IS YOUR TRUST A TICKING TIME BOMB?

When the question is whether or not a trust is up to date the answer can be complicated because so much of that depends on what has changed in your life recently.  However, a huge change in the law has left ticking time bombs in the hands of many unsuspecting people and I’ve decided that it is important enough to step outside of my usual format so you can be made aware of the problem:

WHAT IS A TRUST?

I’m sure I don’t have to tell you that trust is a beautiful, delicate thing.  It is built, brick by brick, interaction by interaction, into a foundation strong enough to hold higher levels of interactions in the future but, like a Jenga game, one poor decision can cause it all to come crashing down.

That’s trust and it is definitely related to what you are doing when you enter into a “trust agreement,”  but it isn’t the whole story.

But first, a little background:

WHAT DOES “PER STIRPES” MEAN AND WHY IS IT IN MY WILL?

You find the words “per stirpes” in a paragraph that goes something like this, “I leave my grand piano to my dearest cousin Herbie Jazz. If Herbie doesn’t survive me then to his decedents per stripes.”  “Per stirpes” is a Latin word meaning to take “by representation” or “by class.”

Basically, if the named beneficiary (Herbie) dies before the testator (the person who’s Will it is), then all of the living people who are closest in relationship to Herbie, basically his children, will take “by representation” what their deceased parent would have taken, and if any of those children pre-decease the testator, their children will take by representation what their deceased parent would have taken and so it goes down the line.

Will I have to pay estate tax?

No, unless you are rich and the definition of rich, my friends, has drastically changed recently. Now, don’t get me wrong, I feel rich because I have a wonderful family that loves me, but strictly in dollars and cents, I am far from rich and as of January 1st 2013, so are you. 

Rich people, you see, have to worry about things like estate taxes and thanks to the Obama crew and your friendly Congressional members any couple who jointly owns less than $10.5 million is now completely exempt from federal estate tax (and in California there is no estate tax so you’re basically home free). That is ten and a half million folks! 

Who has that kind of money? Well you may think your neighbor does— we all tend to over estimate what the Jones actually have in their bank account, but I’m here to tell you that unless you live in Beverly Hills your neighbor is exempt from estate tax. According to the U.S. Census, in 2010 the median net worth for American families was around $57 thousand dollars. That is all your assets minus all your debts. In California, it was around $60 grand. Now, you might argue, the country was in recession in 2010 and things are perking up. My real estate agent swears it! Well, in 1984, when just about everyone agrees that times were great the median net worth was only $73 thousand. 

(By the way, the infamous 1%ers didn’t see that level of drop between 1984 and 2010. See here for a great article on how much wealthier they are than you, if you’re in the mood to get depressed or motivated for a revolution).

So maybe your neighbor is a little above the median. He drives a Lexus for goodness sakes. It doesn’t matter. 99.7% of Americans will not have enough net assets to pay federal estate tax. So the bad news? You’re not rich. The good news? Unless you live in one of the few states that has a state estate tax, that is one tax you don’t need to worry about! 

If you want to do more research on net wealth start at www.census.gov or read a great article on American wealth from that site here.