California Probate - Law Offices of Janet Brewer Blog

Have You Thought About Creating an AB Trust? What You Need to Know

If you and your spouse are thinking about making an estate plan, one of your options could be an AB trust. Many couples have used AB trusts to lower estate tax bills and to make sure that the surviving spouse has financial resources.

What Is an AB Trust?

An AB trust begins as a single joint trust that a married couple creates. Often, each spouse places assets in the trust. The trust’s beneficiary or beneficiaries can be anyone besides the two spouses.

The name “AB trust” comes from the split that happens when one spouse dies. The trust splits in half, with one trust becoming “trust A” or the “survivor’s trust” and the other “trust B” or the “decedent’s trust”. When the original trust splits, money from the original trust that totals the amount of the estate tax exemption in the year that the first spouse dies goes into trust B. The rest of the money from the original trust goes into trust A.

The surviving spouse has complete control over trust A and can use the money in it to pay for expenses. On the other hand, the surviving spouse does not have control over trust B. While a carefully drafted AB trust may allow a surviving spouse distributions from trust B, the principal often stays intact. It will be distributed to the named beneficiaries when the surviving spouse passes away.

Why Are AB Trusts Helpful for Couples?

Married spouses create AB trusts to take advantage of the marital deduction and to correspondingly prevent expensive estate tax bills. Estate taxes on trust A are deferred until the death of the surviving spouse. In addition, trust B is not part of either spouse’s estate and the surviving spouse has no control over it.

As a result, trust B is not part of the surviving spouse’s estate when he or she passes away, lowering potential estate taxes as a whole for the couple. Further, the surviving spouse can take advantage of estate tax portability to keep any remaining portion of the deceased spouse’s estate tax exemption.

The surviving spouse gets the benefit of funds from trust B without control over them, as well as control over funds in trust A. When the surviving spouse dies, his or her potential estate taxes are lower. In addition, an AB trust can provide financial security for the surviving spouse. This is helpful especially if one or both of the spouses does not have an income or plans to retire soon.

Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.

What Do I Need to Know about a Family Trust?

“A trust can be used to manage estate taxes, shelter assets from creditors and pass on wealth to future generations. A family trust is a specific type of trust that families can use to create a financial legacy for years to come. There are several benefits to creating one, although not every family necessarily needs one. If you’re curious about where this type of trust might fit into your family’s estate plan, here’s what you need to know.”

A family trust is a trust you create to directly benefit your family members financially, explains Yahoo Finance in its article “What Is a Family Trust and How Do You Set One Up?”

The three parties involved in a trust arrangement are the grantor, the trustee, and the beneficiaries. The grantor is the person who creates the trust and transfers her assets into it. The trustee manages the assets in the trust for the beneficiaries. The beneficiaries get some type of financial benefit from the trust. With a family trust, it’s just your family members who are beneficiaries.

This is a kind of living trust and can be revocable or irrevocable. It takes effect during your lifetime. A revocable trust can be changed or terminated at any time, but an irrevocable trust is permanent. With a revocable family trust, you can be your own trustee, and name successor trustees to take control, in the event you become incapacitated or pass away. If it’s an irrevocable trust, you must designate another person to act as the trustee.

A family trust makes certain that your property is managed according to your instructions for your beneficiaries. You can add a condition that a child can’t use the money until they complete college or reach a certain age. You might also create a family trust if you have a child who needs specialized medical care.

A family trust can also be useful in estate planning if you want to avoid probate. Transferring the title of assets to a family trust means that they’re no longer subject to probate. You can also use an irrevocable family trust to protect assets from creditors if you’re sued.

Speak with an experienced estate planning attorney to make certain that this type of trust is right for you.

There are several types of trust options you can use in estate planning. Some of these trusts have extremely specific purposes, while others are more general. An estate planning attorney can help you compare different trust options to help you determine if a family trust is right for your estate plan.

Reference: Yahoo Finance (March 17, 2020) “What Is a Family Trust and How Do You Set One Up?”

Irrevocable Trusts Can Protect Family Assets

Irrevocable trusts can also offer flexible solutions.

Irrevocable trusts can protect the assets created by a family over a lifetime, according to The Chattanoogan in “Keeping Your Family from Losing Its Inheritance.” They can also provide protection from events, such as divorce and substance abuse.

If we are lucky, we are able to leave a generous inheritance for our children. However, that doesn’t necessarily mean we should give them easy access to all or some of the assets. Some people, particularly younger adults who haven’t yet developed money management skills, or others with problems like a troubled marriage or a special needs family member, aren’t ready or able to handle an inheritance.

In some cases, like when there is a substance abuse problem, handing over a large sum of money at once, could have disastrous results.

Many people are not educated or experienced enough to handle a large sum of money. Consider the stories about lottery winners who end up filing for bankruptcy. Without experience, knowledge or good advisors, a large inheritance can disappear quickly.

An irrevocable trust provides protection. A trustee is given the authority to control how funds are used, when they are given to beneficiaries and when they are not. Depending on how the trust is created, the trustee can have as much control over distributions as is necessary.

An irrevocable trust also protects assets from creditors. This is because the assets are owned by the trust and not by the beneficiary. An irrevocable trust can also protect the funds from divorces, lawsuits and bankruptcies, as well as manipulative family members and friends.

Once the money leaves the trust and is disbursed to the beneficiary, that money becomes available to creditors, just as any other asset owned by the person. However, there is a remedy for that, if things go bad. Instead of distributing funds directly to the beneficiary, the trustee can pay bills directly. That can include payments to a school, a mortgage company, medical bills or any other costs.

The trustee and not the beneficiary is in control of the assets and their distributions.

The person establishing the trust (the “grantor”) determines how much power to give to the trustee. The grantor determines whether the trustee is to distribute funds on a regular basis, or whether the trustee is to use their discretion, as to when and how much to give to the beneficiary.

Here’s an example. If you’ve given full control of the trust to the trustee, and the trustee decides that some of the money should go to pay a child’s college tuition, the trustee can send a check every semester directly to the college. The trustee, if the trust is written this way, can also put conditions on the college tuition payments, mandating that a certain grade level be maintained or that the student must graduate by a certain date.

Appointing the trustee is a critical piece of the success of any trust. If no family members are suitable, then a corporate trustee can be hired to manage the trust.

An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances and may include irrevocable trusts.

Reference: The Chattanoogan (July 5, 23019) “Keeping Your Family from Losing Its Inheritance.”

Can a Trustee Ever Be a Trust Beneficiary?

Under some limited circumstances, someone could wear two hats as a trustee and beneficiary of the same trust. While it is technically possible to set up your trust this way, you may want to consider alternatives.

What Are Trustees and Beneficiaries?

The trustee or multiple trustees of a trust manage and oversee trust assets for the benefit of trust beneficiaries. Trust beneficiaries receive payments from the trust, on a regular schedule, when some event occurs, or at the trustee’s discretion. The creator of the trust chooses both trustees and beneficiaries when the legal document that creates the trust is prepared.

What Happens if a Trustee Is Also a Beneficiary?

Usually, the trustees and the beneficiaries are different people or entities. Trustees are often relatives, lawyers, or trust companies. Beneficiaries are often children or relatives, or they may be charitable organizations.

Sometimes the creator of the trust is also the trustee. More rarely, the trustee is also one of the beneficiaries. This could occur if one of the trustees steps down and the only person available to replace him is a beneficiary. Also, this could occur if the trust creator (called a “grantor”) intentionally sets the trust up this way.

What Are the Downsides to Having a Trustee Also Be a Beneficiary?

First and foremost, the trustee may have a conflict of interest – especially if there is more than one beneficiary. He would need to be careful not to place his interests above that of the other beneficiaries. Having a conflict of interest could lead to removal of the trustee or a legal battle over control of the trust.

Second, creditors may be able to access trust assets despite the presence of a spendthrift clause in the trust document. In some situations, having a sole trustee who is also a beneficiary gives creditors the ability to make claims against the trust’s principal (not just its income or interest) despite the trust’s supposed asset protection language. Put differently, the trust could lose money because the trustee is a beneficiary.

In short, there are few benefits and some significant downsides to naming someone both a trustee and a beneficiary of the same trust. It is better to select different people for those roles. The trustee or trustees, in particular, should be people that the trust creator really trusts to handle money and make hard decisions.

Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.

Serving as an Estate Administrator Can Be a Challenge

Administrating an estate? Let’s take a look at just how hard it can be.

People often name a family member or close friend as a trustee. However, sometimes it is wise to think it through and consider the possibility of a professional administrator as a trustee, according to Kiplinger in “Why You May Need a Pro Trustee: Trust Administration is Not Just Common Sense.”

The article details some of the problems that can arise despite good intentions.

Let’s call our client Linda. She wants to identify a successor trustee. Linda’s parents had identical estate plans with trusts that were set up for Linda and her two siblings Jack and Diane. Linda was the family’s responsible one, so she received her share in each estate outright and served as the trustee for the other separate trusts, two for Jack and, two for Diane, since the second of her parents died some 10 years ago. This is not unusual—parents will often give the responsible person in the family, the role of trustee, when their siblings are seen as less likely to perform the necessary tasks.

These four trusts were close in value, with about $440,000 in each. They were identical in other ways: the trustee had the power to pay from income and principal each year for the beneficiary’s health, maintenance and support, but there was no requirement to distribute anything. Linda had done a great job, in keeping with her reputation. For 10 years she recorded every transaction. Because she knew her siblings resented her serving as trustee, she never paid herself a fee.

Linda was tired, and she wanted to let someone else be in charge of the trusts.

When the trusts were presented to an institutional trust officer, it was clear why the trusts had never been merged. Linda’s mom had executed an amendment to the estate plan, after Linda’s dad died that ensured that when these siblings passed (that would be Jack and Diane), the trusts would pass to their descendants. Linda’s mom executed this amendment, so that when Jack and Diane passed away, the trust from the mother would be divided among her surviving children. This meant that Linda would get another share, and Jack and Diane’s children would get less benefit from that trust.

Linda’s mom thought she was doing a good thing. However, her decision put Linda in a bad position. She became an “interested” trustee, with the power to make decisions that would eventually put more funds into her pockets or diminish her share. Of course, that would only happen, if she outlived her siblings.

Linda had been diligent and responsible, insuring that the trusts had the exact same asset allocation and investments, paying out income from the trust and when one called asking for money, giving both the same additional amount from the mother’s trust and the father’s trust, even though any distributions made from the mother’s trust make her less likely to receive a larger share in the future. She also made the same distribution for the other sibling, to keep things even.

However, Linda’s actions, while seemingly very prudent and fair, could be interpreted as a breach of trust that leaves her open to a lawsuit judgment against her.

Her sister Diane had few or no other income sources. Each year, she spent every penny she got, just to get by. Diane requested additional distributions every year. When Diane dies, Jack will receive an additional share of Diane’s trusts, if he survives her.

Jack had plenty of income and assets. If Diane survived him, she’d receive a share of one of his trusts. But wait—Jack’s been receiving funds from the trust that was to have benefited his spouse and dependents, not Diane. Therefore, while Linda has been trying to keep everything fair, she has actually been undermining the trusts that may pass to Jack’s descendants, by distributing funds Jack didn’t even need. Linda could have made distributions from her mother’s trusts to increase the chances that Jack’s and Diane’s descendants would receive a greater share at their parent’s death.

Linda didn’t see the larger picture, and as a result has made 10 years of decisions that could create a serious financial problem for herself, if one of her siblings is litigious.

An estate planning attorney can advise you in creating an estate plan that fits your unique circumstances.

Reference: Kiplinger (Jan. 14, 2019) “Why You May Need a Pro Trustee: Trust Administration is Not Just Common Sense”

It's already February! The New Year Is a Good Time for Estate Plan Review

Don’t limit your attention to your investment portfolio. Include a fresh look at your estate plan.

Your estate plan is really important and that is why you did it in the first place. Don’t let it get out of date, so take a fresh look at any changes in your life that have taken place over the previous year, according to Wealth Management in “Eight Simple Estate Planning Review Items for 2019.”

Here are the eight items that need your attention:

Beneficiary designations. When was the last time you checked these? Beneficiary designations are usually looked at when an account is opened, and often that’s the last time people see them. Look at beneficiary designations for tangible assets, like homes, cars or collectibles. Check legal documents including bank accounts and insurance policies.

Digital asset designations. This is a relatively new area, but very important. Even if you don’t own any cryptocurrency, chances are good you have assets like photos, reward points, websites and more. Each social media platform has a different policy for how accounts are treated on the death of the owner.

Trust funding. This is where many estate plans fall apart. Funding trusts often requires changing titles on bank accounts, homes and other assets into the name of the trust. Major purchases, like a boat or second home, also need to have their titling corrected, so they correspond to trusts.

Documents for adult children. When your children turn 18, they are legally adults and you do not have the legal right to get information or make decisions on their behalf. If you don’t have HIPAA releases, Power of Attorney, and other documents, you may find yourself unable to help in an emergency.

Keep up with life changes. Review your estate plan with an eye to changes in your life: births, deaths, marriages, divorces, big purchases, etc. If you haven’t met with your estate planning attorney or had a phone conversation in a few years, make an appointment now for a review.

Secure photos and memories. How many times have we watched dramatic images of fires, floods, and earthquakes in 2018? Videos, photos, family heirlooms, and artifacts and other irreplaceable items should be stored in some digital format, or in the cloud. If the family includes artists, take photos of paintings or sculptures so at least you have an image of the item should it be destroyed.

Discuss wishes with loved ones. One of the biggest challenges after someone passes, is knowing what they wanted to be done with personal possessions. If you have every Beatles album, unopened, what do you want to happen to your collection? Make inventories and then tell your family what you’d like to have happen with your possessions. You can create a “Legacy Letter” and put it down on paper.

Prepare for incapacity. This is not everyone’s favorite task, but necessary. If you were conscious but not able to speak, what information would your family need? Work with your estate planning attorney to create the necessary legal documents, including medical directives.

Reference: Wealth Management (Dec. 12, 2018) “Eight Simple Estate Planning Review Items for 2019”

What Is a Will, and What Is Its Purpose in an Estate Plan?

When you begin planning your estate for the first time, you will need to learn about common structures for distributing property to heirs such as the will. This blog addresses a few basic questions about wills and their purpose in estate plans. If you have more questions after reading or if you want to make a will, we suggest contacting an estate planning attorney to help you.

What Is a Will?

A will is a legal document that explains who you want to inherit your estate after you die. Your will also lists the person whom you want to have gather and manage your estate (called an executor) before it can go to the people who inherit (called your heirs).

Some people choose to make specific gifts of money, real estate, or personal items to specific people in their wills. Some people choose to give their entire estate to one or two heirs, or to charity. As long as your will follows legal requirements in California, you can give your estate away as you please.

What Is a Will’s Purpose in an Estate Plan?

A will explains a person’s last wishes concerning all property that can go to the heirs under the terms of the will. Your will can be the only estate planning structure in your estate plan, or it can work together with other legal documents. If it is the only structure, it usually gives away the entire estate by its terms. If there are other structures, some property may go into a trust, some money may be kept in a retirement account, and so on.

How Do You Make a Will?

To make a will, you can write down a list of how you want to give away your property. Then talk to an estate planning attorney who can prepare the legal language that you need in the official will document. Your attorney will help you get witnesses to the document and choose a safe place to store it. You should avoid pre-written will forms available on the Internet, as they may not meet California law and may not accurately express your wishes.

Are There Other Estate Planning Structures in California?

Yes, and structures such as trusts, life insurance, and retirement accounts may help you achieve your estate planning goals better than a will, or in addition to a will. If you are part of an international family, are a non-citizen or a non-resident of the U.S., or have millions of dollars in assets, you will want to explore other estate planning structures besides just a will.

Planning your estate and wanting to write your will? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.

What Are a Trustee’s Duties in California?

In California, trustees overseeing trusts have various special duties to the beneficiaries. Trustees risk legal liability if they do not uphold their duties. When the creator of a trust passes away and appoints a relative as successor trustee, the relative will need to figure out what to do for the trust. Relatives who have no experience with managing a trust should hire professionals to help out, while still upholding the duties of a trustee in delegating trust needs.

Duty of Care

Trustees have a special duty of care to act in the best interests of the trust beneficiaries. They must not make decisions that could harm the beneficiaries or their interests. Decisions should be made with the care, skill, and caution that a reasonable person would take under the circumstances, with the goal of accomplishing the trust’s purposes.

Some trustees have special skills such as accounting experience, real estate knowledge, or expertise in investing. They should use these skills in administering the trust. Many trustees, however, do not have experience in areas needed to manage the trust with the utmost care. These trustees should prudently select professionals and delegate responsibilities such as preparing tax returns for the trust to them.

Duty of Loyalty and Impartiality

Trustees have the duty to act impartially when considering the interests of various beneficiaries. Often, trusts have multiple beneficiaries receiving different distributions from the trust. Sometimes, the trustee is a beneficiary. The trustee cannot favor any one beneficiary over the others. He or she should avoid the appearance of “self-dealing”, by not entering into transactions that appear to favor himself over beneficiaries, or by obtaining beneficiaries’ prior consent to do so. Self-dealing and favoring one beneficiary could create a conflict of interest for the trustee.

The legal document that creates a trust often gives the trustee certain discretionary powers. This means that the trustee can use judgment to make choices in some situations. For example, the trustee may have discretion to make distributions of trust assets to beneficiaries on their request. As described above, the trustee must act in good faith and without bias in deciding whether to use this power. The trustee could decide not to make a distribution to one beneficiary on his request because it would harm the beneficiaries’ interest as a whole.

Duty to Prudently Invest Trust Property

The trustee’s duty to invest trust property can be extremely challenging and time-consuming in practice. Not only must the trustee remember his or her duties of care and loyalty in picking investments, but he must also navigate the complicated world of investing to try to make the trust money or make it productive. This duty and the many others trustees must uphold will be discussed in more detail in future blogs.

Need help managing a trust? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience and her certification as a California estate planning and probate specialist by the California State Bar Board of Legal Specialization will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 325-8276.

You Have a Will. Do You Need More Estate Planning?

If you already have a will drafted, you may think that your estate plan is complete. Or instead, you may have started wondering whether you need more than a will. There are a few reasons you might need more estate planning, and a few other estate planning tools you can consider.

Reasons You Might Need More than a Will

Do you have a dependent child or disabled relative who you support? Do you want to save your relatives time and trouble after you pass away? Are you worried about large estate taxes because you have many valuable assets? Have you heard about the high cost of probating a will? Are you a non-U.S. resident living in California? These are all reasons that you might need more than a will in your estate plan.

Wills dispose of all assets that you own as of the date you pass away. You can specify in a will exactly who will receive which items of property, down to the dollar bill. You cannot set up a payment plan or monthly distributions in a will, as you may want to do for a dependent or another relative who is not responsible with money. Nor can you avoid your will being probated if you have assets over a certain amount. Probate often is extremely costly in California. Wills do not optimize tax consequences and may not address international estate planning issues.

In other words, many people need more than wills to address their individual circumstances. If you created your will a long time ago or used a form from the Internet, you may not know whether your will addresses your circumstances. To find out, you should consult an experienced estate planning attorney.

Other Estate Planning Tools Besides Wills

In California, you have many available estate planning tools besides wills. These include:

• Revocable trust
• Irrevocable trust
• Advance health care directive
• Power of attorney
• Life insurance and life insurance trust
• Special needs trust
• Pet trust
• Charitable trust

Again, whether you need one of these estate planning tools depends on your circumstances, including the assets you own, your family structure, your goals for family support and charitable giving, and your values.

When you talk to an estate planning lawyer about expanding your estate plan, he or she will need to review your existing will. In some cases, you can keep using the same will. In other cases, you may need a new will, whether because your old will is out of date with your goals or because your old will does not meet California legal requirements. Check with a lawyer to be sure.

Do you have a will but think you need more estate planning? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience and her certification as a California estate planning and probate specialist by the California State Bar Board of Legal Specialization will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 325-8276.

What To Do When It's Time to Name a Trustee

One of the most important tools in estate planning is the trust. To put it simply, the trust is created when the owner of property (grantor) transfers legal title of an asset to another individual (trustee). The trustee holds the asset for the benefit of a third party (beneficiary). The trustee also holds a fiduciary responsibility to the grantor and beneficiary.

The trustee has to carry out the grantor’s intention and act in the best interest of the beneficiary. It is a unique relationship that the trustee must keep in mind while carrying out their fiduciary duties.

When creating a trust, you must name a trustee that you can depend on to fulfill your instructions and act on your intentions. When seeking to name a trustee, seek responsibility, reliability, experience, and expertise. Consider the fact that they will need to communicate effectively with the beneficiaries.

Qualities that Make a Good Trustee:

• Trustworthy
• Responsible
• Reliable
• Attention to Detail
• Skilled Recordkeeper
• Experienced Investor
• Efficient Communicator
• Available to Fulfill Duties and Responsibilities of a Trustee

Before designating your trustee, ask yourself the following questions:

• Will this person be responsible in exercising the powers of the trustee?
• Will this person be reliable when dealing with trust assets and in administration of the trust?
• Do they have a good understanding of the requirements expected of a trustee?
• Will this person understand the role of the trustee? The obligations and duties of a trustee?
• Will this person understand the potential liability associated with the role?
• Is this person able to deal with a wide variety of issues from investing to filing tax returns to keeping exemplary records?
• Is this person able to communicate efficiently with beneficiaries of the trust?
• Are they able to resist pressure from beneficiaries? Act on behalf of the trust without showing favoritism amongst beneficiaries?

When creating a trust, designating the right trustee or combination of trustees is extremely important. The decision should not be taken lightly. Make sure to objectively consider the choices and choose the best combination that fulfills the needs of the job. Before the final decision is made make sure to check with them to verify their willingness to serve as a trustee.

If you need assistance creating a trust or if you need to discuss how to choose a responsible for trustee, please contact one of the experienced California estate planning attorneys at The Law Office of Janet L. Brewer.