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LEGAL INFORMATION
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Morgan Hill, CA
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One estate planning technique of great potential benefit is
easily available to everyone. But the "Intervivos or Living Trust" is not used
extensively because most people are unaware of the substantial economic advantages it
offers.
Under a simple revocable living trust, property may be
registered in the name of the trust, with the Trustor also named as Trustee. Upon death,
ownership passes through the trust without the necessity of Probate Court proceedings.
Many people feel that living trusts are only for high bracket
taxpayers or large estates. But as a result of inflation, medium sized "middle
class" estates can suffer heavy charges as well. An estate of $300,000 will incur
charges in excess of $14,000 just for probate: Probate Court fees of $7,150 and statutory
attorney's fees of the same amount (A $600,000 estate will have total Probate fees and
costs of $26,300.). Not only would a living trust avoid these probate costs, but estate
taxes can be minimized as well.
A SUMMARY OF
ADVANTAGES OF A LIVING TRUST
- Living Trust Defined: A living trust avoids the costs
and problems of administering an estate in Probate Court. An agreement or declaration
incorporating many of the features of a Will, the living trust is created by a person
while living as opposed to a testamentary trust, which is created upon death. A living
trust names successor trustees to succeed the original trustee in the event of the
trustee's incapacity or death. The successor trustee takes over the trust immediately upon
the death or disability of the trustee, thereby avoiding any delay in the flow of income
to beneficiaries following death. By contrast, Probate Court proceedings are notorious for
delays -- sometimes lasting years!
- Financial Affairs: A living trust allows financial
affairs and transfers to remain private. There is no public disclosure of the amounts of
bequests or the names of beneficiaries as there is no inventory of assets or inheritance
provisions filed with the Probate Court.
- Protection of Children/Beneficiaries' Interests: The
trustor can protect children or other beneficiaries of the estate against their own
inexperience while providing for their care and custody. Further, a trust is not as easily
attacked by dissatisfied heirs on grounds of fraud, incompetence or undue influence
because the living trust exists before death.
- Remarriage by Surviving Spouse: When a surviving spouse
remarries, the new spouse automatically gains inheritance rights in the assets owned by
the survivor. While this can be prevented by an antenuptial agreement between the survivor
and the new spouse, such an arrangement is frequently hampered by embarrassment, if not
outright distaste. However, if the marital deduction property was placed into a suitable
trust by the decedent, no future spouse of the survivor will acquire any rights in such
property. Also, the survivor will have some assurance that the suitor is not
fortune-hunting.
- Avoiding Probate: Probate drawbacks include delays in
distribution, administrative expenses, and publicity. Contending with ancillary probate in
other jurisdictions is also a factor. A living trust becomes irrevocable at death and
avoids probate -- unless assets are distributed to the grantor's estate.
- Avoiding Guardianship: Where minors are beneficiaries,
the need for court-appointed guardians involves restrictions and expenses that could be
avoided with a trust arrangement.
- Discouraging Litigation: It is much more difficult for
a dissatisfied heir to challenge a living trust than a will. Arguments in will contests
pertaining to undue influence or testamentary capacity carry little weight where the
grantor established a living trust and allowed it to remain in effect over a period of
time. This is particularly true where the trust was funded and had an active role in the
grantor's finances.
- Providing Long-Term Security: A living trust can be
designed to last a lifetime and beyond. With the benefit of a corporate fiduciary,
professional supervision can continue uninterrupted. Continuity is maintained
notwithstanding the grantor's incapacity, and the trust can be used to invest and
distribute assets after the grantor's death as well. Indeed, the grantor may consider the
living trust's lifetime operation as a blueprint for how it can continue after death and
how the trustee will perform.
- Coordinating of Assets: As discussed hereafter, many
funding options are available for living trusts. Insofar as the living trust establishes
guidelines for assets supervision and distribution, other assets may be added to the trust
during life or upon the grantor's incapacitation or death.
- Flexibility, Mobility: A revocable living trust is a
flexible tool. Like a Will, it is subject to revocation or amendment at any time prior to
death. There are no restrictions whatsoever on adding or removing trust assets, changing
beneficiaries, or in buying, selling or exchanging assets. Trustees have the same freedom
of action as if they held the property in their individual names. Further, there is no
expense in creating or terminating a living trust, excepting legal preparation costs and
nominal fees for transferring property to oneself as trustee. In addition, the trust has
great latitude insofar as the trust remains effective wherever the grantor may move and
may provide a choice of state laws in some instances. Residency requirements that apply to
other arrangements do not generally affect trustees. Transfer Taxes: Assets in a revocable
living trust are included in the grantor's gross estate. However, the living trust may
well become the focal point of the estate. Upon the grantor's death, the trust becomes
irrevocable and may be the receptacle of probate and nonprobate assets. The trust can then
address transfer tax burdens by incorporating traditional QTIP, GST, and other
arrangements just as a testamentary trust plan would.
- Income Tax: The revocable living trust does not
generally qualify as a separate taxable entity. All income is taxable to the grantor,
regardless of how income is distributed. Based on current income tax rates, having income
taxes to an individual will be preferable to having income taxed to a trust under certain
instances. As compared with the funding of an irrevocable trust, which involves a
completed transfer, use of a revocable trust allows appreciated capital assets to remain
in the grantor's estate so that a stepped-up basis may be obtained at death. Additionally,
state and federal estate taxes may be minimized through the use of a living trust. For
example, qualified pension plans lose their federal estate tax-free status if payable to
one's estate, but retain it if paid to a living trust in installments.
- Taxpayer I.D. Number: A Federal Taxpayer I.D. number is
not required for the trust, nor is filing Federal Income Tax returns [Regulation
1.671-4(b); 1.6012-3 (a)(9); 301.6109-1 (a)(2)]. Filing of State of California Trust
Income Tax Returns is not required either (Letter, Franchise Tax Board, January 22, 1982).
- No Tax Reassessment: There is no Proposition 13 tax
reassessment on real property transferred to a living trust (R&TC SS62(d)). Also, the
homeowner's exclusion still applies (R&TC SS218).
- Other Advantages: Whether a revocable trust can avoid
creditors or spousal election rights depend on state laws and circumstances. But
irrevocable trusts are generally a better choice and, even then, remain subject to
statutory limits and factual determinations.
- Expedites Asset Distribution: The living trust
expedites asset distribution. There is great hardship on heirs awaiting distribution of an
estate through probate. If your beneficiaries will have liquidity problems that may be
occasioned by probate administration -- bills to pay or a business to continue -- then a
living trust may be for you.
- Avoid Ancillary Probate Proceedings: Another
complication of probate administration arises when real property is owned in more than one
county or state. Often, the executor is required to open ancillary or additional probate
proceedings in each county and/or state where real property is located. Living trusts may
be used to overcome this problem.
HOW DO I MANAGE LIVING
TRUST PROPERTY?
There may come a point in your consideration of living trusts
when you realize that how a trust functions during your life is probably more important
than how it will function after your death. After all, if you truly transfer everything
you own to the trust, it becomes your sole means of support. Besides, the better your
property is managed now, the more that will be left for your beneficiaries.
Therefore, choosing a good trustee is vital. Ability and
experience are the things to look for in a trustee. A close friend or relative who lacks
the capacity for making sound financial decisions is not a good choice unless you also
find a competent co-trustee to shoulder the burden.
Here are some of the types of trustees you might consider:
Beneficiaries. Before naming a beneficiary as trustee,
consider the fact that even the most trustworthy of beneficiaries may not always have your
best interests at heart. Having a co-trustee in this situation would be wise. The
necessity of getting approval from a co-trustee could prevent any self-seeking impulses.
Friends or Relatives. Be careful when appointing
friends or relatives as trustees. They have no reason to act against you, but no reason to
act for you either. To avoid one getting worn out from the burden of trustee, you may
consider providing compensation for his or her services.
Professional Management. Many attorneys, accountants,
financial planners, or other professional advisors are generally well prepared to take on
the task of acting as trustee. Also, some banks and other financial institutions are
willing to act as a trustee for a fee.
HOW DO I SET UP A
LIVING TRUST
A trust needs three things: (1) one or more beneficiaries,
(2) one or more trustees, and (3) a fund of cash or property that the trustee can manage
for the benefit of the beneficiaries.
Tailor the trust to your needs: There are many
questions that you will have to answer in formulating the plan of action that will be
incorporated into your trust. Here are some of the most important points to consider
before seeking professional assistance:
Who do you want as your beneficiaries? When should they start
receiving distributions from the trust? (Now? After your death?) How much should they
receive? (Percentage? Dollar amount?) How should it be paid? (Installments? Lump sum?) Are
there any conditions attached? Who will receive your property if your beneficiaries do not
survive? What share will you retain during your lifetime? Who do you want to act as
trustee?
Funding is critical: The biggest continuing question
in terms of mechanics is how you plan to fund the trust. Because you have selected a
living trust rather than a will or testamentary trust, it is important to complete the
trust by funding it and keeping it funded.
WHY WOULD I WANT TO
AVOID PROBATE?
Interruption of business: Your death will be a big
blow to any business you own, whether you own it on your own or with others. Probate
delays could compound the issue and cause liquidity and management problems for the
business.
Public record of estate: Probate is a court proceeding
and in our system, court records are public. This means that your will and an inventory of
your estate will be available to anyone. Furthermore, if anyone challenges your will, it
will be a matter of public record.
Handling out of state property: If you own property in
another state, particularly real estate, one probate proceeding may not be enough. It may
be necessary for your executor to open ancillary proceedings in the court where the
property is located. This results in extra cost to the estate.
If you wish to receive a complete copy of
our estate planning pamphlet including asset protection planning strategies, please e-mail
us at
KPCLaw@KPCLaw.com
Kevin P. Courtney, Attorney At Law
(408) 779-5101 Morgan Hill
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