Q. Since Virginia has no death tax, and with the “federal exemption” for the death tax beginning in 2016 being $5.45 million per person with portability between spouses, why does a real estate agent, or anyone else for that matter, with less than this size of an estate need to consider estate planning?
A: The subject of estate planning includes three main topics: (1) The passage of ownership of one’s property at his or her death through the use of joint ownership techniques, a will, a trust, a deed or some other entity; includes business succession planning; (2) asset protection issues and (3) the avoidance (not evasion) of applicable death or inheritance taxes.

Q. I heard that a transfer to my spouse is tax free during my lifetime and at death?
A: This is called the “marital deduction.” It is entirely tax-free if the donee spouse is a US citizen. If not, then only $148,000 of the transfer will be tax free using the “marital deduction.” Otherwise, a donor spouse must rely on the lifetime exemption that applies at the federal and state level.

Q. Is gifting to non-spouses during one’s lifetime free of taxation? 
A: There are four types of transfer that do not incur a gift tax: (1) the annual exclusion, which remains at $14,000 per donee per year, for which no gift tax is due and no gift tax return need be filed. A spouse can also use the spouse’s annual exclusion with the spouse’s consent and with the filing of a gift tax return; (2) the lifetime gift exemption of $5.45 million; (3) paying medical bills directly to the provider for someone else’s care; and (4) paying someone else’s education bills directly to the institution. 

Q. What are the key differences between a will and trust, and how is title passed into a trust? 
A: A will is a formal and witnessed document that is effective only upon death. It must be probated through the court, which process is a court-supervised transfer of title. Probate is public: a listing of the deceased’s assets, how they are accounted for and to whom they pass will be available to the public. 

A trust takes title by the transfer from a property owner into the trust. This can occur while the property owner is alive (a living trust), or the transfer can take place through a will into a trust at death (a testamentary trust). A trust created within a will must go through the probate process, while one made during a property owner’s lifetime passes title outside of the will and avoids probate. 

There are several ways to transfer property to a revocable living trust: 1)  use a deed from the property owner to the trust to transfer title to real estate; 2) put bank accounts in the name of the trustee, or 3) assignment of personal property into the trust.
At the death of the trust maker, the trust still owns the assets, and title is directed in accordance with the terms of the trust document. There is no probate needed to transfer title of assets held in trust. This privacy means that ex-spouses, creditors, neighbors and relatives cannot go to the courthouse to see what the deceased’s assets were and where they are going. 

Q. Will joint ownership with survivorship, or TOD, POD or TODD solve a lot of the transfer of title at death problems? 
A: Joint ownership with survivorship will solve some problems and create others. It will transfer ownership of the first to die to the survivor and hence avoid probate at that level. The survivor’s ownership will not pass by survivorship unless a new joint owner is named. Bank and financial accounts can use “transfer on death (TOD)” or “pay on death (POD).” For real estate, one may use its equivalent: the “transfer on death deed (TODD).” Only about half of the states have this deed form available.

“A revocable living trust offers no asset protection; the same is true for most, but not all, irrevocable trusts."

The problem created by joint ownership is that the survivor may add a new spouse to the deed, or sell the property and put the money into a property owned with a new spouse and with survivorship, so that the ultimate ownership will not pass to the original owner’s children as planned, but to strangers. This is known as the “unintended heir.”

With TODD, now available in Virginia and a number of other states, title may transfer by the deed. It states that on the property owner’s death, title passes automatically to the designated beneficiary without probate. Until the property owner dies, the named beneficiary will have no rights to the real estate, or to interfere with the owner’s use or enjoyment of the property, or to have a say in the financing of the real estate. Moreover, the beneficiary’s creditors cannot attach the property until title has passed at death. If a property owner simply added a child as a co-owner with survivorship, that child and his/her creditors could force a sale of the property during the property owner’s lifetime and could prevent sale, leasing or refinancing of the property.
 
Q. With no death tax in Virginia, why be concerned about death tax planning at the federal and state levels?
A: Although there is no death tax in Virginia, a number of states still have a death or inheritance tax that should be considered by owners of property in those states:  DC, MD, DE, NJ, CT, RI, MA, PA, NY, VT, NH, ME, TN, KY, IL, IA, MN, NE, OR, and WA. 

Q. If there is a death tax, is there something that can be done to avoid it? 
A: Yes, there are tax planning tools available. The planning techniques for federal taxation planning may be the same as those needed at the state level. Good planning should include an analysis of your assets and situation.

Q. Are there asset protection techniques?
A: If you have assets from which personal liability may arise, then that liability will attach to all of the assets that you own in your own name. If the liability will attach to a corporation or limited liability company, then only the assets inside those entities will be subject to the liability.

For example, let’s say your primary residence is in Virginia, but you own a residential rental house in your own name in DC. Upon death, title to the rental property passes in DC, and ancillary probate will be required in DC to pass title. Depending on its value, the property may be subject to DC’s death tax. Because it is in your individual name, you are exposed to personal liability for problems related to the conduct of that rental business.
 
If the ownership is in an entity, such as a corporation, then your liability will be limited. Because the ownership of a corporation is a stock certificate, that certificate is considered personal property. The passage of its ownership will be probated in your resident state of Virginia, and not in DC. If you have moved the ownership of the corporation into your revocable living trust, then you will avoid probate. 

Q. If I put my assets in a revocable living trust, will they be protected from my individual creditors?
A: No. Many people mistakenly think that by forming a living trust, revocable or irrevocable, those assets are protected from their creditors. A revocable living trust offers no asset protection; the same is true for most, but not all, irrevocable trusts. For asset protection, a statutory entity that gives that protection is required, such as a corporation, limited liability company, statutory business trust, or another limited liability entity. Asset protection planning is complex. 

Q. It is a recognized practice for a real estate broker to form a LLC or corporation to protect the assets that are held within that entity. What about protection from the agent’s personal creditors? Will this ownership of the LLC or a corporation protect those assets from the agent’s personal creditors in addition to the company’s creditors?
A: No. Whether it is a share in Microsoft or a share in your wholly owned corporation, the ownership interest may be subject to attachment by the personal creditors of the owner. This is different than liability for the creditors of the company. The stock of a corporation can be sold to pay off the shareholder’s personal creditors. The creditor can become the new owner of the corporation. LLC membership will be subject to what is called a “charging order” in Virginia. This offers some protection which is better than that for corporate stock and prevents the loss of ownership.
Estate planning is complex, and this article offers a simple overview. Realtors® should consult an estate planning professional who can address their specific needs.