Living Trusts

What is Probate and why does everyone want to avoid it?

What is a Revocable Living Trust?

What are the advantages of having a Living Trust?

Will I lose any control over my property if I create a Revocable Living Trust?

Do I have to transfer all my assets to my Living Trust?

If I transfer title to real property to my Living Trust can the bank accelerate my mortgage?

Do I have the proper tax planning in my Revocable Living Trust?

What is an Irrevocable Life Insurance Trust?

What is a Charitable Remainder Trust?

Q: What is Probate and why does everyone want to avoid it?

When a loved one passes away, his or her estate often goes through a court-managed process called probate or estate administration where the assets of the deceased are managed and distributed. If your loved one owned his or her assets through a properly drafted and funded Living Trust, it is likely that no court-managed administration is necessary, though the successor trustee needs to administer the distribution of the deceased. The length of time needed to complete probate of an estate depends on the size and complexity of the estate as well as the rules and schedule of the local probate court.

 Every probate estate is unique, but most involve the following steps:

  • Filing of a petition with the proper probate court
  • Notice to heirs under the will or to statutory heirs (if no will exists)
  • Petition to appoint Executor (in the case of a will) or Administrator for the estate
  • Inventory and appraisal of estate assets by Executor/Administrator
  • Payment of estate debt to rightful creditors
  • Sale of estate assets
  • Payment of estate taxes, if applicable
  • Final distribution of assets to heirs

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Q: What is a Revocable Living Trust?

A properly drafted Revocable living trust (RLT) is a powerful estate planning tool that allows you to remain in control of your assets during your lifetime, have them managed during incapacity, and efficiently and privately transfer them to your loved ones at death according to your wishes.

Sometimes referred to simply as a Living Trust, an RLT holds legal title to your assets and provides a mechanism to manage them. You would serve as the trustee and beneficiary of your trust during your lifetime. You also designate successor trustee(s) to carry out your instructions for how you want your assets managed and distributed in case of death or incapacity.

In order for the Living Trust to function properly, you need to transfer many of your assets to your Living Trust during your lifetime. The fact that it is "revocable" means that you can make changes to it or even terminate it at any time.

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Q: What are the advantages of having a Living Trust?

Like a will, a Living Trust is a legal document that provides for the management and distribution of your assets after you pass away. However, a Living Trust has certain advantages when compared to a will. A Living Trust allows for the immediate transfer of assets after death without court interference.  It also allows for the management of your affairs in case of incapacity, without the need for a guardianship or conservatorship process. With a properly funded Living Trust, there is no need to undergo a potentially expensive and time consuming public probate process.  In short, a well thought out estate plan using a Living Trust can provide your loved ones with the ability to administer your estate privately, with more flexibility and in an efficient and low-cost manner.

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Q: Will I lose any control over my property if I create a Revocable Living Trust?

Creating a Revocable Living Trust and transferring your assets to the name of that trust will generally not affect your ability to control such assets. During your lifetime when you are mentally competent, you have complete control over all of your assets.  As the trustee of your trust, you may engage in any transaction that you could before you had a Living Trust. There are no changes in your income taxes. If you filed a 1040 before you had a trust, you can continue to file a 1040 when you have a Living Trust. There are no new Tax Identification Numbers to obtain. Because a Living Trust is revocable, it can be modified at any time or it can be completely revoked if you so desire. Upon your incapacity, the individuals you designate will be able to transact on your behalf according to the instructions you have laid out in the Living Trust. Upon your passing, the Living Trust can no longer be modified and the successor trustee(s) you have designated will then proceed to implement your wishes as directed.

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Q: Do I have to transfer all my assets to my Living Trust?

Assets with beneficiary designations such as a life insurance policy or annuity payable directly to a named beneficiary need not be transferred to your Living Trust.  Furthermore, money from IRAs, Keoghs, 401(k) accounts and most other retirement accounts transfer automatically, outside probate, to the persons named as beneficiaries. Bank accounts that are set up as payable-on-death account (POD for short) or an "in trust for" account (a "Totten Trust") with a named beneficiary also pass to that beneficiary without having to be titled into your trust. It is important, however, to seek the counsel of an experienced estate planning attorney who can advise on and assist with transferring necessary assets to your trust.

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Q: If I transfer title to real property to my Living Trust can the bank accelerate my mortgage?

Federal law prohibits financial institutions from calling or accelerating your loan when you transfer property to your living trust as long as you continue to live in that home. The only exception to the federal law, enacted as part of the 1982 Garn-St. Germain Act is that it does not provide for such protection for residential real estate with more than five dwelling units.

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Q: Do I have the proper tax planning in my Revocable Living Trust?

Those with a taxable estate are perhaps affected the most by a good estate plan. Their living trust may effectively carry out all their wishes while eliminating estate taxation. But estate planning is not a static process. This is particularly true for those who completed estate planning prior to May 2001. If you fall into this category you need to break out those “old” trusts.

For example, in the 1990s, AB and ABC trusts were extremely popular. These are trusts that divide into separate trusts (bypass, exemption, and perhaps, marital trust) upon the death of a spouse based on the estate tax exemption amount then in effect. The reason to employ such a trust was to reduce estate taxes. Under current law however, if one were to pass away in 2009 for instance, the possibility exists under many trusts that the bypass portion of the trust will house 3.5 million dollars of the estate, leaving nothing or very little of the estate for the surviving spouse. On the other hand, perhaps the bypass trust will fail to be fully funded because the estate is less than 7 million dollars. That means that there will not be estate tax upon the death of the first spouse, but perhaps plenty of tax upon the death of the second spouse. Similarly in 2010, there is no estate tax whatsoever. Thus, in 2010, with some AB and ABC trusts, that means that one’s surviving spouse may inherit nothing. Conversely, it may leave a surviving spouse half the estate, only to be taxed in future years. Clearly, now more than ever is the time to review your estate plan. Your trust must address your particular needs and desires or there is a good chance that they will not be carried out.

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Q: What is an Irrevocable Life Insurance Trust?

An irrevocable life insurance trust is an irrevocable trust that is utilized to purchase life insurance. It is also used to remove currently owned life insurance from your estate. There are several benefits to this type of trust. First, all the trust assets should pass income, gift, and estate tax free. Second, it allows those with a taxable estate to currently make gifts, thereby reducing the size of their estate. Another tangential benefit is that the trusts corpus remains untouchable by creditors. Once the insured passes away, the proceeds may be used to pay estate taxes, add liquidity for a family business, or simply increase the size of the estate left to loved ones. Oftentimes, people use this type of trust in conjunction with other estate planning devices.

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Q: What is a Charitable Remainder Trust?

A charitable trust is an irrevocable trust utilized to house a gift to charity. For one who is charitably inclined, these devices are incredibly useful. It allows one to make a present interest gift and currently receive an income tax deduction. A highly appreciated asset may in turn be sold in the charitable trust tax free. The proceeds are then reinvested. With compounding, the assets in the trust will grow significantly larger than they otherwise would have outside the trust. Depending on the type of charitable trust, one may even be able to receive an income stream for life from the trust. Thus, these trusts allow for tax savings as well as retention of the benefits of the gifted assets, plus one is able to donate to their favorite charity.

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Law Offices of Mary P. Kulvinskas located in Westlake Village, CA serves clients in southern CA including Agoura, Calabasas, Camarillo, Los Angeles, Malibu, Oxnard, Simi Valley, Thousand Oaks, San Fernando Valley, and Ventura.

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