7 Reasons to Have a Trust in California

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1 ROCHELLE J. BIOTEAU, PARTNER Direct Dial Number (619) Direct Fax Number (619) Address: SQUIRES, SHERMAN & BIOTEAU, LLP A LIMITED LIABILITY PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS ATTORNEYS AT LAW 1901 First Avenue, Suite 310 San Diego, CA Tel. (619) Fax (619) KENDALL SQUIRES BRUCE SHERMAN ROCHELLE J. BIOTEAU 7 Reasons to Have a Trust in California 1. To Direct Where and How Their Assets Will be Distributed After Their Death: The California Probate Code provides a statutory scheme for the distribution of a decedent s estate when he or she dies without a Will. Upon the death of a spouse or registered domestic partner, the survivor is automatically entitled to receive all of the community property accrued by the couple. Depending on how many children the decedent had, the spouse or domestic partner is also entitled to at least 1/3 of the decedent s separate property. The children, or if there are no children then the next of kin, are entitled to receive the balance of the decedent s separate property. In the case of a lengthy marriage or domestic partnership, where all the assets are owned as community property and all the children are adults with no disabilities or special needs, this statutory scheme may be adequate. If the heirs are minor children, have disabilities, special needs, receive public assistance benefits, or have other issues regarding money management, substance abuse problems or creditor concerns, more detailed estate planning might be beneficial. Also, if one desires a distribution scheme that varies from the statutory scheme, then a formal written document, such as a will or trust, must be prepared specifying the desired distribution. 2. Avoiding Probate: Probate is necessary when an individual dies WITHOUT THE PROPER ESTATE PLANNING DOCUMENTS, and his/her estate assets exceed $100, The cost for probating an estate is based on the estate s GROSS asset value. A probate proceeding involves multiple forms, the engagement of multiple professionals such as CPA s, lawyers, and appraisers and the payment of court fees and costs. This process is extremely time consuming, expensive and is completely open to the public. In most cases, legal counsel is required to help the estate s representative complete the process. The attorney and personal representative are both entitled to a statutory fee that is based on the fair market value of the gross estate, regardless of liens or encumbrances on the decedent s property. This fee is calculated as follows: 4% of the first $100,000; 3% of the next $100,000; 2% of the next $800,000; 1% of the next $9,000,000; and for all amounts above $25,000,000, a reasonable amount to be determined by the court. Conversely, if a properly drafted trust exists, that is not contested, absolutely no statutory court or attorneys fees are imposed to administer it. 1

2 The following is an example of how the high cost of probate can divert your estate s assets not to your loved ones, but to the government and to lawyers. The fees are the minimum fees as set by California law and do not include special fees for the sale of assets, tax preparation, and litigation, which could cause the figures to dramatically increase. Gross Asset Value of Entire Estate Minimum Probate Fees WITHOUT Proper Estate Planning Probate Fees WITH Proper Estate Planning $200, $14,000.00* $0.00 $300, $18,000.00* $0.00 $400, $22,000.00* $0.00 $500, $26,000.00* $0.00 $750, $36,000.00* $0.00 $1,000, $46,000.00* $0.00 $2,000, $66,000.00* $0.00 *This amount is not a tax. These are the fees authorized by the California Probate Code. One half of this amount will go to the Executor of your estate or an appointed Administrator if an Executor has not been designated in your Will. This amount is based on a married couple. 3. Property Management & Preservation: Property management is useful both during a settlor s lifetime and after death. A trust that comes into being or continues after a settlor s death can provide property management for the settlor s family or other heirs. When the settlor dies, the management of the trust property will not be disrupted, but will continue under the direction of the trustee or the successor trustee. 4. Financial Management: A trust can also be a useful catalyst and means for providing investment direction, advice and in many cases force settlors to get organized. Settlors who need or desire investment advice and direction include settlors who are ill, settlors who are unable to devote substantial time and attention to their own investments, and settlors who have little interest in or aptitude for making investment decisions. Financial advice and direction may also be vital after the settlor s death. The settlor s spouse or domestic partner may be unwilling or unable to accept full responsibility for making financial decisions. If young children, aged parents, or disabled persons are the beneficiaries, financial advice and direction may not only be preferable, it may be crucial. For the unwilling or unable beneficiary, a trust provides a perfect opportunity to involve direction and management by a professional trustee such as a bank, professional fiduciary or trust company. Retention of such professional trustee, provided the services and advice are sound, ideally insures proper management of the trust. Increased income growth will often exceed and the cost of such professional services and the services can always be terminated if the settlor is dissatisfied and if the trust permits. 5. Providing for Minor Beneficiaries or Beneficiaries with Special Needs. Most would agree that giving a large monetary or property gift to a minor causes concern. Sometimes the beneficiaries need special help due to a disability. To ensure that gifts made to minors are preserved and utilized in a specific manner and for a specific purpose, a trust is ideal. 2

3 6. Minimize Estate Tax Liability In the case of larger estates, currently those above $2,000,000 per individual (net, after expenses and less liens and encumbrances) the IRS imposes an estate tax. Actually, the estate tax is imposed on the estate beginning with the first dollar, but a credit is also granted which offsets the tax liability up to the $2,000,000 figure. The tax obligation increases with the size of the estate, and at the $2,000,000 mark it s nearly 50%. A married couple (but not domestic partners) also have the ability to bequeath to one another any amount without creating a tax liability at the death of the first spouse, but unless structured properly, the death of the second spouse, will trigger an estate tax on the entire remainder of the estate. A simple mechanism to minimize the ultimate estate tax is an AB trust. An AB trust allows the decedent s ½ share of the couple s assets to be held separately known as the B Trust, but leaves them accessible to the surviving spouse for certain purposes. The surviving spouse keeps her share of the couple s assets, along with the remaining ½ of the decedent s share in the A Trust and can be used without restrictions. Upon the death of the surviving spouse, the assets of the first spouse in the B Trust would not be counted as part of the second spouse s estate, and thus not subject to estate tax. Although this is a simplistic explanation of one type of trust, many other mechanisms also exist to achieve the goal of estate tax minimization. Each estate plan is different and depends on the character and value of the assets, as well as how the funds are ultimately used and or needed by each settlor. 7. Providing for Your Pets and Animals. In many cases, a dog is a man s best friend, or woman s for that matter! In California, the law allows trusts to specifically provide for a settlor s companion animals, such as dogs, cats, horses, or any other type of animal the settlor designates. Specific care instructions can be carefully crafted to carry out the settlor s intentions and wishes. Knowing that a settlor s animals are provided for is extremely comforting and reassuring for many. 3

4 Estate Planning Questionnaire If you can answer No to any of the following questions, please make an appointment for a free consultation with our firm. Yes No Do you have a Will? Do you have a current Will which names custodians for minor children? Have you designated how your personal property will be distributed (including your pets) after your death? If the GROSS value of your estate (including your house) is over $100,000, do you have a Trust? If you have a Revocable Living Trust, have your assets been transferred into it, i.e. has a Grant Deed been recorded placing the property into your Revocable Living Trust s name? Do you have someone authorized to handle financial matters for you, or your spouse, in case you, or your spouse, become disabled or incapacitated? Do you have a Health Care Power of Attorney that provides the names, addresses and telephone numbers of your designated agents? Do you have a HIPPA ( Healthcare Information Privacy Protection Act ) disclosure form authorizing a medical provider to disclose protected health care information about you to designated individuals? Do you have provisions in your Trust or Will for payment of estate taxes? Have you made provisions for gifts to charities of your choice? Have you been unable to locate your Trust or Will? Does your spouse fully understand the contents of your estate? If you can answer Yes to any of the following questions, please make an appointment for a free consultation with our firm. Yes No Do you have a Durable Power of Attorney for Health care signed before 1992? Have you changed your mind regarding distribution to your Heirs/beneficiaries since your documents were drafted? Has there been a change in the value of your estate (the value of all property and assets you own)? Have you started a corporation, limited liability company, partnership or other corporate entity? 4

5 Have you recently married or remarried? Have you divorced? Has one of your children or grandchildren married? Has one of your children or grandchildren divorced? Have you or your spouse become incapacitated, mentally or physically? Has one of your children or grandchildren become incapacitated, mentally or physically? Have you bought or sold your house or another piece of Property or asset? Are you contemplating selling stock or assets with a low cost basis? Do you have any international businesses or assets? Have you moved between states? Between countries? Do you have a prenuptial agreement? If the above questions make you wonder about how well prepared and organized your estate is, please contact our office so we can walk you through the status of your affairs. We are a full service general practice firm, with emphasis on Trusts, Creation of Corporate Entities (including subchapter S corporations, professional corporations, Limited Partnerships, Limited Liability Companies, etc.), Business Transactional Litigation, Civil Litigation and Enforcement of Judgments. Let us guide you through the maze and take the worry and confusion out of Estate Planning, or any other legal matters you may have. 5

6 Frequently Asked Questions about Living Trusts Frequently Asked Questions: 1. If I have a trust, why do I also need a will? The type of will that is used with a living trust is called a "Pour-Over Will," because its purpose is to pour (transfer) assets into the trust if the assets were not transferred to the trust previously. This can occur if the trustees fail to make the transfers of assets to the trust, or if mistakes are made in titling the assets. A Pour-Over Will doesn't have the usual provisions that are found in a standard will and the only beneficiary is the living trust. 2. Does a Pour-Over Will have to be probated? Probate is not required unless the assets that are subject to probate total more than $100,000. In that case, there will be a probate of the trust assets and also an administration of the trust assets. 3. 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 IRAs, 401Ks, and life insurance, assuming that a beneficiary has been named to receive the assets involved. Even these assets might be subject to probate if the beneficiary listed is the "estate" of the decedent or if no beneficiary is listed. Joint tenancy assets become the property of the surviving joint tenant, regardless of the provisions of the decedent's will or trust. 4. Do trust documents become public information when someone dies? California law requires that notice be given to trust beneficiaries and the decedent's heirs if all or part of the trust becomes irrevocable after the death. The beneficiaries and heirs are then given an opportunity to request a copy of the trust. The trust also might become public information is there is a court challenge to the trust, in which case a copy of the trust will be filed with the court. 5. Who should be chosen as the successor trustee? Many clients choose their children, either as co-trustees, or in a particular order of succession. This can be a good choice, particularly if the proposed trustee has some experience with accounting or taxes. If there are no children, or if the clients would rather not use their children as trustees, other choices are other relatives, friends, or trust companies and banks. However, the person chosen as trustee must be responsible and able to devote the time required to the trust administration and management. The proposed trustee does not need to have an extensive knowledge of trusts, law, or accounting, but should be willing to seek professional help to carry out the administration of the trust. 6

7 6. Do I need a federal tax number for the trust? No. A federal tax number is not needed for a trust for a married couple until one of the trustors dies, or both trustors resign as trustees or become incompetent. For a trust for a single person, a federal tax number will be required after the trustor dies. Until death or resignation, the trustors' Social Security numbers will be used as the trust tax number. 7. What is a special needs trust? The beneficiary of a special needs trust is usually receiving benefits from a government program for the indigent. Those benefits will stop if the beneficiary receives an inheritance because these programs have strict limits regarding the amount of income and assets that a beneficiary can receive. A special needs trust provides a source of money that is held by the living trust and paid in small amounts either to the beneficiary, or for his or her benefit. The trustee will not pay any amount to the beneficiary that would increase his or her income or assets beyond the limits set by the government program and cause the government benefits to stop. The trust can own certain assets that are available to the beneficiary, such as a car. After the death of the beneficiary, the balance of the trust fund will be distributed to other trust beneficiaries. 8. What is a Qualified Domestic Trust? If the surviving spouse is not a U.S. citizen, no marital deduction is allowed unless the assets to be transferred to the surviving spouse are instead transferred to a qualified domestic trust, also called a QDT. The marital deduction allows married couples to transfer assets between themselves at death without subjecting those assets to the federal estate tax. At least one trustee of a QDT must be a U.S. citizen or a domestic corporation, such as a bank or trust company. The trust document must also provide the no distribution can be made from the trust unless the trustee who is the U.S. citizen or domestic corporation has the right to withhold federal estate taxes from the distribution. 9. Do I really need to read all of the pages of the trust before I sign it? Yes, although the trust may be lengthy, you are expected to be familiar with its basic provisions and you should ask your attorney for an explanation of any parts of the trust that you do not understand. If a trustor does not understand the provisions of the trust, it might be declared an invalid agreement if it is challenged in court. 10. If I start a bank account for my trust, will it be covered by FDIC insurance? Yes, but the amount could be less than you think. 7