The Trust as an Estate Planning Device

<body topmargin=0 leftmargin=0 marginheight=0 marginwidth=0> <table cellpadding=0 cellspacing=0 border=0><tr> <td valign="top" rowspan="2" width=185 BGCOLOR="#003333" TEXT="#F7F7FF" bgproperties="fixed" background="18fd4c00dduajq.jpg"> <bR> <bR> <bR> <div> <A HREF="id11.htm" TARGET="_top" TITLE="The Goals of Estate Planning"><B><IMG SRC="01109110.png" border=0 width="9" height="17" ALT="previous" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></B></A><B>       </B><IMG BORDER="0" SRC="1x1.gif" HEIGHT="17" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" WIDTH="17"><B>   </B><IMG BORDER="0" SRC="1x1.gif" HEIGHT="17" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" WIDTH="17"><B>       </B><A HREF="id15.htm" TARGET="_top" TITLE="Advanced Estate Planning Trusts, etc."><B><IMG SRC="01409110.png" border=0 width="9" height="17" ALT="next" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></B></A></div> <div> <A HREF="id14_m.htm#the_living_trust" TARGET="TRLX_Middle" TITLE="The Trust as an Estate Planning Device"><B>Trusts</B></A></div> <div> <A HREF="id14_m.htm#the_revocable_living_trust" TARGET="TRLX_Middle" TITLE="The Trust as an Estate Planning Device"><B><IMG BORDER="0" SRC="Symb075c00b700c899ccff00.png" HEIGHT="13" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">The Revocable Living Trust</B></A></div> <div> <A HREF="id14_m.htm#the_testamentary_trust" TARGET="TRLX_Middle" TITLE="The Trust as an Estate Planning Device"><B><IMG BORDER="0" SRC="Symb075c00b700c899ccff00.png" HEIGHT="13" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">The Testamentary Trust</B></A></div> <div> <A HREF="id14_m.htm#the_trustee" TARGET="TRLX_Middle" TITLE="The Trust as an Estate Planning Device"><B>The Trustee</B></A></div> <div> <A HREF="id14_m.htm#the_beneficiary" TARGET="TRLX_Middle" TITLE="The Trust as an Estate Planning Device"><B>The Beneficiary</B></A></div> <div> <B>Benefits:</B></div> <div> <A HREF="id14_m.htm#no_probate" TARGET="TRLX_Middle" TITLE="The Trust as an Estate Planning Device"><B><IMG BORDER="0" SRC="Symb075c00b700c899ccff00.png" HEIGHT="13" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">No Probate</B></A></div> <div> <A HREF="id14_m.htm#no_conservatorship_1" TARGET="TRLX_Middle" TITLE="The Trust as an Estate Planning Device"><B><IMG BORDER="0" SRC="Symb075c00b700c899ccff00.png" HEIGHT="13" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">No Conservatorship</B></A></div> <div> <A HREF="id14_m.htm#may_save_taxes" TARGET="TRLX_Middle" TITLE="The Trust as an Estate Planning Device"><B><IMG BORDER="0" SRC="Symb075c00b700c899ccff00.png" HEIGHT="13" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">May Save Taxes</B></A></div> <div> <A HREF="id14_m.htm#estate_tax" TARGET="TRLX_Middle" TITLE="The Trust as an Estate Planning Device"><B>Estate Taxes</B></A></div> <div> <A HREF="id14_m.htm#personal_exemption" TARGET="TRLX_Middle" TITLE="The Trust as an Estate Planning Device"><B>Personal Exemption</B></A></div> <div> <A HREF="id15.htm" TARGET="_top" TITLE="Advanced Estate Planning Trusts, etc."><B>Next Page (Advanced Estate Planning)</B></A></div> <div> <A HREF="id11.htm" TARGET="_top" TITLE="The Goals of Estate Planning"><B>Previous Page</B></A></div> <div> <A HREF="id12.htm" TARGET="_top" TITLE=" Trust and Estate Planni"><B>Estate Planning Page</B></A></div> <bR> <div> <A HREF="index.htm" TARGET="_top" TITLE="Law Offices of Mathews Bergen Grier"><B>Home</B></A></div> <bR> <div> <A HREF="mailto:mbglaw@cts.com" TARGET="_top" TITLE="mailto:mbglaw@cts.com"><B><IMG SRC="01573ce0.jpg" border=0 width="115" height="206" ALT="E-mail MATHEWS BERGEN & GRIER" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></B></A></div> </td> <td valign="top" colspan=2 height=60 BGCOLOR="#FFFBF0" TEXT="#080000"> <div> <I>The Trust as an Estate Planning Device</I></div> <div> </div> </td> </tr><tr> <td valign="top" height=420 width="100%" colspan=2 BGCOLOR="#FFFBF0" TEXT="#080000"> <div> <B> <A NAME="trusts"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B><B>TRUSTS:</B> Many people think trusts are something new. Quite the contrary is true. It was soon after the <I><B>Magna Carta</B></I> was signed in England that landed gentry found it to their advantage to convey legal title to another and retain the "use" to themselves. In fact, the Franciscan Friars used trusts so that they could enjoy the benefits of ownership while obeying their oath of poverty. Trusts are an old, well established, concept in the English Common Law. The English Common Law is the basis of the laws of the United States. This includes the law of trusts. </div> <bR> <div> Using a trust, "legal" title was separated from the “beneficial ownership" (or “use”) of the property. This separation of title is the essence of a trust. A trust is nothing more than property (either real estate or personal property) being held by one person (called the Trustee) for the <I>benefit</I> of another person (called the Beneficiary). The person who sets the conditions under which the Trustee holds title for the Beneficiary is the person who created the trust; this person is called the Settlor (or, in some estate plans, the “Trustor”).  </div> <bR> <div> You might think of the concept being somewhat similar to the situation of having bought a car and financing it through a bank. The bank holds the legal title (the trustee) and you (the beneficiary) have the use of the car. </div> <bR> <div> From this you can see that establishing a trust is a two-step process. Step One: Create the trust. Step Two: Transfer property to the Trust. For estate planning purposes there are two types of trusts: The Living Trust and the Testamentary Trust. Each of these is discussed below.</div> <bR> <div> <B><IMG BORDER="0" SRC="Symb075c00b7011800000000.png" HEIGHT="19" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0"><A NAME="the_living_trust"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B><B>The Living Trust:</B> The Living Trust was the first of the trusts. This vehicle is created when one person (the Settlor) requests another (the Trustee) to hold title to property for the benefit of someone else (the Beneficiary). The Settlor sets the terms by which the Trustee shall manage and distribute the property held in trust. This is called a Living Trust because it is created by the Settlor during the lifetime of the Settlor. Properly held in the Living Trust does not require probate proceeding. </div> <bR> <div> <B><IMG BORDER="0" SRC="Symb075c00b7011800000000.png" HEIGHT="19" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0"><A NAME="the_revocable_living_trust"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B><B>The Revocable Living Trust: </B> For most estate planning, we use a <I>Revocable</I> Living Trust. This means that the Settlor (or, if a married couple, Settlors) may revoke the Living Trust or change it in any manner desired. The Settlor may do this without asking anyone's permission.</div> <bR> <div> <B><IMG BORDER="0" SRC="Symb075c00b7011800000000.png" HEIGHT="19" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0"><A NAME="the_testamentary_trust"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B><B>The Testamentary Trust:</B> A Testamentary Trust is a trust which is created as part of the probate proceedings as a specific provision of the decedent's will. In other words, the Living Trust is created while you are living while the Testamentary Trust is created after you are dead. With a Living Trust, you set the terms under which the Trustee shall manage the property held in trust in the Declaration of Trust. In a Testamentary Trust, you set the terms under which the Trustee shall manage the property held in trust in your will.</div> <bR> <div> The Testamentary Trust is created by the Will and managed as a part of the probate process. This means, of course, that a formal court probate is required for this type of trust to be effective. The probate means, also, that the delays, attorneys fees, and other costs must be paid.</div> <bR> <div> A Testamentary Trust is usually recommended only by those who wish to charge fees for drafting the trust provisions of the Will and still handle the probate with all of the fees that are paid as a part of the probate process. The Law Offices of Mathews Bergen & Grier does not recommend formation of a testamentary trust for any but the most unusual estate plans</div> <bR> <bR> <div> <B> <A NAME="the_trustee"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B><B>The Trustee:</B> In most well-planned estates, the Settlors are also the original Trustees; in other words the Trustees are <B>you</B>. A <I>Trustee </I>is the manager of the property held in trust. The Settlors can amend the Declaration of Trust at any time. The Trustees manage the property. Since both the Settlor(s) and the Trustee(s) are the same person (or same persons), the Settlor is in complete control. Upon the death or incapacity of the Settlor (or, if a married couple, upon death or incapacity of the surviving Settlor) the Successor Trustee takes over as Trustee. The responsibility of the Successor Trustee is to transfer the property held in trust to the Successor Beneficiaries named in the Declaration of Trust. This happens without probate. </div> <bR> <div> <IMG SRC="045af820.png" border=0 width="175" height="130" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"> <A NAME="the_beneficiary"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A><B>The Beneficiary</B>. In estate planning, the Settlor is normally the <I>Beneficiary</I> during lifetime. Upon death (or, if a married couple, upon death of the surviving Settlor) the property then passes to the <I>Successor Beneficiaries</I> named in the Declaration of Trust. This happens without probate.</div> <bR> <div> <B><IMG BORDER="0" SRC="Symb075c00b7011800000000.png" HEIGHT="19" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">You</B> are the Settlor(s). </div> <div> <B><IMG BORDER="0" SRC="Symb075c00b7011800000000.png" HEIGHT="19" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">You </B>are the Trustee(s) during your lifetime. </div> <div> <B><IMG BORDER="0" SRC="Symb075c00b7011800000000.png" HEIGHT="19" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">You </B>are the Beneficiary(ies) during your life.</div> <bR> <bR> <div> <B><IMG SRC="0493f220.jpg" border=0 width="63" height="34" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"> The Settlor(s) direct(s) the Trustee on how to manage the property held in trust.</B> </div> <bR> <div> The advantages of a Living Trust exist only if the trust is actually created and if title to property is actually transferred to the trust. At this point, a quick review is in order. The Settlor creates the trust by signing a Declaration of Trust in which the Settlor also designates who will be the <I>Successor</I> Trustee and who the <I>Successor Beneficiaries</I> are to be. So far, so good. However, if no property is transferred to the Trustee to hold in trust, then all of the property of the Settlor will pass 'outside' of the trust. This usually means probate.</div> <bR> <div> Transferring property 'to the trust' is much easier than you might think. When some people hear the words 'transfer to the trust' they often do not know exactly what that means. Here is the explanation. To transfer property to trust means nothing more than transferring it to the 'Trustee, as Trustee of the Trust.' For example, the words written on the deed (or other document) would be: ' <I><B>John Doe and Jane Doe, Co-Trustees of the Doe Revocable Trust</B></I>.' It is usually just that simple. </div> <bR> <div> Only when both steps have been completed, that is, the trust has been created and the property transferred to the trust, are the advantages of the Living Trust possible. These are some of the advantages of the Living Trusts:</div> <bR> <div> <IMG SRC="0461a190.png" border=0 width="26" height="25" ALIGN="BOTTOM" HSPACE="0" VSPACE="0">     <FONT SIZE="4" COLOR="#006600" FACE="Arial" ><A HREF="#no_probate" TITLE="The Trust as an Estate Planning Device"><B>No Probate</B></A></FONT></div> <div> <IMG SRC="0471a190.png" border=0 width="26" height="25" ALIGN="BOTTOM" HSPACE="0" VSPACE="0">     <A HREF="#no_conservatorship_1" TITLE="The Trust as an Estate Planning Device"><B>No Conservatorship</B></A></div> <div> <IMG SRC="0481a190.png" border=0 width="26" height="25" ALIGN="BOTTOM" HSPACE="0" VSPACE="0">     <A HREF="#may_save_taxes" TITLE="The Trust as an Estate Planning Device"><B>May Save Taxes</B></A></div> <bR> <div> <B> <A NAME="no_probate"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B><B>No Probate:</B> The first major advantage of the Living Trust is that it avoids probate. How does it do this? It avoids probate because it does the law of probate without court interference, delay and expense. The law of probate is to transfer the assets you own at the time of your death to your beneficiaries. Here is how that is done. </div> <bR> <div> While you are alive, you transfer title of property you own by signing your name to some sort of transfer document. How is it possible to obtain your signature after your death in order to keep the records straight? One answer has been the probate process. During this process someone is appointed by the court to (in effect) sign your name. The more efficient answer is a Living Trust</div> <bR> <div> With a Living Trust the Successor Trustee becomes the manager of the assets in the trust upon your death. The Successor Trustee is then required by the terms of the Declaration of Trust to manage and distribute the assets to the beneficiaries. In effect, by signing the documents needed to place the title into the trust, you have avoided the need to sign documents after your death. The Successor Trustee can do this. When it is done, the assets you owned at the time of your death are transferred to the Successor Beneficiaries by the Successor Trustee. <B>No Court Interference. No Frustration. Less Delay. No Attorneys Fees for Probate. No Delays in Legal System.</B></div> <bR> <div> <B> <A NAME="no_conservatorship_1"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B><B>No Conservatorship:</B>  The avoidance of probate is a benefit to your heirs. The avoidance of a conservatorship is a benefit to you. Not only is a conservatorship proceeding time consuming and expensive, it is often humiliating as well. Should you ever be disabled (either mentally or physically) the Living Trust avoids the necessity of having the court appoint a conservator to administer your financial affairs. After all, if all of your assets are being held in trust, then the Successor Trustee may manage those assets. This eliminates the need for a court proceeding for a conservatorship.</div> <bR> <div> <I><B><U>Only a Living Trust has these advantages.</U></B></I></div> <bR> <div> <B> <A NAME="may_save_taxes"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B><B>May Save Taxes: </B>Both the Living Trust and the Testamentary Trust may reduce taxes for husband and wife if the total estate of the couple is in the taxable size. While both types of trusts may be used to reduce or eliminate taxes, the Living Trust is the one which also avoids probate.  The Testamentary Trust requires a probate. Sometimes people become confused with the tax problems of estate planning and the probate problems. </div> <bR> <div> Even if your estate is less than the taxable size, you still need a Living Trust to avoid probate or possible resort to court to set-up a conservatorship on disability.</div> <bR> <div> <B> <A NAME="estate_tax"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B><B>Estate Tax:</B> So far we have been examining estate planning from the viewpoint of avoiding probate with the use of a Living Trust.  We now change our focus to death (estate) taxes. This has been called “a tax on your right to die! That is, if you own more than the government wants to let you own tax free, then your estate must pay a tax. <A HREF="id28.htm" TARGET="_top" TITLE="Federal Estate Unified Rate Schedule">Currently</A>, this amount is $2,000,000. When the net worth of a person is less than $2,000,000 at the time of death, there is no estate tax. This tax has <I><B><U>nothing</U></B></I><I><B><U> </U></B></I>to do with Probate: Without a Living Trust you still have to go through the Probate proceeding. We are now talking about taxes. When adding up all of your assets to determine your net worth, keep in mind that the value of life insurance owned by the decedent is included in the estate for estate tax purposes.  [We frequently, and occasionally correctly, think that California is a progressive state.  At least in the area of inheritance taxes <B>it is</B>.  California has done away with such death taxes!]  <B>Note:  </B>as of the <A HREF="index_last_revised_june_16_2000__©_2000_john.htm" TARGET="_top" TITLE="Law Offices of Mathews Bergen Grier">date of last revision</A>, Congress is still debating whether or not to eliminate death taxes or minimize them in the future.  It is impossible for us to predict when this may happen -- or whether it will at all.</div> <bR> <div> <B><U>Taxes have nothing to do with probate</U></B><B>.</B></div> <bR> <div> In other words, if a married couple owned $2,000,000 in property and investments (including the home, and everything else owned) plus had a $500,000 life insurance policy with double indemnity for accidents, the joint estate would have an estate of more than $2,000,00 if the cause of death were an accident. The tax on each dollar over $2,000,000 would be taxed. The tax rate starts at 48%. As large as these numbers may seem, at first blush, with the rapidly accelerating value of real property, an improving investment market, etc., these numbers are no longer unrealistic, even for 'average' persons.  To be a 'millionaire' today is not so unusual as it was just 10 years ago!</div> <bR> <div> <B> <A NAME="personal_exemption"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B><B>Personal Exemption:</B> Each person is permitted to own a net value of $2,000,000 at the time of death, pass this on to whom ever desired, and pay no tax. This two-million dollar figure is per person. This means a husband and wife would have a $2,000,000 exemption for each of them. This totals $4,000,000. <B><U>However, this benefit is not automatic</U></B>. It is very easy to lose one of these exemptions. That is why planning is so important. The planning must be done before death. A widow cannot do the planning for her deceased husband. </div> <bR> <div> Each person may die with an estate of $2,000,000 and pay no Estate Taxes, with a properly drafted trust. </div> <bR> <div> With proper planning through the use of the Marital Deduction Trust (often called the “A-B” Trust, we call it a “tax sensitive trust,” but for simplicity it is typically referred to below by the terms “A-B”) both exemptions can be preserved. This must be done before the death of either the husband or wife. That is one of the reasons we call this <B>Planning</B>. </div> <bR> <div> A husband and wife who have an estate which is under $2,000,000 as of January 1, 2006 (this amount  increases until the year 2009, <A HREF="id28.htm" TARGET="_top" TITLE="Federal Estate Unified Rate Schedule">see chart</A>) <I>may</I> need only a simple husband and wife Living Trust. This is because the object in such an estate plan is to avoid probate. A widow or widower does not have a spouse, and can have only one exemption. Other than the preservation of the personal exemption, we believe it is virtually impossible to eliminate the estate tax. [There are advanced estate planning techniques available for estates over $2,000,00 in value. <A HREF="id27.htm" TARGET="_top" TITLE="Complex Estate Planning (Large Estates)">These techniques are discussed, </A>later.]</div> <bR> <bR> <bR> </td> </tr></table></body>