There is substantial benefit to setting up a revocable living trust as part of an estate plan. An estate vehicle and account held during a person’s life, the revocable living trust is guided by a written will outlining the disposition of assets associated with the transfer of their financial accounts, and protection of other assets.
Established while the owner is still alive and competent, the revocable trust affords maximum flexibility for future decision making about investment fund and pension or retirement fund account transfer for purposes of tax exemption. A revocable trust also offers the option of designating periodic income distribution from interest to an estate owner, spouse, or child, as well as coverage of any extenuating, end-of-life healthcare costs. If planning a revocable living trust agreement, the guidelines for formation vary depending on the state where an estate has been recorded in court.
A licensed estate planning attorney can assist in consultation of trust agreement formation.
The living testament or will of an estate owner’s intent is basis for the formation of a revocable living trust plan. Other trust types are credit shelter, marital disclaimer, marital deduction, and qualified terminable interest property trust otherwise known as a “QTIP.” In general, a trust outlines the priorities of estate administration related to inheritors, joint tenancy transfers from retirement accounts, and property settlements for a spouse, children, or other designated beneficiaries.
The revocable living trust enables the creator of the trust to terminate the agreement wholly or modify it according to preference during their lifetime. This is sometimes done with a joint tenant spouse in preparation of a terminally Ill spouse or common law partners end of life. A revocable living trust reduces the chances an estate will go to probate and protects it from creditor attachment once they are gone.
An estate’s trust account where assets and property are recorded, is administered by an executor or trustee. Although trust administrators are generally an external party to the estate such as the CPA or licensed attorney responsible for the professional advisory of the planning and tax filing process, in some circumstances where a trust is revocable, the trustee may be the owner(s).
The option of creating a self-declaration trust is one that can be administered by a person who is also the trustee of their own trust while still alive. Self-declared revocable living trust agreements stipulate the protocol for elimination of the trustee once incapacitated or dead. The transfer of trustee power is normally accorded a family member, and often a physician charged with the responsibility of determining it is the proper time to execute the transfer of the trust to the named successor cited within the original trust agreement. Transfer of the executor responsibility of a trust account to a new trustee, however, typically does not occur until death.
Each year the U.S. federal Internal Revenue Service (IRS) federal tax rules provide individual taxpayers with an official exemption amount accorded trust income that is not be subject to federal estate taxation by law. In 2021, IRS assigned up to but no more than 20% capital gains tax on trust earnings. Therefore, once an estate trust becomes irrevocable at end of life, capital gains on trust fund disbursements to final beneficiary heirs can cost them substantially in taxes without the professional guidance of a CPA tax accountant upfront.
Spousal rights to income transfers before and after death of a decedent are a common concern for estate owners setting up a revocable living trust. Spousal disbursement of funds from a joint tenancy investment account or retirement account initially promised children or other final beneficiaries, rather than transfer to a trust, is example of such a circumstance. Federal estate rules do not cover the decision to disburse or partially disburse the value of a joint tenancy account to a spouse rather than transfer those same funds to an estate while both parties are still alive.
Similarly, liquidation or early income distribution to final beneficiary children from a trust account prior to the death of a decedent and their spouse, is possible with a revocable living trust. This includes children from a union, former union, or adoption. Yet, the decision to disburse early is not protected from IRS taxation under law.
Estate tax planning professionals concede “portability” is one of the singular most inquired about topics by clients seeking information about the rules and restrictions of federal estate tax law and its application to tax treatment of trust assets. Portability is the lawful transfer of unused tax exemption of a deceased estate holder to a spouse.
It is important to check IRC rules annually to for rules of portability and unified credit exemption. Tax-exempt marital deduction rules do not extend to children or other final beneficiaries of an estate or will, before or after the decedent passes.
The Federal Deposit Insurance Corporation (FDIC) covers accounts up to $250,000 from default. Where trust funds are concerned, a limit is applied to the combined total of an estate’s trust account funds. The FDIC defines revocable trust accounts as “a testamentary deposit account[s]” that expresses intent that “deposited funds will pass to one or more named beneficiaries” at the time of death(s). According to the FDIC, a revocable trust account can be revoked, amended, or terminated at the discretion its owner(s).
FDIC deposit insurance regulations recognize two types of revocable trust: Informal revocable trusts, and formal revocable trusts. The FDIC classifies formal revocable trusts as those that are “living” or defined as “family” trusts, formed by written agreement and created for the purposes of estate account transfers to beneficiaries.
The FDIC’s interpretation of living trust protocol allows for account control by an owner during their lifetime. The FDIC applies the same regulatory guidelines to insurance coverage of both “informal and formal revocable trust deposits.” The FDIC does not consider calculation of non-depository value.