Congress generally allows you to leave a certain amount of assets estate tax free when you die, known as the exemption amount. The value of your assets that exceed the exemption amount will be subject to estate taxes, unless they are left to a surviving spouse or to a charity. Even if you leave the assets to your surviving spouse, those assets will likely be subject to estate taxes when your spouse dies and leaves the assets to his or her beneficiaries.
In addition to minimizing estate taxes, it is important to do planning to ensure that there are sufficient liquid assets available to pay estate taxes when they are due nine months after you die. This is especially true in Southern California, where increasing real estate values have placed many people in potential estate tax situations.
There are several advanced estate tax planning techniques that can be used to help reduce estate taxes. Some of these techniques are discussed in this section.
A Family Trust is an entity you establish to own your assets while you are alive in order to avoid probate when you die. Probates are discussed below.
If your assets are titled in the name of your family trust when you die, those assets will pass directly to your beneficiaries and will avoid the probate process.
The family trust acts like a Will and names one or more persons (known as trustees) to take care of your assets until they are distributed to your beneficiaries.
The family trust will not have to file a separate tax return while you are living and serving as a trustee of your trust, and it will continue to use your social security number on all of its investments. The trust does not exist for income tax purposes and you will continue to file your income tax returns as you always have.
If you do not have a family trust, it is likely your assets will have to be probated. Probate is a state mandated court procedure to transfer your assets to your family when you die. Your assets will be probated whether you have a Will or not. The three most important matters to know about probate are:
- It takes approximately one to 1½ years to complete. If your family needs money during that time, they need to ask the court’s permission to receive money from the probate estate.
- Probates are very expensive. The attorney’s fees in a probate are based on the gross value of the assets being probated. If your house is worth $1 Million and you have a $600,000 mortgage on your house, the attorney’s fees are based on the $1 Million gross value, not the $400,000 equity in the house. On a $1 Million probate, the attorney’s fees would be approximately $23,000.
- Probate is a public proceeding; so anyone can go to the court and look at your probate file. This would tell them what you were worth and how much each of your children or other beneficiaries will inherit, thereby eliminating any privacy you would have wanted.
The way to avoid probate is to set up a family trust and transfer your assets into the trust before you die.
A Privacy Family Trust (PFT) is used to prevent others from finding out what real estate you own.
Deeds showing title to real estate in the name of family trusts are recorded with the county recorder’s office and show the trustees of the trust and the name of the trust.
If you do not want your name to appear on the deed to real estate, you can establish a PFT to hold title to the real estate. You would select someone other than yourself as trustee (preferably someone with a different last name than yours) and you would give the PFT a name that is not connected to your name (i.e., the address of the property it will own).
The real estate in the PFT will be protected, because it will not be able to be sold or refinanced by the trustee. The trust contains specific provisions limiting the right of the trustee to take actions with respect to the real estate, such as selling or refinancing the real estate.