Trusts & Estates - Frequently Asked Questions

• What do you need?
• Why do you need this type of estate plan?
• What will it cost?
• How long will the process take?
• Do I need to update my current estate plan?
• Why do I want to avoid probate?
• Will I have to pay taxes upon my death?
• What are the tax benefits of a revocable living trust
• What do I need to do upon a loved one’s death?

1. What do you need?

Most clients need a core Estate Plan that includes:

• Revocable Living Trust
• Pourover Will
• Nomination of Guardian for Minor Children
• Advance Healthcare Directive
• Durable Power of Attorney for Assets
• Community Property Declaration
• Certification of Trust
• Assignment to the Trust
• Trust Transfer Deed Conveying Real Property into Trust

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2. Why do you need this type of Estate Plan?

A Revocable Living Trust: There are two reasons that a Revocable Living Trust fits most Estate Planning needs. First, the Revocable Living Trust facilitates probate fee avoidance. Probate fees can exceed $40,000.00 for an estate with a gross value of $1,000,000.00. Any assets that are transferred into the trust during the life of the client are not included in the probate estate and avoid inclusion in the probate fee calculation. Second, trust administration is usually simpler, faster and more private than estate administration through a public probate process.

Clients frequently ask if managing assets during their lives through a trust is more complicated than not doing so. The answer is no, assets held in a Revocable Living Trust are managed the same way that assets that are not in a Trust are managed. Assets are transferred into the name of the Trust and from that point on are accessed, spent, saved, moved just as the assets were before the transfer. Revocable Living Trusts are very common and very main-stream. Banks and financial institutions are completely familiar with the Trust method of holding assets and are very accommodating in helping clients to change title to their assets.

Pourover Will: The Pourover Will provides testamentary treatment of assets that may not have been transferred to the Trust and need to pass through probate. The Pourover will provides that any such assets should be distributed according to the distribution instruction of the Revocable Living Trust.

Nomination of Guardian: Most parents of minor children rest easier knowing that their desires for the care of their minor children are set forth in writing. A nomination of guardian gives guidance to the Court in case a decision has to be made regarding who the minor children’s physical guardian will be in case the parents are gone before the children are adults. The nomination of guardian, along with a Children’s Trust for Assets included in the Revocable Living Trust, provides a comprehensive plan for the physical care and financial needs of the children.

Advance Healthcare Directive: The Advance Healthcare Directive gives another person, usually a spouse or loved one, the authority to make decisions for medical care and treatment (or the withholding of treatment if desired) should the first person becomes incapacitated.

Durable Power of Attorney for Assets: The durable power of attorney (DPAA) gives a person the authority to conduct business affairs for another person, if he or she becomes incapacitated.

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3. What Will it Cost?

When a married couple desires that their estate plans mirror each other (that is both parties have the same desires for the disposition of their estates) they can expect legal fees for their Estate Planning design and documentation to be $2,250.00. More complicated estate plans, developed for clients with special needs or desires, may cost more.

When a married couple has different instructions for the disposition of their respective interests in community and separate property they can expect legal fees for estate planning documents to be $2,500.00.

A single person can expect legal fees to range from $1,250.00 to $1,750.00, depending on the complexity of their estate disposition instructions.

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4. How Long Will the Process Take?

It takes approximately thirty minutes to fill out our factual questionnaire. The first meeting with the attorney takes one to one and one-half hours, in order to learn more about estate planning and to talk about specific distribution options. The attorney then drafts the Estate Planning documents over the next week. A second office meeting of an hour to an hour and one-half takes place about one week later for final questions, changes, and signing.

Our office will remain available over the years to assist you in your estate planning or other legal needs. It is our goal to make you feel comfortable and confident with our ability to address your Estate Planning and other legal needs.

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5. Do I need to update my current estate plan?

There are a number of events which may require you to update your estate plan. A change in your family relations, economic position, employment status, and external factors requires an evaluation of your estate plan to determine whether it should be changed.

Changes in Family Relations:

• Marriage.
• Dissolution of Marriage.
• Death of a spouse.
• Changes regarding child, grandchild, or other beneficiary:
• Birth of a child.
• Death of a child.
• Marriage or dissolution of a child.
• Adoption of a child.
• Medical issues of a beneficiary.
• Substance abuse issues of a beneficiary.
• Financial irresponsibility of a beneficiary.

Changes in Economic Position and Employment Status:

• Asset values substantially increase or decrease.
• Change in insurability.
• Change of employment.
• Change in business interests.
• Property acquired.
• Change in health or health of spouse.
• Retirement.

External Changes:

• Changes in laws.
• Change of residence out of state.
• Death of executor, trustee, or guardian.

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6. Why do I want to avoid probate?

Probate is the legal process of passing property from a deceased person to their beneficiaries or heirs. Probate is necessary to transfer title to property such as bank accounts, real property, and automobiles which the decedent owned at death. A personal representative, an executor if named in the will or an administrator if appointed by court, will be approved by the court to probate the decedent’s estate. The personal representative’s duties include notifying all creditors of the decedent’s death, filing an inventory and appraisal listing all assets, and the court appointed referee will appraise the assets. The personal representative also must file the decedent’s tax returns and pay any taxes from the estate. Approximately a year after the probate process in initiated, the personal representative will file a final petition for probate along with a final accounting and if the court approves, a final order of probate is entered.

The probate process can be very cumbersome, time consuming, public, and expensive. A properly created estate plan can avoid the process in its entirety and save the decedent’s beneficiaries a great deal of time and money. The probate process generally takes a year to complete so long as the procedures detailed in the paragraph above are properly carried completed. An additional drawback of the probate process is that probate entirely lacks privacy as the filings with the probate court are a matter of public record. Most importantly, the probate process can be very expensive, especially in the case of larger estates.

The probate code provides for a sliding scale for attorney and administrator fees. Probate Code Section 10810 provides that the attorney for the personal representative shall receive fees equal to four percent of the first $100,000 of the estate; three percent on the next $100,000; two percent of the next $800,000; one percent on the next $9,000,000; one-half of one percent on the next $15,000,000; and a reasonable amount to be determined by the court for all amounts above $25,000,000. Probate Code Section 10800 provides that the personal representative is also entitled to fees in the same amount. Additional fees may be awarded for extraordinary work.

The chart below demonstrates the combined attorney and personal representative fees for difference size estates:

A properly drafted and executed estate plan can avoid the probate process. The deceased person’s assets will be in the trust and the successor trustee will have the task of distributing the assets according to the trust’s instructions. This process is referred to as trust administration and although it is not without some cost, it will generally result in substantial savings when compared to the probate process. The trust administration is also carried out in privacy and it is not made public record like a probate. There are no statutory waiting requirements to distribute assets of a trust unlike probate’s requirements. Also, there is no court supervision so the successor trustee does not have to go to court and receive permission before acting.

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7. Will I have to pay taxes upon my death?

The federal estate tax is levied at a top rate of forty-five percent. The estate tax is applied against the deceased person’s gross estate which is defined as everything the decedent has a beneficial ownership in at the time of their death. The assets of a revocable living trust are included in the gross estate and subject to estate tax. Assets that transfer to a spouse or charity escape payment of estate taxes. Estate taxes are levied upon the assets in the estate which exceed the lifetime exclusion (unified credit) amount which is set at $3,500,000 in 2009. Estate taxes sunset for 2010 and the amount of the unified credit for 2011 and future years is unknown at this time.

The federal gift tax is also levied at a top rate of forty-five percent. Every person has a $1,000,000 gift tax exclusion which allows transfers up to this amount without incurring gift tax. Additionally, an annual gift tax exclusion allows for gifts up to $12,000 per recipient to be made without incurring gift tax. Gifts to a spouse and charity are also exempt from gift tax. The gift tax is preferable to the estate tax because the gift tax is exclusive while the estate tax in inclusive.

The generation skipping tax (GST) is levied at a forty-five percent rate on transfers to grandchildren or more remote heirs. Every person has a $2,000,000 GST exclusion which allows for transfers up to this amount to grandchildren and others of a “skip” generation without incurring tax.

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8. What are the tax benefits of a revocable living trust?

A properly drafted revocable trust will insure that both spouse’s unified credits are used by taking advantage of the unified credit first and then using the marital deduction to avoid the payment of any estate taxes upon the death of the first spouse. The unified credit of the first spouse to die may be wasted if a properly drafted estate plan is not in place. With no estate plan in place, all of the assets of a married couple will pass to the surviving spouse tax-free because of the unlimited marital deduction. The problem is incurred upon the death of the second spouse as their estate will include all of the estate assets and they are only left with their unified credit as their spouse’s was never used.

To demonstrate, imagine a couple with community property assets totaling $7,000,000. With no estate plan in place all the assets will pass to the surviving spouse upon the first spouse’s death tax-free which will result in the surviving spouse having assets of $7,000,000. When the surviving spouse dies, his or her estate will be valued at $7,000,000 which results in the payment of estate taxes on the $3,500,000 which exceeds his or her unified credit.

If this same couple had a properly drafted estate plan in place, an amount equal to the unified credit ($3,500,000) would be transferred to a bypass trust upon the death of the first spouse. The bypass trust would use the deceased spouse’s unified credit so no estate taxes would be due on the $3,500,000 in the bypass trust and it will not be included in the surviving spouse’s estate. The assets of the bypass trust would still be available for the surviving spouse’s needs per an ascertainable standard. The surviving spouse’s estate would only consist of $3,500,000 upon death and by the use of the surviving spouse’s unified credit would result in no estate taxes upon the second spouse’s death.

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9. What do I need to do upon a loved one’s death?

The steps necessary upon a loved one’s death depend upon whether or not the decedent passed away with a living trust in place. If the decedent passed with a living trust in place we can assist you in the administration of the trust(s). We can also represent you in probate matters where the decedent dies without a trust in place.

Procedure with living trust in place.

When a Trustor dies, a portion of the living trust (usually consisting of all or part of the deceased Trustor's separate property and his or her share of the community property) will usually become irrevocable. The duties of the Trustees with respect to the irrevocable trust then become more important and the Trustees' responsibilities become substantially greater.

At the death of a Trustor, trust assets must be valued, death tax returns must be filed, assets must be allocated to the proper accounts or subtrusts, appropriate books (records) must be established so that the income and principal receipts of each trust that has become irrevocable can be recorded accurately, and investments must be more carefully made because the Trustees are now responsible to all of the trust's beneficiaries, even if they are not yet born or identified.

Upon the death of one of the spouse Trustors, the living trust is usually divided into two or three separate subtrusts, the "Survivor's Trust," the "Family Trust" and, in some cases, the "Marital Trust." To the Survivor's Trust is allocated property equal in amount to one-half of the Trustors' community property, all of the surviving Trustor's separate property, and, in some instances, a portion or all of the deceased Trustor's separate and community property. The balance of the trust property, often an amount equal to the amount that may pass free of death taxes, is allocated to the Family Trust. (The amount that may pass free of death taxes is $3,500,000 in 2009.)

The discussion of the activities, duties and liabilities, set forth above, also applies to the management and distribution of assets after the death of both Trustors. Often the terms of the trust will then require specific allocation of certain assets to specified beneficiaries or trusts, as, for example, all of the stock in a family business to those children involved in the business; or will charge a beneficiary's share with loans previously made to that beneficiary or with prior gifts, etc. Obviously, the terms of the trust must be examined carefully to see that all of the Trustors' directions are carried out.

If there are continuing trusts for children or grandchildren, these trusts may be separate trusts (i.e., separate tax entities each requiring its own tax returns) or separate shares (i.e., one trust with varying interests requiring only one tax return). Normally, the trust document will specify that separate trusts are to be used as they are usually most advantageous from an income tax standpoint.

The need to be familiar with and understand the terms of each trust cannot be overemphasized.

Procedure with no living trust in place.

Probate is the legal process of passing property from a deceased person to their beneficiaries or heirs. Probate is necessary to transfer title to property such as bank accounts, real property, and automobiles which the decedent owned at death. A personal representative, an executor if named in the will or an administrator if appointed by court, will be approved by the court to probate the decedent’s estate.

The personal representative’s duties include notifying all creditors of the decedent’s death, filing an inventory and appraisal listing all assets, and the court appointed referee will appraise the assets. The personal representative also must file the decedent’s tax returns and pay any taxes from the estate. Approximately a year after the probate process in initiated, the personal representative will file a final petition for probate along with a final accounting and if the court approves, a final order of probate is entered.

The probate process can be very cumbersome, time consuming, public, and expensive. The probate process generally takes a year to complete so long as the procedures detailed in the paragraph above are properly carried completed. An additional drawback of the probate process is that probate entirely lacks privacy as the filings with the probate court are a matter of public record. Most importantly, the probate process can be very expensive, especially in the case of larger estates.

The probate code provides for a sliding scale for attorney and administrator fees. Probate Code Section 10810 provides that the attorney for the personal representative shall receive fees equal to four percent of the first $100,000 of the estate; three percent on the next $100,000; two percent of the next $800,000; one percent on the next $9,000,000; one-half of one percent on the next $15,000,000; and a reasonable amount to be determined by the court for all amounts above $25,000,000. Probate Code Section 10800 provides that the personal representative is also entitled to fees in the same amount. Additional fees may be awarded for extraordinary work.

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