"Estate Planning Choices... in California"
by Valerie K. deMartino

Taking Charge: Everyone has a choice of who will get their assets when they die. One can take an active role in deciding who gets their estate or one can do nothing, in which case your estate will pass by intestate succession to the people the State Legislature has decided are entitled to inherit from you. The decision of the legislature may not always be the same decision a person would make himself. Therefore, it is prudent to take charge of your estate by making a Will or some kind of Trust. Both a Will and a Trust stipulate who is to get your assets when you die.

Probate: A Will is a document wherein you state who will inherit your estate when you die. A will must be probated, which means the distribution of the estate and payment of any creditors is supervised by the court. Probate is a lengthy and expensive procedure. Fees for the attorney handling the probate as well as the executor or administrator are set by statute and are based on a percentage of the appraised value of the probate estate. For example, the minimum statutory fee for a $100,000 estate is $6,300 and for a $300,000 estate is $14,300. The contents of a probate file is available to the public. Furthermore, if you own assets in more than one state, frequently probate proceedings will have to be opened in each other state. Assets which are held in joint tenancy, life insurance benefits, retirement plans and the like do not pass pursuant to a will and are not probated. see article ["What is Probate"]

Joint Tenancy is Not a Substitute for Good Estate Planning: It is true that probate can be avoided by placing property in joint tenancy (i.e. "John Smith and Mary Smith, as joint tenants"); however, the property would still have to be probated at the time of the second joint tenant's death, and joint tenancy can result in gift tax liability and increased income taxes. Any time you add a joint tenant to property you already own, if the value of the new joint tenant's half is more than $10,000 you have a possible gift tax liability. A recently passed law effective in July 2001 allows property to be held by a husband and wife as "community property with right of survivorship". Property held this way will get a stepped up basis for the entire property upon the first death, as it would if the asset was held as community property.

Reasons to have a Trust. While both a will and a trust will get your assets to your heirs, a living trust has several advantages over a will, particularly if your estate is greater than the unified credit amount allowable for one individual (which in 2007 is $2,000,000).

A trust is a contract between you and the person you name as trustee whereby you transfer your property to the trustee and the trustee has a fiduciary duty to manage and use that property for your benefit. Trusts can be irrevocable or revocable. A revocable trust can be amended or revoked during your lifetime. Irrevocable trusts cannot be changed and are generally only used in special circumstances.

There are a number of advantages to having a revocable living trust. First of all, there is no probate of your estate required, regardless of where the property is located. This generally means the estate can be distributed to the heirs more quickly and with much less cost than if you had only a will. The contents of a living trust are not public. Since living trusts are established during your life and are generally in existence for many years before your death, it is much harder for anyone to contest a living trust than a will. Considerable estate tax savings to your heirs can be realized by a husband and wife who set up a living trust. Because one of the advantages is tax savings, the cost of setting up a living trust (while usually higher than writing a simple will) may be tax deductible. Finally, once all of your assets are transferred into a trust, the trustee can administer the trust for your benefit regardless of your capacity; so if you become temporarily or permanently incapacitated a conservatorship of the estate is generally not necessary.

The current Federal estate tax rates start at 37% and go up to 55%. Starting in 2002 as a result of the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001, each person is able to pass up to the following amounts in the following years Federal estate tax free:
Year of Death	Exemption amount	Highest Estate and Gift Tax Rate
2002	$1,000,000.00	50%
2003	$1,000,000.00	49%
2004	$1,500,000.00	48%
2005	$1,500,000.00	47%
2006	$2,000,000.00	46%
2007-8	$2,000,000.00	45%
2009	$3,500,000.00	45%
2010	$unlimited	None

Federal estate tax is based on the date of death value of all your assets less your debts and include assets which pass outside probate, such as IRAs, life insurance and joint tenancy assets. Estate tax is payable whether your estate is probated or you have a living trust. Anyone can leave unlimited property to their surviving spouse without tax by using what is called the Marital Deduction. Without a trust, however, when the first spouse dies he or she cannot use his or her Federal Estate Tax Exemption if he or she leaves his or her entire estate to the surviving spouse. The real tax problem arises when the second spouse dies and leaves the estate to the children. Then the entire estate consisting of both parent's share of the estate is lumped together for estate tax purposes and only the survivor's federal estate tax exemption can be used. With a living trust, when the first spouse dies, his or her Federal Estate Tax Exemption can be used, thus reducing the size of the estate which is taxed at the time of the survivor's death. The entire estate remains available for the survivor's benefit, however. This can result in significant tax savings. For example, say Mary and Bill had a combined estate valued at $1,300,000. Bill died in January 1999 leaving his half of the estate valued at $675,000 (coincidentally the same as the Federal Estate Tax Exemption amount for 2001) to Mary. There is no tax because of the Marital Deduction. Mary dies in August 2001 leaving the combined estate of $1,350,000 to their children. After using her Federal Estate Tax Exemption of $675,000, the balance is taxed $340,800. If instead, Mary and Bill had set up a living trust where they could use both exemptions, there would be no tax at Mary's death. The savings to their children would be over a third of a million dollars. This strategy seems sound up through 2009, and therefore your current living trust should be reviewed, but may not need to be revised.

On January 1, 2010 all estate tax is abolished, however, the estate tax repeal only lasts one year. On January 1, 2011, as it now stands, the rates go back to 55% on anything over $1,000,000.00. Because of this rather bizarre effect, and the budget deficit which is predicted, there is a high likelihood that between now and 2011, the law will change.

Because all income from a living trust flows to the grantors, a separate income tax return does not need to be filed for the trust. All income is accounted for on the grantor's tax return.

A trust established to use the gift tax exemption amount must be an irrevocable trust. When the trust is irrevocable, the assets held by the trust will not be included in the grantor's estate for federal estate tax purposes. The grantor cannot exercise dominion and control over the trust assets or the IRS will include the trust in his or her estate. Therefore, neither the grantor nor anyone controlled by the grantor (such as an employee) can be the trustee. Additionally, in order to qualify for the annual gift tax exclusion, the beneficiary must have the right to take possession of any gifts made to the trust for his or her benefit each year. This is called a "Crummey" power after the case entitled Crummey v Commissioner of Internal Revenue (9th Cir. 1968). Setting up the trust to allow the beneficiary a short window of time within which to exercise this withdrawal power is sufficient. As its name implies, this kind of trust cannot be amended or revoked. This type of trust should have a separate tax identification number, file income tax returns, and pay tax on income earned each year.

Other Tax Savings Ideas: Remove assets from your estate before you die by gifting. You can gift up to $10,000 per year ($20,000 per married couple) to as many people as you wish. The trustee can invest in anything within reason or buy life insurance, the proceeds of which can be used to pay estate taxes.