The revocable living trust is a very versatile estate planning solution that can be the right choice for a wide range of people. We are going to look at the tax question in this post, but before we get there, we will explain some of the benefits that living trusts provide.
Streamlined Estate Administration
When you have a living trust, the assets that comprise the estate will be owned by the trust, and this streamlines the estate administration process.
You can account for assets that you may never convey into the trust through the inclusion of a pour-over will. This document would transfer these resources into the trust after your passing.
Assets in the trust can be distributed to the beneficiaries outside of probate. This is a costly and time-consuming process that enters the picture when you use a will as your sole asset transfer vehicle.
Incapacity Planning
More than one third of people that are 85 years of age and older have Alzheimer’s disease, and this is not the only cause of cognitive impairment. And of course, some people encounter these challenges before they enter the ranks of the oldest old.
You can account for this possibility when you have a living trust. Why you are alive and well, you would act as the trustee, so there would be no loss of control.
When you are drawing up the trust agreement, you can name a disability trustee. This individual or entity will step into the role if it ever becomes necessary.
Spendthrift Protections
The inheritance that you are going to leave to a beneficiary can be protected through the inclusion of a spendthrift clause. After you are gone, the trust would become irrevocable, and the beneficiary would have no direct access to the assets.
Creditors of the beneficiary would “step into their shoes.” Since the beneficiary would not be able to reach the principal, the creditors would be in the same position.
They would be able to go after assets after they have been distributed. To account for this, you could instruct the trustee to provide limited incremental distributions.
Taxes on Living Trust Distributions
Now that we have provided a basic overview, we can focus on the point at hand. The assets that you originally conveyed into the trust were in your possession after you paid taxes throughout your life. For this reason, distributions of the principal would not be subject to regular income taxes.
However, earnings that are generated by assets in the trust would be taxable. The trust itself would pay taxes on undistributed earnings, and the beneficiary would be required to claim distributions of the earnings.
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While he was in law school, he worked as an aide to the late John Sparkman, Senior Senator from Alabama. This gave him the opportunity to gain intimate knowledge of the workings of government, and this background has served him well.
He started his private practice in New York in 1974, the first Sikh to be admitted to the bar in the state of New York.And in 1995, when he narrowed his legal focus to the areas of estate planning and elder law, the prestigious American Academy of Estate Planning Attorneys accepted him into their membership.
Special needs planning is an important aspect of the field, and Mr. Khalsa has intertwined his empathy with his expertise to become a leading advocate in this area. Shortly after the Education for All Handicapped Children Act was enacted in 1975, he won the first case in New York that was adjudicated under this law.
S.J. Khalsa has a penchant for philanthropy, and he has raised well over $20 million for charities nationwide. He is a deeply spiritual man who represents the Sikh religion at religious and interfaith gatherings all over the globe.
He believes that successful professionals should contribute to the fabric of their communities, and to this end, he works with law enforcement in New York.
Mr. Khalsa is a graduate of the FBI Citizens Academy program, and he is active in their Alumni Association. He is a member of the FBI/New York Police Department Joint Task Forces on Civil Rights and Hate Crimes, and he sits on the Community Engagement Council that advises the FBI Assistant Director for New York.
He is the author of the highly acclaimed book, Estate Planning Essentials: A Guidebook for Modern Families. Lawyers of Distinction recognized him for his excellence in 2020, naming him a 2020 Power Lawyer, and he is a member of the prestigious American Academy of Estate Planning Attorneys.
Mr. Khalsa lives in Manhattan with his wife, and he has two grown children and four grandchildren. He likes to travel, and he is an avid golfer. As the co-owner of Kundalini Yoga East in New York along with his wife, he instructs practitioners and aspiring yoga teachers.
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- Everything You Need to Know About Estate Taxes - August 21, 2023
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