Estate Planning For Dummies
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Estate planning often involves setting up a revocable trust or irrevocable trust. Each one of those trusts begins with an intervivos trust — a trust you set up that goes into effect while you're still alive. You then decide if the intervivos trust is revocable, meaning that you can change your mind, or irrevocable, meaning sorry, what's done is done.

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Irrevocable trusts are the easier of the two to understand. After you place property into an irrevocable trust, you can't retrieve the property. For all intents and purposes, that property now belongs to the trust, not to you!

With a revocable trust, however, you can place property into the trust and at some point in the future, undo the transfer by removing the property and terminating the trust.

Very often, if you die or become incompetent, the provisions of a revocable trust call for the trust to become an irrevocable trust. For example, you can terminate a revocable burial trust at any time, usually before death or incompetency. But if the burial trust still exists when you die or become incompetent, the trust becomes irrevocable and the money is used for your burial expenses.

You most likely have gift tax consequences when you establish an intervivos irrevocable trust, so make sure your accountant is "in the loop," along with your attorney. Also, certain transfers within certain time periods prior to your death can be included in your estate as "gifts in contemplation of death" under both state and federal statutes. So watch out for possible death tax implications!

How revocable and irrevocable trusts affect estate taxes

The most significant distinctions between revocable and irrevocable trusts are the estate tax considerations. Property that you place in an irrevocable trust is no longer considered part of your estate, meaning that the property typically isn't included in your estate's value when it comes to determining if you owe death taxes and, if so, how much.

However, you still own property that you place into a revocable trust, and therefore that property is still subject to death taxes. If you can change your mind about the trust and retrieve the property from the trust at any time while you're still alive, the property is really yours and should be considered part of your estate.

So if you only get a break on estate taxes with an irrevocable trust, why would anyone want to use a revocable trust without the estate tax break? Estate tax savings is only one of the reasons you may consider including a trust in your estate planning. If your estate's value is nowhere near the federal estate tax exemption, then you really don't need to be concerned about federal estate-tax-saving tactics.

Your motivation for setting up a trust may have more to do with estate protection or helping out a charity, but you also may want a safety valve that allows you to pull money out of a trust if circumstances change in some way.

Make sure to work with your accountant to understand any and all tax implications — gift, federal estate, and state inheritance or estate — for property transfers to both irrevocable and revocable trusts. He or she can help you set up the right provisions and avoid unpleasant tax-related surprises from the government because of some provision of the tax code you didn't know about.

A closer look at revocable trusts

Estate-planning advisers often point to revocable trusts, especially living trusts, as the "perfect way to totally avoid probate." Put all your property into revocable trusts and you can have control over that property, the pitch goes, and because none of your property is now in your probate estate (that's, it's all held in trust) your estate doesn't have to go through the probate process because your probate estate is "empty!" The pitch continues: By avoiding probate, you avert probate costs, put off the lack of privacy, and bypass other disadvantages of the probate process.

Not so fast! True, you can avoid probate costs, but do you really think setting up and maintaining trusts is free? No way! Your costs to establish a revocable trust will vary, depending on attorney fees and other costs, and be prepared to pay to have your trust managed.

You also need to make sure that everything you own is held in trust form. If you fail to include any part of your estate in your trust(s), then you have a probate estate that's subject to the probate process. So every time you buy a new home, open a new brokerage account, or make any changes to your estate's inventory, you need to make sure that you transfer that property into your trust(s).

Remember that probate isn't always bad. The probate court ensures that the property in your probate estate is disposed of properly with no secret maneuverings and supervises your probate estate. With the probate court's supervision, part or all of your estate that's held in trust or other nonprobate form (joint tenancy with right of survivorship, for example) can be in for problems if someone close to you in a position of authority is unethical. All the beneficiary problems may get eventually get resolved, but quite possibly because of prolonged, costly legal battles.

About This Article

This article is from the book:

About the book authors:

N. Brian Caverly, Esq., is an attorney-at-law emphasizing estate planning and elder law. Jordan S. Simon is Vice President of Asset Management at Venture West, a Tucson-based investment firm.

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