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Estates & Trusts

Effects of Tax Reform on Trusts and Estates

By Estates & TrustsNo Comments

Effective in 2018, the Tax Cuts and Jobs Act, signed into law on December 22, 2017 by President Trump, includes many new provisions that not only impact the taxation of trusts and estates but may also potentially affect your estate plan.

Tax Rates.

The new tax table for estates and trusts have not changed significantly, moving from five tax rates to just four. The brackets are still extremely compressed as compared to the individual tax brackets. Taxable income above $12,500 is taxed at the highest rate of 37% (previously 39.6%). See below for a comparison of pre vs. post tax reform tax tables.

2017 Tax Table

If taxable income is:                          Then income tax equals:

Not over $2,550                                      15% of the taxable income

Over $2,550 but not over $6,000            $382.50 plus 25% of the excess over $2,550

Over $6,000 but not over $9,150            $1,245 plus 28% of the excess over $6,000

Over $9,150 but not over $12,500          $2,127 plus 33% of the excess over $9,150

Over $12,500                                          $3,232.50 plus 39.6% of the excess over $12,500


2018 Tax Table

If taxable income is:                          Then income tax equals:

Not over $2,550                                      10% of the taxable income

Over $2,550 but not over $9,150            $255 plus 24% of the excess over $2,550

Over $9,150 but not over $12,500          $1,839 plus 35% of the excess over $9,150

Over $12,500                                          $3,011.50 plus 37% of the excess over $12,500


State and local taxes. The new law limits the aggregate deduction for state and local taxes, including income taxes and property taxes, to $10,000 per year. Property taxes related to the production of income and investment holdings do not fall under this limitation and can be deducted in full.

Miscellaneous Itemized Deductions. The new law suspends all miscellaneous itemized deductions subject to the 2% limitation, included investments fees and unreimbursed business expenses. The deductibility of trust accounting and legal fees, trustee/executor fees and other costs incurred in connection with the administration of an estate or trust appears to be unaffected by the new legislation, but is pending clarification. The new legislation does not provide a clear exception for the expenses of estates and trusts that are not subject to the 2% limitation.

Impact on Estate Plan.

Changes to individual, estate, corporate, and pass-through entity taxation provisions will also impact many estate plans. Some of the provisions included in the law that may affect your plans include:

  • Increase in estate and gift tax exclusions amounts — for 2018, the estate and gift tax exclusion amount — the amount a taxpayer may transfer without incurring estate or gift taxes — is inflation-adjusted to $11,180,000. The increased estate and gift tax exclusion amount is only available for decedents dying and gifts made after 2017 and before 2026; thereafter, the inflation-adjusted estate and gift tax exclusion amount returns to $5,000,000. The value of a person’s estate and/or lifetime gifts exceeding the exclusion amount is subject to a 40% estate and gift tax rate. Aside from being free from gift taxes, lifetime gifts of up to $11,180,000 could save estate taxes because they remove post-gift appreciation on, and possibly income from, the gifted assets from the transferor’s estate.
  • Increase in charitable contribution limit for cash donations — the legislation increases the amount of cash contributions to charitable organizations that may be deducted from 50% of a taxpayer’s contribution base (generally equal to adjusted gross income) to 60% of the contribution base for tax years after 2017 and before 2026.
  • New deduction for certain business income earned through pass-through entities — the legislation creates a new deduction for individuals and trusts/estates, generally equal to 20% of the qualified business income received by the individual or trust from a pass-through business. Certain service businesses (such as law, accounting, investment management, etc.) are excluded, and there are other income limits and conditions placed on the receipt of the deduction that we should discuss if you earn income from such entities.
  • Changes to Electing Small Business Trusts — generally, shareholders in an S corporation must be U.S. individuals; however trusts, including electing small business trusts (ESBTs), that meet certain criteria can hold such stock. Under prior law, for an ESBT to be a qualified shareholder, all of the beneficiaries of the trust had to be U.S. individuals. The legislation has removed the requirement that beneficiaries be U.S. persons, meaning nonresident aliens can now be ESBT beneficiaries without resulting in the termination of the S corporation’s status. In addition, ESBTs will now be subject to the charitable contribution limitations applicable to individuals, rather than the unlimited deduction allowable to trusts.

In light of the numerous changes made by the new legislation, we recommend a review of your estate plan to make sure that it continues to satisfy your tax- and family-related objectives while remaining as flexible as possible. Please contact your L&B professional at (858) 558-9200 to schedule a convenient time to discuss your estate plan and how the recent tax law changes might impact you and your family.

How a “Crummey” Clause Can Make Your Day

By Estates & TrustsNo Comments

Are you thinking about setting up a trust for a child, grandchild, or other loved one? You should be aware that transfers into a trust may be subject to gift tax. With careful planning and a Crummey provision, you may be able to reduce or eliminate this tax burden.

Full Article:

The Estate / Gift Tax Exclusion

Before getting into how the Crummey provision works, here are a few key points to refresh us on how the estate / gift tax works.

  • When a donor transfers property or money to a non-spouse in the form of a gift or a bequest, the donor is responsible for any tax associated with the transfer.
  • For 2018, each individual can transfer $11.2 Million ($22.4 million per couple) in property over their lifetime before any transfers are taxable.
  • A donor is able to exclude annual transfers to each donee of up to $15,000 before transfers start to count against the exemption amount.
    In order for the exclusion to apply, the transfer must be a gift of a present interest.
    A present interest gift is one that is made to a donee which they receive unrestricted and have immediate access to use and enjoy.
    A gift of a future interest is not eligible for the exclusion.
    A future interest is an interest for which the benefits are enjoyed in the future.

A Gift of Present Interest

A common scenario exists when a donor funds a trust that names the donor as the trustee. The transfer is generally considered a gift of a future interest to a beneficiary and does not qualify for the annual exclusion. This is because the trust property is controlled by the trustee, and therefore, the beneficiary does not have uninhibited enjoyment of the benefits of ownership in the property.

Setting up a Crummey trust allows the donor to fund a trust for the donee’s benefit using the exclusion amounts. The benefit is the donor gets to fund the trust without generating gift tax or eating into their overall lifetime exemption amount.

The Mechanics of a Crummey Trust

Here is how it works. First, the donor contributes assets to the trust. Then a beneficiary is given a written notice that gives them the opportunity to withdraw the property from the trust for a period of time (usually 30 days). The right of withdrawal must give the beneficiary unrestricted access to the property. After the window to withdraw property expires (the 30-day period mentioned above), the funds would become restricted and the trust operates as the trustee intended. The Crummey provision works because the right to withdraw the funds gives the beneficiary a present interest in the property.

The obvious risk involved in setting up the Crummey trust is that during the window in which the donee is eligible to withdraw property, they may decide to do just that. In this case, the donee walks away with the property and the ultimate goal of funding the Trust would not have been accomplished.

Crummey trusts are a great estate and gift tax planning tool, but there are many things to consider before establishing one. If you are interested in exploring the benefits of Crummey trusts and understanding the complex matters associated with them, please feel free to contact your L&B professional at (858) 558-9200.

Is Your Trustee Trustworthy? Learn Why Choosing the Right Trustee Matters.

By Estates & TrustsNo Comments

Due to the administrative powers a trustee holds over the use and maintenance of property held in a trust, the choice of an appropriately capable trustee is an important component in trust planning. Depending on a number of factors, including the type of trust, the trustee may be the trustor, a family member or personal friend, or a professional or corporate trustee (typically CPAs or attorneys). Regardless, the trustee is legally and ethically obligated to make decisions in accordance with the trust agreement and in the best interest of all beneficiaries.

The Obligations

The trustee is obligated to act with objectivity and independence within the terms of the trust agreement. They should be capable of making well-informed decisions with the intent of accomplishing the financial and operational goals of the trust, which requires at least a rudimental understanding of the legal and operational mechanics of the trust. If their understanding falls short, the trustee should be willing to seek professional assistance as is necessary. When making administrative decisions, the trustee should take financial goals, tax implications, and the financial needs of the beneficiaries into consideration.


Administering to a trust after the passing of a trustor can be a stressful and nuanced task. They are tasked with managing trust assets, making financial decisions, and adhering to trust documents, all while managing the expectations of the beneficiaries. If the trust documents are unclear, the trustee may be required to make difficult administrative judgements. In situations with multiple beneficiaries, the interests of one beneficiary may conflict with others, potentially creating tension and discord. The beneficiaries will look to the trustee for answers, which requires that the trustee make decisions tactfully and dispassionately while still acting in the best interests of all parties involved.

Change of Trustee

In the event that a trustee becomes unable or unwilling to act prudently in the administration of the trust, procedures for replacing a trustee are available. If the trust agreement defines such procedures, they must be followed first. If the trust agreement does not provide replacement procedures and the trustor is no longer living or capable of making such a decision, state courts may deliver judgements to initiate the process of replacing the trustee. Depending on your state of residency, it may be necessary to obtain the consent of all beneficiaries prior to amending the trust documents for a new trustee.

Family and Friends

When a trust is established, the trustor may decide to designate a trusted friend or family member to be the trustee. Friends or family members typically have a deep understanding of the family dynamic that surrounds the trust situation, are generally seen as trustworthy by the trustor, and are much less expensive than their professional counterparts. However, their ties to the family means that they lack independence, which may result in subjective decision making. The decision they make may negatively affect their relationships with beneficiaries. Finally, they may lack technical expertise in relevant areas like law, investing, and tax planning. Friends or family members are typically ideal when they are known to be trustworthy and objective, and when the cost of professionals cannot be justified.

Professionals and Corporations

A trustor may also choose to designate a professional trustee or a corporation to be the trustee of the trust. Professionals and corporations offer the benefits of being independent, making decisions logically and impartially, and preventing family relationships from suffering. Additionally, they typically have greater access to technical expertise in law, investing, and tax planning. The downsides are that they are much more expensive and, in many instances, lack a relevant understanding of the family dynamic. Professionals or corporations are typically ideal for larger, more complex trusts where professional decision making is necessary.

Regardless of which choice is made, the trustee is obligated to act with objectivity and independence within the terms of the trust agreement when making decisions relating to the financial and operational goals of the trust. When making decisions, the trustee should consider financial goals, tax implications, and the needs and expectations of the beneficiaries. The beneficiaries will look to the trustee for answers, which requires that they make decisions tactfully and dispassionately while still acting in the best interests of all parties involved.

If their knowledge or capabilities fall short, the trustee should be willing to seek professional assistance as necessary. If the trust documents are unclear, they may be required to make difficult administrative judgements. In situations with multiple beneficiaries, the interests of one beneficiary may conflict with others, potentially creating tension and discord.

Selecting an appropriate trustee to manage your trust’s operation and administration is an important and nuanced step which deserves thoughtful consideration. If you are considering establishing a trust or require assistance in managing an existing trust, please feel free to contact your L&B professional at (858) 558-9200.

2018 Tax Cuts Act: Estate, Gift, and GST Tax Exclusions Increased

By Estates & TrustsNo Comments

The Tax Cuts and Jobs Act doubles the basic exclusion amount for federal estate and gift taxes and the exemption amount for the generation-skipping transfer (GST) tax. For the estates of decedents dying and gifts made after 2017 and before 2026, the amount increases from $5 million to $10 million, as adjusted for inflation.

Estate and gift tax exclusion doubled

For the estates of decedents dying and gifts made after 2017 and before 2026, the basic exclusion amount for purposes of federal estate and gift taxes is doubled from $5 million to $10 million, as adjusted for inflation. Accordingly, the estate and gift tax basic exclusion amount applicable to the estates of decedents dying and gifts made in 2018 is estimated to be over $11 million, as adjusted for inflation. For a married couple using portability, the maximum applicable exclusion amount would be doubled again, estimated to be more than $22 million.

Example: Carol Cologne, a wealthy widow, dies in 2018 leaving a taxable estate of $20 million. Her late husband died earlier in 2018, having used only $2 million of his available estate tax exclusion amount. Her estate will owe no federal estate tax. However, if the couple had died under the same circumstances in 2017, the estate tax payable would have been $4,408,000.

Because the doubling of the estate and gift tax exclusion amount expires for decedents dying and gifts made after December 31, 2025, the next several years present a tremendous opportunity for wealthy individuals and married couples to make large gifts, including those that leverage the amount of the available exclusion, such as those to grantor retained annuity trusts (GRATs).

GST tax exemption amount

Because the exemption from the GST tax is computed by reference to the basic exclusion amount used for estate and gift tax purposes, the GST exemption amount for GSTs occurring in 2018 is also estimated to be more than $11 million. Portability does not apply for purposes of the GST tax.

Corresponding adjustments with respect to prior gifts. In addition to the increase in the basic exclusion amount, the Tax Cuts and Jobs Act modifies the computation of gift tax payable and estate tax payable in cases where gifts have been made in prior years. With respect to the computation of gift tax payable, the tax rates in effect at the time of the decedent’s death are used rather than the rates that were in effect at the time the gifts were made.

Inflation adjustments going forward. A separate amendment of the Tax Cuts and Jobs Act requires that future inflation adjustments mandated throughout the Internal Revenue Code be made using the “Chained” Consumer Price Index for All Urban Consumers (C-CPI-U) rather than the CPI adjustment used under current law. This change, effective for tax years beginning after December 31, 2017, will generally serve to slow down inflation adjustments to provisions throughout the Code, including the estate and gift tax exclusion amounts.

If you have any questions related to the increase of the exclusion amount for federal estate and gift taxes and the exemption amount for GST tax, or for estate planning in general, please contact your L&B professional at 858-558-9200

Charitable Trusts and Their Benefits

By Estates & TrustsNo Comments

If charitable giving is in your estate plan, setting up a charitable trust is something to consider. These trusts give you the flexibility and control over your charitable contribution, while saving you income tax (and maybe even estate tax) dollars. Read on to learn more about charitable trusts and how they can benefit you.

When choosing to set up a charitable trust, there are two types to consider. Both types split the assets in the trust between a charitable and a noncharitable beneficiary. The main difference lies in the timing of when the charity receives funds. In a charitable lead trust (CLT), the charity (or charities) of your choice receives the income generated by the trust for a specific number of years or for someone’s lifetime. Upon the death of the specified individual, oftentimes the creator of the trust, the remaining assets in the trust are distributed to a noncharitable beneficiary(ies). Contrastingly, a charitable remainder trust (CRT) pays an annuity back to the creator of the trust (or another noncharitable beneficiary) for a specific number of years or someone’s lifetime while the remainder goes to a charitable organization.

Advantages of a Charitable Trust

Charitable trusts provide more tax benefits than just income tax deductions. If set up correctly, they can also reduce estate taxes and preserve the value of highly appreciated assets that you may have in your portfolio.

Income Tax Deductions. If you set up a CRT, you will receive an immediate income tax deduction for the portion of the contributed assets that will eventually go to charity. CLTs can also be set up so that the donor receives a charitable deduction in the year the trust is funded.

Estate Tax Reduction. Generally speaking, transferring assets to a charitable trust excludes them from your taxable estate upon your eventual death. Especially for highly appreciated assets, this reduces your possible estate tax and preserves money for your heirs.

Preserving Highly Appreciated Assets. Contributing highly appreciated assets to a charitable trust preserves the value of the asset while avoiding the capital gains tax you would incur if you sold it in your name. The trust can sell the assets without incurring this tax liability thereby retaining more value to fund charitable organizations.

Creating Income. If you need income but your assets don’t produce any, you can put these assets into a charitable trust, sell them without incurring any tax liability, and provide a stream of cash back to yourself until the remainder goes to a charitable organization.

Although these trusts come with many advantages, it is important to factor in the cost of setting up and maintaining the trust when considering creating one to further your charitable goals. If you have questions or are interested in figuring out if a charitable trust is right for you, please do not hesitate to contact your L&B professional at (858) 558-9200.

Tax reform is here! Below are critical updates for Estates and Trusts:

“Estate Tax: Not Repealed – Exemption Doubled”

The new law did not repeal the estate tax but rather doubled the estate and gift tax exclusion amounts for estates of decedents dying and gifts made after December 31, 2017 and before January 1, 2026.  The generation-skipping transfer (GST) tax exemption is also doubled.

“Electing Small Business Trusts to include nonresident aliens – (ESBT)”

A nonresident alien individual may be a potential current beneficiary of an ESBT without causing the loss of the S corporation election.  The new law does NOT allow a nonresidential alien to be an S corporation shareholder.  This change is effective January 1, 2018.

Keeping Your Trust Accountable: Trust Accountings & How They Could Benefit You

By Estates & TrustsNo Comments

Across the board, companies need financial statements to assist them with understanding and managing assets, income, and expenses, which can be very complex. By the same token, fiduciary or trust accounting can improve the management of a trust by providing visibility into the financial workings of the trust. This provides the trustor, trustee, and beneficiaries with the information necessary to make prudent decisions, prolong or improve the life of trust assets, and better manage tricky decisions that may arise during the distribution of assets.

Fiduciary accountings are financial statements for your trust or estate. They include both summaries and detail of the information about assets held, income earned, expenses incurred, and any debts owed by the trust. This information provides visibility into the appropriateness of trust expenses and disbursements, tax liability and how to avoid as much of it as possible, and strategies to maximize trust income while limiting portfolio risk. Aside from benefitting all parties to the trust, however, trust accountings are required unless all beneficiaries consent to forego an accounting.

What are the requirements? Trust accountings are governed by the U.S. Uniform Principal and Income Act (UPAIA) and the California probate code section 16063. California requires, at a minimum, that trust accountings be prepared annually, at the termination of a trust, and upon a change in trustees. Among other items, trust accountings must include information pertaining to receipts and disbursements, assets and liabilities, trustee fees, and a written statement initiating a three-year statute of limitations, during which time the beneficiaries may petition the court for review of trustee decisions. Trust accountings, however, are not required for revocable trusts or in the event that all beneficiaries consent to foregoing a trust accounting. It is possible to opt out.

What are the costs? While they are both beneficial and required, these accountings also present significant costs that should be taken into consideration. Because trust accounting services are typically performed by accounting or legal firms with specific expertise in trust and probate law, the cost of such services may add up. As a result, the trustee and beneficiaries must determine if the benefits of the accounting outweigh the costs. Once the choice is made to have an accounting, the trustee must determine who will prepare the statements, keeping in mind that they follow a unique set of rules and often include complex situations. While the trustee may prepare the accountings on their own, in many instances the task is outside of their scope of expertise and they should look to accounting or legal professionals for assistance.  The trustee should seek out a firm with extensive knowledge in the trust and estate field and experience in preparing accountings. In addition to creating complete and accurate accountings, the professional should also be a resource for any questions or concerns the trustee may have concerning the management of the trust.

Is it worth it? Trust accountings are typically required, but also come with costs which must be considered. So why should you get one? From the trustor’s perspective, the inclusion of language in the trust documents calling for periodic trust accountings may provide better long-term results in the management of trust assets to achieve the trustor’s original goals. From the trustee’s perspective, trust accountings establish a statute of limitations which limits the legal liability of the trustee for past decisions. Finally, from the beneficiary’s perspective, trust accountings provide visibility into the operations of the trust and offer the comfort of knowing that the trust is operating correctly.

Trust accountings represent a significant component of trust management, and the benefits of investing in accountings warrant serious consideration. If you are interested in exploring the value of trust accountings or the complex legal matters associated with them, please feel free to contact your L&B professional at (858) 558-9200.

Generation Skipping Transfer Tax & How It Impacts Your Estate

By Estates & TrustsNo Comments

Your estate plan includes maximum flexibility by providing the entire estate of the first decedent to the surviving spouse during their lifetime. With the availability of portability, there is no need to create and fund a family trust upon the first spouse’s death, which otherwise would not be directly accessible by the surviving spouse. However, you should be aware that the Generation Skipping Transfer Tax Exemption is not portable like the estate tax exclusion and could have a major impact to your estate.

Generation Skipping Transfer Tax. The generation skipping transfer tax is imposed on transfer of property that skips generation. Each person is allowed an amount of lifetime exemption from tax, which is indexed for inflation. Every generation-skipping transfer is subject to the generation-skipping transfer (GST) tax, which takes one of three forms: direct skip, taxable termination or taxable distribution. A direct skip is a transfer to a skip person that is also subject to estate or gift tax. A skip person is two generations or more younger than the transferor. The best example of a direct skip is a grandparent making a gift to his grandchild. Deceased parents are ignored for lineal descendants and for other descendants if the transferor has no living lineal descendants at the time of the transfer. The tax applies to all generation-skipping transfers made after October 22, 1986 and the basic exclusion amount is $5 million of direct skip transfers.

Taxable termination. A taxable termination occurs when an interest in property held in trust terminates and the trust property is held for or distributed to a skip person. A taxable distribution is any distribution from a trust, including a distribution of income, that is not a taxable termination or direct skip.

Tax. The tax is computed by finding the taxable amount of the transfer and multiplying it by the applicable rate. The applicable rate is the product of the highest estate and gift tax rate multiplied by the inclusion ratio for the transfer. The inclusion ratio is found by allocating all or a portion of the transferor’s lifetime exemption to the transfer. It is allocated first to lifetime direct skips, but the transferor may elect his own allocation. The exemption will be equal to the applicable exclusion amount.

Tax Return & Payment. The executor must file the return and pay the tax for direct skips occurring at death. The transferor is responsible for filing the return and paying the tax on lifetime direct skips. The trustee is responsible for filing the return and paying the tax on taxable terminations. The transferee is responsible for paying the tax and filing the return for taxable distributions.

To learn more about the generation skipping tax and how it affects your estate, please do not hesitate to contact your L&B professional at (858) 558-9200.

Trusts 101: Types of Trusts

By Estates & TrustsNo Comments

Are you thinking about setting up a trust? People use trusts to help manage assets, ensure financial security of loved ones, avoid probate, and to make donations to charities. There are many unique types of trusts and it is important to select the right one to accomplish your goal. Let’s take a look at some of the basic characteristics of these trusts.

  Irrevocable Life Insurance Trust – ILIT

  • Trust contribution is used to obtain a life insurance policy on the trustor.
  • Insurance proceeds are tax exempt for both of the spouses’ estates (if surviving spouse is only an income beneficiary of the trust).
  • Insurance proceeds are available to surviving spouse through their life and any remaining assets are distributed to their children at the surviving spouse’s death.
  • Annual insurance premiums qualify for the annual gift tax exclusion if certain requirements are met.

Charitable Remainder Annuity Trust – CRAT

  • Irrevocable trust.
  • Noncharitable income beneficiary must receive annuity income of at least 5% of the original trust contribution.
  • Trust permits only one single contribution with no additional future contributions.
  • Immediate income tax deduction for the computed value of the charitable gift.
  • Remainder contributed to designated charity at the surviving spouse’s death.

Charitable Remainder Unitrust – CRUT

  • Irrevocable Trust
  • Noncharitable income beneficiary receives set income of at least 5% of the yearly value of the principal. The principal of the trust is revalued annually.
  • Income amount can be the lesser of the unitrust amount or the amount earned by the trust with deficiencies paid in later years when earnings are higher.
  • Income can change from year to year based on the value of the principal.
  • Remainder contributed to designated charity at the surviving spouse’s death.

Charitable Lead Annuity Trust – CLAT

  • Qualified charitable organization receives income payments in set periodic installments of at least 5% of the original trust contribution for a set term.
  • Trust permits only one single contribution with no additional future contributions.
  • Noncharitable beneficiary receives the principal after the trust term expires.

Charitable Lead Unitrust – CLUT

  • Qualified charitable organization receives set income payments of at least 5% of the yearly principal amount in the trust. The principal of trust is revalued annually.
  • Income and deductions are taxable to the grantor.
  • Noncharitable beneficiary receives the principal after the trust term expires.

Intentionally Defective Grantor Trust (IDGT)

  • A powerful estate planning tool used to freeze assets for estate tax purposes.
  • If properly structured, the transfer of the grantor’s properties to the trust is considered a gift for gift and estate tax purposes. The assets receive a step-up in basis upon the death of the grantor.

Again, setting up a trust offers many benefits, but there are complex tax issues involved. If you have any questions regarding the different types of trusts, please contact your L&B professional at 858-558-9200

Do You Need a Living Trust?

By Estates & TrustsNo Comments

Revocable living trusts have become popular estate planning tools for avoiding the costs of probate, maintaining privacy, all while providing a means of controlling one’s assets both during life and after death. This article will discuss the advantages and disadvantages of setting up a living trust.

A living trust is a trust that you set up during your lifetime. You will transfer most or all of your assets to this trust. You will have the right to receive the income and withdraw principal from the trust. You will have the ability to revoke or cancel the trust at any time during your life. At death, the trust becomes irrevocable (meaning that it cannot be modified) and its income and assets are disposed of under terms specified by you in the trust documents. You have the same flexibility to dispose of your assets by means of a trust as you do with a will.

Why would you do this? The most commonly cited advantage of living trusts is that, upon the trust owner’s death, trust assets are distributed without going through probate. Probate is a very costly court-supervised process of distributing a deceased persons assets to the rightful inheritors. By avoiding probate, people generally expect to reduce their overall expenditures. These savings often may be smaller than expected, however.

First, it is difficult to avoid probate costs altogether, unless all of your assets have been retitled to the trust, including your personal property. Transferring title of mortgaged real estate or personal possessions may be impractical or undesirable. Funding a trust requires a lot of diligence, but the purpose for setting up the trust will be undermined if all assets have not been retitled.

Second, the upfront costs of setting up a trust can be high. People pay thousands of dollars to attorneys to draw a detailed living trust for them.

Third, if trust assets must be retained and administered before they can be distributed, trustee fees may approximate those of an executor since the period of administering the trust may be drawn out. Even with a trust, a period of administration may be necessary to file income and estate tax returns, collect assets, pay debts, and distribute assets.

Tax Consequences

Perhaps the greatest misconception concerning living trusts is that they reduce federal estate taxes. This is not the case. Transferring your assets to a living trust does not remove them from your gross estate, so the assets remain subject to estate tax.  In fact, a living trust is tax neutral in terms of both estate and income taxes. A living trust can provide the same estate tax planning flexibility as a will. As for income taxes, the owner of a living trust is taxed on its income as if the assets were owned outright. A separate tax return generally is not required.

Advantages of a Living Trust

Although the anticipated savings of a living trust must be carefully evaluated, living trusts do offer several advantages other than reducing the cost of passing your assets to your beneficiaries.

Incapacity. A living trust is an excellent means for planning for incapacity. The trust can instruct the trustee to manage your assets and provide for your financial support. A durable power of attorney can also authorize your agent to transfer additional property to the trust. Thus, a living trust and durable power of attorney can avoid the need for a court-appointed conservator.

Speedier distributions. Upon your death, the trustee of a living trust can begin to make distributions to surviving beneficiaries without the delays and procedures that the probate process requires. Delays are also avoided with joint accounts, insurance proceeds, and other assets that pass directly to the beneficiary without going through probate.

Out-of-state property. A living trust can be very beneficial if you own real property in more than one state because separate probate proceedings are required in every state in which you own property. Transferring such property to a living trust avoids the need for multiple probate proceedings.

Avoidance of disputes. A living trust offers an advantage over a will if you anticipate discord among your beneficiaries. Unlike a will, family members do not have to be notified of the existence of the trust. A living trust also may withstand legal attacks better than a will.

Although a living trust may provide advantages, it is important for you to have a realistic expectation of what a living trust can accomplish. This will allow you to make an informed decision as to whether such a living trust is appropriate for your situation. If you have any questions please feel free to call your L&B professional at 858-558-9200.

What is Portability and How Does it Impact Your Estate?

By Estates & TrustsNo Comments

The IRS currently allows an individual to exclude $5.49 million from their taxable estate. Married couples are able to exclude $10.98 million from their estate using a concept called portability. The IRS issued permanent regulations regarding the allowable estate exclusion amount as well as the portability of a deceased spouse’s unused portion of this exclusion. As a surviving spouse with assets above these thresholds, this guidance is essential to your estate plan.

Estate tax is imposed on the value of a decedent’s assets at date of death. It is increased by any taxable lifetime gifts and decreased by various deductions. The lifetime exclusion amount for 2017 is $5.49 million per person. Prior to the 2010 Tax Relief Act, it was possible for married couples to waste the exclusion amount applicable to the first spouse when he/she passed away if the taxable estate was less than the lifetime exclusion amount. The 2010 act introduced the idea of portability regarding the deceased spousal unused exclusion, or DSUE, amount. By making the portability election, the surviving spouse is able to apply the decedent’s DSUE amount to the surviving spouse’s own transfers during life and at death. The concept of portability was made permanent by The American Taxpayer Relief Act of 2012.

After the passing of the first spouse, the executor of the estate should typically make a portability election which passes on a decedent’s unused gift and estate tax exclusion to the surviving spouse. In order to elect portability for the benefit of the surviving spouse, an estate return must be filed at first death even if the value is below the threshold for filing. The election is only valid if the estate tax return on which the portability election made is “complete and properly prepared” as well as filed in a timely manner.

The portability election comes into effect as of the date of death of the deceased spouse. As a result, the DSUE amount may be taken into account and applied against any gifts made by the surviving spouse after the date of death of the deceased spouse. The DSUE is used first before the surviving spouse uses their own exclusion amount.


Betty dies in 2012 with a taxable estate of $3 million. In 2012 the estate tax exemption was $5.12 million. Her executor files an estate return making the portability election. Betty’s husband Tom, who has not made any lifetime taxable gifts, dies in 2017 with a taxable estate of $10 million. The executor of Tom’s estate computes Tom’s DSUE amount as Betty’s basic exclusion amount ($5.12 million) less her taxable estate ($3 million), or $2.12 million. Accordingly, the total applicable exclusion amount available to Tom’s estate is $7.61 million: his own basic exclusion amount of $5.49 million, plus the $2.12 million DSUE amount from Betty’s estate.

The portability election should be reviewed and considered as part of your overall estate planning strategy. If you need assistance or have any questions regarding portability, please contact your L&B professional at (858) 558-9200.

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