Several clients have asked if they should just ditch their trust due to the fact that the estate tax doesn’t start until $5 million in assets. The short answer: Keep the trust.
1. Avoiding Probate. Revocable living trusts avoid probate. The filing fees and other costs for a Cook County probate are now around $700.00 and attorney’s fees will be about $2000.00. Clients don’t like this and can sidestep these costs by using a trust.
2. Estate tax limits change every five minutes and will soon go back to $1 million. For 2011 and 2012, the estate tax exemption amount is $5 million. But, this will change again in 2013 back to $1 million. Living trusts for married couples often use a formula that sets up A/B or family/marital trusts upon the first spouse’s death. The purpose of this is to avoid estate tax on the amount in the family trust of the first spouse to die. I think it’s best to keep your A/B trust intact if you are a married couple since you will need it when the amount clicks back to $1 million in 2013. The A/B trust protects the surviving spouse’s assets from creditors and insulates the assets in the event of remarriage.
3. Portability won’t last. Under the new law, married couples won’t even need A/B trusts because of the new concept called “portability.” This means if one spouse dies without a trust, the surviving spouse can file an inheritance tax return for the deceased spouse and claim the funds in the deceased spouse’s name as exempt from inheritance tax, even if the deceased spouse did not have an A/B trust. Wow, confusing, huh? The problem with this: It forces the survivor to pay to file an inheritance tax return (not cheap) on the first death and both spouses must die by the end of 2012 for it to “work.” And the clients still has to find a way to avoid probate on all of their assets. So it’s crazy for a married couple to get rid of their trusts because of portability.
For a nice summary of the many changes brought by the estate tax law, please read a series of posts by a Chicago lawyer that cover in detail and with clarity the many changes to the estate tax laws.
1. Illinois tax kicks in at $2 million. The Illinois inheritance tax used to run parallel with the federal tax. Not any more. If you have a large estate, the best solution to this problem is to buy a foreclosed condo in Florida and become a Florida resident since it has no state inheritance tax or state income tax.
2. Gifting can go up to $5 million lifetime. It used to be that the lifetime limit for gifting was $1 million. Now it’s $5 million, which is sweet, especially if you are the progeny of a rich dude.
So don’t ditch your living trust, just be sure that it says what you want it to say and that it’s properly funded with life insurance, real estate and the other fruits of your labor.