What is a Revocable Trust?

Information in this article was recently updated - (September 2017)


First, some recent changes to the Minnesota estate tax environment to consider:

1. Minnesota had a gift tax for a short time – it has been retroactively repealed

2. Estate Tax exemption amount (the amount a person can pass on to heirs free of estate tax) is changing. It was $1 Million per person for a long time. Now it is rising as follows:

2017 - $2.1 Million
2018 – $2.4 Million
2019 - $2.7 Million
2020 - $3 Million

Tax planning is still required in many cases, because the amounts do not "add together" for spouses – so if all assets pass to the surviving spouse upon the first death, the exemption amount for the first spouse to die is ‘lost’. That means the couple only gets to use one ($2.1 million in 2017) exemption amount instead of two exemption amounts. Federal law allows spouses to use both exemption amounts, if an election is made within 9 months of the first spouse’s death, but Minnesota does not.

The Federal estate tax exemption amount is $5.49 Million ($10.98 million per couple), so many people do not need to plan around that tax now. We have strategies to employ for those who do need that planning.

Along with the good news of rising Minnesota exemption amounts and no state gift tax, there is one piece of bad news: Any gift in excess of the annual exemption amount of $14,000 per recipient that is made within 3 years of death of the giver is brought back in to his or her estate for estate tax purposes. So there can be no more ‘deathbed’ transfers to avoid estate taxes. Gifting and transfers to Irrevocable Trusts are still effective strategies, but forethought is required.

Revocable Trust

At its most basic level, a Revocable Trust is an agreement that directs the management of the assets owned by the trust during lifetime, in the event of disability, and upon death. During lifetime, the trust creator (we will say ‘you’ or ‘your’ here) will transfer all assets into the name of the revocable trust, or name the trust as beneficiary on most or all accounts. The trust is almost ‘invisible’ during lifetime; the income is still reported and taxed to your social security number, just as before. You may buy and sell assets freely and spend as much money as you want, just as before.

However, a Revocable Trust has some very significant advantages, particularly at disability and after death:

DISABILITY – an easy transition. The successor trustee you have appointed, simply takes over to manage the assets for your benefit during any period of disability.

ESTATE TAX PLANNING - While assets in a revocable trust are considered part of the ‘gross estate’ of the trust creator for estate tax purposes, a properly drafted trust, will minimize estate tax for married couples by fully utilizing exemption amounts of both spouses by using credit shelter or disclaimer trust provisions.

The idea is to fully utilize the estate tax exemption amount for both spouses, by having some assets pass to a Trust upon the first death, rather than having all the assets pass to the surviving spouse, and being left with only one exemption amount to use.

Example: Joe and Mary have $4 million between them, and each owns $2 million in his/her respective Revocable Trust. Their Trust provisions allow for the funding of a Disclaimer Trust if the surviving spouse wishes to utilize it. Let’s say Joe dies. Under the terms of his Trust, his $2 million will pass to Mary. But Mary may not want to take all of it because then she will have $4 million in her trust, and everything over $2.1 million (in 2017) will be subject to Minnesota estate tax.

Mary may disclaim the $2 million so that it passes to a Disclaimer Trust. She must do this within 9 months of Joe’s death, she can’t have accepted any of the assets she is disclaiming, and the disclaimer must be in writing. Once the assets are properly disclaimed, Mary will receive all the income from that disclaimer trust, and she may access the principal if she needs it for her health, education, support or maintenance. Upon Mary’s death, the assets in the disclaimer trust and the assets in her trust pass down to the children per the terms of the trusts.

AVOID PROBATE – this is an important reason people use Revocable Trusts. Probate is avoided because at death, there are no assets in the decedent’s name, so there is nothing to probate. All assets are owned by the trust, and simply pass according to the trust terms. This has several advantages:

Cost Savings – Typically saves thousands of dollars, and a lot of headache for the family

Privacy – no publication of assets, and no court supervision of the asset distribution (note: sometimes it is desirable to have court supervision, so probate might be the right choice for some people)

Asset Control - Assets go to whom you wish, when you want them to pass. For example, you might say you want 1/3 of the assets to pass to the children upon death, ½ of what remains 5 years later, and the balance 5 years after that. Or you may select ages for distribution, such as 25, 30, and 35. There are many options here, depending on your assets and your wishes. Trusts may address specific concerns.

Consult with your Estate Planning attorney for more complete information on these and other strategies. This information is not intended to be complete, so do not make decisions based on this article without having your attorney evaluate your specific situation.

For more information, or to find out if a Revocable Trust is right for your situation, please contact Patrick Boley at 651-351-2115, pboley@eckberglammers.com or Katie Kranz at 651-351-2139, kkranz@eckberglammers.com.

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