A. Living Trust

A living trust is considered a “person” by legal standards, and therefore, may own property. A living trust will allow you to control the way your assets are managed and disposed of, whether upon incapacity or at the time of your death. A living trust will prevent your estate from being probated and it will serve as a definite safeguard against a conservatorship proceeding. A living trust will also help you to avoid or substantially reduce death taxes.

1. Power of Appointment Living Trust

A Power of Appointment Living Trust carries out a “simple will” estate plan whereby each spouse leaves all of their property to the other spouse. The surviving spouse has the ability to disclaim all or part of the decedent spouse’s interest in the estate with a Power of Appointment Living Trust. If the surviving spouse disclaims all or part of the decedent’s interest, the disclaimed portion goes into a Disclaimer Trust for the benefit of the surviving spouse. The Disclaimer Trust uses the decedent spouse’s estate tax exemption; in effect creating a “B” or Bypass Trust. If the surviving spouse does not disclaim, when the surviving spouse dies, death tax will be due on every dollar of the estate that exceeds the surviving spouse’s $2 million estate tax exemption.

2. A-B Living Trust

An A-B Living Trust uses both spouses $2 million estate tax exemptions. The “B” or Bypass Trust represents the decedent spouse’s interest in the estate. The Bypass Trust becomes irrevocable upon the death of the first spouse, and therefore, is treated as a separate entity for tax purposes. The assets of the Bypass Trust pass to the children or other beneficiaries of the trust free of death tax on the surviving spouse’s death. In other words, the assets of the Bypass Trust, including any appreciation in value over the surviving spouse’s lifetime, bypass the death tax on the surviving spouse’s death.

An A-B Living Trust has two primary non-tax objectives. First, an A-B Living Trust will ensure that on the surviving spouse’s death, the assets of the Bypass Trust will be distributed the way both spouses originally intended at the creation of the trust. Second, the Bypass Trust will protect the decedent spouse’s interest in the estate from any creditors of the surviving spouse. Thus, the Bypass Trust will ensure that the surviving spouse’s needs for support and maintenance are being met. While there are many benefits to an A-B Living Trust, the surviving spouse is somewhat restricted with respect to how he or she can use the principal of the Bypass Trust. Also, an A-B Living Trust requires a difficult administration on the death of the first spouse. Notwithstanding the difficulty of administering an A-B Living Trust, the benefits of an A-B Living Trust will generally far outweigh its costs.

B. Dispositive Provisions

1. Outright Distribution

There is nothing inherently wrong with an outright distribution or provisions in the living trust which leave the trust estate outright to the children (or other beneficiaries of the trust). There are, however, many potential problems with an outright distribution. First, an outright distribution will trigger a guardianship of the estate if the children are minors or incapacitated. Second, an outright distribution will not protect the trust estate from any creditors or potential future creditors of the children. Third, an outright distribution may not protect the trust estate from an ex-spouse of a child. Fourth, an outright distribution will not protect the trust estate from a spendthrift child. Fifth, an outright distribution will add to the child’s estate, and therefore, may subject the child’s estate to death tax at the time of his or her death.

2. Discretionary Spendthrift Trust

A living trust that creates an irrevocable separate trust for each child (or other beneficiaries of the trust) on the surviving spouse’s death will avoid the many potential problems associated with an outright distribution. An irrevocable separate trust structured as a Discretionary Spendthrift Trust will generally continue no longer than the child’s retirement age. The entire time the Discretionary Spendthrift Trust continues for the benefit of the child, the assets of the trust may be applied for the child’s needs. If the child is able to adequately provide for his or her own needs, the income of the Discretionary Spendthrift Trust should be accumulated and added to its principal so that the assets of the trust are growing over the term of the trust. The entire time the Discretionary Spendthrift Trust continues for the benefit of the child, the assets of the trust are protected from any creditors or potential future creditors of the child. Also, the assets of a Discretionary Spendthrift Trust retain their separate property character, and therefore, are not subject to division in the event the child’s marriage ends in divorce. Additionally, if the Discretionary Spendthrift Trust terminates because of the child’s death, the assets of the trust will pass to that child’s children or if the child is survived by no children to your then-living children or their children, as the case may be. Thus, the Discretionary Spendthrift Trust will help to keep the trust estate in the immediate family. Furthermore, if income is accumulated and added to principal, when the child is ready to retire he or she will have a nest egg that will supplement any retirement income.

3. Unitrust

An irrevocable separate trust for each child structured as a Unitrust will continue for the child’s lifetime. A Unitrust pays the child a fixed percentage (usually 3% to 5%) of the fair market value of the trust’s assets each year. The first business day of each calender year the Unitrust is valued for purposes of determining the Unitrust payment for that year. If the Unitrust is growing more than the Unitrust payment each year, then the child’s check will be something larger each and every year. The Unitrust will protect the assets of the trust for the lifetime of the child. Spendthrift provisions allow for the accumulation of income that is not otherwise needed for the support and education of the child. A creditor cannot attach what is otherwise needed for the support and education of a child or other beneficiary. Thus, even the Unitrust payments are protected from a creditor of the child. The Unitrust will also ensure that the child has an income for the rest of his or her life. On the death of the child, the Unitrust is divided into separate share trusts for that child’s children which are usually structured as Discretionary Spendthrift Trusts, thereby ensuring that your grandchildren will have the support and education that they will need. If the child is survived by no children, then the assets of the Unitrust will pass to your then-living children or their children, as the case may be. Thus, the Unitrust will ensure that the trust estate remains in the family.

A Unitrust is also very beneficial from a wealth creation point of view, because it maximizes the benefits for both the child and that child’s children. There is no potential for conflict of interest with a Unitrust. In other words all the beneficiaries are best served by growing the assets of the Unitrust; the more the trust grows, the larger the child’s check will be and the more the grandchildren will eventually inherit at the time of the child’s death.

4. Annuity Trust

An irrevocable separate trust for each child structured as an Annuity Trust may or may not continue for the child’s lifetime depending on how large the Annuity Trust payment is. The Annuity Trust pays the child a fixed dollar amount each year. If the Annuity Trust payment is more than the trust is growing each year, then the principal of the trust will be diminished each year. Thus, depending on how large the Annuity payment is each year and how old the child lives to be, it is possible that the assets of the Annuity Trust will be exhausted during the child’s lifetime. Like the Unitrust, the Annuity Trust will protect the assets of the trust and the Annuity Trust payments for the duration of the trust.

C. Medi-Cal Provisions

Are you aware that your carefully crafted estate plan can be destroyed if you do not plan appropriately for long-term care! Today, the cost of nursing home care is approximately $7,000 a month. Most people who are suffering from a catastrophic illness or disability can not afford to pay this amount for any extended period of time, and therefore, are forced to apply for medical assistance under the Medi-Cal program. However, the problem with receiving Medi-Cal benefits is that at the time of the Medi-Cal recipient’s death, the Department of Health Services (“DHS”) will have the right to attach and sell the family home in order to satisfy their claim for the amount of money they paid out. This is called a Medi-Cal estate claim. Although, if the Medi-Cal recipient is married, DHS must wait until the surviving spouse’s death before satisfying their Medi-Cal estate claim. Special Medi-Cal provisions called catastrophic coverage powers and other long-term care provisions can be incorporated into your living trust and general durable power of attorney. These provisions give your agent the power to carry out Medi-Cal estate planning in the event you are ill or disabled and lack the capacity to carry out the planning yourself. The purpose behind Medi-Cal estate planning is to ensure that your home and other assets will be protected from being consumed by long-term care costs in the event you suffer a catastrophic illness or disability.

D. Pour-Over Will

A Pour-Over Will is used to capture and pour-over into the living trust any assets that are inadvertently left outside the living trust so that these assets are disposed of by the living trust. Thus, the living trust becomes your will because the living trust disposes of your property at death in accordance with your wishes. This is why a living trust is sometimes called a “will substitute.” However, you should not rely on a Pour-Over Will to capture and pour-over assets into your living trust. If the estate that is left outside the living trust has a fair market value that exceeds $100,000, then the estate will be subject to probate. This is true even if the equity in the estate is less than $100,000. For example, a home with equity of $75,000 and fair market value of $700,000 will be subject to probate if it is left outside the living trust. It will still be captured by the Pour-Over Will, but only after the probate proceedings are completed.

There are many kinds of assets that are not captured by a Pour-Over Will, and therefore, are not subject to probate if left outside the living trust. For example, qualified retirement plans, IRA’s, life insurance policies, annuities and transfer on death accounts. These assets are characterized by non-probate transfers because a contract controls, by way of a beneficiary designation, the manner in which these assets are disposed of. Also, jointly held accounts are not captured by a Pour-Over Will because jointly held accounts pass by right of survivorship or by operation of law. Thus, the surviving joint tenant is entitled to the money in these accounts, notwithstanding the existence of a Pour-Over Will.

E. General Durable Power of Attorney

A General Durable Power of Attorney is a legal document by which a principal appoints an agent to act on behalf of the principal with respect to any or all of the principal’s assets, as specified in the General Durable Power of Attorney. A General Durable Power of Attorney will continue in effect during the principal’s lifetime, even if the principal becomes incapacitated. A General Durable Power of Attorney can be effective immediately upon signing the document or, if the principal is reluctant to grant immediate powers over his or her assets, it can “spring” into effect upon the principal’s incapacity. Although, a General Durable Power of Attorney constitutes an added security to your estate plan, the following problems may prevent it from effectively avoiding a conservatorship in the event of your incapacity: (1) Many institutions may not accept a General Durable Power of Attorney because either they require their own form to effect the power of attorney or they believe it lacks legal validity; and (2) The General Durable Power of Attorney can be revoked by a court-appointed conservator.

F. Advance Health Care Directive

An Advance Health Care Directive is made up of two legal documents combined into one. Part 1 of the Advance Health Care Directive is a Durable Power of Attorney for Health Care by which a principal grants an agent the authority to make health care decisions in the event the principal is unable to make those decisions for himself or herself. The Durable Power of Attorney for Health Care allows you to select your spouse or a trusted friend or family member to be your agent in advance of an accident or the onset of illness. The Durable Power of Attorney for Health Care becomes effective only if you are unable to make health care decisions for yourself. Part 2 of the Advance Health Care Directive is a Living Will. A Living Will allows you to express your intent with respect to health care matters. A Living Will includes broad language that covers catastrophic conditions and the medical procedures, or lack thereof, for the treatment of those conditions. Your agent under the Durable Power of Attorney for Health Care must act in accordance with your wishes. A Living Will generally serves as evidence of those wishes.