WILL I NEED TO FILE DIFFERENT TAX RETURNS IF I HAVE A LIVING TRUST?
When you have a revocable living trust there is no concern for any tax changes in terms of having to seek a separate tax identification number. Simply, the IRS and the franchise tax Board in California ignore a revocable living trust as a separate taxable entity. You simply file tax returns under your personal social security number as you did before you had a trust.
WILL TRANSFERRING REAL ESTATE TO MY LIVING TRUST CAUSE PROBLEMS WITH MY PROPERTY TAXES?
No. From a property tax point of view, you and your living trust are the same person. You can transfer property into and out of the trust without causing any changes in your property taxes for that property.
WHO IS THE “TRUSTOR” OF MY TRUST?
You are the Trustor. Remember that a living trust is a contract between the person creating the trust (the “trustor”) and the person who will manage the trust (the “trustee”). Since you’re the creator of your living trust, you will always be the trustor of that trust. If you’re married, your spouse will also be a trustor of your trust.
WHO IS THE “TRUSTEE” OF MY TRUST?
You can be the Trustee. Remember that a living trust is a contract between the person creating the trust (the “trustor”) and the person who will manage the trust (the “trustee”). You will also manage the trust as long as possible, which makes you a trustee. If you’re married, your spouse will also be a manager of your trust. If neither you nor your spouse can continue to manage it, then someone else (someone you pick) will take over as manager and will become a successor trustee.
WHAT MUST I CHANGE AFTER I SIGN MY LIVING TRUST?
As long as you’re well, you can change anything you want to change. You can put assets into the trust (fund the trust), take assets out of the trust, add beneficiaries, delete them, and change your successor trustees. You can get rid of the trust altogether. If you become incapacitated, the terms of the trust freeze because only you can change your trust. Once you regain capacity, you can start making changes again. REMEMBER, you must fund your trust for it to be effective.
HOW DO I TRANSFER MY PROPERTY INTO MY TRUST AFTER I SIGN MY LIVING TRUST?
You need to make sure all your property is transferred to the trust, and I will give you instructions on how to accomplish this with regard to both real and personal property assets. For now, just remember that one of the important reasons for doing a trust is to avoid court involvement with your estate, and a trust is only effective in accomplishing this if you transfer your assets into the trust.
WHO SHOULD I NAME AS SUCCESSOR TRUSTEES TO MANAGE THE TRUST IF I CAN’T DO IT?
This is one of the most important issues in estate planning. People usually name their parents or siblings for this job. Whomever you choose must carry out the instructions in your trust no matter what – even if they actually disagree with the instructions. You should identify people who will be able to do that.
WHO SHOULD I NAME AS GUARDIAN FOR MY CHILDREN?
Remember that with a living trust, two people will be involved with your children. The manager of your trust will use your property to support your children until they can support themselves, which means he or she will need to balance current needs (like deciding what kind of car a 16-year old needs) with likely future needs (such as college expenses). The guardian will make day-to-day decisions about your children, such as where they should live, where they should go to school, and what kind of medical treatment they should get. Sometimes, it makes sense to have the same person in both roles; sometimes it doesn’t. You may trust one person with financial issues but prefer someone else’s parenting style for example.
DOES PYE365 ENCOURAGE LIFETIME TRUSTS FOR BENEFICIARIES?
Yes. An example will help with this answer. Say I have two sons and they are equal beneficiaries of my estate. After my death, my trust says to create equal shares for them (so each gets 50% of my estate), but instead of ending the trust and giving each son his share (a pretty typical approach), I say to keep the trust going. I also say that each son automatically gets all the income from his share and can use more than the income (up to 100% of the assets) if he needs more for living expenses. I specifically say that I do not want these assets paid to his creditors. By giving this instruction, I’ve created a pocket of assets which will always be available to my sons and their descendants but that creditors cannot touch. If he runs some attorney off the road, or makes a bad business decision, or marries the wrong person and ends up with a divorce court looking to split his assets, my trust will protect his inheritance. If I make him the manager of his trust, then he can invest and control the assets as he sees fit, which means he can buy a house through his trust or start a business. This gives him maximum flexibility and maximum protection.
IF I’M MARRIED, WHAT CAN MY SPOUSE DO WITH PROPERTY IN OUR TRUST AFTER MY DEATH?
The goal of estate planning for married couples is making it as easy as possible for the survivor. After the first spouse dies, the survivor will have complete control over the assets in the trust. This means the survivor will only need to do a minimal amount of paperwork after the first spouse passes.
WHAT IS DIFFERENT FOR DOMESTIC PARTNERS?
California law says that registered domestic partners should be treated as spouses. Those couples who got married in 2008 expect to be treated as spouses. But federal law and the laws of many other states don’t agree. Estate documents make sure your partner gets to make decisions for you and control your assets if you can’t; however, your partner’s authority has to be limited in certain ways or else you both face bad tax consequences. One of the biggest differences is that we encourage each person in a domestic partnership to have a separate living trust, instead of doing a joint trust like a married couple usually does. All other estate documents work pretty much the same way for married couples and for domestic partners.
SHOULD I UPDATE MY TRUST FROM TIME TO TIME?
The fact that your trust is revocable is also very important. This means that you can revoke the trust at any time or make amendments to the trust and update it at any time of your choosing. In fact, it’s recommended that you change your living trust in conjunction with any life changes that you might experience.
IS THE TRUST ITSELF THE ONLY DOCUMENT INCLUDED IN MY PYE365 PLAN?
No. Most importantly, you will secure a living trust package rather than just a living trust by itself. There are number of documents that tie into a living trust in order to make it effective both while you’re alive and after you pass. Review the PYE365 site in order to get a better education on what these documents are, or simply give me a call and I’ll be happy to explain them to you at your convenience.
WHAT IS INCLUDED IN YOUR ESTATE PLAN?
Your estate plan will include:
Pour Over Will
Health Care Directive (Living Will/Power of Attorney for Healthcare)
Power of Attorney Designation for Assets
Nomination of Guardians (If appropriate)
A Deed of Transfer for one California property
HIPPA Authorization for Release of Medical Records
Declaration of Trust
These documents that I’ve just named have a very intricate relationship to one another that when taken as a whole, insures that the probate process, or as I like to call it the probate “nightmare,” will be avoided.
WHAT EXACTLY IS A POWER OF ATTORNEY?
A Power of Attorney usually comes into play in two different areas: either in the form of a healthcare directive, otherwise known as a “living will,” or in the form of asset protection. The healthcare directive allows for your instructions to others to be implemented regarding medical treatment and end of life issues, typically should you become incapacitated. The power of attorney for assets ensures that your everyday finances and business affairs are taken care of in the manner you desire, again typically in a scenario where you can no longer act under your own volition.
The thing to remember, and this is what I’m always asked questions about, is that a power of attorney allows someone to step into your shoes and act on your behalf. It is effective only when you are alive. Subsequent to your passing, it is the trustee of your living trust who is empowered to settle your affairs pursuant to the terms of the trust. A power of attorney then works in conjunction with your living trust and is part of your overall trust package.
WHAT IS THE DIFFERENCE BETWEEN A REVOCABLE VERSUS AN IRREVOCABLE LIVING TRUST?
*A revocable trust is the most common and basic type of trust. When you create the trust, you as the trust maker, reserve the power to change anything about the trust at any time without the need of obtaining permission from anybody.
The beneficiaries of the revocable trust have no legal right to any of the assets of the trust. You can change the beneficiaries at your whim and thus the beneficiaries merely have an “expectancy” of inheriting something from you but are not guaranteed or promised anything.
Because you have full control and because you can change anything about the trust at any time, for the most part, the trust is not considered to be a separate entity from you. All the assets in the trust are still part of your estate and you use your Social Security Number as the Tax Identification Number of the Trust. Your state and federal income taxes, your property taxes, and your estate taxes remain exactly the same as if you never created the revocable trust in the first place. The trust serves as merely a “pass through.”
*An irrevocable trust is a trust that cannot be changed easily by the trust maker once it is completed. As I mentioned in a previous article, you still might be able to change your irrevocable trust, but you need to often obtain permission from the beneficiaries, the Court, or both.
The beneficiaries have an enforceable right to the trust assets, rather than merely an “expectancy” as with revocable trusts. The trustee must take special care as to consider not only the current beneficiaries of the trust but also the remainder beneficiaries: sometimes this can be a very tricky balance.
An irrevocable trust is considered a separate entity from you as an individual. Often, you will need to obtain a new Tax Identification Number for the trust. Transfers of assets into the trust will often be considered taxable gifts and such assets will generally be removed from your estate. The irrevocable trust can be drafted in such a way as to place income tax liability on the trust itself, requiring the trust to file its own tax return, or can be drafted in such a way to keep the tax burden on you as the trust maker.
Reasons for creating irrevocable trusts include tax and gift planning, planning with life insurance, ensuring that assets in the trust are used to carry out a specific purpose such as caring for a pet or providing a person with a legal defense fund, planning for minor children, and – in some circumstances – providing asset protection to the beneficiaries.
SO, WHY DO ESTATE PLANS MATTER?
Well generally, there’s three scenarios we must explore in order to answer that question. The first is where you have no estate plan at all. After you pass, the Probate Court takes control of your estate and its corresponding assets. The court then determines how to distribute those assets. This process can typically take between 18-24 months and generally costs between 4%-6% of the full market value of your estate.
The second is where you greater will in only a will. All you really do in this instance is decide who specifically receives the assets in your estate. You still do not avoid the probate nightmare. Rather, your heirs must still endure the same slow and expensive court process.
And finally, is where you actually create a living trust package. This choice allows you to decide who receives your estate’s assets and you avoid the cost and expense of Probate Court. It insures the complete privacy of your estate and avoids expensive attorney’s fees that would otherwise accompany the administration of an estate where no trust was created.
The moral of this story is that it’s better to participate in a preventative maintenance plan of sorts that will avoid all of the pitfalls that are attendant to having an inadequate estate plan.
FAQ didn’t answer your question?
Here are several ways to contact us
Please contact me directly with your questions.