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Learning the facts about trusts can keep your heirs safe from Uncle Sam
The widow adds her nephew's name to her nest egg--a $47,000 money market account--so he can pay her bills for her if she becomes incapacitated. One day, the Internal Revenue Service seizes the entire amount because the nephew owes $140,000 in back taxes. The nephew is very sorry about it and pledges to pay the widow's bills. Nonetheless, her nest egg is gone.
This scene, which played out recently in Central Florida, shows why joint bank accounts with family members or neighbors are definitely not good ways to plan for incapacity or death.
Neither is putting property like houses or cars in both spouse's names. While it avoids a trip to probate court when the first spouse dies, your heirs will end up there later, when the surviving spouse passes on. And consider this: If your spouse remarries after you're gone and retitles the property jointly with her new husband, your children could be summarily cut out of inheriting the old homestead.
"People just don't understand all the legal ramifications that can come as a result of holding joint property," says Belford S. Lester, a Maitland attorney specializing in probate and estate planning.
Here's another horror story: a well-off local woman becomes mentally incompetent. When she dies, her estate will pay considerable federal estate taxes. If the court-appointed guardian acts quickly to shield assets from the tax, there may be something left for the children. But he can't act without the court's permission--a process that has taken three years.
Last month, we explained how revocable living trusts can avoid both probate and guardianship proceedings and can reduce, or even eliminate, federal estate taxes. A revocable living trust would have kept our widow's nest egg safe, according to attorney Charles Moore of South Daytona's Gosney Manjasek and Moore. It also would have eliminated costly guardianship proceedings for our mental patient, says Kaki Rawls, a manager in KPMG Peat Marwicks Orlando office.
How do you decide if a living trust is right for you?
While revocable living trusts have some major advantages over simple wills, they're not a panacea. They won't help your current income tax situation. Done improperly, trusts could do more harm than good. Plus, the trust can't work unless the assets are titled properly and physically transferred to the trust, which can be a time-consuming and frustrating process if you do it yourself (or an expensive one if you let your attorney do it for you).
Depending upon your estate's size and complexity, living trusts also may cost more up front than simple wills. But saving money today could cost your heirs a bundle in probate fees tomorrow. And you'll still need a pour over will to sweep forgotten assets into the trust.
Also, federal estate tax isn't an issue if your estate's worth less than $600,000. But Uncle Sam counts the face value of life insurance policies you own as part of your gross estate, so there's a very real chance the IRS will say your estate's worth more than you think it is. "There are a lot of people whose estates are under $600,000, but there also are a lot of people who think they are and might not be--that's the risk," says Barbara Hipple, senior trust officer for Orlando's SunBank.
"A lot of people never dream they'd be worth half a million dollars," says Moore. Life insurance policies and Individual Retirement Accounts are assets that add up faster than you might expect.
According to the latest IRS figures, the number of estate tax returns exceeding the $600,000 threshold grew 80 percent between 1982 and 1991. Gross assets grew by 143 percent over that decade, thanks in part to a tax code change in 1982 that allows a unlimited marital deduction for bequeaths to a surviving spouse. That means no matter how large your estate is, no federal estate tax is due when the first spouse dies.
But when the surviving spouse dies, the estate is taxed before your beneficiaries receive their share. In 1989, the latest year for which figures are available, women owned 40 percent of the gross assets, but their estates incurred 55 percent of that year's estate tax liability.
"A lot of people have heard there's an unlimited marital deduction, and they just assume that if they leave everything to their spouse, there won't be a tax," says Hipple. "And that's true. There isn't a tax at their death. But if they load up their spouse, and their spouse gets over $600,000, when the spouse dies, there is a tax."
When considering whether a living trust is right for you, stay away from do-it-yourself kits. Hipple warns. "Many of those kits aren't specifically and carefully geared toward Florida residents," she says. "They may say this has been looked at by a Florida attorney, but the odds are they've got some sort of generic kit that someone has made limited adjustments to. To be deluded into thinking you've got a good plan when you haven't, all because you saved some money because you didn't go to an attorney, but instead you've bought a kit--that's a very scary thing."
You probably shouldn't buy a living trust package over the telephone, advises the AARP, which does not sell or endorse any living trust product, despite what the earnest-sounding salesman says. Like the do-it-yourself kits, the package deals fall short because the trust documents must be tailored to your individual situation if they are to work effectively.
Before you consult an attorney, think about what you have and who should inherit what. Consult your accountant or your bank's trust officer if you have questions about your options. Make a list of your assets and how they're titled. Decide who should administer the trust when you can't. Once that's done, ask several attorneys how much the trust documents will cost and how much probate would cost. Also ask what isn't included and how much it costs.
If you moved here from another state and already have a living trust, bring the trust document and your will to a Florida attorney. While living trusts are valid in all 50 states, each state's law is a little bit different. If it's been a while since you drafted the living trust, you may have acquired assets that need to be transferred into the trust anyway.
If you have a will and want to set up a living trust, make sure you bring the will along when you meet with your attorney, even if you think it's outdated.
Estate planning is like putting together a jigsaw puzzle; the pieces fit together several different ways, depending on your assets and priorities. Other types of trusts, such as life insurance trusts and charitable remainder trusts, may be useful, too.
Bank trust departments, estate planning attorneys, financial planners, accountants and insurance agents can provide free basic information on living trusts. Some local estate planning attorneys also give free, two-hour seminars that explain the general concept of living trusts; check your Sunday newspaper for details. Also, the AARP has some excellent free literature: Product Report on Living Trusts and Wills (stock #D14535) and Senior Consumer Alert on Living Trusts (stock #D15210). Order them from AARP Fulfillment, 601 E St., N.W., Washington, D.C. 20049. The phone number is (800) 424-3410.
Copyright 1995, Danialle L. Weaver. All rights reserved.
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