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Most Frequently Asked Questions
1. What is estate planning?
2. Given this definition, would you say that having a Will is the best way to accomplish this objective?
3. What is Probate?
4. What are some of the common ways to avoid going through probate?
5. What is a living trust?
6. Do I lose control of the assets that I put into my living trust?
7. If I have a will, why would I want a trust?
8. Will my children be better off if I just give them all of my property now?
9. Can a living trust save estate taxes?
10. How does a living trust work?
11. Since many married couples hold title to their assets in joint tenancy, what does joint tenancy ownership mean in this regard?
12. Is joint tenancy ownership the best way for a couple to hold title?
13. Isn't joint tenancy ownership and community property ownership one and the same?
14. what is a revocable living trust? What is the difference between a trust written in your Will and a living trust?
15.
What are the primary advantages of using a revocable living trust?
16. What disadvantages are there to using a revocable living trust?
17. Briefly, what is a so-called "dynasty" or "generation skipping trust"?
- What is estate planning?
Estate planning is the procedure by which an individual or couple make legal arrangements to take care of their assets, families and their own personal needs in the event of death, incompetence or other major disability. It is not simply the process of filling out a form or two. Estate planning involves:
- Determining who will manage your assets if you are unable to do so;
- Planning who will assist with your health care decisions if you can no longer care for yourself
- Deciding when your assets are to be transferred to others (during your life, at your death or sometime after your death)
- Specifying to whom your assets shall be transferred and in what manner.
Of course, one major goal is to transfer one's wealth at death to loved ones, friends or favorite charities with the least amount of taxes, the least amount of expense, with the least amount of aggravation and in the least amount of time.
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- Given this definition, would you say that having a Will is the best way to accomplish this objective?
In most instances, the answer is a resounding "no!" because in most cases a Will is synonymous with the term Probate and does not assist you if you become incapacitated.
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- What is Probate?
Probate is the legal process through which the court makes sure that, when you die, your Will is legally valid, your debts are paid and your assets are distributed according to your desires expressed in your Will. If you don't have a Will, the probate laws of the State of California decide how your assets are distributed. A "probate" is the legal process of transferring one's property at death.
One problem is that the average probate takes anywhere from 8 months to 1½ years; and it is expensive. The lawyer's fees are based upon the gross value of the decedent's estate and not the time value of the services. For example, if the Decedent owned a home worth $500,000.00 which is subject to a $400,000.00 mortgage, its' net worth is $100,000.00 but the probate attorney's fees are based upon the $500,000.00 gross value. Accordingly, good sound estate planning dictates that you may want to avoid probate.
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- What are some of the common ways to avoid going through probate?
The key to avoiding probate is, in large part, the manner in which you register title to the assets you own. Each of the following ways of holding title will avoid probate:
- Joint tenancy ownership with another person (Examples: married couples; parent and child);
- As to securities and bank accounts, holding title in one's name "as Trustee for" another person (so called "Totten Trusts"), or "Pay on Demand" (POD) accounts;
- Beneficiary designations in life insurance policies, retirement plan benefits (including IRAs) and annuity policies;
- A revocable living trust.
Keep in mind, however, that in each of the first 3 mentioned alternatives, the property will have to be probated at the death of the surviving owner or beneficiary (unless such survivor take affirmative steps to again avoid probate after the first death). Only the use of a revocable living trust assures one of avoiding probate at the second death if there isn't time (such as in a common disaster) to update the survivor's estate plan.
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- What is a living trust?
A living trust (also known as an inter vivos trust, a revocable trust or a grantor trust) is a legal entity created for the benefit of the designated beneficiaries. In a way, it combines the function of a Will and a financial power of attorney into one document.
A trust also prevents the court from controlling your property if you become incapacitated.
For income tax purposes, the trust is ignored if you are the trustee. You continue to treat all income, losses, deductions as your own, as you would have if the Trust did not exist.
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- Do I lose control of the assets that I put into my living trust?
Absolutely not. You keep full control over your property. As the creator of your trust, you can do everything with your trust assets as you could do before you established the trust. Nothing changes except the title by which the assets are held. Usually, the grantor is the trustee of his or her own trust.
When you establish a Living Trust, you transfer all of your property from your name into the name of the trustee of your trust. For example, instead of "Ward and June Cleaver, a husband and wife as joint tenants" your house would be transferred to "Ward and June Cleaver, Trustees under the Cleaver Living Trust, dated February 30, 1993" Even if you appoint someone else as trustee, you have the power to change the trustee, terminate the trust, or make any other changes that you want. You remain in control as long as you are alive and capable of making your own decisions. Remember that nothing actually changes except the name on the titles to property and accounts.
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- If I have a will, why would I want a trust?
A will is probably not the best way to plan your estate. A will does not avoid probate. A will cannot save any estate taxes. A will only takes affect after your death. A will does not afford you any protection in the event you become physically or mentally incapacitated. A will cannot protect you from ending up as the subject of a conservatorship under the control of the probate court before your death.
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- Will my children be better off if I just give them all of my property now?
They may be worse off if you give them everything during your lifetime. They may have to pay increased taxes and/or capitol gains taxes.
By giving substantial gifts, you may be disqualified from receiving Medi-Cal and/or SSI (Supplemental Security Income) benefits for a substantial period of time.
If circumstances change, you might decide you want your property back and it may be too late to do that.
Under some circumstances, gifting can be a very good way to reduce estate taxes if you can afford to give away the asset. However, it can be extremely complicated. To divest significant amounts of property requires the assistance of an experienced professional to insure that it is done properly and to avoid future problems. NEVER GIVE AWAY AN ASSET YOU MAY NEED.
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- Can a living trust save estate taxes?
Absolutely. A living trust can save substantial amounts of estate taxes if the trust is specifically drafted for that purpose.
If the net value of your estate is more than $2,000,000 at your death, a federal estate tax return must be filed. The starting rate of estate tax is 45%. But, if you are married, and if you have assets valued of $4 million or more, an "A-B" living trust can save your beneficiaries over $200,000 in estate taxes and several thousand dollars in probate costs. Some tax planning features may be included in a will, but a will is subject to probate.
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- How does a living trust work?
When you establish your trust, you become the Grantor (sometimes called the Trustor or Settlor) the person who creates the trust and whose property is put into the trust. If you are married and create the trust with your spouse, you both become Co-Grantors (unless you each become Grantors of your own separate trusts). Only the Grantor(s) can make changes to the terms of the trust - that is how you keep control.
The person who administers the trust is the Trustee. You can be your own trustee or appoint anyone you want to be the trustee. Your trustee can be a friend, relative, accountant, attorney or professional trustee (bank or trust company). You can appoint co-trustees to administer your trust together if you wish. The trustee will have whatever powers are given in the trust document. The list of powers is usually a long one allowing for most any eventuality. Basically, a trustee is given the powers to do anything with the trust assets that you can do with your own property (buy, sell, lease, borrow, lend, etc.).
As a trust continues to operate after your death, your trust document will name your choice of successor trustee(s) to administer the trust after your death. When you die, the trustee will either distribute your assets or hold assets in trust for your beneficiaries as you have directed in the trust. The trustee will also file tax returns and pay any taxes from the assets of the trust. If your trust includes an ongoing business, the trustee may manage that business. Basically, the trustee will administer the trust and do the things according to your directions in the trust document.
At your death your trust becomes irrevocable. This means that until the purposes of the trust have all been completed or the trust becomes insolvent, no substantial changes can be made to the trust and the trust will continue to operate.
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- Since many married couples hold title to their assets in joint tenancy, what does joint tenancy ownership mean in this regard?
Joint tenancy ownership is a contractual arrangement between the owners that the surviving joint tenant will receive full ownership of the jointly held property if neither joint tenant unilaterally terminates or breaks the joint tenancy prior to the first joint tenant's death.
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- Is joint tenancy ownership the best way for a couple to hold title?
Joint tenancy is not the best way to hold title. Adverse death taxes and income taxes result unless (i) the couple's net worth is less than $1,500,000.00 and there is no likelihood it will ever exceed that amount; and (ii) none of the assets owned by the couple have materially increased in value since its' purchase; that is, joint tenancy ownership is the worst possible way of taking title if tax planning is a material element of the estate plan. If tax savings is a material factor, title should be in community property and not in joint tenancy.
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- Isn't joint tenancy ownership and community property ownership one and the same?
No! There are many important differences.One difference is that community property title has an income tax advantage over joint tenancy title on appreciated assets when the first spouse dies. The surviving spouse is entitled to a "STEP UP IN COST BASIS" to the market value of both the deceased spouse's and the surviving spouse's 1/2 interest in the property even though the surviving spouse is still alive. If tile is left in joint ownership, only the deceased spouse's 1/2 interest gets a stepped up basis.
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- This position poses a number of questions, including:
First, what is a revocable living trust? What is the difference between a trust written in your Will and a living trust?
A trust created under one's Will only becomes operational at such person's death; it is called a "testamentary trust". A living Trust is a written agreement that becomes operational while both spouse are still living instead of becoming operational only after the death of one of the spouses [see EXHIBITS "A" and "B"]. The trust is the creation of an artificial third person (much like creating a corporation) to hold, manage and distribute one's wealth in accordance with the written instructions set forth in the trust agreement.
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- What are the primary advantages of using a revocable living trust?
- Estate tax savings [see EXHIBITS "C" and "D"]
- Probate avoidance (at both deaths)
- Conservatorship avoidance
- Controlling disposition (at 2nd death) to children of marriage
- Management Control over trust assets
- Privacy
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- What disadvantages are there to using a revocable living trust?
- The initial cost of setting up the estate plan
- The aggravation of having to change title to one's holdings to their trust
- The formality involved with third parties in having to provide them with a copy of the trust agreement and delays caused in their accepting the acts of the Trustee.
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- Briefly, what is a so-called "dynasty" or "generation skipping trust"?
There is a federal law that went into effect in 1987 that, in the simplest of terms, both limits and permits one to leave up to $1,000,000 of their net worth to their grandchildren or other more remote generation family members without incurring a second death tax when the children ultimately die. For married couples, the exemption would be $2,000,000. Individuals with that kind of wealth should consider a more sophisticated version of the living trust to not only achieve the basic savings discussed today but to also take advantage of this new law. The use of this device could reduce the death taxes that would otherwise be incurred by as much as 55%.
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