estate tax – Experience a Richer Way to Wealth

HOW MANY TIMES HAS ONE OF YOUR CLIENTS ASKED YOU “HOW SHOULD I TAKE TITLE TO MY NEW HOME?”

As an estate planning attorney, navigating clients through this pivotal question becomes a crucial aspect of our service. A correctly titled property is not just a matter of legal compliance; it’s a strategic move to ensure the financial security and wishes of the property owners are honored.

Realtors play a pivotal role in not just finding the perfect home for clients but also in navigating the intricate pathways of home ownership. One question that frequently arises, yet is often underestimated in its complexity, is, “How should I take title to my new home?” This question extends beyond the closing of a deal and delves into the realms of legal compliance, financial security, and estate planning. As a realtor, equipping yourself with knowledge on this subject isn’t just adding another feather to your cap—it’s about becoming an indispensable resource to your clients.

Realtors: You have the opportunity to make sure that your clients have all the benefits of rightly titled property and they will definitely thank you for it.

WHY IS TITLING PROPERTY CORRECTLY SO IMPORTANT TO HOMEOWNERS?

The Importance of Correct Titling:

The foundation of estate planning is control. Homeowners want assurance that their wishes, especially regarding their property, will be respected and executed.

If Titled Incorrectly:

If titled incorrectly, the property owner cannot control what happens to the property after he dies; second, if titled incorrectly, the heirs can lose the property to creditors, the government, or even an ex-spouse; third, if titled incorrectly, the heirs will have to pay capital gain on the sale of the property.

THREE COMMON WAYS TO HOLD TITLE

JOINT TENANCY:

The worst part about joint tenancy is the owner who dies first cannot control what happens to the property after his or death. Joint Tenancy ensures that there will be a probate upon the death of the second joint tenant. Finally, the surviving joint tenant will pay capital gain on one-half of the property after the death of one joint tenant.

COMMUNITY PROPERTY:

Possibly the most common way for married couples to own property, Community Property causes half of the property owned as community property to be probated upon the first death and the whole property must be probated upon the second death. Probate is not fun- it is time consuming and costly!

COMMUNITY PROPERTY WITH RIGHT OF SURVIVORSHIP:

Like joint tenancy, CPw/ROS is a he who dies last wins situation, because the surviving owner controls the disposition of the property on her death.

THE FOURTH AND BEST WAY TO OWN PROPERTY – A REVOCABLE LIVING TRUST:

Realtors: Present this option as a comprehensive solution, offering control, protection, and tax efficiency. It’s an avenue to sidestep probate, maintain privacy, and ensure a seamless transfer of the estate.

The best way for your homeowners to own their property is in a revocable living trust.

A properly drafted and funded trust will avoid time consuming, expensive and public probate upon the first death and the second death.
A revocable living trust will make sure that the right people receive the property after the death of both owners and that it doesn’t go to creditors, predators, or future spouses.
Property received by the heirs can usually be sold free of any capital gain tax and can be protected from creditors and predators of the heirs.

Empowering Conversations with Knowledge:

Your role as a realtor is evolving. Clients are looking for more than property listings—they are seeking informed guidance. By understanding the implications of each title option, you can engage in deeper, more meaningful conversations with your clients, positioning yourself as a trusted advisor.

Revocable living trusts extend beyond financial savings, morphing into a protective shield for the property and its intended beneficiaries. In a world where creditors and predators lurk, having a well-structured trust is akin to building a fortress around the estate. It’s an assurance that the property will transition according to the explicit wishes of the owners.

The Realtor’s Advantage with Revocable Living Trusts:

Revocable living trusts stand out for their multifaceted benefits. Educate your clients about this option; explain how it enhances control, minimizes tax liabilities, and acts as a shield against third-party claims. When clients realize you’re not just about the sale but genuinely invested in their long-term welfare, your reputation and relationships will be solidified.

Conclusion:

In the competitive world of real estate, the realtors who stand out are those who offer value beyond the conventional services. Equip yourself with the knowledge of property titling, and transform each client interaction into an opportunity for empowerment. You’re not just helping clients buy a property—you’re guiding them to secure their legacy, and in doing so, you’re building your legacy as a realtor of distinction. Your informed advice on property titling won’t just close deals; it will open doors to enduring client relationships, referrals, and a reputation anchored in trust and expertise.

People are often curious — or confused — about the role trusts play in saving on taxes. Given how frequently this issue comes up, we’re going to explain the tax implications associated with different types of trusts in order to clarify this issue. Of course, if you need further clarification about trusts, taxes, or any other issue related to estate planning, meet with us.

TWO TYPES OF TRUSTS

There are two primary types of trusts — revocable living trusts and irrevocable trusts — and each one comes with different tax consequences.

REVOCABLE LIVING TRUST

A revocable living trust, also known simply as a living trust, is by far the most commonly used form of trust in estate planning. As long as you’re living, there’s absolutely no tax impact of creating a living trust.

A living trust uses your Social Security Number as its tax identifier, and this type of trust is not a separate entity from you for tax purposes. However, a living trust is a separate entity from you for the purpose of avoiding the court process called probate, and this is where the confusion regarding taxes often comes from. Before we explain the tax implications of a living trust, let’s first describe how a living trust works.

A living trust is simply an agreement between a person known as the grantor, who gives assets to a person or entity known as a trustee, to hold those assets for the benefit of a beneficiary(s). In the case of a revocable living trust, the reason there are no tax consequences is because you can revoke the trust agreement or take the assets back from the trustee at any time, for any reason. In fact, as long as you’re living, you can change the terms of the trust, change the trustee, change the beneficiaries, or terminate the trust altogether.

The revocable living trust becomes irrevocable if you become incapacitated or when you die. At that point, the trustee you’ve named will step in and take over management of the trust assets, and one of the first things your trustee will do is to apply for a tax ID number for the trust. At this point, the trust becomes a taxable entity, and any income earned inside of the trust that isn’t distributed in that year would be subject to income taxes, at the taxable rates of the trust (or at the tax rates of the beneficiaries, if income is distributed to the beneficiaries).

IRREVOCABLE TRUSTS

An irrevocable trust is created when you make a gift to a trustee to hold assets for the benefit of the beneficiary, and you cannot take back the gift you’ve made to that individual.

When you create an irrevocable trust, either during your lifetime, or at death through a testamentary trust (a trust that arises at the time of your death through your will), or through a revocable living trust creating during your lifetime, the trust is a separate tax-paying entity, and it’s either subject to income tax on the earnings of the trust at the rates of the trust or at the rates of the beneficiaries.

Unlike a revocable living trust, an irrevocable trust is (as the name implies) irrevocable. This means that the trust’s terms cannot be changed, and the trust cannot be terminated once it’s been executed. When you transfer assets into an irrevocable trust, you relinquish all ownership of those assets, and your chosen trustee takes total control of the assets transferred into the name of the trust. Because you no longer own the assets held by the trust, those assets are no longer considered part of your estate, and as long as the trust has been properly maintained, the assets held by the trust are also protected from lawsuits, creditors, divorce, serious illness and accidents, and even bankruptcy.

However, as mentioned earlier, irrevocable trusts also come with tax consequences. As of 2022, the income earned by an irrevocable trust is taxed at the highest individual tax bracket of 37% as soon as the undistributed taxable income reaches more than $13,450. To avoid this high tax rate, in some cases, an irrevocable trust can be prepared so that the tax consequences pass through to the beneficiary and are taxed at his or her rates, which are typically much lower.

We often set up a trust in this way when creating a Lifetime Asset Protection Trust for a beneficiary. When set up like this, the trust can provide the beneficiary with protection from common life events, such as serious debt, divorce, debilitating illness, crippling accidents, lawsuits, and bankruptcy, without being taxed at such a high rate on such little income.

If you have a trust set up and would like us to review its income tax consequences for your loved ones upon your death, meet with us.

THE ESTATE TAX: WHAT IT IS & WHO PAYS IT

The estate tax is a tax on the value of a person’s assets at the time of their death. Upon your death, if the total value of your estate is above a certain threshold amount, known as the federal estate tax exemption, the IRS requires your estate to pay a tax, known as the estate tax, before any assets can be passed to your beneficiaries.

As of 2022, the federal estate tax exemption is $12.06 million for individuals ($24.12 million for married couples). Simply put, if you die in 2022, and your assets are worth $12.06 million or less, your estate won’t owe any federal estate tax. However, if your estate is worth more than $12.06 million, the amount of your assets that are greater than $12.06 million will be taxed at a whopping 40% tax rate.

You can reduce your estate tax liability—or even eliminate it all together—by using various estate planning strategies. Most of these strategies are fairly complex and involve the use of irrevocable trusts, but such strategies are without question worth it, if you can save your family such a massive tax bill. To learn how to save your family from such a major tax burden, meet with us to discuss your options.

Please note, we’re only speaking about the federal estate tax here. Currently 12 states have their own estate tax, which are separate from the federal estate tax. We’ll cover the specifics of what happens in our state regarding your estate tax when we have a Family Wealth Planning Session. Give us a call to schedule yours!

THE FUTURE ESTATE TAX

The current $12.06 million estate tax exemption is set to expire on Jan. 1, 2026, and return to its previous level of $5 million, which when adjusted for inflation is expected to be around $6.03 million. Here’s one thing we know for sure: We don’t know what the estate tax exemption will be at the time of your death, and we also don’t know what the value of your assets will be at the time of your death. Because of this, when you plan with us, we’ll ensure that we put in place planning strategies to protect your estate from estate taxes, regardless of the amount of the estate tax exemption or the size of your assets.

WE’RE HERE FOR YOU

If you’re trying to decide whether a revocable living trust, irrevocable trust, Lifetime Asset Protection Trust, or some other estate planning vehicle is the right solution for you and your family, meet with us. We’ll support you in making that decision so your estate can provide the maximum benefit for the people you love most, while paying the least amount of taxes possible. Call us today to schedule your visit.

This article is a service of Brittany Cohen, Personal Family Lawyer. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session, during which you’ll get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.

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