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).

  • 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 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.

  • How Should I Handle My Life Insurance With Regard to My Estate Plan?

    In most circumstances, you will want to list your revocable trust as the beneficiary of your life insurance policy. There are exceptions to this rule, but in general, listing your trust is the best alternative. The reason is because it will insure that a payout reaches your eventual beneficiaries. For example, if you are married and have a joint trust in California with your spouse, listing your trust as the primary beneficiary of your life insurance policy will ensure that the money will pass on to your children and even be protected in a continuing trust (if you have set this up in your trust). The reason putting the trust on as the primary beneficiary usually makes the most sense is because if you and your spouse were in a common accident and one of you passes away and the other is on life support, you do not want the life insurance company paying out to the surviving spouse and the proceeds not reaching the trust. Later if the surviving spouse passes away, that money will already be under the protective shield of the trust for your children and you don’t have to worry about the life insurance proceeds inadvertently going through probate.

    Each insurance company will have its own preferred format for designating your revocable trust as the beneficiary. An example for a married couple in California might be: “The Smith Family Trust dated October 26, 2012.” They will have their own beneficiary form for you to fill out to effect the change. The insurance company usually will send you a letter confirming the change of the beneficiary to your life insurance policy. It is best to place that letter under the trust assets tab of your estate plan binder.

    One word of caution…life insurance death benefits are includible in the calculation of your estate for estate tax purposes. What this means is that you may be over the federal estate tax exemption limit because of the size of your life insurance policies. For example, a single person currently has a $5,120,000 federal estate tax exemption. We will use Tom Smith in our example. Tom has a primary residence worth $2,000,000, a business worth about $1,500,000, a brokerage account with $1,000,000, cash accounts valued at $500,000 and a life insurance policy valued at $2,000,000. Tom’s estate (less any debt) is valued at $7,000,000. If Tom dies while the estate tax exemption is $5,120,000 (which it is in 2012 until year end), his estate will owe a 35% tax on $1,880,000 (provided Tom has not made any life time gifts over the annual exclusion amount – currently $13,000). In Tom’s situation, his children will need to write a check in the amount of approximately $658,000 from his estate to the federal government. One solution to this problem is to instead have your life insurance owned in an Irrevocable Life Insurance Trust.

  • How Do I Transfer My Home to My Revocable Trust?

    This is typically done through a Trust Transfer Deed or a Quitclaim Deed. The document which gets recorded with the local Recorder’s Office in the county where the property is located consists of language transferring title from the current Grantors to the Trustees of the trust. In California, we also file what is called a Preliminary Change of Ownership Report so that we do not trigger a reassessment or transfer tax on the property. Proposition 13 allows for several exemptions for this purpose and transfers to a revocable trust is one of the exemptions.

    If the current Grantors are married and they intend the property to be a community property asset, it is advisable to move title from joint tenancy first and then file the Trust Transfer Deed or Quitclaim Deed to the trust. This will ensure evidence that the asset was intended to be a community property asset and is therefore entitled to the double step-up in basis at the death of the first spouse for capital gain purposes.

  • How do I Transfer My Bank Accounts to My Trust?

    Most banks prefer that you and your spouse come to a local branch of the bank and complete their trust transfer form. Typically this is a one or two page document that will ask you to list the name of your trust, the date of the trust and who the current trustees are. If you and your spouse are the ones that created the trust, you are probably also the trustees of the trust if the trust is a revocable trust. Some banks will also ask you to list who the successor trustees are on their form. The reason they may want this information is so that they have on file who will have the ability to take over at trustee if you become incapacitated or passed away. If something were to happen to just one spouse, most revocable trust documents are drafted so that the other spouse can take over as the sole trustee of the trust (and that bank account). The bank is likely also going to request a copy of your Certification of Trust. This is typically a two page document that lists the name of the trust, who the current trustees are, what the tax ID number is (usually your social security number if its a revocable trust) and the address of the trustee. In some circumstances, the bank will also request the first and last pages of the trust document to verify the date it was executed and that it was notarized.