Revocable Living Trusts

Only the Will is more important

revocable living trusts

Why Do estate Planners Use Revocable Living Trusts?

Revocable living trusts have become probably the most prevalent planning tool after the Will itself.

We have seen in estate tax where the exemption amount in calculating estate tax is a big factor in the amount of tax that might be paid. Right now, it is changing every year through 2009. In 2010 there might be no estate tax payable at all, then in 2011, if Congress does nothing, estate tax will be back with a $1 million exemption amount and 55% tax rate.

An object of estate planning should be to ensure that both spouses use the exemption amount, since they are each entitled to it by law.

A typical estate plan in the past had each spouse leave everything to the survivor. Since the tax laws permit an estate to pass to a spouse with no tax payable, folks thought this was great. But the entire estate was taxed in the hands of the second spouse with only that person's exemption amount available to reduce the couple's estate.

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Transferring one's assets to an irrevocable trust was not a palatable alternative to many because they want to keep control of their wealth to use and control during their lifetime.

So the solution most often adopted is for the couple to first put their assets that would attract estate tax into revocable living trusts...

The Significance of Revocable Living Trusts

"revocable" since they retain full control in that they can revoke or change the terms and operation as they wish,

"living" simply because this trust comes into effect and operates during their life rather than upon death,

"trust" because it follows and conforms to the various rules and procedures for a trust.

Because it is revocable, the settlor controls it and it is therefore included in the estate tax calculation.

The key provision for estate planning is that the trust document provides that on death of the settlor, the trust be split into two trusts - sometimes referred to as A and B. One of these is provided to be equal in amount to the exemption amount then in effect. The remainder goes into the other trust. The surviving spouse can be the Trustee and effective beneficiary and so continue to have access to their assets; however, it is critical in drafting that precise wording allowed by the IRS is followed to ensure that the surviving spouse doesn't have control, which would then require that it be brought into their estate and result in double taxation.

When the second spouse dies, their Revocable Living Trust also splits into two - one based on the current exemption amount and the remainder. Their estate also utilizes the exemption they are entitled to and is taxed on the amount in the "remainder" trust. However, that estate does not include the trusts that were created when the first spouse died as long as the precise construct and operation required by the IRS is followed.

These are also known as By Pass Trusts, A-B Trusts and several other names.


Our intent is to describe estate planning scenarios and solutions. We do not provide advice - for advice you should consult professionals such as attorneys and accountants.

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