Don't Leave a Mess for Your Family

We all want to make things as easy and inexpensive as possible for our spouse and children when we're gone. But often, the failure to do basic estate planning creates immense headaches, costs, and stress for loved ones.

If you pass away owning your home in just your individual name, what happens? Your home has to go through the costly, public, and time-consuming probate process before it can be distributed to your heirs. That is because, absent something else, your family does not have the legal authority to sign the purchase agreement and deed to sell the home or any other assets you owned in your own name at the time of your passing. Therefore, they need to go to the probate court to get the legal authority to transfer ownership.

Probate ties up the property for 6-18 months on average and can last years if there are any disputes or complications. Your family has zero control and must play by the court's schedule.

All communications, documents, and proceedings are open public record for anyone to see. Total costs generally eat up 3-8% or more of the entire estate's value in attorneys' fees, court costs, appraiser fees, and other expenses. In addition, your family will have to maintain the home and pay real estate taxes, and any mortgage, while working through probate.

And, even if you have a will in place, your family will still need to go through probate. In fact, a common misconception people have is that a will avoids probate. It doesn’t. A will is a set of written instructions to the probate court wherein you nominate someone to be in charge of probate and set out your instructions for who you want to inherit everything.

And in many states like Minnesota, if your total estate exceeds a certain value threshold (currently $3 million in MN) your kids could owe heavy state estate taxes simply for inheriting your home and assets.

The Smart Alternative to Avoid Probate & Estate Taxes

The good news is that with some basic estate planning utilizing a revocable living trust, you can completely avoid the probate nightmare for your family when passing on your home and other assets.

A revocable trust is a legal entity you create during your lifetime and then transfer ownership of your home, bank accounts, investments, and other properties into the trust's name. You still maintain complete control over all the assets and can revise the trust terms anytime you wish. 

But when you pass away, the revocable trust becomes irrevocable. Your named successor trustee (such as an adult child or trust company) takes over management and distribution of the trust assets per your instructions - all privately and outside of the probate court system. 

Your trustee can immediately transfer your home and assets to your beneficiaries without any court involvement, lengthy waiting periods, or excessive fees and costs. Assets are distributed quickly, efficiently, and according to your specific wishes laid out in the trust.

Maximizing Estate Tax Savings with Trust Planning

But avoiding probate is just one of the benefits of utilizing a revocable living trust and additional trust planning strategies. Properly structured trusts also allow you to minimize or eliminate estate taxes to preserve more of your wealth for your family.

Here's why that matters: In 2023, the federal estate tax exemption is $12.92 million per individual. Any total estate value above that exemption amount is subject to a hefty 40% tax rate before assets can pass to your beneficiaries.

Many states also have their own separate estate or inheritance taxes with much lower exemption thresholds. In Minnesota, any estate over $3 million may owe state estate tax up to 16%.

So for a married couple in Minnesota with a $1 million home plus investment accounts and other assets totaling over $3 million, their children could face a estate tax bill in the tens or even hundreds of thousands of dollars simply for inheriting mom and dad's house and life savings.

Utilizing an AB Trust and other advanced trust strategies allows couples to double their effective exemption amount and defer estate taxes until after both spouses have passed away. Irrevocable trusts like Intentionally Defective Irrevocable Trusts (IDITs) and Qualified Personal Residence Trusts (QPRTs) can also be employed to remove future appreciation on assets from your taxable estate.

Stepped-Up Basis & Capital Gains When Selling

Regardless of using a trust or not, your children or other heirs receive a full "stepped-up basis" on any inherited assets, including the home. The stepped-up basis is the property's fair market value on the date you pass away.

This is a major tax advantage over receiving property as a gift during your lifetime. With an inherited home, capital gains taxes only apply if/when your heirs sell the property for more than the stepped-up basis value versus being taxed on the lower original cost basis from decades ago.

For example, if you purchased your home 40 years ago for $100,000 and it's worth $800,000 when you die and leave it to your kids, they inherit it at the $800,000 stepped up basis. They can then turn around and sell it for $800,000 with no capital gains tax versus potentially owing tax on $700,000 of gains if you had gifted it to them while alive.

However, it's important to note that capitals gains taxes may still apply if your heirs don't sell the home in a timely manner after inheriting it and the value continues appreciating before they sell.

Easy Inheritance & Asset Protection for Your Kids

In addition to probate avoidance and potential tax savings, holding your home in a properly structured trust provides your children with an easy, hassle-free inheritance while protecting their future investment.

When you leave your home and assets to your kids through a will, those inheritances are considered "non-exempt" resources owned outright by your children. This exposure leaves their inheritances vulnerable to being seized by future creditors, lawsuits, divorces, bankruptcies and other claims against your heirs down the road.

But assets inherited through a properly prepared trust with lifetime asset protection provisions for your children maintain a level of protection from your beneficiaries' outside creditors. The trust structure, along with specific provisions your estate planner can include, creates a layer of insulation around inherited assets.

Your children still get to use and benefit from the assets per your wishes. But their inheritance is shielded from being taken in a divorce, from lawsuits against them, and from their own creditors or bankruptcies. It can also be designed to protect the assets from being taxed in their own estates when they pass away.

Effortless Management & Tax-Smart Distribution

Having your home and other assets owned inside a revocable trust also provides a simpler, streamlined process for managing and distributing the assets per your customized wishes, both during your lifetime and after you're gone.

While you're still alive and well, you can act as your own trustee and retain full control over the management and use of all trust assets, making updates whenever needed.

If you were to become incapacitated, your handpicked successor trustee can take over seamless management of the trust assets according to your instructions - avoiding any need for court intervention or your family having to pursue guardianship over your assets.

And after you pass away, your trustee can pay off any debts of the trust, evaluate the most tax-efficient timing and manner for distributing assets to beneficiaries, and ensure the eventual distribution follows your precise specifications for each heir.

For example, your trust may call for keeping assets in further trust for certain beneficiaries rather than giving them an outright lump sum inheritance which could be quickly squandered. Or it could facilitate a stream of income payments to beneficiaries instead of one large sum subject to higher tax rates that year.

Secure Your Family's Future Today

Putting your home and other assets into a properly designed revocable living trust can provide your family with an array of important benefits simply not available when you own property in your individual name or pass it through a basic will:

- Avoids the hassles, delays, and costs of probate court 

- Maximizes estate tax savings for married couples 

- Shields inheritances from beneficiaries' future creditors 

- Allows for effortless, unified management when needed

- Provides customized control over asset distribution 

- Results in a straightforward, easy inheritance for your heirs

Of course, every family's situation is unique. An experienced estate planning attorney is vital to carefully craft and integrate the right trust structures and estate plan customized for your specific goals, assets, and family dynamics.

With decades of experience providing sophisticated yet personalized planning for clients across Minnesota and Florida, our firm can guide you through the process and create a tailored solution. One aimed at efficiently passing on your home, investments, and hard-earned wealth to your loved ones while protecting your assets for successive generations.

If you're ready to secure your family's future or simply have questions about putting your home into a trust, call our Florida office at 941-909-4644 or our Minnesota office at 763-420-5087 today to schedule a consultation. Or, you can fill out the contact form on this page and a member of our team will reach out to you to schedule your consultation.

Or, if you are not yet ready to schedule a consultation, and want some more information, Click Here to sign up for my online masterclass where I revea insider strategies for your will, trust, powers of attorney, health care documents, how to minimize taxes and even protect the money you leave for your children and grandchildren from divorce, poor money management, and lawsuits.

Chuck Roulet
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Nationally Recognized Estate Planning Attorney, Author, and Speaker