If you are married and have a joint revocable living trust, there’s a good chance your plan should be revised to help your children and beneficiaries avoid income taxes after your death.
When Karen’s mother passed away three months ago, she and her three siblings received a much larger inheritance than they had expected. Karen’s parents were comfortable, though not wealthy. They saw an estate planning attorney and got a standard joint revocable living trust in 2008. After Karen’s father died in 2011, her mother sought investment advice from a financial planner, who invested the trust’s assets wisely. When Karen’s mother died in 2014, the trust assets had increased in value significantly in the three years since her husband’s death.
Sounds great, right? There was one problem—a big one. When Karen and her siblings sold the trust investments, they found themselves liable for over $200,000 in capital gains taxes! (Not estate taxes, but income taxes.) However, had Karen’s parents had better and more updated planning, their children would have avoided the capital gains tax in its entirety—and received the larger inheritance without having to pay any income taxes!
Up until recently, good estate planning was primarily about protecting loved ones and avoiding estate taxes. Because of very high estate tax rates, avoiding estate taxes was key. Income tax avoidance was not a serious consideration.
But today, with the estate tax exemption over $5 million per person, very few couples will ever have to pay estate taxes. Still, nearly all married couples have planning that avoids estate taxes that will never come, at the expense of causing capital gains taxes that may come if the trust assets increase in value after the first spouse passes away. I have reviewed hundreds of trusts for married couples, and I have yet to see one that both protected loved ones and avoided capital gains taxes for the beneficiaries.
Fortunately, this out-of-date planning is fixable. Revocable living trusts are revocable, meaning a married couple can amend them. But you can only fix this problem if you amend or restate your trust while both spouses are alive. If you are married, have a revocable living trust, and have assets significantly under $10 million, contact your estate planning attorney if you still have a close relationship with him or her—or if not, please give us a call. We can help you potentially save your loved ones tens or even hundreds of thousands in future capital gains taxes while still protecting your loved ones from the bad things that can happen to good people.