I have carefully reviewed the following for their straight forward information
on the subject of living trusts, and more importantly, on how you can minimize
any estate tax.
A reminder of the "Important Disclaimer: Answers and comments provided on
Google Answers are general information, and are not intended to substitute
for informed professional medical, psychiatric, psychological, tax, legal,
investment, accounting, or other professional advice."
The main advantage of a living trust, which it shares with some other estate
plans, is that it avoids probate. Wikipedia defines probate as follows.
"Probate is the legal process of settling the estate of a deceased person;
specifically, distributing the decedent's property."
The New York State Attorney General's site has a great page on living trusts,
and you should read it detail for advice.
"Perhaps the biggest advantage of a living trust is that it does not have to
go through probate, as does a will. However, there are other estate planning
devices which avoid probate, such as a joint tenancy, a life insurance policy,
and in-trust-for bank account (also known as a Totten Trust), and individual
retirement, pension or Keogh accounts.
In addition, living trust salespeople often overstate the cost of probate and
the length of time it takes to probate a simple will."
To your main concern about estate taxes, the above site states the following.
"With proper training, a living trust can be a valuable estate and tax planning
device. However, there is no inherent estate tax advantage to using a living
trust. While a trust may contain provisions taking effect at death which do
save on taxes, the identical tax savings can be contained in the grantor's will
instead of a living trust.
There are no substantive income tax advantages in the use of a living trust.
The grantor is treated as the owner of the trust for income tax purposes, and
must report all trust income on his or her personal return under the 'grantor
trust' income tax rules."
So, we see that a living trust, on its own, is not going to let you avoid any
estate tax. The Nolo website has a great resource on their "Estate and Gift
Tax FAQ" page, as it lists some ways to avoid or reduce estate tax.
"Will my estate have to pay taxes after I die?"
"It depends. The federal government imposes estate tax at your death only if
your property is worth more than a certain amount, which depends on the year of
death. But all property left to a spouse is exempt from the tax, as long as the
spouse is a U.S. citizen."
You should read the information on the above page in detail, as it also
outlines the exempts amounts, which change, for the next few years.
2006, 2007 or 2008 $2 million
2009 $3.5 million
2010 No estate tax
2011 $1 million unless Congress extends repeal
The Nolo site also outlines a way of reducing estate tax through the process
"Can't I just give all my property away before I die and avoid estate taxes?"
"Making gifts of $12,000 or less, however, can yield substantial estate tax
savings if you keep at it for several years. Some other kinds of gifts are
exempt from the gift/estate tax as well. You can give an unlimited amount of
property to your spouse, unless your spouse is not a U.S. citizen, in which
case you can give away up to $120,000 per year free of gift tax."
You should read all of the "Estate and Gift Tax FAQ" for other tips.
There are other ways, such as a "Qualified Personal Residence Trust" (QPRT)
which can be used to reduce estate tax. The Asset Protection Law Center site
has an outline of the QPRT process.
"The Qualified Personal Residence Trust (QPRT) is a grantor-type of
trust, specifically permitted under the Internal Revenue Code. You or
you and your spouse can be the trustees of the trust. As such, you
have full power to buy, sell, or refinance the property."
You should read the above article in detail for the full picture.
There are yet other ways to reduce the estate tax, but these can get rather
detailed, so the best advice I can give you on those is what is stated on the
New York State Attorney General's site, referenced above.
"WHAT IS THE BEST ADVICE FOR CONSUMERS?"
"When you are planning for the disposition of your estate, avoid dealing with
anyone but a trusted and well-referred professional in your community. Do not
agree to contract for any legal service from someone selling door-to-door or
over the phone. If you have already purchased a living trust on that basis,
take the time to show it to an attorney."
If you need any clarification, please feel free to ask.
Google search on: trust "estate tax"
Google search on: avoid OR saving "estate tax"
Google search on: "Personal Residence Trust"
Looking Forward, denco-ga - Google Answers Researcher