Articles Posted in Taxes and planning

Living Trust Taxation – The IRS ignores revocable living trusts


Image of Old man resting on bench and cuddling dog and catThe term “living trust” is commonly used by estate lawyers and financial planners to describe a trust which is established during a person’s lifetime and which is revocable and changeable.


According to the tax laws, IRC §671-679,  a “grantor trust” is any trust in which the Trustor/Grantor retains control over the income or principal, or both to such an extent that he is regarded as the substantial owner of the trust property and income.  The power to revoke is a typical retained power that makes a trust a grantor trust.  Thus, the typical living trust used in estate planning is a revocable trust and hence a “grantor trust”.  The income tax significance is that the taxable income generated by the grantor trust is reported on the income tax return form 1040 of the Trustor/Grantor. Also, the tax due on such income is paid by the Trustor/Grantor on his personal income tax return, form 1040.  Thus, a grantor trust does not typically file any income tax return.


WHAT IS IT? – What is a Generation Skipping Trust?

Generation Skipping TrustA Generation Skipping Trust (GST) is a generic term for any trust where there are trust benefits which are skipping a generation.  A typical example is where a Trustor establishes a trust that does not benefit his children but instead benefits his grandchildren.  Thus, the trust “skips” giving anything to the Trustor’s children. The law imposes a “Generation Skipping Tax” of a flat 40% on certain transfers above an exemption amount to insure that property transfers are subject to transfer tax at least once at each generation. The exemption amount is the same as the estate tax exemption amount which for 2014 is $5,325,000. The relevant IRC sections are §2601 through §2642.


Image depicting Charitable Remainder Trust

WHAT IS IT?  – What is a Charitable Remainder Trust?

A Charitable Remainder Trust (also known as a “ CRT”) is a permanent, irrevocable trust that is established to pay an amount at least annually to the Trustor for a period of time and then at the end of that time pays the remainder in the trust to a charitable organization. The Trustor contributes assets to the CRT when it is established. The Trustor gets a current income tax deduction for the present value of the remainder interest and escapes capital gains tax on the assets placed in the trust. A CRT is established under the specific authority of Internal Revenue Code §664 and the regulations thereunder.

Typical Situation

Image of Orange County Luxury Home

If you are rich enough your estate will pay a 40% tax above the exemption


Under the federal estate taxes and gift taxes laws, the amount that one gives away during one’s lifetime counts toward the entire exclusion from estate and gift taxes. The lifetime estate and gift tax exclusion is now at $5 million per person indexed for inflation. For  2014 the exclusion is $5,340,000 per person.  There is a federal estate tax of 40% of the net asset value of the estate over 5,340,000. Thus, if a person dying in 2014 has $6,340,000 in net asset value, he would have $1 million taxable and the tax would be $400,000. Under the unified tax concept, the exclusion is reduced for whatever gifts are made over and above the annual gift tax exclusion amount. Thus, one cannot escape estate taxes by giving away once estate prior to death.

Image of Tax Basis Increase

Gifting before death may cause huge capital gains taxes


Under our system of federal and state income tax, if the property is sold before death for more than what was pay for it then there is a capital gain. There are special rates which apply to capital gains the penny upon one’s tax bracket. To compute capital gains, you subtract the income tax basis of the property from the net selling price. The income tax “basis” is what was paid for the property in the first place minus any depreciation and adding any expenditures for capital improvements.

Reassess Property Tax on Death of an Owner

County assessor will reassess property tax on death of an owner unless prevented


California Property taxes are administered by the County in which the real property is located. The County tax assessor determines the amount of property taxes based upon the fair market value of the property at the date of purchase plus a small amount of increase each year is allowed. The value is called the “assessed value”. The yearly amount of tax is roughly 1.2% of the “assessed value”. Thus, if a property is purchased for $100,000, the annual property tax would be about $1,200 and will increase each year. The county property tax year goes from July 1 through June 30. Tax bills are sent out typically in October and are payable in two installments: December 10 for the first installment and April 10 for the second installment

The wrong kind of deed can have expensive and unintended consequences. Once the horse is out of the barn you can get back!

What is a deed?

image of California property deedReal estate property ownership is legally changed by a document commonly known as a deed which is signed by the person making the ownership transfer. The deed is then recorded with the County recorder in the county where the property is located.

A permanent estate builder that provides asset protection and covers future generations


What does a Life Insurance trust do?

Life Insurance Trusts – A Life Insurance Trust is a permanent, irrevocable trust that is established to own one or more life insurance policies that cannot be altered, amended, or revoked. When the insured named in the life insurance policy dies, the life insurance company pays the policy proceeds to the Life Insurance Trust, instead of to the estate of the insured. The Trustee of the Life Insurance Policy then distributes the proceeds to the beneficiaries of the Life Insurance Trust according to the instructions in the Declaration of Trust.