Ethan R. Okura
Hawai‘i Herald Columnist
Before you put real estate into a revocable trust, you should consider your age, your health, whether you might refinance or sell your home someday, whether your death might result in an estate tax and whether you would rather have your property go to your children or other loved ones rather than to the government should you end up in a nursing home.
For Single People
Should you put your property into a revocable trust if you are unmarried (divorced, widowed, or never married)? If you are young and healthy and not worried about going into a nursing home for many years to come, then yes, you should put your home and other real estate into a revocable living trust. This will avoid probate when you die or allow your successor trustee to manage your assets for you if you become incapacitated.
If you are old enough to be concerned about nursing home costs but feel that you won’t need nursing home help for at least the next five years, and if you will not be selling your home, then you should consider putting your home into a special kind of irrevocable trust rather than a revocable trust. You can arrange to keep a long-term lease on the property at little to no cost. This will allow you to continue living in the home but will protect the home from nursing home costs. Other real estate should be put into a revocable trust if you want to keep full control and ownership of it. If you are willing to give it away to protect it from nursing home costs, you may transfer it to the irrevocable trust, or directly to loved ones.
When transferring property, you should generally not give away more than $6 million in assets during your lifetime without getting proper legal advice, as it could result in a gift or estate tax problem. The lifetime exemption from federal gift and estate tax in 2022 is $12,060,000! However, the federal exemption is scheduled to drop back down to approximately $6,200,000, in 2026. Hawai‘i’s exemption is locked in at $5,490,000 and doesn’t adjust for inflation. If your death is likely to trigger an estate tax, then you should consider giving away property at the rate of $16,000 per year to each person. This can be done by having your property appraised by an appraiser with experience in “fractional interest valuation discounts.” You would then give each child a small fraction of the property worth $12,000 each year. This gift can be made either directly to the child or to a special type of irrevocable trust called a “Crummey Trust.”
For Married People
If you are married, you would follow the same guidelines as unmarried person, except that a married person has four other factors to consider: estate tax reduction, divorce, stepped-up tax basis and protection from lawsuits. If, as a married couple, you feel that you might die with more assets than the amount exempt from estate taxes ($5.49 million), and if you are not ready or able to give away substantial assets now, then you should each have an A-B trust. As a general rule, you should put half of each property into each spouse’s trust to keep each spouse’s assets roughly equal.
Unfortunately, half of all marriages end in divorce. If you owned real estate (or other assets) before you were married and put half of it into your spouse’s trust during your marriage, your spouse will probably be able to take the half you gave him or her should your marriage end in divorce. If you keep the property in your own name or in your own trust, then if you divorce, the most you might have to give up is the increase in value of the property from the time of the marriage until the time of divorce. Think about how strong your marriage is before you transfer any property you owned before marriage.
When a person dies owning property in his or her name or in a revocable trust, that property gets a new tax basis equal to the value at date of death. For example, if you bought property for $100,000 many years ago and you die owning it when its value is $800,000 the person inheriting it can sell it for $800,000 after you die and pay no capital gains taxes. If you have a certain property that you will want to sell if your other spouse dies, you may want to consider putting that property into the trust of the one who is likely to die first. This same result can also be accomplished by using a carefully designed irrevocable trust instead, which is less common but can be highly effective.
If one spouse is concerned about the possibility of being sued, you may want to own real estate as tenants by the entirety, rather than putting it into a revocable trust. Alternatively, you could put the real estate into an irrevocable Domestic Asset Protection Trust, or into the revocable trust of the spouse less likely to be sued. On the other hand, if the concern is that a guest or tenant of your real estate might be the one to sue, then a limited liability company might be a better choice to hold your real estate.
These issues, and all the other aforementioned considerations, should be discussed with a knowledgeable estate-planning specialist before you put property into your trust.
© OKURA & ASSOCIATES, 2021
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Ethan R. Okura received his JD from Columbia University in 2002. He specializes in Estate Planning to protect assets from nursing-home costs, probate, estate taxes and creditors.
This column is for general information only and is not tax or legal advice. The facts of your case may change the advice given. Do not rely on the information in this column without consulting an estate-planning specialist.