How to Avoid Probate, Save Taxes, Protect your Children, and More...

I have a Will. Why would I want a Living Trust?
Contrary to what most people believe, a Will may not be the best plan for you and your family - primarily because a Will guarantees probate. A Will must be verified by the probate court before it can be enforced. Additionally, a Will can only go into effect after you die, providing no protection if you become physically or mentally incapacitated.

Fortunately, there is a simple and legal alternative to a Will – The Revocable Living Trust. It avoids all probate, and lets you keep full control of your assets while living - even if you become incapacitated - and after you die.

What is Probate?
Probate is the court process required when you die to assure debts are paid and assets are distributed according to your Will. If you do not have a Will, your assets are distributed according to state law.

What is so bad about Probate?

  • It is expensive! Probate fees paid to your attorney and/or executor are set by law at approximately 5% of the gross value of your estate. If you own property in more than one state, there may be a probate in each state.
  • It takes time. In California, typical probates last 9 months to 2 years. Assets are frozen during this period - if your family needs money to live on, they must request a living allowance from the court which may be denied.
  • You lose privacy. Probate files are open to the public, so anyone can see what you owned and who owed you. This invites unscrupulous solicitors to prey on your loved ones at a vulnerable time.

Why would the court get involved at incapacity?
If you lose your mental or physical capacity (due to Alzheimer's, stroke, heart attack, etc.), only a court appointee can sign documents for you - even if you have a Will. (Remember, a Will only goes into effect when you die.) Once the court gets involved, it stays, involved until you recover or die. The court, not your family, controls how your assets are used to care for you. This can be expensive, embarrassing, time consuming, and difficult to end if you recover. And it does not replace probate at death - your family would have to go through the court system twice!

Wouldn't a Power of Attorney Prevent this?
All Powers of Attorney end at death, so they cannot be used to avoid probate. Many also end at incapacity. Proper Durable Powers of Attorney may work, but they can be risky . . . you are giving someone else the power to do whatever they want with your assets. It is very effective when used with a Living Trust, but risky as a primary estate plan.

What is a Living Trust?
A Living Trust is a legal document that is similar to a Will in that it includes your instructions for what you want to happen with your assets when you die. But unlike a Will a Living Trust avoids probate at death, and prevents the court from controlling assets at incapacity. It also provides tax planning to avoid paying unnecessary estate taxes.

How Does a Living Trust Work?
When you set up a Living Trust, you transfer assets from your name to the name of your trust, which you control. Legally, your Trust (ie: the Smith Family Trust) now owns your assets and you designate a back up trustee to handle your trust (according to your instructions) upon your incapacity or death. From the legal viewpoint, having a Living Trust means that you do not hold title to anything; since your assets are inside the Trust, the Trust holds title to everything. However, even though you have relinquished ownership of your assets, you still retain control of those same assets.

Upon your death, since you have nothing titled in your own name (because your assets are in the Trust), there is nothing to probate. If you are married, the surviving spouse typically becomes the surviving trustee and continues to have control over the assets.

Advantages of a Living Trust

  • Avoids probate at death
  • Avoids multiple probates if you own property in more than one state
  • Prevents court control of assets at incapacity
  • Provides maximum privacy
  • Allows quick distribution of assets to your beneficiaries
  • Assets can remain in Trust until beneficiaries reach the age(s) you want them to inherit
  • Can reduce or eliminate estate taxes
  • Inexpensive, easy to set up and maintain
  • Can be changed or cancelled at any time
  • Difficult to contest
  • Prevents court from controlling finances when minor children inherit
  • Can protect dependents with special needs
  • Prevents unintentional disinheriting and other problems of joint ownership

Who should have a Living Trust?
It does not really matter how old or wealthy you are, or if you are married or single. If you own any titled assets (home, IRA, mutual funds, etc.) and/or have minor children, and you want to make sure your loved ones avoid the problems and cost of court interference at your death or incapacity, you should consider a Living Trust. And if your parents are living, you may want them to consider one so you won't have to deal with the courts at their incapacity or death.

As an additional benefit a Living Trust can provide for the care, support and education of your minor children or other young beneficiaries by providing management of the assets by the Trustee. The assets can be distributed to the children at an age or ages chosen by you. By implementing a Living Trust for this purpose your estate will also avoid the costs and burdens of court supervised guardianship for your minor children.

A Special Needs Trust can also be implemented for beneficiaries that are disabled and/or receiving government benefits.

Living trusts can also be used to ensure that both the surviving spouse and any children from a prior marriage receive fair treatment and protection.

Should I see an attorney to plan my estate?
Yes, preferable one who specializes in Living Trusts. An experienced attorney can provide valuable guidance and assistance, and assure your Trust is properly prepared.

What are Death Taxes?
Separate from the expense and delay of probate, your estate may also be liable for death taxes, federal estate tax and California's estate tax, known as a "pick-up" tax. The pick-up tax is equal to a credit given by the federal government for the payment of state death taxes attributable to assets located in California. In essence, the gross estate tax due is fixed and California merely takes a share of the federal tax. But, if you own assets, such as real property, in another state, that state will take a percentage of the "pick-up" tax and California will take the balance. Please note that some states assess a separate inheritance tax, over and above and "pick-up" tax.

Valuation of Your Estate

Unified Transfer Credit
Every person in the United States has a credit which may be applied to either federal gift tax or federal estate tax. That Unified Transfer Credit (UTC, also known as the "applicable credit amount") will pay the transfer tax on both lifetime gifts and assets passing at death.

1998 $625,000.00 $202,500.00
1999 $650,000.00 $211,300.00
2000 $675,000.00 $220,550.00
2001 $675,000.00 $220,500.00
2002 $700,000.00 $229,800.00
2003 $700,000.00 $229,800.00
2004 $850,000.00 $287,300.00
2005 $950,000.00 $326,300.00
2006 + $1,000,000.00 $345,800.00

If the value of your estate is less than $1,000,000 at your death, and you die after 2006, and you made no taxable gifts during your lifetime, no federal estate tax will be due.

Among the other changes to the tax laws, some important ones include:

Exclusion from estate tax of a significant value of a family farm or business, subject to certain conditions.

Exclusion from estate tax, starting at $100,000 (increasing to $500,000 in five years), for certain real properties permanently subjected to qualified environmental easements. A cost of living adjustment ("COLA") for the $10,000 gift tax exclusion and certain other limits.

Federal Estate Tax Rules
Estate taxes begin at 37% for property value which exceeds the unified credit. The tax rates increase on a graduated scale up to 55% on taxable estates over $3,000,000. Estates between $10,000,000 and $21,040,000 are taxed up to 60%. Additionally, some assets, such as highly funded pension plans, may incur taxes as high as 80%.

Marital Deduction
Married couples are granted the additional advantage of the unlimited marital deduction, which exempts assets passing from a surviving spouse from taxation. The marital deduction can provide a significant amount of benefits to the surviving spouse if used properly. This deduction does not reduce your taxes, it merely postpones payment of tax on assets passing to the surviving spouse until their death. (Please note that, if the surviving spouse is not a U.S. citizen, the marital deduction will not be available unless the property passes into a "Qualified Domestic Trust". This is a critical planning issue for non-citizen spouses. )

Do I Need a Living Trust?
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Stacy L. DenHerder
Sharon D. Fitch
Shelley A.C. Quinn
San Diego
Central Valley
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