Trusts

HISTORY/BACKGROUND

The forerunner of the trusts/estate plans we use today were introduced in England during the 12th and 13th Centuries. Trusts were used to keep land in the hands of the Nobles when they left for the Crusades, with the agreement that the “trustee” Noble would return the land upon the absent knight’s return, which kept the country thriving even when many leaders were absent. The modern day trust/estate plan has evolved greatly since. Nevertheless, trusts still serve the same purpose, that is, to protect assets in times of need and keeping property in your possession and control.

Here at Traditions Law, we have the tools, knowledge and expertise to help you navigate through the current trust choices and help you create a trust that fits your personal needs. Below is a survey of the various forms of trusts our offices produce.

Revocable Living Trust

The Revocable Living Trust is the backbone of any estate plan. Once established, other trusts can be incorporated to interact with the Revocable Living Trust. We call it “Revocable” because YOU, as the creator of the trust, can amend or revoke it when you are alive and have capacity. You are also in total control of assets put into your trust while you’re alive and have capacity. In your trust you will determine; who, how and when the assets of your Trust gets distributed at your death. Revocable Living trusts avoid the Probate process which can be very expensive, time-consuming and frustrating. Revocable Living Trusts are essential for individuals, new couples just beginning their journey, as well as individuals/couples that already have acquired substantial assets and wants to protect themselves as well as their families. If you have assets you want to manage or pass on to specific entities or designated individuals, the Revocable Living Trust is essential for you.

Individual Retirement Account (IRA) Inheritance Trust

It is common for an individual to have a retirement plan, such as, 401 (k), §408, §403 (b), or §457 of substantial value. These plans provide for tax deferred growth of plan assets, thus the longer the tax deferral, the greater the value of the plan. An IRA Inheritance Trust can extend the tax deferral period for generations. This can result in very substantial gains for you and your heirs.

Medi-Cal Asset Protection Trust

The Medi-Cal Asset Protection Trust protects an individual’s assets and continued qualification of governmental aid in the event that an individual must apply for government benefits due to illness or extreme circumstances. A Medi-Cal Asset Protection Trust also assures that your assets will be distributed to your designated beneficiaries after you are gone. Recent changes in California Law exempt assets not going through the Probate process from Medi-Cal reimbursement. However, it is important to note that having a standard Revocable Living Trust may not necessarily qualify an individual for benefits.

Special Needs Trust

A Special Needs Trust provides for someone who is disabled or otherwise incapacitated. It is not funded by the person who will receive the trust benefits, but it is commonly funded by the parents or relatives of the individual receiving benefits. It assures that if the cared for individual is currently receiving or will apply for any government benefits, that they (1) may safely do so and (2) continue to receive coverage. This trust is far superior than gifting money to an individual for many reasons, including: the donor (Settlor) can spell out their wishes for the estate and can make sure all of the funds go to the beneficiary, and the beneficiary continues to receive government benefits and can seek further assistance with the help of the trust funding.

 

Firearm Trust

If you own any firearms you should consider a Gun Trust. This is true even if you have a current revocable living trust or a will. The complicity of the rules for owning and transferring firearms are not addressed in your trust and if definitely not handled correctly in a will. This is particularly important if you own multiple firearms. The ownership and transfer of firearms are subject to many specific and complex rules the violation of which can be a crime. A gun trust is designed to make sure that your firearms are handled properly. Your trust can have multiple trustees and each one, if qualified, can use the trust firearm. Without having to transfer them to this individual trustee. This avoids having to actually transfer and re-register the firearm(s) and have to pay the transfer tax.If you own firearms and want to assure they are properly handled in your estate, contact us for more information on a gun trust.

Pet Trust

Your pet is a part of your family. As such, you may feel that they deserve much the same consideration as your human beneficiaries. Since pets can have very individual characteristics they are best assured of living out their views in the security and comfort by creating a trust specifically for them. A Pet Trust will provide legal assurance that your pet will receive the care you would provide if you were alive. Pet trusts are authorized by statutes in California. Many states limit pet trust to 21 years. This would be inappropriate for pets like a parrot which can live 75 years, or more. The California Statute does not have this limitation. If you wish to specifically provide for the care of your pet in the event of your death, please contact us to discuss what is needed to create a Pet Trust.

Charitable Remainder Trust

A Charitable Remainder Trust has numerous benefits among which are: Avoidance of capital gains tax upon the sale of highly appreciated capital assets, increased retirement income, as well as immediate tax deductions and benefiting the charity(ies) of your choice. A Charitable Remainder Trust is often linked with a Private Foundation. A Private Foundation gives you immediate income tax charitable deductions when you are in a higher tax bracket due to high current income. It is commonly used when you have current high income but expect that it will be considerably less in the future. If property is transferred up front, you can regain possession of this property at the end of a specified period of time.

Charitable Lead Trust

This trust gives you an immediate income tax charitable deduction when you are in a higher tax bracket due to high current income and a potentially very favorable transfer tax result. It is used when you have high income, but expect it will be considerably less in the future. If income producing property is transferred up front, you can regain possession of the property at the end of a specified period of time. This trust can be extremely beneficial when paired with a private foundation. This trust is the opposite of a Charitable Remainder Trust (CRT) in that you get an immediate deduction for present transfers to a charity for a specific period. At the end of this time you regain the asset and/or income

Blind Trust

This is a very specialized Trust. It is often used when you own an asset(s) that, if you continue to own and/or manage, could create a potential conflict of interest with a new position. A common example is when an individual is elected into a public office and owns a business that contracts or could contract with the government entity they represent. In this case, your assets are put into an Irrevocable Trust managed by an Independent Trustee while you hold office.

Irrevocable Life Insurance Trust (ILIT)

This Trust holds your life insurance policy(ies). It is often used in large estates to avoid or minimize estate tax. It is best to have the trustees of this trust acquire the policy, but an existing policy may be used. At your death, the proceeds can be distributed to your heirs and/or can be used to buy estate property of the decedent. This can be very beneficial where the estate has liquid assets like real estate. The estate then has liquidity to pay expenses, such as taxes. This trust is often used with a charitable trust or charitable bequest to replace the value of the donated property otherwise reducing the amounts received by your beneficiaries.

For Example: Anna Smith (Age 60) is a single mother. She has a daughter, Jenny (Age 25). Anna owns a mortgage free convalescent home on a cliff overlooking the Pacific Ocean, which is in her Revocable Living Trust. It is worth over 8 million dollars. Which exceeds her available estate tax credit of $5.49 Million by approximately $2.5 Million. She has no other liquid assets. If Anna dies, the Estate Tax due on the convalescent home would be approximately $1.25 Million. In that case, the convalescent home might have to be sold to pay the tax. Anna Established an Irrevocable Life Insurance Trust and provided a $2 million term policy. With her daughter as trustee and sole beneficiary, if she dies the trust will be for the $2 million policy. Which would give you enough liquidity to pay the Estate Tax and have some additional funds for reserve. The living trust will show no taxable gain on the sale as it got stepped up basis at Anna’s death.

Qualified Personal Residence Trust (QPRT)

This trust allows you to legally transfer your home to your children while continuing to live in it for a set time period or for life. If you have a large estate, for a single person the credit is $5.49 Million and for a married couple, the credit is $11 Million. It can help reduce estate taxes by removing the value of your home from your estate. If you live in the home, your children own the home after the stated period, and can lease the house back to you. This gives your children income and rental property that can provide them with valuable tax deductions.

 

For Example; if your home is worth $2 Million and your other assets are worth $11 Million, your home would cause you to pay approximately $1 Million in estate taxes. Transferring your home into the QPRT removes approximately $2 Million from your Estate, resulting in no Estate Tax.