The Law Offices of Jimmie L. Joe
A Professional Law Corporation
17700 Castleton Street, Suite 358
City of Industry, California 91748
Phone: (626) 839-8980
1. What is a Will and why should I have one?
A Will is a legal document that allows you to determine how you want your property to pass. If you do not have a Will, your property will pass to your
heirs according to California law. A Will also allows you to nominate an executor to manage the assets of your estate, nominate a legal guardian to care for and provide for minor children, and allocate or apportion estate taxes.
No. Although a Will can pass most of your assets, assets such as life insurance proceeds, retirement benefits, joint accounts, jointly held realty, assets held in a living trust,
and your spouse’s one-half community property interest in any assets cannot be passed using a Will.
In California, a deceased person can have a handwritten (Holographic) Will, a Statutory Will or a Will prepared by an attorney. A Holographic Will must be
in the maker’s handwriting and must conform to the laws in California recognizing use of handwritten Wills. A Statutory Will is a form Will authorized by California and is created by filling in blanks. A Will prepared by an
attorney is a Will that is prepared under the advice of an attorney, who usually oversees the execution.
5. If I want to change my Will in the future, can I?
Yes. Anyone can amend his or her Will by use of a Codicil (an amendment to a Will) or by destroying a previous Will and executing a new one. However, it is
advisable to seek the advice of an attorney when changing a Will. A Will that is not correctly amended could cause confusion after death and, often, leads to contests by disgruntled heirs.
Probate is a court-supervised process that oversees the administration of a deceased person’s estate. Its purpose is to assure that a deceased person’s
debts are paid, the beneficiaries described in the Will ascertained, the executor’s or administrator’s actions are monitored, income and estate taxes are paid, and the assets of the estate are distributed according to the
deceased person’s Will. Court supervision is the biggest advantage to probate. It allows for a measure of accountability when disputes are anticipated. The disadvantages of probate are that the process is public, the costs and
expenses are usually greater than if an estate were administered through a living trust, and the process could take a year or more to complete.
Yes. Certain property will not have to pass through probate before it can be distributed. They include jointly held property (joint bank accounts, real
estate held as joint tenants, etc.), community property (unless one spouse Wills away his or her one-half interest in the community property), small estates (in California estates valued at less than $100,000 can pass by way of a
signed affidavit according to the probate code), life insurance proceeds (as long as they are not payable to the estate of a deceased person), IRA’s, 401K’s, retirement accounts, and property passing to a surviving spouse
(California allows property to pass to a surviving spouse through a streamlined process called a spousal property petition), and assets held in a living trust.
A revocable living trust, also known as an revocable inter-vivos trust, is a legal document that allows you to direct how you want your assets to be
distributed when you die while allowing you to maintain control of those assets during your lifetime. When a living trust is combined with a comprehensive estate plan, some of the benefits it can provide are the care of disabled
and handicapped children (special needs trust), the prevention of taxation of life insurance proceeds (irrevocable life insurance trust), the private administration of a deceased person’s estate after death, the nomination of a
successor by the deceased person to manage estate assets in the event the deceased person becomes incapacitated, the benefit of directing how estate assets are to be distributed at death and to whom, the benefit of allowing
married couples to take full advantage of their lifetime exemptions to reduce or eliminate Estate Taxes, the option to pass property with limitations established by the deceased person, the option to establish educational funds
for children, the option to distribute property to children in trust for the benefit of grandchildren, for the purpose of avoiding the Estate and Gift Tax at the death of the children, to the extent authorized under the
generation skipping transfer tax rules, and the benefit of avoiding probate. An estate planning attorney can help you plan and select the appropriate options tailored to your estate planning needs.
9. Are there any disadvantages
to having a living trust?
In some cases, yes. A living trust is not subject to court supervision. As a result, a trustee may be able to take advantage of the trust to a greater
extent than if the court is supervising the actions of the trustee. In addition, a living trust is generally more expensive than a standard Will, although the difference in cost is nominal when compared to the alternatives of
probate and Estate Taxes. A living trust may not be extremely helpful if one is a young single individual without kids and little or no assets. However, one must keep in mind that assets accumulate over time and circumstances
change for people. A living trust may also still be important in directing how a deceased person is to be cared for in the event of incapacity or disability. Finally, certain individuals (real estate developers) find there
dealings with third parties (banks, title companies, etc.) in connection with real estate may be difficult when title to property is owned by a trust.
10. If I have a living trust, do I still need a Will?
Yes. A Will directs how a deceased person’s assets are to be distributed. When a living trust is created, it must be funded. Funding occurs when assets are
transferred into the trust at the time of creation. What could happen is that future assets acquired by an individual or couple are left out of the trust. Having a “pour over Will” directs that any assets held in your name be
transferred at your death to your living trust. These assets will have to pass through probate, but distribution will be according to the terms of the trust. A Will also permits a deceased person to nominate a guardian to care
for and provide for minor children.
11. Can I avoid Estate Taxes if I have a living trust?
Merely having a living trust does not mean that you will not be subjected to Estate Taxes. A living trust is a tool that can allow married couples, by
effectively planning their estates, to prevent wasting one of their lifetime exemptions to reduce or eliminate Estate Taxes. Each spouse can leave an unlimited amount tax-free to a surviving spouse who is a U.S. Citizen. This is
called the marital deduction. Use of the marital deduction will merely defer Estate Taxes. For example, assume that Amy and Brian are married in California with a two-million ($2,000,000) dollar community property estate. When
Amy dies, her one-half interest in the estate ($1,000,000) will pass tax-free to Brian as a marital deduction provided that Brian is a qualified U.S. Citizen. Brian would then be the owner of a $2,000,000 estate. However, if
Brian were to die in 2002, his lifetime exemption would be $1,000,000, meaning his estate would be reduced by $1,000,000 for purposes of computing the Estate Tax. This would leave $1,000,000 subject to Estate Taxes, which would
amount to approximately $435,000. If Amy and Brian had engaged in proper estate planning, they could have used a revocable AB Living Trust to eliminate any Estate Taxes. The AB Living Trust works like this. When established, the
trust is funded with $2,000,000 and both Amy and Brian are named as trustees and manage the assets for their benefit. At Amy’s death, the trust splits into two separate trusts, Trust A and Trust B. Each trust would have
$1,000,000 in it. Amy’s exemption would reduce the assets in Trust A by $1,000,000, leaving no Estate Taxes due. Brian can live off of the income from Trust A until his death. When he dies, Brian’s lifetime exemption of
$1,000,000 will reduce the assets of Trust B to zero, leaving no Estate Taxes due.
The Estate Tax is a Federal Transfer Tax. Congress allows each of us to pass a certain amount of assets tax-free during our lifetime. This is known as the
lifetime exemption. Currently, each individual can pass $1,000,000 tax-free in the form of lifetime gifts or at death. Any amount transferred in excess of this amount is subject to either a Gift or Estate Tax. This exemption will
increase for Estate Taxes (but not for Gift Taxes) to $1,500,000 in 2004 and 2005, $2,000,000 in 2006-2008, $3,500,000 in 2009, and is repealed in 2010, when the Estate Tax is abolished. In 2011, Congress can reinstate the Estate
Tax. The Gift Tax rates for will gradually be reduced until it reaches 34% in 2010. Each individual can give away $11,000 annually to anyone, without having the gift reduce the lifetime exemption. In 2002, the Estate Tax rate
starts at 41% and increases to a peak of 50%.
13. What is included in my estate for purposes of
determining Estate Taxes?
Almost everything you own will be included in your estate to determine Estate Taxes. This includes one’s home, business interests, bank accounts,
investments, personal property, IRAs, retirement plans and death benefits from life insurance policies payable to or owned by the estate. These items are reduced by one’s debts at death, expenses of administration of the estate
(such as executor, legal, and accounting fees), certain medical expenses, funeral expenses, marital and charitable deductions and certain losses. The value of the estate after deductions is subject to the Estate Tax to the extent
it exceeds the exemption amount established by Congress at the time of death.
14. How can I remove assets from my estate without being
subject to estate or gift taxes?
You can give up to $11,000 annually to anyone you want tax-free. So, if you and your spouse each give $11,000 to your three children and two grandchildren,
you can give away $110,000 annually. This is a great way to reduce the size of your estate. Other ways to reduce your estate include use of the Irrevocable Life Insurance Trust, the Qualified Personal Residence Trust, the Grantor
Retained Annuity Trust and Grantor Retained Unitrust, the Family Limited Partnership, and the Charitable Remainder Trust.
You can also establish an irrevocable life insurance trust to remove your life insurance from your estate. The irrevocable life insurance trust becomes the
owner of your life insurance policy. However, you must live at least three years after the transfer. At death, the life insurance proceeds will not be in your estate. You can name the irrevocable life insurance trust as the
beneficiary of the policy. When you pass away, the life insurance proceeds will be paid according to the instructions of the irrevocable life insurance trust (i.e. to your spouse, children, etc).
You can establish a Qualified Personal Residence Trust to transfer your home out of your estate. This works by transferring your home into a trust for an
established time period for the benefit of your children. You can continue to live at your home. When the period has expired, the home is transferred to your children and is not included in your estate. If you pass away before
expiration of the period established in the trust, your home is included in your estate. At the time of the transfer, the value of your home will be discounted for gift tax purposes since your children will not receive the home
until some future period. The discounted value of the home will be used to determine the gift, allowing you to maximize your lifetime exemption.
17. What is a Grantor Retained Annuity Trust (GRAT) and
Grantor Retained Unitrust (GRUT)?
You can establish a GRAT or GRUT assets such as a stock, a business, real estate, etc., for a fixed number of years while still retaining the income. If
you do not live until the set period expires, the asset is included in your estate. After the set period expires, the asset is passed to your children at a discounted value since they would not be receiving the asset until some
future period. This enables you to remove investment assets from your estate while allowing you to retain the income for a fixed period.
You can reduce your estate by transferring a family-owned business, real estate, stock, etc., to your children by establishing a Family Limited Partnership
(FLP). The benefit of a FLP is that you and your spouse can maintain control over your assets as the general partners. Each of your children can be given limited partnership shares, which can be given annually to make use of the
$11,000 annual gift exemption. The FLP allows both spouses to retain control no matter how much of the assets are transferred to the children. In fact, as limited partners, the children cannot sell or transfer their shares
without the parents’ approval. As for the examples above, the shares of the limited partnership are discounted since there is no market for them.
You can reduce your estate by transferring establishing a Charitable Remainder Trust. By doing so, you can reduce your estate and while donating to a
charity of your choice. The Charitable Remainder Trust is useful for appreciated assets (stocks, real estate, etc). The asset is transferred to an irrevocable trust, removing it from your estate and providing you with a
charitable income tax deduction. The trust then sells the asset at the fair market value, but is not required to pay capital gains tax. You retain a lifetime income stream from the trust that is higher than you would otherwise
receive since the principal is not reduced by capital gains tax. At your death, your favorite charity receives the assets.
20. What is the Generation Skipping Transfer Tax (GST)?
The GST is an additional transfer tax that applies when a transfer “skips” a generation. An example of when this might occur is when parents leave part of
their estate to grandchildren. In the past, wealthy grandparents made use of trusts that left a life income to their children. On the death of their children, the trust would leave a life income to the grandchildren. On the death
of the grandchildren, the principal would then be distributed to great grandchildren, avoiding Estate Taxes at the prior “skips” in generations. This allowed for the accumulation of wealth and appreciation of assets. Congress
then added the GST to impose a transfer tax for individuals bypassing their children’s generation. For 2002, the GST is at a 50% tax rate. The GST is in addition to the Estate Tax, which is also taxed at a 50% rate in 2002. The
good news is that in 2002, each individual is allowed a $1,100,000 GST exemption, which can be used with a revocable living trust to allow a husband and wife to take full advantage of their combined $2,200,000 GST exemption while
reducing or eliminating Estate Taxes with the trust.
The information contained on this website is not intended as a source of legal advice. You should not act upon or rely on information at this or any other website without the advice of competent counsel, especially if you reside outside the State of California, where I am not licensed to practice law and don’t give advice. Nothing provided by this website is intended to create an attorney-client relationship. Sending e-mail to this firm or to an attorney at this firm will not create an attorney-client relationship. This website is intended for educational and informational purposes only. Please read the full
Disclaimer page to this site by clicking here.