California Living Trusts and Estate Planning

(prHWY.com) March 26, 2013 - Oakland, CA -- In over a decade of drafting wills and trust, I've noticed that many people do their downstream planning but forget to do upstream planning. By that I mean they take care of their own descendants, but forget to ask their parents to give them the same forethought. It is easier than it sounds.

What if you could inherit your share inside of a trust that you control that gave you three benefits that you cannot give yourself:

1. protection of your inheritance from all creditors for the rest of your life
2. protection of your inheritance from divorcing spouses
3. protection of your inheritance from estate tax at your death.

You can also do this for your own children and descendants for generations to come. When you do, be careful to preserve the property tax levels by drafting the documents correctly. This kind of trust is sometimes called a "beneficiary-controlled" trust because it provides as much protection to the child as allowed by law without unduly tying the child's hands when it comes to distributions.

This is possible by using an independent trustee that the child can hire and fire at any time to make distributions. Most people don't make distributions anyway -- instead they invest the protected assets of the trust -- in homes, businesses and things they want to pass on to the successor generations. During their lives they enjoy these assets.

California has a wonderful tax break (Proposition 13) when you leave your real property to your children. Instead of being reassessed and the property taxes increasing to the actual value of the property, the child inherits the same tax base as the parent.

The mistake that some families make is failing to plan ahead by determining which of their children will want to hold onto certain pieces of real property. Here's an example - three children inherit a home from their parents in equal shares. One child wants to buy-out the other two and keep the home. Since the buy-out is between siblings (not parents and children), then two-thirds of the home will be reassessed and the property taxes may skyrocket if the home has grown in value.

Had the parents simply gifted 100% of the home to the child that wanted it in their estate plan, then this reassessment could have been avoided. That doesn't mean that the other children don't get their fair share, it just makes the gift clear for the assessor's purposes. The formula in the will or trust would clarify that the special gift shall not exceed the child's residual share (in this case one-third). If the gift does exceed the residual share then the child can negotiate with the other siblings.

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