Revocable Living Trusts & Taxes

Once you establish your Living Trust, maintaining the trust is relatively simple.  It is always a wise idea to discuss with your accountant the tax advantages and responsibilities of your trust.

Advantage of Trust Over “Joint Tenancy”

If your home is transferred to a Living Trust as “community property”, joint tenancy is eliminated.  As a result of holding the home in the Living Trust as community property, a stepped-up “basis” can be taken on the entire home (rather than just the one-half owned by the deceased spouse.)

Capital gain taxes can be reduced, through a Living Trust, when a husband and wife own a home in joint tenancy.

With a higher stepped-up basis on the home, the resulting capital gain is significantly reduced and any taxes due on subsequent sale of the home are likewise reduced.  When the basis on real property goes up, the taxes owed on the sale of the real property go down.

The above example may not necessarily apply to your circumstances.  Always seek the advice of a professional regarding your tax advantages.  The main reason for the Living Trust is avoiding probate.  Tax considerations are important and a Living Trust can gain some savings, but the main purpose is what has already been stated - avoiding probate.

Death Taxes

Death taxes are also referred to as “estate taxes” and the terms can be used interchangeably.

As a rule, a Living Trust will not necessarily affect or reduce estate taxes.  However, in a case where a married couple has in excess of $3 million dollars, a different kind of trust may be used to reduce the surviving spouse’s exposure to estate taxes.  But a trust, in itself, simply cannot completely eliminate all taxes.

Beginning 2003, federal law increased the estate tax exemption, as follows: 

Federal gift tax exemption remains at $1 million per person for all such years.