California Trust Lawyer
What is a living trust?
- What is a living trust? A revocable living trust is a written agreement designating someone (a trustee) to be responsible for managing your property. It’s called a living trust because it’s established while you’re alive. It’s “revocable” because, as long as you’re mentally competent, you can change or dissolve the trust at any time at your own discretion for any reason. Typically, a living trust becomes irrevocable (cannot be changed) when you die.
- Benefits: (1) A living trust will avoid probate for all assets that have been transferred to the trust. Probate is a costly, time-consuming process that many estates do not need. However, there are some cases in which having a living trust will not provide protection against probate because the estate has few probate assets and probate is not required. (2) A trust also can avoid a conservatorship, which is a court proceeding that is expensive, time-consuming and restrictive. Conservatorships are needed when an individual can no longer manage his or her financial affairs. A conservator is appointed by a court and given the power to manage the conservatee’s financial affairs, and also make decisions concerning the conservatee’s living arrangements. A properly prepared trust can provide a successor trustee who will manage the trust for the benefit of the trustor, sometimes avoiding the need for a conservatorship. (3) For married couples with estates subject to the federal estate tax, a living trust can reduce or eliminate federal estate taxes by setting up an Exemption Trust. The trust can also include a disclaimer trust, intended to reduce or eliminate federal estate taxes.
- Disadvantages: (1) A living trust costs more than just having a will. (2) Transferring assets to the trust involves costs and paperwork not required for less elaborate estate plans. (3) Administration of an Exemption Trust can involve additional effort for the surviving spouse.
- How set up and fund a trust: A trust document is prepared that usually names the trustors (the persons who are setting up the trust) as the trustees of the trust. The trustees are responsible for managing the trust and its assets. The successor trustee(s) will take over management of the trust after the death, resignation, or incompetency of the original trustee(s). The trust also provides for distribution of the estates of the trustors after the deaths of both trustors. Depending on the size of the estate, the trust might also include provisions that will reduce or eliminate federal estate taxes. After the trust is signed, the trustors transfer their assets to the trust. If this is not done, additional legal work, possibly including a probate of these assets, will be required after the deaths of the trustors. (Probate Code Section 15200-15212)
- Benefits: An exempt trust is used to reduce tax liability for gifts given, especially upon death. An exempt trust will place the assets of a married couple into a trust, or in the name of separate organization that has been created. The trust will then hold the assets until one of the spouses dies; when the second spouse then goes to claim the assets, he or she will already have access to them through the trust, and will not be considered for tax purposes as having inherited the assets or as having had them transferred through the inheritance process. This method helps reduce or eliminate the tax liability of the surviving spouse. The second spouse will have access to the principal balance, which will allow him or her to continue to live comfortably, without having to pay a large chunk of the inherited money to the government or other taxation office.
Questions About Estate Planning
- What is estate planning? Estate planning is the process of anticipating and arranging for the disposal of an estate. Estate planning typically attempts to eliminate uncertainties over the administration of a probate and maximize the value of the estate by reducing taxes and other expenses. Guardians are often designated for minor children and beneficiaries in incapacity.
- Benefits:A charitable trust lets you donate generously to charity, and it gives you and your heirs a big tax break. First, you can take an income tax deduction; spread over five years, for the value of your gift to the charity. Second, when the trust property eventually goes to the charity outright (at your death or the end of the payment period you specified), it’s no longer in your estate — so it isn’t subject to federal estate tax. Third, with a charitable trust you can turn appreciated property (property that has gone up significantly in value since you acquired it) into cash without paying capital gains tax on the profit.
- Charitable trusts require that that you give up legal control of your property, and charitable trusts are irrevocable — once the trust becomes operational, you cannot change your mind and regain legal control of the trust property. The most common type of charitable trust is called a charitable remainder trust. First, you set up a trust and transfer to it the property you want to donate to a charity. The charity must be approved by the IRS, which usually means it has tax-exempt status under the Internal Revenue Code. The charity serves as trustee of the trust, and manages or invests the property so it will produce income for you. The charity pays you (or someone you name) a portion of the income generated by the trust property for a certain number of years, or for your whole life — you specify the payment period in the trust document. Then, at your death or the end of the period you set, the property goes to the charity.
- Furthermore, when you set up a charitable remainder trust, there are two basic ways to structure the payments you will receive. First, You can receive a fixed dollar amount (an annuity) each year. That way, if the trust has lower-than-expected income, you still receive the same annual income. Once you set the amount and the trust is operational, you can’t change it. Second, It’s common to set your annual payment as a percentage of the value of the current worth of the trust property. Because you receive a percentage, not a flat dollar amount, if inflation (or wise investment) pushes up the dollar value of the assets, your payments go up accordingly. Under IRS rules, you must receive at least 5% of the value of the trust each year.
- Benefits:When you hold money in an FDIC insured account; you won’t lose your money if the bank fails.
- FDIC insurance applies to all deposits at covered banks this includes: Checking accounts, Savings accounts, CDs, Money market accounts (but not money market funds). FDIC insurance does not cover Safety deposit box contents, Investments such as mutual funds or stocks, and Insurance products such as annuities. Credit unions are not covered by FDIC insurance instead they have NCUSIF protection. FDIC insurance does not protect you against identity theft or unauthorized use of your bank account. FDIC insurance is not unlimited. If you have too much money in the bank you may be leaving yourself open to risk. The basic FDIC insurance limits are: $100,000 per depositor and $250,000 in certain retirement accounts per depositor. These limits are separate for each bank that you have accounts at. Note that you can have more than $100,000 of coverage at one bank if the money is spread among various owners or ‘registrations’. Furthermore, banks are required to meet certain standards to qualify for FDIC coverage.
Life Insurance Trusts:
- Benefit: The main goal of a life insurance trust is to reduce or eliminate estate taxes.
- How to create a Life Insurance Trust: First, you create an irrevocable trust, naming someone else as trustee. Then you transfer the policy into the trust and the trust becomes owner of the policy. You will no longer have any control over the policy, but through the terms of the trust you can determine who will have control, how premiums will be paid, who will benefit from the trust, and how payments should be made to the beneficiary or beneficiaries.
- Three important requirements: (1) The trust must be irrevocable (2) You cannot be the trustee of the trust (3) The trust must exist for at least three years before your death
- Benefit:A pet trust is a legal arrangement to provide care for a pet after its owner dies. (California Probate Code section 15212 was revised in 2009 and authorizes trusts for pets.)
- A pet trust falls under trust law and is one option for pet owners. Options include honorary trusts, provisions in a will and traditional legal trusts. Pet trusts stipulate that in the event of a grantor’s disability or death a trustee will hold property (cash, for example) “in trust” for the benefit of the grantor’s pets. The “grantor” (also called a settlor or trustor in some states) is the person who creates the trust, which may take effect during a person’s lifetime or at death. A payment to a designated caregiver(s) will is made on a regular basis. Depending upon the state law, trusts usually continue for the life of the pet or 21 years, whichever occurs first. Some states allow a pet trust to continue for the life of the pet, without regard to a maximum duration of 21 years. This is particularly advantageous for companion animals that have longer life expectancies than cats and dogs, such as horses and parrots.
- Benefits:A type of trust that allows taxpayers who are not U.S. citizens to claim the marital deduction for estate-tax purposes. The marital deduction allows transfers of unlimited amounts of assets between spouses at death, but only if they are United States citizens. The result is that the surviving spouse does not have to pay any tax on the estate of the first spouse to die, provided the surviving spouse is a citizen of the United States. The marital deduction only postpones the federal estate tax on the estate, and, in some cases, may cost a married couple additional taxes if there are no other provisions to reduce estate taxes.
- The Problem for Non-Citizens: If a married couple has an estate that is greater than the $5 million estate tax exemption, and one or both of them are not citizens, they need a QDOT to avoid estate taxes on the death of the first spouse. For estates that are less than those amounts, no QDOT is needed because no federal estate tax will be due. However, for estates greater than those amounts, no marital deduction will be allowed if the surviving spouse is not a U.S. citizen and does not become a citizen by the time that the estate tax return is filed. After the death of the surviving spouse, the assets in the QDOT are subject to the estate tax as though they were included in the estate of the first spouse to die. These assets are not included in the surviving spouse’s estate. Income distributed from the QDOT to the surviving spouse is subject to income tax, but not estate tax. However, when principal is distributed from the QDT to the surviving spouse it is subject to estate tax, unless the distribution is made for hardship reasons
- Requirements for a QDT: To qualify as a QDT, a trust must meet the following requirements: (1) At least one trustee must be a U.S. bank. (2) No distribution can be made from the trust, except for income, unless the trustee who is the U.S. citizen or corporation has the right to withhold estate taxes from the distribution. (3) The trust must meet Treasury regulations regarding the collection of any tax. (4) The executor must elect on the estate tax return to treat the trust as a QDT.
- “QTIP” is short for “Qualified Terminable Interest Property.” In the U.S., each citizen is granted a credit against the gift and estate tax. When gifts and inheritances exceed the amount of this credit, a tax is imposed. For estate tax purposes, any property, which passes to a decedent’s surviving spouse, is not subject to the gift or estate tax; however, generally full ownership of this property must in fact pass to the surviving spouse. A QTIP Trust is an exception to this general rule. Under Section 2056 of the Internal Revenue Code, as long as the surviving spouse has a lifetime income interest in the property, the property is treated as passing to the surviving spouse. QTIP trusts are commonly used when a spouse has children from another marriage. The other spouse may wish to provide for this spouse, but nonetheless designate where the money will go after that spouse is deceased. A Q TIP trust allows this to be accomplished in a manner treated as a gift to a spouse.
Restatement of Trust:
- What is a restatement: The restatement is an amendment to the trust and it also revokes all previous amendments.
- Why would you use a restatement? Some trusts are substantially out-of-date, or have become irrelevant due to changes in the statutes or case law. Amending these trusts paragraph by paragraph could result in a very complicated amendment that is difficult for future trustees to understand. It is faster (and therefore cheaper) in many cases for a California trust lawyer to start over with a format that the lawyer knows is valid and applicable to the situation. The name of the trust, the trustees, and the date that the trust was established remain the same. Also, deeds, bank accounts, brokerage accounts, and other investments do not need to be changed if the title of the assets is already in the trust.
Special Needs Trust:
- Benefits: A special needs trust is created to ensure that beneficiaries who are disabled or mentally ill can enjoy the use of property which is intended to be held for their benefit. In addition to personal planning reasons for such a trust (the person may lack the mental capacity to handle their financial affairs) there may be fiscal advantages to the use of a trust. Such trusts may also avoid beneficiaries losing access to essential government benefits. Also, Third Party Special Needs Trust can own various assets that are used by the child, but due to the ownership by the trust, the assets are not counted as being owned by the child. The trust could also pay for services required by the beneficiary, such as telephone, education, car repairs, etc., without affecting the beneficiary’s eligibility for the government programs. The trustee, however, would not make cash payments to the child because the payments would be counted as income for the beneficiary and could result in reduction or loss of benefits. The trust could also own a home for the child, thereby reducing the child’s expenses for rent, although there may be some reduction in SSI benefits as a result.
- Problems with Special Needs Trusts: When the parents’ estate plan becomes irrevocable, usually through the deaths of the parents, the special needs trust also becomes irrevocable. If the beneficiary regains mental or physical capacity after that point, making changes to the trust or revoking it can be difficult, and will require court approval. Unless the beneficiary is severely disabled and has no hope of financial survival without the government programs, a special needs trust may not be the answer.
- After the death of the trustor (who is the person who created the trust), certain steps must be taken to comply with state law, to preserve the federal estate tax exclusion amount, and to change title to assets. This is called “trust administration,” and the complexity of the administration depends on the number and type of assets, their total value, and whether the trust includes tax-planning provisions. If a decedent had a properly drafted and funded trust, probate is generally not required. Unlike a will, a trust is a private document and need not be filed with the probate court. Nonetheless, the successor trustee must still take steps to administer the trust: Beneficiaries must be contacted and kept informed; the trust-maker’s assets gathered and invested; any debts paid; potential creditors notified; taxes filed and paid; assets and/or income distributed in conformity with trust provisions to beneficiaries, etc.
- Benefit: Disclaimer Trusts help to minimize or eliminate federal estate taxes for a married couple. After the death of the first spouse, the surviving spouse has the option of disclaiming all or part of the estate of the first spouse to die. The assets that are disclaimed are transferred to the Disclaimer Trust, and are not included in the estate of the surviving spouse when he or she dies. The disclaimer trust will probably have the same distribution plan as the living trust, but the couple can also specify a different distribution plan for the disclaimer trust.
- Disadvantages: The decision to disclaim must be made within nine months of the date of death, and the person making the disclaimer cannot have received any benefits from the asset being disclaimed. If the surviving spouse does not remember this deadline, or does not understand it, the disclaimer trust won’t work, and, depending on the circumstances, the estate could face heavy taxes.