Long ago, if you had too much money when you died, the government wanted part of it.  That's called "estate taxes."  Some folks call it "inheritance tax" or "death tax."  Sounds horrible either way.  Imagine if you visited Disneyland and as you left the park, an attendant charged you $50 to leave!  On a federal level, estate taxes are levied against an estate if the estate is worth too much when you die. After all, the government wants your family's money to fund various government programs, fix roads, etc.  However, most people don't have that problem anymore unless you have more than $12.06 million (this is called the "exemption" amount - the amount that is exempt from estate taxes).  Also a married couple can double that.  So that's a lot of money you can leave to your heirs and they won't need to worry about estate taxes.  Therefore, most people don't have enough money in their estate to be affected by estate taxes.  Also, California currently doesn't levy estate taxes unlike some other states which indeed impose an estate tax in addition to the federal estate tax.  

Also, the gift tax laws have changes a bit in 2022.  A married couple can gift any amount to one another without any gift tax implications.  However, there are limits to how much you can gift to a non-spouse.  You may have seen old movies where someone was on their death bed, signing away everything in their estate at the last minute.  Then they would die pennyless and the government would get no revenue from estate taxes.  The government grew wise to this tactic and imposed restrictions on how much a person could gift per year so people could not simply divest themselves of everything moments before dying.  These limits still exist even though estate taxes aren't much of an issue for most Americans.  

So how much can you gift to a non-spouse?  It use to be $15,000 per year per person.  Now it's $16,000 per year per person.  If you gift more than this, you will probably need to file a gift tax return with the IRS. You won't actually have to pay taxes, but the IRS wants to keep track of gifts that exceed the annual gift limit.  Spouses can double up on this as well.  For example, husband can gift his son $16,000 and wife can gift another $16,000 to the same son.  The recipient of the gift doesn't pay taxes either.  You can gift up to $12.06 million over your lifetime - again, not a problem for most folks! 

Remember that these numbers change year to year.  Make sure you talk to your CPA about any tax questions you might have as these laws are subject to change year to year.  

Client sometimes ask how often they should review their estate plan.  I tell clients that checking up on your legal affairs is something they should do.  It's not a vaccination - you don't create an estate plan and then forget about it.  There are some important reasons for this.  First of all, an estate plan is exactly that - a "plan."  Therefore, if circumstances change, you may need to change or alter your plan depending on those circumstances.  So I tell clients they should revisit their estate plan if there is a major life change - a birth of a child, a divorce, a new marriage, a beneficiary who might be facing some challenges like bankruptcy, divorce, litigation, etc.  There are times when you have to revisit the plan and make changes accordingly.  I liken it to going to the doctor - people don't just go to the doctor one time and then never again.  Ideally you should be going to your doctor regularly in case there are any changes that require a new approach, new medication, new diet, etc.  

Also, laws changes as the years go on.  Therefore, you want to make sure your legal documents are current and reflect the current laws.  That doesn't mean you need to make a change every time there is a minor change in the law.  In many cases, minor changes in the law won't really affect your overall plan.  However, just like there are changes in medicine that may affect what a doctor recommends that you do, your lawyer might recommend changes or updates to keep up with current law changes that affect your plan.

Finally, if your documents are too old, some places may be reticent to honor your documents when the time comes.  As a practical matter, your will and/or your living trust probably won't be too affected by that.  It is common for people to use old wills or old living trusts.  However, if you present a durable power of attorney or health care documents that are 10 years or older, some places might say, "Do you have anything newer than this?"  Although your documents may be perfectly legal, some institutions may be reluctant to honor them if they are too "old."  What is too old?  Some places don't like document older than 5 years old.  Some other places worry about documents that are more than 10 years old.  I usually recommend clients update their health care documents and the power of attorney document every 10 years at least.  That way, they always have current documents and are less likely to run into such resistance.  The reason some places are concerned about older documents is because they worry that someone is trying to trick them.  They worry about fraud.  If a document is more than 10 years old, they worry there might be a newer document and someone is trying to use an older document instead.  If the documents presented are fairly recent, the facility is generally more confident the document is legitimate and indeed what the client wants.  

The general rule of thumb I give clients is to revisit their estate planning documents every 7 years.  That's because 5 years is probably too soon and 10 years might be too long.  Plus, people tend to remember the "lucky" number 7.   Of course, they should also review their documents if there is a major life change as indicated above.

Once you create your living trust, you have to "fund" the trust.  What does that mean?  Many people have a living trust but it's empty...there's nothing in the trust.  Putting things INSIDE your trust is known as "funding" the living trust.  

Assets inside a trust are (1) governed by the trust, (2) avoid the court system and (3) are managed by those you've designated in the trust.  Those people are known as your Successor Trustees.

There are several analogies that I like to use that help clients understand the concept of funding their trust:

First, I draw a circle on a piece of paper.  The circle represents the living trust.  Then I draw a whole bunch of X's inside the circle. The X's represent the client's assets.  I explain that only the assets that are inside the circle are governed by the trust.  You see, the trust only applies to assets that are inside the circle.  

Sometimes I tell people to imagine that their living trust is like a bucket.  First it starts out as an empty bucket.  There's nothing in it.  Then you have to start putting things inside that bucket.  Putting things "inside the bucket" is "funding" the trust. 

Another analogy I use is that of building a brand new home.  Imagine you built a house from the ground up. You chose all the options, designed every room, chose the layout that suits you best. It's a beautiful home, designed by you, exactly the way you want it.  Now imagine if after building this home, you got in your car and drove away and never came back.  You never move into the house. You never furnish it.  It's just a big empty shell.  What was the point of building the house in the first place if you're not going to move into the house and furnish it?  So the living trust is like this new house.  You create a living trust with all the provisions you want.  Now you have to "furnish" that new trust with your assets.

OK one last analogy...I promise!  Imagine your living trust is like having your own airplane.  You design the plane.  On the side of the plane, it says "Johnson Family Trust".  You are in the cockpit, flying the plane, because you are also the initial trustee of your trust (assuming you do things as most people do).  Seated in first class are your successor trustees who will fly the plane if you cannot for any reason (death or incapacity).  The cargo on the plane are your trust assets.  If you are flying a plane without any "cargo" (i.e., assets), the plane is going to be empty when it reaches its destination and a whole bunch of folks are going to be upset their luggage didn't arrive.  

So now that we know that we must put things inside the trust, what does that mean?  That means you have to change the title on the asset.  So instead of your home being owned by you as an individual (or couple as the case may be), it would be owned by your living trust.  That would involve preparing a new deed signed by you, transferring title to your trust.  The same applies for bank accounts, investment accounts, etc.  You have to change the title on the asset.  So instead of your name being on the bank account, your trust would be the new owner.  That takes some effort. You have to visit the various banks and work with them to change title.  Your lawyer should advise you how to do that.  

So as we've said before many times, many people "have" a living trust.  However, many of those same people haven't funded their trust.  It's simply an empty bucket.

Your living trust is not a mysterious legal document that has magical properties.  Some people find living trusts to be very enigmatic creatures.  At the end of the day, a living trust is like any legal document.  It's commonly referred to as a "trust agreement."  It's an "agreement" between the creator of the trust (often termed the "Settlor" of the trust) and the person who manages the trust (commonly known as the "Trustee"). 

In the case of an individual person, it's kind of strange to think of it as an "agreement" but it is nevertheless.  It's easier to understand when thinking of a married couple creating a trust.  However, at the end of the day, whether it's an individual or a married couple, a living trust is an "agreement" created between the Settlor(s) of the trust and the Trustee(s) of the trust.  

Since the living trust is an "agreement", it's basically a contract between the Settlor(s) and the Trustee(s).  As a contract, it can be legally enforced like any other contract.  Therefore if someone is not playing by the "rules" of the trust, that person can be taken to court where the trust can be enforced.  So imagine if a Trustee is using the trust assets in an improper way or is failing to account regularly to the beneficiaries (as required in most trusts), he/she can be taken to court where a judge will inquire and find out why the Trustee isn't following the rules of the trust.  

The trustee is not the only person who has to play by the rules of the trust (the contract).  The beneficiaries also need to follow the rules of the trust.  For example, a beneficiary might have to wait till a certain age before they get their inheritance.  In other circumstances, the beneficiary might not receive they inheritance right away, but perhaps in stages, upon certain milestones, etc.  

If you think of a living trust like any other enforceable legal document, it becomes less mysterious and easier to understand.  It's basically a contract or agreement that governs the use and distribution of assets in the name of the trust.  That means the asset must be titled in the name of the trust.  Not all assets are governed by a living trust.  Only assets in the name of the trust, or payable to the trust, are ultimately governed by the trust. 

​For an asset to be "in" the trust, it must be titled in the name of the trust.  For example, a parcel of real estate would be owned by "The John Smith Living Trust" instead of being in John Smith's name alone.  The same goes for bank accounts or other investments.  Think of the living trust like a bucket.  Assets "in" the bucket are governed by the trust.  Assets that are not in the bucket, are not governed by it. 

When I conduct the initial consultation with my clients, there is an issue that often pops up that I think we should address in this blog entry.  

Clients often want to grant someone (sometimes a child or significant other) the right to remain in the primary residence after the clients die.  In a recent case, my married clients (who have 3 children) told me they wanted their daughter (who currently resides with them) to be able to remain in their primary residence until she passes away or decides to move out.  At that time, the house will be sold and the money divided among all their surviving children.  Apparently their daughter had fallen on hard times, separated from her husband, and needed to stay with them.  

This raises many interesting questions that should be addressed in the estate plan.  If the named beneficiary gets to stay there until they die (should they so choose), we generally call that a "life estate" in the property.  Here are several things I discuss with my clients when this issue arises:

1) First, I tell them it's important to outline all the provisions clearly in their living trust so we can avoid arguments that may occur after they die.  Perhaps all their children might not be that crazy about giving the daughter the right to live in the property till she passes.  After all, doing so would delay their inheritance with respect to the property.

2) I ask if they've discussed this idea with the other beneficiaries.  How do they all feel about it?  

3) Do they have any sons-in-law or daughters-in-law that may create a problem if they find out about this?  After all, it's not only the children of the couple that can be a problem.  

4) If their daughter gets to stay in the property, will it be for "life" or perhaps for a period of time (like 5 or 10 years).  

5) If their daughter remains in the property, who is going to pay for all the property taxes, upkeep, utilities, and other maintenance of the property?  What if they don't pay for those things?  What happens then?

Those issues should be outlined clearly and addressed in the living trust.  The more specific, the better, as doing so may help prevent arguments later on.   Whether you plan on granting a "life estate" or some other similar solution to a specific beneficiary, you should discuss the pros and cons with an estate planning lawyer who can help you think through the various options.

VIDEO TRANSCRIPT:

Hello everyone. This is Robert Mansour, and I wanted to present a very quick explanation today of the standard estate plan that most of my clients implement. You'll notice that in the background of this graphic, I have a tool box (a graphic of a tool box), and that is the analogy that I like to use -  An estate plan is a legal toolbox and it's full of all different kinds of "legal tools" that can help you and your family.

If something should happen to you, either death or incapacity or car accident (something that happens when people need to assist you). Also this assists in the distribution of property after you pass away. So the four major tools of the estate plan are on the screen. There's the living trust at the top, wills, power of attorney and health care documents.

Now there are other tools, but for our purposes today, we're going to hit on the big four. So a living trust is a legal document up here at the top left that an individual can create, or two people can create like a husband and a wife and three or four people etc. The people who create the living trust are called the "Settlors." You'll see at the very top left the word Settlors. If it's an individual, obviously Settlor, Settlors for plural (when you have more than one individual). The term that you might be familiar with is "Grantor" or "Trustor". They all mean the same thing. The Settlors are the people who create the living trust from the very beginning. So an individual would be that person, a husband and wife, etc.

Now, what I want you to understand also is that a living trust is basically a contract. It's a legally enforceable document. So the contents of the document can be enforced in court. So it's not anything terribly mysterious. For example, my wife and I have a living trust, and it is nothing more than a contract between me and my wife about what happens with our stuff. If we should get sick, something happens to us...who is in charge after we pass away, where does our estate go? Who sees to it that those assets get to the right people? In our case, it's our two children. And we want to make sure that those assets get to our kids in a certain fashion. And all of those rules and regulations are contained in our living trust. Now, the next people involved in a living trust are called the Trustees.

These are the people who are in charge of everything that is in the living trust. So let's say for example, let's say the Smith family creates the Smith Family Trust. Assets that are in the name of the Smith Family Trust are managed by the trustees. In the very beginning, the Trustees are the people who created the trust, whether it's an individual or a married couple. And so you are the initial trustee of your own trust. At some point, you will not be able to be the trustee and the people who will take over are folks called your "Successor Trustees." I use the analogy of the airplane. As you can see at the very top of the graphic - here in the very front of the airplane in the cockpit are the initial Trustees (i.e., the husband and the wife or the individual who created the living trust). The Settlor(s) are typically also the initial Trustees.

And then the first class are the Successor Trustees. They are sitting there having champagne, maybe some shrimp cocktail. As soon as the people in the cockpit can no longer fly that plane, those Successor Trustees step into the cockpit and take control over the living trust. Now they have to follow the "flight plan" (which are the rules of the living trust).  So they can't just do anything. Do you see these stars here in the middle of the graphic? The stars represent the "assets" of the living trust (the cargo on the plane, if you will). So a lot of people create a living trust, but they don't put anything in it. It's basically like building a house and not furnishing it.

So once you create your living trust, you have to put things in your living trust - and you do that by changing title to your assets. So for example, your real estate will no longer be held in your name alone.  It would say "Smith Family Trust" on it, or "Johnson Family Trust".  Your bank accounts, your investment accounts - not all of them - but many of them are going to say Smith Family Trust on them. You have to actually physically go to the bank or call your investment company and change the name on your assets. Once you create your living trust, we call that "funding" the living trust.

The final people involved in the living trust are the "beneficiaries." These are the people who benefit from the living trust. Once again, in the very beginning, it's the Settlors - the people who created the living trust are the beneficiaries of their trust. Eventually, other people will be the beneficiaries such as the children or whoever else you have as the beneficiary of your living trust. Now you'll notice out here, there is a star that is floating out here.  This is an asset that's not in the living trust.  I'll get to that in just a minute. Now, the living trust is a common document among two people or a single document for one person. Then you have the wills. If you're dealing with a married couple, each person is going to have their own will. The person in charge of the will is called the "Executor." People tend to confuse the terms "Executor" and "Trustee" a lot. They tend to use them interchangeably.  In fact, they are not interchangeable terms. They are separate jobs. Now you can choose the same people to do those jobs, but they are nevertheless separate jobs. So the executor is the person in charge of the will and the trustees are the people in charge of the trust.

Now you will notice that I drew a trampoline down here. Here's why I deliberately put the will under the living trust. I want you to get a visual. The will is like a big "safety net" that sits under the trust. If an asset is sitting outside the trust like this one over here, and after you die, we find this asset not in the trust. It falls, bounces off the trampoline, and goes into the trust. So consider the will like a big safety net that sits under your living trust.

Now you're also going to have powers of attorney. The power of attorney is also a very important document. The power of attorney is a managed by somebody known as your "Agent." Your agent is the person who's in charge. Now the agents can be the same people as the trustees, the executor, it can be the same people. It's just a different job. In most cases, with a married couple, the husband is first in line for the wife and the wife is first in line for the husband.

So the agent is the person who gets to act on your behalf. That's what the power of attorney is. You're giving someone the legal authority to act on your behalf in matters that do not directly involve your trust, your will, or healthcare decisions. So for example, let's say I need to call my wife's credit card company or my wife's former employer, because I need information about something. Sometimes you'll run into resistance when you do that - because they'll tell you, "No, we can't give you that information because it's private information." However, if I have power of attorney given to me by my wife to me and I'm her agent, therefore I can act on her behalf. There may be times in life when I need to do that.

Now, keep in mind, this is a power that you have to give somebody. They can't take it from you. I get calls from clients all the time and they say, "Hey, I'm at the hospital. My dad is sick. My mom is sick. I need power of attorney over them." I say, "Well, you can't just take it from them. They have to give you that authority." In many cases, clients are calling me too late. Their father or their mother, or their loved one is in a coma or they are not doing well. They're at the hospital - whatever the case may be. So you want to make sure you get this legal toolbox set up BEFORE something happens. So that's power of attorney, and then you have the health care documents down here. Once again, we use the term agent to be the person in charge of health care decisions.

There are two important documents in California that go under the healthcare discussion. The first one is something called an Advance Health Care Directive. Sometimes people confuse this with something called "power of attorney for health care." In California, we call this thing an advance health care directive - where you give someone the authority to make health care decisions on your behalf.  It's very similar to power of attorney but this one is specific to health care. This is where you let people know what your wishes are - what kind of measures do you want.  If you're very sick - and this is not just about pulling the plug - that's what people usually think about. It's a lot more than that. This individual is your advocate. They are the ones who can demand answers from doctors and nurses and other professionals. They can move you from one facility to another. They can do a lot of things.

It's not just about end of life decisions. In California, it's becoming increasingly important to have a separate authorization for the release of medical records. So even though you are the agent, some facilities might give you a hard time if you're trying to obtain the medical records of a loved one. There may be times when you need those records for a variety of reasons, including perhaps getting a second opinion about a recommended surgery or something like that. So those are the documents that go into health care decisions.

So this is just a very cursory and quick glance of the four major tools that go into most estate plans. I hope you found that helpful. If you want to learn more about my practice, you can always visit www.MansourLaw.com.  You can also call our office at (661) 414-7100. Thanks so much.