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MARC WEISSMAN

ESTATE PLANNER
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See the perfect way to inherit: THE DYNASTY TRUST

A Trust may be used for married couples, or single people. This brochure discusses the benefits for a married couple with children. Click here if you would like our Brochure for a Married Couple Without Children, Single People or Unmarried Couples.

LIVING TRUST BROCHURE

This Article is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal adviser.

ESTATE PLANNING

Estate Planning encompasses Wills, Trusts, and other devices to allow you to leave the most assets to your beneficiaries with the least governmental interference.

The best Will reads, "Being of sound mind, I spent it all." For most people, life is not this perfect and more complex planning is needed.

I'M NOT RICH -- DO I NEED A TRUST?

A Living Trust is advisable for anyone with an estate which would otherwise need to be probated.

If you think that you need a Will, a Living Trust is probably appropriate.

PROBATE AVOIDANCE

Probate is the process whereby the Court supervises the transfer of the assets of a decedent. In California, the estate of a person with assets in excess of $100,000 must be probated. PROBATE IS REQUIRED whether you have a WILL OR NOT.

Probate is wasteful, both of time and money.

Probate fees (Executors' fees and lawyers' fees) are avoided with a Trust. Probate fees are based on the gross value of a person's assets (before reduction for mortgages or other debts).

Probate fees are about 5% of the estate; $8,000 for an estate of $150,000; $42,000 for an estate with a gross value of $1,000,000.

Probate is full of delays. The Judge's permission is needed for many actions. Notice must be given (frequently it must be published in a newspaper) and a hearing must be held to decide to sell assets or pay money to the family. A Probate usually takes 1 year but can easily take twice as long.

A Trust does not die and Probate is avoided entirely.

With a Trust, decisions can be made immediately. Investment decisions or payments to heirs can be made even before the funeral.

A TRUST WILL NOT COMPLICATE YOUR LIFE. While you are alive, the Trust will not change the way you do anything. No special tax returns are required; no reports to any government agency. No control is lost. In fact, once the Trust is set up, you can forget it; everything should work automatically.

Furthermore, a Trust is private. (Once a Will is admitted to Probate, its terms become a matter of public record. The Will and assets held by the deceased are public knowledge.) A Trust is a private document and its contents and provisions are fully confidential.

LIVING TRUSTS

A "Living Trust" is formed during the lifetime of the founders. The founders are the managers (TRUSTEES) of the property, the same as they were prior to the formation of the Trust.

They are also the sole BENEFICIARIES of the Trust during their lives. They have full control. They are entitled to do anything they want to do with Trust assets. No one else has any powers over the Trust.

The Trust may be amended easily at any time during the lifetimes of the founders. As family circumstances change, the Trust should be amended to reflect changes.

A TRUST MAY BE APPROPRIATE FOR:

DEATH OF FIRST SPOUSE

The major benefit of a Trust begins when the first spouse dies. [For simplicity, let's assume the Husband dies first.]

The Trust provides for automatic replacement of the manager with a person previously selected by the founders (normally the Wife).

Usually, at the death of the husband, the wife will be allowed full lifetime use of all of the assets. At her later death, the assets are divided among the children.

OR ARE THEY? This is another issue: Should the survivor have the right to change the survivor's half? Or should the survivor's half be locked so she may spend it but when she dies, whatever remains must go to the children?

Of course, this may be modified in any way.

A major advantage of a Trust is the speed and flexibility it provides. Since Court approval is not required, property can be transferred immediately after death, providing for family needs without the delay and expensive procedural requirements of Probate.

NO INCOME TAX SAVINGS

A Trust has many advantages, but cannot accomplish everything. A Living Trust does not produce income tax savings (although estate taxes and Probate fees may be reduced or eliminated). During their lifetimes, the founders have full powers over the Trust. For tax purposes, since they have total control they are considered to be the owners of the Trust; therefore, they are taxed on all income from Trust property on their 1040. No annual tax return is needed for the Trust.

DEATH TAX SAVINGS: BYPASS TRUST

No Federal or California death taxes are due if a taxable estate is less than $1,000,000. In addition to the $1,000,000 tax free amount available to everyone, an unlimited marital gift may be left to a spouse, without any tax. These two rules are the crux of Estate Planning.

Each (husband and wife) can leave $1,000,000 tax free, plus a marital gift. If Husband leaves everything outright to Wife, no tax is owed at his death, but when she later dies, tax on her total net worth over $1,000,000 starts at 48%.

If the family is worth $1,100,000, tax is $48,000 at the death of the second spouse.

In this example, the husband's tax free $1,000,000 has been wasted. A Bypass Trust will avoid this waste. It allows the Husband and Wife each to leave up to $1,000,000 to their children [$2,000,000 total] without tax. The ultimate beneficiaries of both spouses' $1,000,000 tax free amount are the children. However, the Wife will have full control and use of all of those assets during her lifetime, without taxation at her later death.

Even greater tax savings occur for wealthier individuals. If the family's combined net worth is $2,000,000, $500,000 in taxes [PLUS Probate Court fees of at least $60,000] would be saved by not leaving the assets directly to the Wife, but by doing so using the Bypass Trust.

Even a family whose net worth consists only of a house, retirement accounts, and insurance could quickly grow to the point where the Bypass Trust will save significant taxes.

During her lifetime, the wife has almost unlimited right to use whatever assets are necessary, in her opinion, for her (or the children's) health, support, education, and maintenance in her accustomed manner of living.

As you can see, the Bypass Trust lets the Surviving Spouse have her cake, but not pay tax on it too!

FLEXIBILITY

Do you want to provide for only some of your children? Do you want to give the children the assets immediately, or have a relative act as manager to invest and distribute funds as needed?

Should the children receive assets in stages [1/3 at age 25, 1/3 at 30, 1/3 at age 35]? Pay for college? Give them a big allowance, or encourage them to get jobs? Almost anything you want to do is possible with a Trust.

Distributions

A Living Trust will allow flexible, personal administration of assets after death.

One concern clients have is distributions to their children. At what age is a beneficiary mature enough? The client may specify any age (or ages) or a formula to determine when the beneficiary is old enough to receive outright ownership of the assets without any supervision.

Age 18 is the legal minimum. But most 18 year olds are not wise enough to own substantial wealth. You may decide to distribute a portion at each of several different ages, allowing a trusted person to retain management and control of the balance of the assets.

Some clients give the Trustee total control, using such language as, "When my Trustee deems my child to be of sufficient maturity, he shall distribute, free of Trust."

Some clients put other or additional prerequisites on bequests, such as college graduation, drug free testing, non-participation in certain religious groups, or any other matters which meet the particular needs of the client.

Whatever method is right for each client's situation can be constructed.

Two horror stories illustrate the concern:

A 17 year old girl (with $2,000 in the bank) wants to take her boyfriend (the dishwasher) to college to share an apartment. She meets parental opposition. She says, "When I turn 18, it's my money, and I can do it if I want to!"

A 34 year old woman says, "I cannot pay the $2,000 debt, because I already spent the $100,000 per year I get from grandmother's trust fund. [She spent it on `a couple of trips to Hawaii' and has nothing to show for it except a suntan.] But I'll pay it in 6 months when I turn 35 because then I get the millions grandmother left me in Trust."

Deciding on the distribution or `strings' is very difficult sometimes, but total flexibility is achieved with a Living Trust.

SPECIAL CIRCUMSTANCES

Should adopted children be treated identically to natural children? Should children's spouses receive a share? Should the `black sheep' of the family be excluded?

The Trust allows anything to be accomplished, privately, with a minimum of difficulty.

Handicapped children present special needs in planning. The Trust is the ideal way to provide for a handicapped child in such a way to retain eligibility for most public assistance.

DISADVANTAGES OF A LIVING TRUST?

Often, clients ask if there are any disadvantages of a Trust.

With a Trust, Probate Court is avoided entirely.

However, there are two advantages of Probate. First, Probate protects against wrongful actions by the manager you appoint. However, this is very expensive protection [5% of the GROSS estate]. In other words, the freedom from court restrictions might allow your manager, after your death, to steal from your heirs. Probate's restrictive rules may eliminate this opportunity.

Typically, there is only one other disadvantage to a Living Trust: its cost of formation. (There are no other costs of its operation during the lifetime of the founders - no tax returns, no management fees, no legal fees, no filing fees.)

Forming a Living Trust is not expensive, especially in view of the savings of Probate (and the possible estate tax savings).

INTESTATE

If a person does not have a Will, on his death, California provides the following:

MARRIED

SINGLE

If these dispositions meet your needs, do you still need a Will? YES! Probate Court proceedings are much more efficient and less costly if a Will exists.

ADULT HEALTH CONSENT

A form has been jointly prepared by the California Medical and Bar Associations. (This may be the first time Doctors and lawyers ever agreed on anything!) This form authorizes another person to grant consent for medical treatment for you, in the event that you are unable to do so. [This form is also called a "pull the plug" form.]

This is sometimes referred to as a `Living Will.' This document has nothing to do with Wills, but should be used in conjunction with a complete estate plan and Will.

A new (1992) law allows such forms to be valid forever in California, rather than merely 7 years as under prior law.

POWERS OF ATTORNEY

A document authorizing another person to act on your behalf is a Power of Attorney (POA). A POA may be very limited or broad.

A POA may be limited by you to a particular transaction (e.g., sign documents to sell my house while I am out of town), or broad to allow the person you select to act on your behalf for all matters.

It may be effective immediately; or "spring" into effect only on the occurrence of a future event (such as upon your absence, illness, or incapacity); or have limited duration.

It may be canceled, enlarged or restricted (in scope or in time).

A Will is used to control assets after death; a POA may be used to control assets during life, in periods of absence or illness. A POA has become a standard tool to round out estate planning, ensuring that someone is authorized to act on your behalf in the event that you are not able to do so.

Click here for more details on POAs.

COMMUNITY PROPERTY vs JOINT TENANCY

Joint tenancy is the manner in which most married couples take title to assets. However, this may be a mistake.

Joint tenancy provides automatic transfer of title on the death of a joint tenant, to the other co-owner. Probate is not required at the death of the first spouse, but Probate is required on the death of the second spouse.

Community Property has many similar characteristics. A married couple may take title either way, although the tax consequences are different. [Joint tenants do not have to be married. Any number of joint tenants is allowed.]

Community Property provides a big tax benefit - a free step-up in basis.

After a death, heirs receive property, valued for income tax purposes at the date of death value. This means that the heir may sell the property without any income tax, even though the decedent would have had substantial income tax if he had sold it prior to death.

Example 1:H owns 2 shares of stock which cost $1 each. H dies when each share is worth $10. W inherits. W sells both shares for $20. W OWES NO INCOME TAX, as W's "cost basis" was increased to H's date of death value ($20). Thus, no profit was taxable.

Example 2: Same as #1, but H sells the stock, before death. H must pay tax on the profit [$18].

Example 3: Same as #1, except H and W own the stock as joint tenants. For tax purposes, H is treated as owning 1 share, and W 1 share. On H's death, only 1 share receives the step-up in basis to the date of death value. If W sells the stock, her profit is $9 (20 - 1 - 10 = 9).

Example 4: Same as #1, except H and W owned the stock as Community Property. H dies first. NO TAX IS OWED, because, unlike joint tenancy property, BOTH HALVES RECEIVE A FREE STEP-UP IN BASIS.

Example 5: Same as #4, except W dies first, and the stock is Community Property. Same result as #4; no tax is owed, because, REGARDLESS OF WHICH SPOUSE DIES FIRST, BOTH halves receive a free step-up.

In rare instances, it is preferable to hold title as joint tenants, but not usually. Look at your deeds to ensure that you are actually holding title as you intend.

Click here for more details on Community Property.

CHOOSING A GUARDIAN

The toughest question in forming an estate plan is who should be nominated as the guardian of minor children. This is a question we cannot answer, and can give only limited guidance as to common situations and concerns.

There are two types of Guardians: one for financial management of the minor's assets; the other for actually raising the child. These duties may be performed by the same person, or you may choose different people for each role. Since their responsibilities (namely, providing for the children's upbringing) are connected, they should be compatible.

The Financial Guardian should be someone with common sense and sound judgment, rather than a financial wizard. If necessary, professional managers can be hired.

No one can replace a parent. The Guardian of the Person should be a person who knows your philosophy of life and will raise your children to appreciate that philosophy. The Guardian does not have to share your ideas, but must be willing to teach them to your children.

Click here for more details on Guardians.

PRE-1982 ESTATE PLANS

IN 1981, THE TAX LAWS RADICALLY CHANGED ESTATE PLANNING. PRE-1982 PLANS SHOULD BE REVIEWED CAREFULLY FOR CONFORMANCE WITH THE PLANNER'S INTENT IN LIGHT OF THE CHANGES IN THE LAW MADE AT THAT TIME.

Before 1982, the tax-free marital deduction was limited. Most pre-1982 plans used formula clauses to leave to the spouse the maximum amount tax-free. ["I leave my spouse the maximum tax-free amount allowable by the Tax Code."]

In 1982, the marital deduction became unlimited. This drastically changed estate planning. Pre-1982 plans may result in unintended dispositions and unnecessary tax. [Under present tax law, the "maximum amount" is now 100%. The intent, and the result, of the pre-1982 clause is uncertain.]

REVIEW OF PRE-1982 ESTATE PLAN

If you are uncertain of the soundness and adequacy of your current estate plan, we would be happy to meet with you to review your plan in the context of the current tax laws. Please call Marc or Jeff to schedule such an appointment.

SUMMARY

A Living Trust is a simple to use device which will:

  1. Provide the founders with full control over all of the assets during their lives;

  2. Provide for an orderly transition of management and use (benefits)at the death of one or both founders;

  3. Eliminate Probate Court, saving time, money, and publicity, ensuring privacy of your financial and personal affairs; and

  4. Provide flexibility for management and distributions of Trust property.

SPECIAL RULES FOR NON-CITIZENS

Non-Citizens must comply with an additional set of rules. If you (or your spouse) are not a US citizen, please see our Memo for Alien Spouses.

1991 UPDATE

In past years there was a disadvantage of Living Trusts which has been almost eliminated.

In Probate cases, all known creditors must be given notice. Unknown creditors were deemed notified by newspaper publication. Any creditor who did not file a Probate claim within four months forever lost his right to assert a claim.

Under old law, if you had avoided Probate with a Living Trust, the 4 months' creditors' cut-off did not apply. People were faced with a potential unlimited duration of claims against a person with a Living Trust.

Most people did not mind, since this only affects people with unknown creditors, something which applies to very few people.

What's an unknown creditor? Someone you owe, but don't know it yet. An example would be the Obstetrician whose malpractice on delivering a baby doesn't show up until many years after the doctor's death.

While Probate of his estate would cause a cut-off of all claims, including those which were unknown or even unknowable, under old law, if the Doctor had avoided Probate by using a Living Trust, the creditors' cut-off would not apply, so that a later discovered victim could pursue the Doctor's heirs years after his death.

Effective January 1, 1991, any claim against a decedent must be filed within one year of his death, or it is forever lost. This law applies whether the estate is Probated or a Living Trust is used to avoid Probate.

Now, even the remote risk of a claimant appearing long after death of a person who avoided Probate by use of a Living Trust is eliminated, although the one year period applies, rather than a 4 month cut-off.

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