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Articles Posted in Trusts

Our Palm Desert estate planning attorneys continually see clients who have not updated their Will or Trust since it was first established….20 or more years ago. Although out-of-date documents are better than no document at all, current and updated documents are best. Estate tax laws change regularly and so do changes in state laws regarding estates and trusts. We recommend clients review their estate planning documents at least every five years. However, there are some circumstances which necessitate reviews and revisions sooner than the five year mark.

If your immediate family experiences a major event such as a marriage, death or birth, you should review your current documents.

Current estate tax rates and exemption levels are set to end on December 31, 2012 absent an act from Congress. The new law effective January 1, 2013 is dramatically different than our current laws.

When you buy or sell a home you need to revisit your estate plan and make sure you update your documents to reflect this change. If you have a trust, make sure that all new pieces of real estate are vested properly.

Whether you sold a business and are expecting significant financial gains or realized considerable losses, you need to review your plan. Some estate planning mechanisms may no longer work for your changed financial status.
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A Successor Trustee must follow all the provisions in the actual Trust document. However, a California Trustee must also follow the rules and procedures mandated by the California Probate Code. The following are some of the most common pitfalls that get Trustees into Trouble.

Failing to serve the required Notice to Beneficiaries AND heirs-at-law

Whenever a Trust becomes irrevocable, or there is a change in Trustees of an irrevocable Trust, the Trustee must send out notice pursuant to Probate Code § 16061.7. Failure to give timely notice or no notice at all can open the Trustee up for personal liability as well as allow for any beneficiaries or heirs-at-law to contest the trust for a prolonged period.

Failing to Account

Some Trust documents waive all accounting and thus a Trustee may believe that he or she is not required to provide any accounting. However, under California law a Trustee must account at least annually and any waiver of such accounting is against public policy.

Failing to Act Impartially

Trustee must act impartially among all the beneficiaries of a Trust. Favoring one beneficiary over another may result in a breach of fiduciary duty.

Failing to Keep Trust Assets Separate

A Trustee must manage an estate completely separate from the Trustees own personal assets. Trust accounts have their own EINs and must be vested in the name of the Trust, not the Trustee individually.
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A Trust is a written document that directs where your assets go when you die. However, unlike a will, a trust is a private instrument that does not require court intervention. If you have a trust you will avoid the court directed probate process and your estate can be administered privately and promptly.

Traditionally, trusts are used as probate avoidance techniques. However, Trusts are also beneficial for individuals wanting to have more control in the distribution of assets. Assets are distributed outright when they are distributed through probate, beneficiary designation or pay-on-death. A trust can instead provide that assets remain in trust until a beneficiary reaches a certain age, accomplishes some goal or indefinitely.

Trusts are especially helpful, yet overlooked, in the case of parents with young children. Many parents with minor children may still be establishing a career and may not be as financially secure as other adults. They may believe they do not have assets that warrant establishing a trust. However, they usually have substantial life insurance policies. Naively, the beneficiary designations on these policies generally lists the spouse first and then the children. The problem with this beneficiary designation is what happens when both parents die while the children are still minors? In this scenario, the life insurance policy will retain the proceeds until the children reach the age of 18. During the child’s minority, his or her guardian will not have access to these funds to care for the child. Additionally, the child will get the entire proceeds of the policy upon his or her 18th birthday. To avoid designating your minor children as the life insurance beneficiary, you can name your trust as the beneficiary after your spouse. This allows the trust provisions to designate when, where and how the proceeds are distributed.

Everyone needs an estate plan. However, too often we get calls to do an emergency house call because Mom or Dad received a bad prognosis and doesn’t have any estate planning documents in place. While we endeavor to accomplish the needs of these individuals, sometimes we simply cannot. California law requires that an individual have testamentary capacity to sign a Will or Trust. A person is not mentally competent if she or he doesn’t understand the nature of the document, cannot remember the nature and types of his or her property, and doesn’t recall his or her relations to living relatives.

A dementia diagnosis does not automatically prohibit someone from having testamentary capacity. However, it is crucial to have your estate planning documents in place before you become severely ill or disabled. Children whose parents suffer from a memory disorder should try and determine if Mom or Dad has sufficient planning before the disorder gets worse. This does not mean that children should have access to Mom or Dad’s will, but an honest conversation with parents about the state of their affairs is certainly prudent. Too often we have clients come in trying to sort of their parents’ estate because they were too embarrassed to talk to Mom or Dad while they were living.

Many Coachella Valley residents have revocable trusts which include a provision for a “bypass trust” otherwise known as an “A/B split trust.” Some residents are considering amending or restating their trusts to remove this provision. Although this may seem wise, there are numerous reasons why these provisions are still important today.

Under the old estate tax laws, every individual had an exemption amount of $3,500,000 but married couples also enjoyed an unlimited marital deduction. Therefore, if Warren Buffet wanted to give his entire estate to his Spouse, no estate tax would be due until her death. Unfortunately, he would have lost his personal estate tax exemption and higher estate taxes would be paid upon the Spouse’s death. However, if Mr. Buffet funded a bypass trust with his personal exemption amount ($3,500,000 in 2009) then this amount would still be available for the wife to use for her health, education, support and maintenance AND it would be exempt from estate taxes. In this scenario, Warren Buffet’s wife saved $1,575,000 in estate taxes that would otherwise have been paid to the US Treasury upon her death.

In December 2010, a new law was passed and the estate tax exemption was raised to $5,000,000. Additionally, the exemption is “portable” to Surviving Spouses so even if the first spouse doesn’t use up the whole $5,000,000 the unused portion is passed onto the Surviving Spouse. Thus, a Surviving Spouse can effectively have an exemption amount in excess of $5,000,000. With these higher exemption amounts and the option to “port” any unused exemption, why would you still need a bypass trust?

There are many reasons why bypass trusts are still important tools in most estate plans. First, the new estate tax laws are temporary. They are scheduled to expire in 2013 along with the $5,000,000 exemption and the notion of portability. The exemption amount will fall to $1,000,000 on January 1, 2013. Second, bypass trusts remain excellent mechanisms for ensuring where some money eventually gets distributed. Although Surviving Spouses have access to the funds in a “bypass trust” they cannot change who the ultimate beneficiaries are, nor can they frivolously or lavishly spend down these funds. Third, under most circumstances the bypass trust is a great way to protect assets for the children of one Spouse when there is a second marriage. Fourth, assets in a bypass trust cannot be reached by creditors of a Surviving Spouse.

Although getting rid of that bypass trust provision may seem like a good way to simplify your estate plan, prudent estate planning attorneys would advise keeping this provision until more permanent estate tax laws are in place.
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Thumbnail image for Courthouse.JPGProbate is the legal process of transferring property after a loved one has passed away. It requires a petition to the Probate Court as well as various other forms and court hearings. Most Coachella Valley residents would rather avoid probate altogether because there are some serious drawbacks of having your estate administered through the court. Most notably, the reasons to avoid probate are:

The attorney fees for administering a probate case are outlined by statute and based on the gross value of an estate. The following are the statutory fees:
4% first $100,000 3% next $100,000 2% next $800,000 1% next $9,000,000 ½ % next $15,000,000 Therefore, an estate with a gross value of $500,000 will pay attorney’s fees in the amount of $13,000.

Since a probate is a court process, it is entirely public. Anyone who has the time or desire can walk up to a court clerk and request to see your documents. This includes your last will and testament. Additionally, a notice about the probate case must be published in a local newspaper. Most individuals would rather have their estate administered privately and without court supervision.

Time Consuming
The statutory minimum length of a probate in California is four months long. However, due to court calendars and issues with court reporting requirements, most probate cases last between nine to twelve months. This means that your estate cannot be distributed quickly and any bequests outlined in your will cannot be carried out timely.
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