Valerie K. deMartino
444 West Ocean Blvd., Suite 400, Long Beach, CA  90802
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"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 $4,000 and for a $500,000 estate is $13,000. 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 state where there are assets. 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 $13,000 you have a possible gift tax liability. Since July 2001 property may 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. Property held in joint tenancy only gets a stepped up basis for the decedent's half.

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.
A trust is a contract between you and the person you name as trustee. Pursuant to this contract, you transfer your property to the trustee and the trustee has a fiduciary duty to manage and use that property for your benefit and that of your heirs. 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 their 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.

Federal estate tax is based on the gross date of death value of all your assets less your debts and includes 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 and includes assets transferred within three years prior to your death. 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 by funding an irrevocable trust with his or her assets, 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 but many people abhor the fact that they cannot thereafter amend the trust containing the deceased spouse's estate.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 radically changed the rules for estate and gift tax. These changes currently only last until December 31, 2012 however. Under the 2010 Act, Federal Estate Tax was lowered to 35% and the amount an individual could pass during their lifetime without tax was increased to $5,000,000. Gift tax rates were also set at 35% and the lifetime tax free gift amount set at $1,000,000. Starting in 2013, unless Congress enacts a new law, Federal Estate Tax will raise to 41-44% and the exemption amount will fall to $1,000,000 per individual. Gift tax rates will similarly go up but the gift amount will stay at $1,000,000. If the surviving spouse of a person who dies in 2011 or 2012 make an election, they may also use the unused estate tax exemption of their spouse. However, a timely Federal Estate Tax Return must be filed and an irrevocable election made. Portability of the first spouse's unused tax exemption only applies in 2011 and 2012 under current law.

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 $13,000 per year ($26,000 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.

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