Some advantages are particular to living trusts. First, a living trust can give its grantor substantial tax advantages. Second, possessions held in a living trust are not subject to estate administration by the probate court after the grantor dies. Survivors do not have to reveal the details of any possessions held in trust through the public filing process that takes place during probate. In addition, if the grantor owns real estate in another state, establishing a living trust for the title to that property may allow survivors to avoid probate in the other state. A living trust can free the grantor from the burden of overseeing his or her financial affairs, because a trustee manages all the assets of a living trust. More importantly, a living trust allows a trustee to manage the trust funds in the event that its creator becomes incapacitated or mentally or physically unable to oversee his or her possessions. If a living trust contains all of a person's assets, then he or she may not need a will, and his or her survivors may be able to avoid probate. If only part of a person's possessions are held in living trust, then a will is necessary to distribute those items in the estate not placed into a trust. However, a "pour-over provision" in a will can place any possessions remaining upon death into a pre-existing living trust.

The primary disadvantage of a living trust is that it involves the loss of some flexibility and control over one's assets. Unlike a will, which becomes effective only at death, a living trust becomes effective immediately upon its creation. For the person who wants to retain unrestricted control over his or her estate, a will or a testamentary trust is a better estate-planning tool because it can be changed at any time prior to death.

The primary advantage of a testamentary trust is that it allows the grantor to retain unrestricted control over his or her estate. A testamentary trust becomes effective only upon the death of its grantor. Like a will, a testamentary trust can be changed at any time prior to death.

The primary disadvantage to testamentary trusts is that they do not take advantage of the beneficial tax treatment given to living trusts. Because a testamentary trust only takes effect when the grantor dies, the grantor cannot enjoy any tax advantage during his or her life. Also, most testamentary trusts must go through probate.

Revocable and Irrevocable Trusts
A living trust can be either revocable or irrevocable. As implied by their names, a revocable trust can be changed or revoked after its creation, while a person signing an irrevocable trust gives up the right to change or revoke the trust. A revocable trust quite often is devised to supplement a will and/or to name someone to handle the grantor's affairs should the grantor become incapacitated. A trust usually must be made irrevocable if the grantor wants to avoid income or estate taxes. Tax authorities consider the grantor of a revocable trust to be the owner of the property because he or she still controls the property. For this reason, income from assets held in a revocable trust must be reported as income to the grantor for income tax purposes. At the death of the grantor, property in a revocable trust is included in the estate for calculating estate taxes.

An irrevocable trust often is designed to be the beneficiary of a life insurance policy. Such a life insurance trust also may spell out how the policy's money is distributed to survivors. In addition, irrevocable trusts often are set up to manage money given to minors and to charities. Finally, an irrevocable trust can be used to transfer assets to another person in the event that the grantor requires expensive medical care. Although doing so may protect the grantor's family by ensuring that the cost of medical care does not wipe out the family fortune, it may make the grantor ineligible to receive federal and state medical assistance.

Probate
With few exceptions, the estate of a person who dies owning property in his or her name cannot be legally distributed without first going through probate. Only if a decedent left the entire estate to a spouse, or if the entire estate is worth no more than $60,000, or if all of a decedent's property is held in joint tenancy or in trust, can the survivors avoid probate. Probate operates either formally, with court supervision, or informally, without court supervision. Whether formal or informal, the first duty of the probate court is to determine whether the decedent left a valid will. If the decedent left a valid will, the probate court oversees the process of settling the estate according to the terms of the will. If the decedent did not leave a will or if the probate court determines the will is invalid, the probate court applies the state inheritance laws, described earlier, to the estate.

Informal probate is designed for small estates in which court supervision or adjudication is not required because the estate has no uncertainties, legal disputes, or complex administrative requirements. If a public administrator is appointed as personal representative, the public administrator can summarily dispose of a small estate in accordance with state statutes. A public administrator may engage an attorney to handle at least a portion of his or her duties even under informal probate.

When probate court formally supervises distribution, its responsibilities may include:

• Overseeing the distribution of estate assets, including payment of state and federal taxes
• Hearing any contested claims by creditors or others seeking to collect from the estate
• Choosing a personal representative when one is not named in the will
• Supervising the actions of the personal representative, including the payment of state and federal taxes
• Deciding which possessions are subject to estate administration
• Determining a decedent's true heirs
• Ruling on the legitimacy of any claims outstanding against the estate
• Supervising the transfer of assets to beneficiaries named in the will

Overseeing a guardian's use of property placed in trust for the benefit of children or dependents
Making out a will does not guarantee that survivors avoid all distribution problems, but a carefully drafted will can minimize their time in court.

Avoiding Death Taxes
A carefully created estate plan can considerably reduce the tax burden on an estate. Although California no longer has an inheritance tax, under California and federal laws a decedent with an estate worth more than $600,000 must file an estate tax return and may be liable for payment of federal and California estate taxes. The federal government's inheritance tax scheme is quite complicated. Under federal tax law a person is allowed to leave $600,000 tax-free to one or more individuals, other than a surviving spouse. The surviving spouse is entitled to receive an unlimited amount tax-free. If the estate is a very large one, however, and the entire estate is left to the surviving spouse, the surviving spouse may lose the option of giving $600,000 tax-free to individuals of his or her own choosing. An experienced tax attorney can create trusts that will allow both spouses to pass on a total of $1,200,000 free of estate taxes.

Contact the Office to schedule a Consultation to discuss how Robert Spitz, Esq. can assist you in your estate planning needs.

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