FAQ

Most people will want a revocable and amendable Trust. Such a Trust would remain revocable and amendable during the person's lifetime, and it would become irrevocable after their death (for spouses, the Trust can remain revocable and amendable after the death of one spouse, or a portion of it can become irrevocable when the first spouse dies, depending on the spouses' needs and desires). In this way, if the person who created the Trust changes their mind about something, or there have been deaths or other changes among beneficiaries or family members, the person can amend the Trust to revise it to take into account such changes. And, sometimes people fall in and out of favor, which can require revision of the terms of the Trust regarding who will be in charge and who will receive an asset.

An irrevocable Trust is a somewhat specialized Trust (which means you need a good reason to make it irrevocable) and there are gift tax issues associated with creating a irrevocable Trust. An irrevocable Trust cannot be changed once it has been signed, and the person who created the Trust generally cannot be the Trustee of that Trust (the person in charge).

Joint ownership typically means that one or more people are joint owners of some asset, which can be a bank account, real property, motor vehicle, etc. For bank accounts, this is typically where two (or more) people become joint owners, and the bank statements and checks all indicate that two (or more) people are account holders who have access to the assets in the account. For real property, joint ownership can be tenancy in common, joint tenancy, or, for spouses, community property or community property with right of survivorship.

As a general proposition, if one joint owner owes money to a creditor, that creditor can collect against everything that that joint owner has access to. For bank accounts, that would typically include the entirety of the account, regardless of how many other joint owners there are, because any one joint owner of a bank account has the power to withdraw up to the entirety of the contents of that account. So creditors coming after a joint account holder can make a claim against the entirety of what that joint owner could take out of that account, which would be everything.

War story: I had a client of very, very modest means. The client owned one car with minimal value, a single wide mobile home, and she had $20,000 to $30,000 in the bank. She added her son to her bank account so he could help her pay bills. Unfortunately, the Son was a deadbeat dad (he had child and spousal support arrearages), and the County came along and imposed a lien on the entirety of Mom's bank account. This was entirely legal because Son, as a joint owner on that account, had the right to withdraw up to the entirety of that account. Ultimately, the County backed off in this particular matter because they were able to confirm that that account was entirely Mom's and because that was all that she had in the way of assets, she would have ended up on the County's welfare roll.

War story: Mom added Daughter as a joint owner of all of her accounts with financial institutions. These accounts held several hundred thousand dollars worth of assets. Daughter and her husband divorced. Since daughter was a joint owner on all of Mom's accounts, the entirety of those assets were treated as Daughter's assets for purposes of the divorce and calculating child support and spousal support. These assets that were not taken from Mom, but the amount of child and spousal support to be paid by Daughter's husband was significantly affected.

War story: Mom added all five of her children as joint tenants on her real property. Her intent was that when she passed away the property would pass to her children without going through probate. Thereafter, Mom needed to refinance the property. One of the five children was a deadbeat dad and the County recorded a substantial lien against his interest in the property. Because of this lien, Mom could not refinance the property without paying the lien off first.

Overall, joint ownership by spouses is generally a reasonable way for spouses to own property, but not always. The exact facts of the situation need to be discussed with an attorney.

If the value of your assets exceeds $5.45 million (for the year 2016), there will be an estate tax imposed on the amount over $5.45 million. For most people (about 99% of us) our Estates and Trusts will not have to pay any estate tax. However, the deceased person's Estate or Trust will be responsible for paying the deceased person's debts that the deceased person owed as of the date of death. This could include state and federal income taxes and tax arrearages, mortgages, credit cards, lines of credit, and other types of debt. However these are not taken by the government, but are paid to the creditors to whom the debt is owed.

It depends.

If you set up a irrevocable Trust and transfer assets to it, and then after you set up that Trust you become indebted to some person or entity, that person or entity should not be able to access the assets of that irrevocable Trust to satisfy the debt owed to that person or entity. Keep in mind that if you set up a irrevocable Trust while you owe a person or entity money, the creation of the irrevocable Trust and transfer of assets to it could be considered a fraudulent transfer to try to prevent the creditor from collecting.

If you set up a revocable Trust (one that you can revoke or amend), that will provide no protection from creditors, regardless of when you became indebted to such creditors.

For the super wealthy (at least tens of millions of dollars worth of assets), there are Trusts that can be set up to make it expensive and difficult for a creditor to access assets held in the Trust that you have created. However, even these types of Trusts cannot be used to avoid state or federal tax liabilities (especially for the IRS, just about anything you try to do to avoid paying income taxes will be strenuously challenged by the IRS; and there is a strong likelihood that both you and any attorney that assisted you will be treated as having committed a serious crime).

No.

Assuming that all of the deceased person's debts (including taxes) were paid off before a distribution was made to the heir or beneficiary, the heir or beneficiary will not pay a tax on what they receive.

No.

Assets held in a Trust are exempt from probate. However, if a person has a Trust but, for some reason, they never transfer assets to their Trust, those assets will be part of their Estate rather than their Trust. If the value of those assets held in the Estate exceeds $150,000, those assets will have to go through probate. If there is real property that is not held in the deceased person's Trust, then no matter what the value of the assets in the estate, title to the real property can only pass by Court order.

This is a very common, shorthand way of talking about transferring assets from an individual (or individuals), to the Trustee (or Trustees) of a Trust.

For example, many people who have created a Trust have a checking and savings account, and they own real property. Prior to signing the Trust, the bank accounts were held in the person's name as an individual, for example "John Doe." For the real property title would be held in "John Doe's" name. For married couples, the assets will likely be held by John Doe and Jane Doe. Once John and Jane sign their Trust, then they need to change the title to reflect that they, as Trustees, are now the owners of these assets. The ownership would change to something like "John Doe and Jane Doe, Trustees." They, as Trustees would actually become the owners of the assets, and the formal title with bank and with the Recorder (where title to the real property is recorded) would reflect ownership of those assets by the two of them in their capacities as Trustees. The common and shorthand way of referring to this is that the Trust now owns those assets, even though, technically, it is the Trustees that now own the assets. In general, once a person (or persons) sign a Trust all of their assets that can be held by Trustees of the Trust should be transferred by the person(s) to the Trustee of the Trust. This would include accounts of financial institutions, real property, motor vehicles, etc.

The general way that title to Trust assets should be worded is as follows:
  “John Doe, Trustee of the Doe Family Trust.”
  “John Doe and Jane Doe, Trustees of the Doe Family Trust.”

There are certain types of assets that cannot be held by Trustees of the Trust. These include, but are not limited to, IRAs, 401(k)s, certain types of annuities, and certain types of insurance.

A Durable Power of Attorney is a document that allows someone of your choosing the power to act in your place if you are too ill or mentally incapable to do so. This person will be chosen to help with decisions in medical care, legal, and finances.

This is also known as a living will. It is a legal document that outlines exactly what a person wishes in the event of being unable to make decisions for themselves due to illness or other incapacity. The ill person will leave details about their treatment, care, and how to handle the situation if their health continues to decline.

Estate planning involves planning for incapacity as well as for death.

Estate planning starts with establishing one or more of a Trust, Will, Power of Attorney, or Advance Health Care Directive to appoint persons to manage your affairs in the event that you become incapacitated, and after your death.

There are two basic issues for estate planning: Money and Control.

The "money issue" involves the size of your estate. If your estate is high enough in value, then estate taxes will need to be paid after your death. In 2016, if your estate is worth less than $5.45 million, then no estate taxes will need to be paid. From 2016 on, this dollar amount, which is called the "Applicable Exclusion Amount," will be adjusted annually with cost-of-living increases.

Right now, less than 1% of the people in the United States have more than $5 million in assets. Therefore, if the value of everything that you own (your estate) is worth less than the Applicable Exclusion Amount, your estate will not have to pay any estate taxes and this means that the "money issue" does not apply to your estate.

The "control issue" breaks down into two sub categories. The first is control issues before death, and the second is control issues after death.

The before death control issues deal with incapacity as a result of illness or injury. If something happens to you to cause you to become incompetent, all of your affairs will need to be taken care of by someone. If you have no estate planning documents in place, a conservatorship may need to be established in order to handle your affairs. While a conservatorship will address all the needs of your estate while you are living but incompetent, it is also very expensive, time-consuming, and cumbersome, because the Court is overseeing the conservatorship.

A conservatorship can be avoided if you have certain estate planning documents in place—Established prior to becoming incompetent. If you wait until you need estate planning documents, it will be too late if you are already incompetent.

A Trust is a very common estate planning document. The person who creates the Trust is known as the "settlor" (a.k.a. "trustor") and typically, while the settlor is living, the settlor is the beneficiary of the Trust. The initial Trustee of the Trust is usually the settlor, but this is not required. The Trustee is responsible for administering the Trust for the benefit of the beneficiary of the Trust. The Trust will typically contain provisions naming successor Trustees who will take over as Trustee in the event in that the settlor (or the original trustee becomes incapacitated or dies. The Trustee administers the Trust for the benefit of the settlor while the settlor is living, even if the settlor is incapacitated, and then, after the settlor's death, for the benefit of the beneficiaries named in the Trust.

If the value of your Estate is worth less than the Applicable Exclusion Amount, the primary benefit to a Trust is that the assets held in the Trust as of the date of death are exempt from Probate. If assets are NOT in your Trust as of your date of death, they will be part of your Estate, which could require a probate, or probate alternative, to administer.

The main reason to establish a Trust is that the assets in the Trust at the time of death are exempt from Probate.

Then, there are so many non-Trust matters that need to be taken care of in the event of your incapacity (i.e. you are still living, but you are not competent). Since these are "non-Trust" matters, the Trustee can NOT handle these matters.

For making health care decisions, you can appoint agents (they can be the same persons as the Trustee(s) of the Trust) who can make healthcare decisions, deal with doctors, etc.

In addition to non-Trust healthcare decisions, there are many other non-Trust issues that need to be handled in the event of your incapacity, which include handling retirement and pension accounts (which generally cannot be owned by a Trust), annuities, insurances, income taxes, governmental benefits, lawsuits, etc. In order to handle all these other non-Trust non-healthcare issues, a Durable Power of Attorney can be established in which an agent (also known as "attorney in fact") is appointed to handle these non-Trust matters.

With these three documents: 1) Trust 2) Advance Health Care Directive, and 3) Durable Power of Attorney, if something happens that renders you incapacitated (you are still alive, but not competent), then persons that you have already appointed to manage your affairs will take over to manage those affairs for your benefit.

The foregoing is how pre-death control issues are handled.

The following discusses the post death Control issues.

Of the foregoing documents, the Trust is the only one that survives death, as the Advance Health Care Directive and Durable Power of Attorney cease to have effect after death (except for handling a person's remains and funeral services, as may be set forth in an Advanced Health Care Directive).

In addition to a Trust, there is a very basic Will that is referred to as a "pour over" Will, which established when the Trust is established. The purpose of this Will is to transfer all non-Trust assets (if any) from the deceased person's Estate to the Trust, so the terms of the Trust will control the disposition of those assets. Administering these non-Trust assets will require a Probate or a Probate Alternative in order to transfer from the deceased person's Estate to the Trust.

After the settlor's death, the person, or persons, who were appointed as Trustee will take over the management of the Trust for the benefit of the beneficiaries named in the Trust. The Trustee can also be a beneficiary, but this is not required. The Trustee will have control over all the Trust assets, and will be responsible for handling all of the deceased person's debts (e.g. credit card, car loan, contract, mortgages, business operations, etc.). Then, when the Trust is in a condition to be closed, making the final distributions to the beneficiaries or otherwise specified by the Trust.

The settlor can control the administration of the Trust after death by specifying such things as who will be in charge of administering the Trust, age requirements for a beneficiary to receive their share, imposing drug testing, making specific gifts of specific things or cash amounts to specific persons, disinheriting specific persons, etc.

The Trustee is specifically required to follow the terms of the Trust as they were written by the settlor.

DISCLAIMER: The foregoing is NOT legal advice. The foregoing is only a general outline of some Estate Planning issues, and should NOT be used as a guide to drafting or interpreting any estate planning documents. Unless you, the reader, have signed an Attorney Client Employment with the Law Office of Phillip H. Darling ("the firm"), you are not a client of the firm.

A Trust is a very common estate planning document. The person who creates the Trust is known as the "settlor" (a.k.a. "trustor") and typically, while the settlor is living, the settlor is the beneficiary of the Trust. The initial Trustee of the Trust is usually the settlor, but this is not required. The Trustee is responsible for administering the Trust for the benefit of the beneficiary of the Trust. The Trust will typically contain provisions naming successor Trustees who will take over as Trustee in the event in that the settlor (or the original trustee becomes incapacitated or dies. The Trustee administers the Trust for the benefit of the settlor while the settlor is living, even if the settlor is incapacitated, and then, after the settlor's death, for the benefit of the beneficiaries named in the Trust.

If the value of your Estate is worth less than the Applicable Exclusion Amount, the primary benefit to a Trust is that the assets held in the Trust as of the date of death are exempt from Probate. If assets are NOT in your Trust as of your date of death, they will be part of your Estate, which could require a probate, or probate alternative, to administer.