It’s Your Estate – Spring 2012ADVANCED ESTATE PLANNING

(Beyond Wills)

Presented by: Leslie R. Daff, JD, MBACertified Specialist in Estate Planning, Probate & Trust Law

by the State Bar of California Board of Legal Specialization

Estate Plan, Inc.A Professional Law CorporationPhone: (949) 497-5056

Fax: (9490 497-7150 Email: LDaff@estateplaninc.com

Website: http://www.estateplaninc.com

Laguna Beach Office352 3rd Street, Suite 301Laguna Beach, CA 92651

Irvine Office19200 Von Karman Avenue, Suite 500Irvine, CA 92612

Statutory Probate Fees in California

4% on first $100,000 3% on next $100,000 2% on next $800,000 1% on next nine million Administrator/Executor and Attorney each entitled to fees based on the

gross value of the estate (not net of mortgages and indebtedness) - Examples: $500,000 gross estate - $26,000 $1 million gross estate - $46,000 $3 million gross estate - $86,000 $5 million gross estate - $126,000

Also… Court costs Probate referee fees Potential for extraordinary fees

Ways to Avoid Probate

Payable-on-death and transfer-on-death designations Beneficiary designations Titling (e.g., Joint Tenancy)

Drawbacks: In California, married couple holding title as joint

tenants (instead of community property) do not get full step up in cost basis at first death.

Adding children to title is a gift if over $13,000 in any given year (requires gift tax return) and exposes the real property to sale by child, child’s creditors, and child’s ex-spouse if divorce occurs. Child loses full step-up in cost basis he or she would have otherwise received if inherited at death instead.

Revocable Living Trust

Common Estate Plan

A Revocable Living Trust is often used to avoid conservatorships at incapacity and probate at death.

Commonly, an estate plan consists of: Revocable Living Trust Pour-over Will Financial Durable Power of Attorney Advance Health Care Directive HIPAA Authorization

Revocable Living TrustTerminology A Revocable Living Trust is a contract between a

Settlor/Grantor/Trustor/Trustmaker and a Trustee which defines the rights, obligations, and use of property held in the Trust. Generally, the Settlor and Trustee are the same person when the Trust is created.

Settlor/Trustor/Grantor/Trustmaker – The creator of the Trust and the owner of the property placed in Trust. The Settlor can amend the Revocable Living Trust during his or her lifetime.

Trustee – The person or entity holding title to the Trust property as Trustee and who carries out the duties of the Trustee as set out in the Trust agreement (i.e., manages the assets) for the benefit of the Beneficiary, the person(s) or entity(ies) designated by the Settlor to receive the benefits of the trust pursuant to the terms of the trust instrument (i.e., uses and enjoys the assets). The Beneficiary is generally the Settlor during his or her lifetime.

Types of Trusts

Revocable Trust – Can be changed Irrevocable Trust – Cannot be changed (often

used for gifting purposes) Trust Protector

Benefits of Revocable Living Trust

Avoids probate. Assets are distributed without court involvement. Trust provisions are not made public. If Settlor/Trustee becomes incapacitated, a named successor

Trustee takes over management of the assets without court involvement (no conservatorship). Trustee can be:

Individual Trust Company Private Fiduciary

After death, assets which would otherwise be paid outright to beneficiaries can continue to be held and administered in one or more subtrusts for the entire lifetime of the beneficiary or distributed at specified age(s) or stage(s):

Protects beneficiary from himself or herself, creditors, predators, and divorce

Drawbacks of Revocable Living Trust

Cost – Typically several hundred to several thousand dollars to create

Administration Funding the Trust

Why living trusts fail Why your estate may still go through probate

Trust Administration after Death But typically 50-90% less than probate

administration What to do when your spouse dies What to do as successor Trustee

Marital Subtrusts:

A Trust – Survivor’s Trust B Trust – Bypass/Credit Shelter/Exemption Trust – to

hold decedent’s Applicable Exclusion Amount: 2012 $5 million (portable exemption

between spouses) 2013→ $1 million (exemption not

portable) C Trust – QTIP/Marital Trust – to control decedent’s

property after death

A-B-C Trust (2013)

$3 MillionCommunity

Property

A Trust(Survivors Trust)

$1.5 Million(Revocable)

B Trust(Bypass Trust)

$1.0 Million(Irrevocable)

C Trust(QTIP Trust)

$500,000(Irrevocable)

Beneficiary 1 Beneficiary 2 Beneficiary 1 Beneficiary 2 Beneficiary 2Beneficiary 1

HEMS

Survivor$1.5 Million

Decedent$1.5 Million

HEMS

Subtrust Considerations

Whether to give surviving spouse a limited power of appointment (e.g., among joint descendants, or among descendants and charities)

Subtrust administration – allocating assets between trusts, obtaining taxpayer ID numbers for irrevocable trusts, and preparing additional tax returns

Disclaimer Trust:

Surviving Spousedisclaims $1 Millionin assets (in 2013)to create BypassTrust (B Trust)

$3 Million Community

Property

Remaining$2 Million to

Survivor’s Trust(A Trust)

Cautions:

• Not Automatic

• Surviving spouse must disclaim in writing within 9 months of first spouse’s death

• Must not have accepted benefits of disclaimed property (e.g. interest, rental income)

Considerations for Distributions to Children and Other Beneficiaries

1. Outright 2. In Stages

Distributions for health, education, maintenance, and support – example:

At age 25, receives one-third of trust principal outright At age 30, receives one-half of remaining trust principal

outright At age 35, receives remainder of trust principal

3. Lifetime Beneficiary-Controlled Trusts Distribution Trustee (for maximum creditor protection) Beneficiary as Trustee (can resign, remove, and replace

Trustees)

Will

Pourover Will still used as a “safety net” to catch any assets that are not in the trust and “pour” them into the living trust so they can be distributed according to the trust’s terms. Guardians for minor children are also named

in the Will.

Special Needs Trust

For child with special needs Mental or physical incapacity Governmental assistance is available. Inheritance would mean no governmental

assistance. Limited rights to use but preserves trust assets

from governmental levy. Can be set up in parent’s revocable living

trust or as a stand-alone trust

Qualified Domestic Trust

Non-U.S. citizens If one or both spouses are not citizens of the United

States, a qualified domestic trust (QDOT) must be used to take advantage of a special marital deduction similar to the unlimited marital deduction used by couples who are both citizens.

Properly structured, a QDOT can postpone estate taxes until the death of the second spouse.

Special restrictions apply

Gifting

Generally, you are subject to gift tax whenever you give property to individuals.

Three types of gifts are exempt from gift tax: Generally, gifts to spouse Gifts to any individual of up to $13,000

annually Direct payments for tuition or medical care for

any individual $5 million lifetime gift tax exemption in 2012

Irrevocable Life Insurance Trusts (ILIT) Although life insurance is income tax free, it is not

estate tax free. However, a special trust called an Irrevocable Life Insurance Trust (ILIT) can be created to hold the life insurance policy. An ILIT is an IRS-approved means of removing your life insurance proceeds from your taxable estate while still having the proceeds available to provide for your spouse, children, or other beneficiaries according to your desires. Gifts made each year to the ILIT to pay the policy premiums can be exempt from gift tax. 3-year rule

How ILITs work Settlor of ILIT sets up Irrevocable Trust (ILIT) naming another

person/entity as Trustee. The Trustee is named the owner of the life insurance policy and

the ILIT is named the beneficiary. Trustee obtains a new taxpayer ID number for the ILIT and sets

up an ILIT bank account under the new taxpayer ID. Settlor provides the account with a “gift” with which to pay life

insurance premiums. Trustee notifies beneficiaries (“Crummey” notice) that a gift has

been made to the ILIT and they have 30 days to take the gift (required to make it a gift of a present interest), otherwise it will be used to pay the premium.

Beneficiaries decline to take the present gift. At death, the life insurance proceeds pass free of estate tax Can be used to pay estate taxes to keep an otherwise taxable

estate intact.

Additional Trusts for Larger Estates

Charitable Remainder Trusts (CRT) Charitable Remainder Annuity Trust (CRAT) Charitable Remainder Unitrust (CRUT) Grantor Retained Annuity Trust and Grantor Retained

Unitrusts (GRAT or GRUT) Qualified Personal Residence Trust (QPRT) Charitable Lead Trust Irrevocable Trusts for Children/Grandchildren

(Crummey Trusts) Intentionally Defective Grantor Trusts

Family Limited Partnership and Limited Liability Company The family limited partnership (FLP) and family

limited liability company (FLLC) are sophisticated estate planning devices.

By transferring income-producing capital assets (i.e. rental property) into an FLP or FLLC, the value of the assets can be discounted up to 30% or more based on factors such as the lack of marketability of or minority interest in the partnership shares.

Gifting fractionalized FLP and FLLC interests in assets can be an effective way to make maximum use of an individual’s federal transfer tax applicable exclusion amount during life. Caution: Must have business purpose (not used for

residence) – not just tax-avoidance, observe formalities.

Asset Protection

Insurance Entities (e.g., LLC, LP)

Choice of jurisdiction considerations Domestic Asset Protection Trusts

Nevada and other states permit self-settled asset protection trusts

Offshore Asset Protection Trusts Cook Islands

Cost/Benefit Analysis