HROMADKA & GAULKE FAQs
What is an Estate Plan?
An estate plan involves executed documents that assist in preserving the value of your estate assets, reduces unnecessary taxes and expenses to your estate, ensures that your heirs and/or beneficiaries receive what you intend for them to receive upon your death, manage your assets for you and your heirs and/or beneficiaries in the event of your disability or incapacitation, and ensures your privacy. Generally speaking, an estate plan involves a trust, a general assignment of assets, a will, a durable power of attorney for management of assets and personal care, and an advanced health care directive.
What is a Will?
A will is a legal document that allows you to specify gifts of your estate to named beneficiaries after your death. A will also allows you to name guardians for any dependent children. Without a will, your assets will be distributed pursuant to the intestacy laws of the state of California.
What is a Revocable Living Trust?
A revocable living trust is used to avoid probate, and sets forth how a settlor wants his or her assets to be managed and distributed, during the lifetime, and upon death, to the beneficiaries named in the trust. The trust is amendable and revocable during the settlor’s lifetime. When a settlor establishes a revocable living trust, he or she will transfer assets to the trust, and the trust becomes the owner of the assets. However, the settlor, if serving as trustee of the trust, maintains complete control of said assets held in the trust. When the settlor passes away, the trust assets avoid probate. There are several types of revocable living trusts that are tailored to a single person or married couples.
What is an Irrevocable Trust?
An irrevocable trust is a trust with terms and provisions that cannot be changed by the settlor, grantor, or trustor. This is distinguished from a revocable living trust, which is commonly used in estate planning and allows the settlor to change the terms of the trust and/or take the property back at any time. Using an irrevocable trust allows you to achieve a number of significant benefits, including minimizing estate tax, protecting assets from creditors, and providing for family members who are minors, financially irresponsible, or who have special needs.
What is a Testamentary Trust?
A testamentary trust is an irrevocable trust created under a will, and is only valid after the probate process is completed. This type of trust does not address a settlor’s incapacitation as it is created after the settlor has died and his or her will has been probated.
What is a Life Insurance Trust (ILIT)?
A life insurance trust (“ILIT”) is an irrevocable trust that is both the owner and beneficiary of one or more life insurance policies. Upon the death of the insured(s), the trustee of the ILIT invests the insurance proceeds and administers the trust for one or more of the named beneficiaries of the trust. The purpose of establishing ILITs is to avoid having the insurance proceeds become a part of an insured’s taxable estate.
What is a Grantor Retained Interest Trust/Qualified Personal Residence Trust?
A grantor retained interest trust (“GRIT”) or qualified personal residence trust (“QPRT”) is an irrevocable trust established for the purpose of transferring your assets, which have significant value, to your family members while incurring little to no gift tax. The trust instructs the trustee to pay the grantor (i.e. you) the income from the trust for a specified number of years or allow you to retain possession of the trust’s property (i.e. continue living in a residence). When your interest terminates at the end of the years you have selected, the property in the trust is distributable to the designated family members or other beneficiaries named in the trust. In some cases, the trust may continue being administrated for those beneficiaries’ benefit. The longer the term of years you specify in the trust, the larger the value of the interest you have retained. This in turn reduces the value of the gift you have made through the trust.
What is a Grantor Retained Annuity Trust?
A grantor retained annuity trust (“GRAT”) is an irrevocable trust typically used for wealthy individuals, wishing or needing to retain all or most of the income generated from a high-yielding and rapidly appreciating asset, who want to transfer said asset to a child or other designated beneficiary without incurring significant gift or estate tax liability. A GRAT is established by transferring a high-yielding and rapidly appreciating asset to an irrevocable trust and retaining the right to an annuity interest for a fixed term of years or for the shorter of fixed term of life. When the retention period ends, the assets in the trust (including all appreciation) go to the named remainder beneficiary(ies) of the trust. The GRAT fixed annuity payment is typically expressed in the trust as a fixed percentage of the original value of the assets transferred to the trust.
What is an Intentional Defective Grantor Trust or Intentional Defective Interest Trust?
An intentional defective grantor trust (“IDIT”) is a trust of which the grantor is considered the owner for federal income tax purposes. A sale or other transactions between an IDIT and the grantor does not result in any capital gain or loss, or any other tax consequences. An installment sale to an IDIT may be an effective means to transfer part of the future income or appreciation from a high-income or rapidly appreciating asset held in the trust with little or no gift or estate tax liability.
What is a Charitable Remainder Annuity Trust?
A charitable remainder annuity trust (“CRAT”) is a special type of irrevocable “split interest” trust in which a fixed income stream, the amount of which is determined by multiplying the value of the trust assets by a specified percentage, is payable to a noncharitable beneficiary for life or for a specified period of time not to exceed 20 years, with remaining trust assets being distributed to a qualifying charity (the remainder beneficiary) at the end of the noncharitable beneficiary’s interest. Such trusts can be created during the settlor’s (i.e., the trust creator’s) lifetime or at the time of death (e.g., under the decedent’s will). Typically, the settlor designates himself / herself as the noncharitable income beneficiary of the CRAT for the duration of his or her lifetime, with one of more favorite charities designated to receive the trust’s assets at death. The settlor can also include his/her spouse as an income beneficiary of the CRAT so that income can be received as long as either the settlor or the spouse is alive. Someone other than the spouse could be named as an additional income beneficiary, although this is usually not done due to gift and estate tax issues. The designated charity can be changed after the creation of the trust, if the settlor reserves in the trust instrument the right to do so. Specific requirements are necessary of the CRAT for the settlor to qualify for favorable income, gift, and estate tax savings.
What is a Charitable Remainder Unitrust?
A charitable remainder unitrust (“CRUT”) is an irrevocable trust where a settlor transfers cash or other assets to the trust but retains (either for herself or for one or more named noncharitable beneficiaries) a variable annuity (payments that can vary in amount, but are a fixed percentage) from the trust for a designated period of time, either a term of years or a lifetime. At the end of the specified term, or upon the death of the beneficiary(ies), the remainder interest in the trust property is distributed to the named charity(ies) who are the remainder beneficiary(ies) of the trust. The difference between a CRUT and a charitable remainder annuity trust is that a unitrust pays a varying annuity, meaning the amount paid to the noncharitable beneficiary is likely to change each year. Specific requirements are necessary of the CRAT for the settlor to qualify for favorable income, gift, and estate tax savings.
What is a Family Limited Partnership?
A family limited partnership (“FLP”) is an advanced estate planning technique to allow for significant estate tax savings through lifetime asset transfers intended to “fractionalize” an estate. Similarly to other entities, an FLP is a partnership among family members that is created to allow joint ownership of family-owned assets. The existence of the FLP is evidenced by a written agreement that details the terms of the partnership and the rights, duties, and obligations of each partner. An FLP is a limited partnership in that there are two classes of partners: general partners and limited partners. Limited partners have limited liability. This means that the limited partners in the partnership are only responsible for partnership liabilities to the extent of the value of their partnership interest. By comparison, in a general partnership, all of the partners have liability for all of the activities of the partnership and that liability is not restricted to the value of the partnership interest of each partner. The general partner remains liable for all partnership liabilities. Donors (typically parents) make gifts of small fractions of certain property to their children to qualify for the parent/child property tax exemption. The parents and children then transfer their respective interests in the property at issue to the FLP. A business appraiser is then retained to opine as to the discount of a limited partnership interest for lack of marketability and lack of control which can range between thirty-five to forty percent (35-40%). The rationale behind the discounts is that the fair market value of a gift or of an asset owned by a person at his or her death is determined by what a “willing buyer” would pay for that particular asset. A willing buyer would pay less for an interest in the partnership that owns the real property than eh would for one hundred percent (100%) of the real property. Specific requirements are necessary of the FLP for the donor to qualify for favorable income, gift, and estate tax savings.
What is the Unified Credit for Estate Tax Purposes?
The federal estate tax applies to the net estate of a decedent at death. Each person is allowed a unified credit which provides an exclusion from tax. The unified credit for year 2015 is $5,430,000. For gifts or estates that exceed the unified credit, the federal estate tax rate is 40% for year 2015. An effective estate plan seeks to take maximum advantage of the unified credit to limit estate tax liability for individuals.
What is the Annual Gift Exclusion?
A donor is required to file annual gift tax returns for all gifts exceeding the annual gift exclusion amount. No return is necessary for each gift to an individual within a taxable year that is below the annual gift exclusion. A donor may make as many gifts to separate donees, in an amount up to the annual gift exclusion, without having to file gift tax returns. The annual gift exclusion for 2015 is $14,000.
What is the Internal Revenue Code §6166 - Installment Payment of Estate Tax?
Internal Revenue Code (“IRC”) §6166 was created to alleviate an estate’s liquidity problems. If the estate qualifies to use IRC §6166, an executor may use installment payments to pay the federal estate tax attributable to the decedent’s interest in a closely held business. The statute is a useful tool when an estate is unable to pay tax without selling assets at a loss. It is also useful when the business or estate is capable of earning a greater after-tax rate of return then it spends in interest for the deferral privilege.
What is a Durable Power of Attorney for Management of Assets and Personal Affairs?
A durable power of attorney for management of assets and personal affairs is a written legal document whereby a competent adult appoints someone to act as their attorney in fact to manage their financial affairs. Durable means that should there come a time when you become unable to manage your financial and/or personal affairs, then the power of attorney remains in full force and effect. However, a durable power of attorney may become effective upon signing said instrument. Your disability or inability to manage your financial and/or personal affairs will not cause the durable power of attorney to be inoperative. The ability of your attorney in fact to manage your affairs if you become disabled is the underlying purpose of having a durable power of attorney for management of assets and personal affairs. The attorney in fact must act pursuant to the terms, conditions, and limitations that you designate in your durable power of attorney for asset management and personal affairs.
What is an Advanced Health Care Directive?
An advanced health care directive is a written document that informs others of your wishes with respect to your health care, when you become unable to make health care decisions on your own. The advanced health care directive allows you to name a person as your agent to make personal care or medical decisions as you so instruct in the instrument.
What is Probate?
Probate is the judicial procedure by which a testamentary document is established to be a valid will and/or the proving of a will to the satisfaction of the court. Said procedure also involves the appointment of an executor if one is named in the will, notifying and paying creditors of a decedent’s estate and distribution of assets to heirs according to the terms of the will. If a decedent dies without a will (intestate) his or her spouse, a family member, family members of the spouse, a conservator, a guardian, a public administrator, or a creditor may commence a probate proceeding before the court to finalize the administration of the decedent’s estate, which includes but is not limited to appointing an administrator of the estate, notifying and paying creditors of the decedent, and distribute the decedent’s estate assets to his or her heirs.
How long do probates generally last?
The California Probate Code provides for a four (4) month period for creditors of a decedent’s estate to file a formal claim against the estate. With statutory creditors claim period and general delays in obtaining court hearing dates, probate proceedings, at a minimum, take six (6) months to complete, but generally last approximately eight (8) to ten (10) months. If litigation is involved, probate proceedings could potentially be pending for years.
What is a guardianship?
A guardianship is a court procedure that provides the court appointed guardian(s) with decision-making authority and responsibility over the minor child’s personal affairs and/or finances, depending on whether a guardianship of the person and/or estate is established.
What is a conservatorship?
A conservatorship is similar to guardianship in that it is a fiduciary relationship between a conservatee and one or more individuals appointed by the court to serve as conservator(s). A conservator is responsible for making care and/or financial decisions on behalf of the conservatee, depending on whether a conservatorship of the person and/or estate has is established. Conservatorships are generally established when an individual loses the ability to manage his or her own personal care and finances, and he or she does not have an estate plan that can manage his or her care and assets.