Understanding Estate Planning – Part 2
(Originally published Sept. 2013)
UNDERSTANDING WILLS AND TRUSTS
WHAT IS A WILL?
Most of us have heard the term “Will” or “Last Will and Testament” but many don’t know what that exactly means. A Will is simply a document in which you designate who will get your real and personal property upon your death and who will administer your affairs during the process. As such, it is a basic building block of estate planning. If you should die without making such a designation (legally called “intestate”), the laws of the State of California will determine who gets your property regardless of what your unwritten intentions may have been (California does not recognize “oral wills”). All persons related to you through blood or marriage have a claim at law on your estate property including all of your children (natural, adopted, illegitimate, etc.) and their successors if predeceased. Furthermore, if you desire to intentionally omit providing for any child, you must state this intent. In a Will you also designate who should be the Guardian of your minor children.
ADVANTAGES OF A WILL
Creating a Will is a relatively easy matter. You state in writing and in the presence of several witnesses who you want as an administrator and who you want to get your assets when you die. Many low-cost programs and forms are available for this purpose or we can do this for you.
DISADVANTAGES OF A WILL
The biggest disadvantage is that all Wills must be confirmed by a Probate Court. As I described in last week’s Article, this Probate process is generally expensive, time-consuming, and open to the public to see. If your objective is to pass your assets on to your heirs and other beneficiaries as intact as possible, the Probate process will take a chunk out of what you are leaving them.
HOW CAN I AVOID THESE COSTS AND DELAYS?
The easiest way to avoid these costs is through the use of a Revocable Living Trust.
WHAT IS A REVOCABLE LIVING TRUST?
A Revocable Living Trust is a legal entity that you create on paper to hold your assets for you. In other words, the Trust owns your real estate, your personal property, and your investments. It is called “revocable” because you can change it or even terminate it at any time during your life. It is called “living” because it is created and operated while you are still alive. And it is called a “Trust” because it holds and manages all of your property for you and your beneficiaries.
DOESN’T THIS MEAN I LOSE CONTROL?
NO! When you create your Living Trust, you designate yourself as the “Trustee” of the Trust and you have the sole right to manage the Trust’s assets. And, because you are also the beneficiary of the Trust, you continue to use and enjoy your Trust throughout your lifetime just as you did before. Since you own the Trust, you can set up the “rules” such as who will manage your property if you can’t (“Successor Trustees”), who will get those assets you put into the Trust, and when those assets will be distributed. You can in effect continue to control your property after your death. During your life, you can continue to add and remove assets from your Trust, receive any and all income, and you can change any provision. You NEVER lose control.
HOW DOES THIS SAVE ME TIME AND MONEY?
1. Probate Avoidance: Because a Trust is treated as a separate legal entity, when you die the Trust survives. As an individual, if you have properly transferred all your assets into the Trust while you are alive, you then have no estate when you die and therefore there is no need for Probate. The role of the Successor Trustee then is to step into your shoes to manage and distribute your estate just as you have designated… they can’t change your wishes. Once the estate is all distributed, the Trust comes to an end and, since there are no assets remaining in the Trust estate, no Probate is required.
2. Minimizing Estate Taxes: Through a Trust, you can combine your Estate Tax exemption with that of your spouse to gain the full exemption available. This alone could protect your Estate from huge amounts in federal estate taxes. Some people think they can avoid the Estate Tax by holding their assets in “Joint tenancy”. But in reality, all this does is lose the tax exemption of the first spouse to die.
WHAT OTHER BENEFITS WILL A LIVING TRUST BRING ME?
1. Avoid a Conservatorship: If you become incapacitated and cannot manage your financial and health care affairs, someone will have to be authorized to step in and take control. Without proper planning, a Court supervised Conservator will have to be appointed at substantial cost and inconvenience. However, a properly drafted Trust can avoid this by authorizing your Successor Trustee to take control and providing the power for them to act during your incapacity.
2. Avoid Publicity: A Living Trust is a completely private affair and generally no-one can know its contents unless you let them. In fact if there is an occasion when you have to prove that the Trust really exists – such as when buying or selling a home, getting a loan or insurance, etc. – we create a related document called a “Certification” which gives those third parties the information they need to know while preserving your privacy.
3. Flexibility: As the owner of your Trust, you have complete flexibility in relation to your estate and its distribution after you die. You can provide for all, or certain, of your children. You can provide for all, or certain, of your grandchildren. If you have heirs with “special needs”, you can provide distribution that could take place over many years. Your Trust can also provide for children of prior marriages. Your Trust can even regulate when and how your beneficiaries may be provided for and prevent their creditors and others from attaching their interest in the Trust. The point is, everyone’s needs are different and your Living Trust can meet those demands.
4. Revocable: You can change the terms of your Trust or revoke the entire trust any time you want. The Trust only becomes unchangeable when you die (the new “trust managers” cannot change the terms of your trust).
ARE THERE ANY DISADVANTAGES OF A LIVING TRUST?
The only disadvantage is that you may gain a false sense of security and fail to “fund” the trust, that is to make sure that you change the ownership of your assets from you as an individual to you as a Trustee of your Trust. We handle this for you when the Trust is first setup.
WILL A LIVING TRUST MAXIMIZE MY ESTATE PROTECTION?
All things are not for all people. The same is true of a Living Trust. They are, however, for MOST people. By analyzing the size of your estate now and making reasonable projections as to how large your estate may become, as well as looking at what your specific desires are, we can determine what form of estate planning would best serve you and then custom design an Estate Plan to meet those needs. Additional Documents may be recommended to achieve specific results. These most typically will involve methods of reducing estate taxes. Examples of such documents would include:
– Special Needs Trusts for disabled persons
– Life Insurance Trusts for estate tax coverage
– Charitable Remainder Trusts for estate tax reduction
– Family Limited Partnerships for estate tax reduction
– Special Trusts for business interests
In planning your Estate now, you are demonstrating the foresight and concern that will save your family and survivors time, trouble, money and grief. Our easy-to-follow Estate Planning Worksheet will guide you in assembling all the information you need to get your personal Estate Plan started. We look forward to assisting you and your family in this most important concern. Also please feel free to refer our services to other family members or friends who may not have begun their own estate planning. If you are ready to get started now, call our office at (916) 966-2260 and schedule an Estate Planning Consultation.