Top 10 Frequently Asked Questions about Wills and Trusts:
By Thomas K. Ledgerwood, Esq.
Q1: What happens if I die without a will?
A: As far as the courts are concerned, there are two ways to die in California: “intestate” and “testate.”
Intestate means that the decedent had no legal will at the time of death. That means that the court, via a court appointed executor, will locate your assets then distribute them to your heirs based on Probate Code section 6400.
As they say, “If you like sausage or law, you do not want to see either being made.” I had a relation go through the process when his mother passed away without a will. To get his inheritance, he had to hire a lawyer and petition the Superior Court in a probate proceeding. The process took 15 months and cost about $10,000.00 in attorney fees.
Testate means that the decedent had a legal will at the time of death. Unfortunately, passing away with a valid will does not exempt you from the probate process. Lawyer fees on the “gross estate” are:
(1) Four percent on the first $100,000.00.
(2) Three percent on the next $100,000.00.
(3) Two percent on the next $800,000.00.
(4) One percent on the next $9,000,000.00.
It normally takes around 12 to 24 months to probate a will. The good news is that if your gross estate (market value of your property not subtracting mortgages and the like) is less than $100,000.00 and there is no real estate involved, your heirs can normally avoid the probate process by doing an “Affidavit of Small Estate.” But, if the estate is larger than $100,000.00 or real estate is involved, it normally must be probated.
There is a very simple way to avoid the headaches and heartaches of the probate process. Most people who are concerned about the orderly distribution of their estates elect to have a trust drafted up so they can avoid the probate process and maximize any tax benefits they may be able to realize. “Revocable Trusts” are surprisingly affordable and allow the “settlor” (the maker of the trust) complete control over the assets in the trust. Best yet, a Revocable Trust normally avoids the probate process completely.
Q2: What is the difference between a Revocable Trust and a Will?
A: A will is a document that lays out how your estate is to be distributed at your death. The main difference between a will and a trust is that a will must go through probate process. A revocable trust, on the other hand, is an entity that is separate from the decedent. The trust is “funded” with the assets of the “settlor” (the one creating the trust). On the death of the settlor, the property passes to the “beneficiaries” based on the wishes of the settlor, free of the probate process.
The upshot of all of this is that months of hassle, probate procedure, and attorney fees are avoided, and your assets quickly pass on the your loved ones in the manner of your choosing.
Q3: Can I reduce my Estate Taxes with a living trust?
A: Well, that depends on the size of your estate at the time of your death. If you are married, and pass away before your spouse, you spouse can inherit all your property free of estate tax. This is called the “Marital Deduction” (I.R.C section 2056(a)). Thereafter, you need to consider the exemptions Congress has made to estate taxes in general. This is called the “Personal Estate Tax Exemption.” This exemption allows property, subject to the exemption, to pass free of tax to your heirs. The amount of the exemptions is as follows:
Year of Death: Personal Exemption:
2008 $2 million
2009 $3.5 million
2010 Estate tax repealed
2011 $1 million
2012 and thereafter $1 million
There are a variety of ways to reduce your estate taxes at the time of your death. One popular choice is the “AB Trust” or Marital Bypass Trust.” Here is how it works: Both spouses create an “AB Trust”, instead of leaving property to each other, each spouse leaves the bulk of their estate to “Trust A.” When the first spouse passes away, their property goes into Trust A for the benefit of the surviving spouse. This creates a “life estate” for the surviving spouse in the deceased spouses property. The surviving spouse can use the assets in Trust A, subject to certain limitations, and retain their interest in Trust B.
The tax savings come about because Trust A is subject to estate tax only when the surviving spouse dies. If there is less than the Personal Exemption left in Trust A (see above) when the second spouse dies, no federal estate taxes are due! And, the second spouse to pass away still has his or her own Personal Exemption that can be applied to Trust B. If there were no Bypass Trust created, then all the property would be in the estate of the second spouse and there would be only one Personal Estate Tax Exemption. Estate taxes are 45%, a whopping tax hit that can be completely avoided with good estate and tax planning.
For example: Marge and Max have an estate of two million dollars. They have one son, Junior. Max passes away in early 2010 without a trust. Due the unlimited Marital Deduction, Marge inherits Max’s interest in his estate tax free. Her estate is now two million dollars. Lets assume Marge passes away in late 2010. The Personal Exclusion will shelter one million dollars of her estate, but the second million will be fully taxable. That’s a $450,000.00 tax hit—money to the federal government that could have been passed on to Junior. If an AB Trust was in place, the Bypass Trust would have one million dollars in it that would be able to utilize Max’s personal exemption and there would be no tax due on the estate.
A: Legacy Estate Planning Center offers a one-hour free consultation to assess your estate planning needs. It is a no obligation meeting, where we can review your estate and decide if you even need a trust.
For a medium sized estate (husband, wife, a house, bank account, a couple cars, kids, retirement accounts etc.) we are talking around $1,500.00 for a complete estate plan (+/-) depending on complexity.
This would include:
1) A Trust (s)
2) A power of attorney for property management (DPA).
3) A Pour Over Will (for inadvertently omitted trust property),
4) An advanced health care directive (regarding your wishes if you are in a persistent vegetative state.)
5) A Declaration of Trust (an abbreviated verification of the existence of a trust to present to banks for asset administration and the like).
Simple wills are much less. Complex estates are much more. It really depends on the individual, their dependants, their distribution plan and the size of their estates.
As far as the costs of a trust, just so you know if you are a do-it-yourselfer, you can get on the Internet or go to your local bookstore and do it on the cheep. The cost here could range from free to a couple hundred dollars. As they say “you get what you pay for.” What you do is get a fill in the blanks form, or a computer program to generate documents, and hope it works when you pass on.
The problem many clients experience with these methods is that they really do not know how a trust works and what certain trust provisions do. Then there are the formalities of properly attesting and funding a trust. Do it wrong, and the document may be worthless or you have an Estate Contest between your heirs. Somewhat like giving yourself a hair cut or worse yet, an appendectomy.
A: There are two main problems children face if their parents pass away prematurely:
A) Who will take care of them?
B) How will they be provided for financially?
If you leave a surviving spouse, "A" above, usually isn’t a problem. The surviving spouse takes on full custodial responsibilities. But, what if there is no surviving spouse? For example, in the unlikely event of parents dying while on vacation or away from home, who will be appointed to take care of the children?
Ultimately, the question may be up to the Superior Court in a Guardianship Proceeding. In the case of a Trust (or a will for that matter), the designation of a Guardian for the kids is the thoughtful and prudent thing to do. While the designation is not determinative of whom the Guardian will ultimately be, the court takes the choice very seriously. Designation of such a person or persons in advance might prevent a non-family member (a judge or commissioner in Superior Court) making this decision for the children.
As far as the finances go, under age children cannot inherit property. So, setting up a sub- trust for their support is a serious consideration. There are a variety of different trusts that can be set up to provide for their support during their minority and distribute the balance of your estate to them at a age you feel they can responsibility handle funds.
If your estate is not sufficient for the support of your children, you might consider an insurance trust. For people starting out with new families, term insurance provides a relatively inexpensive way to fund a trust for their children in the unlikely event of their death.
For children that could receive income based federal or state benefits (such as SSI, Medi-Cal, or CMSP), a “Special Needs Trust” could be created that would shelter inheritance income from disqualifying them from these programs.
A: Most people know about the Terri Shiavo case and wonder what would happen if they found themselves on life support, in a coma, or in a persistent vegetative state. Some people may want to have their life support continued indefinitely. Others would rather have life support “turned off” if they end up in this condition.
To be sure, there are serious moral and financial considerations in such a situation.
I have seen cases where there was insufficient insurance coverage and an individual’s hospitalization used a lifetime of earnings, leaving nothing to the children.
In other situations, I have seen a loved one on life support with little to no brain activity “wake up” after a week or so in a hospital on a ventilator.
Conversely, perhaps you have reached a ripe old age and are simply failing. Would you want “heroic” life support efforts (chest compressions, intubations or other intrusive life support measures—“flogged” in hospital parlance) or, would you want to be “let go” and pass away peacefully?
Weighty decisions to be sure. So who is to decide? That really should be up to a family member who has your best interest at heart.
The best way to provide for this contingency is through an “Advance Health Care Directive,” or a “Durable Power Of Attorney for Health Care.” This is a document that allows a trusted individual to make health care decisions for you due to your physical or mental incapacity.
Q7: How Does a Trust Work?
A: Simply put, a trust is a legal receptacle for your assets. It is much like a corporation, in that it is an entity that is separate and distinct from you. Probate is avoided by a trust for this reason. A trust is not a person, it is a document that creates an independent legal entity. At the moment of your death, the trust becomes irrevocable (it can’t be changed) and your property can be immediately distributed to your heirs.
A historical note: Trusts have been around for a long time. They were found to be a valid and legal method of property transfer by the Chancery Court of England in 1535. Early on in the US, wealthy individuals used trusts to preserve their riches from generation to generation. More recently, the use of trusts by the masses has caught on (much to the chagrin of Probate Lawyers), as people soon discovered that a trust was a vastly superior method of property transfer when compared to probating a will in Superior Court.
Q8: Can a trust provide for management of my financial affairs if I should be unable to do so for myself?
A: A big concern many people have is how their finances are going to be managed if they are unable to do so on their own. A trust is designed to handle this contingency by the appointment of a successor trustee. Usually, when a trust is initially drafted, the creators of the trust (the “settlers”) are the trustees and they manage the trust assets.
If the initial trustees become incapacitated, a properly drafted trust will provide for a successor trustee who will manage the trust for the benefit of the settlor(s). This usually avoids the need for initiating a Conservatorship Proceeding in Superior Court.
Q9: What are the advantages and disadvantages of a Trust?
A: Advantages: You avoid Probate:
Assets can be readily transferred to beneficiaries without the delays and reporting requirements of a probate.
You normally maintain privacy. The trust paperwork usually never becomes a public document. A will, on the other hand, becomes a public document during the probate process.
Your affairs are put in order:
Many times, when a person dies, they leave a mess for their loved ones to figure out. Assets are not inventoried. Distribution plans are not set forth. No one knows what the decedent wanted to do with the property. So there is a 15-month probate hassle waiting for the beneficiaries. This is completely eliminated by a trust. Assets are inventoried and readily transferable outside the probate process, usually in a matter of days. Distribution wishes are clearly laid out for beneficiaries, so there is less squabbling regarding who is to get what.
You take the maximun advantage of tax savings:
There are tax savings for couples with sufficient assets to pass on to their beneficiaries via the creation of an “A-B Trust” (Marital Bypass trust).
Related Trust Documents provide for peace of mind on property management and health care decisions if you become incapacitated:
A well drafted trust will include a Durable Power of Attorney. A “DPA” allows a trusted person to manage assets that fall outside a trust..
A well drafted trust will also include an Advance Health Care Directive that will have a responsible person assisting you in medical decision should you be unable to do so.
Disadvantages:
My wife and I have had a trust for 10 years. Speaking from experience, trusts can be a bit of a pain in the rear because of the clerical responsibilities they saddle you with.
Trusts are much like corporations in that you are creating an entity that is separate and distinct from you. A trust is a vessel used to store your assets. Like a corporation, formalities need to be observed. A trust will not function unless it is “funded,” that means putting your real estate and other assets into the trust by changing title on the deeds, savings accounts and the like.
If you are buying and selling real estate or refinancing, it can be a chore making sure that title is eventually transferred to the trust. So it is somewhat of a record keeping hassle, but well worth the effort in the long run.
Costs:
Trusts are not exceptionally expensive, but they do require an investment early on.
Q10: Can I avoid Probate by having my property in Joint Tenancy?
A: There are many ways to bypass the probate process entirely. One is holding an asset such as real estate, bank accounts, stocks, bonds, CD’s and the like in some form of Joint Tenancy. When the first joint tenant dies, the property passes to the surviving tenant or tenants, seamlessly without the need for the probate process. As far as real estate goes, the surviving joint tenant need only go to the County Recorder’s Office (accompanied with a death certificate to have the real estate re-titled in his or her own name).
Joint Tenancy between Husban and Wife:
As between husband and wife, Joint Tenancy is a common way to have title set up. The problem is what happens when the second spouse dies? Joint tenancy ends at death. Unless another joint tenant is added to the mix, there is a potential probate of the asset.
But, watch out, as having property in Joint Tenancy is a great way to unintentionally disinherit children. Essentially, this happens when husband and wife enter into their second marriage. It is important to understand that property in Joint Tenancy will take precedence over a will or a trust. So the property will flow upon death to the other joint tenant. Suppose you wanted your children to inherent your family home. You hold title with your second spouse in Joint Tenancy. You have a will or a trust that specifically sets forth your intent that the children get a ½ interest in the residence. Additionally, your spouse has kids of his/her own. You pass on; the property flows to your spouse and completely bypasses your desires laid out in a will or a trust. The bottom line, your spouse, and eventually your spouse’s children, get the property.
Joint Tenancy with Children:
Some people enter into joint ownership with their children as a way of avoiding probate. This is like going 90mph in the slow zone. Do you trust your kids? Normally, the answer is yes. But, once you change title to add a child on the deed, the property is ½ theirs--period. Want to sell your property after you made the title change? Your kids better be on board, anyone that isn’t’ can say no and force you to start a Partition Action Superior Court.
Then there is the cash. If someone is on title to the account, they have equal rights to withdraw funds. It is very possible for the child or other joint account holder to take funds and go on an extended vacation (without you).
Then of course, what happens when Junior gets shot into collections because he was not paying on his credit card? Since he is on title to the asset, his share is subject to the collections action of his creditors.
It can get worse. Suppose Junior gets married (after he is deeded a ½ interest in the family home in Joint Tenancy with Right of Survivorship). Junior’s bride turns out to be a real piece of work—not a nice person. Junior looses control of his car one night and dies. The joint tenancy property is now in his estate. Your daughter-in-law now has an interest in the property under the “Widows Election” in Junior’s probate. You just lost, at a minimum, a ¼ interest in the property. Now try to sell or transfer the residence, you new daughter-in-law gets to call part of the shots.
Tax Issues:
Then there are the tax issues that a Joint Tenancy creates. The IRS imposes a “Capital Gains Tax” on the increase in the value of assets upon sale. Attempting to avoid probate by transferring title to property could result in the paying of unnecessary taxes.
Here is how it works: For inheritance purposes, the IRS will permit a “Stepped-up Basis” for the valuation of property upon the death of the owner. In other words, suppose you purchased land for $100,000.00 in the 70’s. It is now worth $500,000.00. Upon your death, your children’s “Basis” on the property is $500,000.00, not $100,000.00 so there is no Capital Gains Taxes due.
But, what would happen if you deeded the property to a child giving them an undivided one half interest in the property in the 70’s. The child would only get a “Stepped-up Basis” on the inherited portion of the property. The balance of the property is subject to Capital Gains Tax, and a whopping tax hit, upon sale without the benefit of the stepped up Basis.