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Revocable Living Trusts

A Revocable Living Trust is a valuable estate planning document that is commonly used by estate planning attorneys in Oregon. A well-drafted and properly funded Revocable Living Trust offers many benefits beyond those of a simple will. Meeting with an estate planning attorney to discuss whether a trust should be incorporated into your estate plan is one most important thing you can do to ensure that your property passes to your loved ones in the way you desire, while also avoiding the expense of probate and potential estate taxes. Call 503-990-6641 for a FREE consultation or fill out the contact form to meet and discuss your questions with an estate planning attorney in Salem, Oregon.

What is a trust?

A Trust is a fiduciary arrangement between the “Settlor” (the person who establishes the trust) and the “Trustee” (a trusted individual) who holds trust assets for the use and benefit of the named beneficiaries. A trust can be arranged in many different ways and allows for greater control over exactly who, how, and when assets will pass to the beneficiaries.

What are the benefits of trusts?

A trust is not always advisable in every situation. A simple will may be all you need to get your estate plan in order. However, trusts are commonly used by estate planning attorneys in Oregon because of the many uses and benefits they provide, including the following:

  • Greater flexibility and control over trust distribution to minor children and other beneficiaries;
  • Probate avoidance;
  • Protection for children and spouses of second marriages;
  • Tax-saving provisions and arrangements (Bypass Trusts, QTIP, and ILIT);
  • Protection for individuals with special needs (Special Needs Trusts);
  • Planning for incapacity; and
  • Ease of administration, and potential cost and time savings.

How does a Revocable Living Trust work?

Generally, a Revocable Living Trust is arranged so that during your life you act as both the settlor and the trustee of the trust. This allows you full control over your assets during your life, and in the event that you become unable to manage your financial affairs, your successor trustee will take control and manage your affairs as specified in the trust agreement.

Upon your death the trust becomes irrevocable, at which point your successor trustee will manage the assets held in trust and distribute those assets to the named beneficiaries according to the provisions and direction provided in the trust agreement. Generally, all of the trust administration can be done without court supervision and avoids the cost and hassle of probate.

Oregon estate taxes and tax planning though the use of trusts.

In Oregon, an estate is subject to Oregon estate taxes if the total gross estate exceeds $1,000,000, which is significantly less than the federal exemption amount of $5,450,000 (current rate as of 2016). The Oregon estate tax rate starts at 10% and can be as high as 16% of the value of the estate exceeding $1,000,000. By itself, a revocable living trust does not avoid estate taxes. However, a trust can be drafted to include tax-saving provisions.

How a Bypass Trust works?

For married couples whose estates exceed $1,000,000, a “Bypass Trust”, also known as an “AB Trust” or “Credit Shelter Trust”, can be an effective way of reducing estate tax liability that might otherwise arise. So how does it work?

Example 1

Suppose you and your spouse have a combined estate worth $1.5 million, and for whatever reason you did not establish a Trust while you were both alive. At the death of the first spouse, all $1.5 million passes estate tax free to the surviving spouse through the use of the unlimited marital deduction, which allows for the deceased spouse to pass an unlimited amount to the surviving spouse estate tax free. However, at the death of the surviving spouse any amount over $1 million (Oregon exclusion amount), will be subject to estate taxes. In this example $500,000 would be taxed at a rate of 10% ($1.5 million minus $1 million), costing your estate $50,000 in Oregon estate taxes.

Example 2

Now, suppose you and your spouse have a combined estate worth $1.5 million, but this time you met with an estate planning attorney in Oregon to establish a Bypass trust. The Bypass trust is set up so that at the death of the first spouse, the trust is divided into two trusts: A Bypass Trust and a Marital Trust. Sufficient assets (up to $1 million) are transferred to the Bypass Trust and the remaining $500,000 is transferred to the Marital Trust. The surviving spouse has full access to the assets in the marital trust. They can use the trust assets for their own benefit, distribute to any person, or even revoke it. The Bypass Trust, on the other hand, becomes irrevocable at the death of the first spouse. All the income held in this trust is distributed to the surviving spouse in periodic installments. The trust principle is made available to the surviving spouse for the limited purpose of provided for the surviving spouse’s “health, education, maintenance, and support.” Using this language, the Bypass trust assets are not considered part of the surviving spouse’s estate; instead they pass to the named beneficiaries free of estate taxes by using the first spouse to die’s $1 million exclusion. Once the surviving spouse dies the estate of that spouse is valued at just $500,000 instead of 1.5 million (see above example). Because the surviving spouse’s estate is now under the $1 million exclusion amount, it also passes to the beneficiaries free of estate taxes. By preserving both spouses’ $1 million exclusion amount, married couples can pass up to $2 million to their children and other beneficiaries without paying any Oregon estate taxes.