Trust and Estate Planning
Services provided for clients include:
- Development of strategies to
minimize estate, gift and income taxation while conserving, protecting
and facilitating the growth of the client's assets over time.
- Integrated approach to
resolving the issues presented by probate, estate and gift taxation,
income taxation, financial planning, IRA and 401-k plan distributions,
protecting assets from creditors and other objectives of the client.
- Avoidance of probate by using a
properly funded living trust to keep surviving spouse or adult children
in control of the assets after the client's death, and avoid the
unnecessary expense, delay and red-tape of the probate process.
- Basic estate planning services
will include preparation and execution of a revocable living trust (to
avoid probate), a pour over will, a living will, a health care power of
attorney, a general durable power of attorney (in
the event the client becomes unable to make health care or financial
decisions), an appointment of guardian and an organ donor gift document,
as well as assistance in transferring client assets into the living
trust. Where appropriate, living trusts will include credit shelter
trusts (also known as by-pass trusts or "AB trusts") to minimize estate
taxes, protective trusts for grandchildren in the event a client’s child
predeceases the client, and special needs trusts for children or
grandchildren who have physical, mental or other disabilities, or who
are lacking in financial discipline.
- Utilization of more sophisticated planning techniques
such as charitable trusts, family limited partnerships, irrevocable
life insurance trusts, utilization of limited liability companies,
medicaid planning, annuities and life insurance to shelter assets from
taxation, where appropriate.
- Personal, confidential consultations with clients to discuss the client's assets, family concerns and estate planning objectives.
- Reasonable and competitive legal fees, commensurate with quality personalized service.
Important Estate Planning Topics:
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For those clients who want to start a new
business, maximize tax deductions to reduce taxes in their current
business, or minimize the client's personal liability:
- Discussion of different forms of business entities:
partnerships, limited liability companies, “S” corporations, “C”
corporations, limited partnerships, professional associations, and
professional corporations. The advantages and disadvantages of each are
considered to determine which form of business entity would best serve
the client's present and future needs.
- Assessing the costs and paperwork requirements
of each form of business entitly to enable the client to make the best
choice for the particular objctives the client has in mind.
- All necessary legal documentation and filing
will be handled
for the client, who will also receive a “corporate binder” with copies
of important documents and explanatory guidance on procedural and
- Personal consultations with clients to discuss the client's business formation objectives.
- Reasonable and competitive legal fees, commensurate with quality and personal service.
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Asset Protection Strategy services for professionals and others, including:
- Development of strategies to
shelter the income and assets of professionals from potential creditors
and professional malpractice liability, while retaining management and
control for the client of his or her professional practice. There is no
reason to leave your personal assets and wealth exposed to potential
creditors and litigation risks.
- Why consider asset protection?
Many clients know how to play offense, they know how to make money and
their wealth increases over time. But many clients are not as good at
defense, having not devoted enough time or energy to protecting the
money they have accumulated or will continue to accumulate. Sensible
strategies are available to build a bullet-proof wall between the
potential creditors and the client's assets so that the creditor cannot
get at the client’s income or the client’s assets, while at the same
time the client retains management and control of both the income and
the assets. A by-product of using the right strategies is that income
taxes can be significantly reduced by maximizing available deductions
and depending upon the client's family situation, spreading income to
family members with lower tax rates.
- Professional Associations or Professional Corporations
are useful to shield one professional from the professional malpractice
of his or her colleagues, but are ineffective to protect the working
professional from litigation creditors asserting malpractice claims
arising out of his or her own professional practice. In addition, many
professionals unwisely place significant assets, such as real estate or
equipment, in the P.A. or P.C. where it is fully exposed to the claims
- You don’t know what you don’t know, and that can bankrupt you.
Creating wealth is a commonly taught subject in this country, but how
to keep it out of the clutches of creditors and lawsuits is hardly ever
taught. Most estate planners, most financial planners and sadly, most
lawyers, do not know how to do it. Litigation is exploding in this
country against wealthy professionals who have long been the target of
choice of plaintiffs' attorneys. However, the law can be every bit as
much a shield as a sword, when properly applied to a comprehensive asset
- Bullet proof strategies to protect your assets.
A good asset protection strategy will prevent a judgment creditor from
attaching any significant part of your assets, will shield as much as
99% of your family’s income from a judgment creditor, will prevent a
judgment creditor from being able to interfere with your own management
and control of your assets, and will maximize your own after-tax income
by maximizing your entitlement to tax deductions. North Carolina’s laws
are favorable for asset protection strategies, so you need not relocate
to Florida to maximize your protection from civil creditors (unlike O.J.
Simpson and Paul Bilzerian and other notorious persons who have taken
flight to Florida for protection against creditors).
- You can put insurmountable obstacles between your assets and potential creditors.
It is perfectly legal to erect reasonable barricades which protect your
assets from potential creditors. When faced with properly constructed
barriers, many plaintiffs' lawyers will give up trying to get money out
of your assets and will pursue other litigation targets.
- Personal consultations with
clients to discuss the client's assets, potential creditors and
litigation exposure, to develop and asset protection strategies to meet
the client's goals.
- Reasonable and competitive legal fees, commensurate with quality and personal service.
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Important Estate Planning Topics:
What is a living trust?
A living trust is a formal written document that you sign that creates
a new legal entity, “the trust”, which you own and control while you
are alive, and in the trust document you specify who is to be in charge
of distributing your assets when you die (the “successor trustee”), and
to whom your assets are to be distributed when you die. It is called a
“living trust” because it is in effect while you are alive, unlike
trusts which are created in a will and take effect only when you die.
You are the creator of the trust (the “grantor”), you are the
beneficiary of the trust, and you are the person in charge of the trust
(the “trustee”) while you are alive. You can easily amend the trust (or
even terminate it) anytime you want and you can easily move assets in
and out of the trust at any time. You retain 100% control of your assets and 100% flexibility over your assets
– everything you can now do with your assets without a living trust,
you can do in the future once a trust is established. You can also
specify who will manage your assets for your benefit in the event you
become incompetent or mentally disabled. Your trust is “revocable” (that
is, amendable) by you while you are alive and becomes “irrevocable”
upon your death so that after you die nobody can interfere with your
wishes as expressed in the trust. No extra tax returns are required for
your trust and no special accounting of bookkeeping is required while
you are alive. When you die, your successor trustee distributes your
assets in accordance with your wishes, just as an executor would do
under your will, but without all the expense, delay and red-tape
associated with probate.
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How does a living trust avoid probate?
The answer is quite simple. Probate only applies to the
assets controlled by your Will and your Will only applies to the assets
you own at the time you die. To avoid probate, you simply transfer
ownership of your assets to your living trust and then the trust, not
you, owns the assets when you die so that none of the assets in the
trust go through the probate process. Our legal system considers the
trust to be a separate legal entity (just like a family-held
corporation) and because the trust does not die when you die, there is
no change of ownership of your assets when you die. For example, in a
typical living trust for a married couple, both spouses are trustees of
the trust until one spouse dies, and then the surviving spouse simply
continues to manage and control the assets as the sole truste. No change
of ownership occurs when the first spouse dies (unless the couple wants
to make distributions to children when the first spouse dies). When the
surviving spouse dies, your trust still owns the assets (so again, no
probate is required) and the successor trustee selected by you
distributes your assets to the beneficiaries you designate in the trust.
Avoiding probate takes two steps: first, you create the trust and
second you “fund” the trust by transferring your assets from your own
name into your name as trustee of your trust and then you as trustee own
the assets on behalf of your trust. The successor trustee named by you
administers your trust just like an executor would administer your
estate under a will in the probate process, but without any of the
expense, delay, aggravation and red-tape of probate. Compared to a will,
a living trust is an equally safe and a much more efficient way to pass
your assets on to your family and your beneficiaries.
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Of those who have estate plans, why do more people have wills than living trusts?
Most Americans do not have a will or any estate plan. They
worry about what will happen when they die, but they never get around to
doing anything about it. After all, it’s not pleasant to think about,
and many who do think about it, figure that they won’t be around to have
to deal with it. Many people procrastinate and wind up without any
estate plan at all.
Many Americans have a will. Some wills are done without any
professional help but most wills are prepared by a lawyer. Having a will
is better than having nothing at all, but having a living trust is
better than having a will. So, the question is, why do so many more
people have wills than have living trusts? The simple answer is that
lawyers encourage people to have wills instead of living trusts and the
average person does not know any better and simply follows their
lawyer's advice to have a will. Lawyers make big money probating their
clients' wills and make no money or very little money when the clients
die with a living trust. Clients are often not told that living trusts
are better than wills.
If you have a will, regrettably, you may not have been told the
whole story. Your lawyer may not have told you three key facts that you
needed (and were entitled) to know:
- Probate (the court process of administering your will and
distributing your assets when you die) is often very expensive,
time-consuming, full of red-tape and hassle, and, most importantly,
unnecessary and avoidable. Many lawyers do not tell tehir own clients
how much money the lawyer will charge for probating the client's will!
- If you choose to use a will to distribute your assets when you die, your estate must go through your state’s probate system because your will has no effect whatever unless it goes through the probate process.
- You could choose, as an alternative to probate, to use a
living trust instead of a will to distribute your estate and thereby
avoid probate entirely.
Were you told these facts? Sadly, many lawyers do not tell their own clients any of these three key facts.
In North Carolina, many lawyers who advise clients to have wills
charge a relatively modest amount, say $400 to $600, to do wills for a
married couple. But when those wills have to go through the probate
process when the client dies, the lawyer or law firm will earn legal
fees often in the tens of thousands of dollars! There are many estates
in North Carolina of approximately $400,000 to $500,000 where the total
of the legal fees and the other costs of probate exceeded $20,000,
$30,000 or $40,000. However, the families of clients with living trusts
usually do not have to pay legal fees to have their assets distributed
according to their living trust, and the lawyers who write wills for
clients know this.
Were you told that you could have had a living trust which would
give you better protection while alive and save your surviving family
members a lot of money, time and aggravation when you die? Many people
with wills were not told this! In truth, there is no good reason to
volunteer to put your estate and loved ones through the probate process.
And yet that is what must happen when you rely on a will to distribute
your assets. A will is a guaranteed ticket to probate, and probate means
some lawyer profits at the expense of your family.
Many clients, when told of the advantages of a living trust over a
will, choose to avoid probate by having a living trust instead of a
will determine the fate of their assets and their family. Lawyers love
probate because they make money. Clients hate it.
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5 common mistakes many people make about their wills:
- MISTAKE #1: Thinking that a trust only makes sense if you are wealthy and have a big estate.
- MISTAKE #2: Thinking that because you only have a modest amount of assets, the probate process won’t be too bad.
- MISTAKE #3: Thinking that a trust is more expensive than a will.
- MISTAKE #4: Thinking
that owning assets (whether real estate or personal property) as joint
tenants with survivorship, with a family member, is a good way to avoid
probate of those assets
- MISTAKE #5: Believing your lawyer had your own interest, and not his, at heart when he told you that all you really need is a will.
MISTAKE #1: Thinking that a trust only makes sense if you
are wealthy and have a big estate.
Unlike many states, North Carolina requires a full-blown
probate process for very small estates.
In North Carolina, every unmarried person’s will
that disposes of more than $10,000 of personal
property (anything that is not real estate) must go through a
full-blown probate process. So, if you are single, live in North
Carolina, own a $5,000 car and have $8,000 in the bank (or in stocks and
bonds), your estate would not qualify for special expedited treatment
as a small estate!
For a married couple, if the first spouse to die leaves
everything to the surviving spouse, the monetary threshold is raised to
$20,000. But for example, if the first spouse to die leaves any property
to anyone other than his or her spouse, then a full probate proceeding
is required. So, if a wife dies and leaves her engagement ring to her
daughter, the wife’s estate has to go through the entire probate process
if her probate assets exceed $10,000. And so, of course, does the
surviving spouse’s estate if it is more than $10,000.
Worse yet, the courts make you pay probate fees based on your gross estate, so your heirs often cannot
even subtract your debts or liabilities when the executor's and probate fees are calculated!
For example: Most wills say the Executor is entitled to be
paid for his or her services and executors often apply for a 5% fee
based on the assets they handle for the estate
(without subtraction for any liabilities). So a
$200,000 house (with a $150,000 mortgage)
sold by an executor (who lists it with a
realtor and pays a 6% sale commission
of $12,000 to avoid any possible personal
liability for selling the house for too little money),
could generate a $10,000 commission for an executor!
Thus, $22,000 of an asset only worth
a net value of $50,000 to the surviving family
members will be eaten up in fees and expenses!
This is an example of what can happen in probate.
So don’t make the mistake of believing that because you have a modest amount
of money probate won’t be a big problem.
MISTAKE #2: Thinking that because you only have a modest
amount of assets, the probate process won’t be too bad.
In many, if not most cases, the smaller the estate, the higher
the percentage is that is eaten up by court costs, lawyers, accountants,
appraisers, and the like.
Our country’s leading consumer educational organization for seniors, the
American Association for Retired Persons (known as AARP), conducted a
lengthy study of how the probate process really works in practice. The study, published in 1990,
surveyed probate statistics for several years from three states believed by AARP to be
representative of the country generally.
AARP’s study showed that on average 5% to 10% of an estate is eaten up
by probate costs, and that smaller estates suffer proportionately higher
probate costs than larger estates. AARP found “in some cases, attorney’s fees
consume 20 percent or more of estate value. This is especially true of small estates.
For the estates of the middle class, attorney and personal representative fees
can deplete the assets by as much as 10 percent even in uncomplicated cases.”
With a will, your family loses control to the lawyers, the courts and the probate process,
pays unnecessary legal, accounting, appraisal and court costs, and must wait
at least a year, usually longer, before they can get on with their lives and
enjoy whatever assets are left after the lawyers and the courts finish paying themselves.
MISTAKE #3: Thinking that a trust is more expensive than a will.
When the costs of probate of the will are added to the cost
of the will, the living trust costs a mere fraction of the total cost of
using a will.
Many lawyers charge very little for a will in terms of the
time and effort it takes to prepare the will because they view the will
as a “loss leader”, knowing that down the road they can earn a big fee
when the estate is probated. The hidden cost of a will is the high cost of probating the will. Sadly, a lot of clients are never told this.
Legal fees for probating a will are often more than 20 or 30
times the price of the will! So if a typical will might cost $500, the
legal fee for probating that will may be more than $10,000 or even more
than $20,000 in many cases. And that is just the legal fee, it does not
include the executor’s fee, any accountant’s fee, or the court costs!
As the AARP study concluded, “The potential for unfair fees in an unnecessary [probate] proceeding is reason enough to seek alternatives” such as a living trust.
AARP endorsed the popularity of living trusts, stating: “The living … trust can be a reasonably priced alternative to a will and it avoids probate altogether.”
#4: Thinking that owning assets (whether real estate or personal
property) as joint tenants with survivorship, with a family member, is a
good way to avoid probate of those assets.
Putting an asset in a joint ownership with another family
member often causes bigger problems than it solves. Far too many seniors
have put their homes or investments in joint tenancies with family
members only to learn to their horror that the financial mistakes or
unexpected liabilities of a family member have caused them to lose their
If your joint tenant gets divorced, has tax problems with the
IRS, files for bankruptcy or has a motor vehicle accident and is sued
for more than his or her insurance (a common occurrence every day),
half, if not more, of your asset is at risk and your entire asset could
be sold out from under you!
Sadly, thousands of seniors have unexpectedly lost
their most valuable assets by mistakenly believing that joint tenancy
with adult children is a smart way to avoid probate. Don’t become one of
#5: Believing your lawyer had your own interest, and not his, at heart
when he told you that all you really need is a will.
14 years ago, AARP publicly recommended that state and
local bar associations should require your lawyer to tell you up front
how much he or his firm will charge your estate in probate fees when you
die with your will. But, not surprisingly, that recommendation fell on
Many lawyers do not tell their clients that a living trust would save the client's family a lot of money, time and aggravation.
- Most lawyers who prepare wills earn much, much more money
in probate fees than they ever do from preparing wills. Many clients do
not realize this.
- Some lawyers tell their clients something like this: “You
need a will because if you don’t have a will, the state of North
Carolina will decide who gets your assets instead of you”.
That is true as far as it goes, but that is only part of what the client needs to know.
As a client, you need to know:
- Using a will requires that your estate go through probate.
- Legal fees can be very large in probate.
- Lawyers and legal fees can be avoided with a living trust.
Back in 1990 AARP found that the annual amount of probate fees and expenses was $2 Billion! This number has dramatically increased since then.
In 1997 the leading United States author on living trusts estimated that probate costs $14 Billion annually! No wonder many lawyers who prepare wills do not tell their clients how much money they will make with your will when you die!
As one public official commented: “The probate process has
been a cash cow for attorneys” it has been described as a “guaranteed
retirement annuity program” for lawyers.
No wonder AARP concluded: that probate was “inappropriate”
and probate fees are “unreasonable”. AARP concluded: “Those who go to an
attorney and merely ask for a will may get less, and pay more, than
they bargained for.”
Probate feeds lawyers, accountants and appraisers. Who pays? You and your family. It’s just that simple.
Lawyers love probate. Clients hate probate.
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10 reasons why it makes sense to use a Living Trust instead of a Will.
With a Will:
With a Living Trust:
||Your family loses 5% to 10% of your assets, eaten up by probate costs.
||No probate expenses other than a $40 filing fee.
|Your family loses control of your assets to the court and the attorneys.
||Your family stays in control of your assets.
||Distribution of your assets will be delayed by one or two years.
||No delays. Your family sets its own schedule to distribute assets.
||No protection from court-appointed, expensive guardians, in event of disability.
||No court-appointed guardian. No expenses or fees. You choose who will be in charge of your assets.
||Unbelievable red-tape and hassle with the probate process.
||No red-tape. No hassle. No court delays. No lawyers.
||Wills and all probate proceedings are open to the
public. Your assets, your debts and your family's affairs are open to
||Total privacy. No public access.
||Your lawyer earns a big fee! Often 20, 30 or more times the fee charged for your will!
||No lawyers required. No fees.
||More likely to pay more in estate taxes.
||More likely to minimize estate taxes.
||(Trusts and wills are tax neutral; using one or
the other does not necessarily result in tax savings. But the process of
preparing and funding a living trust involves more consideration of the
client's assets and, as a genral rule, persons who have living trusts
pay less estate taxes than those who have wills.)
||Wills can be contested on various grounds, and the
legal standard to successfully challenge a will is easier to meet than
for a trust.
||Trusts are harder to challenge successfully, and thus are less often contested.
||Witnesses and notary needed to make changes. Lawyers charge fees for changes.
||You can make changes easily, no formalities required and usually no fees required.
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Why did AARP conclude that living trusts are better than wills?
Our country’s leading consumer educational organization for
seniors, the American Association for Retired Persons (known as AARP),
conducted a lengthy study of how the probate process really works in
practice. The study, published in 1990, surveyed probate statistics for
several years from three states believed by AARP to be representative of
the United States generally. In its report entitled “A Report on
Probate: Consumer Perspectives and Concerns”, AARP concluded that
“probate’s procedures and protections, even with recent reforms, are
inappropriate for all but the most exceptional cases” and that
“attorney’s fees in connection with probate work are unreasonable”.
AARP found that, on average, 5% to 10% of an estate is eaten up
by probate costs, and that smaller estates suffer a proportionately
higher probate cost than larger estates. AARP found “in some cases,
attorney’s fees consume 20 percent or more of estate value. This is
especially true of small estates. For the estates of the middle class,
attorney and personal representative fees can deplete the assets by as
much as 10 percent even in uncomplicated cases.”
AARP concluded: “The potential for unfair fees in an unnecessary
[probate] proceeding is reason enough to seek alternatives” such as a
living trust. AARP endorsed the popularity of living trusts, stating
“The living, or inter vivos, trust can be a reasonably priced
alternative to a will and it avoids probate altogether.”
After studying how lawyers in the three states studied were
making “unreasonable” amounts of money from probate, AARP found that
many lawyers use a will as a “loss leader” so that they can earn
excessive probate fees later! AARP’s conclusion was that: “Those who go
to an attorney and merely ask for a will may get less, and pay more,
than they bargained for.”
A key recommendation of the 1990 AARP study was that “state and
local bar associations should require members of the probate bar, when
drafting a will, to disclose the estimated cost of the eventual probate
proceeding…. Clients should be informed of any percentages currently
charged [by the lawyer] for probate and how this might affect the assets
they intend to pass to survivors.” AARP also expressed its concern as
to “whether attorneys actively inform their clients about estate
planning options other than wills”.
Fourteen years have passed since AARP publicly recommended that
state and local bar associations should require your lawyer to tell you
up front how much he (or his firm) will charge your estate in probate
fees when you die with your will. But, that recommendation fell on deaf
ears! Not even one bar association in the country stepped up to the
plate and followed AARP’s recommendation to protect the public!
Many lawyers who write wills for clients do not tell their
clients that a living trust would save the client’s family a great deal
of money, time and aggravation. Perhaps your lawyer did not tell you
A typical pair of wills for a married couple in North Carolina
might cost about $500. However, often the legal fees for probating that
will wind up being more than $20,000. And that is just the legal fee, it
does not include the executor’s fee, any accountant’s fee, or the court
costs! North Carolina probate court records include many estates having
total assets of approximately $400,000 to $500,000 where the total of
the legal fees and the other costs of probate exceeded $30,000 or
$40,000 or more.
The economic self-interest of lawyers who make big money
probating wills may influence how some lawyers prepare estate plans for
clients. Certainly lawyers know that clients with living trusts do not
have to pay large legal fees to have their estates distributed according
to a living trust.
Back in 1990 AARP found that the annual amount of probate fees
and expenses was $2 Billion. This number has dramatically increased
since then. In 1997 the leading United States author on living trusts
estimated that probate costs $14 Billion annually! No wonder some
lawyers who prepare wills do not tell their clients how much money they
will make probating the will when the client dies!
As a senior official of the National Conference of Commissioners
of Uniform State Laws observed, “The probate process has been a cash cow
for attorneys”, noting that one lawyer candidly described probate as a
“guaranteed retirement annuity program” for lawyers.
No wonder AARP concluded that probate is “inappropriate for all
but the most exceptional cases” and probate fees are “unreasonable”.
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Do you need a living trust?
You owe it to yourself and your family to consider getting a living trust if any of the following apply to you:
- You have a will executed in North Carolina or another state
and are relying on that will to distribute your assets when you die.
- You want to avoid losing 5% - 10% or more of your assets to unnecessary probate expenses.
- You want your spouse or family member to be in charge of your
affairs when you die, instead of lawyers, accountants and the courts.
- You are single, you live in North Carolina and you own more than $10,000 of personal property (including financial assets).
- You are married, you live in North Carolina, you own more than
$10,000 of personal property and you want to leave one or more items to
a child, grandchild or friend.
- You are married, you live in North Carolina and you own more than $20,000 of personal property.
- You own real estate outside North Carolina (a time share is also considered to be real estate).
- You want to avoid a court-appointed, fee-charging guardian of yourself, in the event of disability.
- You have a child or family member with poor spending habits.
- You trust your spouse or your family more than lawyers and judges.
- You value your privacy and that of your family.
- You want a quick and efficient settlement of your estate, not one or more years of red-tape, hassle and aggravation.
- You want freedom for you and your family to manage your own
affairs without outside interference, and to be free to hire, or not to
hire, advisers of their choice.
- You want peace of mind that your affairs will be handled with common sense, efficiency and convenience.
- You want to protect your spouse and family from outsiders.
A will fails to address these concerns, but a living trust and can properly resolve all of them!
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How does a so-called "AB Trust" save estate taxes?
A so-called “AB Trust” (also often referred to as a credit
shelter trust or a by-pass trust) is a form of trust arrangement used to
avoid or minimize estate taxes when the total assets of a married
couple exceed what is commonly called the federal estate tax per person
exemption amount. AB Trusts are not relevant to unmarried persons. The
designation “AB” is used simply to indicate that this trust arrangement
has two parts to it (in other words, it could have been called the “1,2
Trust” simply to indicate that there are two components to the
arrangement). The federal estate tax “exemption” is the amount of assets
that a person can own at the time of his or her death without being
subject to any federal estate tax.
The use of an AB Trust to save estate taxes is best explained
with an example. To keep the example short and simple, some
simplification will be utilized. Suppose, for example, that Husband and
Wife are married and their total assets are $1.8 million and that the
per person federal estate tax “exemption” is $1.5 million (as it was in
2004 and is in 2005). Assume that Husband owns $1.1 million of their
total assets and Wife owns $700,000 of assets. At first glance, it would
seem that there should be no possible federal estate taxes because each
of them owns less than the per person exemption amount. But if one
spouse dies and leaves everything outright to the surviving spouse
(which is often the case), the surviving spouse would then own $1.8
million and when the survivor died (assuming no change in assets
valuation), the survivor would own $300,000 more than the survivor’s
personal exemption of $1.5 million, and the IRS would impose an estate
tax of more than $100,000 upon the extra $300,000 above the $1.5 million
The AB Trust methodology is designed to avoid that result. The
couple’s living trust provides that when one of them dies, the assets
are divided into two parts and two new trusts are created, the so-called
“A” trust and the so-called “B” trust. Instead of the first spouse to
die leaving all of his or her assets outright to the surviving spouse
(with the result that those assets would be included in the survivor’s
taxable estate at the time of the survivor’s death), at the time one
spouse dies, the assets of that spouse are put into a new trust,
typically known as the “B” trust (easily remembered because that spouse
is usually Buried or Below ground), instead of being given outright to
the surviving spouse. At the same time, the assets belonging to the
surviving spouse are put into the “A” trust (also easily remembered, as
that spouse is Alive and Above ground).
The surviving spouse’s assets in the A trust are fully available
to the surviving spouse who can withdraw the income and principal of the
A trust or remove the assets from the A trust. However, the terms of
the B trust are specially designed under the applicable IRS groundrules
so that the deceased spouse’s assets which were placed into the B trust
will not be considered to be in the taxable estate of the survivor when
he or she dies. The survivor will have certain carefully specified
rights to the use of the assets in the B trust during the survivor’s
remaining lifetime, but not complete freedom to do whatever the survivor
wants with those assets. Happily, the IRS guidelines permit the
surviving spouse to have a great deal of financial flexibility with, and
the economic protection of, the assets placed in the B trust. Thus, to
finish the example started above, if Husband died first, his $1.1
million of assets would go into the B trust, Wife could be the trustee
of the B trust, could have the right to the income from the B trust for
her remaining lifetime, could have the right to utilize the principal of
the B trust if necessary to pay her normal bills, and yet the assets
left in the B trust when she died would not be part of her taxable
estate. Where appropriate, consideration can be given to “equalizing”
the present asset distribution as between the spouses, so that each
spouse, no matter which spouse dies first, can fully utilize his or her
This example utilized the $1.5 million per person exemption
applicable in 2004 and 2005. However, many individuals believe that
Congress may well, during the next several years, turn the clock back to
a few years ago when the per person exemption was only $675,000 and
revise the federal estate tax law to return to a per person exemption of
$1,000,000 or less, possibly less than $700,000. To protect against
that contingency, Attorney Horgan typically recommends that a couple
consider utilizing an AB trust if their total assets now exceed, or are
projected over time to exceed, approximately $675,000. Prudence
suggests, in an era of increasing deficits, a war against terrorism,
rising energy costs threatening our domestic economy, etc., that
Congress might well go back to the days of a smaller per person
exemption for estate tax purposes. Inclusion of an AB trust mechanism in
a living trust for a couple today having more than $675,000 in assets
seems like a sensible idea, despite the current tax law with its higher
per person exemption amounts. This is just one example of how good tax
planning can save clients (and their families) substantial money in
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