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Estate Planning

I. General Overview

A. There are 5 main considerations in any sound financial management strategy, namely: (i) protection; (ii) investment; (iii) retirement planning; (iv) tax planning; and (v) estate planning.

B. In a well-thought-out plan, each of these considerations will fit snugly together like the pieces of a puzzle.

C. Estate planning is designed to accomplish 2 primary goals, namely: (i) manage your estate during your life-time; and (ii) make arrangements for the prompt and proper distribution of your estate upon your death.

II. Estate Planning Offers a Number of Challenges

A . Each estate plan must be specifically tailored depending on (i) your family size, (ii) the kinds and amounts of assets you own, and (iii) what you want your estate plan to accomplish.

B. Three basic challenges.

1. Find the right attorney.

2. Estate taxes -- perhaps the most important challenge in estate planning is taxes. When you die, the IRS and state government want a healthy piece of everything you leave behind. There are 2 notable exceptions:

(a) Unlimited Marital Deduction: This concept applies to married couples only. Regardless of the size of your estate, there will be no federal estate taxes levied when a husband or wife dies and leaves his or her wealth to the surviving spouse.

(b) Personal Exemption or Unified Credit: In addition to the unlimited marital deduction, there is a $1,500,000 unified credit exemption in 2004 (increasing to $3,500,000 in 2009). This means that if the total value of your estate in 2004 is less than $1,500,000 upon your death, there will be no federal estate taxes due.

3. Probate.

III. What is Probate?

A. After most people die, their estates go through probate.

B. Probate is a court procedure that changes the legal ownership of property when someone dies. During probate, the court determines the validity of your Will. The court supervises the work of the executor or administrator, who is responsible for marshalling all of the decedent's assets and paying all debts. When the affairs of the decedent's estate have been concluded, the court will order the assets distributed to the beneficiaries in accordance with the terms of the Will. If no Will exists, then the assets are distributed in accordance with the laws of intestate succession.

C. Probate is a long and expensive process.

IV. Estate Distribution Techniques

A. Do nothing : Dying without a Will is called "intestate" and requires your estate to go through probate.

1. Joint Tenancy: There is a common myth that joint tenancy avoids probate. Well, it does not!!! Rather, it merely postpones probate until the surviving joint tenant dies. If a husband and wife own assets as joint tenants, there will be no probate when the first spouse dies; however, there will be a probate when the surviving spouse dies.

(a) Advantage of Joint Tenancy is that property can be easily transferred to the surviving joint tenant at a reduced cost of administration.

(b) Disadvantages of Joint Tenancy

(i) Can be terminated by any joint tenant;

(ii) Creditors of any of the joint tenants may attach and force a sale of the joint tenancy asset;

(iii) Creating a joint tenancy may result in a taxable gift, a carry-over basis in the hands of a surviving joint tenant and increased property tax;

(iv) Incapacity of one of the joint tenants may create difficulties; and

(v) Significant income tax hardship upon death of a joint tenant.

2. Community Property: Property earned or acquired by either spouse during marriage. This property is owned equally by the spouses, no matter which spouse earns the most.

(a) Your Will cannot include your spouse's half of the community property, only your half.

(b) Holding title to assets as community property also postpones probate until the death of the surviving spouse.

(c) There is a significant income tax advantage to holding title to assets as community property upon death of first spouse as opposed to joint tenancy.

(i) Assume a married couple buys an asset for $100,000 in 2000 and it is worth $500,000 today. If a spouse dies, and title is held in joint tenancy, the income tax basis of the deceased joint tenant's interest is increased to $250,000 (i.e., 1/2 of the $500,000 date of death value). The income tax basis of the surviving joint tenant's interest remains at $50,000 (i.e., 1/2 of the original $100,000 cost). Thus, the surviving spouse's tax basis is increased from $100,000 to $300,000 ($250,000 + $50,000). If the surviving spouse sells the asset for $500,000, there is a $200,000 taxable gain ($500,000 - $300,000). If title was held as community property when the first spouse dies, the surviving spouse also would receive a new stepped-up basis to $250,000; thus, the new basis in the hands of the surviving spouse would be $500,000 ($250,000 + $250,000). A subsequent sale at $500,000 would result in no taxable gain ($500,000 - $500,000).

B. Will

1. A Will is a legal written document which names who you chose to receive your assets, as well as who you want to administer the estate.

2. A Will allows you to name a guardian for your minor children.

3. A Will also allows you to provide burial instructions and let's your heirs know if you wish to donate any organs to a charitable organization.

4. You can write your own Will; however, if you have a sizable estate, or if your family affairs are complex, you probably should have a lawyer prepare your Will. 

5. A Will has serious legal effects on your family and assets.

6. A Will is good until it is changed or you write a new one. It should be reviewed and changed if any of the following occurs: (i) marriage or divorce; (ii) birth or death in the family; (iii) estate greatly increases or decreases; or (iv) guardian or executor moves away or dies. 

7. Certain forms of assets are not covered by a Will (e.g., joint tenancy, life insurance proceeds and retirement plan benefits). These assets go to the named beneficiary regardless of whether you have a Will. 

C. Trust

1. A trust is a legal arrangement under which one person or institution controls property given by another person for the benefit of a third party.

2. Trustor, trustee and beneficiary must be defined.

3. There are 2 main types of trusts, namely: (i) testamentary trusts which take effect upon your death and do not avoid probate; and (ii) living trusts which are established while you are still alive and if properly funded completely avoid probate.

4. There are 3 principal advantages of a living trust, namely: (i) avoidance of probate; (ii) avoidance of a conservatorship; and (iii) confidentiality of the overall estate plan.

5. How does a living trust work?

6. A Will is good until it is changed or you write a new one. It should be reviewed and changed if any of the following occurs: (i) marriage or divorce; (ii) birth or death in the family; (iii) estate greatly increases or decreases; or (iv) guardian or executor moves away or dies. 

7. Certain forms of assets are not covered by a Will (e.g., joint tenancy, life insurance proceeds and retirement plan benefits). These assets go to the named beneficiary regardless of whether you have a Will. 

(a) During your joint lifetime nothing changes; you must transfer title of your assets into name of trust to avoid probate.

(b) Upon death of the first spouse, the trust estate is usually divided into 2 or 3 sub trusts; however, small estates may require no division.

(i) Trust A (Survivor's Trust), Trust B (By-Pass Trust) and Trust C (QTIP Trust).

(ii) The use of these trusts in combination allows for optimum estate tax planning.

(c) Upon death of the surviving spouse, the trust assets are distributed to the heirs; either outright or in trust.

8. Can the trust provisions be changed?

(a) During lifetime.

(b) Upon death of first spouse.

9. Will the real property be reappraised upon the transfer of title into the name of the trust?

10. Will the transfer of the real property trigger any "due on sale" clause in the mortgage?

11. Since I am going to leave all of my assets to my spouse, wouldn't it be easier to hold the assets in joint tenancy form with my spouse?

12. When does the trust terminate?

13. Does a trust save taxes?

V. Conflict of Interest

VI. How Much Does an Estate Plan Cost?

A. Depends on each individual plan.

B. Lawyers usually charge on either a flat fee or hourly basis.

C. Ask the lawyer for a written statement setting forth the anticipated fees to complete the entire estate plan package.  

D. Are the lawyer's fees deductible?

VII. Summary

A. No one estate planning strategy will work for every estate. The needs of each estate are different, so the solutions will be different.

B. Trusts are not tools for the rich, they are available for everyone. Establishing a trust is almost always less expensive than the alternative of going through probate.


1. What is a revocable "Living" Trust?

A revocable "living" trust is an agreement that arranges for another person or institution (referred to as the "trustee") to manage or control your property for your beneficiaries. When you sign a trust agreement, you are handing over legal "title" or ownership of your property to the trustee. As the person who sets up the trust, you are the "trustor." In addition, in the typical "living" trust situation you are also the trustee and beneficiary of the trust.

In recent years, more and more individuals have become interested in the use of revocable trusts to implement their estate plans. Most individuals have a perception that they are substantially better than Wills. Because this is not always the case, each individual must assess whether using a revocable trust to implement his or her estate planning goals is appropriate.

2. Will a revocable trust avoid probate?

The execution of a revocable trust, without more, will not avoid a probate proceeding at death. The revocable trust also needs to be funded during the individual's lifetime by transferring to it assets that would otherwise be subject to probate upon death.

3. Can I change my revocable trust?

You can change and even cancel a revocable trust but not an irrevocable one. In California, the person who sets up the trust can revoke a living trust unless the trust agreement says no changes can be made.

4. How much can one save in probate fees by using a revocable trust?

The attorneys' and Executors' fees for a probate estate are set by statute, and are divided into "statutory fees" and "extraordinary fees." Statutory fees for each of the attorney and the Executor are approximately $23,000 on the first $1 million of estate property (valued disregarding encumbrances) and 1% of the estate's value in excess of $1 Million. Several proposals have been made to repeal the statutory fee schedule, but no such proposal has been approved by the California Legislature at this time.

The fees for "extraordinary services" such as tax work, sales of real property, operation of businesses, etc. generally will be the same whether there is a probate or a revocable trust is used because in both cases the same work must be done and the fees for these services are not covered by the statutory probate fees.

5. What are the income tax consequences to having a revocable living trust?

A revocable trust has no significant income tax consequences during the trustor's lifetime. No separate taxpayer identification number or income tax return is required for the trust if (i) the trustor is the trustee or a co-trustee, or (ii) a husband and wife are trustors and one or both of them are a trustee or co-trustee, and they file a joint return. Instead, the trustor reports all items of income and deductions directly on his or her individual returns.

6. Does a revocable trust save estate taxes?

It is a common perception that revocable trusts save estate taxes. While this is true, Wills also save estate taxes: a properly drafted Will and revocable trust will yield identical estate tax consequences.

7. Will my property be reappraised for property tax purposes if I transfer my house or other real property to my revocable trust?

Under Proposition 13 in California, transfers of real property to a revocable trust do not constitute a change in ownership, and, therefore, do not trigger a reassessment.

8. Will the transfer of my house or other real property to a revocable trust trigger any "due on sale" clause in my mortgage?

Conveying encumbered real estate other than an owner-occupied residence to a revocable trust may technically trigger the "due-on-sale" clause of the underlying deed of trust. Many lenders require a modest fee ($50 - $100 per property) to consent to the transfer without enforcing the due-on-sale clause.

9. Does a revocable trust protect my assets from creditors?

Creditors are able to reach the assets of a funded revocable trust during lifetime and after death. Under recent changes to the law, creditors must begin a lawsuit against a decedent within one year of a decedent's death, regardless of whether a revocable trust or a Will is used. In a probate proceeding, reasonably ascertainable creditors are entitled to notice of the decedent's death and the rights of most creditors who do not file claims within four months of the issuance of Letters Testamentary are terminated. The trustee of a revocable trust now has the option to initiate a similar procedure to notify creditors so that most creditors who do not file claims within four months following the initiation of the procedure will be barred from filing claims later.

10. What is the cost of forming a revocable trust?

The cost will depend on your individual plan. Most lawyers the lawyer, you should ask for an estimate of the cost and the amount of time the work will take. You also should request a written fee agreement, so you won't be surprised when you get the bill.

A revocable trust requires the conveyance of assets to the trust. For $1 million worth of property, the extra cost of funding the trust can be anywhere from $500 to $1,000. It is difficult to avoid these costs because unless the revocable trust is actually funded, it will be necessary to probate the Will and the fees discussed above for a probate proceeding will be incurred.

11. May I deduct the fees payable to the lawyer?

A substantial portion of the fees to prepare and fund the revocable trust are deductible, but are subject to the 2% (of adjusted gross income) floor imposed on miscellaneous itemized deductions by Internal Revenue Code.

12. What are the annual costs of maintaining a revocable living trust?

If you are serving as the trustee or as a co-trustee, there is generally no cost associated with managing the trust assets. If another person or institution acts as your trustee, you will be required to pay an annual administration fee. Since the cost of managing the trust can vary, you may want to "shop around" before you make a decision.


Copyright © 2000 Stuart Jay Yasgoor, Esq. all rights reserved