Tax Implications of a Living Trust.

All things involving taxes and your Living Trust. A rambling of thoughts...

1. A Living Trust will not protect your assets from creditors. So if you owe the IRS money, they can attach assets in your Living Trust.
   
2. California does not have inheritance tax so your beneficiaries who inherit from your Living Trust will owe no taxes.
   
3. If your total estate is less than the Federal Tax Exemption, which is at $2million for 2006, no federal estate taxes will be owed by your estate after you pass away. So, in other words, your estate may very well pass tax free to your beneficiaries.
   
4. Your Living Trust beneficiaries will also receive the new stepped-up basis of market value of any real property and stocks in your Living Trust. This means that the real property and stocks will be valued at the day you pass away rather than the day you acquired them for capital gain taxes.
   
5. If your Living Trust contains real property in which you are giving to your children, they will have the same property tax basis as you so long as they apply for the parent-to-child exclusion for reassessment in property taxes. This must be done within 3 years of the transfer from the Living Trust to your child. This means that your children will not face an increase in property taxes on your property when they inherit it.

Cross-References:

Read my post on March 11 about Living Trusts and Asset Protection.

Read my post on February 15 for a definition of real property.

Read my post on January 22 for an explanation of stepped up basis.