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As Hurricane Harvey proved, sudden cataclysmic events can irrevocably change your life. This includes a life altering or life threatening event that leaves your family without the financial resources provided by the primary wage earner. Sadly, not enough Americans have created the right estate plan that takes care of loved ones.
Both private sector and public sector studies demonstrate that more than two-thirds of all American adults have not created a will. If you fall within the troublesome category, you need to learn how to create the right estate plan to take care of your spouse, children, and/or siblings.
The Benefits of a Revocable Living Trust
The primary benefit of a revocable living trust is the estate planning tool allows you to pass down personal assets to love ones and not have to deal with the inconvenient legal process associated with a probate court. Setting up a revocable trust is relatively easy to do on your own, but your bank can expedite the process by filing the correct paperwork and meeting submission deadlines. Revocable trusts allow you to modify the terms any time you are alive. You have the legal right to add money for beneficiaries or include more beneficiaries in the trust. After you die, the assets in the trust quickly go to the beneficiaries listed in the revocable trust
Considered by many probate and estate plan attorneys an easier trust to set up than a revocable trust, a Totten trust only requires you to have a bank account. You just sign a form provided by your bank that clearly defines the beneficiaries of the financial proceeds deposited into the bank account. Totten trusts avoid protracted probate court proceedings and the trusts are a highly efficient method for transferring your assets that include securities such as stocks and bonds.
The Tax Dilemma
The United States Congress sets a minimum estate value, before the federal government can collect taxes on the assets you pass down to beneficiaries. If your estate exceeds the minimum estate value threshold, you can face an estate tax rate that approaches 50%. To avoid the steep estate tax rate, give away your assets while you are still alive. Federal law allows you to give a certain amount of assets to each beneficiary tax free. However, the maximum tax free gift amount varies from year to year. It is important to consult with a probate and estate law attorney to determine the current value of the tax free asset amount.
Trusts to Consider
You can create an AB trust to avoid or reduce the amount of federal taxes you owe on the assets passed down from your estate. An AB trust allows you and your spouse to leave property to each other first, and then to your children if both of you die. When one spouse dies, the other spouse can spend the income generated from the trust and in some cases, the principal as well, without having to pay federal taxes. AB trusts typically cost more money to create than other types of trusts. Therefore, you should compare the tax savings with the money you spend to set up an AB trust.
Creating a charitable trust donates property to the charity of your choice, which reduces your federal tax burden. Charitable trusts work best for estates worth tens of millions of dollars. However, you can still benefit from the tax savings by taking standard federal income tax deductions.
Remember that you must clearly describe every provision that you include in a trust. This means designating someone you have confidence in to carry out your wishes after you die. You do not want a judge to decide who gets what from your estate. The designation of a trusted family member to carry out your estate wishes is referred to as the durable power of attorney.