WHAT IS A LIVING TRUST, EXACTLY?

Much of the rest of this book will be about constructing a good living trust. But what is a living trust, exactly?

As I explained briefly earlier in the book, you can think of a living trust as a kind of vessel, a bucket which you create, and into which you place your stuff. Some things, like IRAs, 401(k)s, annuities and life insurance do not go into the trust, (See Mistake #5).

Basically, when your stuff goes into a bucket, it’s a lot easier for you to carry around, a lot easier to track, and a whole lot easier to pass on to another person. Forgive me for extending the metaphor, but if your stuff is not in a bucket, when you die, it falls onto the ground. Then other people have to find it, figure out who owned it, and go to court to prove it’s now theirs. Only then can they pick it up off the ground.

When you (or you and your spouse) create a living trust, you literally transfer many of the things you own into that trust. And while you are alive, you remain in control of that trust. When you die or become incapacitated, you give control of your trust to someone else. Because, according to law, the living trust owns all that stuff, and the trust survives you, no probate is required. There is nothing to prove to a judge. No “probare” needed. The trust continues to be the legal owner of the assets. Control of the trust simply passes to a new trustee.

As I also said in the Introduction, a living trust may sound like a legal fiction, but it is not. Living trusts are the very sensible way our society has devised to make succession easy, logical, and low cost. Trusts are the way we preserve legacies—a way of cheating some of the chaos created by death.

Every living trust includes at least three key roles. And while you are alive and of sound mind, you can play all three roles in the trust.

First, there’s the grantor. That’s the person (or jointly as a married couple) who creates the trust “bucket” and puts all their stuff into it. In the beginning, that would be you, or your parents, if you’re helping them get this done. Sometimes, other names are used for the grantor, such as the settlor, trustor, or trust maker, but it’s all the same idea. Attorneys prefer grantor, because that word has a specific meaning in our tax laws—the Internal Revenue Code.

Second, there’s the trustee. That’s the person (or couple) who controls the trust. Again, while the grantor is alive and well, that’s usually you.
Third, there’s the beneficiary. This is the person (or couple) who has a right to all the benefit of the stuff in the bucket.

While you are alive, this is definitely you.

Again, when you are alive and well, you generally play all three roles—that’s why it’s a living trust, because the trust protects you now, and continues to protect your estate when you are no longer able to protect it yourself. All your stuff is in the bucket, and as the grantor, when you get more stuff, you just add it to the bucket.

Need to pay your credit card bill? Your mortgage? Get some groceries? Buy a ticket to Hawaii? As trustee, you are the only one who can reach into the bucket and take stuff out for use by the beneficiary. You can do that as often as you like, because while you are alive, you are also the beneficiary.

Your kids go off to college? You write a check from the trust. Your daughter gets married? Paid from the trust.

You can treat the money in a trust completely as your own money, the house owned by the trust as your house, the car in the trust as your car—though again, in the eyes of the law, it all technically belongs to the trust.

HOW A LIVING TRUST PROTECTS YOU AND YOUR ESTATE

Now, what if you become so sick that you cannot exercise proper control over your assets? Without a trust, a lot of uncertainty and confusion attends disability. (See Mistake #8: Forgetting to Plan for Disability.)

With a trust, everyone knows exactly what will happen. Why? Because it’s written down. You will have designated someone else to take the role of trustee in your absence. Crucially, however, because you (or you and your spouse) remain the sole beneficiaries of the trust, the new trustee can only use your assets to take care of your needs: food, clothing, and mortgage payments, for example. In the event that you become capable of taking the trustee role again, the trust returns that power to you.

Here’s the key to avoiding probate: when you (or you and your spouse) pass away, the trust continues. It does not die with you. Only the names playing the roles change. There’s a new trustee and a new beneficiary, specified by you in the trust. And, presto! Your assets can be dealt with and passed on without any court or probate process required.

If Bob Sr. had created a living trust, placed all of his assets and accounts into that trust, and then named Bob Jr. as trustee when he died, well, our story would have had a very different ending.

On that first Monday morning when Bob Jr. showed up at Friendly Bank, he would only have needed to bring a copy of the signed trust, his father’s death certificate, and his photo ID. That’s it. The bank would have immediately given him control of his father’s accounts. Bob Jr. may also have had to get a “Taxpayer Identification Number (TIN)” from the IRS by submitting a form SS-4. The TIN belongs to the trust and functions like a Social Security number for the trust to deal with assets in the trust. Bob Jr. would not use his Social Security number, or that of his late father.

The manager would have said, “Terrific. You are now the trustee. You are in charge. We will change the name on the living trust account here at Friendly Bank, and starting today, you can sign the checks.”

That’s how simple the succession would have been. No published notices, no court dates, no legal fees, no judge, and no “form pleading.” Just an orderly passage of assets, generation to generation, in exactly the manner Bob Sr. would have desired.

Had minor children been involved, Bob Sr. could have designated a trustee to watch over the assets in his trust until those children were out of college. And in separate documents, as part of a complete estate plan, he could have nominated proper guardians for their well-being.

There’s more, of course. If Bob Sr. were a partner in a business, he could have used his estate plan to designate a trustee to take over his decision-making powers and business assets for the benefit of his estate and heirs. Maybe that trustee would have been Bob Jr. Or perhaps, it would have been a business associate he trusted, with Bob Jr. still being the beneficiary.

I hope you now understand why you must do whatever you can to protect your heirs from probate—and how a living trust will be critical to your plans.

Even with this understanding, however, it is imperative that you avoid making the mistake of assuming that all living trusts are more or less the same. Or, that they can be created with some cut-and-paste template.

In our next posts, we’ll look at the different kinds of living trusts, and how they must be custom-built for the complexities of modern families and modern life.

For more information on how to begin your living trust, contact our team today.

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Education Savings Strategies You Might Not Know About

The Benefits of a 529 Education Savings Plan

Named after a section of the tax code enacted two decades ago, 529 education savings plans are a tax-advantaged plan that encourages parents to save money for their children’s education. Although contributions are not deductible, the invested assets can grow free of federal and state taxes. There are two types of 529 plans – one lets you pre-pay tuition at a qualified education and lock in current tuition rates, while the other lets you invest in a tax-deferred account that can be used to pay in the future for tuition.

Traditionally, withdrawals are tax-free if they are used to pay eligible education expenses such as college tuition, books, room and board, fees, and possibly even computers. But things have changed in the last few years as to where this money can be spent, and there are a few helpful benefits that you may not know about.

Paying for K-12 Education

A significant change in the new tax law is the gift of flexibility: 529 plan assets can now be used for up to $10,000 per year, per student, for private, public, or religious and secondary school tuition for K-12. This alleviates concerns of “what if I save all this money and my child doesn’t go to college?” All earnings are exempt from federal taxes when withdrawn for appropriate expenditures, providing a huge tax advantage.

Of note is that private schools will likely want to know about a families’ 529 savings and may take that information into account when making financial-aid decisions for the school year.

Variations by State

529 plans do not have any residency requirements. You can invest your money in any college in any state, or any state’s plan…regardless of where you reside. There are variations in the features that each state provides, so doing your research will provide great benefit. Some states even require the use of a financial advisor or brokers to buy into their plan, so make sure to factor these additional costs into your budgeting.

Control Over Access

Unlike some other education savings accounts, you will maintain control over your plan instead of worrying about the money falling into the hands of an irresponsible beneficiary; the named beneficiary has no legal rights to that money. There are no restrictions for whom you can open these accounts – it can be a family member, friend, co-worker, or even yourself.

Transfers To 529 ABLE Accounts

In another meaningful change, the new tax laws enable savers to transfer funds from 529 plans to 529 ABLE accounts. ABLE accounts are for people who become blind or disabled before age 26, and the person’s access to Medicaid and Social Security income, or SSI benefits is not limited.

Like 529 plans, 529 ABLE plans allow assets to grow tax-free. Annual contributions are capped at $15,000, and withdrawals can be tax-free if used to pay expenses such as housing, legal fees and employment training. Total assets in an account can reach $100,000 without affecting SSI benefits.

The recent change allows transfers of up to $15,000 a year from a regular 529 plan to a 529 ABLE account. The ability to make such transfers avoids a significant drawback: that after the disabled person’s death, remaining funds in an ABLE account typically go to the state to repay benefits if the person was receiving Medicaid—as many are.

But the assets of a regular 529 plan needn’t go to the state at death. Someone could fund a 529 account for a disabled person and transfer money from it as needed to a 529 ABLE account. This arrangement offers tax-free growth and perhaps a state-tax deduction, without giving up ownership of assets.

Bonus information

Did you know that a 529 plan account can be a great estate planning tool that can be stretched to benefit multiple generations? Once one child has completed his or her education, the remaining balance continues to grow tax-free until the next child is ready to enroll. You remain in full control of the assets and can determine account ownership or change the beneficiary.

No matter your stage of life, it’s never too late to save for an education for a loved one. With some simple strategy and some help from your legal and financial advisors, you can find ways to reduce college costs and increase the ways to pay for it.

Please consult with your tax professional regarding your individual tax situation.

 

  tel: 805.312.7200

 

Source: Ascent Wealth Management, a financial services partner. https://myascentwealth.com/

 

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Do All Estates Need Probate?

In California, a full probate is not necessary if someone dies with under $150,000 in assets. For example, say, Joe Client dies owning a bank account in his name worth $130,000 and no other assets. The beneficiaries (i.e., the ones getting Joe’s stuff under his will or intestacy if there is no will) complete what is called a “Small Estate Affidavit” and give it to the bank. Upon receiving the affidavit, the bank will release the funds to the beneficiaries.

For real property, there are also simplified procedures to transfer ownership to the beneficiaries if it, along with other assets in the estate, are worth under $150,000. This $150,000 figure is based on the gross value of the estate, NOT the net value. There is a simple procedure for transferring real property worth between $50,000 and $150,000 and there is a simpler procedure for real property worth less than $50,000. I’ll illustrate this with two examples.

Real Property worth between $50,000 and $150,000

Let’s say Joe Client owns a bank account worth $10,000 and a small home in the desert worth $120,000. Joe’s beneficiaries must file a “Petition to Determine Succession to Real Property” and go to a hearing in probate court before a judge. After the hearing is completed and the judge signs an order, the beneficiaries take the signed order and record it with the county recorder’s office to get title in their names.

Real Property worth less than $50,000

Same example as above, but instead of real property worth $120,000, Joe has a parcel of land in Salton Sea worth $5,000. Joe’s beneficiaries can do what is called an “Affidavit Re Real Property of Small Value” for the Salton Sea land. The affidavit is completed by the beneficiaries and given to a probate court clerk to stamp and return. No hearing is necessary. To seal the deal, the beneficiaries take the stamped affidavit and record it with the country recorder’s office to get title in their names.

These procedures are also used if someone has a trust and dies with an asset outside of the trust. The asset or assets outside of the trust can be put in the trust with these simplified procedures if the values are in the ranges explained.

If you have an estate worth more than $150,000, you need a trust to avoid probate! Or, if you have a trust, you need to make sure your stuff is in the trust! Get your trust done and make sure it’s working for you by giving me a call and scheduling an appointment – (805) 484-2769.

Stephen M. Wood, Attorney

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Grass Valley, Nevada City, Lake Wildwood, Penn Valley and Alta Sierra Residents – Did You Know?

If you are a resident of Grass Valley, Nevada City, Lake Wildwood, Penn Valley or Alta Sierra, you now have more choices when selecting your Estate Planning attorney. The areas in and around Grass Valley and Nevada City already have living trust attorney’s in town, but just a short drive down Highway 49, in beautiful, historic Auburn, you will find CunninghamLegal. For those who are not familiar with CunninghamLegal, we are The Living Trust Lawyers, have been in business over 20 years and have handled thousands of living trusts and trust administrations.

That’s what we do. Estate Planning, Living Trusts and Trust Administration. In fact, we even have two California Bar Board Certified Specialist attorneys, one attorney with an advanced LL.M. degree and another attorney who will be Board Certified soon; all in our Auburn office to serve you and your families.

Our current clients from Grass Valley, Nevada City, Lake Wildwood, Penn Valley and Alta Sierra love the small town feel of their cities, but at the same time, they recognize that they don’t want people in town to know their business. That’s why they head to Auburn.

If you are the kind of person who values privacy and expects a fantastic client experience give us a call for a free, no obligation consultation. We’ll even review your existing trust for free.

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What happens when you die?

“In this world nothing can be said to be certain, except death and taxes,” Benjamin Franklin once wrote in a letter.

Unfortunately, those words are just as true today as they were in the 1700s.

Worse, sometimes the two come as a package deal.

After all, when someone dies, their family members must go through a lengthy series of tax, financial, and legal steps in order to sort out the affairs of the deceased.

And just so we’re being clear, this article is not a comprehensive list of what to do after someone’s death. Contact your legal, financial, and tax adviser or advisers for advice catered to your specific situation. Also, some legal language was simplified for clarity.

It will be necessary to determine whether or not there is a will.

If there’s a will, the executor will be named in the will. In lay-person English, their job is to administer the process by which assets are transferred, including paying the deceased’s debts, filing their income-tax returns, and distributing any remaining assets according to the terms of the will.

If there’s no will, the remaining assets pass to the decedent’s heirs according to the state of law. The executor is appointed by the court.

Although Hollywood has glamorized the role of the executor of the will, one is not always needed.

Sometimes, an executor may not even be needed. The most obvious reason being if an asset is owned jointly with the right of survivorship. For example, if a couple’s bank account was jointly owned, then when one spouse dies the second gets the account.

Furthermore, if there is a beneficiary designation, such as life insurance or an RIA, then in order to receive these assets the beneficiary needs to file a claim form.

Still, there are other reasons, such as if the deceased held all of their assets in a revocable living trust, or if the deceased’s individual assets do not exceed a certain threshold — which depends on the state.

The executor or closest family member will need many copies of the death certificate.

It’s important to get multiple copies of the death certificate. They will be necessary when notifying financial institutions, government agencies, insurance agencies, and others about the death.

Death certificates can be obtained at the funeral home. It’s a good idea to obtain at least 10.

The deceased’s debts will (usually) not be passed on to family members

The deceased’s estate is liable for debts, but the deceased’s family is usually not.

The exception to this is when debts are in joint names/cosigned, in which case the survivor party will be responsible for the debt.

Notably, although the family is not legally responsible for the debts, they could still feel the effects. Any money or assets must be used to pay off the deceased’s debts before anything is given out to the surviving parties.

Someone will need to contact Social Security and other government agencies, alerting them of the death.

“This step is typically completed by the executor of the decedent’s estate. The executor should contact the Social Security administration to let it know to discontinue Social Security payments,” Garber told Business Insider. “If the Social Security Administration is not notified, the decedent’s estate will owe the money back.”

Additionally, “if the decedent was a veteran, the executor should contact the VA, as there may be a death benefit payable as a result of the decedent’s death.”

After that, every other group and company that the deceased was associated with will need to be contacted.

An executor will need to get in touch with banks, savings providers, mortgage providers, credit-card companies, and insurance companies to notify them of the death.

Additionally, they will need to get in touch with the “everyday things” that may not immediately come to mind, including utility companies; internet, phone, and TV companies; and even the deceased’s employer.

Federal student loans will be discharged after death, but private ones will not.

According to the US Department of Education, if a student-loan borrower dies, then that person’s federal student loans will be discharged.

Additionally, if a parent plus a loan borrower dies, then the loan may be discharged if the parent dies, or if the student on whose behalf the parent obtained the loan dies.

However, this does not apply to private student loans.

The executor will have to file a final income tax return, and possibly an estate tax.

“The executor will also have to file a final income-tax return for the decedent. On the income-tax return, the executor will indicate the decedent is deceased,” Garber told Business Insider.

“Also, if a decedent’s gross estate exceeds $11,200,000, the executor will have to file an estate-tax return within nine months of death,” he added. “If an estate tax is due and a return is not filed, there are penalties for failure to file and file to pay and interest is assessed on any amounts due. If the executor distributes the assets without filing the return, the government may have recourse against the executor.”

If an heir wishes to live in a home with mortgage debt, then they are responsible for making the payments. Otherwise, they can try and sell the house to pay off the existing loan.

If a person who inherits a house with mortgage debt wishes to live in it, then they will be responsible for making the mortgage payments.

Alternatively, the person can choose sell the home in order to attempt to pay off the existing loan. But if the mortgage is worth more than the property, then the executor can try and get the bank to agree to a short sale or tell the bank to foreclose.

“That being said, if there is a personal guarantee, the bank will have a claim against the decedent’s estate to the extent that there is a short fall and the decedent’s other assets will be used to pay that claim,” according to Garber.

If the deceased rented, the lease agreement does not automatically terminate upon death.

The most important thing to note here is that a lease agreement does not automatically terminate upon the death of a tenant.

Month-to-month renting: “Generally, the official written notice of the tenant’s death acts as a 30-day notice and signals the end of the lease. The estate is responsible for paying all rent owed to the landlord for 30 days after the written notice is delivered,” according to Rent Prep.

Long-term renting: Technically, the deceased’s estate is responsible for the rental payments until the lease’s expiration. But the lease can sometimes be broken, and the executor will continue to pay the rent until new tenants move in.

Auto loans fall under the ‘estate planning’ category — meaning that the executor will handle

The executor will be in charge of paying of the deceased’s debts — including car loans — from the proceeds of the estate.

But if the estate does not have enough money to pay off the debts — and provided the deceased was the only one who borrowed the loan — then “the lender generally repossesses the vehicle and writes off the car loan as an uncollectible loss,” according to Internet Autoguide.

Someone will need to contact the local post office to stop or forward the incoming mail.

Sometimes it’s easy to forget the small, day-to-day things, but it is important that someone contacts the local post office to stop or forward any incoming mail.

Additionally, it would be a good idea to cancel any magazine subscriptions that the deceased may have had.

Creditors will have a claim against the deceased’s estate.

“When a person dies, that person’s creditors have a claim against his or her estate. The executor pays all of the decedent’s debts with his or her assets,” Garber told Business Insider. “If the decedent’s assets are insufficient to pay his or her debts, then those debts die with the decedent so long as somebody is not jointly liable on them.”

“In the case where a decedent’s debts exceed his or her assets, state law sets forth an order of priority in paying off a decedent’s debts,” he added.

The executor of the deceased’s estate can reclaim any debts owed.

“A debt owed is an asset of the decedent’s estate. The executor of the decedent’s estate is in charge of collecting the debt. It is important to make sure that debt is papered so that the executor will have a way to learn about the debt,” Garber told Business Insider.

BONUS: There’s also the question of what to do with emails and other online accounts.

In some cases, a person agrees that no one else will be entitled to their online account — in which case the company will delete the account and its contents after death.

But different companies have different rules. We’ve outlined a few:

Gmail account:

  1. The deceased decides what to do with the account prior to death.
  2. A relevant party can submit a request regarding the deceased’s account in order to close it, obtain data, resolve a potential hijacking, or simply notify Google that the user has died.

iCloud account:

  • When you sign up to iCloud, you agree that your account is “non-transferable” and that any rights to your Apple ID/content in the account terminate after death. The account may be terminated and all the content within it deleted upon the receipt of a copy of the death certificate.

Facebook/Instagram account:

  1. The account can be “memorialized.” It will say “remembering” next to the name, and no one will be able to log in to it.
  2. A person can delete their account prior to death.

Twitter account:

  • A person authorized to act on behalf of the estate or a verified immediate family member can work with Twitter to deactivate the account, and possibly delete certain images.

Source: http://www.businessinsider.com/what-happens-with-finances-when-you-die-2015-9

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2018 Medicare Parts A & B Premiums and Deductibles

On November 17, 2017, the Centers for Medicare & Medicaid Services (CMS) released the 2018 premiums, deductibles, and coinsurance amounts for the Medicare Part A and Part B programs.

It appears there aren’t many changes, but it’s still a good idea to familiarize yourself with the latest information. For example, Medicare Part B deductible is unchanged, the Medicare Part B premium is unchanged, but the Part A deductible has gone up.

Read the CMS Factsheet here: CMS Medicare Fact Sheet

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One million dollars. How long your money will last in retirement.

CunninghamLegal – The Living Trust Lawyers

One million dollars. Think about when you were a kid and how the concept of one million dollars and being a millionaire seemed like something only encountered in movies. Reality, however is often stranger than fiction, and the truth is one million dollars in 2017 is a realistic number that deserves some conversation. Specifically, have you thought about and talked with your family and children about how far one million will take you in your retirement? Will you have enough money after working 20, 30, 40 years to live a comfortable life? Where will you live? Which state makes the most sense? Ok, that’s a leading question, but “making the most sense” is based on many variables such as lifestyle, weather, proximity to family and equally as important, the cost of living.

Top 5 states where your dollar will last the longest:
1. Mississippi
$1 million will last: 26 years, 4 months
2. Arkansas
$1 million will last: 25 years, 6 months
3. Oklahoma
$1 million will last: 25 years, 2 months
4. Michigan
$1 million will last: 25 years
5. Tennessee
$1 million will last: 25 years

Top 5 states where your dollar will last the shortest:
1. Hawaii
$1 million will last: 11 years, 11 months
2. California
$1 million will last: 16 years, 5 months
3. Alaska
$1 million will last: 17 years, 0 months
4. New York
$1 million will last: 17 years, 1 month
5. Massachusetts
$1 million will last: 17 years, 4 months

The rest of this article can be found on the USA Today site at How long one million will last in retirement

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Trust Protector. Like a Superhero.

CunninghamLegal – The Living Trust Lawyers

Trust Protector. Like a Superhero: The American Academy of Estate Planning Attorneys offers insight on the subject of Trust Protectors. In the Estate Planning practice in the United States the Trust Protector is a relatively new concept. Originally started in England, it made it’s way to the United States only recently. As a result, not all Estate Planning attorneys include Trust Protector provisions in living will. Some do, but not all. When you look for the right attorney be sure to ask if they have Trust Protector language in the living trusts they draft. 

Read the entire article: Trust Protector

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Estate Planning Basics – Asset Protection – Part II

CunninghamLegal – The Living Trust Lawyers

Estate Planning Basics II: The American Academy of Estate Planning Attorneys offers great information on the subject of Estate Planning. This article continues the discussion of the basics of Estate Planning with information on protecting your assets. How you divide up your assets in your trust is no easy task, and is certainly not a do-it-yourself type of activity.

Read the entire article: Asset Protection in Estate Planning – Part II

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