Estate Planning - Who needs it?

Estate planning is for everyone; it is no longer the private domain of the rich or the elderly. Whether it be a simple will or a more comprehensive living trust portfolio, proper estate planning could make a substantial difference in almost any family setting.

"First it was winter vacation; then it was second homes. And now, yet another bastion of the rich has fallen to the middle class: estate planning." (MONEY magazine, December, 1985.)

Estate Planning - Do I need it now?

Catastrophe can strike at any time, and because of this, most of us have life insurance, car insurance, home insurance, and medical insurance. Yet relatively few have even a simple will. As with insurance, it is risky to be unprepared. Estate planning can help you provide for the future and achieve greater peace of mind.

What are my Estate Planning alternatives?

A. Do nothing.

B. Create a Will

C. Create a Trust

Types of California Wills and Trusts

There are a variety of Wills and Trusts to fit your needs. A few of the more common estate planning documents are listed below. Additional trusts may be used for current income tax savings or to remove life insurance from the taxable estate.

1. Simple Will
Generally gives everything outright to surviving spouse, children, or other heirs.

2. Will With Testamentary Trust
Married couples with minor children will can pass everything to their spouse, if living, and if not, to a Testamentary Trust their minor children until they become more mature.

3. Pour-over Will
Generally used in conjunction with a Living Trust. It picks up any assets which were not transferred to the Trust during the person's lifetime and "pours" them into the Trust upon death. The assets may be subject to probate administration.

4. "Straight Through" Living Trust (without Tax Planning)
The surviving spouse retains or gets full control of the assets and income. Its main purpose is to avoid probate and perhaps manage the assets for beneficiaries who are not yet ready to inherit the assets outright.

5. "A-B" or "A-B-C" Trust
This type of Trust avoids probate and also makes certain that both spouses can use their Unified Credit. Estates up to $1.35 million can be passed to children or other heirs without probate expense or death tax.

6. Qualified Terminable Interest Property Trust or "QTIP" Trust.
By adding another Trust to the "A-B" or "A-B-C" Trust (above), the first spouse to die can determine the beneficiaries of his or her estate after the surviving spouse dies.
For example, the income earned on assets in the Qualified Terminable Interest Property (QTIP) Trust must be given to the surviving spouse for his or her lifetime, but can then pass to the children of a prior marriage of the first spouse to die.
Even if there are no children of a prior marriage, some estate owners use this Trust to prevent a subsequent spouse of the survivor from diverting the assets to themselves. Additionally the QTIP permits deferral of death taxes on the assets until the surviving spouse dies.

7. Qualified Domestic Trust or "QDOT"
Asset transfers at death to a non-citizen spouse do not qualify for the Marital Deduction unless the assets pass to a Qualified Domestic Trust (QDOT). The QDOT rules require that the trustee be a U.S. citizen, and have other measures which help ensure that death taxes will be collected when the surviving spouse dies.

Avoiding Probate

The probating of a Will permits a court of law to supervise the transfer of assets from the decedent to his heirs. A typical probate lasts about one year, with six months generally being a minimum time if everything proceeds according to schedule.

Because of the expense of attorney's fees, executor's commissions, court costs and the time delay, many people attempt to avoid probate administration. Some of the methods used to avoid probate are described here:

1. Joint Tenancy
The title of the property passes automatically to the surviving tenant. The joint tenancy automatically dissolves after one tenant dies.
Creditors of either joint tenant can attach the asset.

2. Totten Trust
Is a way to pass savings accounts to heirs. Accounts are held "in trust" for another. (ex: "Ron Eiger, in Trust for Sammy Eiger.")

3. Life Insurance
The proceeds of life insurance are rarely subject to administration unless the insured's estate is the beneficiary or all of the named beneficiaries pre-decease the insured.

4. Lifetime Gifts
Gifts made shortly prior to death will avoid probate. They may be brought back into the estate for death tax purposes. Note: Gifts carry the donor's basis to the donee, whereas appreciated assets in the decedent's estate will generally get a new or stepped-up basis.

5. Revocable Living Trust
An effective method of avoiding probate. It has the additional advantages of providing management of the funds for the heirs for some time after the decedent's death. In the event the person setting up the Living Trust becomes mentally incompetent or otherwise incapacitated, the Successor Trustee can take over management of the estate.

Revocable Living Trusts or Inter-Vivos Trusts

A Trust is created when one person (the Trustor or Grantor) transfers to another person or corporation (the Trustee) a property interest to be held for the benefit of himself or others (the beneficiaries).

If the Trust is created during the Trustor's lifetime, rather than in his or her Will, it is an Inter-Vivos or Living Trust. When the Trustor retains the right to dissolve the Trust arrangement, it is a Revocable Living Trust.

NOTE: Assets in a Revocable Living Trust are included in your gross estate for Federal Estate Tax purposes.

Some Advantages of Living Trusts

1. Assets in the Trust are not subject to probate administration. This saves executors' and attorneys' fees. It also grants more privacy as to who gets the estate, how they get it, and how much they get.

2. Professional management is available if the Trustor becomes incompetent, disabled, or wants to be free the worries of management.

3. Should the Trustor (also usually the original Trustee) die, the Successor Trustee can step in and manage the estate without delay or red-tape.

4. Trustee can collect life insurance proceeds immediately after the Trustor dies and can use the proceeds to care for family members without any need for court approval.

5. Successor Trustee can be in another state.

Some Disadvantages

1. Creditors may not be cut off as quickly as they are in probated estates.

2. A little more effort is required to transfer assets into the Trust and records should be kept for transactions by the Trustee.

3. An attorney usually charges a higher fee to establish a Living Trust than to establish a Testamentary or Will Trust.

4. Annual tax returns may be required if the Trustee is someone other than the Trustor.

Estate Planning - Who needs it?


by: Gary A. Quackenbush, Esq.


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