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.