Your Important Questions Answered
We understand you have a lot of questions
concerning wills,
trusts and probate avoidance. You also want to know
more about estate taxes and gift taxes. We
hope you'll find the following information helpful and
encourage you to contact us should you have additional
questions.
Wills, Trusts & Probate Avoidance
What is probate?
Probate is a court procedure that is required before a person’s assets
can be transferred to his/her heirs. Probate involves a series of steps such
as publishing and giving notice of the death to creditors, validating the person’s
will, identifying the person’s heirs, paying of the deceased person's
debts, selling of the estate assets, if required, and distributing the estate
to his/her heirs.
Will a probate be necessary if either I or my spouse
dies?
Usually, a probate is unnecessary upon the death of
one spouse because most spouses hold joint title to their
assets (such as in their home, bank accounts and brokerage
accounts.) This method of holding title gives the surviving
spouse access to the couple’s assets, thereby alleviating
the need for court involvement. But when the second spouse
dies, probate would be required in order to transfer the
second spouse’s estate to his/her heirs.
I
have a will. Won’t that avoid probate?
No, because your will must be validated as your last
will by a court proceeding, before anyone will recognize
your heirs as the owner's of your assets. Some people
create more than one will over their lifetimes; usually
only the last one is effective. Sometime the last will
is subject to challenge because the will was not properly
executed or witnessed, or if the maker of the will was
not of sound mind or under undue influence when signing
his/her will. Therefore, probate is needed in order
to determine whether your will is valid. If it is, the
court will order that your estate be transferred to
your heirs according to the terms of that will, after
your debts are paid. Third parties will not honor your
will until they have received such a court order.
I am unmarried. Can I avoid probate
by giving my children title to my assets as joint tenants?
Yes, this will allow you to avoid probate. However, it will
also complicate your life and put you at risk of losing your
assets to your children’s creditors. For example, if
you add your children to the title of your home and then
decide to sell your home, your children, as co-owners, would
be required to sign the purchase and sale contract, the escrow
instructions, and the deed. In some cases, a title company
may even require your child’s spouse to sign a deed
or other document confirming that such spouse has no community
property interest in your home because of his/her marriage
to your child. Also, if your children are sued and a creditor
(such as a credit card company or a victim of an auto accident)
obtains a judgment against one of your children, the creditor
may force the sale of your home or other assets in which
your child has an ownership interest, in order to satisfy
the judgment. Putting your children’s name on title
may also have gift tax consequences because such an action
is recognized as making a gift of an interest in your assets
to your children. In addition, when you die the surviving
joint tenants take your interest by the joint tenancy and
not by your will. For example, if you executed a deed for
your home naming you and your daughter as joint tenants and
also created a will naming that same daughter and your 2
sons as equal beneficiaries, upon your death, your daughter
will own 100% of your house because of the joint tenancy
and your sons will acquire no interest in your home through
your will.
Why should I
have a will?
A will is necessary if you want to change your beneficiaries
from those determined by California law to include those
who would not normally inherit if you died without a will.
You would also need a will in order to make unequal distributions
or specific gifts to a particular beneficiary. A will also
allows you to disinherit a child or other usual beneficiary.
Contrary to what some people believe, a will does not avoid
probate.
What are the
major disadvantages of probate?
One of the most significant disadvantages is the expense. Probate is expensive.
The estate attorney and personal representative (i.e. your executor or administrator)
can collect combined fees of approximately 5% of the gross value of your estate.
For example, if your only asset when you die is your home that is worth $500,000,
your estate will have to pay combined fees of $26,000, not including incidental
court costs and other expenses, to your personal representative and estate attorney
could collect. Another disadvantage is the loss of confidentiality. Probate files
are public and include the names and addresses of all of your heirs, along with
a description of your assets and their value. A third significant disadvantage
is the amount of time it takes to distribute your assets. Probate typically takes
about one year to complete, thereby delaying the distribution of your assets
to your heirs.
What can I do to avoid probate?
Probate is easily avoided by creating a revocable living
trust.
What is a trust?
Simply stated, a trust is a relationship that is created
by a person, called the trustor/settlor, who transfers
his/her assets to a trustee. The trustor can also name
himself/herself as the trustee. The trustee then manages
the trustor’s assets for the benefit of a person
who is referred to as the beneficiary of the trust. The
beneficiaries can be yourself or third parties. A trustor
who creates a trust that becomes effective while he/she
is alive creates what is called a “living” trust.
A trust that is created by a will takes effect only upon
the death of the trustor and is called a “testamentary” trust.
A trust can also be revocable or irrevocable. It is revocable
if it can be canceled or amended by the trustor. It is
irrevocable if the trust cannot be canceled or amended.
Why should I create a revocable living trust?
A revocable living trust is the cornerstone of any estate
plan. There are several advantages to creating this trust,
including the possibility of saving thousands, or hundred
of thousands, of dollars in probate fees and estate taxes.
A revocable living trust avoids the need for probate, along
with its high fees and delays. It provides an efficient
means of distributing and selling your assets upon your
death. It is a way to plan for incapacity since it allows
you to specify a successor trustee to be in charge of your
assets held by the trust, without a court order, for your
benefit while you cannot manage your finances. It can reduce
estate taxes for married couples. A revocable living trust
also provides an efficient means of managing a beneficiary’s
inheritance, especially if you feel that a particular beneficiary
is unable to manage such inheritance on his/her own, due
to a young age, incapacity or financial problems.
How does a revocable living trust work?
You, as trustor (the maker of the trust), would create and
execute a trust document and transfer your assets to yourself
as the trustee of your trust. In your trust documents you
would name yourself as the immediate beneficiary of the
trust. You would identify a subsequent or successor trustee
to manage your assets upon your incapacity or death. You
will list those who will inherit your assets that are placed
into the trust, who are called the “contingent beneficiaries” or "remainder
beneficiaries.". Therefore, the trust document acts
like a will by providing a distribution plan for your estate
to be used upon your death.
Won’t
a revocable living trust make my life more complicated?
No, it will not. For example, the IRS will continue to let
you use your own social security number instead of making
you get a separate tax ID for the trust. You will be able
to file your usual IRS form 1040 income tax return. The transfer
of your real property into the trust is exempt from reassessment
because it is not considered a change of ownership under
Prop. 13. Also, since the trust is revocable, you can easily
cancel or amend it at any time without the knowledge or involvement
of any of your contingent beneficiaries.
How does the revocable living trust avoid probate?
Unlike a testamentary trust, a revocable living trust does
not need validation by the probate court because the trust
was created and your assets transferred while you are still
alive. A revocable living trust also allows you to transfer
your assets to your heirs without a court order because
you appoint a successor trustee (such as your child, trusted
friend or other relative) to take over as the trustee upon
your death or legal incapacity and provide him/her with
a distribution plan. The successor trustee can then immediately
transfer the trust assets to your beneficiaries or hold
them in trust until the beneficiaries reach a certain age,
as you have specified in you trust document.
Estate
Taxes & Gift
Taxes
What
is an estate tax?
When a person dies, their assets get transferred to his/her
heirs (either by the a will, a trust, or by the laws of
intestate succession). The federal government imposes a
tax on these after-death transfers. This tax is referred
to as the “estate tax.”
What is a gift tax?
When you give someone one of your assets before you
die, such as your vacation home or $20,000 in cash, for
nothing in return or for less than its full value, you
have made a “gift”. The federal government
may impose a tax on this type of transfer. This tax is
referred to as the “gift tax.”
How will gift and estate taxes change over the years?
An individual can make gift transfers free of estate
or gift tax as long as the value of those gifts are
no more than a certain amount. This amount is called
the “exclusion amount”. There is an exclusion
amount for gift tax and a separate one for estate tax.
Each year these amounts change according to the Internal
Revenue Code passed by Congress. Effective in 2004,
for the first time in many years the gift tax exclusion
amount and the estate tax exclusion amount are NOT the
same. For 2004 and beyond, the gift tax exclusion amount
is $1,000,000. The estate tax exclusion amount for those
dying in 2007 or 2008 is $2,000,000. This means that
if you made gift transfers during your lifetime totaling
less than $1,000,000, you will not have to pay gift
tax on those transfers in 2004 or later, but a large
gift, in excess of the $12,000 annual exclusion, will
reduce the amount that you can leave estate tax free
when you die. According to current federal law, the
gift tax lifetime exclusion amount of $1,000,000 will
continue indefinitely. However, the estate tax exclusion
amount will change. For 2004 and 2005, the estate tax
exclusion amount was $1,500,00. For 2006, 2007 and 2008
the estate tax exclusion amount will be $2,000,000.
For 2009 it will shoot up to $3,500,000. There will
be no estate tax in 2010. But it will be reinstated
in 2011 and beyond with an estate tax exclusion amount
of $1,000,000.
How does the estate tax work?
Estate tax is calculated by first determining your gross
estate, minus certain deductions. Then, any taxable
gifts that you made after 1976 are added to this amount.
The total gives you what is called your “taxable
base”. You then use this total to figure out the
tax rate that applies to your estate. Tax rates are
based on your “taxable base” and are set
by the IRS Unified Transfer Tax Rate Schedule. The last
step is to subtract the credits that apply to you and
this last total is the amount of tax that will be imposed
on your estate. For example, if your “taxable
base” is $2,000,000 your estate will be subject
to a tentative estate tax of $780,800 in estate taxes.
But everyone dying in 2007 and 2008 gets a $780,800
applicable credit. If you subtract this from your tax
liability you end up having $0 to pay in estate taxes.
If however, your “taxable base” is $2,100,000,
your estate would have to pay $45,000 in estate taxes.
This is because the amount over $2,100,000 will be taxed
at 45%. After subtracting your $780,800 credit you will
be taxed $45,000. ($780,800 + ($100,000 x 0.45) - $780,800
= $45,000). Very large estates, e.g., in excess of $5,000,000,
will have to pay an estate tax of nearly ½ of
the net value of the estate. Estate taxes are usually
due and payable by the estate 9 months after the death
of the estate’s owner. However,
the Estate Tax exclusion amount will revert to $1,000,000
on January 1, 2011 unless Congress changes the Estate
Tax law again. Therefore, someone dying in 2011 or later,
with a net taxable estate of $2,000,000 will be subject
to an Estate Tax of about $435,000.
How does the gift tax work?
Gift tax is calculated by adding up the taxable transfers
that you made during your lifetime and subtracting those
taxes that have already been paid. You then apply this
total to the Unified Transfer Tax Rate Schedule to determine
the tax rate that applies to you. Not every transfer
is taxable. For example, you can give unlimited gifts
of money to pay for someone’s tuition, tax free,
by paying it directly to the school. The donor is required
for file the gift tax return and pay the gift taxes by
April 15 following the year in which the gift is made.
How much can I give each year and avoid gift taxes?
Every calendar year, you can give away $12,000 worth
of gifts per donee (recipient), or $24,000 per donee
if you are married and make use of gift-splitting, without
having to pay a gift tax or using any of your applicable
credit on those transfers. Such amounts are referred
to as the “annual exclusion”. If you give
beyond the annual exclusion, the gifts you make may
have gift tax consequences. However, if you are giving
money to pay someone’s tuition or medical expenses
by paying those expenses directly, you can give as much
money as you want and it will not be subject to gift
tax, so long as those expenses are not reimbursed by
others, such as medical insurance.
What effect does making a large gift before I die have
on my estate tax?
The value of a gift made during the 3-year period before
your death will be included in your gross estate for
estate tax purposes. Therefore, if the gift is a large
one, it could significantly increase the value of your
gross estate. The higher the value of your gross estate
the higher the tax rate. For example, if the gross value
of your estate is more than $5,000,000, nearly half
of your estate will go to estate taxes.
I am a single person. What would be taxable in my estate
when I die?
The value of the assets that you own or control on the
day you die will be taxable. Such assets include IRAs and
401ks, stocks and bonds, and life insurance proceeds from
life insurance policies that are owned or controlled by
you at the time of your death. In addition, the value of
gifts that you made during the 3-year period prior to your
death will be included in your taxable estate when you
die, but your estate will receive a credit for any gift
tax that you paid on those recent gifts.
My wife and I have
a combined estate with a net worth of $3,000,000 or
more. What can we do to avoid estate taxes?
Your estate and your spouse’s estate each have
a federal estate tax exclusion amount of $2,000,000
for 2007. Let’s say, for example, that you die
before your spouse does and your spouse inherits your
entire estate. Because of an “unlimited marital
deduction” under the federal tax code, you will
not have any estate tax liability and your exclusion
amount will not be used. However, if your spouse dies
in 2007 or 2008, your spouse’s estate will be
equal to $3,000,000 or more and will be subject to an
estate tax of approximately $450,000 or more. Your spouse’s
estate will not be able to use your exclusion amount
to reduce the estate tax. But you can reduce the amount
of this tax or avoid it altogether by creating an irrevocable
bypass trust. This trust allows you to transfer a portion
of your estate of a value of less than or equal to your
estate tax exclusion amount to this second trust (usually
called a bypass trust) so that it will not be transferred
into your spouse’s name. The assets in the bypass
trust would provide for your spouse’s needs after
your death and but not be included in your spouse’s
gross estate on the second death. Using the numbers
in the above example, when the surviving spouse dies,
the value of surviving spouse’s estate will be
$1,500,000 (assuming the entire joint estate is community
property and that its value is not reduced by spending
or depreciation or increased by appreciation.) Because
of your spouse’s $2,000,000 exclusion amount (in
2007 and 2008), your spouse’s estate will transfer
completely estate tax free or at least be subject to
a reduced federal estate tax liability. The bypass trust
is usually created automatically by a provision in a
revocable living trust. The surviving spouse is usually
named as the trustee and beneficiary of such an irrevocable
bypass trust.
I’m
a single person and have an estate of approximately
$2,500,000. Can I use a bypass trust to reduce my estate
tax?
Only a married couple can use a bypass trust. However,
there are other techniques that may be available to you
that will help eliminate or reduce your estate taxes. For
example, if you do not need all your assets to live on,
you can make lifetime gifts, usually in the annual exclusion
amount, to a custodian under the Uniform Transfer to Minors
Act, an irrevocable living trust or a 529 college savings
plan for your children and heirs or you can make the outright
gift transfers of your assets before you die. Be sure to
seek the advice of an estate planning attorney who can
design a plan that best meets your needs.
I
am one of those who has an estate of more than $5,000,000.
What can I do to avoid having a large part of it go to
taxes when I die?
With an estate of that size, a significant estate tax
will be paid if you do not have an advanced estate plan.
The revocable living trust is a start and can result
in substantial savings in estate taxes for a married
couple. Individuals or married couples with larger estates
can use other estate planning techniques. Some of more
common ones are briefly summarized:
The Irrevocable Life Insurance Trust: This plan will
keep the death benefit of your life insurance from
being taxed as part of your estate. Tax-fee life insurance
proceeds can be used to pay the estate tax on your
estate and avoid your heirs from having to sell your
assets to pay the estate tax
Family Limited Partnerships
or Family Limited Liability Companies: These
business entities allow lifetime
transfers of assets to your heirs at a lower
tax cost due to "minority discounts" and "lack-of-control
discounts." The concept is illustrated by
following example: a 10% interest in an entity
that owns an
asset worth $1,000,000 has a value of less than
$100,000 because the owner of the 10% interest
cannot sell
such minority interest on the open market for
$100,000 and cannot control the management of
the entity with
only a 10% ownership. Therefore, the giver of
the 10% interest removes that 10% interest from
his/her
estate to reduce estate taxes at death, and would
pay gift taxes, which are calculated at the same
rate as estate taxes, on the 10% interest based
on the lower, discounted value.
Charitable Remainder
Trust: An appreciated asset, one that will require
the payment of large capital
gain income taxes if it is sold, can be contributed
to an irrevocable trust you create in which one
or more charities you designate will be the recipient
of the balance of the trust when you die (the charitable
remainder). Since the trust has a charitable purpose
the trustee of the trust can sell the appreciated
asset and not be required to the capital gains
tax.
The transfer to such trust gives you an immediate
charitable tax deduction on your income tax of
an amount that is calculated based on your age and
life
expectancy according to IRS actuary tables. The
full proceeds from the sale are invested by the trustee
(since no capital gains tax has to be paid), and
the income on the investment is paid to you for
life
according to IRS regulations, actuary tables and
imputed interest rates. When you die, your charity
gets the balance of the trust, not your heirs,
however. You can use the income from this trust to
purchase
life insurance, which if held in the irrevocable
life insurance trust, will go to your designated
heirs free from estate tax.
Serving Fremont, Newark, Union City
and Hayward, California
Disclaimer: The content
of this website has been created by Kisner Law Firm for
general informational and advertising purposes only. No
attorney-client relationship is established between Kisner
Law Firm and any reader who views the contents of this
website. The information provided is only a general statement
of the laws and regulations of California and is not intended
to be, nor does it constitute, legal advice. No one should
rely on the information provided by this website without
first obtaining legal advice from an attorney in their
jurisdiction.
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KISNER
LAW FIRM - ESTATE PLANNING & ELDER LAW ATTORNEYS
