This document is prepared for general distribution to the clients and potential clients of Brian J. Sheppard. The production of copies for anything other than free distribution is prohibited. This document is not intended to provide legal advice to the individual and any individual receiving this document is encouraged to meet with the speaker or another licensed California attorney for the preparation of his, her or their estate plan rather than attempt this on their own, with the assistance of a paralegal or semi-legal organization which does not have an attorney meet with the client and review the documents with the client.
A word about the speaker: Brian Sheppard is a member of the National Academy of Elder Law Attorneys, the Southern California Council of Elder Law Attorneys and the
San Fernando Valley Estate Planning Council. He has worked with seniors and their legal issues since 1990. He focuses his practice on Elder Law issues, including Wills & Trusts, Conservatorships and Probate.
A word about the talk: The following talk is meant to be a general overview only. For specific questions contact an attorney or the agencies mentioned later in this talk.
If you believe you have been a victim of a fraudulent trust sales scheme contact the California Attorney General, at 300 South Spring Street, Suite 500, Los Angeles, CA, or
the Estate Planning Fraud Hotline at (888) 460-7364.
1. Correcting some misimpressions about trusts. Many people think they do not need a trust if they have less than $600,000. This is a confusion about the need to probate the property and the “Exemption Equivalent (which until recently was $600,000, was $3.5 million until January 1, 2010, and has now expired). Your heirs can benefit from a trust even if you only have a house worth $101,000.
As of this latest update to this talk, each person has a $5 million (that’s $5,000,000), exemption, and any portion not used by the first spouse to die can be used by the surviving spouse.
A trust is not always necessary to avoid estate taxes. If you have less than the amount of the Exemption Equivalent, (currently terminated but likely to be reinstated at
some level), there will not be estate taxes even if there is not a trust. If you are a single person, having a trust will likely not affect the amount of estate taxes your estate will have to pay.
A revocable living trust will not allow you to avoid the claims of creditors. To avoid creditors you must consult an attorney who specializes in “asset preservation” or “asset
2. Key terms:
Settlor. The settlor(s) is the person or persons who establish the trust. They are also referred to as the trustors.
Trustee. The trustee is the person or agency which administers the trust.
Alternate trustee. An alternate trustee takes over the administration of the trust when the trustee resigns, dies, or becomes incompetent.
Principal. The principal is the person who signs a power of attorney document.
Agent. The agent is the person appointed by the principal to handle their legal, financial or health care decisions.
3. What is a trust?
A “trust” is generally a package of documents with the following components: The trust: The trust is an entity under the control of the trustee (usually the person
who sets up the trust), which serves as a holding vehicle for the assets of the person(s) setting up the trust. Legal ownership of the property is transferred to the trustees of the trust. Generally the persons who establish the trust are named as the trustees. When the original trustees can no longer serve as trustees, either because they have resigned, become incapacitated, or died, the alternate trustees take over. The alternate trustee then uses the funds in the trust to take care of the settlor(s). On the death of the settlor(s) the alternate trustee distributes the property according to the wishes of the settlor(s). The trust property is not probated because the trust as an entity continues in existence. Therefore, there is still a legal owner of the property and there is no need for a court to decide who will be the new legal owner.
Power of Attorney for Asset Management (Durable Power of Attorney): A power of attorney may be drafted to take effect immediately or on the incapacity of the individual.
Each person has to have their own power of attorney. You cannot sign someone else’s power of attorney. A “durable” power of attorney continues to be effective after the
“principal” (the person who signed the power of attorney), becomes incompetent. A power of attorney commonly allows the “agent” to handle the principal’s financial and legal affairs such as making investments, selling property, engaging in litigation on the principal’s behalf, filing income taxes, using credit cards and having access to bank accounts. Other powers may also be included in the power of attorney. I also use my durable power of attorney to nominate conservators if the principal becomes incompetent to manage their own affairs.
Advance Directive/Power of Attorney for Health Care: As long as the principal is mentally competent and can communicate their health care wishes to their doctors they
will make their own healthcare decisions. When they are no longer competent and able to communicate their own health care decisions, the agent the principal appoints will make their decisions for them. These decisions can even include the decision to terminate life support, authorize the donation of remains to other people or to science, or to acquiesce to an autopsy, in accordance with the wishes expressed in the document.
Pour Over Will: A pour over will leaves any property not in the trust to the trustee of the trust. Assets such as cars can be transferred using summary procedures merely by
going to the Department of Motor Vehicles. If the total estate subject to probate is less than $100,000, it may be transferrable using affidavits.
4. Primary benefits of a trust.
A trust will avoid the time and costs of probate. If the surviving spouse has assets that are more than the Exemption Equivalent, a trust may allow the couple to avoid any
estate taxes. A trust is a private document and not a public proceeding, whereas the probate of the will is a public proceeding.
A revocable living trust enables you to distribute the trust assets over time without having the court involved. With a revocable trust you might choose to distribute property
to your children, grandchildren when they reach certain ages, or any other person or entity to whom you wish to give your property. A trust set up in a will is a “testamentary trust” and must be overseen by the court.
A revocable living trust may cost much more than wills and the other necessary estate planning documents. It may, however, be much cheaper than a will after you
consider the costs of probate. Probate may take from 6 – 18 months in a typical estate, while often a trustee can transfer the property much more quickly, sometimes, almost immediately.
5. The “Exemption Equivalent”.
As of 2013, each person has an “Exemption Equivalent” of $5,000,000. That means you could give up to $5,000,000 to your beneficiaries without paying any inheritance or
estate taxes. This amount left over can be added to your spouse’s exemption if you have less than $5,000,000 when you die. Also, this amount is now adjusted for inflation.
If you are a married couple each of you has a $5,000,000 Exemption Equivalent, for a total Exemption Equivalent of $10,000,000. Many couples do not need to take advantage of both credits but where the couple’s joint assets exceed $5,0000,000, or may exceed $10,000,000, the proper trust can ensure that both credits are used. Since the estate tax rate goes up to 35%, the use of the proper trust vehicle can result in significant tax savings for a couple who had more than $10,000,000 in assets.
In addition to the exemption equivalent, you can leave an unlimited amount to your spouse without him or her paying any estate taxes. However, when your spouse dies his
or her estate will be taxed on all of the assets remaining, including those which you transferred to your spouse.
Note: In addition to the amount included in the Exemption Equivalent each person may make an unlimited number of annual gifts of $13,000 to each beneficiary. This amount is scheduled to increase with inflation.
For example: Each year both the husband and wife can give $13,000 to each of their children and grandchildren. They may also give up to $13,000 per year to any other
person. If the gift to any person is more than $13,000 per year a Gift Tax Return must be filed and the amount over $13,000 will be counted as part of the donor’s Exemption
Equivalent when determining whether Estate Taxes must be paid.
Additional Note: As an aside, the speaker notes that while the Estate Tax is a widely hated tax less than 1% of all people in the United States have $5 million. The speaker assumes that if the exemption equivalent is increased (so that fewer people pay the Estate Tax), that other taxes, including those paid by middle-class and upper-middle class people, will be raised to compensate for the revenue loss caused by the increase in the Exemption Equivalent).
6. Tax savings.
A single person will not save taxes merely by having a trust although they may reduce their estate taxes by other planning strategies. A married couple with assets that
total less than the Exemption Equivalent will not save on estate taxes. A married couple who have assets greater than the Exemption Equivalent and a trust that takes advantage of both spouses’ Exemption Equivalents may save significantly on taxes.
7. Joint tenancy and taxes.
Where a couple owns property as joint tenants there is no probate on the death of the first spouse to die. Nor does the first spouse take full advantage of their Exemption
Equivalent. If the surviving spouse dies with more money than they are allowed to protect by the Exemption Equivalent, estate taxes must be paid even though there would have been no estate tax if both spouses had taken advantage of their Exemption Equivalent. If the property is not community property it will not get the full “step-up” in basis.
8. Community property with right of survivorship.
Community property with right of survivorship is a new way of owning property recently created by the legislature. This allows married couples to own property as community property without having to undertake any probate court procedures to pass the property to the surviving spouse when the first spouse dies.
9. Joint tenancy and incompetency.
Where property is owned in joint tenancy or as community property with right of survivorship, and one spouse becomes disabled, the surviving spouse cannot sell or
refinance the disabled spouse’s interest in the property. For all practical purposes, this makes the property unmarketable until the disabled spouse dies unless the well spouse
or children hire an attorney (at significant cost), to apply to the court for a conservatorship. Note that a spouse holding the property as community property would also be unable to refinance without the written consent of the other, unless there was a power of attorney document. A trust would enable the trustee to refinance or sell the property even if the disabled spouse were physically unable to sign any papers and mentally unable to understand that the property was being sold. The property could be sold even if the disabled spouse was in a coma. In fact, if properly drafted, the trustee could sell the property even if all the settlors of the trust were in a coma.
10. Trusts to avoid financial liabilities.
A typical “revocable living trust” drafted to avoid probate will not protect your assets from your legal and financial obligations. There are other kinds of trusts which can be used to protect your assets from creditors. These often involve removing your assets from your control or placing them outside the country. Persons desiring to protect assets from creditors should retain an attorney who specializes in “asset protection.”
11. Why not just put everything in joint tenancy or community property with right of survivorship?
Joint tenancy and community property with right of survivorship avoid probate on the death of the first joint tenant but you also lose possible estate tax advantages. Even if your estate is less than $5,000,000 the property will go through probate on the death of the surviving joint tenant or surviving spouse. And there is no guarantee that both joint tenants or spouses will not die together simultaneously.
Further, if the house is held in joint tenancy, or as community property with right of survivorship, the well spouse or co-owner cannot refinance or sell the house, or even
transfer it to a trust, without the consent of the other spouse or co-owner. If one spouse is disabled the well spouse will need to get a conservatorship in order to sell or refinance the house. Obtaining a conservatorship will cost time and money.
12. Joint tenancy and the new joint tenant’s liabilities.
When you add a joint tenant, usually a child, to the deed it is often with the intent of avoiding probate. But you are also giving that child, or children, a legal interest in the
house. If your child ever has financial problems their creditors can sue them and try to force the sale of the house, even though you just added the child to the deed to avoid
probate. If you want to sell and they won’t agree, you won’t be able to sell. And if you have a falling out and they transfer their interest from you and sever the joint tenancy, they can leave their interest to anyone they want in their own will. I have seen cases where all of these things have happened. You don’t want them to happen to you.
Because community property with right of survivorship only applies to spouses, you cannot add any non-spouse to a property using this form of ownership.
13. Types of trusts most commonly used:
Small estate trust: This trust is the simplest of trusts and can be used for either a single person or a married couple. It does not divide into subtrusts on the death of the first
person to die.
A/B or Marital trust: This type of trust requires that a specified amount of trust assets be placed into an “irrevocable” subtrust on the death of the first person to die. This trust
is used to make sure that the settlors are able to take advantage of both Exemption Equivalents. It also ensures the first spouse to die that the first spouse’s wishes regarding
the distribution of his or her property will be followed.
A/B/C Trust: This is similar to the “A/B” trust above except that on the death of the first spouse to die any amount in his or her one-half that exceeds the exemption equivalent is put into a separate “marital” trust and not taxed until the death of the surviving spouse.
Disclaimer trust: A disclaimer trust allows the settlors to defer the decision of whether to have a small estate trust or an A/B trust until the first settlor dies. On the death
of the first spouse the survivor can decide how much, if any, to allocate to the decedent’s irrevocable trust. If the assets at that time are less than the Exemption Equivalent there will probably be no allocation made to the decedent’s irrevocable trust since there will be no tax benefits to be obtained by doing so. This trust allows maximum flexibility and is my personal trust of choice. This trust, however, does not assure the first spouse to die that his or her wishes will be followed.
Special Needs Trust: A Special Needs Trust is one which allows a disabled beneficiary to obtain funds from government programs for their general care and use trust
funds for additional items not provided by government benefit programs. The establishment of a Special Needs Trust should only be done by an attorney well-versed in
the law of Supplemental Security Income and Medi-Cal benefits.
Irrevocable Life Insurance Trust: This type of trust allows a person to pass life insurance benefits to their heirs without the life insurance benefits being taxed as part of
the “estate”. This type of trust rarely advisable unless you will have estate taxes due on your death. Sometimes these trusts are used to fund a life insurance policy that will be
used to pay the estate taxes on the other assets owned by the decedent at their death.
14. Trust marketing.
Be wary of companies that come to your door or call you on the telephone. Be careful about hiring paralegals; while many are competent there are no licensing
procedures and paralegals are not allowed to give legal advice. You are best advised to deal with an attorney who practices in the area of estate planning and who will be available to you in the future when you have questions. Because they will be familiar with your situation it will take less time (and money), for them to advise you when you have questions.
While I of course prefer that you call me other good ways of finding an attorney include asking other attorneys you trust (even if they don’t do estate planning they may
know someone who does), or friends who have trusts. You might also contact the Los Angeles County Bar Referral Service (213-243-1525), or the San Fernando Valley Bar
Referral Service (818-227-0490). Sometimes a local senior center can refer you to an attorney. Finally, you can look in the Yellow Pages for attorneys who advertise that the
specialize in the area of wills and trusts or estate planning.
15. Updating your trust.
A trust does not expire and does not need to be annually updated. However, you should contact the drafting attorney whenever there are major life events such as childbirth, death, incapacity or divorce. As a general rule you should contact your attorney every 5 years to determine if there is any need to update your trust.
16. What assets are put in the trust?
As a general rule I transfer to the trustee (John Doe and Jane Doe, as trustees, The Doe Family 2012 Revocable Trust), real estate, stocks, mutual funds, bank accounts,
checking accounts, certificates of deposit and most other financial interests that do not pass automatically on the death of the owner. I do not transfer annuities or life insurance to the trust (but in some cases I have my clients name the trust as an alternate beneficiary, such as where the beneficiaries or alternate beneficiaries are minors). An IRA cannot be owned by a trust.
17. Who should draft the trust?
A living trust should be drafted by an attorney practicing in the area of Estate Planning. Paralegals are unlicensed and are not allowed to give legal advice. Cook book
trusts from computer software may serve your needs but you will not know whether the program worked for you until you 1) have an attorney review your work (and maybe correct it for a fee, as well), or 2) die or become incapacitated (at which time you cannot go back and fix your mistakes).
Be careful of non-attorneys who make presentations, even at Senior Centers, the Elks Club, or other reputable places. A few years ago I had a case where a client came
to see me at the ONE Senior Center in Reseda. She had paid $399 for a trust. This price included an additional $200 discount if she signed up at the seminar, which was given on the premises of a non-profit organization. Responding to this pressure, instead of her common sense, she signed up.
After she received the trust and told them that it needed to be changed, since her spouse was deceased, she was told to simply “cross out” the portions of the trust that she
did not want to be there and they trust organization would amend the trust. Of course, my client, not being a lawyer herself, crossed out a variety of sections that should be in the trust because she did not understand them and the trust-sellers could not explain them to her. Although the trust-seller claimed to have an attorney who reviewed the work you don’t want to purchase a trust from anyone who does not do a personal interview with you and explain the basic workings of the trust to you in person.
18. Who should be the trustee?
Unless a client is having significant difficulties I generally make him or her the trustee of their own trust. Sometimes it may be advisable to appoint a co-trustee at the
time the trust is executed. Where the clients are spouses, I ordinarily make both of them co-trustees. If there are responsible children I generally appoint them to be the successor trustees.
The trustee does not have to have any special legal or financial background. When there are legal or financial questions they will consult an attorney or financial professional.
19. What if my beneficiaries are minors?
If your beneficiaries are minors you can authorize the trustee to hold the trust assets in the trust for them. The trustee can then use the assets to pay the expenses of their
You can also use a trust to make gifts to your grandchildren. These gifts can be immediate gifts (if they are over 18), or gifts which they receive only after reaching a certain
If minors receive gifts through a will with a “testamentary trust” the trustee will have to go to court to get permission to spend trust assets. This will involve additional costs and time.
20. What if you decide you want to change your trust?
Most trusts drafted to avoid probate (and that’s the primary reason most people want a trust), are “revocable living trusts”. This means that while both settlors are alive
and competent they can amend or cancel (“revoke”), the trust. Some trusts may even be amended or revoked after the death or incompetency of one of the settlors. That depends on the language of the trust and how it has been implemented.
A single person who sets up a living trust can also amend or revoke their trust as long as they are competent. Note that an Irrevocable Life Insurance Trust or a Special Needs Trust cannot be amended after it is executed.
21. Does everyone need a living trust?
No. If all accounts are held as “pay on death” for beneficiaries as can be done with life insurance, bank accounts and many mutual funds (and there is no other property, such as a house), there may be no need for a living trust. But in California a trust is necessary for good estate planning for persons owning real estate or other assets which cannot be transferred automatically on death by presentation of a death certificate, for persons having minor children, for persons who want to space the distribution of the estate over time or for other reasons too numerous to mention here.
22. Should you tell friends in other states that they ought to have trusts?
No. Other states have different laws regarding trusts and their administration.
Nothing in this talk should be regarded as giving information of the advisability of having a trust drafted when you live in another state. So the information here may not be
applicable to your friends in New York or Oregon. You should tell your friends in other states to ask an attorney in that state whether they should have a living trust. One national organization that specializes in Elderlaw is “National Academy of Elderlaw Attorneys” (NAELA). Your friend can contact them or look in the yellow pages for a attorney who is a NAELA member or member of another group specializing in estate planning.
23. Should you be telling all of your California friends that they should have a revocable living trust?
No. But you would be a good friend by suggesting to your California friends that they contact an attorney who can help them to decide whether they should have a
revocable living trust.
24. If you don’t need a living trust do you still need the Power of Attorney documents?
Yes. Most of us tend to see ourselves in two ways, “I’m alive and I’m fine” or “I’m gone”. But many of us will enter a middle ground where we are alive but unable to handle
our affairs. That’s why every person needs to appoint an agent to make decisions for them when they are unable to do so for themselves. All of us are subject to auto accidents or sudden health problems.
Everyone needs an Advance Directive so that the doctors will know who you want to have making your medical decisions for you. Without such a document doctors will be
less inclined to listen to the wishes of the persons you would have designated as your agents, especially when the question is whether to discontinue life support.
Everyone also needs a Durable Power of Attorney so that your agent can handle your economic and legal affairs if you should have an accident or illness. Otherwise, your
family may incur substantial (and unnecessary), costs to obtain a conservatorship that could have been avoided by a little advance planning. It is worthwhile to note that these costs may be incurred at a time when there are other financial and legal demands associated with the event that caused the need for the conservatorship in the first place (such as an auto accident resulting in both incapacity and a lawsuit against you at the same time).