FAQs

When a loved one passes away, his or her estate often goes through a court-managed process called probate or estate administration where the assets of the deceased are managed and distributed.  If your loved-one owned his or her assets through a well-drafted and properly funded Living Trust, it is likely that no court-managed administration is necessary, though the successor trustee needs to administer the distribution of the deceased.  The length of time needed to complete the probate of an estate depends on the size and complexity of the estate and the local rules and schedule of the probate court. Every probate estate is unique, but most involve the following steps:

• Filing of a petition with the proper probate court
• Notice to heirs under the Will or to statutory heirs (if no Will exists)
• Petition to appoint Executor (in the case of a Will) or Administrator for the estate
• Inventory and appraisal of estate assets by Executor/Administrator
• Payment of estate debt to rightful creditors
• Sale of estate assets
• Payment of estate taxes, if applicable
• Final distribution of assets to heirs

A Living Trust can be used to hold legal title to your assets and provide a mechanism to manage them. You (and your spouse) are the trustee(s) and beneficiaries of your trust during your lifetime. You also designate successor trustees to carry out your instructions as you have provided in case of death or incapacity. Unlike a Will, a Trust usually becomes effective immediately after incapacity or death. Your Living Trust is "revocable" which allows you to make changes and even to terminate it.  One of the great benefits of a properly funded Living Trust is the fact that it will avoid probate and minimize the expenses and delays associated with the settlement of your estate.

Like a Will, a Living Trust is a legal document that provides for the management and distribution of your assets after you pass away.  However, a Living Trust has certain advantages when compared to a Will. A Living Trust allows for the immediate transfer of assets after death without court interference.  It also allows for the management of your affairs in case of incapacity, without the need for a guardianship or conservatorship process. With a properly funded Living Trust, there is no need to undergo a potentially expensive and time-consuming public probate process. In short, a well-thought out estate plan using a Living Trust can provide your loved ones with the ability to administer your estate privately, with more flexibility and in an efficient and low-cost manner.

Creating a revocable Living Trust and transferring your assets to the name of that trust will not affect your ability to control such assets.  During your lifetime when you are mentally competent, you have complete control over all your assets.  You may engage in any transaction as the trustee of your Trust that you could before you had a Living Trust.  There are no changes in your income taxes.  If you filed a 1040 before you had a trust, you continue to file a 1040 when you have a Living Trust.  There are no new Tax Identification Numbers to obtain.  Because a Living Trust is revocable, it can be modified at any time or it can be completely revoked if you so desire.  Upon your incapacity, your durable power of attorney comes into effect and allows your loved ones to transact on your behalf according to the instructions you have laid out in the Living Trust.  Upon your passing, the Living Trust can no longer be modified and the successor trustee(s) you have designated will then proceed implement your wishes as directed such as transfer of  your assets to your beneficiaries.

Assets with beneficiary designations such as a life insurance policy or annuity payable directly to a named beneficiary need not be transferred to your Living Trust.  Furthermore, money from IRAs, Keoghs, 401(k) accounts and most other retirement accounts transfer automatically, outside probate, to the persons named as beneficiaries.  Bank accounts that are set up as payable-on-death account (POD for short) or an "in trust for" account (a "Totten Trust") with a named beneficiary also pass to that beneficiary without having to be titled into your trust.   However, when you do your estate planning, it is important to seek the counsel of an experienced professional who is familiar with the intricate regulations of retirement accounts and can coordinate the appropriate beneficiary designations with your overall estate plan.

Federal law prohibits financial institutions from calling or accelerating your loan when you transfer property to your Living Trust as long as you continue to live in that home.  The only exception to the Federal law, enacted as part of the 1982 Garn-St. Germain Act is that it does not provide protection for residential real estate with more than five dwelling units.  However, we find that most clients who do own residential property with more than five dwelling units tend to own them through a business entity and not directly in their individual names and hence are not concerned with the five dwelling exception.

There are two types of death taxes that you should be concerned about:  The Federal estate tax and state estate taxes.  The Federal estate tax is computed as a percentage of your net estate.  Your net taxable estate is comprised of all assets you own or control minus certain deductions.  Such deductions can be for administrative expenses such as funeral and burial costs as well as charitable donations.  The Federal estate tax currently taxes estates with assets of $5,000,000 or above.  However, this law is set to expire in 2013 and the exemption amount may be reduced at that time if Congress does not act.

Even if you believe that that you may not be affected by the Federal estate tax, you still need to determine whether you may be subject to state estate and inheritance taxes.   Further, you may have a taxable estate in the future as your assets appreciate in value.   You should regularly review your estate plan with an estate planning professional to ensure your estate plan takes into account changes in the tax laws as well as shifts in your individual circumstances.

Your taxable estate comprises of the total value of your assets including your home, other real estate, business interests, your share of joint accounts, retirement accounts, and life insurance policies – minus liabilities and deductions such as funeral expenses paid out of the estate, debts owed by you at the time of death, bequests to charities and value of the assets passed on to your U.S. citizen spouse.  The taxes imposed on the taxable portion of the estate are then paid out of the estate itself before distribution to your beneficiaries.

The Federal government allows every married individual to give an unlimited amount of assets either by gift or bequest, to his or her spouse without the imposition of any Federal gift or estate taxes.   In effect, the unlimited marital deduction allows married couples to delay the payment of estate taxes at the passing of the first spouse because at the death of the surviving spouse, all assets in the estate over applicable exclusion amount ($5,000,000 in 2011 and 2012) will be included in the survivor's taxable estate.  It is important to keep in mind that the unlimited marital deduction is only available to surviving spouses who are United States citizens.

A Credit Shelter Trust, also known as a Bypass or A/B Trust is used to eliminate or reduce Federal estate taxes and is typically used by a married couple whose estate exceeds the amount exempt from Federal estate tax.  For example, in 2011, every individual is entitled to an estate tax exemption on the first $5 million of their assets.

Because of the Unlimited Marital Deduction, a married person may leave an unlimited amount of assets to his or her spouse, free of Federal estate taxes and without using up any of his or her estate tax exemption.  However, for individuals with substantial assets, the Unlimited Marital Deduction does not eliminate estate taxes, but simply works to delay them.  This is because when the second spouse dies with an estate worth more than the exemption amount, his or her estate is then subject to estate tax on the amount exceeding the exemption.  Meanwhile, the first spouse's estate tax credit was unused and, in effect, wasted.  The purpose of a Credit Shelter Trust is to prevent this scenario.  Upon the death of the first spouse, the Credit Shelter Trust establishes a separate, irrevocable trust with the deceased spouse's share of the trust's assets.  The surviving spouse is the beneficiary of this trust, with the children as beneficiaries of the remaining interest.  This irrevocable trust is funded to the extent of the first spouse's exemption.  Thus, the amount in the irrevocable trust is not subject to estate taxes on the death of the first spouse, and the trust takes full advantage of the first spouse's estate tax credit.  Special language in the trust provides limited control of the trust assets to the surviving spouse which prevents the assets in that trust from becoming subject to Federal estate taxation, even if the value of the trust goes on to exceed the exemption amount by the time the surviving spouse dies.

Our homes are often our most valuable assets and hence one of the largest components of our taxable estate.  A Qualified Personal Residence Trust, or a QPRT (pronounced "cue-pert") allows you to give away your house or vacation home at a great discount, freeze its value for estate tax purposes, and still continue to live in it.  Here is how it works:  You transfer the title to your house to the QPRT (usually for the benefit of your family members), reserving the right to live in the house for a specified number of years.  If you live to the end of the specified period, the house (as well as any appreciation in its value since the transfer) passes to your children or other beneficiaries free of any additional estate or gift taxes.  After the end of the specified period, you may continue to live in the home but you must pay rent to your family or designated beneficiary in order to avoid inclusion of the residence in your estate.  This may be an added benefit as it serves to further reduce the value of your taxable estate, though the rent income does have income tax consequences for your family.  If you die before the end of the period, the full value of the house will be included in your estate for estate tax purposes, though in most cases you are no worse off than you would have been had you not established a QPRT.  An added benefit of the QPRT is that it also serves as an excellent asset/creditor protection vehicle since you no longer technically own the property once the trust is established.

There is a common misconception that life insurance proceeds are not subject to estate tax.  While the proceeds are received by your loved ones free of any income taxes, they are countable as part of your taxable estate and therefore your loved ones can lose over forty percent of its value to Federal estate taxes.  An Irrevocable Life Insurance Trust keeps the death benefits of your life insurance policy outside your estate so that they are not subject to estate taxes.  There are many options available when setting up an ILIT.  For example, ILITs can be structured to provide income to a surviving spouse with the remainder going to your children from a previous marriage.  You can also provide for distribution of a limited amount of the insurance proceeds over a period of time to a financially irresponsible child.

A Family Limited Partnership (FLP) is simply a form of a limited partnership among members of a family.  A limited partnership is one which has both general partners (who control management) and limited partners (who are passive investors).  General partners bear unlimited personal liability for partnership obligations, while limited partners have no liability beyond their capital contributions.  Typically, the partnership is formed by the older generation family members who contribute assets to the partnership in return for a small general partnership interest and a large limited partnership interest. Then the limited partnership interests are transferred to their children and/or grandchildren, while retaining the general partnership interests that control the partnership.

The FLP has a number of benefits: Transferring limited partnership interests to family members reduces the taxable estate of the older family members while they retain control over the decisions and distributions of the investment.  Since the limited partners cannot control investments or distributions, they can be eligible for valuation discounts at the time of transfer which reduces the value of their holdings for gift and estate tax purposes.  Lastly, a properly structured FLP can have creditor protection characteristics since the general partners are not obligated to distribute earnings of the partnership.

When a loved one passes away, his or her estate often goes through a court-managed process called probate or estate administration where the assets of the deceased are managed and distributed.  If your loved-one owned his or her assets through a well-drafted and properly funded Living Trust, it is likely that no court-managed administration is necessary, though the successor trustee needs to administer the distribution of the deceased.  The length of time needed to complete the probate of an estate depends on the size and complexity of the estate and the local rules and schedule of the probate court.  Every probate estate is unique, but most involve the following steps:

• Filing of a petition with the proper probate court
• Notice to heirs under the Will or to statutory heirs (if no Will exists)
• Petition to appoint Executor (in the case of a Will) or Administrator for the estate
• Inventory and appraisal of estate assets by Executor/Administrator
• Payment of estate debt to rightful creditors
• Sale of estate assets
• Payment of estate taxes, if applicable
• Final distribution of assets to heirs

A Living Trust can be used to hold legal title to your assets and provide a mechanism to manage them.  You (and your spouse) are the trustee(s) and beneficiaries of your trust during your lifetime.  You also designate successor trustees to carry out your instructions as you have provided in case of death or incapacity.  Unlike a Will, a Trust usually becomes effective immediately after incapacity or death.  Your Living Trust is "revocable" which allows you to make changes and even to terminate it.   One of the great benefits of a properly funded Living Trust is the fact that it will avoid probate and minimize the expenses and delays associated with the settlement of your estate.

Like a Will, a Living Trust is a legal document that provides for the management and distribution of your assets after you pass away.  However, a Living Trust has certain advantages when compared to a Will.  A Living Trust allows for the immediate transfer of assets after death without court interference.  It also allows for the management of your affairs in case of incapacity, without the need for a guardianship or conservatorship process.  With a properly funded Living Trust, there is no need to undergo a potentially expensive and time-consuming public probate process.  In short, a well-thought out estate plan using a Living Trust can provide your loved ones with the ability to administer your estate privately, with more flexibility and in an efficient and low-cost manner.

Creating a revocable Living Trust and transferring your assets to the name of that trust will not affect your ability to control such assets.  During your lifetime when you are mentally competent, you have complete control over all your assets.  You may engage in any transaction as the trustee of your Trust that you could before you had a Living Trust.  There are no changes in your income taxes.  If you filed a 1040 before you had a trust, you continue to file a 1040 when you have a Living Trust.  There are no new Tax Identification Numbers to obtain.  Because a Living Trust is revocable, it can be modified at any time or it can be completely revoked if you so desire.  Upon your incapacity, your durable power of attorney comes into effect and allows your loved ones to transact on your behalf according to the instructions you have laid out in the Living Trust.  Upon your passing, the Living Trust can no longer be modified and the successor trustee(s) you have designated will then proceed implement your wishes as directed such as transfer of your assets to your beneficiaries.

Assets with beneficiary designations such as a life insurance policy or annuity payable directly to a named beneficiary need not be transferred to your Living Trust.  Furthermore, money from IRAs, Keoghs, 401(k) accounts and most other retirement accounts transfer automatically, outside probate, to the persons named as beneficiaries. Bank accounts that are set up as payable-on-death account (POD for short) or an "in trust for" account (a "Totten Trust") with a named beneficiary also pass to that beneficiary without having to be titled into your trust.  However, when you do your estate planning, it is important to seek the counsel of an experienced professional who is familiar with the intricate regulations of retirement accounts and can coordinate the appropriate beneficiary designations with your overall estate plan.

Federal law prohibits financial institutions from calling or accelerating your loan when you transfer property to your Living Trust as long as you continue to live in that home.  The only exception to the Federal law, enacted as part of the 1982 Garn-St. Germain Act is that it does not provide protection for residential real estate with more than five dwelling units.  However, we find that most clients who do own residential property with more than five dwelling units tend to own them through a business entity and not directly in their individual names and hence are not concerned with the five dwelling exception.