EVERYTHING A BABY BOOMER SHOULD KNOW
The “Typical Living Trust”
Below is a diagram of a stereotypical Living Trust where the husband dies first between the years 2006-2008 when the marital tax deduction is $2,000,000 per spouse.
This typical family received some notoriety back in the ‘60s when their Pa, Ben Cartwright, settled down with his three sons: Adam, Hoss and Little Joe, on the Ponderosa Ranch near Silverado. Each son had a different Ma from a previous marriage, but Ben finally struck a Bonanza when he married Kitty, fresh off the stage from Tombstone.
What’s right for Ben and Kitty may not be right for you. Some of the estate planning decisions Ben Cartwright makes may be considered foolish by some, while others would consider them generous. But for educational purposes, the following should help point out why one estate plan does not fit all.
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Living Trust (Revisited)
As stated above (See What Is A Living Trust) a Living Trust is a written document like a Will, but it becomes effective during your life time rather than after you die. It is therefore called a “living” trust. The trust is a legal entity that can own real property, businesses, cars, and any other property or cash from which it can distribute funds to beneficiaries.
As stated previously, the proper name of a Living Trust can be tricky because it is identified by other names for different reasons. Because the “rules” of the trust can be changed any time during your life, or completely revoked, it is sometimes called a “revocable trust.” The proper legal terminology for the trust is an “inter vivos revocable trust.” Many attorneys refer to it as a “Revocable Trust,” but most people call it a “Living Trust.”
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Pourover Will
Every Living Trust needs to have a Pourover Will. A Pourover Will not only reiterates the last testament of the decedent, but works to “pour” assets into the Living Trust if they had not been transferred to the trust prior to the death.
This would be the case if Ben Cartwright failed to transfer ownership of his gun collection into the trust before he died. The Pourover Will allows the gun collection to pour into the trust (after probate if its value is over $100,000) so it can be distributed to Adam, Hoss and Little Joe in accordance with the provisions of the Living Trust.
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Survivor’s Trust
Once the Living Trust comes to an end upon Ben’s death (remember this is a stereotypical example) it automatically divides into two separate trusts. In our simplified example Ben has died first and his half of the $4,000,000 of community property in the Bonanza estate is going into the Bypass Trust discussed below.
The other half of the estate, because Ben has “transmuted” (See Transmutation Agreements Can Save Big Money; Or Not) most of his separate property into community property, goes into Kitty’s Survivor’s Trust.
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Bypass Trust
The Bypass Trust is also known as the “exemption trust” or the “B trust” or the “family trust” or the “credit shelter trust” or the “nonmarital trust,” as well as other names. Do not let this lead to confusion because there is no need for it.
All of these names refer to the same trust used to save money from Federal estate taxes by properly utilizing the “applicable exemption amount” of the nonmarital tax exemption, which in this case is $2,000,000. (See How The Federal Exemption Tax Works.)
If any spouse puts their $2,000,000 share of the estate (called a “nonmarital tax deduction”) into a Bypass Trust for the surviving spouse’s benefit during their lifetime, the surviving spouse will not be taxed on that $2,000,000 at 46% if she dies in the year 2006 (’07, ’08).
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QTIP (Qualified-Terminable-Interest-Property) Trust
The QTIP Trust can be as complicated as the acronym implies but is widely used as an estate planning tool. There are specific requirements that must be met based on the Internal Revenue Code. For example, all of the income from the trust must go to the surviving spouse for life and there can be no authority to change that.
It is the only form of “marital deduction” that gives Husband control over the disposition of the trust property after Wife dies by distributing it to his specified beneficiaries. The property interest is “terminable” because it ends upon Wife’s death.
As a “marital deduction” any amount of money can be added to the QTIP Trust from Husband’s estate tax free. But upon Wife’s death the remainder of the QTIP Trust is added back into Wife’s estate and will be taxed if it is over her $2,000,000 tax exemption.
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Special Needs Trust (SNT): A Special Consideration
When there is a child, friend or family member with a disability that allows them to receive government aid, a Special Needs Trust (SNT) can set aside property for that person in order to supplement their aid without making them ineligible to receive government assistance.
Most government aid programs require the recipient to have resources and income below a certain level, such as SSI, Medi-Cal, IHSS, subsidy housing (section 8), etc. In other words, the programs providing aid to people with no financial resource larger than $2,000.00. (However, that does not mean you can’t set up a SNT for someone less fortunate.)
For example, when a disabled person receives an inheritance gift or personal injury award of substantial value they have three choices: 1) they can go off assistance, 2) spend it all until they are poor again, or 3) get a SNT.
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What To Do With This Nuts And Bolts Information.
With the information you have just read, go back and stare at the Ben and Kitty Cartwright flow chart. Look at all the boxes and follow the arrows to their destination, and/or their alternative destination.
If you take the time to do so it begins to become clear how the tools of estate planning can work for you. This is a prototype for every estate plan, including the very large estates.
To help visually stimulate your understanding there follows two bonus “BONANZA” flow charts. The first one applies to Kitty and the boys if she continues to live the “traditional” lifestyle; and the second chart applies to a lifestyle where she remarries and goes her separate way.
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An Insider's Guide to Estate Planning
TO ESTATE PLANNING:
KNOW WHAT YOU’RE TALKING ABOUT!
Why pay money so an attorney can try and explain the difference between a Bypass Trust and a QTIP Trust, when this book will answer that question long before you have to pay for a consultation?
This guidebook helps you map out your estate plan so it goes exactly where you want it to go. It explains the tools you need to give away or preserve your money, homes, businesses, heirlooms, cars, boats, jewelry, tools, art, memorabilia, and every other artifact of life you have accumulated over the last 45 to 65 baby booming years.
Mark S. Cornwall, Esq.
210 E. Figueroa Street
Santa Barbara, CA 93101