Dan Hall & Associates Solid Plans for Peace of Mind

FAQ

FAQs about Estate Planning

What is a Revocable Living Trust?

A revocable living trust is a legal entity designed to avoid probate, plan for incapacity, lay out the framework for distribution of assets, and plan for reduction of estate taxes.  With a revocable living trust, ownership of assets is transferred to the trust while you are alive. You can keep any or all of the income, act as trustee, change the trust’s provisions or terminate the trust. A successor trustee can be named to take over if you become incapacitated. Because your assets are owned by the trust and not in your individual name, on your passing they are not subject to probate.  In California, most estate plans are built with a revocable living trust as the main legal document.

What is a Bypass Trust or Credit Shelter Trust?

A Bypass Trust (also called a Credit Shelter Trust) is an irrevocable trust created on the passing of the first spouse to die.  If a revocable living trust has bypass trust provisions in it, then on the passing of the first spouse, the deceased spouse’s portion of the estate up to the estate tax exemption are placed in the irrevocable bypass trust.  The surviving spouse can typically benefit from the bypass trust by receiving distributions of income and principal in order to maintain the surviving spouse’s standard of living, but the surviving spouse does not own the assets of the bypass trust.  This lack of ownership by the surviving spouse is important for two reasons: 1) the assets of the bypass trust are not included in the estate of the surviving spouse for estate tax purposes, even if they increase in value during the lifetime of the surviving spouse, and 2) the surviving spouse is unable to change the distribution structure of the bypass trust assets, so the assets of the bypass trust will pass to the beneficiaries and according to the terms that the deceased spouse set up during their lifetime.  Bypass trusts are typically used when a couple knows that their estate value will likely exceed their combined estate tax exemptions, or alternatively in situations where the spouses decide that they want to “lock-in” their distribution structure and beneficiaries of their portion of the estate in the event that they are the first to pass away (which could be in blended families, situations when the spouses have different lists of beneficiaries, etc.).

What is a Qualified Terminable Interest Property (QTIP) Trust?

A Qualified Termination Interest Property (QTIP) Trust is also an irrevocable trust created on the passing of the first spouse to die.  It is typically used with a bypass trust, and it would contain the deceased spouses assets that are not transferred to the bypass trust (because the deceased spouse’s assets exceed the estate tax exemption).  This trust is typically used when the spouse wants to control the use of any remaining assets that are not placed in the bypass trust.  Income from the trust is distributed to the surviving spouse during his/her lifetime. Transfers to a QTIP trust qualify for the unlimited marital deduction, so estate taxes will not be paid after the first spouse’s death.  After the surviving spouse’s death, the principal is includible in the surviving spouse’s estate for estate tax purposes, but the balance after payment of any estate tax is distributed to beneficiaries designated by the first spouse. This trust is often used to protect children from a previous marriage or to ensure that if a surviving spouse remarries, his/her new spouse does not inherit any of the assets.

What is a Disclaimer Trust?

A Disclaimer Trust works like a bypass trust.  The difference comes in how this trust is created and how much is placed in the trust.  A revocable living trust with bypass trust provisions require that on the passing of the first spouse, assets of that deceased spouse up to the estate tax exemption are placed into the bypass trust.  In a revocable living trust with disclaimer provisions, the creation of the disclaimer trust is optional.  The surviving spouse has 9 months from the passing of the first spouse to decide whether or not to create the disclaimer trust, and if it is created then how much will be placed into the disclaimer trust.  The disclaimer trust provides flexibility to the surviving spouse to analyze the estate tax exemptions available, the size of the estate, and other factors at the passing of the first spouse, and make the best decision at that time based on all of these factors.  Clients often decide to use a disclaimer trust rather than a bypass trust when they don’t think that their estates will exceed the combined estate tax exemptions of both spouses, and when they are comfortable with the survivor having control of all of the assets.

What is a Survivor’s Trust?

A Survivor’s Trust is a revocable trust created on the passing of the first spouse to die.  The revocable living trust will have provisions that state that on the passing of the first spouse, a revocable survivor’s trust is created.  The survivor’s trust is funded with the surviving spouse’s portion of the estate, and may also include some or all of the deceased spouse’s portion of the estate.  For instance, in a scenario with disclaimer trust provisions, the survivor’s trust would be funded with all of the surviving spouse’s portion of the estate, as well as all of the deceased spouse’s portion of the estate that is not disclaimed to the disclaimer trust.  In a scenario with bypass trust provisions but no QTIP trust provisions, the survivor’s trust would funded with all of the surviving spouse’s portion of the estate, as well as the deceased spouse’s portion of the estate in excess of their estate tax exemption (with the amount of the estate tax exemption funded into the bypass trust).  In a scenario with bypass trust provisions and QTIP trust provisions, the survivor’s trust would funded with all of the surviving spouse’s portion of the estate only, and the deceased spouse’s assets up to the estate tax exemption would be funded into the bypass trust and all additional assets of the deceased spouse would be funded into the QTIP trust.

What is an Irrevocable Life Insurance Trust?

This trust may keep the proceeds from a life insurance policy out of the insured’s estate for estate tax purposes. Often, the insurance policy is obtained to help pay estate taxes, with the policy held by the irrevocable trust. Annually, you can make gifts to the trust so the trustee can pay the policy premium. After your death, the trust receives the insurance proceeds, distributing them in accordance with the trust’s terms. The life insurance proceeds are not included in your estate for estate tax purposes, so it can be a great way to pay estate taxes, and reduce the size of your estate by gifting to the trust during your lifetime.  Even if the proceeds aren’t needed for estate tax purposes, you may find other uses for the proceeds, such as leaving larger bequests to beneficiaries or charitable organizations.

What is a Charitable Remainder Trust?

A Charitable Remainder Trust (CRT) is a trust used for charitable purposes, but also provides significant income tax planning opportunities.  You transfer an asset to the trust, typically one with a low basis that has appreciated significantly. Since the trust is tax-exempt, it can then sell the asset without paying any capital gains taxes and then reinvest 100% of the proceeds. You will receive an immediate charitable contribution deduction equal to the present value of the property the charity will receive when the trust is terminated. You will also receive distributions from the trust (which carry out current and accumulated income and capital gains), with any remaining trust principal passing to the charity after the trust terminates. CRTs can be drafted to provide an income stream back to you for your entire lifetime, or for a given term of years.

What is a Qualified Personal Residence Trust?

With this trust, you place your home or vacation home in an irrevocable trust, retaining the right to live in the home for a specified number of years. When the trust terminates, ownership passes to your beneficiaries. The gift tax value is determined on the date the house is placed in trust, by calculating the present value of the beneficiaries’ remainder interest in the home. If you die before the trust ends, the home is included in your estate at its fair market value. Since present value calculations are used to determine the gift’s value, this trust allows you to leverage the use of your lifetime gift tax exclusion.

FAQs about Estate Administration/Probate

What is Probate?

Probate is the legal process by which property owned by someone who has died is transferred to heirs.  In other words, probate is simply determining who gets what assets when someone passes away, either by looking at the will, or if no will exists, then the laws of intestacy–laws that determine the hierarchy of heirs. In California, probate is a time consuming, expensive, and public court proceeding.  We almost always plan away from a future probate by creating a revocable living trust and funding your assets into that trust.