Most Americans do not need to worry about the federal estate tax. It only applies to a small percentage of the population with a net worth exceeding the exemption amount, which is $11.58 million for individuals in 2020. The Washington state estate tax, however, has a much lower exclusion amount of $2.193 million for 2020. Because of the lower exclusion amount, many Washingtonians may wish to include tax planning measures in their estate plan to address their potential state estate tax liability even though they do not have any federal estate tax concerns.
Revocable Living Trusts are trusts that you can set up during your lifetime that, if properly funded, will allow your assets to be transferred to your named beneficiaries outside of the probate process. Because this type of trust is revocable, it means that you can change your beneficiaries and revise — or entirely revoke — the trust at a later date, so long as you have mental capacity to make those changes. It also means that, even though assets must be titled in the name of the revocable trust, if you are the trustee you can still control those assets pursuant to the trust’s terms. In most cases, you can spend those assets, sell them, give them away, or otherwise remove the assets from the revocable living trust at any time.
Will establishing a revocable living trust help protect assets from being subject to estate tax when you die? In short, it will not. Because you retain control over the assets in your revocable living trust, when you die, the assets in a revocable trust are included in your estate for purposes of calculating any estate tax liability. A revocable living trust provides no greater protection from estate tax than a traditional will. Both wills and revocable living trusts can include identical estate tax planning measures for married couples.
While a revocable living trust may not provide a solution for limiting estate tax liability, it does provide a way for your estate to avoid probate, if indeed you believe the advantages of avoiding probate outweigh the disadvantages of the probate process for your estate. Sometimes probate makes sense. In developing an estate plan, it is important to consult with an attorney to discuss the relative benefits and drawbacks of various strategies to find the solution that works the best for you.
This post is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting with an attorney.