· Simple and inexpensive to create

· Power to determine distribution of assets to beneficiaries

· Designation of guardian for minor children

· Designation of executor

· Executor's ability to operate business, sell and/or distribute assets, and make decisions

· Elimination of the cost of the executor's bond

· Allows gifts to individuals or charities, none of which are covered by intestacy laws.

· Marital deductions provide tax saving 

· Allows for distribution of assts to children of those who die before decedent.

Disadvantages (compared to a living trust)

· Subject to Probate

· Subject to significant expenses if estate's gross value exceeds $100,000

· Possible interruption in your family’s access to funds

· Slow distribution of assets

· No stepped-up tax basis if title to property held in Joint Tenancy

· Public in nature

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Living Trusts

A trust is essentially a written agreement between the person creating the Trust (Trustor) and the person named to manage the Trust (Trustee) (often the same person).  A trust is a legal entity with powers, not unlike a corporation.   When the trust is created, you transfer ownership of your assets from yourself to the trust, and you as the Trustee, control and manage them.  With a revocable trust, the Trustor may amend the trust at any time, but it becomes irrevocable upon death.  A "pour-over" Will is still needed to provide for assets that are recently acquired or were never transferred to the trust.        

Upon your death, the Successor Trustee takes over the control and management of the assets for the benefit of the beneficiaries.  Your assets avoid the Probate process because they are no longer titled in your name as an individual.  Rather, they belong to the trust.  The Successor Trustee simply transfers your assets directly to your beneficiaries without the need for court or attorney's fees or costs.

There are many types of trusts available for different purposes.  You should consult with your attorney to determine the type of trust best suited for your needs.   Some types of trusts are:

1) Revocable Trusts (most common)

Advantages:

· Provides for management of assets if the Trustor is unwilling or unable, without Court supervision

· Trustee pays debts, taxes, and distributes assets upon the Trustor’s death

· Eliminates Probate & Probate expenses

· No interruption in your family’s access funds

· Assets can be distributed quickly

· Minors are provided for until a certain specified age

· Protects assets from creditors

· Can reduce estate taxes

· Received stepped-up tax basis on sale of residence

· Private in nature

Disadvantages:

· Trust must be funded (transfer title of assets to trust)

· More complicated and expensive to create than a Will

2) Irrevocable Trusts are essentially the same as revocable trusts except....

Advantages :

· Essentially the same as a revocable trust, but

· The value of assets are NOT included for Estate Tax purposes, thus allowing significant tax savings

Disadvantages:

·Essentially the same as a revocable trust, but

· Amendments are not permitted.  Once you create the trust you cannot change it.

3) Bypass Trust

A bypass trust is essentially the same as a Revocable Trust except that two trusts are actually created, which allows a married couple to each utilize the full federal estate tax exemption.

Example of estate taxes owed without Bypass Trust

Assume Husband’s assets are $1M and Wife’s assets are $1M

Assume Husband passes and leaves his entire estate to Wife

Assume when Wife passes her estate is still worth $2M 

In 2003 Wife’s allowed exemption is $1 million, which means that her other $1million is subject to estate taxes.  The tax rate on this amount is 43 ½ percent, which means the estate would owe $435,000 in tax. 

Compare With Bypass Trust

Assume the same facts except that a Bypass Trust is used

On Husband’s death, his $1M goes to Trust A

On Husband’s death, wife's $1M goes to Trust B

On Wife’s death both trusts are still worth the same amount

Each spouse can utilize a $1M exemption on Wife’s death

In 2003 Wife’s allowed exemption is $1M and Husband’s allowed exemption is $1M.  The estate would owe zero taxes, thus saving $435,000 in taxes.  

4) Life Insurance Trust

Federal estate taxes must be paid on life insurance proceeds when the insured owns and pays for the policy themselves (this includes insurance given by an employer).   However, you can eliminate the taxes by creating an Irrevocable Life Insurance Trust.  The reason for this is that the insurance policy is owned and paid for by the trust, not the decedent or the decedent's spouse.  Therefore, the proceeds are not considered part of the estate.

5) Special Needs Trust

A Special Needs Trust is a type of irrevocable trust that is used for an elderly or disabled person.  They are usually created by people who want to protect their elderly parents or disabled children without effecting their ability to receive government assistance.  The Trust protects the person's ability to qualify for certain types of need-based government programs such as social security and Medi-Cal, whereas they might not qualify without such protection.  The Trust money provides for the special needs of the individual and is a supplement to the government assistance.

Because the person who receives the Trust money has no control over the distributions, the government does not include the money when calculating the person's income determine eligibility for the program.

Additionally, a recipient could lose government assistance upon receipt of an inheritance.  Thus, a Special Needs Trust if often created to provide the same protection described above.   

6) Charitable Remainder Trusts

A Charitable Remainder Trust is a type of irrevocable trust.  Such Trust allows you to make a donation to the charity of your choice and is excluded from federal estate taxes.  However, you retain control of the donation and can keep any income derived from the assets during your lifetime.  

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Powers of Attorney

A Power of Attorney is a document granting a person the power to legally act on your behalf.  It usually deals with healthcare or property issues.  A Power of Attorney for Healthcare grants your agent the authority to make medical decisions on your behalf.  A Power of Attorney for Property grants general or specific powers to your agent regarding your financial affairs.

A Power of Attorney terminates automatically if you become incapacitated.  To resolve this dilemma, a Durable Power of Attorney should be created instead.  It stays valid even if you become unable to handle your own affairs.  This type of document can go into effect as soon as you sign it, or you can specify that that it does not go into effect until you become incapacitated.  

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Living Wills & Health Care Directives

A Living Will, also called a Health Care Directive, specifies your wishes regarding healthcare in the event you cannot make the decisions for yourself.  The document is given to the doctor and (s)he is under a duty to honor your instructions.  

A Durable Power of Attorney for Healthcare gives your agent the authority to make medical decisions for you if you are unable to make them for yourself, as discussed above.   It is a good idea to combine your Healthcare Directive and your Durable Power of Attorney.  In other words, your Healthcare Directive can appoint an agent to ensure your wishes are followed.  Alternatively, you can create two separate documents.  The Healthcare Directive will explain your medical care instructions and your Durable Power of Attorney will name an agent to ensure your wishes are followed.  

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Same Sex Couples

Without estate planning, same sex couples will have no legal rights in regards to his/her partner whatsoever.  Therefore, it is absolutely essential for these couples to create a legal estate plan.  Any and all of the estate planning provisions described in this section can be used to protect you and your partner.  

Additionally, same sex couples can register for a legal Domestic Partnership in California and receive automatic legal rights, similar to that of a marriage. They can also legally adopt each other's children just as step-parents do.  

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Asset Protection

Asset Protection is a method to ensure your assets are protected from future creditors.  Consider the following methods to protect your assets:

• Insurance policies

• Homestead

• Irrevocable Trusts

• Incorporation, LLC, or Limited Partnerships

• Non-profit company

• Family Limited Partnership

• Domestic Family Protection Trust

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