Lonich & Patton, LLP

Living Trusts

A living trust (also called a revocable living trust) is an important Estate Planning tool serving a multitude of needs.  Perhaps the most important benefit is protecting you from the courts and the probate process. In its simplest form a living trust is a written agreement which sets forth how you decide what happens to your assets in the event of your death.  While you are living you maintain complete control over your assets in a living trust and retain the power to change or amend the living trust at any time.

Comprehensive living trusts accomplish at least three fundamental estate planning objectives:

• A living trust currently allows parents to pass up to $2 million to their children without incurring estate taxes and will create structures to reduce taxes on estates with assets of more than $2 million. These limits will increase to $3.5 million beginning in 2009.
• A living trust for families with young children should establish a trust that allows a trustee to manage property left behind, defray the costs of raising the children, provide for their education and ultimately distribute the assets to the children in a responsible way.
• A living trust allows parents to pass their estate directly in trust to their children, thus avoiding the expense and delay of probate.

Living trusts created by Lonich & Patton, LLP effectively address these issues (the final critical issue-guardianship-is addressed in a simple will that we prepare together with the trust). While tax savings and asset management for children can be easily accomplished through a will, a will is subject to probate. In most situations, the safest and most effective way to avoid probate in California is to establish a living trust. Probate is time consuming and expensive. In most metropolitan areas in California it takes a relatively uncomplicated estate 6 to 18 months to move through the probate gauntlet. All of this delay creates additional expense. California probate proceedings typically consume 3% to 6% or more of the gross value of the probate estate. A living trust can be settled in a matter of weeks at a fraction of the cost.

The mechanics of a living trust during the lifetime of people who establish a trust (the “settlors”) are straightforward. Property is transferred into the trust which then holds the property. Since the settlers are the trustees, the settlers are free to invest, spend or move the assets into and out of the trust at will. As beneficiaries, they are able to use trust principal or income for themselves as they choose. Finally, during their lifetimes, the settlers can alter, add to or even revoke their living trust at any time for any reason. In addition to the advantage of avoiding probate, the living trusts provide some additional benefits. Because there are no public filings in probate court, family members are less likely to be subject to solicitations and the finances of the estate are not made public. Living trusts also allow a trusted family member, friend or advisor to manage trust property if the settlers are incapacitated. In addition, if a trust holds out of state property, there will be no need to open another probate proceeding in the state where the property is located. Finally, a living trust is usually more difficult to contest than a will.

Special Needs Trust

If you would like to make provisions for the care of a disabled child or adult, you may want to consider setting up a special needs trust (also known as a supplemental needs trust or SNT). A special needs trust lets you leave property and other assets to your loved one without disqualifying them from certain government funded benefits. At the same time, it allows you to provide for their special needs and ensure that they are able to live the quality of life and have the quality of care that you can provide for them even after you are gone.

In order to qualify for Medicaid and social security income (SSI), a person cannot have more than $2000 in assets. So, for example, directly leaving someone $100,000 will immediately disqualify them from receiving these benefits, which can provide long term support and services as well as crucial medical care to a disabled person. By leaving your provisions for your loved one in the name of an SNT, they can continue to receive Medicaid and SSI benefits while the SNT continues to fund their special needs.

As money cannot be distributed directly to the person with a disability, it is up to the trustee that you’ve appointed to administer and manage the funds to pay for your loved ones special needs which can include:

• Transportation
• Rehabilitation
• Food
• Clothing
• Out of pocket medical care
• Hobby or recreational activity items
• Vacations and other travel expenses
• Entertainment expenses
• Specialized care services
• Other goods and services that are not covered by government funding
• Personal care

It is important that the documents for your SNT provide specific instructions for how you would like your appointed trustee to handle these funds to ensure that your disabled loved one is properly cared for and supported. Lonich and Patton can help you draw up the necessary paperwork while making sure to include your specific instructions.

Setting up an SNT for your loved one also allows them to receive assets from other people. For example, if a step-grandparent leaves your child $75,000, this money can be left to them through their SNT as well. Additionally, if you have an irrevocable life insurance trust (ILIT) where your child is a beneficiary, you can name their SNT as the beneficiary so that they can avail of the income from the ILIT while still receiving government-funded benefits.

Irrevocable Life Insurance Trust

An irrevocable life insurance trust (ILIT) is created to significantly reduce or eliminate estate taxes. Other benefits that can come from an irrevocable life insurance trust include

• Any estate settlement taxes can be paid with proceeds from this trust.
• Assets from the trust are protected from taxes as they are transferred from one generation to the next.
• Your estate is provided with tax free liquidity.
• Proceeds from the trust can be used in conjunction with charitable gift giving.

You may also want to set up an ILIT to make significant cash gifts without any gift tax consequences. There are specific laws governing this type of gift, so you will want to make sure that you consult with an estate planning attorney before setting this up. Whether you would like to set up an insurance policy for your trust or you already have a policy that you would like to transfer to the trusts ownership, Lonich & Patton, LLP can help you.

You will need a trustee to manage your policy, pay any premiums from your trust to the policy, and distribute your trusts assets after your death. It is important to note that an irrevocable life insurance trust is permanent and cannot be changed once it is established. This means that names of beneficiaries that you choose for the trust are also irrevocable.

At Lonich & Patton, LLP, we can help you select the right life insurance policy to go with your trust. We also can carefully set up your trust so that it doesn’t trigger the very same taxes that you are hoping to avoid. For example, electing to transfer an already existing policy to your trust might not be the best decision for you to make if you are an elderly person. If you were to pass away within three years of transferring the life insurance policy to your trust, your policy’s proceeds would be considered part of your taxable estate.

Our estate planning attorneys don’t believe in offering services that are “one size fits all”. We understand that each family has particular needs and concerns, and we can customize our estate planning services to meet these specific needs so that your long term wishes are carried out.

We invite you to visit one of our offices in San Jose or Long Beach for a free, no obligation consultation.

CONTACT US
1871 The Alameda, Suite 475
San Jose, CA 95126
Phone: (408) 553-0801
Fax: (408) 553-0807
contact@lonichandpatton.com