Frequently Asked Questions about Trusts
FREQUENTLY ASKED QUESTIONS ABOUT TRUSTS
ISN'T A WILL ENOUGH?
WHAT IS PROBATE?
WHAT ARE PROBATE ASSETS?
WHAT'S WRONG WITH PROBATE?
HOW DOES A LIVING TRUST AVOID PROBATE?
WHO CONTROLS MY TRUST ASSETS?
CAN I CHANGE THE TERMS OF MY TRUST?
WHAT IF I BUY OR SELL ASSETS AFTER MAKING MY TRUST?
WHO SHOULD BE CHOSEN AS THE SUCCESSOR TRUSTEE?
WHO WILL CARE FOR OUR CHILDREN?
WHAT ABOUT MY PETS?
IF I HAVE A TRUST, DO I NEED A WILL?
CAN A LIVING TRUST REDUCE INHERITANCE TAX?
A/B TRUST
AVOIDING PROBATE, SAVING TAXES, AND MORE
(FREQUENTLY ASKED QUESTIONS ABOUT TRUSTS)
Before beginning to learn about estate planning, one must learn the distinction between state law and federal law. State law concerns Probate, which is required on estates where the gross value of the estate exceeds $100,000 in personal property or $20,000 in real property. Federal law concerns Inheritance Taxes. Pursuant to federal law, your beneficiaries must pay Inheritance Tax, or Federal Estate and Gift Taxes when the net value of your estate exceeds a $2,000,000 (in years 2006 - 2008).
ISN'T A WILL ENOUGH?
Contrary to what you may have heard, a simple will may not be the best plan for you and your family, primarily because a will does not avoid probate when you die. Even if you have a will, California Probate Code § 13100 states that if your estate exceeds $100,000 in personal property OR $20,000 in real property, your beneficiaries will have to go through Probate Court when you die. One of the important things to consider when analyzing estate-planning options is the possibility of probate. When a person passes away, he leaves property behind. Probate is the process that courts use to determine the validity of a will, make sure that all creditors get paid, and transfer that property to the decedent's heirs.
Probate occurs when the deceased either dies with a valid will (called dying testate) or dies without a will at all (called dying intestate.) The only time probate is not needed is if the decedent used a living trust.
Furthermore, because a will can only go into effect after you die, it provides no protection if you become incapacitated during your lifetime. Consequently, the court could then take control of your assets before you die, a critical concern to older people and their families.
WHAT IS PROBATE?
"Probate" is a court proceeding that takes place after you die. The main reason children have to go through probate is because they need to "transfer title" of their parents' assets to themselves after their parents die.
The typical probate court proceeding usually lasts about one to two years from the beginning to the end. On average, the fees associated with probating an estate range from 6% to 15% of the GROSS value of the estate. Yes, the gross value of your estate. That means that your $500,000 house with $1,000 in equity means that in Probate, your heirs will be paying probate fees on a $500,000 house, or in other words, paying fees on $499,000 of assets that you don't even own!
WHAT ARE PROBATE ASSETS?
Any asset that is in the decedent's name, and not in joint tenancy or in a trust. Assets that are not subject to probate include retirement based accounts (IRAs, 401Ks) and life insurance, assuming that a beneficiary has been correctly named to receive the asset involved.
WHAT'S WRONG WITH PROBATE?
- It is expensive. In addition to the probate fees of 6% to 15%, attorney's fees add to the cost of probate. Attorneys fees are set be statute (but additional fees can be awarded by the court). The minimum attorney's fees for an estate with $500,000 in probate assets are $22,300. For an estate with $1,000,000 in probate assets the minimum attorney's fee is $42,300.
- Your family has no privacy. Probate is a matter of public record, meaning anyone can see the contents of your estate.
- It takes a long time. Probate usually takes 10 - 24 months, but often longer. During this time, the assets of the estate are frozen so an accurate inventory and accounting can be made. As a result, assets cannot be distributed or sold during this time.
HOW DOES A LIVING TRUST AVOID PROBATE?
You create a living trust during your lifetime and transfer the title of your assets to your trust. Since you no longer technically own your assets as an individual, your beneficiaries no longer have to go through probate court to transfer title in the assets when you die, as the title was already transferred to the trust, which passes directly to your beneficiaries.
WHO CONTROLS MY TRUST ASSETS?
You do. As the trustee of your trust, you manage your trust assets for your own benefit during your lifetime. You continue to use your assets just as you were doing before setting up your trust.
CAN I CHANGE THE TERMS OF MY TRUST?
Yes. As the trustor, you retain the right to change any of the terms of your trust anytime you wish.
WHAT IF I BUY OR SELL ASSETS AFTER MAKING MY TRUST?
If your assets change, you keep track of the changes at the back of your trust. You do not need to see an attorney to do this.
WHO SHOULD BE CHOSEN AS THE SUCCESSOR TRUSTEE?
You can choose individuals (adult children, relatives, friends) or a corporate trustee. The successor trustee has several responsibilities. If you become incapacitated, your successor trustee takes care of your financial affairs for as long as needed, using your assets to pay your expenses. When you recover, you automatically regain control of your affairs.
When you die, the successor trustee pays your debts and obligations, then distributes the trust assets according to the terms of the trust, without court intervention and in a fraction of the time of probate.
WHO WILL CARE FOR OUR CHILDREN?
All parents worry about what happens to their children if both parents die before their children attain 18 years of age. This concern draws many people to lawyers' offices to start the estate planning process.
If one parent dies or becomes incapacitated, then usually the surviving parent will retain sole custody of any children, unless special circumstances exist. If both parents die, then usually there must be a court action to appoint a legal guardian for the children. In such a proceeding, the court will always look first to the desires of the parents, preferably expressed in a written Nomination of Guardian. The court is required to appoint a nominated person as guardian unless this would not be in the best interests of the child.
WHAT ABOUT MY PETS?
California Probate Code § 15212 was enacted in 1991 and authorizes trusts for pets. Prior to 1991 in California, courts had been reluctant to declare that these types of trusts were valid. However, provisions can be made for the care of a pet, and a specified amount of money will be used by the trustee for the care, feeding, and health care of the pet for the remainder of its life. Another approach to lifetime care for pets would be to give the pet to a friend, and also give the friend a cash bequest. This would allow the trust to be closed prior to the death of the pet, but also has a risk that the friend would not be legally obligated to pay for the pet's care.
IF I HAVE A TRUST, DO I NEED A WILL?
Yes, but only a very special type of will called a "pour-over" will. The pour-over will acts as a safety net to put any non-trust assets, such as your cars, jewelry, furniture, artwork, and maybe a checking account into your trust when you die. As long as your non-trust assets do not exceed $100,000, this pour-over will does not have to go through probate court when you die.
CAN A LIVING TRUST REDUCE INHERITANCE TAX?
If the net value of your estate when you pass away is more than $2,000,000 (in the years 2006 - 2008), Federal Estate and Gift Taxes must be paid for any amount over $2,000,000. If you are married, an "A/B" Trust will allow you and your spouse to pass up to $4 million to your heirs (in the years 2006 - 2008) without any Federal Estate and Gift Taxes, saving your heirs over $750,000 in potential Inheritance taxes if you had just a will. Additionally, if you only had a will, you would also subject your heirs to probate, which would cost them an additional fee of 15% of your gross estate, and take them approximately 2 years to obtain title to your assets. To see how the benefits of a Trust could apply to you, see the Living Trust hypothetical.
A/B Trust
Often called an exemption trust, bypass trust, or credit shelter trust. Regardless of the name, its purpose is to reduce or eliminate Federal Estate and Gift Taxes for a married couple's estate. This type of estate plan sets up an irrevocable trust that will hold the assets of the first spouse to die in trust. The amount transferred into the irrevocable trust (the "B" trust) will not be taxed for federal estate tax purposes when the second, surviving spouse dies. This provides for savings for married couples of over $750,000.