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 call me at (310)320-0588 ext.111. 
| 
