A living trust can also be used to minimize estate taxes. In an unplanned estate, a couple with a net worth of $1,200,000 would commonly leave the entire estate to their surviving spouse. Doing this would maximize the eventual estate tax due when the surviving spouse died. At the death of the first spouse with a living trust, however, a Credit Bypass Trust could be created. Six hundred thousand dollars could be put into this bypass trust for the benefit of the surviving spouse. At the death of the surviving spouse, assets remaining in this bypass trust could go to the children with no estate taxes (under the $600,000 lifetime exemption).

In the above example, the $1,200,000 dollar estate would pass without estate taxes because of the Credit Bypass Trust. By using both unified credits through the Bypass Trust, this well planned estate saved over $200,000 in estate taxes! This does not mean that a will necessarily creates a taxable estate. In the above example, if the first spouse to die willed $600,000 in assets to his or her children (which is not commonly done when there is a surviving spouse), and the second spouse died with a $600,000 estate, there would be no estate taxes due. Also, a testamentary trust could be established in the will which could have the same benefit as the credit by pass trust created in the living trust. This is rare, however, because most people who are this sophisticated in their wills usually go into living trusts.

It must be emphasized that a living trust does not eliminate estate taxes. Any married couple with over $1.2 million in assets, or a single person with a net worth of over $600,000, will be subject to estate taxes with or without a living trust.

A good attorney should be consulted if you are considering a living trust. If you have a living trust, or are considering one, make sure that it is properly funded. Many people create living trusts and then forget to put their assets in the trust. You are wasting your time with the living trust if you and your attorney do not pay attention to this crucial detail.

Additional Information on Estate Planning:

Estate Planning Overview
Irrevocable Life Insurance Trusts (ILITS)
Using Ownership and Beneficiary Designations
How to Get Existing Policies Out of my Estate
Can the Three-Year Rule be Avoided?
Second to Die Life (Survivorship) Insurance
Gifts - Overview
Leveraging Your Gifting Program
Grandchildren
Generation Skipping
Living Trusts
Credit Bypass Trust
Charitable Remainder Trusts
Avoid Capital Gains Income for life

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