Many people seem to have this misconception that Revocable Trusts (also known as “Living Trusts”) save taxes. The answer is a big more nuanced. A living trust can save estate taxes if a person is married and the trust is used to multiply the estate of husband and wife to take advantage of each persons unified credit exemption. You see when person dies, he or she has a unified credit exemption (unlimited in 2010 currently and $1 Million in 2011 currently). With a trust the unified credit exemption of the first to die can be credited to that persons estate for estate tax purposes. If assets were held jointly, that exemption would be wasted. So in that circumstance a trust saves estate taxes. What about a single or widowed person. The answer is pretty much “no”, except that you may be able to sprinkle income among generations to marginally save some income taxes.
Trusts do serve two purposes: (1) they avoid probate which in many states is a long and exhausting process and a public process. (2) they can provide for management of a person’s assets for the period after they become incompetent and after they die. If properly drafted this affords asset protection to later generations. These are very good reasons to have a trust and certainly need to be examined. As our next Tale will show, a Revocable Living Trust in and of itself, does not save taxes.
Monthly Archives: February 2010
Why Would a Man Fly a Plane into an IRS Office?
First, I am not surprised when any person does anything these days. But still, burning down your house and then flying a plane into an IRS office is pretty off the charts. As one who has dealt with the IRS on numerous occasions, I find most of their employees to be courteous, hard working and considerate. There are some who are none of those things. But still to fly a plane into an IRS building says something more. Out of curiosity, I read the man’s manifesto that he put on the internet to explain his actions. As expected it was rambling and self-absorbed. But two things struck me. The man was a self-professed atheist and communist. You see when you have to fear of an after-life, you have no fear of doing things that are evil per se. And flying a plane into an IRS office is evil. And as a communist, he railed against the inequities of the tax code which favored the rich without really thinking about how much the rich actually pay in taxes percentage wise. As I read his manifesto, it became clear that while, yes, this man was unbalanced, he was filled with the kind of endemic hate that comes from a life apart from God. And from that life came a very evil act. In the Book of Ecclesiastes, Soloman who was by many accounts one of the wisest men to ever rule, wrote that everything under the Sun is vanity (or worthless) except pleasing God. If you read this man’s manifesto and then read Ecclesiastes you will see a parallel. Both show a sign of despair in the current condition of man. However, Ecclesiastes ends in hope, this man’s flight ended with no hope.
Practice Note
Unless Congress Acts, my view is that all estates should consider filing a Form 706 to elect to allocate basis under Section 1022 of the Internal Revenue Code (even for estates that are under the filing threshold (absent regulatory guidance to the contrary). This will allow you the opportunity to fix the basis forever. The other question is whether the repeal of Section 1014 and its replacement by Section 1022 repealed the Gallenstein rule for basis pre-2010. This could mean that the property of the first to die for a couple that owned property pre-1976 and in which one spouse died, were able to get the full step-up instead of a 50% step-up, but under Section 1022, for decedent’s dying in 2010, there is clearly no step-up in basis as to the husband’s half regardless of the Gallenstein rule without an allocation. There are ton’s of issues in Section 1022 and I am sure the Service is loathe to give much guidance because Congress could repeal the law any day now and try to make it retroactive. So, you will need to read the statute and follow its language to the letter.
“Because your mom died in 2010, she has no increase in basis to date of death value. We have established that the amount is $150,000. Section 1022 of the Internal Revenue Code permits us to allocate $1.3 Million to the value of assets. We will have to file a form 706 (which will be late, its due within 9 months of the date of death). This could present a problem because the Internal Revenue Service could elect to disallow the basis increase”, the Accountant droned to Suzie. “Your mom’s estate was $900,000, so we can apply the entire amount to the the estate and there should be no taxes due.” Suzie breathed a sigh of relief until she heard the accountant say, “of course if the IRS refuses to allow the step up in basis, your taxes will be $90,000 Federal and $30,000 state.” Suzie left in tears and cursed the family attorney for not filing the Federal Estate Tax return on time silently praying that the IRS would allow the retroactive election.
April. 2011
Jonas Romule called Suzie. The accountant asked Suzie. “Suzie, can you tell me what your parents paid for this stock that you sold and what did they pay for the house?” “Why are you asking?” Suzie asked. I have to compute the capital gains taxes. Its a rather complicated formula. You get to elect a partial step-up, but I have to determine what is the basis first. “How do you do that?” Suzie asked. “Well first, we have to determine what the property was worth when your father died. You see because of a old court ruling, the basis of the property for your mother was the value on the date that your father died. Once we get that, then we need to determine what other assets your mother had when she died in order to allocate the increase in basis permitted by the statute”, the accountant replied. “Wow, does that mean we might owe taxes on what we inherited?” Suzie inquired, nervously. “Its possible, we just have to run the numbers”, the accountant replied.