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Many people mistakenly believe that the Federal Estate Tax, also known as Death Tax, has been repealed. You know that obnoxious tax that taxed everything you worked your whole life for, at rates up to 55%. That tax is not only a double tax, but in many cases a triple tax. If you earned money, before it hit your pocket, you paid Income Tax. If what you bought was real property, you paid Property Taxes every year. If you sold it for more than you bought it for, you paid Capital Gains Taxes, etc., etc., etc.
Here is the real deal on the Death Tax. The bill that Congress passed and the President signed does not repeal the Death Tax. It merely increases the Death Tax exemption, year by year, through 2009 and repeals it for only one year: 2010. In 2011 and beyond, the exemption goes back down to one million dollars.
A lot of people have asked us: "Now that the Death Tax has been repealed, why do I need a living trust?" The answer is very simple. First, the Death Tax is not repealed. Second, while certain types of trusts do reduce or eliminate the Death Tax, even if there were no Death Tax, you still need a living trust. Why? Because of probate. Probate, the court supervised process of distributing an estate, is necessary when an individual dies without the proper estate planning documents and his/her assets subject to probate exceed $100,000. The average probate takes about one and a half years during which time the assets are frozen and the estate becomes public.
Let us give you an idea of the cost of probate. If you have $1,000,000 of assets that are subject to probate, the average cost of probate will be about $46,000... $23,000 to the lawyer and $23,000 to the executor. This does not include additional fees for the court and other various costs. If you have a living trust, your estate can avoid probate
Many people also mistakenly believe that since they have a
Will, their estate will not go through probate.
However, Wills do NOT avoid probate. Wills provide the
probate court with instructions on how to distribute an estate, but do
not avoid the probate process.
Another thing we hear a lot is: "My wife and I hold everything
as Joint Tenants and Joint Tenancy avoids probate." However, Joint
Tenancy just puts off probate. When the last spouse dies, there will be
a PROBATE, and it will cost a lot of time and money; that is, unless
you have a trust.
Finally, we hear:
"I know that when the last of us dies there will be a probate, so I
have put my son's name on our home and accounts as a Joint Tenant. That
way, if I die, my wife will get it without probate. When she dies, my
son will get it without probate and then he can share the proceeds with
our other children."
In our practice, we have seen many sons in this position not
share with his siblings. And even if he wanted to share, he would incur
Gift Tax consequences. Furthermore, if you sell your home, you and your
spouse may have a $500,000 exemption from the Capital Gains Tax, but
your son does not. How understanding will he be when you come to him
and say: "Mom and I want to sell our home and move. You don’t mind
paying the I.R.S. $35,000 in Capital Gains, do you son? Please sign the
deed here, so we can sell it." This is also a very good way to lose
your home should your son have
problems with the I.R.S., California State Franchise Tax Board, or
other
creditors. If your child is on your deeds or accounts as a joint
tenant, these properties and accounts are subject to his debts.