Dan Hall & Associates Solid Plans for Peace of Mind

Estate Planning

Once you have a spouse, a child, or significant assets, you naturally want to safeguard them from the unexpected. While it may seem serious to think about, it is far more serious to leave your family unprotected. More than just planning for contingencies, our personal approach provides a unique opportunity to think about your wishes and have important conversations with your family.

Our carefully tailored approach typically utilizes one or more of the following vehicles to carry out your wishes:

Living Trust (or Family Trust or Revocable Trust)

A living trust is the central document to most of our clients’ estate plans. It avoids probate, which in California is very time-consuming, expensive, and reveals everything about your assets to the public. Yet a trust allows you to retain complete control over your income, assets and spending while you are alive.

Probate is the court process of transferring title to various assets owned by someone who has passed away, and it becomes a public record. A living trust avoids this step because the trust is a legal entity that lives on and is already the owner of the assets. Important aspects of a living trust include the following:

  1. During our planning, you (and your spouse if married) will be named trustees, meaning that all decisions and control over the assets in the trust remain in your hands. You simply designate who will succeed you as the trustee in the event of your passing or if you are incapacitated. Thus, no transfer of individual assets is required upon your death, making the process very simple.
  2. The trust is also revocable – it can be amended or revoked at any time by the consent of all trustees (you alone or you and your spouse). Since you retain control of your assets and can change the trust at any time, a trust is nearly invisible for the day to day earning and spending of your assets. For simplicity, all income is still reported under your social security number and no additional tax return is required.
  3. Your trust becomes active when you transfer the title to most of your assets (called “funding” of the trust), including all real estate and bank and brokerage accounts, into the name of the living trust. We will help with the process of funding at the time of preparing your estate planning documents. Any new assets that you acquire after the trust is created should be owned in the name of the trust, rather than you as an individual.
  4. Deciding who will succeed you as trustee is one of the most important decisions in the estate planning process. We guide clients through this process to ensure that the named successors have strong financial ability, a good relationship with the named beneficiaries, and are trusted to make all of the necessary decisions that a successor trustee makes.
  5. Your trust will designate who is to receive your property after your passing, and the trustee will carry out these wishes. You can also specify how old beneficiaries must be before they can receive an inheritance outright. Prior to that age they will not have control over the assets, but may receive distributions of property from the trustee for such things as education and living expenses.

Additional provisions can be made to further reduce estate taxes and accommodate your specific circumstances. These may include the effects of a second marriage, caring for a special needs beneficiary without disqualifying them from government benefits, or subsequent trusts that are automatically created upon your passing. We will address your specific wishes and craft a personalized trust to meet all of your needs.

Pour-Over Will

A husband and wife will each have a pour over will which serves three important functions:

  1. The pour-over will designates the transfer of your personal effects (personal property such as furniture, jewelry, and other meaningful items). Generally these are transferred to the surviving spouse or equally to the children.
  2. Second, the pour-over will names guardians for minor children.
  3. Finally, the pour-over will acts as a safety clause, in case any property is held in your name rather than by the living trust (described above). This insures that any property owned by a person is transferred into the living trust upon their death. This really serves as a safety clause, since our objective is to already have all assets titled in the name of the living trust (above). If for some reason you happen to die owning assets in your own name rather than in the name of the trust, this helps to avoid probate. However, it does have limits: if one dies with assets valued at more than $150,000, or real property valued at more than $50,000, a probate will be required to transfer the assets into the trust.

Certification of Trust

A certification of trust is a condensed version of the Family Trust and protects your privacy.

This document provides proof that a valid trust has been established, without revealing details such as the identity of beneficiaries and the assets owned by the trust. This document is presented to banks and other financial institutions in order for the institution to title an account into the name of your Family Trust (whether the account is new or an existing account being renamed).

Durable Power of Attorney for Asset Management

This document gives your appointed agent the power to make financial decisions on your behalf, without requiring court approval.

With a durable power of attorney, you have control over deciding if the powers to act as your agent will be effective immediately, “spring” into effect upon your incapacity, or are a hybrid of each. Details of the various types are described below.

Currently Effective
Under a Currently Effective Power of Attorney, the powers granted are effective immediately. Therefore the power of attorney does not change in the event of any subsequent incapacity. In other words, once it is effective, your spouse can act on your behalf regardless of whether you have the capacity yourself. In addition, if your spouse is unable or unwilling to act then the alternate agents you have named will also have the power to act on your behalf, without first having to obtain a physician’s written opinion as to your capacity to act on your own.

This term indicates that power of attorney by your agent becomes effective immediately upon your incapacity (it “springs” into effect), if verified by two physicians. As a safeguard, if the power to act as attorney by any and all persons you name is ‘springing’, then none of them can act unless your spouse is also incapacitated, and they would need to obtain two physicians’ letters verifying the incapacity of your spouse. This keeps you or your spouse in control so long as one of you remains capable of acting independently.

Hybrid (Currently Effective for spouse but Springing for all other agents)
Like the “Currently Effective” powers, the hybrid allows several people you name, including your spouse, to act as your agent, regardless of your current capacity. However, in the event that your spouse cannot fulfill that role, then the other agents do not automatically take control. Instead, their powers will be also be suspended until they obtain two physicians’ letters verifying your incapacity as well.

Advance Health Care Directive

This document allows you to express your healthcare wishes, sparing your family from needing to guess what you want or making difficult medical decisions while under emotional stress.

The advance health care directive gives your appointed agent the power to make healthcare decisions on your behalf. One of the benefits is that it eliminates the need for court approval, yet the power is effective only if you are unable to make the healthcare decisions for yourself. It also allows you to express the extent to which measures should be taken to resuscitate you and prolong your life if faced with a terminal illness. Lastly, there is a section in which you can designate whether you would like to be an organ and tissue donor.

Property Agreement

The property agreement is used to minimize the tax impact on property owned in joint tenancy by a couple.

This is a document that specifies that property owned by husband and wife in joint tenancy should be treated as community property. Otherwise, California law makes the presumption that joint tenancy property is not community property. By affirming that all joint tenancy property is community property, a surviving spouse receives a step-up in income tax basis for the value of the property. This could save a substantial amount in income taxes if the property has appreciated in value since it was acquired.

Ethical Will

An ethical will is a document that you prepare to communicate on a more personal level with your loved ones.

The ethical will allows you to share with family and friends your ideals, life lessons, and values. Our experience is that while the legal documents prepared during the estate planning process are critical to the effective and efficient distribution of a client’s estate, they express little feeling and emotion. When an ethical will is prepared by the client and placed with the estate planning documents, your family and friends feel a more personal connection to you and get a clear sense of your true wishes for them.

The ethical will can take many forms. It can be a letter to children or grandchildren, expressing your hopes and dreams for that person and conveying experiences that you learned during life that may be helpful to them. It may be in the form of a manuscript that recounts your life story or expresses your views on certain issues. It may be a video tape in which you speak directly to your family and friends, expressing love and sharing stories.

During our initial meeting we will give you a copy of an extremely helpful book on ethical wills, written by an M.D. It tells about the process of writing an ethical will and gives examples of ethical wills others have written. When we meet to sign your estate papers, we will provide you with a document that offers some prompts to get you thinking about possible items to include in an ethical will. The important thing to realize is that the ethical will does not any have legally binding effect, so it cannot make gifts of property or place contingencies on receiving gifts. It is a document you will prepare yourself to add a personal touch to the estate plans that we prepare for you.

Advanced Estate Planning

Estate tax planning is considered with each client in the living trust as part of the preparation of the foundation documents. But, for larger estates, we look at additional planning tools beyond the foundation documents that can reduce or eliminate future estate tax or at least provide liquidity for payment of estate taxes. We consider many different tools, and in some cases decide to employ more than one. Some of the most frequently used are as follows:

Crummey Trust – A person can make gifts to any number of individuals of up to $14,000 each in 2016 without filing a gift tax return, without using any of their lifetime gift tax exemption, and without paying gift tax. This is called the annual gift tax exclusion. Parents or other relatives can make gifts into a crummey trust for the benefit of a child or other individual. Gifts in trust usually do not qualify for the annual gift tax exclusion ($14,000 in 2016) and thus require that the donor use a portion of his or her lifetime gift tax exemption or pay gift tax. Crummey trusts give the beneficiary the right to withdrawal the gifts for 30 days, which is enough to allow the gift to qualify for the annual gift tax exclusion. The crummey trust then dictates at what ages and under what circumstances the beneficiary can receive distributions from the trust. It is a great way to make gifts to minor children or individuals who are not financially responsible enough to receive distributions outright.

Irrevocable Life Insurance Trust (ILIT) – An irrevocable trust is created that then purchases life insurance on the life of the parent or grandparent (or jointly on the lives of the parents or grandparents). The life insurance is outside of the parent’s estate for the determination of estate tax, but the proceeds can be used to pay estate taxes if the beneficiaries so choose. Sufficient cash is gifted to the ILIT annually by the parent or grandparent such that the ILIT is able to pay the annual life insurance premiums. This gift of cash into the trust annually qualifies for as many annual exclusions as there are beneficiaries of the trust, and any gifts in excess of the annual exclusion amounts are substracted from the parent’s or grandparent’s lifetime exemption. If he or she has no remaining lifetime exemption, then the excess gift is subject to gift tax.

Charitable Remainder Trust (CRT) – Appreciated property is placed into a CRT, with the owner of the property receiving the right to an annual distribution from the trust for a number of years or for life, with a designated charity (or charities) receiving the property in the trust at the end of the term or at death. Because the trust qualifies as a charitable entity, the appreciated property transferred to the trust can be sold without income tax up front, and the grantor pays income tax as he or she receives distributions from the trust. Additionally, the grantor receives an income tax deduction for the present value of the interest that will pass to the charity. (The deduction will be at least 10% of the value of the property transferred) A CRT can be a great way to benefit a charity, ensure a continued stream of income, and defer the recognition of income tax on appreciated property at the time it is to be sold.

Qualified Personal Residence Trust (QPRT) – A primary residence or second residence (vacation property) can be placed in a QPRT with the intent that it will pass to the children. The grantor retains the right to live in the property for a number of years, and at the end of the term, the property is owned by the children. The amount of the gift to the QPRT for gift tax purposes is much lower than if the property were gifted outright because the grantor is not transferring all of his or her rights in the property. The grantor retains the right to live in the property for a period of time and also retains the right to receive the property back in his or her estate if he or she passes away during the trust term, so the value of the gift is only the value left once the value of the retained interests are taken from the total value of the property. A QPRT can be a great way to pass on a property to children at a significantly discounted value that the next generation will want to keep for years to come.

Intentionally Defective Grantor Trust (IDGT) – An IDGT has very distinct characteristics that allow the owner of the property in the trust for estate tax purposes to be the children, while still allowing the parent to be the owner for income tax purposes. This means that when the parent passes away, the property in the IDGT will not be included in his or her estate for purposes of calculating estate tax, but the parent will pay the income tax on the income generated by the trust for his or her lifetime. The income taxes paid by the parent “on behalf of” the child are not a gift and further reduce a parent’s estate for estate tax purposes. IDGTs are commonly used when making gifts to children and when family businesses are sold to children.

Grantor Retained Annuity Trust (GRAT) – The grantor places assets into a GRAT and retains the right to receive annual payments from the trust for a period of years. The amount of the gift is based on an interest rate published by the IRS (Section 7520 rate). If the assets in the trust earn more than the IRS interest rate, then the excess growth passes to the children free of gift taxes. This can be an effective way to limit the amount an estate increases in value, while passing dollars to children without gift tax consequences.

Many other techniques are considered, but the ideas above give a flavor of the options available to an individual or a couple considering ways to lessen the impact of estate taxes after death.

What Will Work Best for You?

The descriptions above represent some of the methods we use most frequently in estate planning, but each client’s unique circumstances and needs are different. We’re here to help assess your specific goals and wishes, and recommend the best ways to accomplish those for you. Please call us for a free and confidential consultation to learn how we can best serve your needs.

Far more than just legal advice, we tailor a plan that is right for you and your family, with advanced techniques for high net-worth individuals.

Dan Hall

One of the reasons I refer clients to Hall, Bishop & Hall, LLP is their expertise, care and precision. I know that if a client’s plans are ever challenged, the work will hold up in court. The language will be drafted so carefully there will be no room for any confusion.

I know some people think those documents are boiler plate, but they’re not. With this team I have confidence that it’s always going to be right.”

Gary Alt
Co-founder & Wealth Advisor
Monterey Private Wealth
Pleasanton / Monterey, California