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Tax and Estate Planning
- Tax Controversy and Litigation
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A trust is an instrument used in an estate plan to accomplish any number of goals. Primarily, a trust creates guidelines for the distribution of assets to designated beneficiaries, avoids probate for all assets that are put into the trust, and minimizes potential tax burdens. Among all of the documents in your estate plan, the trust is the master document.
What is Probate, and How Do I Avoid It?
Probate is the court-supervised distribution of your assets upon death. The California Probate process is particularly onerous. The court system is underfunded and overburdened. The Probate of an estate can draw out anywhere between one and two years. This is because every action in the distribution of an estate must be overseen and approved by the court. Additionally, there is a mandatory fee based off the total fair market value of the assets in the estate that is paid to the court, executor, and attorneys. Finally, the Probate process is a matter of public record; therefore all information regarding your assets, debts, and property distribution is available for anyone to see.
When utilizing a Trust to distribute an Estate, you can avoid Probate so long as the Trust is properly funded with your Assets. All appropriate assets must be placed into the Trust by titling the assets in the name of the Trust. If your Trust is not properly funded, the assets will remain outside the Trust and likely be subject to Probate. After executing your Trust, it is critical to fund it in order for the Trust to provide its benefits.
Is a Trust Private?
Unlike Wills, Trusts are private. By avoiding Probate, the information in your Trust also avoids becoming a public record. Your Will is still deposited with the Probate court, as that is required by law. However, when you have a Will that works in conjunction with a Trust, there is very little personal information contained in the Will. There is no information regarding your assets or beneficiaries. The Will simply states that all assets owned by your should be distributed according to the terms of your Trust.
Your Trust is a private document. Upon death, notice must be provided to all those named in your Trust (as well as any living family members within two degrees of consanguinity like grandparents, parents, siblings, children, and grandchildren), and the Trustee must furnish a copy to any party who received notice and requests a copy of the Trust.
Does a Trust Provide any Creditor Protection?
A common misconception is that once assets are placed into a Trust they are immune from the claims of creditors. This is not true. You cannot avoid your creditors by putting your Assets into a Trust.
However, you may provide creditor protection for your beneficiaries by including a spendthrift provision in your Trust. Aside from a few public policy exceptions, the Trustee can hold back distributions to the beneficiary when that distribution would go straight into the hands of a creditor.
Revocable vs. Irrevocable Trusts
Under California law, a Trust is presumed revocable (changeable) unless stated otherwise. Most Trusts designed to distribute a person’s estate are revocable during their lifetime, which means, they can take the assets out of the Trust, change administration and distributions schemes, or eliminate the Trust altogether.
Some Trusts for married couples are revocable until the first spouse dies. After the first spouse dies the assets in the Trust may split, with the deceased spouse’s share becoming an Irrevocable Trust (unchangeable) and the living spouse’s share remaining a separate Revocable Trust. This is a common technique used by blended families, to ensure assets go to children of both spouses. Other Trusts are irrevocable from creation. Differing family situations, value of assets, and ultimate goals require different solutions, specifically designed to suit your needs.
Who Monitors my Trust?
Because a Trust operates outside of Probate there is no judicial supervision, and the only responsible party for carrying out your instructions is the Trustee you appoint. Your Trustee may be a family member or close friend in whom you have confidence to carry out the terms of your Trust. Alternatively, some choose to appoint a Professional Trustee (either an individual or corporate). Professional Trustees charge fees for their services, but also provide for a neutral party who is not likely to deviate from the terms of the Trust. In any situation, an interested party can always challenge the Trustee in court, or the Trustee can seek court guidance when they are unsure about an aspect of the administration, but generally speaking there is no judicial oversight of the administration of a Trust.
If I have a Trust do I still need a Will?
A Will is still a valuable part of an Estate Plan even with a Trust. As mentioned above, in order for a Trust to be effective, it must be funded. Occasionally, items may fall through the cracks, and are never titled in the name of the Trust. A Pour Over Will is a back up plan. It simply states that any assets that I own, which are not held by my Trust, should be “poured into” my Trust and distributed according to the terms of the Trust. The pour over will acts as a safety net. As long as those assets held outside of your Trust do not exceed $150,000 (including only $50,000 of real property), you can still avoid Probate.
What Should I Do if I Have Questions about Trusts?
If you have questions about trust and estate plans, McLaughlin Legal can help. McLaughlin Legal is a boutique San Diego law firm, and we strive to provide each client with good judgment, personalized legal services, and great results. McLaughlin Legal prides itself on our three core values:
1. Concentrated Practice Areas2. Personalized Service3. Committed to Clients
McLaughlin Legal’s structure, plus our experience with tax litigation and tax controversies, allows us to represent clients who have tax problems (like an IRS audit or California tax issue) and also advise on other tax law issues with a perspective not found elsewhere. We strive to provide the highest quality services to anyone who entrusts us with their case.
McLaughlin Legal wants to be sure that any estate planning matter, including a financial durable power of attorney, will fit your needs and situation. Together we can help you and your family achieve all of your estate planning goals.
Interested in Learning More?
If you are interested in learning more about trusts, please feel free to contact us today for a free consultation.