Where there’s a will, there’s a way (and probably a trust)

The Thinker by Rodin

Republicans are known to loathe paying taxes and don’t like subsidizing anyone’s freight. There is of course one prominent exception: family. Republicans believe that you can’t be too generous with your blood relations. Which is why they want to repeal the federal estate tax. They really resent the idea that some of their wealth should be taxed upon their death, depriving their heirs of their treasure. Their rationalization goes something like this: we already paid taxes during our life, so why should our estate pay it after death too? So they are hot on the task of abolishing the federal estate tax although presumably it will be somewhat behind other vital tasks like neutering the House Ethics Committee and killing Obamacare.

Unsurprisingly, the estate tax doesn’t affect most of us, as your estate has to be worth at least $5.4M before it pays any federal estate taxes. It won’t affect my wife and I, unless I get some extraordinary growth in our assets between now and death. Unsurprisingly, there are ways to avoid estate taxes, or at least pay less in these taxes. One primary way is to create a “trust”. Like a corporation, I’ve discovered a trust is a legal person-less fiction, which is funded by a sizeable portion of your assets. The general goal of a trust is to avoid estate taxes altogether, so your heirs or designees can get the money instead of greedy old Uncle Sam. Frankly, there is no point to having a trust otherwise. You’d just have your executor cut checks once your estate is out of probate.

Some states tax your estate too, states like Massachusetts where I live now. The commonwealth taxes estates worth more than $1M. In our case because we are married the limit is $2M. The estate tax levied ranges from between .8% and 16% of the amount over the limit, depending on your estate’s value. Since our state’s estate tax threshold is not indexed for inflation, unless we spend down our assets the estate will likely grow beyond $2M. Assuming our estate is worth $3M after our deaths, which is likely, Massachusetts will collect a cool $128,700.

This is what I learned from our new attorney, who is coaching us through the will and estate business because we are making new wills. We had wills when we lived in Virginia, but estate taxes were not a concern because of the federal cap and because Virginia doesn’t have an estate tax. For about $2000 extra though we could pay our attorney to create the legal fiction of a “trust”. Actually, we’re creating two trusts, one for each of us. Spending $2000 to save $128,700 is an easy decision to make, assuming you have $2000 lying around.

Likely most wealthy people create trusts, but I never figured we would need to create a trust. I guess in the eyes of the Commonwealth of Massachusetts, we are wealthy, just on the low side of the scale. All you need is an attorney, some spending money, the right legal language, and a host of signed and notarized documents. Then you can magically tax shelter gobs of money. When completed this month, we’ll have not just one but two trusts, one under my name and one under my wife’s name, with a roughly equal asset allocation between each. If she dies before me and I run out of money, I can take the money in that trust, and visa versa. This is better than an irrevocable trust, which means the money allocated to the trust can never be taken back.

Of course we will still have wills. By the time we are both dead our executor will control both trusts. And since each will directs the money the same way, those inheriting our estate will still get all the money intended for them. The only one that won’t will be the Commonwealth of Massachusetts. Sorry guys.

But not to worry, much of our money will go to charitable purposes. 65% will go to our daughter, 5% to a brother, 5% to a sister and 2.5% to a nephew, leaving 22.5% for charitable distribution. 5% goes to two animal shelters, 2.5% to Planned Parenthood, 2.5% to the Organization for Transformative Works and 2.5% to a local spouse abuse shelter. The remaining 10% will go to charities that will allow African Americans, Hispanics and women to fund their college educations. I am painfully aware of my white male privilege and I want to rectify that to some extent, at least posthumously. This could amount to $300,000 or so.

Still, I am aware that this is basically a dodge to escape the estate tax. I suspect though that we will give more of our estate to charitable causes than most of these moneyed Republicans will. Instead, their money will likely go to their pampered and spoiled offspring, who would be wealthy even if their parents paid an estate tax. This was the reason that trusts were created in the first place.

One way to rectify this inequity would be to tax inheritances, which only five states do. There is a federal inheritance tax, but the first $5,450,000 per person in gifts is excluded from taxation. Unsurprisingly, rich people find ways to pass more of their inheritance to their children through additional trusts.

I think the whole idea of creating trusts to dodge taxes for people related to you to be reprehensible. A more just society would not allow it. Trusts though are either/or, so you can either choose to have one or not, so we’ll be creating them with some reluctance. Our trusts will shelter our charitable contributions but also give a few of our relatives a windfall undiminished by estate taxes. C’est la vie.

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