Estate Planning Attorney


Benefits of an A-B Trust for Married Couples

Benefits of an A-B Trust for a Husband and Wife Who Live in CA
A couple in California have many reasons to establish a living trust. A living trust can help their estate survive onerous estate taxes, avoid probate if they both die, and side step the need for a conservatorship if either one (or both) are incapacitated.

While the State of California has eliminated the California Inheritance Tax, the Federal Government retains the "United States Estate Tax," popularly called the "death tax." This tax, based on assets owned at the time of death, is still in effect, although any assets passing to a surviving spouse who is a US citizen are exempt. While every individual has an exemption and can pass between $1,000,00 and $3,500,000 depending on the year of death, any amounts above that are taxed between 46 and 55 percent.

There is no tax on the assets left to the surviving spouse if the husband and wife leave everything to each other and the survivor is a US citizen. When the second dies and the assets are passed to children or other relatives, they are subject to tax if the assets exceed the current tax exemption. If a living trust is used, the first spouse to die can set aside between $1,000,000 to $3,500,000 in an irrevocable trust, as can the surviving spouse. Between the two, $2,000,000 to $7,000,000 can be passed to their children tax free, twice the amount possible if no trust is in effect.  
Trusts for Married Couples

The probate process, which is a legal proceeding intended to validate someone's will and designate who should receive the assets, can take nine to eighteen painful months to settle. In the end, an "executor" is appointed by the court whose job it is to handle the assets and administer the estate. The executor's fees, as well as those of the attorney and the Court, are determined by law and are based on a percent of the value of the assets. Statutory probate fees usually amount to 5-6% of the estate's total worth.

Joint tenancy of the assets can eliminate the probate process and will let them pass to the survivor with no legal procedures. While this works very well for a husband and wife, if other people such as children are involved, difficulties can arise if the child becomes bankrupt or defaults on his debts, since the assets can be claimed by creditors.

Probate problems can be avoided by use of a living trust, where a trustee manages the assets in accordance with a written trust agreement that is in effect until the trust ends. If a member of the trust dies, the trust survives, and a new trustee is named if the trustee dies. A properly executed and funded living trust will avoid probate even if both spouses die.

If all the assets are held by someone who becomes incapacitated and no living trust exists, a conservatorship of the estate may be required. This legal proceeding is much like a probate, and usually results large court costs and attorney fees. The possibility of such a conservatorship can be eliminated if there's a living trust. The assets covered by the trust are managed by a trustee, and no court intervention occurs. If the trustee becomes incapacitated or dies, a new trustee who is named in the trust assumes control of the assets.

A couple with no living trust and $2,000,000 in assets would have no estate tax or probate costs in 2004 when the first spouse dies. On the death of the surviving spouse who now owns the entire amount singly, however, estate taxes can be as high as $460,000, plus statutory probate fees of approximately $66,000, totaling nearly $525,000 in federal estate taxes and costs. In this situation, a living trust would avoid all of the federal estate taxes and probate costs. While legal and accounting advice would be required to administer and distribute the trust upon death, trust administration fees would be less than $20,000.  
Living Trusts
Thus, the couple's heirs would inherit over $500,000 if there is a living trust in place. $500,000 can send a lot of grandchildren to college! THE MAMOLA LAW FIRM, APC is conveniently located throughout Orange County. For additional information, please contact us at (949) 333-6543.

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