Living Trust vs TOD

[ugeauxgirl]

If you don't need to restrict your kids' access to the money and you don't need a tool to avoid estate taxes (Those currently start at 5 million I think, so you don't need to worry about that quite yet) I don't know why you'd choose a trust over a TOD. TODs are cheap and simple to process. In our office heirs usually have the money within 2 weeks of us receiving a death certificate, which is handy for paying funeral bills and that sort of thing. But I'm not a lawyer.

 

[rodi]

Why is this?

Some states (not all) allow assets in an irrevocable trust be excluded from medicaid spend down. My state does not. I learned this was possible in NY state from Mathjak's posts on this forum.

I am not a lawyer - so take everything I say with a pound of salt - but that's my understanding.

 

[mathjak107]

yep they are not counted

 

[523HRR]

other then i remember seeing that the irrevocable trusts were capped i can't find anything on it . i was hoping someone actually knew .

You were right about the $5,000/5% cap. I looked up the Internal Revenue Code for this topic. It's covered under Title 26 U.S. Code § 2041 - Powers of Appointment. The holder of a General Power of Appointment is treated for estate tax purposes as if he or she is the owner of the property. Therefore any trust assets for which a decedent is deemed to have had a "General Power of Appointment" will be included in their gross estate for federal estate tax purposes. The objective of a Credit Shelter trust is to avoid this.

§ 2041 (a)(2) To the extent of any property with respect to which the decedent has at the time of his death a general power of appointment...such property would be includible in the decedent’s gross estate... inclusive.

There are a few exceptions specified in § 2041 that can AVOID having a General Power of Appointment and therefore AVOID the trust assets being included in the estate of the surviving spouse, including:

(b)(1)(A) having distributions limited to the "health, education, support, or maintenance" of the decedent or
(b)(2) having distributions limited to the greater of "$5,000 or 5%" of the assets (commonly referred to as the "Five or Five Power").

So either language in the credit shelter trust will work such that the assets will not be included in the estate of the surviving spouse for federal estate tax purposes.

 

[meierlde]

Of course unless and until the estate tax changes you need 10 million + to have the problem, (unless you live in a state that still has the taxes). (The trust destroys the ability to pass unused exemptions between spouses as well)

 

[mathjak107]

You were right about the $5,000/5% cap. I looked up the Internal Revenue Code for this topic. It's covered under Title 26 U.S. Code § 2041 - Powers of Appointment. The holder of a General Power of Appointment is treated for estate tax purposes as if he or she is the owner of the property. Therefore any trust assets for which a decedent is deemed to have had a "General Power of Appointment" will be included in their gross estate for federal estate tax purposes. The objective of a Credit Shelter trust is to avoid this.


There are a few exceptions specified in § 2041 that can AVOID having a General Power of Appointment and therefore AVOID the trust assets being included in the estate of the surviving spouse, including:

(b)(1)(A) having distributions limited to the "health, education, support, or maintenance" of the decedent or
(b)(2) having distributions limited to the greater of "$5,000 or 5%" of the assets (commonly referred to as the "Five or Five Power").

So either language in the credit shelter trust will work such that the assets will not be included in the estate of the surviving spouse for federal estate tax purposes.

wow , i wasn't so sure it applied across the board but i guess it really does . thanks for researching it .

it is those limits that make using the irrevocable trusts so restrictive . i am glad at this point we cleared the estate tax threshold this year in ny and no longer need the disclaimer trusts at this point .

they are no good for medicaid planning , not that i need to but the disclaimer trusts are really to pass 2x the state limit .

 

[mathjak107]

You were right about the $5,000/5% cap. I looked up the Internal Revenue Code for this topic. It's covered under Title 26 U.S. Code § 2041 - Powers of Appointment. The holder of a General Power of Appointment is treated for estate tax purposes as if he or she is the owner of the property. Therefore any trust assets for which a decedent is deemed to have had a "General Power of Appointment" will be included in their gross estate for federal estate tax purposes. The objective of a Credit Shelter trust is to avoid this.


There are a few exceptions specified in § 2041 that can AVOID having a General Power of Appointment and therefore AVOID the trust assets being included in the estate of the surviving spouse, including:

(b)(1)(A) having distributions limited to the "health, education, support, or maintenance" of the decedent or
(b)(2) having distributions limited to the greater of "$5,000 or 5%" of the assets (commonly referred to as the "Five or Five Power").

So either language in the credit shelter trust will work such that the assets will not be included in the estate of the surviving spouse for federal estate tax purposes.

one of the problems of putting your home in revocable trusts or any living trust is that home is a protected asset as far as medicaid goes when personally owned .

it's value is not counted in the asset test to get medicaid .

folks use revocable trusts because medicaid can't go after the trust assets but the catch 22 is a home loses its protected status when put in a revocable trust . so now the value of the home counts in the test .

while medicaid can't take the home in the trust the reality is you may have to sell the home to spend down the money in order to qualify to get medicaid in the first place .

so revocable trusts can hurt you if you ever do any medicaid planning .

only irrevocable trusts help in that case but then you have the restricted access to the assets .

 

[mathjak107]

very nice explanation

"You may be asking yourself: Why $5,000 or 5%? What’s so magical about those numbers? Well, put most simplistically, because that is what the Internal Revenue Code (IRC) says. In order to avoid certain consequences, this annual withdrawal power is limited to $5,000 or 5% of the trust’s assets under the IRC. Why is it important to abide by the IRC? Well, for instance, if instead, you gave the beneficiary more than a $5,000 or 5% annual power to withdraw, the beneficiary’s withdrawal power could be deemed a general power of appointment over the trust and some or all the assets in the trust could be included in the beneficiary’s estate for estate tax purposes. This could create devastating tax consequences for the beneficiary."

5 and 5 power | Crummey Estate Plan

 

[karen1972]

Gal and I are "not as tenants in common but with right of survivorship" on all property and joint on all accounts and cars - or TOD/POD on the few things we can't do that on. If one of us dies the other will have the entirety with pretty much no taxable event. We have a verbal agreement that the survivor will pass a certain sum to the others relatives - IF that is doable without hurting the survivor's retirement. The survivor will suddenly have an estate that they will need to worry about for tax purposes - one of us doesn't care about that, the other can do as they wish then. If we are both hit by the same asteroid then our relatives will have to deal with the hassle of reaping the benefits of our estates. Poor babies. Not like we had to do anything to pile up said estate.

Thats what I have done to date, though I'll likely write up a will to ensure certain belongings go back to where they should so there isn't any bickering.

 

[MrLoco]

If your state has an estate tax, a trust can also help preserve the estate tax exemption at the state level for the first spouse to die where most states do not have portability which is available at the federal level.

Ok. This is where I get a little confused. I went to a few legal sites online and from I could gather they all say "All assets (including property ie a home) left to a surviving spouse is exempt from any federal and state estate tax regardless of the amount." The only stipulation is that the surviving spouse is a US citizen. Also today the estate tax and the gift tax are unified. So in this scenario Bill Gates could leave his wife Melinda an estate worth $50 billion and she would not owe a dime in estate tax. Is this correct?
( Let's also make the assumption for this example that Washington did have a state income tax/estate tax and there was no Bill and Melinda GAtes Charitable Foundation).

 

[mathjak107]

there are no taxes between spouses but when two spouses are alive they can each pass up to the estate tax limit an equal amount to other heirs .

when one dies and everything goes to the spouse now there is only that spouses limit that can go to heirs .

irrevocable trusts can preserve both party's amounts and pass 2x the assets to other heirs upon the death of the surviving spouse

 

[MrLoco]

Never mind. I just went to a prominent legal site for my own state and this is what I found:

"All assets left to a surviving spouse pass free of federal and state estate taxes. This is true for both opposite sex and same sex couples who are legally married."

So it seems that any assets (outside of a home maybe) titled as TOD where the spouse is the primary beneficiary would pass free of any estate taxes. This would make the TOD approach a cheaper and less expensive option over a trust as TOD titled assets also avoid probate. I also learned that the TOD approach will also trump any information that is different in a will. I think years ago the TOD approach was not available which is why trusts were popular plus I am sure attorneys pushed them as they would make money drawing them up

 

[mathjak107]

Never mind. I just went to a prominent legal site for my own state and this is what I found:

"All assets left to a surviving spouse pass free of federal and state estate taxes. This is true for both opposite sex and same sex couples who are legally married."

So it seems that any assets (outside of a home maybe) titled as TOD where the spouse is the primary beneficiary would pass free of any estate taxes. This would make the TOD approach a cheaper and less expensive option over a trust as TOD titled assets also avoid probate. I also learned that the TOD approach will also trump any information that is different in a will. I think years ago the TOD approach was not available which is why trusts were popular plus I am sure attorneys pushed them as they would make money drawing them up

many states will not let you use tod's for real estate . some states do have quick claim deeds but others like ours , ny , either require a trust or probate . minors can't inherit anything directly and need provisions in a trust . in some states brokerages can't transfer on tod accounts .

don't forget these are the benefits of a revocable trust . an irrevocable trust does things that multiply estate tax exemptions , give protection from creditors and medicaid planning as well as protect assets when spouses remarry

 

[MrLoco]

there are no taxes between spouses but when two spouses are alive they can each pass up to the estate tax limit an equal amount to other heirs .

when one dies and everything goes to the spouse now there is only that spouses limit that can go to heirs .

irrevocable trusts can preserve both party's amounts and pass 2x the assets to other heirs upon the death of the surviving spouse

The second part you stated is true but the first part I believe is incorrect. Everything I am reading indicates that between spouses there is an unlimited marital exemption and this applies to the situation where both spouses are living or one has died.

For example , both spouses are living and can pass tens of millions of dollars back and forth with no gift tax implications. Or... one spouse dies and the surviving spouse acquires assets previously held in the dead spouses name for tens of millions of dollars. These assets also pass completely free from any federal or state estate taxes. 100%. Especially since now the estate and gift tax are unified. Only if the assets are gifted or left to a child or stranger , etc. would the gift/estate tax be implemented.

 

[mathjak107]

you are not following .

if the fed allows 5 million or so to pass estate tax free to heirs (not spouse ) , a married couple via irrevocable trusts can pass to their kids 10 million dollars . between themselves it is unlimited

if one spouse dies and there is no trust now the surviving spouse has 10 million but can only pass estate tax free about 5 million to kids. anything over gets taxed . the irrevocable trusts preserve each persons limits and multiply them so the 10 million can pass to the kids . .

 

[MrLoco]

No I understand. I missed your first few words where you said " there are no taxes between spouses." I understand the deduction is cut in half when there is only 1 surviving spouse as far as leaving assets to children.

BTW since we are both up this early and online at the same time how about we just call each other and chat?