Living Trust And Real Estate Planning

Recent legislation being passed gradually through the congress is bringing the reality of paying estate tax closer to more and more people. The estate tax ceiling is being constantly lowered. Today the benefactors of almost anyone with an estate of $100,000 or more will be required to pay up to 40% of their assets when their loved ones pass on.

For this reason more and more people, anxious to protect the future of their loved ones, in most cases their children, are investigating the steps involved in establishing a living estate trust. They want to know how establishing an living trust will influence their life style in this life, and their loved ones when they move on to the next life.

The sad fact is that people, who bury their heads in the sand regarding estate planning, leave their loved ones very vulnerable. Many people, whose basic sole asset is the house they are living in, feel that they are putting their property at risk by transferring it to a living trust. This is completely untrue. In fact, the opposite applies. Let's say an average couple establishes a living trust and the only asset that they transfer is their property. It will be more than likely that they will still have a mortgage to pay, and only a certain percentage of the equity is unsecured against it. The trustor as long as he is earning taxable income still retains the right to deduct mortgage interest from your income taxes.

Even if a living trust has been established against a property, then on condition that the trust is revocable, the trustee can allow the trading up or trading down of a property. The trustor will still have the right to exclude up to $250,000 of profit from taxation when they sell their home. If the trustor's buy a larger home and increase their mortgage then the equity percentage is the part taken into account. If on the other hand the couple trade down then again the equity on their house is taken into account, which can be up to 100%.

From the day that the trust is established, the equity only is transferred to the trust. As the couple to live in their home, and continue to pay their mortgage, then the secured proportion will continue to rise accordingly, and the house should, under normal circumstances, continue to rise in value.

If and when one of the couple passes away, and their life insurance policy clears off the mortgage, then the surviving partner can continue to live in the house, until they too pass on. Only then can the trustee sell the property for dispersal of the assets to the benefactors. If there is a single benefactor, then it is possible that the trustee will pass on the house without the need for it to be sold.

This is the advantage of a living trust. However there are more and more astute people who are establishing living trusts, although there is a possibility that their estimated net assets at the time of their passing may not fall into the category where their estate will be liable to have estate tax levied on it. They simply do this to prevent their loved ones having to go through the often harrowing process of probate. This can be a long drawn and expensive process. Average percentage costs of a probate can be between four to eight percent of the estate's net value, and is charged to the estate before dispersal.