These days, estate taxes really aren’t much of a concern for people who live in Utah. In 2014, an individual would need to have more than $5,340,000 in assets before any federal estate tax would be due. Next year, that number rises to $5,430,000. Married couples would need to have more than double those amounts before paying estate taxes. Utah follows the federal estate tax exemptions, so there wouldn’t be any Utah estate tax due either. Some Utah residents own property in other states with lower estate tax exemptions. If that’s the case for you, you’ll need to know the exemption amounts in those other states so that you can plan appropriately.
For those successful people who have been blessed with wealth in excess of the exemption amount: You have a great problem! The need to plan to avoid estate taxes is something not many people need to do these days. If you are in that position, a good estate plan can help you avoid or reduce taxes on your estate.
Many people believe that once they set up and fund a revocable living trust, property held in the trust will avoid estate taxes after they die. In reality, this may or may not be true depending on your choice of beneficiaries and the terms written into your trust agreement.
Single Trustmakers and Estate Taxes
If you’re single and you create and fund a revocable living trust, all of your assets held in the trust will be subject to estate taxes after you die if your beneficiaries are individuals. In other words, if your beneficiaries are your children, your brothers and sisters, or your nieces and nephews, then the property they inherit through the trust will be included in your taxable estate.
On the other hand, if you’re single and you create and fund a revocable living trust and name one or more charitable organizations and no individuals as the beneficiaries, then the property distributed to the charities through the trust will pass free from estate taxes.
What if you’re single and you name both individuals and charities as beneficiaries of your trust after you die? The portion of the trust property passing to the individual beneficiaries will be subject to estate taxes and the portion passing to the charities will be distributed free from estate taxes.
Married Trustmakers and Estate Taxes
If you’re married and you create and fund a revocable living trust and all of the assets held in your trust pass to your spouse after you die, then the property passing to your spouse through the trust will not be subject to estate taxes. This is true if the assets pass outright to your spouse or through the traditional “AB Trust” estate tax planning since the AB Trust strategy is designed to delay estate taxes until after both you and your spouse are gone.
On the other hand, if you’re married and you create and fund a revocable living trust and you name both your spouse and your children as the beneficiaries after you die, the portion of the trust passing to your spouse will be exempt from estate taxes and the portion passing to your children will be subject to estate taxes. If you include one or more charitable organizations as beneficiaries, then the portion passing to the charities will be distributed free from estate taxes.
Do You Need a Revocable Living Trust Even If There Won’t Be Any Estate Taxes?
If you don’t need to worry about estate taxes because your estate isn’t large enough, then why should you consider setting one up? For three reasons:
- To avoid probate – Assets held in your revocable living trust at the time of your death will avoid probate. Depending on your state of residence at the time of your death, this could save thousands of dollars in legal fees and court costs.
- To plan for mental incapacity – If you become incapacitated, the disability trustee you name in your revocable living trust will be able to manage the trust assets for your benefit without the need for a court-supervised guardianship. Like avoiding probate, removing the need for a court-supervised guardianship could save thousands of dollars in legal fees and court costs, depending on your state of residence.
- To keep your final wishes private – A revocable living trust is a private agreement that remains private after you die.
Final Thoughts on Revocable Living Trusts and Estate Taxes
For many people a revocable living trust is the ideal way to organize their final affairs irrespective of the size of their estates. For married couples who need tax planning – aside from offering the benefits listed above – their revocable living trusts can be drafted to include AB Trust planning which will delay the payment of estate taxes until after both spouses die. For single people who need tax planning – while a revocable living trust will provide them with the benefits listed above, they will need to take additional steps such as gifting strategies and charitable planning to minimize their estate tax bill.