TRUSTEE: The Trustee of a trust is the person or persons who will manage the assets which are titled in the name of the trust. Generally, you will name yourself or yourselves as the Trustees of your trust, and will handle all of the financial responsibilities yourselves.
SUCCESSOR TRUSTEE: In the event that the original Trustee(s) shall become unable to act as Trustee, either because of death, incapacity, or unwillingness to act as Trustee, the people you have named to handle the trust when you can’t be the Trustee will act as the Trustee. This usually takes place when the Trustors are deceased.
BENEFICIARY: The people who are allowed to use the assets in the trust are the beneficiaries of the trust. While you are alive, you will be the beneficiary of your trust. Once you are deceased, your heirs (children, etc.) will be the beneficiaries of the trust. In other words, beneficiaries inherit the trust when the Trustor or Trustors are all deceased.
FUNDING THE TRUST: Funding the trust refers to the process of putting title to assets in the name of the trust, or changing beneficiary designation on certain assets to the trust. It is funding the trust which allows the assets to avoid Probate. VERY IMPORTANT!
DURABLE POWER OF ATTORNEY FOR PROPERTY MANAGEMENT: This document allows you to name someone to act on your behalf with regards to your financial affairs if you become unable to act, due to some physical or mental problem (incapacity). This person can do a variety of things, but must do them for your benefit, and cannot do them for their own benefit, unless they are your spouse.
ADVANCE HEALTHCARE DIRECTIVE AND POWER OF ATTORNEY: This document has two purposes. Firstly, it allows you to name someone to make healthcare decisions on your behalf, such as consenting to medical treatment or surgery. This document complies with the provisions of HIPAA (Health Information Portability and Accountability Act of 1996), and allows medical professionals to ask your agent about your healthcare needs. Secondly, this document contains a “Living Will”, which allows your agent to terminate life support (pull the plug), based on your desires. If Terry Schiavo had signed this document prior to her accident in 1990, we would never have heard about her case.
ATTORNEY-IN-FACT: This is the person named by you in a Durable Power of Attorney to act on your behalf. They are also referred to as your “agent”.
SPRINGING: A “springing” Durable Power of Attorney does not give any authority over your finances until two doctors have certified in writing that you are incapacitated, and unable to legally handle your financial affairs.
POUROVER WILL: A “pourover will” is a will drawn up in conjunction with a Revocable Living Trust. This will leaves assets which were not part of the trust, or were not “funded” into the trust, to the Revocable Living Trust when you pass away. The normal types of assets which are not funded into the trust are usually small accounts, such as your day-to-day checking account, and automobiles. The pourover will also names Guardians for any minor children who may survive your passing away.
GUARDIAN: Guardians act as parents for children under the age of 18. They raise the children, and are responsible for their day to day care. Once the child is 18 years old, the guardianship ceases. Guardians work with the Trustee of your trust with regards to financial needs for the child, also.
LIVING WILL: A document which spells out your wishes in the event that you have a terminal condition and are on life support equipment. Allows someone you name to “pull the plug.” The Advance Healthcare Directive and Power of Attorney contains provisions of a living will.
AGENT: The person designated by you in a Power of Attorney to act on your behalf. Also called an “Attorney in Fact”.
PROBATE: A court process which occurs when the owner of assets dies, leaving no joint owners or pay-on-death beneficiaries. The court admits your will, if any, and scrutinizes it as to its legality, and your Executor is given authority over your estate. Your assets and debts are inventoried. Your heirs are listed and the court, eventually, makes an order directing the Executor to give the assets to the heirs. If you don’t have a will at death, the law of the state in which you live will determine who your heirs are, and the court will carry out the law. If you die intestate (without a will), an Administrator is named to oversee the court process, and to give the assets to the heirs at the conclusion of the probate process. In California, probates typically take nine months to two years to complete, and cost the estate various fees which range from 3% to 6% of the gross value of the estate.
ESTATE TAXES: Also called “death taxes” or “inheritance taxes”, these taxes are paid, if at all, within nine months of your death. Current law states that there is no tax owed by the estate of the decedent if the net estate was less than 2 million dollars, or if the estate was passed to the spouse of the decedent. The exempt amount will increase to 3.5 million dollars in 2009. The tax goes away completely in 2010, but, under current law, the exemption reverts back to 1 million dollars in 2011 and beyond. Estates for married couples which exceed the exempt amount should have an “A-B” trust drafted to maximize the amount of the estate which passes to the heirs free of the estate tax.
CAPITAL GAINS TAXES: Capital Gains taxes are computed based on the profit made when an appreciated asset is sold. Due to the increase in the basis of appreciated assets at death, assets in a Revocable Living Trust generally avoid or have reduced Capital Gains Taxes when the assets are sold at the death of the Trustor(s). Capital Gains are computed by subtracting the basis of the asset from the sales price of the asset. For instance, if you bought a house for $30,000, and sold it for $100,000, barring any other ways to avoid the tax, you would pay Capital Gains tax on approximately $70,000. This applies to any asset which has appreciated in value, including stock, art, businesses, real estate, etc. When the owner of the asset dies, however, the asset is given a new basis, which is equal to the value of the asset at the owner’s death. So, let’s say the house was purchased for $30,000, but was worth $500,000 when the owner died. The new basis would be “stepped-up” to $500,000. If it was then sold for $500,000, the capital gains would be zero ($500,000 sales price minus $500,000 stepped up basis). This does not happen with joint tenancy assets, but does happen with community property assets (for married couples) held in a Revocable Living Trust. When married couples hold community property assets in their revocable trust, if one spouse dies, the asset gets a full step-up in basis. It is not unusual for a surviving spouse, in such a situation, to be able to sell appreciated assets at the death of the first spouse, with no or little capital gains tax!
CONSERVATORSHIP: This is a court proceeding carried out by the Probate court. It is necessary when someone is incapacitated, and cannot make financial, legal, or personal decisions on their own, due to some physical, mental, or medical condition. The court will appoint a conservator, who will handle these decisions on behalf of the incapacitated individual. The conservatorship lasts until the death of the individual, or until the individual regains his ability to act for himself. It is expensive, time consuming, and public. The Revocable Living Trust and Durable Powers of Attorney (for Property Management and Healthcare) are used to avoid a conservatorship.
A-B TRUST: Also called a “Bypass Trust”, this type of trust is generally used for married couples with an estate worth at least 2 million dollars. By using this trust, each spouse can provide for the other at death, and shelter their exemption from estate tax (currently 2 million dollars per spouse), until both spouses are deceased. For example, an A-B trust could shelter 4 million dollars (2 million dollars for each spouse), if both spouses passed away before 2009. Properly done, their heirs could pay little or no estate tax on up to 4 million dollars of net worth.
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