I’m kicking the tires on this again as tech stocks are doing well pushing up my numbers. Plus in 2025 the estate tax exemption is likely to drop from current $12.9MM to about $6MM (inflation adjusted). That might catch many of us.
Married couples can easily double their exemption with an AB By-pass trust. Singles can’t do that. Testamentary trust looks like the best alternative.
I’m thinking a pour over trust with assets below the estate tax number going to heirs by TOD, and that above going to the trust created in the will for distribution. They say this protects me from estate taxes, but does require probate. Might cause delays and raise costs. But those are likely tiny compared to 40% estate tax.
Any experience with testamentary trusts out there? Am I overlooking anything?
You will be much better off creating a Revocable Living Trust (RLT), which avoids probate. A Testamentary trust is created by a will which would be delayed by probate.
Both are taxable but the RLT has many advantages. In my experience as my mother’s executor and trustee, everything that was titled in her RLT was easy to handle and everything that was not was a hassle.
Also look into a credit shelter trust (bypass trust), especially if your state has a lower estate tax threshold than the federal cutoff.
I have read several books about trusts over the past 20+ years. The one I like best is " The Complete Book of Wills, Estates & Trusts (4th Edition): Advice That Can Save You Thousands of Dollars in Legal Fees and Taxes,"by Alexander A. Bove Jr. Esq., Melissa Langa Esq..
The book describes all the advantages of the RLT and disadvantages of the testamentary trust in detail.
Wendy
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Thanks for the suggestion, Wendy. I ordered the book. My library doesn’t have it.
In Missouri we don’t have state estate tax, state inheritance tax, and probate is not complicated.
I avoid probate in Missouri by have TOD on all assets. Including house and automobile. I do have a will that will go to probate. But its to cover items missed in the TOD process. Should be minimal.
I’m OK for now but the prospect of 40% estate tax has me looking for what to do about it. I calculate a trust becomes worth it when estate tax due comes to $10K. That is likely when the current exemption law expires.
I know living trusts were popular about 20 years ago. They avoid probate and keep your estate private. But they do nothing for estate taxes.
Testamentary trusts can be used for all sorts of things often unfinished business: taking care of minor children, special needs children, pets, etc. None of those apply in my situation.
I have been told they can be used to avoid estate taxes if you do it right. That is my only reason to consider a trust.
I’m kicking the tires to see what best solves the problem.
There are those who say probate has the advantage that the court makes sure your wishes are followed. We are reminded constantly of executors who fail to write the checks to charities as specified.
@pauleckler the trustee of a trust has an even greater responsibility because the trust may last for many years after the death of the grantor. I am fortunate to have a “deep bench” of successor trustees – DH, my siblings and even my sister’s son are honest and intelligent, capable of being good trustees. DH has a problem because he doesn’t have a similar family. Once I’m gone we aren’t sure who would be successor trustee. He is looking to possibly have his alma mater become trustee since they are a beneficiary. But that’s iffy.
If you are married, consider a credit shelter trust to avoid estate tax at least partially.
https://www.fidelity.com/viewpoints/wealth-management/insights/credit-shelter-trusts
I had a lawyer revise my Revocable Living Trust with the following:
"The trustee shall hold as a separate Credit Shelter Trust, that portion of my estate equal to the smaller of (1) the amount of property which can pass free from federal estate tax pursuant to Section 2010 of the Internal Revenue code as it presently exists or as subsequently amended (applicable exclusion amount), or (2) the amount which can pass free from state estate tax of the state in which I am a resident on the date of my death. "
I did this because my original trust only referred to the federal estate tax. Tax laws change constantly, as you know. It’s hard to know whether the state or federal estate tax in the future will have a lower exclusion limit.
Wendy
@pauleckler if you plan to donate to specific charities, why not consider setting up a charitable gift annuity? A brand-new change in the tax law lets you fund this with a Minimum Required Distribution from an IRA without triggering the income tax on the RMD. (Up to $50,000 in one year. The annuity payments are taxable.)
Wendy