For Your Heirs’ Sake, Put Assets in a Living Trust

Donald Haynsworth had thought a lot about estate planning over the years but had never bothered to do anything about it. But in February, with the Clinton Administration threatening to substantially hike estate taxes, Haynsworth got moving. The San Diego businessman set up a series of trusts in an effort to leave the bulk of his money and property to his kids and grandkids tax-free when he dies. He’s now also considering a more complicated gambit, called a family limited partnership.

“President Clinton’s tax proposals got me off my hands,� Haynsworth says. “This was something that I always planned to do eventually, but (Clinton) certainly speeded up the process.�

Haynsworth is indicative of many Americans who have shifted into high gear in an effort to take advantage of current estate planning rules before they’re made substantially less generous, tax experts say. Some experts believe that people who have estate plans in place will be “grandfathered�--or allowed to operate under the old rules--while those who don’t will be stuck with new laws likely to cost their heirs thousands of dollars.

The proposed estate tax changes are all preliminary and may not happen until next year--if at all. But talk about them has become so pervasive that nearly everyone involved in estate planning thinks one or several such changes are inevitable either this year or next. All of the changes would substantially limit the amount of money you could give your heirs without incurring estate or gift taxes, which add up to as much as 55% of the bequest.

Specifically, lawmakers are discussing three major shifts. One would limit the amount each person could leave to his or her heirs tax-free to $200,000, from $600,000. Another would make annual gifts of less than $10,000 taxable. And a third would require heirs to pay capital gains taxes on inherited investments that have appreciated.

The combination has created land-office business for estate planners, who say they are setting up trusts and partnerships by the hundreds to avoid both probate and estate taxes for their clients.

While many believe estate planning is just for the wealthy, professionals argue that it’s not. Many individuals who have little to bequeath other than their homes, are wealthier than they think, simply because housing values have soared in the last decade. Moreover, even if your estate--including your house, cars, life insurance and savings--adds up to less than $70,000, you can save your heirs hundreds of dollars and months of anguish by doing a little planning now, experts say.

That’s because planning can avoid probate after you die. Probate is a legal review of your will and assets. In the best case, it takes several months and costs several hundred dollars. In the worst case, it can take years and eat up a substantial amount of your assets before they’re distributed to your heirs. Additionally, if you plan ahead, you can also allow your friends or relatives greater flexibility to care for you if you ever become disabled and unable to make your own decisions.

What can you do?

Most professionals suggest a series of steps, which vary based on income and family circumstances. But among the simplest and most effective strategies for those with limited assets is a Revocable Living Trust.

The main advantage of these trusts, which are relatively inexpensive to set up and maintain, is that they allow you to pass all your assets to your heirs without probate.

Probate fees typically amount to between 2% and 8% of your total assets--depending on the size and complexity of your estate, attorneys say. To put that in dollars and cents, someone who leaves their children $500,000 in life insurance and home equity would find the inheritance reduced by more than $10,000 simply for probate. The cost of setting up a simple trust, on the other hand, typically amounts to between $500 and $1,500.

Additionally, probate is a public process. Anyone who wants to can look up your probate records and find out exactly how much money you died with and whom you gave it to.

Set up properly, the Revocable Living Trust avoids that and serves as your will. You simply deed your assets to it and, upon your death, they will be distributed to the appropriate people. However, you should also have what’s called a pour-over will, which essentially picks up any assets you forgot to deed to the trust and drops them in trust after you die.

What the living trust doesn’t automatically do is save estate taxes. Consequently, if you and your spouse have more than $600,000 in total assets, you’d want to take additional steps.

If you’re married and have between $600,000 and $1.2 million in cumulative assets, one of the simplest solutions is to put a provision in your living trust to establish a second trust upon the first person’s death. The second trust, referred to as a bypass trust, passes part of the assets to the surviving spouse and the other part to the rest of your heirs.

If, instead, you left all your assets to your spouse and your spouse left everything to your kids, you would lose out on one of those $600,000 tax exclusions. And that could cost your heirs roughly $200,000 in tax.