Dividing the Trust
Estate Planning Attorney Joseph Hudack knows that the main concern is correctly dividing the trust into two sub-trusts after the first death. This split is done by determining the fair market value of all the trust’s assets as of the date of death. The trustee will then be able to choose which assets and how much of each asset will go into Trust A and Trust B, respectively. The division takes place without the involvement of a judge because a living trust’s assets are not subject to probate or other legal requirements.
Although the maximum estate tax exemption was $2,000,000 in 2007 and will rise through 2010, it is expected to drop to $1,000,000 in 2011 instead. The assets of the original trust can be divided equally between Trust A and Trust B, assuming that the husband and wife will live until 2010 and that they have less than $2,000,000 in communal property. If they had more, the potential for future growth of the assets must be taken into account, and the highest “growth assets” (up to $1,000,000) should be put into the “B Trust” to optimize any inheritance tax advantages in the future.
Based on the assets’ worth at the time of death, the trustee has complete power over how they are divided. Their house may be transferred to Trust A, Trust B, or equally divided between the two if its market value is less than the exemptable maximum in the year of death. Real estate, or a significant piece of it, is sometimes placed in the “B trust” to prevent any potential estate tax penalty for the appreciation accumulated between the deaths of the first spouse and the surviving spouse, for example, due to the high growth volatility of California real estate.
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