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Long Beach, CA  90802-4517

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The primary issues that must be considered in estate planning fall into three categories: (i) the advantages and disadvantages of a living trust versus a will, (ii) estate taxes, and (iii) in the case of a husband and wife, the use of community property versus joint tenancy. Cayer, Spagnola and Jenkins will address each of these issues as well as this law firm's philosophy about implementing an estate plan.

We feel that planning an estate involves very personal decisions. We generally try to assist our clients in exploring all available alternatives while leaving the final decisions to our clients. To achieve this objective, we try to educate our clients on the advantages and disadvantages of each alternative available to them so that a client can make an informed decision with our assistance. Since you have asked us about your estate planning, this letter is intended to provide you with certain basic information necessary to have a general overview of the relevant factors that must be considered in order to prepare a comprehensive estate plan that is right for you.

ADVANTAGES OF A LIVING TRUST VERSUS A WILL

1. Avoid Court Interference. The first major advantage of a living trust is the avoidance of any type of court interference. For example, if a person who establishes a trust becomes disabled, the living trust avoids the necessity of having the court appoint a conservator to administer the person's financial affairs. Or if that person dies, the living trust avoids the necessity of probating the estate. By contrast, a person who makes a will and does not establish a living trust will not avoid a conservatorship upon disability or a probate upon death. Also, the absence of a court proceeding means that the living trust remains a private document that is not filed in the public records, whereas a will that is probated must be filed in the public records of the court.

2. Less Expensive for Heirs. As a natural result of avoiding court interference, the administration of a trust is generally less expensive for the person's heirs. If a person's assets are not in a living trust at the time of death, the probate court will become involved in the person's affairs, and there will be legal fees and court costs. Those legal fees and court costs are paid out of the person's estate and, therefore, reduce the amount that passes to the person's heirs. Those fees and costs tend to be (but are not necessarily) greater than the fees and costs associated with administering a living trust. Since a properly funded living trust avoids those fees and costs, the administration process is generally less expensive for your heirs.

3. Eliminates Lengthy Delays. As an additional result of avoiding court interference, a living trust eliminates delays that are associated with the probate process. The average probate in California takes about a year - sometimes more, sometimes less. Under a living trust, the successor trustee who is appointed in the living trust administers the person's estate. No court process is involved.

DISADVANTAGES OF A LIVING TRUST VERSUS A WILL

1. Establishment and Funding Costs. The out-of-pocket cost to establish a living trust is generally much greater than the cost of a typical will for two reasons: (a) the additional time it takes to explain how to conduct your affairs when you have a living trust and (b) the time it takes to transfer your assets into the trust. Accordingly, it is often said that a living trust is more expensive for you and, as I pointed out above, less expensive for your heirs. Therefore, whether to establish a living trust or a will depends on whom you wish to bear the greater expense of your estate planning, you or your heirs.

2. Nuisance Factor. The nuisance associated with having a living trust is probably the most difficult consideration to weigh when comparing a living trust to a will. After the trust is created, you must be willing to assist your attorney in transferring virtually all of your existing assets into the trust. You must also be willing to accept the responsibility of maintaining the trust for the remainder of your life (or until you decide to revoke it), including the proper transfer of any assets purchased after the creation of the trust (because you would never want to inadvertently "un-fund" your trust). It has been our experience that the ability to obtain financing occasionally is a problem when all of your assets are in a living trust because, from a technical standpoint, you legally own little or no assets. Furthermore, some lenders are reluctant to make loans to living trusts, and this can make it difficult to finance the purchase of large assets such as real estate, which you definitely want transferred into the trust if you go to the trouble of establishing one. Due to this reluctance, some lenders may require you to sign a guaranty as a condition to making a loan to the trust. The signing of such a guaranty could entail waiving anti-deficiency and other public policy protections designed to protect owners of real estate as a matter of public policy. When real estate is transferred to a trust, you must also consider changing the name of the insured on your casualty and liability insurance policies as well as obtaining an endorsement on your title policy. None of these nuisances are associated with a will because a will has no legal effect prior to death - you simply sign it and keep it in a safe place. In summary, if you decide to have a living trust, you must be willing to place a bigger burden on yourself during your lifetime in order to lessen the burden on your heirs at the time of your death.

3. Possible Mismanagement. If you establish a living trust, then the trust instrument will designate a successor trustee to administer your assets upon your death. The probate court is not involved. By removing the court from the administration process, the risk of mismanagement of your estate is increased. This risk is reduced by proper selection of the individual who will serve as successor trustee. If one trustworthy person cannot be found, then two persons who must act together can be named to serve as co-trustees. If no individuals can be found, then the trust department of a bank or other institution may be called upon to serve as the successor trustee, but this again increases the cost of using a living trust in your estate planning.

MISUNDERSTANDINGS CONCERNING LIVING TRUSTS

1. Estate and Income Taxes. There is a common misunderstanding that by establishing a living trust a person can reduce estate taxes that cannot otherwise be reduced by a will. This is false. Through proper drafting, a will can reduce estate taxes by the same amount that can be achieved through a living trust. Another misunderstanding that is very common is that a living trust will eliminate capital gains taxes that cannot be avoided by a will. This is also false. Generally, for example, a married person maximizes savings of capital gains taxes by holding title to appreciating property in "community property" form of title rather than in other forms such as "joint tenancy" or "tenancy in common." The fact is there is no tax savings that can be achieved through a living trust that cannot equally be achieved through a will or through a proper transfer of title. Therefore, tax savings should not be a motivating factor in your decision whether or not to establish a living trust. The focus of your attention should be on the factors discussed previously in this letter.

2. Administration After Death. There is a common misunderstanding that a living trust completely eliminates administration after death. This is false. A living trust simply changes the character of the administration. With a living trust it is true that there will be no probate and, therefore, administration by the probate court will be eliminated. However, upon death, the successor trustee must administer the trust in a manner that is consistent with the provisions of the trust. This generally involves the transfer of title to the trust assets in much the same way that a probate court transfers title to the assets of a person who dies without a living trust. Normally the administration of a living trust after death will involve legal fees and costs.

3. Improper Funding. Another common misunderstanding is that a trust, which is established and funded with a small deposit (such as $100), will be completely effective to carry out the person's wishes. This is false. All property that is intended to avoid probate must be transferred into the trust. There are many firms which, for a relatively small fee, offer to create a living trust for you and fund it with your home or $100 deposit, but leave you the responsibility to transfer the remainder of your assets. This is usually not in your best interests. We feel that you can transfer certain assets that are simple to transfer if you would like to reduce the overall legal expense. But, typically, your attorney should transfer the majority of your assets into trust. Despite the fact that this may cost more in legal expense, once you decide that a living trust is right for you, it is better to transfer your assets properly and be assured that the objectives of your trust are achieved.

4. Power to Amend, Modify, Revoke, or Terminate. One final misunderstanding about living trusts that we find to be somewhat common is the belief that the trust can be amended, modified, revoked, or terminated at any time. This is false. A living trust may be amended, modified, revoked, or terminated only before the death of the person establishing the trust. Once the person establishing the trust dies, the sub-trusts created as receptacles for the decedent's assets become irrevocable and may not be amended, modified, revoked, or terminated (although the successor trustee has discretion to make certain elections and distributions).

ESTATE TAXES

You will note that none of the discussion above about using a living trust versus a will as your primary estate planning vehicle had anything to do with estate taxes. That is because estate taxes do not impact the choice between a living trust and will.

We shall now endeavor to explain how your estate plan would function in the planning of your estate, whether you use a living trust or a will. Your estate plan, whether a living trust or a will, would contain within it at least two separate and distinct sub-trusts, and possibly three. They would be a Survivor's Trust, a Decedent's Trust, and possibly a Marital Trust.

The trusts would be designed to carry out your estate plan in such a manner that upon the death of the first of you, both of your federal estate exemptions would be preserved. The amount of each of your exemptions depends on the year of death, as reflected in the table below.

Year of Death	One Spouse's Exemption	Both Spouses' Exemptions
2002 and 2003	$1,000,000	$2,000,000
2004 and 2005	$1,500,000	$3,000,000
2006 ­ 2008	$2,000,000	$4,000,000
2009	$3,500,000	$7,000,000
2010	Estate Tax Repealed	Estate Tax Repealed
2011 and thereafter	Prior Law Reinstated	Prior Law Reinstated

This means that up to the combined amount of both spouses' exemptions can be transferred tax-free to your heirs upon the death of the surviving spouse. This division concept in estate planning coined the term "A-B" Trusts. The "A" stands for the "above-ground spouse" and the "B" stands for the "below-ground spouse". In other words, the "A" Trust in your estate plan would represent the Survivor's Trust and the "B" Trust would be the Decedent's Trust.
To illustrate how this works, assuming you had an estate equal to exactly the combined amount of both spouses' exemptions in the above table, then on the death of the first spouse, no probate would be necessary and no estate taxes would be required. However, as a result of the first death, the estate would be divided into equal portions: one would be the Survivor's Trust and the other would be the Decedent's Trust. The surviving spouse's share of the estate would be placed in the Survivor's Trust. The surviving spouse would have unlimited access to the income and the assets contained in the Survivor's Trust. The remaining half of the estate would be placed in the Decedent's Trust. While the surviving spouse would receive all of the income generated from the assets in the Decedent's Trust, there would be only limited access to the actual assets in this trust. In other words, figuratively speaking, "hand-cuffs" are placed on the surviving spouse with respect to the ability to consume the decedent's trust. On the death of the surviving spouse, no probate would be required and no estate taxes would be due. Both halves of the estate would transfer to your heirs tax-free.

THE ANALYSIS IN THE PREVIOUS PARAGRAPH IS BASED ON THE PREMISE THAT YOUR TOTAL ESTATE WOULD EXACTLY EQUAL THE COMBINED EXEMPTIONS OF BOTH SPOUSES AND THAT EACH OF YOU WOULD BE ENTITLED UNDER THE LAW TO TAKE ADVANTAGE OF YOUR INDIVIDUAL FEDERAL ESTATE EXEMPTION.
If we assume for purposes of discussion that your estate is worth more than the combined amount of both spouses' exemptions, then each of you would own one-half of the total estate, which would exceed the amount of each of your individual exemptions. On the death of the first spouse, only the amount of the decedent's individual exemption can be placed into the Decedent's Trust tax-free. The excess could be handled in either of two ways:

1. It could be placed in the Survivor's Trust where a marital "umbrella" would protect it. This means it would not be taxed until the death of the surviving spouse. At that time, the portion in the Survivor's Trust equal to the survivor's individual exemption would be transferred to the heirs tax-free; however, the excess would be taxable.

2. Alternatively, since the surviving spouse has absolute control of the assets held in the Survivor's Trust, some spouses have expressed concern that the decedent's share of the estate in excess of the decedent's individual exemption end up in the hands of strangers rather than the decedent's heirs. This fear has caused the creation of a modification to the basic A-B Trust plan. This modification has given rise to a third trust, which is the Marital Trust or sometimes referred to as the "QTIP" trust. QTIP means "qualified terminable interest property." This trust is created to hold the portion of the decedent spouse's share of the total estate in excess of the decedent's individual exemption. The Marital Trust is structured so that it qualifies to be sheltered by the marital umbrella. As a result, assuming you do not die simultaneously or within 6 months of one another, the tax on the excess is deferred until the death of the surviving spouse and no stranger would be able to obtain any of the deceased spouse's share of the total estate. Although the surviving spouse is guaranteed all of the income from this trust and also can have access to the principal under specified standards, the heirs of the deceased spouse are guaranteed the remainder. This arrangement does not alter the estate tax due on the death of the surviving spouse; it only ensures the ultimate disposition.

One final point deserves mention concerning estate taxes. The discussion above focuses on the general rule that it is best to postpone the payment of taxes to a later date. In a situation where the two spouses die simultaneously or within 6 months of one another, there is no reason to postpone the tax liability because the two deaths are so close in time to one another. Therefore, under those circumstances, we would draft "estate equalization" provisions into your trust which attempt to equalize the tax liability between both halves of the estate so that both spouses pay some of the tax but in lower tax brackets. This ensures that a greater portion of the total estate passes to the heirs of both spouses. Through the equalization of the separate property of the spouses and the proper use of disclaimers, the amount of tax liability to be paid by each spouse's estate can be controlled.

When a living trust is utilized, your property interests would be transferred into the living trust. We would prepare the deeds and other documents to accomplish this. Also, we normally suggest that you do not place your regular family checking account in the living trust, but do transfer your major certificates of deposit or savings accounts.
Even though you might create a living trust as your primary estate planning vehicle, you must have wills to cover the proper disposition of any assets not transferred properly to the trust. Your wills would be classified as "pourover" wills that would essentially provide that anything not transferred to your living trust during your lifetime would be willed to the trust.

A will and a living trust are the documents that implement the devolution of your estate on your death. There are other legal instruments that will assist greatly in your estate planning to reduce the taxes on your estate when it ultimately goes to your children. Always keep in mind one fact: that is, you each own half of the estate; the other half may be willed to the surviving spouse tax-free. The only death taxes under our present law result at the death of the second spouse.

Other devices to reduce estate taxes are the following:

1. Gifting. By making gifts to your children, grandchildren and spouses of your children, you can transfer a substantial part of your assets so that your estate will be smaller and therefore the total taxes less. The limit is $10,000 per person per spouse; therefore, two spouses may gift $20,000 per calendar year to one person. I'll leave the mathematics up to you. The difficulty is that other than gifting cash you must determine the current value of the property gifted and determine the instrument to accomplish the gift.

2. Life Insurance Trust. A life insurance trust is a rather complex procedure. Essentially the purpose is to deliver capital in the form of cash on an insured's death to pay the estate taxes. The goal of the life insurance trust is to avoid federal estate taxes on the life insurance proceeds.

3. Charitable Remainder Trust. A Charitable Remainder Trust is also a complex procedure. Essentially, you give up the right to make any other disposition of the asset of the community estate by irrevocably transferring that asset to a trust for the remainder benefit of the charitable organization for receipt by you of annual income payments.

COMMUNITY PROPERTY VERSUS JOINT TENANCY

Often we find that a husband and wife have taken title to some or all of their assets, such as their home, in joint tenancy. Generally, it is more beneficial for a husband and wife to hold title to their assets in community property rather than joint tenancy. The primary reason is to reduce capital gains taxes after the first spouse's death.
If property is in joint tenancy and one spouse dies, only the decedent's half of the property will receive a step-up in tax basis to the property's current fair market value. Consequently, if the surviving spouse found it necessary or desirable to sell that asset, the surviving spouse would be subject to capital gains taxes on the survivor's half interest in the property. By contrast, if the same property is held as community property at the time of the first spouse's death, the entire asset receives a step-up in tax basis, and the surviving spouse can sell it without any capital gains taxes up to a sale price equal to the fair market value of the property on the date of death.

SUMMARY

This summarizes (i) the advantages and disadvantages of establishing a living trust versus a will in your estate plan, (ii) estate taxes, and (iii) community property versus joint tenancy. Also, when we prepare a comprehensive estate plan, we normally prepare a durable power of attorney for property management and a power of attorney for health care. The durable power of attorney for property management is a safety net that provides for the management of your assets, if you become incapacitated, without having to go to court to seek a conservator. The power of attorney for health care appoints an agent of your choosing to make health care decisions for you if you become incapacitated. Finally, we normally recommend that a husband and wife execute a property agreement covering all property that does not have a document of title such as a deed, stock certificate, etc. A property agreement provides that all jointly held property is community property as well as any separate property that you want to transmute to community property. This ensures the raised tax basis discussed above.