Ted (00:00.056)

Can a living trust really lower your taxes? It’s a question I hear all the time. Many people believe a living trust is a magic solution to save on taxes. But is that really true? In this video, we’re going to separate fact from fiction so you will know exactly when a living trust can help. You save money and when it won’t. The answer might surprise you. So stick around to avoid costly mistakes. Hi, I’m Ted Gudorf.

board-certified estate planning attorney with over 37 years of experience, helping individuals and families protect their assets and plan for the future. If you’ve ever wondered how a living trust fits into your financial strategy, you’re in the right place. Today, I’m going to walk you through the tax implications of a living trust, when it works, when it doesn’t, and what strategies might be better suited for your situation. By the end of this video,

you’ll have a clear understanding of how to make the most of your estate planning efforts. Don’t forget to like this video and subscribe to the channel for more practical estate planning tips. Let’s start by addressing some of the biggest misconceptions about living trusts and taxes. First, a living trust does not save you any money on income taxes. Many people think that putting assets like rental properties or other income generating investments into a trust

will lower their tax bill. Unfortunately, that’s not how it works. For tax purposes, the IRS treats a revocable living trust as a pass-through entity or a disregarded entity. This means that any income the trust generates is treated as your personal income and reported on your individual tax return, just as if the trust did not exist. So if you’re hoping to save on income taxes,

With a living trust, that’s not the solution. Second, a living trust does not automatically provide estate tax benefits. While revocable trust is a great tool for managing and distributing your assets, the assets placed in the trust are still considered part of your taxable estate. This means that if your estate exceeds the federal estate tax exemption limit or your state has its own estate tax,

Ted (02:22.955)

You won’t avoid these taxes simply by having a living trust. Finally, a living trust won’t give you any immediate relief from capital gains taxes. For example, some people believe that transferring their home into a trust will let them avoid taxes when they sell it. Sadly, that’s not true. The capital gains tax rules don’t change just because an asset is held in a trust. If that were the case, everyone would use this strategy.

So while a living trust is an essential tool for estate planning, it’s important to understand its limitations when it comes to taxes. Don’t worry, though. There are specific scenarios where a living trust can help, and we’ll dive into those next. Now that we’ve covered what a living trust doesn’t do, let’s talk about when it can actually help you save on taxes. The first scenario is estate tax planning.

If your estate is large enough to be subject to federal or a state estate tax, a living trust can include provisions like marital or bypass trust, also known as credit shelter trust. These tools allow you to maximize the federal estate tax exemption for both spouses, potentially shielding millions of dollars from taxation. For instance.

A properly structured trust can ensure that both spouses’ exemptions are fully utilized, reduced, or even eliminate estate tax liability. This can make a massive difference for families with significant estates, where the cost of federal estate taxes could otherwise be devastating. Another area where a living trust can be helpful is preserving the step-up in basis for your heirs. When you pass away,

Assets held in a living trust are eligible for a step-up in basis. This means that the value of the asset is adjusted to its fair market value on the date of your death, which can significantly reduce the capital gains taxes your beneficiaries might owe if they decide to sell the asset. For example, if you bought a home for $200,000 and today, or on the date you die, it’s worth $1 million,

Ted (04:48.333)

Your heirs could sell the home for $1 million without paying any capital gains taxes on the $800,000 gain. This not only ensures your heirs benefit from your property’s full value, but also eliminates a significant tax burden. Living trusts can also provide state-specific tax benefits, particularly in states with their own estate tax thresholds, which are often much lower than the federal exemption.

Now, for instance, Ohio does not currently impose a state-to-state tax, but for families with significant assets, a living trust can still play a crucial role in minimizing probate costs and ensuring a smooth transfer of wealth. By avoiding probate, you can reduce administrative fees and protect your estate’s privacy, keeping more of your assets available for your heirs. This added layer of protection and efficiency is often underestimated.

but can be incredibly valuable. Finally, a living trust can be invaluable for advanced strategies, such as creating generations-giving trusts or special needs trusts. These provisions help your family avoid unnecessary transfer taxes while ensuring that your loved ones, especially children or grandchildren with special needs, get cared for without losing eligibility for government benefits.

For families with unique circumstances, these trusts can provide peace of mind and a greater degree of financial security. Let’s bring this to life with a couple of examples that show how a living trust can make a difference when it comes to taxes. Examples like these help illustrate complex concepts, making it easier to see how the strategies we’ve discussed can work in real life situations. Imagine a couple, John and Mary.

who have a combined estate worth, let’s say, $30 million. Without proper planning, their estate could be subject to federal estate taxes if it exceeds the current exemption limit. However, by including provisions like a marital trust, and a bypass trust, in their revocable living trust, they can effectively double their federal estate tax exemption. This strategy allows them to shield up to nearly $28 million from federal estate taxes.

Ted (07:15.117)

potentially saving their family millions of dollars. For a family like John and Mary’s, this proactive planning ensures their wealth is preserved and passed on according to their wishes. Now consider another example. Sarah owns a home she bought for, let’s say, $200,000 that is now worth $1 million. This is where the step up in basis becomes crucial. When Sarah passes away, the IRS will adjust the home’s taxable value

to its fair market value of $1 million at the time of her death. This adjustment means that if her children sell the home for $1 million, they won’t owe any capital gain taxes on the $800,000 increase in value, saving them a substantial tax bill. By placing the home in a living trust, Sarah ensures her children will benefit from the step-up in basis without facing the headache of probing, which often involves

lengthy court proceedings, administrative costs, and delays in distributing assets. This is a powerful example of how proper estate planning can save families from significant financial stress. Finally, let’s talk about remarriage protection. These days, many surviving spouses decide to remarry after the first spouse passes away. Without proper planning, the surviving spouse may give all of the family’s assets to a new spouse.

To prevent this, we draft remarriage protection provisions into the Revocable Living Trust. These provisions are designed to keep your assets within your family and prevent a new spouse from disinheriting your children and grandchildren. While Ohio does not currently impose a state-of-state tax, avoiding probate is particularly important for Ohio residents due to the time-consuming and public nature of the process.

A living trust can help ensure your estate transitions smoothly and privately to your heirs, sparing them unnecessary costs and delays. A properly structured living trust can help minimize probate costs, streamline asset transfers, and protect your estate’s privacy. Avoiding probate is particularly beneficial as it reduces administrative fees, court involvement, and delays, ensuring your heirs receive their inheritance smoothly and efficiently.

Ted (09:39.255)

By leveraging a living trust, Ohio families can protect their assets and simplify the estate planning process. These examples highlight how a living trust can be a key tool for minimizing taxes and ensuring your family’s financial security. While the tax savings may not be immediate, the long-term benefits for your heirs can be substantial. A living trust, when combined with other estate planning tools, can form the cornerstone of a well-rounded strategy.

So can a living trust lower your taxes? The answer is both yes and no. It won’t directly reduce your income taxes or immediately eliminate capital gains taxes. A well-structured living trust can be a powerful tool for minimizing estate taxes, preserving the step up in basis, and ensuring your family keeps more of your hard-earned wealth. It’s all about understanding how to use the trust strategically within your broader estate plan.

Don’t forget to like this video and subscribe to the channel, your go-to source for practical estate planning advice. By subscribing, you’ll gain access to expert insights and actionable tips that make navigating your estate plan easier and more effective. If you’re ready to dive deeper into the world of trusts, check out our video, Trust 101, Understanding the Basics of the Four Essential Trusts We Create for Our Clients. In it, we break down the fundamental types of trusts

and how they can work for your unique needs. Click here to watch and take the next step in mastering your estate plan.