If you die without a will, the state’s probate court will take control of distributing your assets. Every state has very well-established laws to decide who will get your money and real estate. Generally, the list of next-of-kin is as follows: spouse, children, parents, siblings, grandparents. Without a will to follow, a probate court will go down the list until it reaches a living person and assign that person your entire estate. If there are multiple people within a category (three siblings, for example) the court will divide the money evenly. The court generally will not split money between categories. So, for example, if you have a spouse and two children, your spouse will get the entire estate.
Probate laws keep next-of-kin succession simple. If you want to divide your estate into a more complicated pattern, you need to create a will. A valid will can be as simple as a notarized statement. However, if you have significant assets (over $10,000) you should consult an attorney to help you craft a will. A will crafted by an attorney might help avoid undue taxation, prevent delays in probate court, and assure assets are divided exactly as you want. An estate lawyer will add some necessary information to your will (the name of your preferred executor, for example) making it more functional and efficient. A homemade will could be subject to verification challenges and contestation by someone left out of the will.
The best will is the one you leave behind when you die. No will is perfect, and there is no need to feel hesitant about making an appointment with an attorney. If you don’t have a huge estate to leave behind, it won’t cost much for a good lawyer to create a good will for you and your next-of-kin. If you do have a large estate, you can afford the time to ensure your estate is properly distributed after your death with little taxation and few delays.Read More
At Crouse Petrov Law Firm, our attorneys will sit down with you and create a specific plan to provide for your family’s future.
We will explore your wishes and will implement a strategy to reduce or eliminate your estate tax obligations.
While it’s difficult enough to think about not being there to raise your children, imagine a court choosing a guardian with no input from you. Imagine your relatives arguing in court over who gets your children—or having them agree on someone you would not have chosen. That’s why it’s important to nominate a guardian while it’s still up to you. Here are some tips to help you make your best choice.
- Tip #1: Think beyond the obvious choices. Make a list of all the people you know who you would trust to take care of your children. You don’t need to limit your list to close family members. While siblings and parents can be excellent choices, consider also extended family members who are old enough to raise your children – cousins, aunts, uncles, nieces, nephews, even second cousins once removed.
- Tip #2: Friends can make excellent guardians. Beyond family, consider close friends, families with whom your family is close, the families of your children’s friends, friends you know from your place of worship, even teachers or child care providers with whom you and your children have a special relationship
- Tip #3: Don’t stress about finances or the size of someone’s house. Don’t eliminate anyone from onsideration because you don’t think they have the financial wherewithal to take care of your children. You can take care of the finances with what you leave or by having adequate life insurance. You can even instruct your trustee to provide funds for your chosen guardian to build an addition to their home or move to a larger home to accommodate your children.
- Tip #4: Focus on love. Consider whether each couple or person on your list would truly love your children if appointed their guardian. If they have children of their own, will your children be second fiddles? Or is the couple sufficiently loving to make your children feel loved no matter what?
- Tip #5: Consider values and philosophies. Ask yourself which people on your list most closely share your values and philosophies with respect to your:
- religious beliefs
- moral values
- child-rearing philosophy
- educational values
- social value
- Tip #6: Personality counts. Consider whether each of your candidates has the personality traits that would work for your children.
- Are they loving?
- Are they good role models?
- Do they have the patience to take on parenting your children?
- How affectionate are they? (If your family is particularly affectionate, a guardian who is loving but not physically affectionate could be damaging.)
- If they’re fairly young, how mature are they
- Tip #7: Consider practical factors.
- How would raising children fit into their lifestyle?
- If they’re older, do they have the necessary health and stamina?
- Do they really want to be parents of a young child at their stage in life?
- Do they have other children? How would your children get along with theirs?
- Are there potential problems if your children were to live with theirs?
- How easily could the problems be dealt with? (For instance, do you want to place a child who struggles in school with a high-achieving child of the same age for whom everything comes easily?)
- How close do they live to other important people in your children’s lives?
- If a couple divorced, or one person died, would you be comfortable with either of them acting as the sole guardian? If not, you need to specify what you would want to happen.
- Tip #8: Look for a good – but not a perfect – choice. Most likely, no one on your list will seem perfect – that is, just like you. But if you truly consider what matters to you most, you will probably be able to make some reasonable choices. In the end, trust your instincts. If one couple or person meets all of your criteria, but for some reason doesn’t feel right, don’t choose them. By the same token, if someone feels much more right than any of the others on your list, there’s good reason for it. Make your primary choice, then some backup choices. It’s essential that both you and your spouse agree. If you cannot make a decision, or if you and your spouse cannot agree, a good counseling-based estate-planning attorney can help you through the process.
- Tip #9: Select a temporary as well as a permanent guardian. Temporary guardians may be appointed if both parents become temporarily unable to care for their children – for example, as the result of a car accident. Depending on your choice for permanent guardians, you may want to designate different people to act as temporary guardians. If your choice for a permanent guardian lives a considerable distance away, choose someone close by to serve as temporary guardian. If you’re temporarily disabled, you’ll want your children close by. And you won’t want their lives unnecessarily disrupted by moving them to a new town and school. If you have no relatives or close friends nearby, consider families of your children’s friends.
- Tip #10: Consider a Guardianship Panel. Because it’s difficult to predict what your children’s needs will be as they grow older, consider appointing a “Guardianship Panel” to decide who would be the best guardian when and if it becomes necessary. Choose trusted relatives and friends to make up the panel. This allows for maximum flexibility, so the most appropriate choice can be made at the time a guardian is actually needed. The Panel can consult with your children and assess their needs and desires to make the most appropriate choice based on the current situation.
- Tip #11: Write down your reasons. If you’ve chosen friends over relatives, or a more distant relative over a closer one, be sure to explain your decision in writing. That way
– in the unlikely event your choice is challenged by people who feel they should have been chosen – a court should readily uphold your decision, knowing you’ve made your choice for good, solid reasons.
- Tip #12: Have backup guardians. Nominate at least 3 guardians in successive order. That way if a first choice guardian is unwilling or unable to take custody of your children, the Court will know your second and third choices for raising your children.
- Tip #13: Talk with everyone involved. If your children are old enough, talk with them to get their input as well. And be sure to confer with the people you’d like to choose, to ensure they’re willing to be chosen and would feel comfortable acting as guardians. Once you’ve made your choice, there are steps you can take to make sure the potential guardians you’ve chosen will have the guidance and support they need. Here are a few ideas:
- Create a set of guidelines to convey information about your children, your parenting values and your hopes and dreams for your children.
- When a person becomes disabled or incapacitated, he or she is often unable to make personal and/or financial decisions. If you cannot make these decisions, someone must have the legal authority to do so for you. Otherwise, your family must apply to the court for appointment of a conservator for either your person or your property, or both.
- At a minimum, you need at least two documents in place, a Power of Attorney for Finances and a Health Care Directive. A broad Durable Power of Attorney that will allow agents to handle all of your property if you become incapacitated will keep your family out of the court process and allow them to pay your bills. Equally important is the appointment of a decision-maker for health care decisions which can be accomplished through an Advance Health Care Directive (in California). This document may be called other things in other states.
- Alternatively, with regard to your property, a fully funded living trust can ensure that your property will be properly managed, pursuant to the highest duty under the law that of a trustee. It is important that you choose your trustees and agents carefully and that they are people you trust who are capable of handling your affairs the way you would.
- You will also want to make sure you address the release of your medical information to your loved ones. Under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), absent a written authorization from the patient, a health care provider cannot disclose medical information to anyone other than the patient or the person appointed under state law to make health care decisions for the patient. The penalty for failure to comply with these rules is severe: civil penalties plus a criminal fine of $50,000 and up to one year of imprisonment per occurrence. It’s even worse if the disclosure involves the intent to use the information for commercial advantage, personal gain, or malicious harm.
- Since these HIPAA rules became effective, most doctors, hospitals and other health care providers now refuse to release any information absent a release from the patient. For example, hospital staff will go so far as to refuse to disclose whether one’s spouse or parent has been admitted to the hospital. The inability to receive information about a loved one could become very troubling when the information concerns treatment as part of long-term care. The regulations promulgated under HIPAA specifically authorize a HIPAA Authorization for release of this information to persons other than you or your personal representative. Thus, you should consider creating such an Authorization so that people you designate in addition to your personal representative can access this informatio
Call the local funeral home Bring the deed to the grave plot, pre-paid cremation documents and/or military discharge papers (if applicable). Also bring any written instructions your loved one left behind regarding viewing and burial preferences. And note that it is customary for friends and family to call the funeral home to find out more on the funeral arrangement such as the date and time of any viewings, church funerals, burials, and treatment of flower arrangements and preferences regarding charitable donations.
Write up an obituary. Write out information on your loved one’s education, career, surviving family, military service, notable achievements, etc. to help assist the funeral director in drafting information for the obituaries in local newspapers.
Get certified death certificates. You can typically obtain death certificates from the funeral director or from the County Assessor/Recorder’s Office. Request at least 10 certified copies. In San Diego County, Certified Death Certificates are $12 for each copy. See the attached forms for obtaining Certified Death Certificates by mail and in person.
Review Will and/or Trust. Search for your loved one’s original will. This will often times be kept at the drafting attorney’s office or in a fire proof safe or safety deposit box. Hopefully, your loved one kept the document at home in a fire proof safe or with the drafting attorney since the safety deposit box could be “frozen” at death which could make it difficult to obtain. After a death, the original will should be lodged with the Probate Court in the region where the person was a resident. After you have located the will and/or trust, the next step is to take these documents to an attorney.
Call an attorney. You may or may not need the help of an attorney for a probate or trust administration. It is best however to consult with an attorney to best make that determination. There are many steps in a trust administration that if not done or done improperly, could lead to legal liability for the successor trustee or executor.
Contact current and former employers. Contact current and former employer human resource departments and ask them to fax or mail you a benefits summary for life insurance, accident insurance, profit sharing plans, retirement plans, flexible spending plans, etc. Former employers may have pension or annuity benefits listing beneficiaries.
Contact the Social Security Administration. Contact the local Social Security Office and notify them of the death. You can find an office at www.ssa.gov. If your loved one was covered under Social Security, his or her spouse may be eligible for a lump-sum death benefit. Spouses must have been married for 9 months or longer before the death, unless the spouse’s death was the result of an accident or military service.
Contact life insurance and annuity providers. Obtain any policies for life insurance or annuities and notify the carriers of the death to process the claims.
Access safety deposit box. In order to access the safety deposit box, you will need to be listed as a signatory on the box and have the key. Most banks will not allow you access without these two requirements being met. It is also possible to obtain an Order from the Probate Court to gain access to the box
Call the accountant. The executor/executrix of the estate will need to know what taxes, if any, are due to the IRS and State. The accountant (if the decedent had one) should be called as soon as possible to make sure that any estate tax that is due is paid within 9 months of the date of death as required by Federal law. The estate may need to file a separate tax return and a 706 tax return may be necessary in a larger estate.
Pay any bills that are outstanding. Make sure to open a bank account for the estate if you are the executor or a trust bank account if your loved one had a trust and you are the trustee. Transfer liquid funds from assets in the estate or trust to the new bank account to pay things like funeral expenses, utility bills, credit card payments, mortgages or any other debts your loved one had. The executor or trustee needs to make sure these payments are made and that records of all expenses are kept up-to-date. This will be important information that should be shared with the accountant for the filing of tax returns.
Notify the post office. If you are the trustee or executor of the estate, you need to contact the post office to forward any future mail to your address. You may need to cancel certain utilities and subscriptions as well
Re-title any joint tenancy accounts. Make sure to re-title any accounts that were in joint tenancy to the survivor’s name only. The bank or other financial institution will likely request a certified copy of the death certificate and that you fill out their appropriate form to make the change. If the joint tenancy asset is real estate, an Affidavit of Death of Joint Tenant along with a Certified Death Certificate will need to be recorded at the County Assessor’s Office.
The primary goal of estate planning should be to protect yourself and your family, and to ensure that your ultimate plans for the transfer of your wealth are achieved. Nevertheless, estate taxes are a major consideration, as they can devour a substantial portion of your accumulated wealth. Currently, estate taxes top out at 45%, and must be paid within nine months of the date of death. However, there are a number of estate planning strategies that can reduce or eliminate estate taxes for families with estates over $3.5 Million
1. The Federal Coupon
In 2009, each person is entitled to a $3.5 million dollar exemption from the Federal Estate Tax. This is called the “Federal Estate Tax Applicable Exclusion Amount”. I refer to it as your Federal Coupon. If you die in 2009 with less than $3.5 million dollars, and you made no taxable lifetime gifts, no estate tax will be owed by your estate
In 2010, estate taxes will be repealed for exactly one year (but a capital gains basis system will be in effect for the year 2010). So you can die in 2010 with any size estate and owe no estate taxes (but your estate will likely have to pay capital gains tax instead). However, in 2011 the federal estate tax will be reinstated with a Federal Coupon amount of $1 million per person. Because of the uncertainty in knowing what the Federal Estate Tax will be when you die, or what changes to the tax laws may be made in the future, we recommend estate tax reduction strategies for any clients with currently at least $3.5 million in their estates
2. The Credit Shelter Trust
A Credit Shelter Trust (also commonly known as a “B” or “Bypass” Trust) is a trust created within your revocable trust at the death of the first spouse. This allows a husband and wife to effectively double the amount they can give tax free to their children. If drafted correctly, this trust can:
- Shelter trust assets from federal estate taxes
- Provide the surviving spouse substantial access to trust income and principal for the remainder of his or her life
- Protect substantial sums from creditors and predators who may prey on a surviving Spouse
- Seamlessly transfer assets to children or other beneficiaries when the surviving spouse dies
- Keep trust assets out of the surviving spouse’s estate
3. Annual Gifts And The Family Bank Trust
- If your estate exceeds the amount of the Federal Estate Tax exemption, one way to reduce the size of your estate and avoid estate taxes is to make gifts to your family members while you are still alive. As long as these gifts do not exceed the annual exclusion amount, which is currently $13,000 per recipient per year, you will not have to file a gift tax return on the gifts. This means that you can give away up to $13,000 to each of your children and/or grandchildren each year without any gift tax consequences.
- A lifetime gifting program allows you to avoid gift, estate and generation-skipping transfer tax on transferred assets. Under the Internal Revenue Code, you can transfer up to $13,000 per year, per person, to anyone without incurring gift tax or the generation- skipping transfer tax. With a lifetime giving program, you can transfer this amount annually to the individuals of your choice, typically children, grandchildren and other close family members.
- For example, if you give $13,000 per year to two beneficiaries for five years, you will have removed $130,000 from your estate for estate tax purposes. After 10 years, you will have removed more than $260,000 and nearly $650,000 after 25 years. We have many clients who would like to make annual gifts, but who don’t want to lose control of the assets that they give away. For these clients, we recommend the Family Bank Trust. A Family Bank Trust is a type of irrevocable trust that provides complete asset protection for your spouse, children and/or grandchildren. It also removes the trust assets from your estate and the estates of your spouse, children and/or grandchildren for estate tax purposes. This type of trust is very similar to a “bypass” trust (one that bypasses the Federal Estate Tax) at death. You don’t lose access to the assets because your spouse can withdraw from the trust for health, education, maintenance or support.
Annual exclusion gifts are used to shield transfers to the Family Bank Trust from gift and generation-skipping transfer taxes. The beneficiary must have the right to withdraw up to $13,000 of the transferred funds, but if that right is not exercised, the gifted funds can then be used to purchase life insurance on the life of the transferor or for other investments. This trust can be a multigenerational estate tax exempt trust or it can become a family “bank” for:
- (2) business acquisitions; or
- (3) home purchases,
- among other things. With a Family Bank Trust, you irrevocably transfer assets to the trust of which your spouse is trustee (or co-trustee) and beneficiary. Your children and other descendants can also be beneficiaries during your spouse’s lifetime, or they can be remainder beneficiaries after the death of your spouse. A married couple can create similar trusts for each other’s benefit, and thereby obtain the asset protection and estate tax benefits, but the trusts cannot be identical in all respects. This gives each spouse access to the assets in the other spouse’s trust.
- In addition to annual exclusion gifts, medical care and tuition paid to assist family members or any other individual may be made free of gift tax. As long as the gifts are made directly to the medical facility or educational institution, donors can exceed the $13,000 annual exclusion amount without imposition of gift taxes.
4. Life Insurance and The Wealth Replacement Trust (aka Irrevocable Life Insurance Trust)
Life insurance is a unique asset in that it serves numerous diverse functions in a tax favored environment. Life insurance proceeds are received income tax free and, if properly owned by an Irrevocable Life Insurance Trust, life insurance proceeds can
also be received free of estate tax. Some of the frequent uses for life insurance include:
- Wealth Creation: Where age or other circumstances have prevented one from accumulating a desired level of wealth, life insurance can create instant wealth, for example, to build an estate, to replace a key employee, to buy out the interest of a business co-owner at death, or to pay off a mortgage.
- Income Replacement: Life insurance can provide wealth to replace income lost upon the premature death of the family “bread winner.”
- Wealth Replacement: Life insurance can provide the liquidity to pay estate or capital gain taxes after death. Life insurance can also be used to replace the value of gifts to charity or non-family members.
- There are several types of life insurance, including term, permanent, and survivorship or second-to-die insurance. Term insurance, which includes annual renewable and fixed-level term (for example, 20-year Level Term) is temporary. At the end of the term, the policy terminates and the insured must reapply at the then-going rates, based upon age, health, etc. Therefore, term insurance is often recommended for temporary needs.
- Permanent insurance, of which there are several types- whole life, universal life, and variable universal life– are intended to remain in force until the insured’s death, and thus are often recommended for permanent needs.
- Survivorship or second-to-die insurance pays out at the death of the survivor. Therefore, second-die insurance is often recommended in those circumstances where the liquidity need arises only at the second death; for example, the need for liquidity to pay estate taxes or to care for minor children.
Contrary to what many people think, at death, the death roceeds of life insurance you own are included in your estate for estate tax purposes. This adverse result can be avoided by transferring the life insurance policy to an Irrevocable Life Insurance Trust (or having the trust purchase a new policy on your life) that would become the owner and beneficiary of the policy. The disposition terms of the trust would mirror the terms in your revocable living trust. However, note that it is much more favorable to have the Irrevocable Life Insurance Trust purchase a new policy on your life as opposed to transferring an existing policy to the trust. This is due to the IRS three-year look back rule that could pull the insurance proceeds back into your estate if you die less than three years after the transfer of an “existing” policy to your irrevocable life insurance trust. A properly drafted Irrevocable Life Insurance Trust (ILIT) can accomplish the following
- Provide income and/or principal to your heirs
- Prevent life insurance proceeds from being included in your estate
- Provide your family with funds to pay estate tax and settlement expenses
- Provide your surviving spouse with access to the death benefit for his or her health, education, maintenance or support
- Protect the proceeds of the life insurance from creditors and predators
- Care for your minor children
- If you are concerned about accessing the cash value of the insurance during your lifetime, the trust can be carefully drafted so that the trustee can make loans to you during your lifetime or so that the trustee can make distributions to your spouse during your spouse’s lifetime. Even with these provisions, the life insurance proceeds will not be included in your estate for estate tax purposes.
- You can create these trusts individually (and typically own an individual policy on your life) or they can be created jointly by you and your spouse (with a survivorship policy).
5. Keep Your Family Home In The Family
- A Qualified Personal Residence Trust (“QPRT”) is a type of trust specifically authorized by the Internal Revenue Code. It permits you to transfer ownership of your residence to your family during your lifetime and retain the exclusive right to live in the residence, while reducing the size of your estate for estate tax purposes.
- The residence is transferred to the Qualified Personal Residence Trust for a designated initial term of years. Provided you survive the initial term of years, ownership of the residence will be transferred to your family at a fraction of its fair market value. If you die during the initial term of years, the property will be brought back into your estate, but you will be no worse off than had you not created the Qualified Personal Residence Trust. You may transfer up to two (2) personal residences into Qualified Personal Residence Trusts.
- The Qualified Personal Residence Trust is a particularly noteworthy estate-planning tool to reduce federal estate taxes . It permits you to transfer a residence out of your taxable estate while retaining the right to use it during your lifetime. The gift for federal gift tax purposes is based upon IRS published interest rates at the time of the transfer, and this rate does not take into consideration actual appreciation in the value of the property. Accordingly, these trusts are particularly useful to transfer residences in which significant future appreciation is anticipated. The Qualified Personal Residence Trust permits you to continue to enjoy your residence, knowing that the value at the date of death will not be included in your estate.
- During the term of years of the trust, you have the absolute right to remain in the residence rent free. After the initial term, you can be granted the right to rent the residence for the balance of your lifetime for its fair rental value. During the term of years, you can be the sole trustee or a co-trustee of the trust with complete control over all decisions of the trust and the assets in the trust. You may also sell the residence and buy another residence during the trust term.
- Because the Qualified Personal Residence Trust is a “grantor trust” under the income tax laws, you are treated as the owner of the property for income tax purposes during the initial term of years. Therefore, all items of income, gain, loss and deduction with respect to the trust are treated on your personal income tax return. So for example, the deduction for real estate taxes remains available to you. In addition, favorable capital gains treatment, including capital gain rollover and the $250,000 individual exclusion of capital gain are still available to you. This strategy is particularly useful for a vacation home that you wish to keep in the family.
6. Charitable Contributions Are Good For Your Heart and Your Pocket Book
- Gifts to charities are fully exempt from gift and estate taxes. In addition, they qualify for current income tax deductions. These lifetime gifts can reduce your estate by both the value of the gift and any subsequent appreciation. Various charitable trusts can be created which offer additional advantages. These trusts, Charitable Remainder Trusts and Charitable Lead Trusts, are discussed below.
Charitable Remainder Trust
- The Charitable Remainder Trust (“CRT”) is a type of trust specifically authorized by the Internal Revenue Code. These irrevocable trusts permit you to transfer ownership of assets to the trust in exchange for an income stream to the person or persons of your choice (typically you). This can be for life or for a specified term of up to 20 years. With the most common type of Charitable Remainder Trust, at the end of the term, the balance of the trust property (the “remainder interest”) is transferred to a specified charity or charities. Charitable Remainder Trusts reduce estate taxes because you are transferring ownership to the trust of assets that otherwise would be counted for estate tax purposes.
- A Charitable Remainder Trust can be set up as part of your revocable living trust planning, coming into existence at the time of your death, or as a stand-alone trust during your lifetime. At the time of creation of the CRT, you or your estate will be entitled to a charitable deduction in the amount of the current value of the gift that will eventually go to charity. If the income recipient is someone other than you or your spouse, there will be gift tax consequences to the transfer to the CRT.
- Charitable Remainder Trusts are tax-exempt entities. In other words, when a Charitable Remainder Trust sells an asset, it pays no income tax on the gain in that asset. Therefore, after a sale, the trust has more available to invest than if the asset were sold outside of the Charitable Remainder Trust and subject to tax. Accordingly, Charitable Remainder Trusts are particularly suited for highly appreciated assets such as real estate and stock in a closely held business, or assets subject to income tax such as qualified plans and IRAs. While the Charitable Remainder Trust does not pay tax on the sale of its assets, the tax is not avoided altogether. The payments to the income recipient will be subject to income tax.
- There are several types of Charitable Remainder Trusts. For example, the Charitable Remainder Annuity Trust pays a fixed dollar amount (for example, $80,000 per year) to the income recipient at least annually. Another type of CRT, the Charitable Remainder Unitrust, pays a fixed percentage of the value of the trust assets each year to the income recipient (for example, 8% of the value as of the preceding January 1). A third type, perhaps the most common, allows you to transfer non-income producing property to the CRT. This converts the trust to a Charitable Remainder Unitrust upon the sale or happening of a specified event (for example, upon reaching a specified retirement age).
- At the end of the term of a Charitable Remainder Trust, the remainder interest passes to qualified charities as defined under the Internal Revenue Code. Generally, any charity that has received IRS tax-exempt status qualifies, but this is not always the case. It is possible for you to name a private foundation established by you as the charitable beneficiary.
Charitable Lead Trust
- The Charitable Lead Trust is a type of charitable trust that can reduce or virtually eliminate all estate tax on wealth passing to heirs. In order to accomplish this goal, you create a trust that grants to a charity or charities, for a set number of years, the first or “lead” right to receive a payment from the trust. At the end of the term of years, your children or grandchildren receive the balance of the trust property—which of ten is greater than the amount contributed—free of estate tax in most instances.
- Although the Charitable Lead Trust is a complex estate planning strategy, the steps to implement it are few and simple from your perspective. Here is how one of the most frequently used Charitable Lead Trusts, the Charitable Lead Annuity Trust, operates:
- You, as grantors, create a Charitable Lead Trust as part of your revocable living trust planning. Upon the death of the survivor of the two of you, a substantial amount of property will pass to the Charitable Lead Trust. The income beneficiary of the Charitable Lead Trust will be a qualified charitable organization, chosen by the two of you or by the survivor of you, named in your revocable living trust. The charitable income beneficiary receives a fixed, guaranteed amount from the trust for a certain number of years (determined by you with the assistance of your legal and financial advisors). Generally, any charity that has received IRS tax exempt status qualifies, but this is not always the case.
- It is also possible for you to name a private foundation established by you as the charitable beneficiary. If so, you must have very limited authority over which charity is to receive money from the foundation. Too much control while you are alive will result in adverse tax consequences. At the end of the Charitable Lead Trust’s term, the remaining assets in the trust pass to non-charitable trust beneficiaries such as children and grandchildren, free of estate and gift tax. These assets can pass outright to the beneficiaries, or can continue to be held in trust, either in new trusts or in trusts previously established for the benefit and protection of the beneficiaries.
- The charity will receive the same dollar amount each year, no matter how its investments perform. The remainder interest ultimately passing to the heirs, however, will be affected by the performance of the trust’s investments.
- Charitable Lead Annuity Trusts are particularly suited for hard-to-value assets (such as real estate or family limited liability company interests) and assets which are expected to grow rapidly in value.
What is a Schedule A and Why is it Important?
- Every revocable living trust should have a Schedule A attached to it. This is a document prepared by your estate planning lawyer to list all of the assets that are part of your trust, ie. they have been titled in the name of your trust “John Doe, Trustee of the John Doe Trust.”
- There are two important things to keep in mind about your schedule A. First, it is just a summary of your trust assets. What is critical is that assets you want to be in your trust are indeed titled in the name of your trust. Assume for example that you buy a new home and that the deed to your new home lists your trust as the owner but you fail to get out your estate planning binder to add it to your Schedule A. Is the home “in” your trust? Is the home now a “trust asset”despite not being listed on your Schedule A? Yes, because what matters is how the deed is written, not whether you actually wrote it on your Schedule A.
- The second important thing to know about a Schedule A is that although it is just a list, that list can in some circumstances assist in avoiding probate. As an example, suppose your Schedule A lists a particular brokerage account that you intended to title in the name of your trust but somehow forgot to mail in the necessary paperwork to make the change. Is the brokerage account “in” your trust (ie. is it a trust asset?) No, because it has not been properly titled in the name of your trust. In California however, if you have an assets listed on your Schedule A and have not transferred that asset by making the title change, you can file a petition called a Heggstad petition to show the court your intent was to transfer the asset into the trust.
- Also important is that you keep your Schedule A up to date. Does it list bank accounts that you opened after you executed the trust? Does it show a vacation property you own? Are any businesses you operate in the trust? Have you sold some assets and bought other assets and listed those new assets on the schedule? An updated schedule can assist you during your lifetime in knowing which of your assets are trust assets and it can be useful for your successor trustee in handling your trust administration upon your death.
There are 3 types of probate conservatorships that can be obtained in the San Diego Probate Court. The first is the general conservatorship of a person where the Probate Court gives a responsible person (the conservator) the ability to take care of another person (the conservatee) or to manage someone’s financial affairs. With a conservatorship of the person, the conservator takes care of the conservatee’s health care, housing, food, clothing, and other personal needs. A conservatorship of the estate pays the conservatee’s bills, taxes, asssets and manages other aspects of finances.
A limited conservatorship is one that is set up for a developmentally disabled adult. If an adult with developmental disabilities is unable to care for himself or herself or their property in certain ways but not to the extent of needing a regular conservatorship, a limited conservatorship may be appropriate. The difference between a limited conservatorship and a general conservatorship is that a limited conservatorship is only available to adults with developmental disabilities. This could be something like autism, a brain injury at birth such as cerebral palsy or mental retardation, or other disability that arose before the age of 18, which is expected to continue indefinitely and constitutes a substantial handicap. The handicap could be in the area of self-care, receptive and expressive language, learning, mobility, self-direction, capacity to live independently, or economic self-sufficiency. Some of the powers that can be granted to the limited conservator are the power to decide living arrangements, the power to a sign a contract, and the power to make decisions about education or health care.
A third type of conservatorship is one under the Lanterman-Petris-Short Act for persons who are gravely disabled. “Gravely disabled”means a person, who as a result of a mental disorder or chronic addiction is unable to provide for their personal needs for food, clothing, or shelter. Usually this type of conservatorship is necessary for an individual who is seriously mentally ill or needs specialized care.
Use and Abuse of Powers of Attorney
A power of attorney is a document that lets you appoint someone you trust (“your agent” or “your attorney-in-fact”) to act on your behalf. When you create a power of attorney,you are called the “principal.” Powers of attorney can be limited in scope or can be quite broad. You might execute a power of attorney to allow someone to close an escrow while you are out of town. You might give your agent the authority to sell your car with a power of attorney. Powers of attorney can be limited to a specific act or they can be quite broad. They also can be powers that are effective immediately or “springing” powers that come into existence when you become incapacitated.
A power of attorney can be misused which is why we emphasize that your agent should be someone you trust. Unfortunately there have been many cases where an agent acting under a power of attorney has used the document to help themselves to the money or assets of the principal. It is important to recognize that a power of attorney is a very powerful tool bringing with it a fiduciary duty to act in the best interest of the person giving the power of attorney.
Some circumstances to look for if you have a loved one who has given another individual a power of attorney are a sudden change in financial circumstances of the agent or the principal or a loved one seeming to be overly trusting of his or her agent. Remember too that a power of attorney can be cancelled or a new one executed at any time.
What is an “estate”?
Estate planners like to use the term”estate” frequently, assuming that everyone knows what that term means. “Estate planning,” “trust estate,” “distributing your estate,” and “estate taxes” are terms often used. What do these terms mean?
In simple terms, everything you own is your “estate”. It includes all real property, personal property, bank accounts, stocks, bonds, pension and IRA accounts, retirement plans, and life insurance. Sometimes assets overlooked are mineral rights, timeshares, deeds of trust, assignments, or notes receivable. It includes community property, separate property, or property held in joint tenancy with someone else. It includes all businesses, whether sole proprietorships, partnerships, or joint ventures. Personal property includes the furnishings in your home, artwork, tools, musical instruments, collections, guns, gold, RVs and other vehicles.
With that description, it is easier to understand other terms that have the word “estate” in them:
“Estate planning” involves the planning for the management of your estate during your lifetime and the plan for distribution after you die. It is not simply the writing of a will or a trust. It involves planning for periods of incapacity also, whether temporary or permanent.
Your “trust estate” is everything you transfer into the name of your trust. You probably will have assets that are part of your “estate” in the sense that they are an asset you own but will not be part of your “trust estate” because they are not in your living trust. Examples are IRAs, retirement, or life insurance which are definitely part of your “estate” but since they usually have specific beneficiaries, they are not part of your “trust estate.”
Distribution of your “estate” is the gathering and valuing all of a decedent’s assets, however held, and distributing them to the decedent’s beneficiaries or heirs. Thus if you had a trust but also had life insurance, your trustee would see that the trust assets go to the beneficiaries you named in your trust and that the life insurance proceeds were distributed to the beneficiaries you named in your life insurance beneficiary designation.
“Estate taxes” are the federal taxes that have to be paid after death if your estate is over the exemption amount, which is $3.5 million in 2009. If your “estate” (including everything you own, not just your trust assets) is over that amount, “estate taxes “ have to be paid.
What is a QTIP Trust?
We have all heard of a QTIP, but do you know what it means in the context of estate planning?
If you are in a second or third marriage, as many people are in San Diego, you may know that a QTIP is a type of trust. It is a common type of trust which provides for your current spouse but also ensures that ultimately your estate will pass to your own children.
QTIP actually stands for Qualified Terminable Interest Property and is often used in cases of blended families where there are “his”, “hers”, and “their” children. For example, a husband may set up a QTIP trust to provide income for his second wife when he dies.The husband names his children from his first marriage to be the ultimate beneficiaires when his wife dies. There are some strict guidelines for such a trust which an experienced estate planner can explain to you. Some of those are that all of the income from the trust must go to the surviving spouse for her lifetime. The surviving spouse cannot use trust assets to benefit a new spouse or her own children. When the surviving spouse dies, the remainder of the trust must go to whoever the Settlor has designated in the trust document, which in this example would be the husband’s children.
QTIP Trusts are expecially appropriate where estate taxes might be involved. In 2009 this is estates of married couples with assets over $7 million. If taxes are not an issue, there are other options for blended families including customized language in your trust in which your trustee makes payments to the surviving spouse for his or her support and then upon the death of the surviving spouse, to the your children. You can also leave your current spouse a life estate in a home that was yours before marriage and shared together during your marriage. When your spouse dies, the home goes to your children.
Multiple marriages, where both spouses have children from prior marriages, is not an area for do-it-yourself trusts or inexperienced lawyers.
Leaving Money to Grandchildren
Many people want to leave their grandchildren something when they pass away. It may be small or it may be significant. There are several ways to do this, some better than others. When you draft your estate plan, you have no way of knowing whether some of your beneficiaries are going to be minors at the time you die. You have to plan for the possibility that some may be minors.
1. Outright Gift. You can simply provide in your will that a dollar amount or a percentage of your estate will go to a grandchild but this leads to problems if the recepient is a minor. Substantial amounts of money being inherited by a minor may cause a court-supervised guardianship of the estate of the minor until he or she is 18. Then at 18, the entire inheritance is handed over to the now adult, but still 18 year old, with no limitations attached.
2. Custodial Accounts. One way you can leave money to minors is in an account under the Uniform Transfer to Minors Act ( a UTMA account). This works well for small amounts of money. The account has a custodian who has the power to withdraw funds for the health, education, and maintenance of the minor. Once the child reaches the age you specify (In California it can be as old as 25), the child has full access to the funds.
3. Minor’s Trusts. Another option for leaving money to minor beneficiaries is to set up a minor’s trust. This is a trust customized to fit your situation and fulfill your wishes. You have infinite possibilities. You can put limitations on what the trustee can use the assets for such as for medical expenses, education, a home, car, etc. You can provide for the intervals at which you want the child or grandchild to receive distributions. As an example, one method would be 1/4 at age 18, 1/4 at age 25, 1/2 at age 30, and the balance at 35. The disadvantage of a trust is that there are costs of administering the trust during the time it is in existence. An experienced estate planner can help you weigh the benefits against the costs and expenses associated with administering the trust.
4. Educational Savings Plans. If your goal is to help your grandchildren with their education, there are many tax-favored college savings accounts, also called 529 Plans, Cloverdale Plans, or educational IRAs. The earning are not usually taxed as long as they are used for education. If the beneficiary does not go to college, however, the funds will have to go to another beneficiary.
Other ways to help your grandchildren out is to pay their education expenses directly while you are alive. You must however write the checks out to the school, not the individual. Savings bonds also work well since they are purchased at half the face value.
Revocable Living Trusts in This Economy
Most people agree we are in the middle of an economic recession in this country. Unemployment is high and the stock market is like a roller coaster. How does the recession affect your need for a trust or affect your exisiting trust you already have?
If you do not have a trust and have assets of over $100,000, you do need a revocable living trust even in this economy, and some people would say, even more so. If you have real property out of state, a trust will avoid probate in both California and the state where the property is located. Many people have young children and need a trust with guardians set up in case something happens to them. Death is inevitable, recession or not, but a trust will enable your estate to be distributed faster and less costly than with a will or with no estate plan at all.
If you already have a trust, the recession may also affect you. In a recession, some investors try to recession-proof their portfolios by switching their IRAs, 401(ks) or other investments into different funds or CDs. Have you remembered to always title new investments in the name of your trust and made up to date beneficiary designations? Changing accounts, sales of real property, refinancing, etc. all increase in times of rescession, leaving open the possibility that assets are not properly titled in the name of the trust.
A second way your estate may be affected is by the type of trust you have. Your trust, even if old, is still valid, but may not be optimal. Estate plans written in the 90′s often require a division of the estate into two separate trusts upon the death of the first spouse. These trusts are called A/B trusts, exemption trusts, or marital trusts. That was a good choice in those days but today with an inctease in the estate tax xemption to $3.5 million ($7 million per couple) you may want to update the type of trust you have. Revising your trust may save on trust administration after the first death and give the surviving spouse more flexibility.
Lastly, the economy may affect not only you but your beneficiaries. Do you have beneficiaries that have become dependent on public assistance? Are some facing bankruptcy? Maybe you need to create a special needs trust or make sure your trustee has the power to postpone distributions if a beneficiary is in bankruptcy.
We can’t control the stock market and other effects of the rescession, but we can control our own estate plan by creating the appropriate documents and revising them from time to time as necessary. Contact us if you need to discuss these issues.
The best way to avoid probate is to have a revocable living trust into which you transfer all of your assets to yourself as the trustee during your lifetime. Upon your death, the successor trustee you have chosen will have immediate authority to administer your trust without a probate. It is critical however that you in fact transfer your assets into your trust by deed, changing title to accounts, etc. Other advantages of a trust are privacy and that if properly drafted, the trust will also have provisions for someone to manage your assets if you become unable to do that for yourself.
Other ways to hold title to avoid probate are:
1. Property held in joint tenancy with a right of “survivorship”. An example might be a home you own with your spouse with a “right of survivorship.” Sometimes people own their cars in joint tenancy with other people or a bank account in joint tenancy. When a joint tenant dies, the other joint tenant(s) inherit the property without the probate process. Although assets held in joint tenancy avoid probate, holding title in joint tenancy can cause other problems such as the potential loss of a full step-up in basis which can result in capital gains. Another problem which can result when you own something in joint tenancy is that creditors of the other joint tenant may be able to enforce a judgment against the property.
2. Payable on Death Accounts (or POD accounts). This is a type of account where you choose a beneficiary who will receive the account upon your death. These accounts pass to the beneficiary without probate.
3. IRAs and Retirement Accounts. Benefits payable to beneficiaries under these accounts automatically pass to the named beneficiaries and avoid probate.
4. Life Insurance Proceeds. Just as with pension and retirement plans, life insurance proceeds are paid to the named beneficiaries and avoid probate.
Frequently Asked Questions about San Diego Probate
1. How long will my probate matter take? As a general rule, most probates in San Diego are finished in a year to 18 months. However there can be many issues that may cause the probate to last longer. Common examples are litigation issues that develop such as an objection to the will, unusual property that has to be appraised or liquidated, difficulty finding heirs or beneficiaries, and larger estates with tax issues.
2. If I am an administrator or an executor, will I have to post a bond? A bond is for the purpose of protecting the decedent’s estate in case the personal representative mismanages the estate. Depending on the size of the estate, bond premiums can be $2000 or more per year.If the will waives bond or you can get all the beneficiaries to waive bond, you probably won’t have to post a bond, however the Court can always order the personal representative to be bonded if the Court believes it is warranted. Bonds are usually required if the administrator or executor live out of state. To obtain a bond, you have to provide information to the bond company about your employment, criminal convictions, bankruptcies, and civil judgments against you. Some people are not bondable if they have issues in these areas.
3. What should I do if I am a creditor of a probate estate? If someone has died owing you money and there is a probate opened, you can file a creditor’s claim against the estate. You may receive a Notice of Administration if you are a known creditor in which case you have 60 days to file a claim. If you are not notifed of the probate, you have 4 months after the letters testamentary (probate with a will) or 4 months after the letters of administration (probate without a will) within which to file a claim.
4. What if my spouse died and all of his or her property is community property? If all of a decedent’s property is held as community property with the surviving spouse, a petition can be used to pass the assets to the surviving spouse. This is a simple petition filed in the probate court but without all the formalities of regular probate and it can be heard in a relatively short time after it is filed.
These are general answers to general questions but remember each probate situation has its own facts and issues which may change the general rules.
What is Your San Diego Probate Matter Going to Cost?
The fees for a probate attorney to handle your probate matter are set forth in the California Probate Code. Section 10810 escribes the maximum fees an attorney can charge. These are 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 million
If the estate is worth more than $25 million, the Court will determine the fee.
Who is entitled to these fees? The statute allows compensation for both the attorney handling the probate and the executor or administrator (if you have read the previous blogs, you know the difference). So for example, if the estate is valued at $500,000, the statutory fees would be $13,000 for the attorney and $13,000 for the executor/administrator. With a $1 million estate, the fees would be $23,000 each, or $46,000 total. Fees can also be increased by the court if the probate is complicated by litigation or tax issues.
You may be asking how the fee is determined when there is an asset which is mortgaged. For example, you may have a home appraised at $400,000 but it has a $300,000 mortgage. The house is still considered an asset worth $400,000 for purposes of determining attorneys fees.
In addition to the statutory fees for attorneys and executors or administrators, there will aso be costs to file the probate, publication costs, and appraisal fees.
What Assets Do Not Go Through Probate?
If you have a will and not a trust, when you die your estate will have to go through probate. In general this means that all the property that the deceased owned at the time of death such as real property, personal property, bank accounts, investment accounts, etc. will be part of the probate estate. However there are some exceptions. You may have in your estate some assets that do not go through probate in California. These are some of them:
1. Property held in joint tenancy. An example might be a home you own with your spouse with a “right of survivorship.” Sometimes people own their cars in joint tenancy with other people or a bank account in joint tenancy. When a joint tenant dies, the other joint tenant(s) inherit the property without the probate process. Although assets held in joint tenancy avoid probate, holding title in joint tenancy can cause other problems such as the potential loss of a full step-up in basis which can result in capital gains. Another problem which can result when you own something in joint tenancy is that creditors of the other joint tenant may be able to enforce a judgment against the property.
2. Payable on Death Accounts (or POD accounts). This is a type of account where you choose a beneficiary who will receive the account upon your death. These accounts pass to the beneficiary without probate.
3. IRAs and Retirement Accounts. Benefits payable to beneficiaries under these accounts automatically pass to the named beneficiaries and avoid probate.
4. Life Insurance Proceeds. Just as with pension and retirement plans, life insurance proceeds bypass probate and are paid directly to the named beneficiaries.
Another way you can avoid probate is to transfer your assets into a revocable living trust. Assets which have been transferred into the name of the trust are non-probate assets.Read More
What is Joint Tenancy? Can I hold my property as “joint tenants with right of survivorship” to avoid probate? Are there any other problems with Joint Tenancy?
- Joint tenancy means that when the first owner dies, title automatically passes to the surviving owner.
- The simple answer is no. Here is why:
- If you hold property as Joint Tenants with your spouse, Probate proceedings will be initiated on upon the death of the surviving spouse. Additionally, holding property in joint tenancy with your spouse prevents your family from optimizing estate tax savings available to married couples.
- Yes. If you hold property in Joint Tenancy with someone other than your spouse, you may cause the “unintentional disinheritance” of your children. This can occur because, on your death, the surviving Joint Tenant has no obligation to provide for your children or your spouse because they hold the property outright.
When it comes to estate planning, where do we find the most drama? What cases are the most contested in Probate Court? The answer is easy, Conservatorships! Today’s court systems are not helpful when it comes to resolving family disputes. Ask someone who has been through an unpleasant divorce or painful custody battle and they will tell you that the court litigation process is time a consuming, draining, expensive process–there are no real winners.
Conservatorship is a legal concept where a guardian is appointed by a judge to protect and manage the financial affairs of a person’s daily life. This could be due to many factors, such as physical disabilities, mental limitations, or old age. Conservatorship can refer to the legal responsibilities over a person who is mentally ill, suicidal, incapacitated, or in some other way unable to make sound legal, medical, or financial decisions.
Typical Conservatorship cases involve elderly parents who have started to show signs of loss of memory, mental defects, or inability to make appropriate decisions. Most family relationships are strained after a court case has been completed, and it’s no different in Conservatorship cases. The only difference is that the people involved are usually siblings fighting over an aging parent. The one benefit of an unpleasant divorce case is that when there are no children involved, the man and woman can go their own individual ways. The good news is that they do not have to continue to have any relationship after their divorce has been finalized.
Unfortunately, in Conservatorship cases family members are often torn apart during the litigation process. When all issues are eventually settled, the family then has to find a way to continue a healthy relationship. The litigation process does little to resolve any underlying sources of animosity, which often include the conflict over money, control, or unresolved hurts.
As practicing attorneys in this particular area of law, we are concerned about these types of cases that involve our aging population. The lack of proper planning is and will be extremely common, and our courts will eventually be in overload. We advise our clients to take steps and think ahead now by creating an plan well in advance to avoid the stressors that can come from a Conservatorship case.Read More