Estate Planning

An ABC trust is created for married couples and is designed to provide for both spouses during their respective life times. Think of an ABC trust as three trusts in one. During their respective lives, both spouses have a trust (perhaps trust A for the husband and trust B for the wife). The property of the spouses is then placed in those respective trusts. As with other revocable trusts, each spouse is able to manage and enjoy the benefits of their trusts as they wish during their lives. For example, each spouse can add assets to or remove assets from the trust during life. Then, when one of the spouses dies, the assets pass as directed by the terms of the trust. Usually, they pass half to the remaining trust (i.e., the C trust), and the other half to the surviving spouse’s trust. The surviving spouse enjoys the income of trust C during his or her life. Then, when the surviving spouse also passes away, the assets remaining in his or her trust also passes to the C trust. The assets of the C trust then pass as the two spouses jointly determined when they prepared the trust.

Although the spouses can agree that the beneficiaries of the trust may be changed while they are both alive, once the first of them pass away the C trust becomes irrevocable. This way, the surviving spouse is not able to redirect the assets of the first to die to a different beneficiary than was intended by the first spouse to die.

The benefits of such an estate is that it permits spouses to care for the survivor while at the same time providing security that the surviving spouse will not dispose of assets contrary to the wishes of the first spouse to die. This can be a very important tool when spouses have children from a prior relationship.

If you have further questions about the benefits of a revocable or ABC trust, contact Daniel Geraldi at (925) 364-4741.

It is often stated that no man dies without a will – if he does not have one prepared during his life, the state will draw one up for him. In other words, if you do not plan for the succession of your estate after your demise, a state court judge by statute will determine who receives your wealth by looking to the laws of intestate succession. However, many negative issues can arise when estate are distributed this way. The most obvious is that the person’s assets may pass to individuals that the decedent did not want to share in his or her estate. Moreover, even if the wealth does pass to the people that the decedent wanted to share in the estate, it can pass in ways that are not beneficial.

For example, depending upon the state law and the number of surviving children, a widow or widower may receive only one-half or one-third of the estate. This is often inadequate for some surviving spouses. Planning out your estate can help to avoid these problems.

In addition, depending upon the state law and the number of surviving children, children often take their property outright when it passes through intestate succession. The age, needs and degrees of competency are often ignored in intestate succession. This creates a problem if a decedent’s child, though perhaps eighteen and an adult in the eyes of the law, is nevertheless not at a point in life when the child has gained the knowledge or experience to deal with inherited wealth. It simply does not take much imagination to envision such a child either spending the money foolishly or living off the money in lieu of gaining an education or productive life skills.

In addition, intestate succession, which is controlled by state law, often occurs without consideration of federal estate tax implications. As a result, an estate distributed in accordance with intestate succession rules may end up paying significantly more in taxes.

Proper estate planning is designed to avoid the uncertainty of intestate succession as well as minimize the estate taxes. If you are interested in learning more about proper estate planning, contact Daniel Geraldi at (925) 364-4741.

To avoid the detriments of the probate process, more and more people are turning to an estate-planning tool called a revocable living trust. Although both a will and living trust are used for estate planning purposes, the basic difference between the two is that the will does not take effect until death, while the trust is effective immediately and continues without interruption notwithstanding the grantor’s incapacity or death. Like a will, a revocable trust also can be structured to minimize taxes.

The basic structure of a revocable living trust starts with the person who creates a trust, who is called the “settlor” (or “grantor”). The settlor will determine what person will manage the trust. That person will then be known as the “trustee”. The settlor also determines who will ultimately receive or enjoy the assets in trust. Those people are called the “beneficiaries”. All these people, and other rules governing the trust, are written in a document prepared by the settlor. That document is called the “trust”.

The settlor then essentially places ownership of all or a portion of his/her assets into the hands of the trustee to manage them for the benefit of the beneficiary in conformity with the instructions stated in the trust. But as long as the settlor is alive and remains capable of managing his or her affairs, he or she also can be (and usually is) the trustee and also the beneficiary. What this means is that the settlor can enjoy his or her assets as if the trust had not even been created. The settlor can manage the assets and use them for his or her benefit throughout the settlor’s life. Then, when the settlor dies, the trust document (which was created with the settlor’s goals in mind) provides who becomes the trustee (or successor trustee) and who become the successor beneficiaries. If the settlor wants to provide for an outright gift at his or her death, it can be done. Alternatively, if the settlor is concerned about a child’s ability (or inability) to manage any inheritance, the trust can provide that the inheritance not pass immediately to the child but instead passes only when the child reaches certain milestones in life – such as obtaining a selected age or after earning a college degree.

An advantage with a revocable trust, as opposed to a will, is that the trust avoids the probate process. Thus, the revocable trust does not become a public record, unlike a will. Accordingly, the settlor’s wishes can be kept out of the public eye.

Another advantage is that, generally speaking, trusts are tougher to challenge than wills. Therefore, unhappy relatives have a much more difficult and expensive route to follow if they wish to overturn trust provisions since they are forced to bring litigation against the trustee.

Moreover, since a trust is revocable, the settlor may make any desired changes from time to time, including adding property to the trust, withdrawing property, changing the dispositions and even terminating the trust.

Yet another significant advantage with trusts is that they are usually designed with a goal of minimizing estate taxes. Therefore, more of the settlor’s assets actually pass to the intended beneficiary as opposed to going to the tax collector.

If you have further questions about the benefits of a revocable trust, contact Daniel Geraldi at (925) 364-4741.

Life insurance is a great method to fund an estate and a great way to provide for the welfare of your surviving family members. However, in order to maximize the benefits of an insurance policy it is vitally important that its ownership and administration be structured properly. One of the best ways to do this is by placing the insurance policy in an Irrevocable Life Insurance Trust (“ILIT”). Because a properly created ILIT is viewed in the eyes of the law as a separate legal entity, creating one ensures that the proceeds will be separate from your estate and therefore not subject to estate taxes.

In order to qualify for this individualized tax treatment, certain rules must be followed. For example, as the insured, you must give up control and ownership of the trust. Therefore, you cannot be the trustee. It is also important to note that if the ILIT is paying out to your children and you wish your children to be trustees as well, there should be an independent co-trustee appointed to oversee payments from the trust.

Consideration must be given to how the insurance premiums are to be paid after the ILIT is created. The ILIT can be set up either with a lump sum gift, and then the premiums deducted from this amount as needed, or the settlor can make periodic payments into the ILIT to cover the premium amount. However, both payment methods have different tax implications. So it is important that these are discussed with your legal professional.

A settlor of an ILIT can either purchase a new insurance policy or can have an existing policy transferred into the trust. However, it is better to create the trust with a new policy because if you transfer an existing policy into the trust and you do not survive at least three years after the date of the transfer, the policy may be considered part of your estate and taxes could be taken out from the insurance proceeds. This is an important item to think about when you begin setting up your ILIT. Because the goal is to structure the ILIT so that it is kept out of your estate, you must give up control of the ILIT. This means you will not have the right to amend or revoke the policy or trust once created. What this means is that it is important to set up the ILIT correctly. To set up an ILIT properly, it is important to hire an experienced attorney capable of preparing the ILIT with your goals in mind. If you have further questions about ILITs, contact Daniel Geraldi at (925) 364-4741.

Durable powers of attorneys are very important documents and are often prepared as part of an estate plan. There are generally two different types of durable powers of attorney: (1) for health care; and (2) for finances. These documents provide help in caring for a person’s health and finances when that person is no longer able to make decisions and care for one’s self. Most people focus the planning for the distribution of their assets on death rather than in the event of long-term incapacity. However, as you may have already observed, long-term incapacity can be even more devastating than death to the family, both emotionally and financially. Preparation of durable powers of attorney can help.

The durable power of attorney for health care identifies who would make medical decisions on your behalf if you are someday unable to do so yourself. It can provide for alternate or secondary individuals as well. In addition to stating whom you want to make the medical decisions on your behalf, the document can also expressly state any desires you have as to specific medical treatments. For example, desires can be expressed in the document about experimental medications or whether life-sustaining medications are given if there has been significant brain damage or other injuries. This document gives treating doctors the authority to listen to your designated representative otherwise known as an “agent” or “attorney in fact”. Another important aspect is that the document can state the conditions under which the appointment becomes effective.

The other durable power is for managing the finances of a person who has become incapacitated. It is important to understand that even when a person becomes incapacitated, bills may still need to be paid and finances still need to be managed. For example, just because a person ends up under long-term hospital care, that person’s mortgage will still need to be paid or his/her house could fall into foreclosure. The durable power of attorney for finances gives your agent or attorney-in-fact the ability to manage your financial affairs for your benefit. You can limit the authority granted in the document to particular acts, like selling your house. Alternatively, it can be broader in scope, allowing your agent to sign checks, pay bills, and deal with the IRS. The durable power of attorney can be of a limited time if desired and it can limit or direct powers.

If you have further questions about durable powers of attorney, contact Daniel Geraldi at (925) 364-4741.