Tax Wealth Network, service of Boston Tax Planners

Living Trust Myths Debunked

2024-01-27

What are the benefits of a living trust? Should you consider adding a living trust to your estate plan and why? Let's explore how a living trust can help you and your family. Read on to see how living trust myths are debunked.

What is a Living Trust?

A living trust is established as part of your estate plan to be the owner of record for your assets. It allows you to retain control over the trust property until death. When you pass away, the trust is turned over to the successor trustee, who is chosen by you, to distribute the trust property according to your wishes.

By setting up a living trust, you'll find that your estate avoids probate of your assets. This results in faster, easier distribution to your beneficiaries without additional costs. You'll also maintain your privacy because trust provisions stay confidential.

This is in sharp contrast to a last will and testament, which becomes a matter of public record that has to go through the court probate process. Finally, you can change a revocable trust at any time during your lifetime. Revocable living trusts are used to protect property until your beneficiary is mature enough to make wise decisions about his or her inheritance.

Myth No. 1: Living trusts are only for the wealthy. While many wealthy people set up trusts, it doesn't mean that this option is only for the rich. Many people with average incomes find living trusts to be beneficial. Whether or not you have millions in investments, you'll probably benefit from a living trust since it will provide easier control of the distribution of your assets after your death while protecting your privacy.

Myth No. 2: Living trusts benefit only beneficiaries, not the people making the trusts and not you, the grantor. In fact, a trust can allow for easier handling of your affairs should you become incapacitated, and make things much less stressful for loved ones left to care for your affairs when you're unable to do so.

Myth No. 3: You can't access funds once they're in a living trust. This ignores the "living" part of the living trust. Funds and assets can be made as accessible as you wish, to you or to whomever you desire. If you want the trust primarily for your own benefit, you can set it up so that everything is accessible to you until your death. In addition, you can make sure the funds do not end up with those you don't want to get them. Aside from changing the title on your accounts or real estate to reflect the transfer from you to the living trust, you can operate your financial affairs as you did prior to setting it up.

Myth No. 4: Creating a living trust is complicated and expensive. Not true. Setting up a trust may cost a bit more up front than simply writing a last will and testament, but the cost savings later on can make up for these expenses in the long run. Why? The probate process can cost anywhere from 2% to 5% of the value of an estate. Setting up a living trust now avoids paying that cost later. Through the power of technology and a nationwide network of attorneys, a living trust package with a complete set of related documents like a health care proxy, durable power of attorney, and pour-over will can cost as little as $650 for a married couple. For more information, you can check out the Estate Plan Navigator program that we use with clients here.

Myth No. 5: Even if you have young children, a will can do anything a trust can. A living trust can do some things a will cannot easily accomplish, and can become a vital part of your estate plan. It allows you to give your hard-earned money and property to those you care about while protecting it for them. If you have beneficiaries who are not quite able to handle large sums of money on their own, for example, then a revocable living trust is a necessary component of your estate planning. Your beneficiary may not be mature enough to handle large sums of money. This can be handled by implementing rules on how, when, and under what circumstances distributions may be made. For instance, the living trust can specify that your chosen trustee can make distributions to support the health or education of a minor beneficiary. Or if you're worried about a beneficiary unwisely spending their inheritance or of the adverse impact of an addiction, you can specify for the trustee to release money at certain ages or after proof of being in recovery and addiction-free for a period.

Some people are spendthrifts, others are in not-so-good marriages and still others are going through bankruptcy. Then there are those who are just too frail and incapacitated to manage property on their own. You'd rather not be giving money or property to someone under these conditions. That's when a living trust can be relied on.

Hopefully, you can see that the common living trust myths are debunked.

Is a trust right for you? Is the Estate Plan Navigator program the best choice for your family? We can help you decide.

How to Legally Avoid Taxes When Selling Investment Real Estate

2024-01-27

Over the nearly thirty years of practice in financial planning and banking, I have been approached by many clients seeking to avoid paying taxes on highly appreciated real estate investments. There are a few options available to investors and some are better than others. It all depends on the facts presented and the goals of the client. In other posts, I've spoken about some alternative strategies. Now, I'll focus on one of those options. Here's how to legally avoid paying taxes when selling investment real estate. [By the way, this strategy may be used when selling highly appreciated businesses, stock portfolios, and other assets, not only real estate.]

There are several options including 1031 Exchanges, Installment Sales, newer options like Opportunity Zone bonds, and various trusts. Here, we'll focus on one trust strategy: Charitable Remainder Unitrust (CRUT) as described in the Internal Revenue Code Section 644.

While 1031 Exchanges are a good way to defer taxes, they do not offer the opportunity to get out of real estate entirely. It is a "replacement" strategy with a way to defer taxes. But deferral is not avoidance, and you still end up owning real estate even if you're trying to get out of the business of dealing with toilets, tenants, and trash. Other options provide the ability to get out of real estate and even avoid paying taxes.

A CRUT strategy can eliminate taxes on the sale. Assuming that a property doesn't have a mortgage on it (or can have the mortgage paid off from other resources prior to the property's sale), then the CRUT can be a powerful tool.

CRUT Strategy

Not all CRUTs are created equal. There are six players in the CRUT strategy: the donor, the trustee, the income beneficiary, the remainder beneficiary, the trust administrator, and the investment manager.

An Example of the CRUT in Action

Let's use the example of a $1,000,000 piece of property with a basis of only $100,000. The potential tax the client is facing is about $300,000 by the time he factors in federal and state capital gains taxes leaving him only $700,000 to invest.

First, the Donor. If the property is owned individually or jointly there is no problem. In cases where it was owned by different family members and with larger dollars, then you'll use different CRUTs or make gifts of an undivided interest.

Second, the Trustee. The Trustee could be any charity or university or non-profit, and all are eager to fulfill that role. Here is a crucial "no-no." Never go this route because all control will be lost. The IRS has no problem with a self-trusteed CRUT as long as you cross the "t"s and dot the "i"s properly. It's easier to make the Trustee the client and his wife jointly. Later, as years go on, the ability to have either sign makes an adviser's life easier. But you could have the spouse be successor Trustee if you wanted.

Third, the Income Beneficiary. This should be the husband and the wife. The period of the CRUT can be a number of years or a single life or joint lives. The best practice is to use "lives" so the CRUT will continue paying income for the life of his wife even if the donor dies soon after the gift. So, now the owner of the property has given the property to himself as Trustee, and instructed the Trustee (he and his wife) to pay an income stream to the Income Beneficiary (he and his wife) until the last one dies. Also, since the CRUT is legally a split-interest trust paying income to a human and the principal to a charity, the Trustee (himself) can sell the $1,000,000 property to the buyer totally tax-free. The CRUT functions like any church or university as the seller.

Fourth,the Remainder Beneficiary. This can be any non-profit found on the IRS list. It can be multiple charities. But here again, is a "no-no" to watch out for. When the Donor creates the Trust document, he should never make the Beneficiary irrevocable. Instead, the donor should always give the Trustee the power to change the Beneficiary from one charity to another. Personally, I prefer to even make the Remainder Beneficiary a Donor Advised Fund which we call a Perpetual Family Foundation to be advised by his children, grandchildren, and future heirs making gifts to all the non-profits the Donor had in his heart.

Fifth, the Administrator. It may seem to be too good to be true. We have a way to sell his real estate 100% tax free by giving it to himself as Trustee and instructing himself to choose whatever investments to diversify he wants and the pay himself an income stream for life. Then even after his death, he is leaving it to a so-called "Family Foundation" to be administered on behalf of his family by his children and grandchildren. Again, the IRS has no problem with the self-trusteed CRUT as long as you continue to cross the "t"s and dot the "i"s prudently. So, the Trustee is given instruction/power to hire an independent Administrator to report all transactions and produce the tax return. Of course, make sure your Trustee has the power to also change administrators if needed.

Sixth, and last, is the Investment Manager. This can be any Registered Investment Adviser like Clear View Wealth Advisors, LLC. But the Trust document gives the Trustee the power to fire and replace the Investment Manager. Now, the $1,000,000 property was sold and the $1,000,000 is in cash in the CRUT Money Market fund. By using this strategy there is more to invest because less was lost to taxes.

A fiduciary investment adviser, like Clear View Wealth Advisors, can make suitable recommendations for this portfolio. Maybe the $1,000,000 is invested in 6 or 7 conservative mutual funds, or maybe 7 mutual funds and a non-traded income producing REIT. Or perhaps one of the MarketFlex Model Portfolios of Exchange Traded Funds and Dividend-Paying Stocks that Clear View Wealth Advisors oversees. Or, better yet, we can use a dividend-income model based on higher-yielding Closed-End Funds to generate 5%, 6%, 7% or more in dividend income. This is an effective strategy for many different investors and situations from as small as $500,000 to as large as $30,000,000.

But the keys takeaways for clients are these:

Clients get 100% tax avoidance,
Clients get more safety of investments through diversification, and
Clients never give up any control.

This is how to legally avoid taxes when selling investment real estate or any other highly appreciated asset through proper use of a CRUT trust strategy.

To discuss how a CRUT strategy may fit into your plans, call the fiduciary advisers at Clear View Wealth Advisors, LLC at 617-398-7494.