Revocable Living Trusts
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Revocable Living TrustsLegal Disclaimer: The following is an educational presentation, not intended to be legal advice. Contact me to discuss your specific estate planning needsLaw Office of David Sarazen333 W. 6th Street, Suite 207San Pedro, CA 90731(310) 972-0241Sarazen.firstname.lastname@example.org
OverviewWhy Establish a Revocable Living TrustAvoid Probate, Save Taxes, Efficient Distribution
How a Trust WorksThe Settlor establishes their Declaration of TrustThe Office of TrusteePower of the Trustee over the Trust EstateDistribution of Trust Assets During Life of the SettlorDistribution of Trust Assets After Death of the SettlorOther Provisions:Spendthrift and Special Needs TrustsEducation FundsDetermination of CapacityNo Contest Clause
Why Establish a Revocable Living TrustAvoid Probate!Probate is a court proceeding that the settles the estate of a deceased person. Claims are resolved, debts are paid, and property is distributed to Beneficiaries or Heirs
In California, probate is triggered if you leave an estate exceeding $150,000 Probate can be very expensive and time consumingAttorney and Executor fees can run into thousands of dollarsProbate can easily take a year or more to complete
Assets owned by a Trust, in Joint Tenancy, or having named Beneficiaries usually avoid probate
How a Trust WorksYou, as the Settlor, establish your TrustThe Settlor is the Beneficiary of the Trust and has the power to Amend or Revoke the Trust while they are living
Next, you create the Office of Trustee You name yourself as the Initial TrusteeThe Trustee is the day-to-day Manager of the Trust and has Power, or Control, over Trust assets
You name the people you trust to be your Successor Trustee(s)Your Successor Trustee steps-up and takes over control of your Trust ONLY IF you Fail or Cease to Act, e.g., Death, Incapacity, or Resignation
You can appoint one Successor who acts alone, or you can appoint two or more that must act together.
Powers of the TrusteeThe Trustee has Power granted by the Trust and by lawOpen and close bank accounts; buy or sell securities; purchase or sell real property; deal with insurance companies; incur debts, refinance real property, prepare tax returns, employ advisers, etc.
The Trust Estate consists of assets Owned by the TrustRealize that when you create and fund a Living Trust, you, as an individual, no longer own those assets your Trust owns the assets you avoid probate because you dont own anything when you die your Trust owns it all! Its just that simple
You control Trust assets for the benefit of the Settlor which is yourself
If you become incapacitated, your Successor Trustee controls the trust assets for the benefit of the Settlor. Thats why its vitally important that you Trust you Successor Trustee!
Distribution During Life of the SettlorThe Settlor is the Present Beneficiary of the Trust
The Trustees job is to manage the assets owned by the trust for the benefit of the Settlor
Distribute Community Property to the SettlorsDistribute Separate Property to the Settlor who contributed such property to the Trust
If the Settlor is incapacitated, the Successor Trustee manages Trust assets for the benefit of the Settlor
Again, make sure you trust your successor trustee!
Disclaimer TrustsCommunity property trusts MAY be divided upon the death of the First SettlorDivision of the trust is to avoid or minimize Federal Estate TaxesThe Surviving Settlor disclaims, (rather than claims) the deceased Settlors share of community property and funds another Trust
Each Settlor has an Estate Tax Exemption (Exclusion) amount2011 and 2012 is $5.0 MillionFor example, if the community property estate equaled $6.0 million, the surviving spouse could retain $5.0 million in the Family Trust, and place $1.0 million in the Deceased Spouses Disclaimer TrustIf the assets of both trusts exceed the exemption, taxes will be assessed
If the total Community Property is less than the estate tax exemptionThere is no need to split the one trust into twoThe entire trust remains REVOCABLE by the Surviving Settlor
A-B TrustsA-B Community property Trusts MUST be divided upon the death of the First SettlorThe A Trust remains revocable by the Surviving SettlorThe B Trust becomes IRREVOCABLE cant change the terms or beneficiaries but can change the character of assets
A-B Trusts can be used by Blended Families to avoid disinheritanceFor example, where in a second marriage and each spouse has children, the surviving spouse cannot amend, or change, the deceased spouses beneficiaries
Note that Separate Property trusts may work better in the case of Blended Families
The B or Exemption Trust is exempt from Federal Estate Taxes up to the Exclusion amount ($5M in 2011 and 2012)
Distribution After Death of the SettlorUpon the death of the Settlor (or surviving Settlor), the Trust(s) becomes Irrevocable
The Successor Trustee steps up, or succeeds the initial trustee, taking control of all Trust assetsPays debts, taxes, and expenses of Trust administrationDistributes gifts of personal effects if the Settlor left signed and dated instructions (jewelry, automobiles, paintings, etc.)Distributes any Specific Gifts, such as real estate, cash, insurance policiesDistributes the Residue of the Trust Estate whatever is left after all of the above is distributed
The Residue is typically distributed as a percentage You dont know when you are going to die, so you dont know what you will own when you die
Contingent BeneficiariesIf the Primary Beneficiary is not living upon the death of the Settlor, who inherits?If the primary beneficiary died leaving children, do the children inherit their parents share?Or do you want the primary beneficiarys share to be divided between the remaining residue beneficiaries?Maybe you want the deceased beneficiarys share to go to a church or charity?
Its your decision, not theirs If all your named beneficiaries are not living when you die, your Heirs at Law could become the beneficiaries according to the laws of Intestate Succession
Administration and DistributionWHEN do you want your beneficiaries to receive their share?Specify a certain age, such as 21, or make a staged distribution20% upon your death, 20% at age 25, balance at age 30Establish an Education FundIf they dont go to school they dont receive any moneyEstablish a Spendthrift TrustIf your beneficiary cannot manage their own financial affairs you can appoint a trustee to manage their affairs for themEstablish a Special Needs TrustFund a Special Needs trust to hold money that supplements, but doesnt replace, government assistance
Other ProvisionsDetermination of CapacityMost trusts stipulate that only a court of law or licensed physician can determine incapacityIn California, a trustee or Health Care agent, may be able to review your health records for the sole purpose of determining your capacity
No Contest ClauseA no contest clause is used to prevent someone from challenging your expressed wishesIf they attempt to nullify the trust, remove the trustee for acts performed in good faith, object to interpretation, make unsubstantiated claims, etc., they risk being disinherited
Other Estate Planning DocumentsLast Will and Testament (Pour-Over)The beneficiary of your will is your Living TrustIf assets outside of your trust exceed $150,000, they may be subject to probate, after which, you will pours over the assets to your trust for distributionDurable Power of AttorneyAppoints an agent to manage assets not owned by your trust if you become incapacitated401K, IRAs and Deferred Compensation Plans cannot be owned by your trustAdvanced Healthcare DirectiveAppoints an agent to make health care decisions for you if you cannotThey have end-of-life decision powers
Have Questions?Contact me with your specific questions or to set up an appointment to review your estate planSarazen.email@example.com(310) 972-0241