FAQ’s:
What is a Living Trust and why should I have one?
A Living Trust is a centuries old estate planning tool that allows you to transfer your assets into a trust while maintaining complete control over all assets
during your lifetime. You retain the same freedom you enjoy now and no special tax returns are required. A Living Trust also allows you to provide for
incapacity and to reduce estate and capital gains taxes. The goal of most people is to be able to pass their estate to their spouse or children with the least
amount of stress and expense. Unfortunately, having a will is not enough. With a will you cannot pass your estate to your loved ones without probate.
Why is it desirable to avoid probate?
Probate is our legal system's lengthy and expensive method of proving that your will is valid before allowing your designated loved ones to receive your gifts. If
you don't have a will, a bureaucracy will decide who gets your property.
Probate typically takes 6-24 months before loved ones will receive your gifts -sometimes it lasts for many years. Also, you will usually need to hire a probate
attorney whose fees are set by law. Probate fees are a percentage of your gross estate and can easily consume over $26,000 on an estate consisting of only
a $500,000 home. Fees may even exceed the equity in your home. However, the true cost of probate is the toll it takes on your loved ones.
More Facts:
A Living Trust offers many other important benefits and avoids all of the following problems:
Maximizing Real Estate and Investments.
1. Probate: If you own property in different states or counties, a separate probate case must be opened in each jurisdiction -often requiring an attorney in
each state. Have been advised to hold property in Joint Tenancy (JT) or as Community Property w/ Right of Survivorship, the survivor will inherit without
probate but:
(i) If you die together (such as in an auto accident), separate probate cases are required before your children can inherit;
(ii) After the death of the joint tenant, the property is titled in the name of the survivor and must still be probated upon their death before your children can
inherit;
(iii) If a joint tenant becomes incapacitated, the property may be in limbo until a conservator is appointed by the courts;
(iv) At the death of one tenant, the survivor receives a stepped up basis only on the newly inherited share of the property instead of on the entire property.
The next section illustrates how the way title is held makes a tremendous difference.
2. Capital Gains Taxes: Inherited property passes to the new owner with a stepped up valuation or tax basis. This means that you inherit property at its
current market value at the time of death. This reduces the amount of profit subject to capital gains taxes when your beneficiary sells the property. This
applies to real estate as well as investments.
Also, with California real estate, for assessment purposes, most property passed by parents or grandparents continues to maintain its original, lower,
assessed value. Also, with California real estate, for assessment purposes, most property passed by parents or grandparents continues to maintain its
original, lower, assessed value.
Holding Investments and Property in a Living Trust Has Tremendous Advantages for Loved Ones. Here is why:
Joint Tenancy Title vs. Title in A Living Trust
Example 1:
JT property (real estate or investments) originally purchased for $100,000 and held by two people. In 2006, one JT dies and the property has a current market
value of $700,000. The survivor receives a stepped-up basis only on the share that she inherited so her tax basis in the property is now $400,000. If she
decides to sell for $700,000, $300,000 is subject to capital gains taxes.
Example 2:
Same as above but, if the property was held in a Living Trust instead of a JT, she receives a stepped-up basis on the entire property and her new tax basis
would be $700,000. If she decides to sell for $700,000, none of the profit is subject to tax. This difference shields $300,000 from taxes for your loved one.
Joint Tenancy With A Second Spouse Or Child
A. Holding property in JT with a second spouse can potentially disinherit your children from a previous marriage, even if you specifically leave the property
to them in your Will.
B. If you hold title in JT with someone other than a spouse (such as a child or friend), that person has a present ownership right, controls part of the
property and may...
(i) Sell or encumber his interest;
(ii) Prevent you from selling or refinancing the property;
(iii) Possibly subject this share of the property to his spouse's marital rights;
(iv) Prevent your disposition of the property if he becomes incapacitated until a conservator is appointed;
(v) Subject his share of the property to his creditor's claims;
(vi) Subject the property to tax or other liens;
(vii) Receive a lower stepped-up basis when you die (see above). Also, if the property is a residence and he has not been living there, he may lose any IRS
exemption;
(viii) Pass the property to you without probate if he dies first, but you will receive a lower stepped-up basis and the property will still be subject to probate at
your death;
Holding investments and property in joint tenancy only delays probate and has many drawbacks. A Living Trust avoids all of these real estate and investment
ownership issues.
Protect You and Your Spouse.
1. Incapacity. An important part of a Living Trust plan is preparing for the possibility that you or your spouse may become incapacitated by Alzheimer's, etc.
Without a Living Trust, a conservator must be appointed by the court (AKA a living probate). Worse, the court may appoint a non-family member as the
conservator. Conservatorships are expensive and require reporting to the court.
2. Health Care Decisions. If you are unable to make health care decisions because you are incapacitated, someone must make them for you. Hospitals
may not honor the wishes of your family unless you have an Advance Health Care Directive to manage your care. Important decisions such as whether you
wish to remain at home as long as possible or whether you should be kept on life support should be controlled by you. A Living Trust allows you to pre-select a
conservator without the bureaucracy and includes an Advance Directive.
Protect Your Children
1. Minor Children. You plan who will care for and raise your minor children. Often, the most suitable person to raise your child is not the best person to
manage his finances. By law, minors cannot inherit and, without a trust, assets may be locked until the minor becomes an adult A Living Trust Plan resolves
these issues by nominating a guardian and keeping the inheritance in a trust for their benefit The trust funds will be used for your minor children's (or
grandchildren's) health, education and welfare and the entire trust will be released to them when they reach a specified age.
2. Children From A Previous Marriage. If you have children from a previous marriage, a Living Trust may be structured to provide for your surviving spouse
and also insure that assets are passed to your children.
3. Adult Children With Special Situations. Sometimes adult children have dependency problems, tax problems or simply problems managing their money. A
Living Trust can ensure that they will receive your gifts while shielding the assets from misuse or creditors.
Protect Government Benefits For Loved Ones With Special Medical Needs
If you have a loved one that will need SSI or Medi Cal (Medicaid), or both, you may address their special needs and enhance their quality of life without
jeopardizing their government benefits. A Special Needs Trust may provide vacations and other comforts.
Eliminate or Reduce Federal Estate Taxes
Under current law, federal estate taxes will take 46-55% of your net estate that exceeds federal exemption limits. A special Living Trust for married couples can
effectively double your exemption amount, reducing or eliminating the tax entirely.
Protect Your Business Assets
If you are self employed, the assets of your business or your corporate stock, left through a will, must pass through the probate system. The expense and
delay of probate may cripple your business and drain its assets before it is passed to your heirs. This can be devastating to an ongoing business. Your
business assets may be assigned to your Living Trust, thereby avoiding probate.
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