Estate Planning Demystified:

Transcription

1 Estate Planning Demystified: A brief explanation in plain terms of wills, trusts, durable powers of attorney, and advance healthcare directives. Do you want to direct the care of your young children if you are unable to care for them, and not leave such decisions to the courts? Do you want to make your wishes known so that you are taken care of if you cannot make financial or health decisions for yourself? Do you want to ensure that your property is handled and given away according to your values, and not according to impersonal laws? If you answered yes to any of the questions above, you need the information in this pamphlet Park Boulevard Palo Alto, CA P: (650) E: gzohar@gadizohar.com Estate Planning Probate Trust Administration Certificates of Independent Review Professional Wills for Psychotherapists Copyright Gadi Zohar, Esq. All rights reserved.

2 What exactly is a living trust? Most people have created living trusts without knowing it. Here is a simple hypothetical example: Pat is having lunch with 4 friends. Pat needs to leave the restaurant before everyone else is finished. Pat gives Randy $20 to cover Pat s cost of lunch. When Pat gives Randy the $20 with instructions to pay the restaurant, she creates a trust. She is entrusting Randy with her money, and Randy must follow Pat s instructions. The restaurant benefits from Pat s trust, because Pat has ensured payment for her food. Pat also benefits from the trust, because she can leave without waiting for the check. It is helpful to understand these terms: (refer back to these definitions when reading other parts of this booklet) Settlor: The settlor is the person who puts his or her property into the trust. Pat is the settlor in the hypothetical example above. Trustee: The trustee is the person entrusted to manage the property. Randy is the trustee in the hypothetical example above. Beneficiary: The beneficiary is the person who benefits from the property, such as the child who is being cared for with the proceeds from a life insurance policy. Both Pat and the restaurant are beneficiaries in the hypothetical example above. Predeceased spouse: The predeceased spouse is the first in a married or domestic partnership couple to pass away. Surviving spouse: The person who survives the predeceased spouse is referred to in the trust document as the surviving spouse. Living trust agreement: A living trust agreement is a private legal document by which a settlor gives a trustee property to manage for the benefit of a beneficiary. Note that Pat in the example above, was the settlor and beneficiary. The same person may be the settlor, trustee, and beneficiary. Will: A will is a public document directing the use and distribution of property not in a trust. A will must be processed through the court system, which takes much longer and generally costs much more than the private process of following instructions in a trust. Revocable trust: A settlor can cancel a revocable trust at will. Thus, the settlor truly has full control of her or his property. Irrevocable trust: In some situations, a person may give up or withhold from the beneficiary control of trust property by creating an irrevocable trust which cannot be canceled. This is often done to reduce taxes and protect property. More information: (650)

3 Goals of Estate Planning A foundational estate plan includes a series of documents aimed at taking care of you and your loved ones when you are unable to do so. The hub of a foundational estate plan is the living trust. The other typical documents working in concert with the living trust are the will, the durable power of attorney, and the advance health care directive. These four legal tools, when properly and thoughtfully designed, should accomplish these goals: Directing and empowering trusted people to take care of your health and financial matters if you lose the capacity to make or communicate your decisions regarding your health and finances The living trust, durable power of attorney, and advance health care directive combine to address the various aspects of caring for you and your loved ones if you lose capacity. Directing the use and distribution of your assets at death while reducing or deferring tax liability The living trust is the primary tool directing such wishes as giving prop erty to your family members, taking care of a child with special needs, as well as many other personal goals. Avoiding the costly, time-consuming, public probate court process in favor of an efficient, less costly, and private trust administration process If the decedent had an estate worth $1M, the probate attorney will be enti tled by law to legal fees of at least $23K, even if the estate includes a lot of debt. A trust generally costs a fraction of that amount to create and to carry out. Directing the guardianship of your minor children Commonly, a will is used to nominate a person to be legal guardian of your minor child. Otherwise, a court will try to decide, to the best of its ability, who should care for your child. The living trust directs the trustee on how to use money and other property (e.g. a personal residence) for the benefit of the minor child. Please note that any discussion of or advice regarding United States tax matters contained herein does not meet the requirements necessary to be a "covered opinion" as defined in Internal Revenue Service Circular 230, and therefore, is not intended or written to be relied upon or used and can not be relied upon or used for the purpose of avoiding federal tax penalties that may be imposed or for the purpose of promoting, marketing, or recommending any tax-related matters or advice to another party.

4 Pat Roe Living Trust Children: Jacob (age 8), Isabella (age 12) If Pat becomes incapacitated, the person Pat named as successor trustee can step in immediately and use Pat s property for Pat s benefit (e.g. to pay for services not covered by insurance). Pat s Property at Death Pat may direct gifts to charities, loved ones, or anyone else. Isabella s Irrevocable Trust Jacob s Irrevocable Trust Money and property (e.g. life insurance proceeds, securities, etc.) managed by the Trustee for the children s health, education, support, and maintenance of accustomed lifestyle Other options can be included to pass on Pat s values such as 10% of the trust given to the child upon graduation from college Pat s trust can direct Trustee to give money directly to Bella and Jacob when they are mature enough to manage money age 30, 40 or the property can be held in trust for the children s entire life Without an estate plan, Jacob and Bella would receive all assets at age 18 While the assets are in an irrevocable trust, they are protected against creditors Copyright Gadi Zohar, Esq. This representation is for informational purposes only and should not be relied upon as legal advice.

5 Timeline for the Pat Roe Integrated Estate Plan Pat manages and controls all property completely, in the same manner as before creating the trust. A pre-designated person makes health care decisions for Pat according to instructions in the advance health care directive A pre-designated person takes control of all property under the living trust and the durable power of attorney and uses it to take care of Pat as well as Pat s children. Successor trustee manages and uses trust property for benefit of Pat s children under the living trust. The will acts as a backstop, placing into the trust property not titled as trust property. The will also directs who should be the guardian of Pat s minor children. Per Pat s wishes as expressed in the living trust, Pat s children get full control of their respective shares of trust property at age 35.

6 Henry and Wendy Doe Living Trust Children: Noah (age 2), Emma (age 5) Henry s Separate Property Henry s 1/2 Wendy s 1/2 Community Property Wendy s Separate Property The first spouse to die is the predeceased spouse and the living spouse is then referred to as the surviving spouse in the trust document Survivor s Trust The surviving spouse has complete control of the survivor s trust, which remains revocable and amendable Surviving spouse may put the predeceased spouse s property into a bypass trust if it is tax-advantageous Surviving spouse may access any and all property in the bypass trust if needed for her or his care Bypass Trust The surviving spouse may use the property in the bypass trust for health, education, support and maintenance of accustomed lifestyle At the death of the surviving spouse, the property from the Survivor s Trust and the Bypass Trust combines and is distributed and managed by the Trustee according to Henry s and Wendy s instructions in the trust Emma s Irrevocable Trust Noah s Irrevocable Trust Money and property (e.g. life insurance proceeds, securities, etc.) managed by the Trustee for the children s health, education, support, and maintenance of accustomed lifestyle Other options can be included to pass on Henry and Wendy s values such as 10% of the trust given to the child upon graduation from college Wendy and Henry s trust can direct Trustee to give money directly to Bella and Jacob when they are mature enough to manage money age 30, 40 or the property can be held in trust for the children s entire life Without an estate plan, Jacob and Bella would receive all assets at age 18 While the assets are in an irrevocable trust, they are protected against creditors Copyright Gadi Zohar, Esq. This representation is for informational purposes only and should not be relied upon as legal advice.

7 Timeline for the Henry and Wendy Doe Integrated Estate Plan H and W manage and control their property in the same manner as they did before creating the trust. W makes health care decisions for H under the advance health care directive W takes control of all property under the living trust and the durable power of attorney W may choose to put some of H s property in a bypass trust if it is taxadvantageous. W has complete control of all property in the survivors trust. Successor trustee takes over to control trust money/assets for W s benefit under the living trust. Person designated by W in her durable power of attorney takes control of non-trust property (if any). Person designated by W in her advance health care directive makes health decisions for W. Successor trustee manages and uses trust property for benefit of H & W s children under the living trust. The will acts as a backstop, placing into the trust property not titled as trust property. The will also directs who should be the guardian of H & W s minor children. Per H & W s wishes as expressed in the living trust, H & W s children get full control of their respective shares of trust property at age Park Boulevard Palo Alto, CA P: (650) E: gzohar@gadizohar.com Estate Planning Probate Trust Administration Certificates of Independent Review Professional Wills for Psychotherapists

8 Bottom Line for California Residents If you own real estate or have children, you need an integrated estate plan. Real estate: If real property is not in a trust, a judge directs how that property is managed and sold. The judge must approve of the sale price only after allowing the general public to bid on real property in court. This makes selling real property more burdensome than usual, limiting the number of people willing to buy the real estate. As a result, real estate takes considerably longer to sell and is often sold at a discounted price. Children: Without a living trust, all or much of your property is likely to go to your child at age 18. If you have a will but no trust, under California law an account custodian cannot manage assets for your child past the age of 25 (but if you do not instruct otherwise, the default is age 18), regardless of whether or not the child is mature enough to manage such assets. A living trust, by contrast, can direct the management of property for your child s benefit into adulthood and even throughout a child s entire life. Thus, not only can you direct a trustee to use your property for your child s benefit when the child is young, but you can direct the trustee to manage your property for your child s benefit well into adulthood and even for life. The will works with the living trust in two ways. First, it is often the document directing who should be your child s guardian. Second, the will acts as a backstop in the event some property is not in the trust. To accomplish this, the will directs that such property should be placed into the trust.