• Living Trust
• Will or Codicil (modification of Will)
• Estate Plans
• Advanced Health Care Directives
• Powers of Attorney
• Agency
• Trust or Will Contest

How Living Trusts Avoid Probate
Here is the lowdown on basic probate-avoiding living trusts

Ask people why they work hard and save their money, and often you'll hear that it's not only because they want to raise their own standard of living; they want to leave something behind for their children, too. Understandably, they don't want a big chunk of that money to be used up for probate lawyers' fees.

That's where living trusts come in. They don't save you a penny while you're alive, but after death they can eliminate the need for probate -- and probate fees. (Probate involves inventorying and appraising the property, paying debts and taxes, and distributing the remainder of the property according to the will.) When you make a living trust -- a device in which you hold property as a "trustee" -- your surviving family members can transfer your property quickly and easily, without probate. More of the property you leave goes to the people you want to inherit it.

Types of Living Trusts

The two most common types of living trusts are:

• a basic living trust (for an individual or couple), which avoids probate, and
• an AB trust, which both avoids probate and saves on estate tax.

This article discusses basic, probate-avoidance living trusts. Unless you expect to owe federal estate tax at your death or your spouse's, a basic living trust to avoid probate is probably all the trust you need. (Fewer than 2% of estates -- those worth more than $2 million -- owe estate tax.)

Saving AB Trusts

Couples can save a bundle on estate taxes with this kind of living trust, called an AB trust or marital bypass trust.

Most people don't need to think about federal estate tax because it only affects those with very large estates. But if you (or you and your spouse) expect that your estate may owe taxes, creating an AB trust is a good way to both avoid probate and also save on federal estate tax.

How an AB Trust Works

Here's how it works: Instead of leaving property outright to the surviving spouse, each spouse leaves most or all of his or her property to an irrevocable trust that can be used for the benefit of the surviving spouse. Because the surviving spouse does not own the property outright, the property isn't subject to estate tax when the surviving spouse dies.

When setting up an AB trust, each spouse names final beneficiaries who will receive the trust's property when the surviving spouse dies. Spouses often name the same people -- their children -- as final beneficiaries, but it's not mandatory.

Estate and Gift Tax FAQ
Get informed about estate and gift tax laws with this easy introduction.

Will my estate have to pay federal tax after I die?

Most estates -- at least 99% -- don't. The federal government imposes estate tax at your death only if your property is worth more than a certain amount, which depends on the year of death. However, all property left to a spouse is exempt from the tax, as long as the spouse is a U.S. citizen. Estate tax is also not assessed on any property you leave to a tax-exempt charity.

Are there ways to avoid federal estate taxes?

Yes, although there are fewer ways than many people think, or hope, there are. Here are some of the most popular:

• Tax-free gifts. You can give up to $12,000 per calendar year per recipient without paying gift tax. You can also pay someone's tuition or medical bills, or give to a charity, without paying gift tax on the amount. This reduces the size of your estate and the eventual estate tax bill.
• An AB trust, where spouses leave their property in trust for their children, but give the surviving spouse the right to use it for life. This keeps the second spouse's taxable estate half the size it would be if the property were left entirely to the surviving spouse. SeeTax-Saving AB Trusts for more on this type of trust.
• A "QTIP" trust, which enables couples to postpone estate taxes until the second spouse dies.
  Charitable trusts, which involve making a sizable gift to a tax-exempt charity.
• Life insurance trusts, which let you take the value of life insurance proceeds out of your estate.
  

Can't I just give all my property away before I die and avoid estate taxes?

No. The government long anticipated this one. If you give away more than $12,000 per year to any one person or noncharitable institution, you are assessed federal "gift tax," which applies at the same rate as the estate tax. Making gifts of $12,000 or less, however, can yield substantial estate tax savings if you keep at it for several years.

Some gifts are exempt from the gift/estate tax. For example, if your spouse is a U.S. citizen, you can give your spouse an unlimited amount of property (if your spouse is not a U.S. citizen, you can give your spouse up to $125,000 (2007 figure) per year free of gift tax). Any property given to a tax-exempt charity avoids federal gift taxes, and money spent directly for someone's medical bills or school tuition is exempt as well.

Do some states impose estate taxes?
Yes. Even if your estate isn't big enough to owe federal estate tax, the state may still take a bite.
Estate tax. Until recently, most states didn't impose their own estate tax; instead, they took a share of the federal estate tax paid by large estates. (This is called a "pick-up" or "sop" tax.) However, since states no longer get a share of federal estate tax, some states are collecting tax from estates that aren't big enough to owe any federal tax to get back some of what they're losing. So far, almost half the states have changed their laws so they can keep collecting estate tax.

For example, in New Jersey, Rhode Island, and Wisconsin, estates worth more than $675,000 may owe state estate tax. Property left to a surviving spouse, however, is exempt from state estate tax, just as it is exempt from federal estate tax.

Inheritance tax. Some other states impose a separate tax, called an inheritance tax, on a deceased person's property. The tax rate depends on who inherits the property; usually, spouses and other close relatives pay nothing or a low rate.

Can I avoid paying state estate or inheritance taxes?

If your state imposes estate or inheritance taxes, there probably isn't much you can do. However, if you live in two states -- winter here, summer there -- your inheritors may save money if you can make your legal residence in a state that doesn't impose these taxes.

Disclaimer:

Nothing contained in this web site is intended as legal advice. Nothing contained in this web page is intended to create a professional relationship between you and an attorney. If you would like legal advice about your case, you should contact an attorney at Hertz Law Offices by telephone or email today. This web site is not intended to solicit clients for matters outside of the state of California.