Living Trust Q&A

What control do I have over my assets in the Trust? As the Trustor, person who created the trust, you have total control over your assets.  Now when you add things to the trust or sell property you will sign as trustee.

Is the Living Trust valid in all fifty states and what if I move?
A Living Trust is valid in all fifty states.  If you move I recommend asking a local attorney what laws differ and if your trust needs to be updated.  Some common differences are probate codes tax statutes, rule against perpetuities, and property laws.  Picking the situs of your trust and allowing your trustee to change the situs is also important.

Can I have a living Trust if I’m married?  Spouses can have a joint trust or two separate trusts.  It is even possible to have a joint trust and hold property separately within the joint trust.  Even unmarried people can have a joint trust which is a good choice for co-property owners.

How does one settle the Estate? If the Living Trust is properly funded then no probate proceeding needs to take place.  The successor trustee will follow the directions of the Trustor and distribute the assets or hold them in trust accordingly.

Will a living Trust affect my tax deductions and social Security Benefits? A Revocable Living Trust has no effect on income nor did it have any effect on social security benefits.  You will continue to file the Individual tax returnFORM 1040 just as you did in the past.

Can the Successor Trustee make changes to the trust?   If there are two or more trustors then the trust may allow for a surviving trustor and trustee to make changes even if one trustor has passed away.  When all trustors have passed away the trust becomes irrevocable and the successor trustees must follow the directions of the trust.

Can I revoke my Living Trust?  The living Trust can be changed and revoked anytime up until you pass away.

How often do I need to update my Living Trust? It is important to look over your estate planning documents whenever there is a change in the family like marriages, divorces, deaths and births.  Tax and estate laws change often and it is important to make sure that your beneficiaries don’t get stuck with paying high estate taxes.

Why choose Spees Law? We are a family practice who focus on making easy to read documents that properly get your property to your loved ones without court.  Frank and Judy Spees have been practicing law for over 35 years together making documents that cater to each client.  Having Kristen Spees is a huge benefit because she will be around when the time comes to walk your trustee through the process.



The New Estate Tax Exemption 2018

As of January 1, 2018 the federal estate tax exemption amount is $11,200,000 for individuals and double that for married couples!  This number is projected to fall in 2025 back to $5,490,000.   This means that you can give away 11 Million without your beneficiaries paying an estate tax.

The gift tax exemption amount also increased to  $15,000 in 2018.



Domestic Asset Protection Trust

An alternative to titling your property into an LLC is to title it into a Domestic Asset Protection Trust.  Our favorite is the Nevada Self-Settled Spendthrift Trust.  The State of Nevada passed several laws in 1999 which allow for the use of this type of trust and in 2009 more laws were passed which provide guidance for creating this trust.  This trust differs from others because it is an irrevocable trust which is used to protect assets from creditor claims.  The beneficiary does not hold legal title to any assets but still has an equitable interest in ownership in the trust assets.

Nevada asset protections trusts have a spendthrift provisions which prevents potential creditors and beneficiaries from getting access to assets in the trust.

The Grantor places assets into the irrevocable trust and remains a beneficiary of the trust.  The state requires that an independent Trustee make distributions to the Grantor.

The Statute of Limitations os 2 years from the date of transfer and then assets are secure from creditor claims.

13 states authorize the use of Asset Protection Trusts.  Nevada is preferable because is does not tax the income of the trust.  Some states have a longer statute of limitations period.  Nevada has a zero exception for creditors.   Directed trusts are allowed meaning the grantor can choose an independent financial advisor to manage the funds.

You don’t have to be a Nevada Resident to setup this trust. You just need a Nevada resident Trustee or co-trustee.

Five ways to give your home away TAX-FREE

1.  Keep it until you die.   If your estate is below the unified tax credit, currently $4.49
million in 2017, when you die the property tax basis will be STEPPED UP to fair market value, saving your children capital gains taxes on the appreciation.

2. Give it to your kids now for free.  You can give your home to your kids now without paying a conveyance tax but you will tap into the unified federal gift and estate tax exemption which is $4.49 million in 2017.   Each year you can give away $14,000 per person without paying a gift tax.   As long as the net figure is less than $5.49 million you won’t own any gift tax but this amount adds up during your entire life.  This method doesn’t give the kids a step up in basis so they may have to pay capital gains tax when they sell it.

 3. Sell it to your kids for full price.  If your kids don’t have the money they can make a small down payment and carry a note on the property where they pay in monthly installments.  This way they can write off the payments as qualified mortgage interest and they don’t get hit with capital gains tax.  The only downside is that you have to pay income tax on the payments.   You can keep giving them the annual gift amount to ease the burden of the payments.

4.  Rent it from your kids after they buy it.   The IRS doesn’t like you to transfer your house and continue to live there.  The payments to your children can help finance buying the home.  The children can also claim rental property depreciation.  This is only possible if you sell the house for fair market value and pay market value rent, otherwise the IRS may say you didn’t give up possession and enjoyment of your home and get you for the date of death value of your home in your taxable income.

5. Use a Qualified Personal Residence Trust (QPRT). Using a QPRT you can gift your house to your kids while still living in it without having them pay  the fair market value price.  This required you to put the property in an irrevocable trust for several years.  The IRS has a calculation to value the right to live in the house.  When the duration of the trust is up, the owner can pay rent to the children.  The down side is your kids can kick you out onto the street and if you don’t outlive the trust then the kids receive no tax breaks.

Death check list:

Here is a list of what to do when your loved one passes away.   If this is not an emergency situation, sit back, take your time and breath.

  1. Notify a doctor, coroner or local police officer that the person has died, herein after called decedent.
  2. Look for the decedent’s trust and will and look for the decedent’s wishes to see if they wanted to donate their organs and alert the coroner.
  3. Get Death Certificates.
  4. Notify your family and friends of the death.
  5. Look in the will for burial wishes.  A Trust will name a successor trustee and if there is no trust then a Will will name an executor to administer the estate.
  6. Contact a funeral home regarding cremation or burial.
  7. Contact government organizations and benefit programs like the Social Security Administration that are making payments to the decedent.
  8. The Trustee of the Trust must look through the estate planning documents and find the assets list located on schedule A.  One by one, the Trustee will deal with each asset. If there is only a Will the executor of the will can look to see whats assets the Decedent had.  Everything hopefully has been given away already.  If not the Will must be taken to the county office to be accepted for Probate.
  9. Look for Safe deposit keys, life insurance policies, retirement benefits, tax returns, marriage, birth and death certificates, records of personal assets and business documentation, bank statements, check books, titles to cars and deeds of properties, lease agreements, securities, health insurance, stocks, bonds and investments, make claims for unpaid bills and final illness and look for insurance policies and annuities.  Call and cancel credit cards, bills and any thing else that the Decedent may still be paying.
  10. If there is no will and there are enough assets to probate, an administrator will be appointed by the court to distribute the assets according to state law.
  11. As trustee, go to the bank and change the trust account to have a new Tax ID number.  If the bank will not allow that, open a new bank account for for the decedent’s estate so that all expenses of administering the estate can be recorded and reimbursed.
  12. Probate is the process where the executor reports all the of assets to the court, pays debts, taxes and other expenses and distributes the assets according the the decedent’s wishes.  This process takes about 8 months and can be costly.
  13. If there is no Trust Look for property deeds and and any property owned in other states which will be probated in that state.
  14. If the Decedent owned a business look for a buy/sell agreement.
  15. Pay taxes, debts and creditors.  If the assets are distributed before paying creditors the executor may be held personally liable for the debt.
  16. The Decedent’s income taxes must be filed and paid for the year of death.  A surviving spouse can file jointly for the year of death.
  17. A Trust will become irrevocable at the time of death of the last Trustor.  A separate tax return must be filed for the trust called a Form 1041. Fiduciary Income tax return, if the trust estate is receiving income.
  18. The Will lists the guardian for Minor children.  If no guardian is listed, the court must appoint a guardian.
  19. The trustee or executor must make sure that any real estate insurance policies of the decedent are maintained.
  20. Collect Veterans benefits and other Joint and survivor benefits for the surviving spouse.

10 ways to avoid Capital Gains Tax

A capital gain is a profit made from selling an asset such as a stock, bond or real estate.  The U.S. government taxes capital gains at different rates.  Short-term capital gains (held one year or less) are taxed at your normal tax rate.  Long-term capital gains (held over a year) benefit from a reduced tax rate.    There are multiple ways to avoid Capital Gains that are incentivized by the government.

10 Ways to avoid Capital Gains:
1.  Matching losses
Capital losses can be used to reduce your taxes by matching your gains and losses the government allows you to use up to $3,000 of excess losses not used to cancel gains per year to reduce your taxable income.   Losses in excess of matching gains plus $3,000 can roll over to future years.

2. Exclusion of Primary Residence
An individual can exclude up to $250,000 and $500,000 for a married couple of capital gains from the sale of their primary residence.  Certain rules apply such as living in the house 2 out of the last 5 years.

3.  Retirement accounts
One benefit of retirement accounts is that you can defer paying taxes on any gains until you take the money out.  The downside is that you are taxed at the normal tax rate when you take the money out, thus losing the benefit of the long-term capital gain tax rate.

4. 1031 Exchange
This section of the tax code allows capital gains tax to be deferred with the sale of rental or investment property if the proceeds of the sale are put into a similar type of property within a certain amount if time.  You will want to use a 1031 exchange accommodator to make sure you comply with all the rules.
IRC Section 1031 (a)(1) states:    “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.”

5. IRAs
Contributing to a traditional IRA or 401k can reduce your income while in a higher tax bracket and can eliminate capital gains while trading in the account by deferring it.

Roth IRAs can avoid capital gains tax all together.  A Roth IRA allows for tax-free growth for your life and your heirs lives.

6.  Health savings accounts (HSAs)
These accounts allow for a tax deduction when contributing or investing in them.   They also allow for tax free growth and it is possible to avoid paying taxes on this account if withdrawals are used for qualified health expenses only.

7.  Gifting to family
By giving away a highly appreciated stock to a family member in a lower tax bracket you can avoid paying high capital gains tax. It will be subject to the same cost basis but this will be applied to the lower tax rate for the family member.

8.  Gifting to a Charity
You can gift almost any appreciated asset to a charity and the charity will not pay capital gains on the stock upon selling.  You can actually give more to a charity this way than by selling the stock yourself because you would have to pay capital gains.

9  Move States
Certain states charge higher capital gains tax with California ranking in at the highest at 37.1%.

10.  Die
Upon your death, your heirs get a step up in cost basis and do not have to pay capital gains tax except for retirement plans and annuities.

Have you updated your trust since 2004?

DOES THE NAME TERRI SCHIAVO RING A BELL?  All of us watched the unfortunate events on the news BACK THEN involving one family’s struggle with the right to die with dignity.  Regardless of how you felt about that situation, everyone agrees your wishes should be stated in your estate planning documents.  Because of a change in the law effective in 2004, YOU MAY NOT HAVE THE NECESSARY LANGUAGE IN YOUR DOCUMENTS.  The new law is called the “Health Insurance Portability and Accountability Act” or “HIPAA” for short.  The problem is the new law does not allow your loved ones to get your medical information if you are incapacitated.  To review, in a living trust there are four documents: 1) the living trust (for assets titled in the trust), 2) the will (for assets accidentally not titled in the trust), 3) the health care document (for medical decisions), and 4) the power of attorney (for other important decisions).  If your trust has not been undated since 2004 we need to amend your living trust so your “successor trustee” can get medical information to show that you are incapacitated. We need to prepare a new health care document so your “health care agent” can get medical information to make the right decision if you are incapacitated and finally, we need to prepare a new Durable Power of Attorney for Assets so your “attorney in fact” can get medical information to show that you are incapacitated.