Len's Sonoma Valley office provides full service legal assistance in all aspects of estate planning and administration including preparation of comprehensive estate plans for large and small estates.
The Benefits of a Living Trust
What is a Trust?
A Trust is a planning technique that offers benefits to virtually all Californians. It is particularly appropriate for individuals who are older or who have substantial assets. If you own a home in California, a living trust makes sense for you.
In a very real sense, a Living Trust is a new being. It will hold your property while you are living, and it will continue in existence after your death.
Who Manages the Trust?
You do, or the person of your choice may do so. In creating a Living Trust, you do not give up management and control of your assets. The assets and income are used for your personal benefit, or for the benefit of any other person or persons you name as beneficiaries.
What are the Benefits of a Trust?
Avoid
Probate, Save Time and Money
Probate is a process whereby a court of law oversees the
distribution of an estate upon a person's death. It can
be very time-consuming -- taking up to two or three years
in many cases -- and expensive because of attorney and
other fees. For example, the probate costs for a $500,000
estate, which includes the value of a home, can be as
much as $25,000.
Avoid Conservatorship
A Living Trust is especially important for a person who
may lose capacity to make his own decisions. If no advance
planning is done, a conservatorship may be required. In
a conservatorship, a court appoints a person to make decisions
and act or the individual who is unable to manage his
personal or financial affairs.
Obtaining a conservatorship can be expensive, and there
is ongoing supervision by the court. While a conservatorship
can be healthy and protective in appropriate cases, it
can as readily be unnecessarily intrusive and costly.
A Living Trust can avoid the need for a conservatorship
in most cases. It can name someone to manage the trust
if and when the person can no longer do so.
In other words, you can create your own mechanism for
substituted control and management of your affairs without
intervention by any other person or the court. You choose
the person(s), and you can even include specific instructions
about how the assets are to be managed.
Privacy
While probate proceedings and records are open to the
public, and anyone can look at the details of your estate
and distribution plan, the terms of a trust are private.
"Test" a Trustee
If you like, you can name a person to manage the trust
while you have full capacity and let her (or him) manage
it for a test period, such as six months or a year. If
the person does a good job, you let her continue. If she
does not, you take over or replace her with another individual.
This is another illustration of how a Living Trust can
help you retain as much control as possible over your
assets, your personal security, and your future.
How Do You Create a Living Trust?
A Trust document -- such as the "John and Mary Smith Trust Agreement" -- is prepared. It specifies the beneficiaries of the trust, the managers of the trust, and numerous other things such as distribution of the assets upon the death of the first beneficiaries.
The Trust document is signed, and assets are transferred into the Trust. For example, the family home would be put into the name of "John and Mary Smith, Trustees for the John and Mary Smith Trust." Bank accounts and other assets would be similarly transferred.
Significantly, John and Mary Smith, as Trustees, can have the same amount of control over their money and other assets as they did without the Trust. The form of ownership changes, and John and Mary Smith will have specifically provided for their own and their family's future needs.
They will have retained control, preserved it in the event of incapacity, likely saved money, and avoided time-consuming inconveniences for their family.
Other Considerations:
It is emphasized that a Living Trust is a serious and comprehensive planning document. This summary is designed to acquaint you with many highlights of the Living Trust rather than be exhaustive. It does not, for example, explore tax and estate planning issues that are also important considerations when planning the provisions of a Living Trust.
What happens if you don't have a Trust?
Intestate
Succession:
California's laws of Intestate Succession is your "default"
estate plan. It's the law that says who gets what when
someone dies without a will. Here are a few examples of
how it works: Decedent was single with no children, in
order of priority:
Parents,
in equal shares
Brothers and Sisters, in equal shares. If a sibling died
first, leaving children, then those children will take
that sibling's share.
Grandparents, in equal shares, or their issue (aunts,
uncles, cousins, etc.)
Decedent was married with no children:
Spouse gets all community property and one-half of the
separate property.
The other half of the separate property passes to the
decedent's parents, brothers, sisters, etc. just as if
there was no surviving spouse.
Decedent was married with children:
Spouse gets all community property and either one-half
of the separate property (if there is only one child)
or one-third of the separate property (if there are two
or more children)
The children get the rest.
The idea behind all this is that our laws of intestate
succession are the legislature's best guess about what
most people would want to do with their assets when they
die. The State of California will not take everything
if you die without a will, unless it's Hamlet Act IV,
and there's essentially no one left alive in your family
to inherit your property. If that's the case, and there
is no one to inherit your property, only then will your
estate be turned over to the State of California.
New rights for registered domestic partners:
As
of July 1, 2003, the registered domestic partner of a
deceased person is entitled to essentially the same intestate
succession rights as a surviving spouse (either 1/3 or
1/2 of the deceased partner's separate property).
You MUST be domestic partners registered with the California
Secretary of State to qualify for a domestic partner's
succession rights. Local domestic partner registration
provided by some cities does not qualify. To register,
or or both partners must be age 62 or older, or the domestic
partnership must be a same-sex couple. The registration
form is available online with the California Secretary
of State.
Wills:
A will is, simply put, a letter to the judge saying what
you want done with your assets after your death. There
are two types of wills that are valid in California, attested
wills and holographic wills.
Attested
Wills:
Attested, or witnessed wills are valid in California if
they are signed before two disinterested witnesses who
will not inherit any portion of your estate after your
death. Witnesses must also be age 18 or older.
Holographic
Wills:
If you want, you can make your own simple holographic
(handwritten) will by writing out your wishes on a sheet
of paper. Your holographic will cannot be typed, and you
cannot have someone else write it out for you. It must
be written in your own hand. Then, all you have to do
is to sign and date it. Witnesses are not required, but
they never hurt. Here's an example of a holographic will:
I, John Smith, declare this to be my last will and testament. I am married to Mary Smith, and I have two children, Joe Smith and Marlene Brown. Upon my death, my estate shall go to my wife. If she dies before me, my estate will go to my children, in equal shares. I nominate my wife Mary Smith as executor of this will, to serve without bond. If she refuses or fails to serve as my executor, I appoint my daughter, Marlene Brown, as executor of this will, to serve without bond.
-s-
John Smith
August 15, 2005
If you write your own will, you are taking your estate into your own hands. Think of it as performing surgery on yourself. Do not do this unless you are absolutely sure you know what you are doing, and always with the understanding that you may be making mistakes that could result in your estate passing to someone other than who you want. Also, while valid in California, HOLOGRAPHIC WILLS ARE NOT LEGAL IN ALL STATES, SO CHECK TWICE BEFORE YOU DO ONE.
Joint
Tenancy, Life Tenancy, and Beneficiary Designations:
These fall under the category of "Poor Man's Probate
Avoidance". Your probate estate consists only of
your property titled solely in your own name, in a tenancy
in common, or titled as community property. Your other
assets, such as joint tenancy property, property held
in life tenancy, and accounts with "in trust for"
or other beneficiary designations, including IRA's and
insurance policies, will pass to your heirs outside of
your probate estate.
This works really well, and has the advantage that it costs nothing for you to set up, except maybe for a couple of deeds for your home. But before you go putting your children's names on your property, you should first consider the drawbacks. First, you can't take your children's names off of your property without their permission. Suppose you decide that your loving son is actually no good at all, and you decide to leave your home to your grandchildren instead. Well, if your son is on the deed to the home, you are going to have to convince him to sign a deed giving it back to you. Good luck.
Also, if your child goes bankrupt, or causes a major accident that his or her insurance does not cover, then it is possible that your child's creditors will come after your property. While you can prove that the property is really yours, so long as your child did not contribute to it, doing this may cost you money and will tie up your property while these difficulties are resolved.
Trusts:
Revocable Trusts, also known as "inter vivos trusts"
or "revocable living trusts", also work to avoid
probate. In a nutshell, they work because the creators,
or "settlers" of the trust transfer their property
to the trustees. Then, the trustees of the trust manage
the property for the benefit of the trust's beneficiaries.
Usually, the settlers are the initial trustees of the
trust. When the settler-trustees resign, pass away, or
become incapacitated, the successor trustees named within
the trust document take over and run things.
There are, in general, three types of trusts.
One-Settler
Trusts:
This is a trust made by just one person, as settler and
initial trustee. Upon the death of the settler, the successor
trustee pays the bills, does the taxes, and divides the
trust's assets in the manner the trust provides.
Two-Settler
Simple Trusts:
This trust is made usually by a husband and wife. When
one spouse dies, the entire trust continues in existence
for the surviving spouse, and the surviving spouse retains
the power to amend the entire trust. This kind of trust
is not designed to protect assets from estate taxes, but
it does avoid probate.
Two-Settler
A/B Trusts:
If a married couple own property together that is worth
more than the amount that will pass free of federal estate
tax, then they should consider an A/B trust. Here's the
estate tax limits under current federal law:
Year
of Death
Estate Tax Unified Credit Exclusion Equivalent
2004 and 2005 $1,500,000
2006, 2007, & 2008 $2,000,000
2009 $3,500,000
2010 Unlimited - Estate Tax is Repealed
2011 $1,000,000 - Estate Tax Reform expires
The way these trusts work is that when the first spouse dies, the trust is divided into three shares.
The first trust, containing all of the surviving spouse's property, is usually called the "A" or "Survivor's" Trust. The deceased spouse's property (his or her half separate property and half of the community property), is then split into one or two trusts. One trust, is called the "B" or "Credit Shelter" or "Bypass" Trust. This trust holds the portion of the deceased spouse's property that can pass free of estate tax. If there is anything left over, a third trust may be created, called the "C" or "Marital Deduction" or "QTIP" Trust, or sometimes the extra assets go to the surviving spouse in the "A" Trust.
The result of this is that for a married couple there will be no estate tax on the first death. On the second death, the amount of estate tax due will be minimized or even eliminated because the assets of the "B" Trust are not subject to estate tax on the surviving spouse's death.
Do
you need a Revocable Trust?
If you own a home, then you should at least consider getting
a trust. A modest estate valued at $300,000 is subject
to statutory probate attorney and executor fees in the
amount of $9,000 each, for a total of $18,000. Also, because
probate can take anywhere from one year to three years
to complete, getting a trust to avoid probate is, for
most homeowners, a very good idea.
Charitable
Remainder Trusts:
If an A/B trust is not enough to shelter your assets from
federal estate tax, then a Charitable Remainder Trust
is another alternative. Essentially, money is gifted into
an irrevocable trust that pays out a certain amount of
income to the trust beneficiaries over a period of time,
based on an annuity payout schedule. After these payments
are made, the rest of the charitable trust's assets, the
"remainder", is given to selected charitable
beneficiaries. Many charitable organizations encourage
these trusts, and some of them will even pay the legal
fees for setting them up. If you intend to donate to charity,
a Charitable Remainder Trust can help you take full benefit
of the income and estate tax advantages of your gift.
Irrevocable
Insurance Trusts:
This is a specialized form of irrevocable trust that is
designed to purchase and maintain insurance polices on
the lives of the settlers. After the settlers die, the
insurance policies will pay off, but the proceeds will
not be subject to federal estate tax.
Irrevocable Trusts for Medi-Cal Planning:
Assets owned by recipients of Medi-Cal benefits are generally subject to estate recovery claims from the California Department of Health Services after the death of the Medi-Cal recipient and any surviving spouse. Specialized irrevocable trusts are a means of sheltering a Medi-Cal recipient's home from Medi-Cal estate claims. These trusts minimize the settlor's rights with respect to the trust in order to avoid the Medi-Cal claim but also include language causing the trust to be subject to federal estate tax on the death of the settlor, thereby preserving the step-up in cost basis and saving the beneficiaries capital gains tax if the home is sold upon the settlor's death.
Family Limited Partnerships:
This is an advanced form of estate planning that can allow families to significantly reduce or even eliminate their estate tax liability by creating a partnership with their children that benefits from federal gift and estate tax valuation discounts.
