Advanced Estate Planning Presentation (Beyond Wills) for "It's Your Estate" workshop at Ocean Institute in Dana Point, California on April 24, 2012.

1. It’s Your Estate – Spring 2012
ADVANCED ESTATE PLANNING
(Beyond Wills)
Presented by: Leslie R. Daff, JD, MBA
Certified Specialist in Estate Planning, Probate & Trust Law
by the State Bar of California Board of Legal Specialization
Estate Plan, Inc.
A Professional Law Corporation
Phone: (949) 497-5056
Fax: (9490 497-7150
Email: LDaff@estateplaninc.com
Website: http://www.estateplaninc.com
Laguna Beach Office
352 3rd Street, Suite 301
Laguna Beach, CA 92651
Irvine Office
19200 Von Karman Avenue, Suite 500
Irvine, CA 92612

2. Statutory Probate Fees in California
 4% on first $100,000
 3% on next $100,000
 2% on next $800,000
 1% on next nine million
 Administrator/Executor and Attorney each entitled to fees based on the
gross value of the estate (not net of mortgages and indebtedness) -
Examples:
 $500,000 gross estate - $26,000
 $1 million gross estate - $46,000
 $3 million gross estate - $86,000
 $5 million gross estate - $126,000
 Also…
 Court costs
 Probate referee fees
 Potential for extraordinary fees

3. Ways to Avoid Probate
 Payable-on-death and transfer-on-death designations
 Beneficiary designations
 Titling (e.g., Joint Tenancy)
 Drawbacks:
 In California, married couple holding title as joint
tenants (instead of community property) do not get full
step up in cost basis at first death.
 Adding children to title is a gift if over $13,000 in any
given year (requires gift tax return) and exposes the
real property to sale by child, child’s creditors, and
child’s ex-spouse if divorce occurs. Child loses full
step-up in cost basis he or she would have otherwise
received if inherited at death instead.
 Revocable Living Trust

4. Common Estate Plan
 A Revocable Living Trust is often used to
avoid conservatorships at incapacity and
probate at death.
 Commonly, an estate plan consists of:
 Revocable Living Trust
 Pour-over Will
 Financial Durable Power of Attorney
 Advance Health Care Directive
 HIPAA Authorization

5. Revocable Living Trust
Terminology
 A Revocable Living Trust is a contract between a
Settlor/Grantor/Trustor/Trustmaker and a Trustee which defines
the rights, obligations, and use of property held in the Trust.
Generally, the Settlor and Trustee are the same person when
the Trust is created.
 Settlor/Trustor/Grantor/Trustmaker – The creator of the Trust
and the owner of the property placed in Trust. The Settlor can
amend the Revocable Living Trust during his or her lifetime.
 Trustee – The person or entity holding title to the Trust property
as Trustee and who carries out the duties of the Trustee as set
out in the Trust agreement (i.e., manages the assets) for the
benefit of the Beneficiary, the person(s) or entity(ies) designated
by the Settlor to receive the benefits of the trust pursuant to the
terms of the trust instrument (i.e., uses and enjoys the assets).
The Beneficiary is generally the Settlor during his or her lifetime.

6. Types of Trusts
 Revocable Trust – Can be changed
 Irrevocable Trust – Cannot be changed (often
used for gifting purposes)
 Trust Protector

7. Benefits of Revocable Living Trust
 Avoids probate.
 Assets are distributed without court involvement.
 Trust provisions are not made public.
 If Settlor/Trustee becomes incapacitated, a named successor
Trustee takes over management of the assets without court
involvement (no conservatorship). Trustee can be:
 Individual
 Trust Company
 Private Fiduciary
 After death, assets which would otherwise be paid outright to
beneficiaries can continue to be held and administered in one or
more subtrusts for the entire lifetime of the beneficiary or
distributed at specified age(s) or stage(s):
 Protects beneficiary from himself or herself, creditors,
predators, and divorce

8. Drawbacks of Revocable Living Trust
 Cost – Typically several hundred to several thousand
dollars to create
 Administration
 Funding the Trust
 Why living trusts fail
 Why your estate may still go through probate
 Trust Administration after Death
 But typically 50-90% less than probate
administration
 What to do when your spouse dies
 What to do as successor Trustee

9. Marital Subtrusts:
 A Trust – Survivor’s Trust
 B Trust – Bypass/Credit Shelter/Exemption Trust – to
hold decedent’s Applicable Exclusion Amount:
 2012 $5 million (portable exemption
between spouses)
 2013→ $1 million (exemption not
portable)
 C Trust – QTIP/Marital Trust – to control decedent’s
property after death

10. A-B-C Trust (2013)
$3 Million
Community
Property
Survivor Decedent
$1.5 Million $1.5 Million
C Trust
A Trust B Trust
(QTIP Trust)
(Survivors Trust) (Bypass Trust)
$500,000
$1.5 Million $1.0 Million
(Irrevocable)
(Revocable) (Irrevocable)
HEMS HEMS
Beneficiary 1 Beneficiary 2 Beneficiary 1 Beneficiary 2 Beneficiary 1 Beneficiary 2

11. Subtrust Considerations
 Whether to give surviving spouse a limited
power of appointment (e.g., among joint
descendants, or among descendants and
charities)
 Subtrust administration – allocating assets
between trusts, obtaining taxpayer ID
numbers for irrevocable trusts, and preparing
additional tax returns

12. Disclaimer Trust:
Surviving Spouse
Remaining
$3 Million disclaims $1 Million
$2 Million to
Community in assets (in 2013)
Survivor’s Trust
Property to create Bypass
(A Trust)
Trust (B Trust)
Cautions:
• Not Automatic
• Surviving spouse must disclaim in writing within 9 months of first
spouse’s death
• Must not have accepted benefits of disclaimed property (e.g.
interest, rental income)

13. Considerations for Distributions to
Children and Other Beneficiaries
 1. Outright
 2. In Stages
 Distributions for health, education, maintenance,
and support – example:
 At age 25, receives one-third of trust principal outright
 At age 30, receives one-half of remaining trust principal
outright
 At age 35, receives remainder of trust principal
 3. Lifetime Beneficiary-Controlled Trusts
 Distribution Trustee (for maximum creditor protection)
 Beneficiary as Trustee (can resign, remove, and replace
Trustees)

14. Will
 Pourover Will still used as a “safety net” to
catch any assets that are not in the trust and
“pour” them into the living trust so they can be
distributed according to the trust’s terms.
 Guardians for minor children are also named
in the Will.

15. Special Needs Trust
 For child with special needs
 Mental or physical incapacity
 Governmental assistance is available.
 Inheritance would mean no governmental
assistance.
 Limited rights to use but preserves trust assets
from governmental levy.
 Can be set up in parent’s revocable living
trust or as a stand-alone trust

16. Qualified Domestic Trust
 Non-U.S. citizens
 If one or both spouses are not citizens of the United
States, a qualified domestic trust (QDOT) must be
used to take advantage of a special marital deduction
similar to the unlimited marital deduction used by
couples who are both citizens.
 Properly structured, a QDOT can postpone estate
taxes until the death of the second spouse.
 Special restrictions apply

17. Gifting
 Generally, you are subject to gift tax
whenever you give property to individuals.
 Three types of gifts are exempt from gift tax:
 Generally, gifts to spouse
 Gifts to any individual of up to $13,000
annually
 Direct payments for tuition or medical care for
any individual
 $5 million lifetime gift tax exemption in 2012

18. Irrevocable Life Insurance Trusts
(ILIT)
 Although life insurance is income tax free, it is not
estate tax free. However, a special trust called an
Irrevocable Life Insurance Trust (ILIT) can be created
to hold the life insurance policy. An ILIT is an IRS-
approved means of removing your life insurance
proceeds from your taxable estate while still having
the proceeds available to provide for your spouse,
children, or other beneficiaries according to your
desires. Gifts made each year to the ILIT to pay the
policy premiums can be exempt from gift tax.
 3-year rule

19. How ILITs work
 Settlor of ILIT sets up Irrevocable Trust (ILIT) naming another
person/entity as Trustee.
 The Trustee is named the owner of the life insurance policy and
the ILIT is named the beneficiary.
 Trustee obtains a new taxpayer ID number for the ILIT and sets
up an ILIT bank account under the new taxpayer ID.
 Settlor provides the account with a “gift” with which to pay life
insurance premiums.
 Trustee notifies beneficiaries (“Crummey” notice) that a gift has
been made to the ILIT and they have 30 days to take the gift
(required to make it a gift of a present interest), otherwise it will
be used to pay the premium.
 Beneficiaries decline to take the present gift.
 At death, the life insurance proceeds pass free of estate tax
 Can be used to pay estate taxes to keep an otherwise taxable
estate intact.

20. Additional Trusts for Larger Estates
 Charitable Remainder Trusts (CRT)
 Charitable Remainder Annuity Trust (CRAT)
 Charitable Remainder Unitrust (CRUT)
 Grantor Retained Annuity Trust and Grantor Retained
Unitrusts (GRAT or GRUT)
 Qualified Personal Residence Trust (QPRT)
 Charitable Lead Trust
 Irrevocable Trusts for Children/Grandchildren
(Crummey Trusts)
 Intentionally Defective Grantor Trusts

21. Family Limited Partnership and
Limited Liability Company
 The family limited partnership (FLP) and family
limited liability company (FLLC) are sophisticated
estate planning devices.
 By transferring income-producing capital assets (i.e.
rental property) into an FLP or FLLC, the value of the
assets can be discounted up to 30% or more based
on factors such as the lack of marketability of or
minority interest in the partnership shares.
 Gifting fractionalized FLP and FLLC interests in
assets can be an effective way to make maximum
use of an individual’s federal transfer tax applicable
exclusion amount during life.
 Caution: Must have business purpose (not used for
residence) – not just tax-avoidance, observe
formalities.

22. Asset Protection
 Insurance
 Entities (e.g., LLC, LP)
 Choice of jurisdiction considerations
 Domestic Asset Protection Trusts
 Nevada and other states permit self-settled
asset protection trusts
 Offshore Asset Protection Trusts
 Cook Islands
 Cost/Benefit Analysis