We Answer Clients’ Popular Questions About Wills, Trusts, and Related Issues

It’s astonishing how often we hear the same questions from clients. Here, we have gathered together our responses to some of the inquiries we receive over and over. Dip into our FAQ collection; you may find your own questions about California estate planning answered in detail.

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  • Why do I need a trust and not just a will?

    Trusts don’t go through the probate process. Probate is the legal process through the court system to transfer assets to beneficiaries listed in a will or if there is no will, through state intestacy laws (i.e., next of kin). Probate is a major disadvantage in the state of California because it typically will cost the estate 5X or more than a trust administration. It also usually takes 12-24 months even for straightforward probates due to the budget cuts in the court system. The court calendars are overloaded. The process is open to public inspection which opens the details of the estate to prying eyes and prospective con-artists. Trusts are private and avoid the major disadvantages listed above. Also, if you own real estate and want to avoid the probate of that asset, you really need to transfer it to a revocable trust or some sort of business entity (if appropriate).

  • Do I need to update my trust when I open a new bank account or buy another piece of real estate?

    In most cases, no. As long as you didn’t list a specific asset to be given as a specific bequest and then sold it to create a new bank account our buy a new piece of real estate, you don’t normally need to update the trust. You simply need to update the Schedule of Assets at the back of the trust. The new asset should also reflect the trust as the owner of the new asset. However, note that if the acquisition of the new asset puts you over the Federal Estate Tax Exemption amount, you may need to update your trust and/or do some advanced estate planning (think inheritance – i.e., you inherit mom’s house, dad leaves you his bond portfolio, you win the lottery, etc.).

  • How often do I need to update the terms of my trust?

    Although there is no hard and fast rule on how often you should update your trust, conducting an annual review of the trust and asset schedule is recommended. In most situations, updates are typically needed every 3-5 years. Circumstances change. There will always be changes in the law – especially the tax laws. There are also going to be changes in your family situation or make-up and your assets will change over time. Being proactive is worth its weight in gold and will ensure your true intentions are followed down the line.

  • How long will it take to draft my trust plan?

    In our office, we usually can have your trust plan drafted and ready for signature within 2-3 weeks depending on our caseload. About a week prior to your trust signing meeting, we will email you your trust summary and a names and fiduciaries summary listing everyone involved in supporting you and your plan to ensure we have everything correct before your signing appointment.

  • How do I make sure my assets won’t go to my child’s spouse?

    You can set up continuing trusts inside your revocable trust that spring into existence upon your death. By assigning your assets to the continuing trust or trusts, you can segregate the assets you leave your child as a separate property asset. The main issue with outright distributions at death is that most people end up commingling the assets left to them with their spouse. This can result in your assets going to your child’s spouse upon death or divorce (instead of to your grandchildren). This same type of planning can be done inside irrevocable trusts used for Medicaid planning and for high net-worth planning for future generations.

  • Will our kids have to pay estate taxes on our assets after we die?

    It depends. If you do the right planning required to avert having an estate tax liability, then the answer is no. we have many tools and techniques to effectively plan for estate tax contingencies – you just need to do the planning. The Federal Estate Tax is calculated on the value of the assets in your estate at the time of your death (less encumbrances). A portion of the estate is “exempt” from tax. The amount over the exemption amount is subject to the Federal Estate Tax. The amount of the exemption has shifted and changed over the years. It was $600,000 during much of the early 1990s.

    In 2001, Bush enacted a tax that gradually increased the estate tax exemption amount to $3.5MM in 2009. Because that law was about to sunset, in December of 2010, a new temporary law was passed for a two year term which raised the exemption to $5MM per person. That law is also set to expire at the end of 2012. On January 1, 2013, if there is no new law passed, the new estate tax exemption will be $1MM per person with a tax rate of 41-55% on the amount over $1MM in your estate. Although married people who are US citizens can easily take advantage of the unlimited marital deduction and leave everything to their spouse estate tax free, when that spouse later dies, there could be an estate tax on his or her estate. There are ways to plan to maximize the use of both spouses’ federal estate tax exemptions in their revocable trust.

  • How do I get my assets into my trust?

    The process of getting certain types of assets into trust title with the trust as owner is called “trust funding”. For real estate, that means that a Trust Transfer Deed or a Quitclaim Deed is prepared, signed and recorded with the County Recorder’s Office in the County where the real estate is located listing the trust as the Grantee (along with a Preliminary Change of Ownership Report-critical to avoid reassessment and transfer taxes). For bank and brokerage accounts, the financial institution typically has a title transfer form that you fill out listing the trust as the owner and yourself and your spouse as the trustees of the trust. For corporate stock and LLC membership interests, the stock certificate or LLC membership certificate needs to be updated to reflect the trust as the new owner. Changing the interest ownership on the rolls of the corporation or LLC is also advised.

    Retirement accounts such as IRAs, 401Ks, 403Bs, etc. NEVER get titled in the name of a revocable trust (or any other type of trust for that matter). Instead, these assets are governed by a beneficiary designation form. Retirement accounts must be owned by an individual and cannot be owned by a trust. Careful planning is required with these types of assets because they often represent the largest asset in a person’s estate. Life insurance in most cases should list our trust as the primary beneficiary (there are exceptions to this rule but you should consult with your attorney before determining how to fill out the beneficiary form on your life insurance policies). One of the major advantages to listing your trust as the primary beneficiary on your life insurance is to ensure that the life insurance proceeds make it down to your children without court interference. We can asset protect the assets in the trust and life insurance directed to the trust at death in continuing trusts for our children or other beneficiaries. However, in larger estates, it’s important to note that the use of an Irrevocable Life Insurance Trust (ILIT) may be recommended to provide for the payment of an estate tax liability or provide liquidity where there are assets that you do not want to be fire sold. Cars, RVs and other vehicles can be transferred to trust title through the DMV (they have their own forms for transfer). If you are a member of AAA, the process can be made a lot easier.

  • Do I need to refinance my house before I put my house into my trust?

    No. Some lenders will simply transfer your home into your personal name and then re-deed it back into your trust when the loan closes. If this is required by the lender, it is strongly advised that you check the status of the transfer back to your trust within 2 weeks of the loan closing. Some lenders will just have you fill out their form Certification of Trust for the loan process and avoid removing it from trust title during the loan process.

  • What is the best way to leave personal property to specific people?

    If your trust document has provisions for a Personal Property Memorandum, you may have an instruction letter to your trustee listing what goes to who after you are gone. Because people tend to give away or sell personal property possessions throughout their lifetimes, it is easiest to have a Personal Property Memorandum that you can update as needed without the need to frequently amend the trust.

  • Who should be the successor trustee of our trust?

    Depending upon what you are trying to accomplish, the successor trustee might best be a corporate or private fiduciary or a close family member or friend. If you design continuing trusts with asset protection features for your children, having a trustee that is a “discretionary” trustee provides the highest level of asset protection. The discretionary trustee can turn the faucet to the continuing trust off and on when there are creditor threats to the beneficiary of the trust. Such threats include divorcing spouses, lawsuits and creditors who could step into the shoes of the beneficiary if the right provisions and trustee are not in place.

    A discretionary trustee under IRS code Section 672(c) is someone not related to or subordinate to the grantors or the beneficiaries of the trust. This means in order to have a discretionary trustee you need someone not directly related (no parents, siblings or children) to or working for the grantors or beneficiaries of the trust. However, if your heart is set on having your sister or brother as the successor trustee and still have a measure of asset protection for your children, you can do this by instructing them that if their child ever goes through a divorce, has a lawsuit lodged against them or has other creditor problems, that brother or sister should resign as the trustee immediately. Then, if you have a discretionary trustee as a secondary successor trustee, they can accept the appointment of trustee over the trust for your child. The discretionary trustee can be a bank, trust company, private fiduciary, a more remote family member (not a first degree relative), or even a close family friend, your CPA or attorney.