Estate Planning FAQs

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.

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.

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.

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.

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.

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.

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.

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 2020, a person can pass up to $11.58 million free from federal estate taxes. The amount that can pass free from federal estate tax is called the “federal exemption” amount, and it typically goes up every year to account for inflation. The State of California imposes no additional tax burden.

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

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 2020 you can give up to $15,000 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. Gift tax is rarely paid during the giver’s lifetime because of the high gift tax exemption threshold.