it looks like he’s having a bit of trouble with it. He should probably consult with an expert about it, and maybe ask for trust preparation services.
Great article again, and a good reminder especially in these unpredictable times to get things in order. Could you perhaps share the lawyer you used or how you went about selecting the right lawyer? Are there any ongoing fees in the trust, or additional set up fees beyond the 1500 or so?
Sam, have you ever looked into an offshore trust e.g. Cook Islands trust?
Ohhh these are such propaganda tools to have a person work all their lives to pay for whatever their level of wealth obtains and has paid for – (exmpl; their residence, maybe a vacation home, whatever their estate planner has conned them in to adding to the funding)…then a revocable living trust is drafted with creative wording and language produced by an estate planners general preferences that covers and protects the assets after a person death.
Here’s the harsh realities that every estate planner candy coats to get all that a person owns held in a trust – when you have a revocable trust that you were grantor, Trustee and beneficiary of while living….when you die …the trust owns everything in it……if you named a Trustee …..that has all powers you had while living and a large estate ….your family will not be able to see what is in the trust, will be held like a slave that has to request in writing like a school child for anything they may need…..that is not only going to cost them $135 an hour for time spent on reading request, how long it takes to get an approval and then a check to be cut, that costs about $12 and the embarrassment of having to beg from strangers for what belongs to you but, are talked to as if it is there’s and they are above you and you are left waiting each time for an answer so you know how to go about what you are planning as far as your obligations are concerned…that usually end up costing you double of what you needed to pay or had gotten at a discount that now is more than what retail would cost.
If you think you will be able to run a business you had before that was profitable because you saved by price comparison….you will never break even and the Fiduciaries will make more than the bill costs each time. Exmpl: regular water bill: $90……request to have bill paid: 10 min fee $10 + $10 to go to next person + $12 to cut check…+ 30 min. time to Pick up + 30 min to Bank + gas both ways + your day wasted for an answer and your day is gone. This is an everyday prison – if you aren’t waiting for something they call all their staff for a meeting – cost $1500. to them to have you agree to liquidate property that had nothing owed on it and generates $750 mo income from rent. They don’t stop selling until they have gotten every dime in fees for themselves and then you are left on the street and they are driving new cars, $500,000. houses while your entire life is wrapped up in this monster machine that you are forced to watch being scavenged and spent like drunken sailors because they don’t want your family to be able to spend it all at once? It’s a scam…they don’t want you to give to your family because they can’t hold them as pawns and slaves to humiliate as they take the person you thought loved you and through their actions make you realize the person you thought loved you destroyed your life by putting a stranger in control of your life as you are put in a corner ready to attack any one of the persons for what they have put you through to gain your loved ones “life estate”. If you love your family more than your money – revoke your trust and hand it to them before you die or deed them your property as right of survivor. Because they will hate what you put them through in trying to control life after death. It only benefits the person in charge of it. I should no…I’ve been 3 years watching 5 million meant for my sister and I to be taken and conveyed like it was taking candy from a baby. As they smile and sarcastically wave it in your face everyday. That is the truth I believe trusts accomplish….gambling on investments with your money.
Thanks for the informative post on this topic. Several years ago we had initially set up our trust after our first daughter was born. Now that we welcome our second daughter, I need to go back and update our trust. Fortunately through my day job, they have a legal service that you can pay, where you have access to lawyers in their Network to help you accomplished these tasks at an affordable rate. We have our properry title into the trust. What else would you consider worth transferring into the trust while you are still alive and well?
You mentioned a trust is good for multiple properties. Am alternative option I heard is putting each investment property into its own LLC to protect you from being sued across property. If you have it all under one trust, would this leave you susceptible to being sued across assets?
As compared to P.O.D. instructions on each account (payable on death) that obviate probate? Does this not accomplish the same thing?
“Between my wife and I we could give $140,000 a year to our kids. If each child has a spouse, double it to $280,000.”
How do you get to 140,000 per year? Wouldn’t it be 14,000? (15,000 for 2018).
Superfund $70,000 each.
5 children*2 parents*$14000 = $140000
Does anyone have experience with either Alpha Omega Family Services/AmeriEstate Legal Plan? I attended a seminar with them and was wondering if they were legit.
Tom and Sam – thank you for the insightful post. I have known about this for 10+ years, but there are fundamental questions/ to dos that all written materials tend to leave out which i feel leaves the reader hanging in the end. any insights you can provide into these would be helpful. here are some examples:
1) How does one transfer asset title to a trust while alive? Think about an investment account through TD Ameritrade, or Real Estate Crowdsourcing investments with Realty Shares? How does one do this with a physical vehicle they own while they are alive? Go to the DOT/DMC and have them change the ownership name on the title to the trust’s name?
2) The point above is especially problematic for real estate, especially if you have a mortgage. Will the “change” in title trigger the due on sale clause? Even if it does not, will the local county/municipality simply agree to re issue a new deed to the trust’s name instead of your own personal name?
3) What if one has 5 physical properties – can each be under its own land trust and then each of the 5 trusts owned by the living revocable trust?
4) How does the trustee/executor ever know you have passed away, especially if you were to engage a small local law firm? The same question applies to investment and insurance companies – how do they know you have passed and what ensures they reach out to your beneficiaries? What if your beneficiaries move? How do they find them?
Who has the onus? Is the firm obligated to reach out to your executor or does the person you have designated to execute/handle your trust have to reach out to the law firm? What if you create your own trust and documents – where do you keep the paperwork? How would it be discovered to begin with when you pass? Does not seem like the trust is something that is recorded with a government authority or court system. Who is to say after you passed that one exists to begin with?
5) Just a point of clarification on the article. I believe the 14K per person per year gift tax exemption counts towards your total estate tax exemption (netted against full amount). Example, if you have given 14K to your child for 10 years, the 140K is backed out of the estate tax free wealth transfer amount upon your death. Only the balance is then transferred to your spouse or heirs tax free.
A little late here, but I highly recommend the book Beyond the Grave, by Jeffery Condon.
He discusses the issues of how to leave your estate to your heirs, especially the right ways and the WRONG ways to do it. A must read for anyone creating a will and a trust.
I’m so glad you shared this with the community, Sam. I was just talking to my brother overseas who is expecting a child. I am in the initial stages of research to decide if I will set up a 529 for his child or a trust of some sort. The child will have free and good university options in the country where he will be raised, which is why I’m leaning away from the restrictions of a 529. However, if he decides he’d like to come to his father’s country, I’d like to help out some.
Sort of suprised how many people do not know about living trusts as they have been publicized forquite a long time. Back before early retirement in the early 90’s (age 38 with two young kids) we wrote our own Living Trust (AB Trust) and then just paid $100 to an attorney to make sure everything looked good for our state. At the same time I advised both my parents and in-laws to set up trusts. One chose to do it my way, the other paid an attorney $1800 for one with a fancy binder.
Back then there were two big issues, the first being to avoid probate and the second trying to take advantage of the full estate tax exemption for both people as property transferred to a spouse atdeath had an unlimited exclusion but at the death of the second spouse only one exclusion was avaialble. The Tax Relief Act of 2013 allows the second spouse now to use the unused exemption of the first. In addition the increased exemption made federal tax liability non-existent for most estates. We added an addendum to allow the suriving spouse to make a choice as to file an estate return and allow for the use of the exclusion or to set up the AB trusts depending on whch allowed for a better tax situation.
People often forget that life insurance and retirement accounts avoid probate so trust inclusion for probate avoidence is not a issue. Setting up the trust is easy. Putting house title (cars if you want) and bank/taxable accounts in a trust name is simple.
It is important to have a pour-over will to put misc. assets into the trust and to take the time to set up some system of distribution of personal property to avoid familly inheritance conflicts as much as possible.There are situations where one might put life insurance proceeds into the trust. Read up and get good legal advice.
Obvoiusly with young er children, guardian choic, and distribution iintructions and wishes are important. Also, if there are step children, large estates and others issuesthat require other more complex strategies, good legal advice is necessary.
Having gone through the estate issues of my own parents I would say the trusts made things easy. Everything was settled in about 10 days (except for the house sale which took about 2 months) .
Many people tend to put off estate planning. I suggest taking the time to figure out what works and geting it done. Also I recommend as soon as children are old enoough to sit them down and let them know what you haved planned,especially when it comes to disposition of personal property and the naming of executors and their powers. This can avoid a lot of grief for survivors.
Finally, make sure you have living wills and poer of atrneys set up and that your family members understand your wishes.
Very well written article by Tom @ HIP.
One point that wasn’t emphasized strongly enough in the article is the need to transfer assets (house title, investment accounts, bank accounts, cars, etc. [do not transfer IRAs or other assets that have beneficiaries!]) into the trust.
You still have total control and accessibility to the assets, but legally they belong to the trust.
FS – Thanks for sharing this Fantastic article. Tom@HIP,
I was actually talked out of setting up a trust by my lawyer. He focuses on elder care, so I must have picked the wrong lawyer.
Is it correct that trusts are taxed at the maximum Fed rate, such that there is a disincentive to use trusts?
I don’t quite understand what you mean by the maximum federal rate.
Any assets you transfer to heirs will get a step up in basis so it should save taxes in the long run.
In a revocable living trust you still manage the assets so any stock dividends will be taxes in the usual way. That goes for all assets. Just because they are in a trust doesn’t mean you have to pay a higher tax rate.
Tom @ HIP
You are correct.
I misread articles out there that says trusts are taxed at the maximum rate 39.6%, IF the trust retains the income. https://www.forbes.com/sites/ashleaebeling/2013/01/09/tax-hikes-hit-trusts-hard-beneficiaries-pull-money-out/#49568c8c1b16
In a simple revocable living trust as you mentioned, the income is not retained in the trust and therefore, is taxed in the usual way. No issues there.
Sorry, I didn’t mean to confuse but I did some more research after you posted.
There are two errors in this article.
First, although the estate tax is a progressive tax system, the estate tax credit covers all taxes that would be paid on the first $5,490,000 of assets (as of 2017). This means that all assets above $5.49M are taxed at 40%.
Here’s an example:
– You die with assets of $5,000,000. This is less than the amount of the exemption, so total estate taxes = $0
– You die with assets of $6,000,000. The first $5.49M are covered by the exemption. The remaining $510,000k is taxed at 40%. Total estate taxes = $204,000
Second, and this is VERY important – form 706 must be filed when the FIRST spouse dies, not the second. This allows the second spouse to use the deceased spouse’s unused gift/estate exemption. You have 9 months from the date the first spouse dies to file form 706 (there’s also a 6 month extension available). If you don’t file form 706 by then you will LOSE the deceased spouse’s unused exemption. This could potentially cost a bit over $2.1M in estate taxes.
Thanks. I thought point One was pretty clear in the article. At least that was my understanding in terms of how taxes are paid on amounts above $5.49 million.
Thanks for clarifying point Number two.
BlackGold – I think you’re referring to irrevocable trusts. As High Income Parent mentions below, the assets in a revocable trust are taxed to you as if you’re the owner. So if the assets in the trust generated $1,000 in interest and $5,000 in dividend income those amounts would show up as $1,000 in interest and $5,000 in dividend income on your tax return and you’d pay the appropriate taxes on them.
Irrevocable trusts don’t have an “owner” and are treated as a separate taxable entity. Trusts pay taxes on income using the trust income tax table that you referred to. Note that this tax table is very compressed, so the trust will be paying 39.6% tax on all income above $12,500 (in 2017). Congress created this compressed tax table to limit the ability to create trusts for tax avoidance.
There are instances when an irrevocable trust can be taxed like a revocable trust (an intentionally defective grantor trust, for example). This can be advantageous or not, depending on your goals. For example, if you want to maximize the amount of money in the irrevocable trust you’d prefer to pay the taxes yourself rather than having them paid from the trust. However, if you’re looking to make a one-time gift then you’d want the trust to pay its own taxes.
I’m confused. A will is public, but in the ones I’ve seen (after some of our family members died) the amount of the estate is not mentioned nor are assets – unless there are specific bequests. Instead, the estate was divided (by %) to the various inheritors. If the will does not mention assets or net worth, then how would that information become public?
My understanding is an inventory must be published along with the will. Maybe an estate attorney can chime in on this one.
Tom @ HiP
A will is not public, but probate is. Probate is a legal proceeding and, as such, is public record. Because the probate process by definition must include the will, the will becomes public as well.
The probate process includes, among other things, inventorying and valuing assets, so that information becomes public.
Sounds like benefit of this arrangement comes at the death of the second spouse, right? So, unless both spouse’s die at once, seems like a better idea to wait to pursue this. Am I missing something?
I think that depends because if you both die in a car accident or some other event without the kids, then all your assets end up in probate.
The odds of that are less than one spouse dying at a time but I guess you have to weigh the cost of the trust verses your kids not having access to your funds until they are 18.
Tom @ HIP
Thank you for the well-written article. I have a living trust and want to make slight changes to it. For example, I want to remove a couple of charities as beneficiaries.
Can I do this on my own? That is, can I write an addendum or simply cross out the charities I don’t want anymore? Or should I go through a lawyer to make sure it’s done correctly? The estate attorney who did the original trust will charge me $500 for any changes.
You could use a trust amendment form. There are several templates on the web. The common wisdom is never change the original document. Use the amendment form and make sure you sign in front of a notary. I don’t know how straight forward it is because we haven’t amended our trust but it seems easy enough. I’m not a lawyer though so seek legal expertise if you aren’t sure.
Tom @ HIP
Thank you, Tom! The trust amendment form + notary sounds like the perfect solution.
Good article, thanks for posting. I set up a revocable living trust a few years ago. I don’t have a family member I trust so I named a bank as a trustee. I believe the bank is charging me .5 percent of assets per year after me and the wife die so if you have a friend or family member it’s so much cheaper to handle your trust. If not a bank, accountant or lawyer can be named. I set mine up so if my wife and I both died the trustee will pay the full cost of college regardless of where my daughter goes or how much it costs. After college she wouldn’t get another penny till she’s 35. At that time she would get a third of our estate. When she turns 45 she gets another third, and at 65 she gets what’s left. We set this up this way to try to avoid the “trust fund baby syndrome.”
The good thing about these trusts, besides the probate savings, is that as your age or circumstances change you can easily change who, what, and when your assets go to.
Nice! Sounds like you have a good plan. Are you going to tell your daughter that she is getting money after college once she reaches those ages in the trust?
Tom @ HIP
No I haven’t told her anything. She will only get the money at those ages if both my wife and I are dead. As far as inheriting our money we’ve always told her we were going to spend every penny before we die, so if she wants FI she better work hard herself.
I love the plan Bill. By age 35, hopefully our children have their lives together or know where they want to go. If not, they can get a surprise injection. And if so, then they will respect the money more. And then it’s time to go dark until 10 years later.
At age 40, I see money very differently than I was age 30.
My one thing is to not wait until age 65 to pass on my funds b/c one should hopefully be mature about money by age 40-45. I think/hope my offspring could wisely use my money to help their families and other people.
But then again, maybe they live until 90+……. hmmmm.
Great article. Thank you. I pay for the legal service through my employer, $250/yr for Hyatt Legal and they’ll do trusts and wills a sort of this “membership”.
Getting our living trust in place is on our todo list for this year, so thanks for the great write up. My company offers the benefit of allowing us to sign up for a legal plan. They deduct something like $8 per paycheck for the year, and then if you use one of the 100s of lawyers on the plan, you only have to pay a fixed amount (for trusts I think this amount is $250, if I remember right). I signed us up for 2017, and we plan to get this done before the year is out.
I’ve heard of those plans. That’s great you have the option. My lawyer gave us a pretty thorough questionnaire. My wife and I brainstormed as much as we could about how to take care of the kids and how we would like our ideal scenario to play out for them if we couldn’t take care of them. It took a while but I’m glad we got it done.
Tom @ HIP
Thanks for a great article, Tom! I learned a lot, and I’m a lawyer :). Definitely planning on creating a trust if/when my wife and I have kids.
On a related note, we’re currently trying to purchase a property that is being sold through probate, and it’s a major headache… Lawyer fees, court confirmation of sale, overbids, delays, lack of control from the estate’s beneficiaries… After seeing what a pain it is, I want to help my beneficiaries someday avoid the probate process at all costs!
Probate can be a nightmare. There are several stories of the heirs of celebrities with complicated estates losing millions during probate.
I’m sorry your having to go through it. Hopefully it turns out to be a good deal in the long run.
Tom @ HIP
We have been working on a will, but haven’t thought of a living trust. Do you need both or just the living trust would work?
Can the beneficiary become the trustee when they are a certain age?
If you have kids I would have both. The trust usually includes a roll over will. That helps roll over any assets that aren’t in the trusts name into the trust. Those potentially have to go through probate though.
You can make whoever you want the trustee. If you only have one beneficiary then I guess you could make him the trustee when he is the age of majority butts you had multiple beneficiaries and one of the beneficiaries was the trustee that could be a major conflict of interest.
It’s best if the trustee understands all the duties too. It can be complicated with a lot of assets and beneficiaries.
Tom @ HIP
Thanks for putting together the post. I learned a lot and I also can’t believe how expensive probate court fees are. $100,000+ in fees to pay the government and lawyers to tell them how to direct your money to your depends based on a will? That seems outrageous!
Let me see if I have some follow up questions:
* What’s the difference between a revocable living trust and a blind trust?
* Any idea how one can make oneself or family look poorer in the eyes of the government using a trust? Got to fight for Stealth Wealth.
* When the term “trust fund baby” is used, what type of trust are these folks typically referring to?
* When do you tell your kids they have a trust, if ever? I’m thinking a good answer might be never. Good to surprise them if we die so as to not take away their motivation.
Thanks, Sam. Good questions.
A blind trust is usually used by someone that could have a conflict of interest with the assets in the trust. A famous example was Mitt Romney’s blind trust that would hold his assets if he won during the 2012 presidential campaign. The settlor doesn’t have a say in how the funds are managed. The trustee has full control. With the revocable living trust, the settlor can revoke the trust at any time and has control over how the assets are managed while living. Then after death, the asset management is transferred to the trustee.
The main reason someone would want to look poorer in the eyes of the government would be to avoid estate taxes after death. If you have over $10.98 Million in your estate as a married couple as of 2017, then you would have to pay the tax. Some of the ways to avoid this were alluded to in the post with the Qualified Personal Residence Trusts, Grantor Retained Annuity Trusts, Charitable Remainder Trusts and Charitable Lead Trusts and ILIT. You could also set up a trust to give funds to your heirs and transfer them out of your name. You could do this with an irrevocable living trust, but you couldn’t go over the gift tax maximum without filing appropriate tax forms. This would avoid estate taxes buy you lose control of the funds and it can’t be reversed if you change your mind.
When you talk about trust fund baby’s I don’t know of any specific trust that these refer to. I imagine it could be a number of different trusts. The main distinction is that there is a trust that holds assets that are parceled out to the beneficiary at the direction of the trustee. After the parents die, a revocable living trust becomes irrevocable and the funds directed to the beneficiaries/kids would be delivered according to the wishes of the parents and how they drew up the trust. I guess technically any child that lives off the funds from a trust could be called a trust fund baby but I think the term usually refers to the super wealthy families where great-grandpa made a fortune and now the great-grandkids are living off a monthly allowance or the profits from the investments in the trust.
I’d say the last question is up to you. If you want your kids to know then that could provide security and peace of mind for them but it could also cause entitlement and laziness. I’d say that’s each parent’s call on whether or not to tell the beneficiaries/kids.
Tom @ HIP
Thanks Tom. It’s certainly hard to predict one’s future wealth when they are about to croak, but it’s always fun to prepare for various scenarios.
I’ll be meeting up with an estate planning lower next month and will be prepared to discuss all these issues.
So a life insurance policy counts AGAINST the estate tax limits of $5.49/$10.9m? For example, if I have a $1M term life insurance policy and it pays out, the government is going to initiate the death tax on any value above $4.49M now?
To clarify on this statement:
“Irrevocable Life Insurance Trust (ILIT). This entails placing your life insurance into this trust. As long as you don’t die within three years of establishing the ILIT, it’s not considered part of the estate.”
If my current net worth as an unmarried man at age 40 is say $10 million already, and plans to be that level or greater when I did, and I have a $2 million life insurance policy, then I should absolutely create a ILIT because if I don’t, anything above only $2.51M ($10M – $5.49M – $2M life insurance policy) will be subject to death tax.
Did I get this right? If this is the case, it’s actually better to get a life insurance policy that will cover my death e.g. as long a LI policy as possible no? B/c chances are higher than all of us will out live our life insurance policy terms, hence why life insurance companies are such money making machines.
A couple thoughts.
1). For HNW individuals, don’t do it yourself, pay a lawyer to draft the trust. The trust is a legal document and it is only as good as the person who draft the language. A poorly drafted trust will land the estate in probate court.
2). Life insurance proceeds do not pay federal income tax but count against federal estate tax exemption.
3). Putting the life insurance policy in ILIT does indeed remove those proceeds from your estate and thus shelter that money from estate tax. However, it’s a whole other trust that you need to pay the lawyer to draft, and probably cost money to execute. You gotta ask yourself whether it’s worth it. For example, if you bought a term life policy for contingency and plan to be self insured later on when you grow your net worth, you really don’t plan on needing that insurance policy to pay out. Then why pay to create an ILIT for it? Common use of ILIT is owner of private businesses with poor liquidity. They buy a whole life policy on themselves and put it in an ILIT, so it gives cash to their kids to pay estate tax instead of having to create liquidity from the business.
4). Trust fund kids / telling kids – you can write the trust so they get the money at a certain age or on certain events (like graduating college or buying a house or something). It’s really only an issue if there is disagreement in beneficiaries and trustee. Again this is where a competent lawyer is important. You want to find one that not only draft, but also act as trustee. These lawyers will have experience in what worked and what failed. Personally we had also drafted letters of intent, addressed to the trustee and beneficiaries, to state what we want to do in plain language (instead of legal language). It has no legal binding power, but it will help in probate court if it comes to that. Anyways, in all likelihood you will see your kids grow up and you can decide whether they are responsible enough to handle the trust. You can always change the trust depending on how your kids turn out. In my mind, in the unlikely event that I die before the kids grow up, I did the best that I could and it’s not my problem anymore. With the trust at your age, you are probably already head of 99.99% of the people out there anyways.
Thanks Gary. Awesome insight. Good point on the ILIT. I hadn’t thought about whether or not it’s even worth setting it up if you hope the policy doesn’t pay out.
One other point about a ILIT – if you set up an ILIT and transfer an existing policy that you own to it, the value of the policy will still be included in your estate if you die within 3 years.
The way around this is to create an ILIT and then have the trustee of the ILIT take out a new policy on your life. You can make annual gifts to the ILIT so the ILIT can pay the premiums. However, if you do this, you have to give the beneficiary of the ILIT the ability to withdraw the contribution within a certain time period. Doing this turns your annual gift from a future interest gift (which does NOT qualify for the $14k annual gift exemption) to a present interest gift (which does qualify).
One thing to note – the value of the life insurance policy on your life will only be included in your estate if you are the owner of the policy or you are the beneficiary.
If your wife owns a policy on your life and she is the beneficiary then the death benefit of the policy will not be included in your estate if you die. However, the value of the policy (which is different than the death benefit) would be included in HER estate if she died before you.
If you’re a high net worth person it almost always makes sense to NOT own a policy on your own life.
This is great information. We set up ours when out first child was born. It cost about the same as you. I remember many nights of ongoing negotiations with the Mrs.
I setup a Revocable Living Trust through Legal Zoom (I wrote an article about it if you want to check it out). It cost about $300 when said and done. My main reason for doing it was 1) avoiding probate if my wife and I died. We live in California and our property is worth more then $1 million so it made sense. 2) To set forth what we want to happen to our son if we both die. Who does he live with? How much money does he get?
It was pretty straightforward to do on line and then I had to find a notary in town. Not too bad.
I’d be interested to read the legal zoom version. I wonder how it compares to the one my attorney gave us. Did yours include a medical power of attorney and pour over will? If it does everything you want, sounds like you got a good deal.
Tom @ HIP
Yup. It included both. I felt like it was a good deal. If I had a complicated estate I would probably do some 1 on 1 work with a lawyer but I don’t have a complicated estate. On a side note they do offer laser services.
This post is packed with great information! I have never heard of a revocable living trust before, but I sure want to know how I can give my children everything I can. I have only heard of the phrase “trust fund babies” and know that it refers to people with super wealthy parents.
Mr. FAF and I don’t even have a will yet. It’s not that we think we’re invincible. We just think we don’t have much to leave for anyone at this point yet. Thanks for sharing!
If you have a decent life insurance policy and want your kids to get any of it before turning 18 then you should set one up.
Tom @ HIP
Planning for your estate after you die is one of the most fundamental aspects of financial discipline in my opinion. Life insurance and a will are a MUST.
Especially folks with young children (under 18) this is even more important. I don’t think we will have the assets to have a revocable living trust for a few years but for folks that have substantial assets this is something to definitely look into.
Estate planning is a tough subject to talk about but its a necessary one. Great guest post Tom!
Thanks! There are a ton of things to think about when trying to help your kids after death but I encourage all parents that have some assets and especially a sizable life insurance policy to set a revocable living trust up.
Tom @ HIP
We recently set up a revocable living trust for exactly these reasons! After becoming parents in July 2015, we felt an urgency to create a will and trust to ensure that our son (and any other future child(res)) would be taken care of should something happen to one or both of us. Embarrassingly, it took us over a year to finally sit down with a lawyer to create the trust, but the relief we felt on the day we signed was incredible.
And the fact that a trust can be a very useful tool should either Mr. Adventure Rich or I become incapacitated is an additional layer of safety and security for our family’s future.
Do you also have an advanced medical directive/healthcare proxy? This was a piece that we initially did not know about, but added so that we could further indicate our desires should we be unable to express them in a tragic situation.
Thank you for the great post, Tom and Sam!
Yes. That was included in our trust too. I didn’t include that in the post but that is a pretty standard part the lawyer suggested.
Tom @ HIP
Hi Sam – thanks for inviting Tom.
I’m not certain if Tom will be able to review / respond to comments directly via this thread, but:
Hi Tom –
Thanks for sharing – your article was extremely detailed and informative. I will checkout your site soon, too.
From a cost vs. benefit perspective, would you recommend people consider establishing a trust regardless of one’s current income and/or net worth?
Also, reviewing the example factors you listed for considering how much to leave and how to potentially distribute, do these impact the upfront costs of setting up a trust?
I second Mike’s question and would add does a Will ever make sense over a trust?
I think if you have minor kids and a sizable life insurance policy a trust is a big benefit. You can set the kids up with the guardian you want and provide for them financially before they reach the age of majority.
For me, the cost was a flat fee. I don’t see how a lawyer could charge more for more assets. It was just the time that he put in.
Tom @ HIP