Frequently Asked Questions

What are the benefits of estate planning?

Estate planning enables you to:

  • Avoid putting your family through the stress that comes with the probate process while they are trying to adjust to life without you
  • Save potentially thousands of dollars in unnecessary probate costs
  • Control who will receive your assets after your lifetime
  • Control under what conditions your beneficiaries will receive your assets
  • Structure gifts to your children and grandchildren so that they can receive money for things like education or retirement, but they will not have unrestricted access to any money until the age(s) you deem appropriate
  • Keep your assets, debts, and identities of your beneficiaries private
  • Save potentially thousands of dollars in estate taxes
  • Authorize other persons to make financial and medical decisions for you in the event you are unable to make those decisions for yourself
What is Probate?

Probate is a legal process supervised by the court. The purposes of probate are:

  1. To identify a deceased person’s assets, debts, and beneficiaries;
  2. Ensure proper payment of debts; and
  3. Distribute assets
When do assets and debts have to go through probate?

A deceased person’s assets and debts may be subject to the probate process when that person dies with only a will or dies intestate (i.e., without a will).

Why should you avoid probate?

There are many significant disadvantages to the probate process, such as:

  • Excessive paperwork – probate involves the court system which means there can be extensive paperwork and accountings which must be filed with the court
  • Time – probate can take a long time, anywhere from several months to years
  • Lack of privacy – probate is a matter of public record, so anyone can see what the deceased person’s assets and debts are, and know who the beneficiaries are
  • Expense – probate can be very expensive (see the chart below):

Statutory Probate Fees

The California Probate Code provides that the fees listed below be paid to the deceased person’s personal representative (aka “executor” or “administrator”) and the attorney for the personal representative.

probatechart

The size of the estate is based on the fair market value of the estate assets without any deduction for debts or mortgages. For example, if the deceased person’s house is worth $400,000 and there is a mortgage of $375,000, then there is $25,000 of equity in the property. However, the amount subject to probate is $400,000 (the fair market value), not merely $25,000 (the equity).

What happens if you die without a will?

If you die without a will, your property will have to go through the probate process if your assets are sufficient to trigger the probate process and the transfer of your property is not controlled by the title to the property (ex: joint tenancy). Your assets will be distributed through the courts and will go to the people determined under California’s intestacy laws (aka “intestate succession”). The court will appoint an administrator to handle the estate. In addition, the court will appoint a guardian for any orphaned minor children.

If you die without a will (i.e., “intestate”), the State of California has already predetermined how your property will be distributed. Contrary to popular belief, a surviving spouse does not necessarily inherit everything. For example, a surviving spouse may only get one-half (1/2) or one-third (1/3) of the decedent’s (deceased person’s) separate property, depending on if the decedent died leaving children, grandchildren, parents, siblings, or nieces/nephews. A surviving spouse will inherit the decedent’s share of any community or quasi-community property.

If the decedent’s children are minors and they receive an interest in the separate property, a guardianship must be created for the children’s funds and the guardian must report annually to the court until the children reach age 18. If the children are orphans, the court will also need to appoint a guardian to raise the children.

What are the benefits of a will?

A will does not shield assets from probate. However, there are still benefits to having a will, such as:

  • The ability to name any person you want to receive your property under the will (which may or may not be the same persons entitled to receive property under the intestate succession laws)
  • Identification of the person(s) whom you want to serve as guardian of your minor children
  • Identification of the person(s) you want to act as your executor to administer your estate
What is a trust?

A trust is an arrangement in which a trustee (similar to a manager) holds title to property for the benefit of the trust beneficiaries. This relationship is governed by a document often called a “trust declaration” or “trust agreement”. The trust declaration or agreement identifies:

  • The creators of the trust (aka “settlors”, “grantors” or “trustors”)
  • The trustee (manager)
  • Beneficiaries
  • When and under what conditions the trust property is to be distributed to the beneficiaries
  • Rules the trustee must follow when managing the trust property for the beneficiaries

When you transfer title of property from your individual name to the name of the trustee, you no longer own the assets. However, you maintain control over those assets when you are the trustee of your trust. You can be your own trustee, or you can share that role with another person or institution. You can choose to have all or some of your assets in the trust.

What are the benefits of a trust?

A trust enables you to:

  • Control who will receive your assets after your lifetime
  • Control under what conditions your beneficiaries will receive your assets
  • Structure gifts to your children and grandchildren so that they can receive money for things like education or retirement, but they will not have unrestricted access to any money until the age(s) you deem appropriate
  • Avoid probate (no mandatory probate fees, paperwork and accountings which must be filed with the court)
  • Keep your assets, debts, and identities of your beneficiaries private
  • Save potentially thousands of dollars in estate taxes
Who can have a trust?

A single person, a married person or a married couple may establish a trust.

What is a Living Trust?

A Living Trust is another name for a Revocable Inter Vivos Trust, which is one type of trust. “Inter vivos” means “during life,” and refers to a trust that is created when the settlor (aka “grantor” or “trustor”) starts the trust during the settlor’s lifetime. Usually a Living Trust may be revoked or amended (changed) during the settlor’s lifetime. There are other types of trusts which have specific tax, economic or management purposes.

Do I need both a will and a trust?

It depends on your assets, family situation, and tax considerations. For those who need a Living Trust, a “Pour Over Will” is generally prepared to work in conjunction with the trust. A Pour Over Will pours assets into the trust at death so that assets outside the trust can be distributed to the beneficiaries of the trust.

What is a Single Person Trust?

A Single Person Trust is for a person who is not currently married. This type of trust provides for management of the person’s assets during his/her lifetime and for distribution after the person’s lifetime.

When two unmarried persons are in a committed relationship, it would be appropriate for each person to have their own trust for estate planning purposes.

What is an A-B Trust (aka “Bypass Trust”)?

An A-B Trust (aka “Bypass Trust”) is a trust established by a married couple which must divide into two trusts when the first spouse dies. This type of trust is intended to:

  • Avoid probate for both spouses’ estates
  • Position the deceased spouse’s share of trust assets so that they ultimately pass to the deceased spouse’s beneficiaries while providing the surviving spouse access to those assets during the surviving spouse’s lifetime
  • Utilize the federal exemption amounts available to both spouses

When the first spouse dies, the original trust will be divided into two trusts. The surviving spouse’s trust assets will remain in the original trust which is often called the “A Trust” or “Survivor’s Trust”. All of the income and principal in the A Trust are paid to and available to the surviving spouse. This trust remains amendable and revocable by the surviving spouse.

The deceased spouse’s trust property goes into the new trust called the “B Trust” or “Bypass Trust” (up to the maximum amount that passes free from federal estate tax). Income in this trust is paid to the surviving spouse who usually may also access trust principal if the principal is used for the survivor’s health, education, maintenance or support. Any principal remaining in the B Trust at the death of the surviving spouse then passes to the beneficiaries identified by the deceased spouse (i.e., the first spouse to die).

The B Trust is not generally amendable or revocable once the first spouse has died. This means the surviving spouse cannot change the beneficiary designation of the B Trust to transfer the deceased spouse’s assets to his or her own beneficiaries. For this reason, this type of trust is often used in blended families so that the children of the deceased spouse remain the beneficiaries of the deceased spouse’s trust assets.

What is a Disclaimer Trust?

A Disclaimer Trust gives the surviving spouse the option to divide the original trust into two trusts after the death of the first spouse. This decision is largely based on tax considerations (i.e., whether an estate exceeds the federal exemption limit).

When the first spouse dies, the surviving spouse must decide whether to divide the original trust into a “Survivor’s Trust” and a “Disclaimer Trust”. The Survivor’s Trust contains the surviving spouse’s trust property; the surviving spouse has full access to the income and principal in this trust. In addition, the Survivor’s Trust remains amendable and revocable by the surviving spouse.

The Disclaimer Trust contains the trust property that had been owned by the deceased spouse. The income is paid to the surviving spouse, but the beneficiaries designated by the deceased spouse receive any remaining principal once the surviving spouse dies.

If a surviving spouse wants to exercise the right to disclaim and divide the trust into two trusts, he/she must make a written disclaimer within nine months of the date the deceased spouse died. A surviving spouse cannot disclaim assets from which he/she has already accepted benefits (so seeking timely legal advice is very important). If the surviving spouse does not exercise the right to disclaim, the original trust continues on, which means the surviving spouse has the power to amend or revoke the trust. Thus, there is the risk that the surviving spouse could change the beneficiary designations that the deceased spouse had chosen.

Other kinds of trusts

There are many different kinds of trusts which have differing purposes. Some examples include:

  • Special Needs Trusts: Usually this type of trust is designed to benefit a disabled person who is receiving government benefits (like Medi-Cal). The purpose of the trust is to benefit the person without jeopardizing their current or future government benefits.
  • Discretionary Trust (aka “Spendthrift Trust”): The purpose of this trust is to benefit a person without enabling that person to squander the trust funds, or lose the funds to a creditor.
  • Irrevocable Trust: A person can create an irrevocable trust to minimize or eliminate federal estate taxes. When properly drafted, the assets in an irrevocable trust (including life insurance proceeds) would not be taxed in the settlor’s estate.
What is a Durable Power of Attorney?

A Durable Power of Attorney for finances is a document which appoints another person to oversee your non-trust finances in the event you become unable to handle your finances yourself. When there is no Durable Power of Attorney in place and a person is unable to make financial decisions, the probate court must become involved through the conservatorship process. A conservatorship is the method by which a person is appointed to handle the disabled person’s finances. Conservatorships require many filings and accountings to be made to the court. In addition, they are expensive due to attorney’s fees and costs. Moreover, assets can only be transferred with prior court approval. The need for a conservatorship can be avoided by using a Durable Power of Attorney for finances.

What is an Advance Health Care Directive?

An Advance Health Care Directive is a document which (1) authorizes another person to make medical decisions for you in the event you are unable to make your own decisions and (2) identifies the types of medical treatment preferences and end-of-life decisions you would want made on your behalf. For example, an Advance Health Care Directive can be used to specify under what circumstances (if any) you want to receive pain medications or be on life support.

What are Federal Estate Taxes?

Federal estate taxes (aka “death taxes” or “inheritance taxes”) are taxes imposed by the federal government on the right to transfer property from a deceased person’s estate to his or her beneficiaries. In 2014, a person can pass up to $5.34 million free from federal estate taxes. The amount that can pass free from federal estate tax is called the “federal exemption” amount, and goes up every year to account for inflation. The State of California imposes no additional tax burden.

What is the Marital Deduction (aka “Unlimited Marital Deduction”)?

Married persons can transfer an unlimited amount of property to each other at death without incurring any federal estate tax on the transferred property.

What is a Gift Tax?

A gift is a transfer of property for which you receive nothing (or less than fair market value) in return. For example, you have made a gift if you give someone a check for $10,000. Or, if the fair market value of your house is $140,000 but you sell it to your daughter for $25,000, you have made a gift of $115,000 to her.

Not all gifts are taxable. For example, in 2014 you can give up to $14,000 to an individual which will not be taxable. Gifts between spouses are not taxable, either. However, if you make a taxable gift, you must file a gift tax return. You can choose to either pay the tax (in 2014 the maximum marginal gift tax rate is 40%) or use some of your unified gift and estate tax exemption amount to defer (and likely avoid) paying any tax. Gift tax is rarely paid during the giver’s lifetime because of the $5.34 million gift and estate tax exemption amount available to each person in 2014. Generally gift tax is not paid until a person makes so many taxable gifts that the $5.34 million exemption limit is exceeded.

What is the Unified Tax Credit?

The “unified tax credit” refers to the federal gift tax and estate tax which are integrated into one unified tax system. Gift tax applies to gifts made during your lifetime; estate tax applies to the right to transfer property upon your death. These taxes are imposed at the same marginal rates (the maximum is 40% in 2014) regardless of whether you choose to give assets away during your life or leave them at your death.

Federal estate tax is calculated when a person dies. Included in the calculation which may be subject to the tax is the property left behind (the estate) and the amount of taxable lifetime gifts that were made. No federal estate tax is due unless the taxable estate exceeds the federal exemption amount.

In 2014, each person can give away or leave up to $5.34 million without owing federal gift and estate tax (the exemption amount is indexed for inflation and goes up every year). This means, for example, that if you give your kids your house (worth $2 million) and other investments (worth $3 million) during your lifetime or upon your death in 2014, no federal gift tax or federal estate tax will be due. Not all gifts are subject to federal gift tax, such as gifts between spouses. In this scenario, if you give your kids a $2 million house and $3 million in other assets, and another $8 million to your spouse, you still will not owe any gift tax or federal estate tax.

Can a surviving spouse use their deceased spouse’s unused exemption?

If the first spouse dies but the value of his or her estate is less than the federal exemption limit, the amount of the exemption that was not used may be added to the surviving spouse’s exemption. This means the surviving spouse can use the deceased spouse’s unused exemption amount (aka “DSUEA”) plus the surviving spouse’s own exemption when the surviving spouse later dies.

Example: If Husband dies in 2014 with $4 million in his estate, he will only use $4 million of the $5.34 million federal exemption amount available to him. When Wife later dies, she can use the remaining $1.34 from Husband’s unused exemption to add to her own exemption limit of $5.34 million. Thus, if Wife dies in 2014 she can transfer $6.68 million to her beneficiaries free from federal estate tax.

Note that the surviving spouse will not automatically “inherit” the deceased spouse’s unused exemption. The surviving spouse must timely file IRS form 706, United States Estate (and Generation-Skipping Transfer) Tax Return in order to make an affirmative election to add the deceased spouse’s unused exemption to the surviving spouse’s exemption.

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