Cava and Faulkner

What Is a Trust?

A trust is a legal fiduciary arrangement that places assets into a separate ownership usually managed by a third party, known as the trustee. Trusts are organized in numerous ways including how assets eventually make their way to the named beneficiaries. Some trusts provide protection for family members with disabilities by helping them avoid conflicts with government programs such as Medicare or Social Security. Others can provide a steady, controlled income to beneficiaries who may have difficulty managing money prudently.

One advantage of many trusts is that they avoid probate, unlike wills. That has a couple of advantages: First, it usually means the assets will be distributed more quickly when the original estate owner dies. Second, avoiding probate means that the details of the estate are private. Probate is a public function, and wills and estates that go through probate are made available for public review, while trusts remain private. Third, the cost of probate is very high and can drain assets that were meant to improve the lives of loved ones. Fourth, probate deprives a person of choosing when and how a beneficiary receives an asset so an 18 year old could inherit money which may alter the course of their life in a very negative way.

What Types of Trusts Are Available in California, and What Can They Do?

There are many. This is not a complete list, but does include some of the most commonly used trusts. For concerns about your estate’s specific needs, it’s crucial to work with an experienced estate planning attorney.

Revocable or Irrevocable Trust

Trusts are generally either revocable or irrevocable. Which is best for you estate depends on how you feel about the requirements of each.

Revocable trust. The trustor (person who moves their assets into the trust) creates the trust and has the ability to change, end, or revoke the trust at any point in their lifetime, as long as they’re deemed mentally competent. This type is commonly used to avoid probate because the trustor has the ability to make changes in the future (for example, if they come to believe someone listed as a beneficiary is no longer the best choice for certain assets, they can change those assets to go to someone else).

Irrevocable trust. With this type of trust, once the trustor moves the assets into it, they no longer have the right to make any changes, cancel, or revoke the trust. While it might seem logical that the trustor would prefer to retain control, there are circumstances in which an irrevocable trust might be the better choice. One primary reason is that assets in an irrevocable trust can’t be reached by creditors. For people who are more susceptible to being sued (including physicians and lawyers), this is a good way to ensure that a yet-unforeseen lawsuit won’t destroy the estate they’ve built up.

Special Needs Trust

If the trustor wants to ensure one or more beneficiaries who have special needs and will need a steady income for the foreseeable future can receive those without losing their eligibility for various needs-based governmental options such as Medicare/Medicaid. This is especially helpful when there are beneficiaries with disabilities that will make it difficult for them to support themselves as adults.

Life Insurance Trust

This type of trust is arranged to have life insurance payouts go directly into the trust upon the trustor’s death. It can only be an irrevocable trust, and the trustor can’t borrow money against the life insurance policy in their lifetime. But it can protect against excessive taxation at the trustor’s death.

Testamentary Trust

Unlike the other types of trusts mentioned so far which go into effect as soon as the trustor moves assets into them, a testamentary trust doesn’t go into effect until the trustor passes away. These are also irrevocable trusts.

Blind Trust

This is useful when the trustor has reasons not to want the beneficiaries to know about the trust (or the trustees appointed to manage it) because they fear there could be conflict between themselves and the beneficiaries or among the beneficiaries.

If I Have a Trust, Do I Need a Will?

If you have any assets that you don’t want to place in a trust, you should draw up a will to specify how those are to be distributed. A pour over will serves a very important purpose if your trust fails, by ensuring your beneficiaries will receive the assets that should have been distributed through a trust.

There’s also one important thing that a will can do that a trust can’t, and that’s to name a guardian for any orphaned minors. If the parents die with a trust but without a will, it will be up to the courts to determine guardianship for the surviving children. Usually the courts will look at close family members first. But to ensure the parents’ preference for guardians is followed, they must have a will.

Who Should Be Appointed Trustee of My Trust?

There are several considerations, and this topic should be discussed with an attorney. But here are a few basic things to keep in mind.

Trustworthy. The trustee must be someone the trustor can count on to carry out their wishes.

Strong personal financial track record. The trustee should not have a mixed financial background.

Communication skills. The trustee needs to communicate with a variety of people, including family members and beneficiaries.

Detail-oriented. The trustee will have to manage paperwork, accounting, and deadlines, and should be detail-oriented to succeed.

What Should I Do if I Need Help Developing an Estate Plan with Trusts?

Call Cava & Faulkner at 916-685-1225 for a free consultation. As discussed above, trusts are an excellent way to protect assets for future generations. Every estate is unique, and which trusts will most benefit yours depends on the specifics of your estate. We can review your estate and help you determine the best approach for protecting your assets and benefiting your inheritors going forward.

What Is a Blended Family?

A blended family is one created when spouses who were previously married to someone else and had children divorce and remarry, bringing the children from the previous family with them. This can be complicated on many levels, but it’s especially complex when considering estate planning.

Sometimes, one or both spouses already have an estate plan. But once they remarry and blend families, that plan is outdated and needs attention.

What Happens if There’s No Estate Plan and One Spouse Dies?

That’s known as dying intestate, and the decedent (person who died) who didn’t have a plan (or has an outdated one) causes the survivors to go through probate. Without a valid plan, it’s up to the probate court to determine how assets should be divided. The court may distribute assets in ways the decedent wouldn’t have chosen.

It can also open up legal challenges among the blended family members regarding who should rightfully receive what. If the estate is contested, it can be time-consuming and costly, meaning the assets could be drained before anyone actually receives them–something the decedent most likely wouldn’t want.

Sometimes, one spouse might believe it’s easiest just to leave everything to the current spouse, assuming they’ll distribute some of their inheritance to the children from the first marriage. But if that’s not part of the estate plan, the new spouse isn’t legally required to do so, which could lead to resentment and possible lawsuits from the children who are excluded.

What Do I Need to Know About Estate Planning with a Blended Family?

There are several factors to keep in mind when beginning the process. First, it should be something the couple has discussed as part of preparing to marry. Anytime there’s a major life event–marriage, divorce, death, birth–updating the estate plan is vital and should be done with the guidance of an experienced estate planning attorney.

One major consideration–and a primary reason to get an updated plan–is clearly delineating what property belongs to each spouse. A blended family usually has three types of assets or property.

• Separate property. This is property (including debt) acquired by one spouse prior to the marriage. If it’s not used to benefit the marriage, it usually belongs to the spouse who had it before the marriage.
• Community property. Any assets or debts acquired by one or both spouses while married.
• Commingled assets. When the two spouses take what was previously separate property and use it jointly. For example, each owned a house before marriage. They each sell their separate homes and use the money to buy a joint home. That’s now community property, not separate property.

What About Other Types of Assets?

It’s easy to think of property in terms of real estate, cars, or bank accounts, but there are other types of assets that need to be considered, especially if either spouse has specific wishes for how those assets would be distributed after their death.

• Life insurance. Life insurance policies should have a named beneficiary. If someone has divorced and remarried but didn’t change the beneficiary from the previous spouse, that could cause problems in probate. Or it may be that the person with the life insurance would rather it go to someone else, such as adult children. The insurance policy needs to be updated to reflect that.
• Pay on death. Many bank accounts offer the option of adding a beneficiary as a pay on death (POD) or transfer on death (TOD), which allows those funds to go directly to the beneficiary without having to go through probate. But again, the beneficiaries must be up to date.
• Retirement funds. By federal law, retirement funds must automatically be given to the surviving spouse.
• Other assets. If one spouse inherits an asset, such as real estate, they need to decide who should inherit the property on their death, especially if they don’t want the new spouse to receive the separate inherited property.

Should I Have a Trust?

There are many good reasons to have a trust, although it shouldn’t completely replace a will, especially if there are minor children in the family. A trust can’t name a guardian in the event of the parent’s death; only a will can do that.

But a trust can do many other things. For one thing, it essentially bypasses probate, meaning the distribution of the estate is likely to be quicker and less costly. There are many different types of trusts that have various purposes. To learn which type of trust might be most advantageous to your situation, contact an experienced estate planning attorney.

Some popular options in blended families include:

• Special needs trust. If one spouse has a special needs family member, they can set up a trust that will ensure the person will be cared for after the spouse passes.
• Qualified terminable interest property trust. This type of trust allows one spouse to provide for the other if the trust owner passes first, but it also can be set up to ensure children from a previous marriage receive assets and are not disinherited by the surviving spouse.

What Should I Do if I Need Help Developing an Estate Plan for My Blended Family?

Call Cava & Faulkner at 916-685-1225 for a free consultation. Estate planning involving a blended family can be complex and something you shouldn’t undertake without professional advice. Every estate is unique, and there’s no one-size-fits-all plan. We can walk through the specifics of your estate and provide advice as to the best approach that will meet your needs and protect your assets.

Does Business Ownership Matter for Estate Planning Even if the Business Is Small?

Unless you plan to shut the business down in your lifetime–and even then, while no one likes to think about it, unexpected things happen–having an estate plan that includes the business, even if it’s small, is vital. There are a number of factors involved which, if not planned for legally, could be left to probate court to determine–and that may end up with outcomes that aren’t anywhere near what the business owner would have wanted.

What Should Be Included in an Estate Plan Pertaining to a Small Business?

There are many considerations that should be discussed with relevant parties (business partners, family members, potential buyers, etc.) and then made legally binding with the relevant estate planning tool (there are more tools than just wills). Here are a few things every business owner should think about.

• Successors. If the owner wants someone to take over the business through inheritance, those successors should be identified and their roles clearly defined. Often, with a small business, a family member, such as a son or daughter, may stand to inherit the business. It’s vital that they not only be informed of the future inheritance, but that they’re trained in the business’ workings. Ideally, they’d work with the owner before the transition ever took place, but at least they should understand the business, how it works, the bookkeeping behind it, and any future plans. Then, the successors need to be named in the estate.
• Sales agreements. If there are multiple business owners, planning for what happens when one dies or becomes incapacitated is essential, too. There are specific contracts that can be drawn up specifying whether the other business owner(s) can buy the remaining percentage of the business, how the business should be evaluated, and potentially what the sales price should be.
• Legal and tax situations. Whether the business is to be inherited or sold, there are significant legal and tax implications for the estate and whoever eventually becomes the owner. There may be estate or gift taxes to take into consideration. Consulting with both an estate planning attorney and a financial planner who specializes in small businesses can help develop a plan to minimize those situations as much as possible and get that plan into the estate plan as soon as possible.
• Business Valuations. As noted earlier, the business should undergo a financial evaluation to determine how its value is assessed, both for inheritance and for sale. But this is likely something that should be done on a regular basis, as changes in the business can change what the overall business is worth–and those changes could lead to amending the estate plan.

What Types of Estate Planning Tools Should a Small Business Owner Consider Using?

There are several tools available. Because every estate and small business is unique, the estate plan should be, too. What works for one small business estate plan may not work as well for another. Talking to an experienced estate planning attorney is the best way to determine what’s suitable for your situation. In general, these are some of the tools that are frequently used.

• Trust. A legal trust can be an excellent mechanism for helping a small business owner pass the business assets to the named successor. This can be done via a will, but with a trust, the assets don’t go through probate, and there may be financial advantages to using a trust, especially when it comes to taxes. Probate is a public process, and many business owners prefer to keep the details of their business private, which a trust can do.
• Life insurance. Many people think about life insurance in terms of paying for things like funeral expenses, but they’re also valuable in replacing lost income when the business owner dies. The funds can also be used to buy out someone else’s share in the business in order to keep the business in the family.
• Buy-sell agreement. As discussed above, it’s possible that the deceased owner’s share of the business may be sold to another owner or an employee. Having an agreement set in place before it’s needed can make that process smoother with less conflict.
• Financial power of attorney (POA). Very few estates involving small businesses should be without one of these. A financial POA designates someone who is legally authorized to act on the owner’s behalf with regard to running the business and making business decisions if the owner is incapacitated. This is not meant to handle the business after the owner dies, but if they become unexpectedly unable to handle the business (for example, if they’re in a car accident and end up in a coma). The idea is that if the owner recuperates, they can return to the business. If they pass away, the rest of the estate plan is activated, and the business is managed by those requirements.

What Should I Do if I Need Help Setting Up an Estate Plan to Include My Small Business?

Call Cava & Faulkner at 916-685-1225 for a free consultation. We fully understand that it’s not just the personal aspects of your estate that you want to protect but the business you’ve worked hard to establish and maintain. Our team of experienced, knowledgeable estate planning attorneys can look at everything involved in your estate and help you decide how you want it handled and what’s best for everyone and everything, including the future of the business.

What Is Probate?

Probate is a legal process through which the assets of someone who has passed away (known as the decedent) are distributed to the heirs. Under California law, probate is required if someone dies without a will and has an estate worth more than $184,500 (that figure can change with time). It’s also required for decedents who had a will with property that is subject to probate. Because probate is a process that goes through the courts, it can take time and cost significant sums of money, two things the heirs would likely prefer not to use. It’s vital to understand that there are exemptions to what’s required to go through probate and methods of estate planning that can help bypass it.

What Is Exempt from Probate in California?

California law specifies several assets that are considered non-probate property, including the following.

• Assets below the current value threshold of $184,500.
• Assets owned jointly by spouses and designated as “community property with right of survivorship.”
• Assets owned jointly by the decedent and another person (as long as the decedent passes away before the other person).
• Any assets (such as bank accounts and life insurance policies) that list a beneficiary as payable on death (POD) or transfer on death (TOD).
• Assets held in the decedent’s living trust (more on this below).

What Is Usually Subject to Probate in California?

Generally, any property owned solely by the decedent (including items listed above) that was not transferred to a trust or designated as a POD or TOD. This can also include jewelry, artwork, and intellectual property.

One area that will have to go through probate regardless is assigning a guardian to a minor child orphaned by the decedent’s death. If there’s a will that specifies who should be the guardian, that will need to be approved by probate. If there is no will or the will doesn’t name a guardian, the probate court is responsible for designating one.

What Is a Revocable Living Trust, and How Does it Help Avoid Probate?

A revocable living trust is an estate planning tool that allows the estate’s owner to place assets into the trust’s ownership. The trust is managed by a trustee, which can be the estate’s owner or someone else of their choice. The estate’s owner can change or revoke the trust at any time in their life, as long as they’re deemed mentally competent.

The trust dictates who the beneficiaries will be once the estate’s owner passes away. This may sound similar to drawing up a will, but a will often ends up in probate, while a trust bypasses it altogether. This allows the distribution of the trust’s assets to be settled more quickly and at a significant savings and lower cost than going through probate court.

What Is Required to Set up a Revocable Living Trust?

This type of trust requires a creator (also known as a grantor), which is the person who puts their estate assets into the trust. It requires a trustee to manage the trust assets, and it requires that a beneficiary or beneficiaries be named to inherit the trust’s assets on the grantor’s death.

It’s important to know that the trustee is not allowed to manage the assets in the trust for their own personal benefit. They must manage the assets in the beneficiaries’ best interests.

Often, people assume trusts offer tax benefits. Some may, but revocable living trusts usually do not.
It’s also important to understand that this type of trust does not provide asset protection. That means the assets in the trust could be subject to claims from creditors. If this is a potential concern for your estate, it’s highly recommended that you work with an experienced asset protection attorney to tailor your estate plan with that in mind.

Are There Other Types of Trusts That Help Avoid Probate?

There are several with varying restrictions and goals. These are two popular choices.

• Irrevocable living trust. This is essentially a living trust that, once it’s finalized, cannot be changed. The grantor cannot change or revoke it. It’s exceedingly rare that legal exceptions are made once the assets are moved into the trust’s ownership. However, it has some benefits that the revocable living trust doesn’t. It may have tax benefits for the inheritors, and it’s not subject to creditors’ claims. For that reason, it’s also a valuable option for someone whose career might make them more prone to lawsuits.
• Special needs trust. If there’s a family member with special needs, the grantor can set up a trust that will provide assets managed by a trustee on behalf of the special needs person. This is especially useful if the beneficiary is unable to manage their own finances. It’s also valuable in that assets in this type of trust aren’t considered to be under the beneficiary’s control. Then, the beneficiary can remain eligible for various government benefits, including Social Security or Medicaid, as the assets won’t be taken into account when determining their need and eligibility.

What Should I Do if I Need Help Setting Up an Estate Plan that Can Avoid Probate as Much as Possible?

Call Cava & Faulkner at 916-685-1225 for a free consultation. Our team of knowledgeable, experienced estate planning attorneys knows that you want to do everything possible to transfer your estate to your designated heirs in the easiest way possible while avoiding unnecessary public exposure. We can walk you through the specifics of your estate and explain the various options available that can help reduce the need for probate.

Inheritance and estate planning can be complex processes, and often, the person drawing up the estate plan wants to find a way to enable beneficiaries to avoid paying estate or other types of taxes. Here’s what you need to know about what’s possible in California.

What Is an Inheritance Tax?

An inheritance tax is a tax assessed on an inheritance a beneficiary receives from someone in a specific state. For example, if someone lives in a state where inheritance taxes are collected and passes away, their beneficiaries would likely have to pay that state inheritance taxes on the inheritance.

Does California Collect Inheritance Taxes?

California does not levy estate or inheritance taxes. That means that if the person with the estate (known as the testator) dies in California and leaves money to beneficiaries, the state won’t collect estate or inheritance taxes on it. Those funds are not considered income by California.

However, if someone lives in California and inherits money from someone who dies in a state where such taxes are collected, they will likely have to pay them in that state. Some states have exemptions for small inheritances, such as $10,000, while others don’t.

If California Doesn’t Collect Estate or Inheritance Taxes, Does That Mean the Inheritance Is Tax-Free?

Not necessarily. When talking about California’s inheritance tax policies, we’re only talking about taxes on the state level. There are also taxes on the federal level to consider. While the Internal Revenue Service (IRS) does not tax inheritance as income, meaning the beneficiary doesn’t have to report it on their tax filings in the year they received it, the IRS may view it through the lens of capital gains. Capital gains occur when someone inherits something, such as property, and later sells it at a profit. The amount of the profit could be taxed as capital gains by the IRS.

The IRS will also seek an estate tax on estates valued at more than $12.92 million (in 2023). If the estate’s overall value is lower than that, it will not assess the estate tax.

How Can I Find Out if an Estate Tax Will Affect Me or My Beneficiaries?

This is when it’s an excellent time to work with an experienced estate planning attorney. When people think about their own estates, they often only consider certain bank accounts. In fact, legally, an estate is much more than cash. An estate is comprised of anything of value, including real estate, valuable artwork, vehicles, business interests, copyrights, and annuities–and these are only a few of the things that make up an estate. It’s possible that even if bank accounts don’t add up to the minimum estate tax level, adding in the actual value of these other assets could push it over the limit and lead to a taxable situation. A knowledgeable estate planning attorney can help you identify assets you may have forgotten about or didn’t realize would be included in the definition of “estate.”

How Can Estate Taxes Be Avoided or Minimized?

If your estate reaches the federal threshold for estate tax, there are steps you can take to minimize the tax impact. While a will is a valuable document for estate planning, putting assets into a trust is another avenue. Using a trust may not avoid all the federal estate taxes, but there are times when it can help reduce them. Here are some types of trusts that may help. Every estate is unique, so the solutions mentioned here are not one-size-fits-all, nor are all these the only solutions available.

These are simply examples of different options:

• Dynasty trust. This is sometimes referred to as the generation-skipping trust, which unfortunately doesn’t accurately portray how the trust works. In this trust, the estate is put into a trust that has a maximum amount allowed, and the trust passes that amount to the estate owner’s child and then to their grandchild.
• Irrevocable gifting trusts. These gifts are given to others that can’t exceed $15,000 per year and have a lifetime cap. As long as those maximums aren’t exceeded, the recipients should receive the money without taxation.
• Irrevocable life insurance trust (ILIT). A life insurance policy that names a spouse as the beneficiary won’t owe taxes when paid out. But if the policy lists someone else, such as the policyholder’s children, they could be expected to pay tax. An ILIT is a workaround for that.
• Spousal lifetime access trust (SLAT). A SLAT allows someone to put large amounts of assets into this trust to benefit the other spouse (or sometimes children). That allows the amount to be reduced from the shared estate. Only one spouse controls the trust.
• Personal residence trust. This allows someone to put personal real estate into a trust and give it to their children while retaining the right to continue to live there.

It’s important to understand that all of these trusts have numerous, complicated requirements to fulfill. Contact us with any questions.

What Should I Do if I Need Help Setting Up an Estate Plan?

Call Cava & Faulkner at 916-685-1225 for a free consultation. Our team of knowledgeable, experienced estate planning attorneys understands how important it is for you to have your estate distributed according to your wishes and that you want to take every step possible to ensure that happens. Every estate is unique, and we can guide you through the specifics of yours to determine the best approach that could potentially minimize any tax liabilities for the beneficiaries.

Many people are familiar with the concept of drawing up a will to plan for estate succession. But wills aren’t the only type of estate planning tool available. Trusts are another way to plan for the future. In some cases, they act as a replacement for a will, while in other cases, they work together with a will. Each estate is unique. Here’s what to know about trusts in California.

What Is a Trust?

A trust is a financial arrangement in which a third party (known as a trustee) manages assets held for beneficiaries. The estate owner (known as a trustor) transfers the assets to the trust. While this is similar to a will in that the named beneficiaries will ultimately receive the assets, there are some significant differences.

Trusts don’t go through probate, unlike many wills. Probate is a public process, so the terms of the will, how it’s distributed, and to whom becomes part of the public record. Because trusts don’t go through probate, it’s a private matter.

Trusts can often distribute assets more quickly than a will can because of being able to avoid probate.

It’s possible in some cases that using a trust will reduce court fees and other estate costs and potentially reduce estate taxes.

What Types of Trusts Are Available in California?

There are many different types of trusts in California, all with different benefits and nuances. This is not a comprehensive list but includes many of the most commonly used trusts. If you’re unsure which of these might work for you or have needs that don’t appear to be met with any of these, contact an experienced estate planning attorney to learn what other options might be available.

Revocable Trust

A revocable trust (sometimes referred to as a living trust) is one in which the trustor can continue to manage and change throughout their life. Once the trustor passes, the beneficiaries receive the assets assigned to them without going through probate court. But as long as the trustor is living and competent, they can make changes to the trust.

The beneficiaries will receive none of the assets until the trustor passes away.

Irrevocable Trust

When a trustor sets up an irrevocable trust, they lose the ability to revoke the trust if they change their mind later. That can seem like a disadvantage, but there are advantages to irrevocable or revocable. These are often used for long-term care and retirement planning, as once the assets are transferred to the trust, they can’t be included as assets or income when determining whether or not the trustor is eligible for Medicaid.

Life Insurance Trust

This irrevocable trust allows any life insurance assets to be passed to beneficiaries after the trustor’s death without activating any estate taxes.

While a life insurance policy will ask for named beneficiaries, they may have to pay taxes without this type of trust.

Special Needs Trust

This type of trust is used for people with disabilities. It can be an essential part of protecting their future, as when set up correctly, the person with disabilities can receive funds from the trust without it counting against them when determining Medicare or Medicaid (or other government support) eligibility.

Charitable Trust

When someone would like to leave some or all of their assets to a nonprofit organization, a charitable trust is an excellent mechanism to do so. There are multiple ways to create this type of trust, including the possibility of allowing interest-only disbursements for a period of time before the bulk of the assets are transferred.

Generation-Skipping Trust

As the name implies, this is a trust designed to ensure assets go to grandchildren rather than children. If set up correctly, this type of trust may keep the trust assets to remain untaxed.

Bypass Trust

Married couples frequently use this. Each spouse sets up a revocable (living) trust, and each specifies that if the assets of one will pass to the other’s trust upon the trustor’s death. This usually makes the assets safe from gift or estate taxes as it’s passed to the surviving spouse.

Pet Trust

This is an increasingly popular option that allows pet owners to arrange in advance for their pets to be cared for if something should happen to the original owner. The trust can provide funds for the pet’s needs (food, veterinary care) and often includes a stipend for the person caring for the pet.

Is There Something a Trust Can’t Do?

While there are many things different trusts can do, there’s one crucial thing that none of them are able to handle, and that’s assigning guardianship of a minor child. This is a situation in which having both a trust and a will may be the best solution.

Only a will can legally name a guardian for orphaned minor children. Without a will, the courts will name a guardian, who may or may not be someone the parent would have wanted.

What Should I Do if I Need to Set Up a Trust?

Call Cava & Faulkner at 916-685-1225 for a free consultation. Because there are multiple types of trusts available, each with its own pros and cons, working with experienced, knowledgeable estate planning attorneys can help you through the decision process of what’s best for you and your estate. We understand how important it is for you to ensure your estate is handled precisely as you want it to be.