If you have children, own your own home or have assets worth more than $184,500, you need a living trust. If you do not have a living trust properly executed and funded as part of a basic estate plan, upon your death, your assets will go through the probate process in each state where those assets are located. If you have minor children, you want to choose who their legal guardians will be if something was to happen to you instead of a judge in downtown Los Angeles. If you own a home or a condominium your estate will be sent to probate court if that property is not properly deeded and vested in the name of your trust. If all of your assets in gross, including the combined value of your real and personal property are worth $184,500 or more (Probate Code §13151) and you do not have a living trust, your estate must be probated to pass to your heirs. If you want to control to whom, how and the timing of when your heirs receive your assets, you need a living trust.
But I already have a will?
A will must be admitted to probate in order for its executor to follow your wishes. Only a living trust will avoid the probate process.
Why do you want to avoid the probate process?
If you want to choose who receives your assets upon your death, you want to avoid probate. In probate court, the judge gives your property outright to your next of kin. If your estate goes to probate, a judge whom you do not know will appoint a personal representative who will receive a fixed statutory percentage of your assets. The judge will also appoint a lawyer whom you do not know who will also receive a fixed statutory percentage of your assets. The personal representative and the lawyer will distribute your assets according to the California Probate Code in a very expensive and long and drawn out public process. If you value privacy, you must complete a living trust to keep your personal family and financial information from being disclosed to the public. With the recent state budget cuts to the California court system, all of the probate courts in Los Angeles County have been closed with the exception of downtown Los Angeles and Lancaster. The typical probate is now taking years to complete and it is not uncommon for large estates to take more than five years to pass the assets to the decedent’s heirs.
What does a basic estate plan include?
1. Pour Over Will: If you forget to transfer a particular asset to your living trust, you can ask the probate judge to waive the probate process for that asset if you have a valid and already funded living trust together with a pour over will. The will also states whom you have chosen to be the guardians for your minor children.
2. Living Trust: Also called a revocable trust or a family trust, this instrument is a separate legal entity like a corporation that holds title to your assets for you. From a practical stand point nothing changes but legally your assets are owned by your trust. If you do not like your trust, change your mind or get a divorce you can terminate your trust. You can also amend it at any time.
3. Transfer Deeds and Assignments: It is very important to fund your trust immediately upon execution because judges in California will not recognize the trust if it is not holding any assets. The easiest way to ensure this is to immediately deed any real property you own into the trust. It is also very important to transfer all your checking, savings and brokerage accounts into your trust along with any business interests or intellectual property you might own. Depending on your specific circumstances, generally speaking, retirement accounts like pensions, 401(k)s, 403(b)s, IRAs and life insurance do not need to be transferred to your trust because the account administrator will pay your specifically declared beneficiary the assets directly and this will avoid the need for probate.
4. Power of Attorney for Financial Matters: If you become incapacitated, you still need to pay bills and manage your non trust assets like retirement accounts. Someone must manage your financial affairs even if you are in the hospital. A Power of Attorney appoints an agent to complete these tasks for you.
5. Advance Health Care Directive: Like a Power of Attorney for financial matters, an Advance Health Care Directive appoints an agent to make your medical decisions for you if you were to become incapacitated. Additionally, you can include information in this document in regards to “do not resuscitate” (i.e. do not prolong life or take any heroic measures) or its opposite, organ donations and funeral arrangements.
6. Trust Certification: The Certification of Trust evidences your authority to act on behalf of the trust. Financial institutions, brokerage houses and other establishments may request a copy of the Certification before they transfer title on any of your assets (and sometimes they will require you to complete their own internal Certification). The Certification should contain all of the information they will need, such as appointment of trustee and trustee’s powers. While the Certification is much less cumbersome, some institutions still may request a complete copy of your trust.
What are the tax advantages to completing a living trust?
On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Significant modifications were made to the rules governing federal estate taxes, gift taxes and generation skipping transfer taxes. One of these changes was the introduction for the first time the concept of “portability” of the federal estate tax exemption between married couples for the 2011 and 2012 tax years. On January 2, 2013, President Obama signed the American Taxpayer Relief Act (“ATRA”) into law. Under the provisions of ATRA, portability of the estate tax exemption between married couples has been made permanent for 2013 and future years. If you want to take advantage of portability, you must file a Form 706 Estate Tax Return within nine months of the decedent spouse’s death. Traditionally, the 706 return is very complicated and expensive to complete. The IRS has announced that they will accept a less detailed version to elect the decedent spouse’s unused exemption amount in certain circumstances, but we are still waiting for the IRS to produce this new simpler version. To avoid the need to file a 706 return, a living trust can set up an exemption trust that in effect ports the decedent spouse’s unused estate tax exemption to the surviving spouse. This only works to the extent that there assets to fund the exemption trust. An election for the decedent spouse’s unused exemption amount can be made for the difference.
The living trust is the corner stone of everyone’s estate plan. If you have an estate that is near or over the estate tax exemption amount, the law firm of Caldwell Law can discuss with you discounting and freezing techniques that can assist in lowering your estate valuation upon your death. With increased capital gains taxes, it is more important than ever to not lose the benefit of a step up in basis upon death by transferring your assets to your heirs to avoid estate taxes prior to your death. By using Grantor Retained Annuity Trusts you can transfer significant assets to your heirs prior to death outside of your estate, than buy the assets back with cash (which has a basis of 100% of its value) on hand or borrow it at a low interest rate, thereby transferring the cash dollar amount to your heirs outside the taxable estate and obtain a full step up in basis on the assets purchased.
Why should I include a charity in my estate plan?
When you die your assets can only go to your heirs, the government or charity. If you have a taxable estate, your assets are going to go to your heirs and the government. If you have been giving to your favorite charity all of your life, why stop at death? Why not build a legacy somewhere where your family’s name and values can live on in perpetuity? By incorporating a charitable component into your estate plan, many times your heirs will end up inheriting more money than had you not incorporated the charitable component because of the associated tax benefits.
Additionally, many heirs do not need all of the extra income they are likely to inherit. Believe it or not and as sad as it sounds, transferring large sums of money to heirs very often negatively impacts their lives. Inheriting assets at a young age (i.e. under 40) saps people’s ambitions, brings the wrong kinds of friends around and often only leads to trouble like addictive and self-destructive behaviors. By incorporating a charitable remainder trust, charitable lead trust, private family foundation or other charitable technique, you protect your heirs from the down sides on inheriting money, obtain valuable tax advantages, provide your heirs with a steady and protected income stream and instill in your heirs the values and morals that brought you success.
What Are The Laws Governing Living Trusts?
The California Probate Code, starting with section 15000 contains the “Trust Law” that will govern your living trust and can be found here: California Probate Code.
In addition, the law charges the trustee with certain duties known as fiduciary duties. These fiduciary duties are similar to those charged to attorneys toward their clients and real estate brokers toward their clients. These fiduciary duties include: a duty of loyalty, a duty to follow the living trust instrument, a duty to supervise a cotrustee, a duty to notify, a duty to report, a duty to account, and a duty to preserve and manage the trust property (and to invest it in a diversified portfolio of assets). Caldwell Law can explain some of the legal obligations in a comprehensive manner and help avoid confusion.
Why do I need an attorney to prepare my estate plan?
There are numerous on-line sources today where people can pay a nominal fee and print their cookie cutter estate plan off of the internet. What happens to your family upon your death is extremely complicated and nerve racking. Caldwell Law has reviewed dozens of improperly prepared, defective and unfunded trusts drafted by inexperienced lawyers or purchased from on-line sources. Had these estate plan not been redone, these families would have suffered through the probate process despite the fact that they had already paid to do a trust.
A living trust is a legally binding document that is enforceable in a court of law and will govern the disposition of your estate. A carefully planned and designed living trust will plan for the unexpected and help avoid those costs associated with probate or conservatorships. Caldwell Law can help you identify your assets, inform you about a trustee’s duties, help ascertain your family and personal needs and help you plan for unexpected contingencies. For a competitive flat rate fee, you get the needed consultation and your carefully planned living trust instrument as part of a complete estate plan.
The information in this article is intended to be a general description of tax laws and is not advice as to any transactions, nor is this article advice to any person or to any client and should not be relied upon as such. If you or your client desire to receive specific legal or tax advice on a specific transaction, then please call Caldwell Law at (818) 651-6246.