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Trusts Q & A

Common Questions about Trusts
Q1 - I know this is fairly easy to understand but I still can't seem to understand how a trust operates? Can you explain the difference between a revocable and irrevocable trust?

Q2 - Why do some people have trusts in their names such as "The Jones Family Trust dated March 1, 2000" while others have "The Annacortes Trust dated..." what is the difference between naming something with your name or another name?

Q3 - Why is Joint Tenancy not an adequate way for asset protection and estate planning purposes?

Q4 - How do trusts act? I understand a corporation and how they have to file a tax return and have assets and liabilities but can trusts act in the same way? Can a trust have a bank account, savings account, own property, and then file taxes and pay taxes as well?

Q5 - Someone said they put their property in a trust for their kids but they are still in charge of the trust and the property. I like that idea but I don't know how that works and what if one of my children "goes South" as they say and I don't want that child to inherit any money any more? What then?

Q6 - When should someone own more than one trust? Does that make sense to have multiple trusts and if so how do they not come in conflict with each other?

Q7 - If it is true that someone should have a trust if their net worth is greater than $600,000 and since most homes in Southern California these days are close to that if not significantly more than that in value it would seem therefore, that almost every homeowner, and certainly every investment property owner should have a trust as well as a will, right?

Q8 - What's the best way to take title on my investment property? Then, what about our home? Should our home be different then because we can claim our home as being homesteaded?

<Answers>

Q1 - I know this is fairly easy to understand but I still can't seem to understand how a trust operates? Can you explain the difference between a revocable and irrevocable trust?

A1 - A trust is a contract between 3 parties. They are Grantor(Trustor), Trustee(s) and Beneficiary(ies). Trusts can take effect either at the time they are formed or at the death of the Grantor. A revocable trust can be amended at any time or can be dissolved by the Grantor at any time whereas an irrevocable trust cannot be terminated or materially changed. Why choose to make your trust irrevocable? Because of asset protection and estate planning advantages. Making the trust irrevocable places the assets out of reach of most judgment creditors and successfully removes their value from the Grantor's taxable estate.

Q2 - Why do some people have trusts in their names such as "The Jones Family Trust dated March 1, 2000" while others have "The Annacortes Trust dated..." what is the difference between naming something with your name or another name?

A2 - You can name your trusts however you want and with any name you want. People with a number of trusts sometime use a date in that name to help differentiate and distinguish their various trusts.

Q3 - Why is Joint Tenancy not an adequate way for asset protection and estate planning purposes?

A3 - In joint tenancy, assets belong to both joint tenants. Therefore, in the laws of almost every jurisdiction, if a judgment goes against one tenant typically 100% of the jointly held assets can be seized. Because of this, joint tenancy is generally considered among the worst of the asset protection strategies available in America today. Joint tenancy is not usually beneficial for tax purposes.

Q4 - How do trusts act? I understand a corporation and how they have to file a tax return and have assets and liabilities but can trusts act in the same way? Can a trust have a bank account, savings account, own property, and then file taxes and pay taxes as well?

A4 - Revocable trusts are tax pass-through, which means you don't have to file separate tax returns. Income within the trust will be taxed on the Grantors' individual 1040 tax return. Irrevocable trusts will have their own Tax ID number and separate tax returns are necessary. Trusts can own bank accounts, brokerage accounts, real estates and most other assets.

Q5 - Someone said they put their property in a trust for their kids but they are still in charge of the trust and the property. I like that idea but I don't know how that works and what if one of my children "goes South" as they say and I don't want that child to inherit any money any more? What then?

A5 - If you are worried about your children being a spend-thrift, you can place restrictions on asset distribution in any type of trusts so that the distribution will occur on certain timing, or in systematic payments, or whatever the trustee feels comfortable with. You can even put a clause in the trust so that a certain event will trigger or stop the distribution. There is an irrevocable trust called Children's Trust. It was created for the benefit of children and/or grandchildren. Creating a Children's Trust and transferring property to one, permits the grantor to benefit up to the gift tax exclusion each year, potentially reducing the grantor's taxable estate and it will enable the power of parents to exert more control over assets given to children than outright gifts. However, a child may choose to have full control of the assets at age 21.

Q6 - When should someone own more than one trust? Does that make sense to have multiple trusts and if so how do they not come in conflict with each other?

A6 - People need to pick the right trust(s) that meet their situation, their needs and goals - there's no "one size fits all" trust. There are more than 60 kinds of trusts in the United States. You have to choose the best Asset Protection and Estate Planning strategy depending on the size and types of your assets, family structure, your goals, and all other situations. For example, if you have a large estate, high risk business, multiple income properties, high income and an life insurance, you might want to consider having an irrevocable Life Insurance Trust, a Charitable Remainder Trust, an irrevocable living trust, combined with a couple of Family Limited Partnerships, a corporation, and a LLC. Or, if you are planning to sell one of your income properties, you might want to consider having a Domestic Non-Grantor Trust to defer Capital Gains Taxes. Each entity will have a specific role to play in your planning structure and will not conflict with each other. Having a right structure in place should give you a complete asset protection and estate planning, and most importantly, a peace of mind.

Q7 - If it is true that someone should have a trust if their net worth is greater than $600,000 and since most homes in Southern California these days are close to that if not significantly more than that in value it would seem therefore, that almost every homeowner, and certainly every investment property owner should have a trust as well as a will, right?

A7 - Anyone who has a gross (not net) asset greater than $100,000 should have at least a revocable living trust with a pour over will at the very minimum. Less than 10% of people in the United States have some kind of trust. In Europe, where trusts originate, 60% of people have trusts. You should at least avoid Probate by having a revocable living trust. Probate is a court procedure where your assets, upon your passing, are distributed pursuant to the terms of your will or state law. The average time a Probate procedure takes in California is 18 months and it could cost as much as 15% of your gross (not net) estate. In reality, probate often takes longer and costs more than that after everything is factored in. The only person who usually makes any money in a probate proceeding is the lawyer.

Q8 - What's the best way to take title on my investment property? Then, what about our home? Should our home be different then because we can claim our home as being homesteaded?

A8 - You must consider many aspects in order to choose how to take title. Sometimes a choice has to be made between good income tax planning and good asset protection. Income tax planning, estate tax planning, and asset protection planning techniques are not mutually exclusive, one may be compromised by attempting to satisfy the others. For your personal residence, you also have to consider other factors such as mortgage interest deduction, capital gains exemption, homestead Law, etc. There is an irrevocable trust that provides asset protection and estate tax avoidance, while you can keep capital gains exemption and other benefits as a homeowner. There is no "one size fits all". It all depends on each family's specific situation.

If you have any other questions about Trusts, Estate planning and Asset protection, please contact me.

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