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Estate Planning

A typical engagement
In a typical estate planning engagement, after a discussion of the client’s needs and circumstances, we prepare the following documents:

What is a living trust?

  • A trust is an arrangement under which one person, called a trustee, holds legal title to property for another person, called a beneficiary. You can be the trustee of your own living trust, and you will retain total control over all property held in trust.
  • A “living trust” is simply a trust you create while you’re alive, rather than one that is created at your death under the terms of your will.
  • Different kinds of living trusts can help you avoid probate, reduce estate taxes or set up long-term property management for you or your beneficiaries.
  • Avoiding probate is desirable because it can be a time-consuming and expensive process. Probate costs may run several times the cost of administration if a living trust is in place. These costs are based on the fair market value of the property, and not on just the net worth or equity.

A trust avoids probate because your property may be titled in the name of the trust before your death. You have complete control of the property during your life, but the trust is considered to be the legal owner of the property for title transfer purposes. Upon your death a trustee whom you have pre-selected will simply handle the transfers or payments to your heirs that you specified in the trust. You have a great deal of flexibility in specifying the details of these payments and transfer. Although there are some exceptions, after your death the trustee can usually handle everything quickly and simply, with less attorney’s fees, without court supervision and avoiding certain costs and delays.

Wills
The traditional technique for passing assets when a person dies is a properly executed and witnessed will.  The legal requirements for execution and witnessing should be meticulously observed. We have handled many disputes about these formalities, many of which could have been avoided.

If you don’t have a will or use some other legal method to transfer your property when you die, the California Probate Code will determine what happens to your property. Generally, it will go to your spouse and children. If you have neither, it will go to your closest relatives. If you leave no relatives, it will go to the state. Obviously, your wishes might be very different from the results prescribed by the Probate Code.

In a will, you can decide who will care for your young children and their property if the other parent is unavailable or unfit.

Estate tax planning

Today, estate taxes are less of a factor in estate planning than in the past.  The current estate tax exemption is at $5 million dollars.  That is, an individual can pass up to $5 million in assets and there is absolutely no estate tax liability.  If the taxable estate (gross estate less allowable deductions) exceeds $5 million, the estate tax on the excess is thirty-five percent (35%).   A married couple can pass up to $10 million in assets with no estate tax liability.  (These rates and exemption figures are subject to change.)

In past years when the estate tax exemption was lower, a typical husband-wife estate plan would involve, at the least, a division of the trust into two trusts when the first spouse passed away. Now, frequently, this complexity is not necessary if we can predict that the couple’s net assets at the time of death are not likely to entail any exposure to estate taxes.  So today, the typical estate plan for a married couple will provide that, when the first spouse dies, all of the assets will pass to the surviving spouse in the form of a “survivor’s trust” over which the surviving spouse has total control including the power to revoke or amend the survivor‘s trust.

This typical estate plan will also include a provision for a disclaimer trust, meaning that if, after the first death, the surviving spouse and his/her advisors believe that it might be desirable to split the trust into two for estate tax purposes, the surviving spouse can sign a “disclaimer” with the result that the assets of the first spouse to die will go into a disclaimer trust.  The survivor will have considerable access to these assets during her lifetime, but they will not be includible in her taxable estate when she dies.

When the estate is large enough to create estate tax exposure, estate tax savings can be facilitated by a revocable living trust, in the case of a married couple.  This is accomplished by division of the trust into two trusts, the exemption trust (sometimes called a bypass trust), and the survivor’s trust, upon the first spouse’s death.  (These trusts parallel the A and B Trusts described above.)  The purpose of this division is to eliminate the federal tax on the estate of the first spouse to die and to reduce as much as possible the tax on the survivor’s estate.  The use of the exemption trust accomplishes this result by ensuring that both spouses’
$5 million federal estate tax exemption will be utilized. If the first spouse were to give all of his or her property to the surviving spouse without setting up an exemption trust, the property would later be included in the survivor’s taxable estate, and only the survivor’s exemption would be utilized.  This could create an unnecessary estate tax that would be due upon the surviving spouse’s death.

To avoid this problem, the first $5 million of the first spouse’s share of the estate will be allocated to the exemption trust.  The surviving spouse will have considerable access to their use. The surviving spouse will receive all the income from the exemption trust, but he or she is limited to using the principal of the trust only as is necessary for his or her health, education, maintenance or support.  Under the federal estate tax laws, these modest limitations will prevent the exemption trust from being included in the surviving spouse’s gross estate.

When the estate is large enough to create estate tax exposure, estate tax savings can be facilitated by a revocable living trust, in the case of a married couple.  This is accomplished by division of the trust into two trusts, the exemption trust (sometimes called a bypass trust), and the survivor’s trust, upon the first spouse’s death.  (These trusts parallel the A and B Trusts described above.)  The purpose of this division is to eliminate the federal tax on the estate of the first spouse to die and to reduce as much as possible the tax on the survivor’s estate.  The use of the exemption trust accomplishes this result by ensuring that both spouses’ $5 million federal estate tax exemption will be utilized. If the first spouse were to give all of his or her property to the surviving spouse without setting up an exemption trust, the property would later be included in the survivor’s taxable estate, and only the survivor’s exemption would be utilized.  This could create an unnecessary estate tax that would be due upon the surviving spouse’s death.

To avoid this problem, the first $5 million of the first spouse’s share of the estate will be allocated to the exemption trust.  The surviving spouse will have considerable access to their use. The surviving spouse will receive all the income from the exemption trust, but he or she is limited to using the principal of the trust only as is necessary for his or her health, education, maintenance or support.  Under the federal estate tax laws, these modest limitations will prevent the exemption trust from being included in the surviving spouse’s gross estate.