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MARC WEISSMAN

ESTATE PLANNER
FOSTER CITY

Estate Planning, Trusts

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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 who intend to have no children. Click here if you would like our Brochure for Married Couple With Children, Single People or Unmarried Couples.

LIVING TRUST BROCHURE - NO CHILDREN

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.

Couples without children usually say, "We want simple Wills giving each other everything. If we die simultaneously, give half to each of our families."

There are several benefits of this simple plan.

  1. It avoids Probate. Although this is not technically correct, a very simple, very inexpensive, Probate procedure is available for gifts made outright to a spouse. It takes about 6 weeks and costs about $750.
  2. There is no death tax. Guaranteed. No matter how much you are worth, there is no tax if you leave it all to your spouse.
  3. It is extremely simple and inexpensive to set up.

There are several major drawbacks to this plan.

If Husband leaves everything outright to Wife, no tax is owed at his death no matter how rich they are. Probate will cost about $750 and take 6 weeks. Wife then owns everything. Perfect???

Wife then can change her Will to give everything to her family, legally cutting out Husband's family. When she later dies, she can leave only $1,000,000 tax free.

If she is worth $1,100,000, tax is $48,000 at her death.

A Living Trust does 3 things for a married couple, with or without children. It:

  1. avoids Probate Court, while
  2. easily allowing the couple to leave $2 million tax free and
  3. allows control of the ultimate beneficiary after one spouse has died.

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.

These rules guarantee that at the death of the first spouse, there is no tax, no matter how rich the couple is. At the second death, with proper planning, $2,000,000 can pass tax free.

Proper planning is a Bypass Trust. A Bypass Trust is established in a Living Trust or in a Will.

A Bypass Trust allows the survivor lifetime use, but not ownership, giving full management control plus spending authority for Wife's health, education and support. At Wife's death, since she did not own the $1,000,000 Bypass Trust assets (although she spent them when she wanted to) there is no tax on that amount, plus she can leave $1,000,000 of her own assets.

A Bypass Trust will avoid waste the $1,000,000 exemption of the first spouse to die.

Since no tax is owed by the survivor at the first death, the only reason to have a Bypass Trust allowing a couple to leave $2,000,000 tax free is to save tax for their heirs. Even with a Bypass Trust, Wife will have full control and use of all assets during her lifetime, without taxation on up to $2,000,000 at her later death.

If the couple's net worth is $2,000,000, $500,000 in taxes would be saved by not leaving the assets directly to the Wife, but by doing so using the Bypass Trust.

If the couple's net worth is $1,100,000, $48,000 in taxes would be saved with a Bypass Trust.

THESE SAVINGS ARE NOT FOR THE COUPLE: it's the heirs who would have to pay the tax.

During her lifetime, the wife has almost unlimited right to use whatever Bypass Trust assets are necessary, in her opinion, for her 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!

An outright gift wastes the $1,000,000 exemption of the first spouse. A gift in a Bypass Trust saves this $1,000,000 exemption.

The only detriment of a Bypass Trust is that the survivor must file annual income tax returns for the Bypass Trust, after the first spouse's death.

There 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 cannot change it?

PROBATE (at the survivor's death)

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 other than outright spousal gifts.

Probate is simple between spouses. Other than between spouses, it 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; $11,000 for an estate of $150,000; $46,000 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.

Since a Trust does not die, Probate is avoided.

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 both 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 heirs as specified.

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.

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

If these dispositions meet your needs, do you still need a Will? YES! Probate Court proceedings are more efficient 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.

PRE-1982 ESTATE PLANS

In 1981, new tax laws radically changed estate planning. Pre-1982 plans should be reviewed carefully in light of the changes in the law. 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. In 1982, the marital deduction became unlimited. This drastically changed estate planning. [Now, the "maximum amount" is now 100%. The intent, and the result, of the pre-1982 clause is uncertain.] 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.

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 another disadvantage of Living Trusts which has been almost eliminated by a new statute. In Probate cases, 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. 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.

SUMMARY

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

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