Legal Question in Wills and Trusts in Pennsylvania

Re: Trusts: Revocable vs Irrevocable

you may change or terminate a revocable trust any time before your death. You may not do anything with an irrevocable trust after it is signed other than add assets to it. The usual reason for trusts is to diminish your taxable estate when you die. Usually the assets in an irrevocable trust are not counted as part of your estate when you die, and therefore pass to the beneficiaries of the trust, tax free. Not so for a revocable trust. As to the third part of your question about passing assts with minimal tax consequences, it is impossible to answer without all the unique details about you and your spouse and family and assets and how they are held, where located, cost basis and many other factors. The estate plan for individuals is like a fingerprint, no two are alike. The plan must be tailored for your circumstances. I strongly recommend an estate planning lawyer with experience and an LLM in taxation. We would be pleased to help you.

Re: Trusts: Revocable vs Irrevocable

The difference between an irrevocable trust and a revocable trust is that once you put money into an irrevocable trust it is essentially gone from your control forever. When you put money into a revocable trust you can cancel, or revoke, the trust and take the money out.

This difference becomes important when you take tax issues at the time of your death into account. The reason why this becomes important is that federal law says if you have control of assets at the time of your death the money or assets are included in your estate. If you have money in a revocable trust in which you could take the money out the IRS says you own the money in the trust, therefore you are taxed on that amount. If the money is in an irrevocable trust you cannot get the money, or control it, therefore, it is not included in your estate.

To avoid federal tax you first must realize what constitutes your estate. Your estate is made up of all the assets you own and any life insurance paid upon your death. If your estate is over $675,000 you pay tax on the amount over $675,000.

You can minimize, or sometimes eliminate, this federal tax by using trusts. One of the most common uses of trusts is called the A-B Trust or Credit Shelter Trust. This trust usually eliminates all federal estate tax for individuals who have assets up to 1.3 million dollars.

How this works is as follows: During a husband and wife's life they split up the assets of the marriage so that only one person owns the asset. What you end up with is that each person approximately owns $675,000 worth of assets. Now you have new wills drawn up which include an A-B Trust. What happens is that upon, say the husband's death, all of his assets, instead of just going to the wife, go into a trust in which the wife is the beneficiary. She receives all of the income from the trust, but she does not get the assets. This trust continues until the wife dies. At that time the trust dissolves and the assets are distributed to whoever you want them to go to. Since the wife never received (or "controlled") the assets in the trust they are not included in her estate. Therefore, because the wife's estate is only $675,000 no federal tax is paid, and because the husband's estate was only $675,000, no federal tax is paid. Therefore, you can pay no tax if you have assets up to 1.3 million.

If you find that you have a lot of life insurance and the payouts of the life insurance will incur federal tax then you can put the life insurance policies into a trust where you will not own it, and don't control it, and they will not be included in your estate. An irrevocable trust is used for life insurance trusts.

If you have more than 1.3 million in assets or will have more than 2.0 million in 2006 you should see an Estate Planning Attorney.

If you have any questions call me at (610) 635-5555