How Proper Planning Can Save You Thousands in Estate Taxes

December 1, 2011 by · Leave a Comment 

By Adil Daudi, Esq.

trust-estateUnless one of your primary objectives is to fund the government with more of your money, taking the initiative of planning your estate should be one of your top priorities. Far too often people find it an inconvenience to plan their estate; however what is commonly misunderstood is that by taking the time to structure your estate, you could potentially save upwards of thousands of dollars.

One of the optimal tools to use when it comes to estate planning is the creation of a Revocable Living Trust. However, what many attorneys sometimes fail to explain is that even within a Trust, there are certain methods that can be used to help reduce the amount of estate taxes one would normally pay. This trust is commonly referred to as the “AB Trust.”

Under an AB Trust, married couples are given the ability to maximize the use of their federal exemptions from estate taxes. Currently, any estate valued over $5M would be subject to the tax (for the amount in excess of $5M). However, although the current exemption limit is set at $5M, there are strong indications that Congress is to reduce that limit back down to $1M in 2013.

So let’s give a brief breakdown on how an AB Trust works:

How the AB trust system works

In order to avoid being a victim to a steep estate tax, spouses have the option of setting up an AB trust, where each spouse leaves their property to a trust. An AB Trust is created by establishing a living trust with an AB provision. Although the trust remains revocable while both spouses are alive, when the first spouse passes away, the trust becomes irrevocable and is split into two separate components: the A trust and the B trust. Under the A trust, the surviving spouse holds his/her half of the estate, and controls all the property while receiving distributions of income and principle on a need-basis.

On the other hand, the B trust contains the deceased spouse’s share of the estate. Typically, the funds transferred into the B-Trust belong to the beneficiaries, who are usually the children. However, the surviving spouse has the right to use the property during his/her life and is allowed to receive any income, if needed. It is upon the death of the surviving spouse that the property in the B-Trust passes to the beneficiaries designated in the original trust document, as well as the assets contained in the A-Trust.

Advantages of an AB Trust

The property that is contained in the B-Trust is never considered part of the surviving spouse’s estate; therefore it is not subject to estate taxes. It is only the property contained in the A-Trust that is subject to estate taxes at the time of the surviving spouse’s death, but if the A-Trust contains less than the estate tax exemption, then no estate taxes will be imposed. Although many presume an AB Trust is only appropriate if you carry in excess of $5M, which is the current estate tax threshold, this is not necessarily the case because it is always important to note that the current laws may not be the laws in the future. The laws change on a constant basis, and a proper estate plan takes into consideration not just what applies today, but what could apply in the future.

Disadvantages of an AB Trust

With every good comes a little bad. There are disadvantages to an AB trust. After the death of the first spouse, the A and B trusts requires separate tax returns. In addition, the AB trust can limit the surviving spouse’s rights to the trust property, depending on how it is worded.

It is always important to note that an AB Trust is not suitable for every household. With all its benefits, there are reasons for families to not implement such a Trust and to instead utilize the regular Revocable Living Trust. However, it should also be noted that consulting with a professional in the field could prove to be vital as it could potentially save you hundreds, if not thousands of dollars.

Adil Daudi is an Attorney at Joseph, Kroll & Yagalla, P.C., focusing primarily on Asset Protection for Physicians, Physician Contracts, Estate Planning, Business Litigation, Corporate Formations, and Family Law. He can be contacted for any questions related to this article or other areas of law at adil@josephlaw.net or (517) 381-2663.

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Revocable Living Trust – A Beneficial Product, But Is It Right for You?

July 28, 2011 by · Leave a Comment 

By Adil Daudi, Esq.

Recently I was given the opportunity to speak at The Islamic Center of Greater Lansing on “Simplifying your Shariah Estate Plan.” My primary focus for the presentation was two-fold: (a) to provide a greater understanding for the community on the differences between a Revocable Living Trust and a Last Will and Testament; and (b) to inform the community on the importance of a Durable Power of Attorney and a Health Care Power of Attorney.

As the presentation ended and the question and answer period began, I realized that the focus of the questions was on the differences of a Trust and a Will, and which would be more suitable for them individually. Seeing how my article “To Will or Not to Will” has drawn attention from many in our community, I wanted to take the opportunity to write on the other product, the Revocable Living Trust, and hopefully shed some light on the benefits of obtaining such a product.

If you are at the stage where you are prepared to create an estate plan, you may be well-aware of the requirements that are placed on us Muslims: Narrated by Ibn Umar, Prophet Muhammad (s) once said: “It is not right for any Muslim person who has something to bequeath to stay for two nights without having his last will and testament written and kept ready with him.”

The following is a concise list of facts about Revocable Living Trusts that many may or not be taking into consideration when deciding on their estate plan. I would strongly advise for you to consult with an Attorney about these issues and to get a better, clearer, understanding of how a trust actually operates versus a Will.

1. Avoid Probate: One of the primary advantages of establishing a Trust is that you avoid the probate process; therefore, you avoid having the courts involved in your estate. This is extremely beneficial for multiple reasons: (a) allows you to distribute your assets almost immediately; (b) helps reduce the cost that your estate would otherwise pay; (c) allows you to avoid having lawyers involved; and (d) ensures a much smoother process for handling the estate’s affairs.

2. Costs: One of the biggest drawbacks of establishing a Trust is the upfront cost that is typically associated with it. From my experience, this is what usually deters clients away from creating a trust; however, more often than not, this is because they do not fully understand the benefits and the possible savings a Trust can actually provide. The average cost of going through the probate process is approximately 3-5% of your entire estate. Now, depending on the value of your estate, this cost can be excessive. However, in contrast, once you create a Trust, the only fee you will be required to pay is the actual cost of the Trust. 

If you are currently speaking to an Attorney about a Trust, be sure to ask whether there are any hidden costs, e.g. extra charges for making changes or costs for speaking to the Attorney about the Trust after it is created. Although I can only speak on behalf of my firm, we ensure that a client who purchases a Trust with us is given no additional fees, and has essentially retained us for the duration of their life (for their estate planning needs). Please make sure you understand your Attorney’s fee structure before signing up for any estate planning documents.

3. Private Information: Another important advantage with a Trust is that you do not open yourself up to the public. In other words, under a Trust, your information is kept private between you, your spouse and your immediate family (or whomever you choose). Unlike a Will, where once it is filed with the court, it is open for the public to see; with a Trust there is no requirement of having it filed with the court. For many, this is a very serious issue, as not many Muslims are keen on the idea of having their assets openly disclosed to the public. However, these are also issues that you need to address when creating your own personal estate plan.

It has become far too common for clients to focus too much on the type of estate plan they should create (trust vs. will), and less focused on the requirements that have been placed upon us. If you have yet to establish an estate plan, and if you are stalling the process because you confused on which product is more suitable for you, I highly advise for you to at least satisfy the bare-minimum requirement that Allah s.w.t. has made mandatory on us, and draft a Will; at least until you have informed yourself of the advantages to a Trust, and decided whether or not a Trust is in fact, the better product.

In addition, it is always important to discuss and understand these issues with your Attorney. Make sure you speak to an attorney who will not charge for the initial consultation and is knowledgeable in the area; especially in relation to Shariah law. With Ramadan approaching in less than two-weeks, there may be no better time than now to take advantage of completing a deed and satisfying your requirements; as well as ensuring you have protected your assets and have them distributed pursuant to Shariah law, and not Michigan law.

Adil Daudi is an Attorney at Joseph, Kroll & Yagalla, P.C., focusing primarily on Asset Protection for Physicians, Physician Contracts, Estate Planning, Business Litigation, Corporate Formations, and Family Law. He can be contacted for any questions related to this article or other areas of law at adil@josephlaw.net or (517) 381-2663.

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