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Bear Market Report

Three Things You Must Know About Your Trust

Teresa Bear | Apr 7, 2014, 8:10 a.m.

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Teresa Bear

I bet you remember the following line: “Not just a headache...but an Excedrin headache.” Remember that ad campaign? According to the commercial, Excedrin was reserved for the worst type of headache in the world. Grantor trusts—sometimes called living trusts—are popular documents that many retirees set up to avoid Excedrin headaches for their heirs.

Now, I am not an attorney—and I don’t give legal advice. As a CPA and a certified financial planner, the following suggestions come from my experience in viewing trusts from a tax, administrative and investment perspective. Keep in mind that it is much easier to attend to these matters when you are vertical—than letting your spouse or children deal with them when you are horizontal.

Pitfall No. 1: Assets are not in the trust name. Sometimes in my practice I find that a client has paid $1,500 to $5,000 in attorney fees to set up a trust, but the trust was never funded. The assets that they own were never titled in the name of the trust. Essentially they spent an enormous amount of money for an empty box.

Tax time is a terrific time of year to verify that your accounts are properly titled. Review the 1099s that you have received from your investment and bank accounts and make sure that the name of the trust is listed on the 1099. Also check your real estate property tax receipts (or go online to the county assessor’s website) to ensure that the real estate that you own is in also in the name of the trust. Finally, peek in your safe deposit box and pull out those U.S. Savings Bonds. If they are in your name, it may be a good idea to start cashing them in—or they will be subject to probate. Keep in mind that accounts that have a named beneficiary (such as retirement accounts, annuities and life insurance policies) do not need to be owned by the trust, although trust can be the beneficiary of these accounts.

Pitfall No. 2: An unnecessary AB trust. In addition to probate avoidance, trusts have also been used for tax planning. In the past, estates as small as $300,000 were subject to estate tax—with rates as high as 55 percent. To avoid some of the tax liability, attorneys did a great thing: They established more complicated trusts that allowed a married couple to pass $600,000 estate tax free to their heirs. This saved estate tax, but it came at a cost. When the first spouse passes away, the “B” trust becomes a separate taxable entity. This means that a form 1041 needs to be filed for the trust—and most CPA firms charge between $500 and $1,000 to prepare that return. For a trust that is subject to estate tax, this additional tax prep fee is worth it. However, now a couple can give $10,680,000 to their heirs without paying estate tax. So the tax need for an AB trust has been eliminated for most taxpayers. Sometimes there are valid nontax reasons for an AB trust (such as a couple with children from previous marriages), but if your estate is less than $10,680,000 it may be time to review this issue with your attorney.

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