October 17, 2017

Legal News You Can Use: What a Revocable Living Trust Can and Can’t Do For You

trustA revocable living trust (or RLT) is a widely used estate planning device, often promoted in magazine articles and at seminars.  There is no doubt that individuals and couples can achieve substantial benefits, both tax and non-tax, through the use of revocable living trusts.  It is important, however, that people considering making a revocable living trust part of their estate plans have a clear understanding of what the revocable living trust can and cannot accomplish.

Some of the benefits that can be realized through the use of revocable living trusts are:

  • Any assets titled in the name of the Trustee of the trust upon death do not need to pass through probate.
  • People who own real estate in multiple states may avoid having their estates conduct probate proceedings in each state by titling the real estate in the name of the Trustee during life.
  • A revocable living trust can provide a mechanism for managing assets in the event of lifetime incapacity. The Settlor (person who established the trust) of a revocable living trust will designate a person or financial institution to assume the duties of Trustee in the event the Settlor is unable to manage his or her finances.
  • If privacy after death is a concern, a revocable living trust may help alleviate that concern because a revocable trust does not become part of the Probate Court’s public file after the death of the person who created the trust.

As useful as a revocable living trust can be to accomplish your estate planning goals, there are some things that it cannot do for you:

  • Transferring assets to a revocable living trust will not protect those assets from your creditors during your life.  Further, most revocable living trusts have language directing the trustee to pay the Settlor’s just debts after death.
  • The RLT does not shield trust assets from the costs of long term care, such as nursing home care. Everything in a revocable living trust is considered available to pay for nursing home care.
  • A revocable living trust will not prevent assets from passing through probate unless the assets are transferred to the revocable living trust during the life of the Settlor. Assets that are not transferred to the trustee during life may pass through probate, unless those assets are payable to a named beneficiary or owned jointly in survivorship.
  • A revocable living trust will not reduce the size of your gross taxable estate. Everything in your revocable living trust will be part of your gross taxable estate when you die.  Estate tax savings may be realized as part of your estate plan due to provisions contained in the revocable trust instrument, though, such as gifts to a spouse or charities.
  • The revocable living trust will not reduce the statutory fee that your estate must pay to the Probate Court after the death of the Settlor. Connecticut statutes set forth the Probate Court’s fee schedule based on the size of the gross taxable estate, and the Probate Court does not have the power to deviate from the fee schedule.
  • Even if you transfer all of your assets to a revocable living trust, you will not be able to completely avoid contact with the Probate Court. Your trustee or executor will be required to file at least a Connecticut Estate Tax Return after your death.

Attorney Jeanette Dostie is a Director at Suisman Shapiro in New London, CT, the largest law firm in eastern Connecticut. She has a wide experience in estate planning, ranging from simple wills to complex estate plans designed to maximize estate tax savings for clients. For more information, visit www.suismanshapiro.com or call (860) 442- 4416. Suisman Shapiro is located at 2 Union Plaza, P.O. Box 1591, New London, CT 06320.

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Legal News You Can Use: The Gift of Real Estate From Parent to Child

real-estate-giftShould I gift my house to the kids now, or leave it in my estate?  This can be a tricky question.  There are also many other factors to consider, including mortgages, capital gains tax, Medicaid regulations, and other risks. 

GIFT TAX

The current federal law gives each donor (maker of a gift) a $5.43 million lifetime exemption from the federal gift tax.  The Connecticut statutes provide for a $2 million lifetime exemption from the Connecticut gift tax.  Therefore, there is no gift tax due unless the donor has made more than $2 million in taxable gifts during his/her life.

Each donor receives a  $14,000.00 annual gift tax exclusion per donee (receiver of a gift) for gifts of a present interest, meaning that the recipient can use and enjoy the gift immediately.  For example, the exclusion for a gift from a parent to two children may total $28,000.  If both the donor and their spouse join in the gift, the exclusion would be $56,000.00.  That is, the value of the gift for gift tax purposes would be reduced by $56,000.00.

The $14,000.00 annual gift tax exclusion is not available for gifts of a future interest, such as a gift of real estate in which the donor reserves a life use.  So, if your total estate is below the $5.43 million federal estate tax exemption and the $2 million Connecticut estate tax exemption, there is really no practical difference in this case.

MORTGAGE

Most mortgage documents prohibit the borrower from transferring an interest in the real estate without the lender’s written consent.  To be assured of avoiding trouble with the lender, be sure to seek this consent before making a transfer.

CAPITAL GAINS

A donor may have purchased real estate many years ago at a price that is much lower than the property’s current value.  Because the gift recipient’s basis for capital gains tax purposes is the same as the donor’s basis, if and when the donee children sell the property, they could anticipate paying capital gains tax on a substantial gain.

By contrast, if the children were to inherit the property at the parent’s death, the children’s basis would be the fair market value of the property at the parent’s date of death. In that case, if the property were eventually sold, the gain upon which capital gains tax may be due would be much smaller than it would be if the property were received by gift and then eventually sold. 

MEDICAID

The current Medicaid regulations provide that if a person makes a gift of assets, and subsequently applies for Medicaid sooner than five years from the date of the gift, a period of ineligibility based on the value of the gift will apply.  For instance, if a parent gifted real estate to a child on September 1, 2014, and the parent or the parent’s spouse needed to apply for Medicaid to pay for the cost of long term nursing home care prior to September 1, 2019, the parent or their spouse would be ineligible for Medicaid.  Because of this five year look back rule, it is important to examine what other assets are available to pay for long term care.

OTHER RISKS

What if your child passes away before you do?  As much as we don’t like to think about these scenarios, this can be particularly problematic if the parent has not reserved a life use in the gifted property. In this case, the deceased child’s interest would pass under his/her own estate plan documents, possibly to a spouse or to the deceased child’s own children.

Other unexpected events such as bankruptcy, or an accident suffered by one of the donee children, or a divorce, could leave the gifted real estate vulnerable to claims of creditors or claims of the child’s spouse.

The long and short of this complicated discussion is that it is very important to consult with an experienced estate planning attorney before making the decision to gift property to your children.

Attorney Jeanette Dostie is a Director at Suisman Shapiro in New London, CT, the largest law firm in eastern Connecticut.  She has a wide experience in estate planning, ranging from simple wills to complex estate plans designed to maximize estate tax savings for clients.  For more information, visit www.suismanshapiro.com or call (860) 442-4416.  Suisman Shapiro is located at 2 Union Plaza, P.O. Box 1591, New London, CT 06320.

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