At the meeting to sign, she signed a power of attorney, an advanced medical directive, a Revocable living Trust and a pour over will, instructions on changing accounts and a bill for $4,000 in the office in front of the paralegal as notary and some witnesses. She said during the signing how great it was that her family would save so much in taxes and probate costs. She was elated. She went home and put them as directed in a joint safe deposit box with her daughter who was going to be the Trustee after her death. She did not look at the instructions, the attorney did not prepare any deeds. She did not transfer any accounts into the name of the Trust. She figured everything was taken care of.
Author Archives: John
Have you considered a Revocable Trust
“Sandy picked up the flier which read -Save Taxes through Revocable Trusts”. The flier went onto describe saving estate taxes and avoiding probate. The Virginia native was very excited about saving taxes and avoiding probate (though) she had no clue what that was. Sandy was widowed. She had three children. Her estate was $50,000 which she expected to deplete before she died. She lived on social security and the government pension her late husband Ralph had left her. She went to the seminar and a lawyer showed these power point presentations about the costs of probate and the estate taxes and she was a bit overwhealmed. But she made an appointment with him to go over her estate plan. She brought a financial statement with her that his paralegal had sent her and he talked to her about the savings that would be afforded by having a trust at just a mere $4,000. She figured she could do this for her kids. After the meeting she got a 3 inch thick stack of documents. They talked about businesses that she owned, S corporations that she owned, none of which seemed relevant to her. She called the office and talked to the paralegal who told her that this was boilerplate and if it didn’t apply don’t worry about it. An appointment was made and she went ahead to sign the documents.
Revocable or Living Trusts
Many people seem to have this misconception that Revocable Trusts (also known as “Living Trusts”) save taxes. The answer is a big more nuanced. A living trust can save estate taxes if a person is married and the trust is used to multiply the estate of husband and wife to take advantage of each persons unified credit exemption. You see when person dies, he or she has a unified credit exemption (unlimited in 2010 currently and $1 Million in 2011 currently). With a trust the unified credit exemption of the first to die can be credited to that persons estate for estate tax purposes. If assets were held jointly, that exemption would be wasted. So in that circumstance a trust saves estate taxes. What about a single or widowed person. The answer is pretty much “no”, except that you may be able to sprinkle income among generations to marginally save some income taxes.
Trusts do serve two purposes: (1) they avoid probate which in many states is a long and exhausting process and a public process. (2) they can provide for management of a person’s assets for the period after they become incompetent and after they die. If properly drafted this affords asset protection to later generations. These are very good reasons to have a trust and certainly need to be examined. As our next Tale will show, a Revocable Living Trust in and of itself, does not save taxes.
Why Would a Man Fly a Plane into an IRS Office?
First, I am not surprised when any person does anything these days. But still, burning down your house and then flying a plane into an IRS office is pretty off the charts. As one who has dealt with the IRS on numerous occasions, I find most of their employees to be courteous, hard working and considerate. There are some who are none of those things. But still to fly a plane into an IRS building says something more. Out of curiosity, I read the man’s manifesto that he put on the internet to explain his actions. As expected it was rambling and self-absorbed. But two things struck me. The man was a self-professed atheist and communist. You see when you have to fear of an after-life, you have no fear of doing things that are evil per se. And flying a plane into an IRS office is evil. And as a communist, he railed against the inequities of the tax code which favored the rich without really thinking about how much the rich actually pay in taxes percentage wise. As I read his manifesto, it became clear that while, yes, this man was unbalanced, he was filled with the kind of endemic hate that comes from a life apart from God. And from that life came a very evil act. In the Book of Ecclesiastes, Soloman who was by many accounts one of the wisest men to ever rule, wrote that everything under the Sun is vanity (or worthless) except pleasing God. If you read this man’s manifesto and then read Ecclesiastes you will see a parallel. Both show a sign of despair in the current condition of man. However, Ecclesiastes ends in hope, this man’s flight ended with no hope.
Practice Note
Unless Congress Acts, my view is that all estates should consider filing a Form 706 to elect to allocate basis under Section 1022 of the Internal Revenue Code (even for estates that are under the filing threshold (absent regulatory guidance to the contrary). This will allow you the opportunity to fix the basis forever. The other question is whether the repeal of Section 1014 and its replacement by Section 1022 repealed the Gallenstein rule for basis pre-2010. This could mean that the property of the first to die for a couple that owned property pre-1976 and in which one spouse died, were able to get the full step-up instead of a 50% step-up, but under Section 1022, for decedent’s dying in 2010, there is clearly no step-up in basis as to the husband’s half regardless of the Gallenstein rule without an allocation. There are ton’s of issues in Section 1022 and I am sure the Service is loathe to give much guidance because Congress could repeal the law any day now and try to make it retroactive. So, you will need to read the statute and follow its language to the letter.