revocable living trusts

1. Revocable Living Trusts Legal Disclaimer: The following is an educational presentation, not intended to be legal advice. Contact me to discuss your specific estate planning needs

2. Overview Why Establish a Revocable Living Trust Avoid Probate, Save Taxes, Efficient Distribution How a Trust Works The “Settlor” establishes their Declaration of Trust The Office of Trustee Power of the Trustee over the Trust Estate Distribution of Trust Assets During Life of the Settlor Distribution of Trust Assets After Death of the Settlor Other Provisions: Spendthrift and Special Needs Trusts Education Funds Determination of Capacity No Contest Clause

3. Why Establish a Revocable Living Trust Avoid Probate! Probate is a court proceeding that the settles the estate of a deceased person. Claims are resolved, debts are paid, and property is distributed to Beneficiaries or Heirs In California, probate is triggered if you leave an estate exceeding $100,000 Probate can be very expensive and time consuming Attorney and Executor fees can run into thousands of dollars Probate can easily take a year or more to complete Assets owned by a Trust, in Joint Tenancy, or having named Beneficiaries usually avoid probate

4. How a Trust Works You, as the “Settlor,” establish your Trust The Settlor is the Beneficiary of the Trust and has the power to Amend or Revoke the Trust while they are living Next, you create the “Office of Trustee” You name yourself as the “Initial Trustee” The Trustee is the day-to-day “Manager” of the Trust and has Power, or Control, over Trust assets You name the people you trust to be your “Successor Trustee(s)” Your Successor Trustee “steps-up” and takes over control of your Trust ONLY IF you “Fail or Cease to Act,” e.g., Death, Incapacity, or Resignation You can appoint one Successor who acts alone, or you can appoint two or more that must act together.

5. Powers of the Trustee The Trustee has Power granted by the Trust and by law Open and close bank accounts; buy or sell securities; purchase or sell real property; deal with insurance companies; incur debts, refinance real property, prepare tax returns, employ advisers, etc. The Trust Estate consists of assets “Owned by the Trust” Realize that when you create and fund a Living Trust, you, as an individual, no longer own those assets – your Trust owns the assets – you avoid probate because you don’t own anything when you die – your Trust owns it all! It’s just that simple You control Trust assets for the benefit of the Settlor – which is yourself If you become incapacitated, your Successor Trustee controls the trust assets for the benefit of the Settlor. That’s why it’s vitally important that you Trust you Successor Trustee!

6. Distribution During Life of the Settlor The Settlor is the Present Beneficiary of the Trust The Trustees “job” is to manage the assets owned by the trust for the benefit of the Settlor Distribute Community Property to the Settlors Distribute Separate Property to the Settlor who contributed such property to the Trust If the Settlor is incapacitated, the Successor Trustee manages Trust assets for the benefit of the Settlor Again, make sure you trust your successor trustee!

7. Disclaimer Trusts Community property trusts MAY be divided upon the death of the First Settlor Division of the trust is to avoid or minimize Federal Estate Taxes The Surviving Settlor “disclaims,” (rather than claims) the deceased Settlors’ share of community property and funds another Trust Each Settlor has an Estate Tax Exemption (Exclusion) amount 2008 is $2 million; 2009 is $3.5 million; 2010 is Unlimited; 2011 is $1.0 Million For example, if the community property estate equaled $3.0 million, the surviving spouse could retain $2.0 million in the Family Trust, and place $1.0 million in the Deceased Spouses “Disclaimer Trust” If the assets of both trusts exceed the exemption, taxes will be assessed If the total Community Property is less than the estate tax exemption There is no need to split the one trust into two The entire trust remains REVOCABLE by the Surviving Settlor

8. “A-B” Trusts “A-B” Community property Trusts MUST be divided upon the death of the First Settlor The “A” Trust remains revocable by the Surviving Settlor The ”B” Trust becomes IRREVOCABLE – can’t change the terms or beneficiaries but can change the character of assets “A-B” Trusts can be used by “Blended Families” to avoid disinheritance For example, where in a second marriage and each spouse has children, the surviving spouse cannot amend, or change, the deceased spouses’ beneficiaries Note that Separate Property trusts may work better in the case of Blended Families The “B” or “Exemption” Trust is exempt from Federal Estate Taxes up to the Exclusion amount ($3.5M in 2009)

9. Distribution After Death of the Settlor Upon the death of the Settlor (or surviving Settlor), the Trust(s) becomes Irrevocable The Successor Trustee steps up, or “succeeds” the initial trustee, taking control of all Trust assets Pays debts, taxes, and expenses of Trust administration Distributes gifts of personal effects if the Settlor left signed and dated instructions (jewelry, automobiles, paintings, etc.) Distributes any Specific Gifts, such as real estate, cash, insurance policies Distributes the “Residue” of the Trust Estate – whatever is left after all of the above is distributed The Residue is typically distributed as a percentage You don’t know when you are going to die, so you don’t know what you will own when you die

10. Contingent Beneficiaries If the Primary Beneficiary is not living upon the death of the Settlor, who inherits? If the primary beneficiary died leaving children, do the children inherit their parent’s share? Or do you want the primary beneficiary’s share to be divided between the remaining “residue” beneficiaries? Maybe you want the deceased beneficiary’s share to go to a church or charity? It’s your decision, not theirs If all your named beneficiaries are not living when you die, your “Heirs at Law” could become the beneficiaries according to the laws of Intestate Succession

11. Administration and Distribution WHEN do you want your beneficiaries to receive their share? Specify a certain age, such as 21, or make a staged distribution 20% upon your death, 20% at age 25, balance at age 30 Establish an Education Fund If they don’t go to school they don’t receive any money Establish a Spendthrift Trust If your beneficiary cannot manage their own financial affairs you can appoint a trustee to manage their affairs for them Establish a Special Needs Trust Fund a Special Needs trust to hold money that supplements, but doesn’t replace, government assistance

12. Other Provisions Determination of Capacity Most trusts stipulate that only a court of law or licensed physician can determine incapacity In California, a trustee or Health Care agent, may be able to review your health records for the sole purpose of determining your capacity No Contest Clause A no contest clause is used to prevent someone from challenging your expressed wishes If they attempt to nullify the trust, remove the trustee for acts performed in good faith, object to interpretation, make unsubstantiated claims, etc., they risk being disinherited

13. Other Estate Planning Documents Last Will and Testament (Pour-Over) The beneficiary of your will is your Living Trust If assets outside of your trust exceed $100,000, they may be subject to probate, after which, you will “pours over” the assets to your trust for distribution Durable Power of Attorney Appoints an agent to manage assets not owned by your trust if you become incapacitated 401K, IRAs and Deferred Compensation Plans cannot be owned by your trust Advanced Healthcare Directive Appoints an agent to make health care decisions for you if you cannot They have “end-of-life” decision powers

14. Have Questions? Contact me with your specific questions or to set up an appointment to review your estate plan