LIVING TRUST OUTLINE

copyright © 1996-2008 Peter Bassing

Prepared by Peter J. Bassing

Attorney at Law
(Member, California Bar--State Bar No. 63315)
Note: The following discussion is in some instances specific to
California law.

WHAT IS A LIVING TRUST?

"LIVING TRUST" is the popular term applied to a Revocable Inter Vivos Trust. This is a
way by which property (the trust estate) is held by one person (the trustee) for the benefit
of another person (the beneficiary). The person who creates the trust and contributes the
trust estate is known as the settlor or the trustor. One person, or a couple, might occupy
more than one, or all, of these roles, as settlor, trustee and beneficiary. Usually, the settlor
or settlors are in fact the initial trustees.
The trust is created by a written Declaration of Trust which spells out all of the terms of
the trust and the distribution of the trust estate and its income, both during the lifetime(s)
of the settlor(s)/beneficiaries(s) and after death.

The living trust is revocable. This means that the person or couple who created it can
change or undo it. Many trust declarations provide, however, that upon the death of the
first spouse, portions of the trust become irrevocable.

A Living Trust may provide some or all of the following advantages:

1. Avoidance of Probate
2. Flexibility in the distribution of an estate (Compare to Joint Tenancy)
3. Avoidance of a Conservatorship
4. Avoidance of some post-death income taxes
5. Estate tax savings for married couples
6. Privacy

PROBATE

Probate is the legal proceeding by which a person's assets are distributed after death.
Assets which have been held in a Living Trust do not have to go through Probate since
the decedent transferred them to the trust while alive and, upon his or her death, has no
estate to probate. Much has been written about the disadvantages of Probate, including
the following:

a. Delay: It is almost impossible to complete the probate of an estate in less

than 6 months, and it may take years.
 b. Expense: Unless they agree to take less, the executor and the attorney are
each entitled to a fee set by law and calculated from the size of the estate (without
reduction for mortgages or other debts). For example, for a $100,000 estate, the
executor's and attorney's fee would each be $3,150, for a total of $6,300. For a
$1,000,000 estate, they would each be $21,150, for a total of $42,300.

c. "Red Tape": Court approval and extensive notice requirements are still
required in many situations. For example, some sales of real estate require court
approval and an auction.

d. Possible Duplication: If the decedent owned real estate in more than one
state, a probate proceeding (with its own local attorney) may be required in each
state.

e. Loss of Privacy: Anyone may view the Court's probate file, which will
normally contain the name, address (and sometimes age) of each relative and heir,
and a description of all property in the estate and its disposition.

In a few situations there are advantages of probate. The probate proceeding requires
creditors to file their claims within a period of months, rather than simply within the
longer statute of limitations. If claims appear likely, a Living Trust can be put through
probate to gain this advantage.

Even without a trust, a probate is not always required. In the case of a married couple, on
the death of the first spouse a simpler court proceeding (a spousal property petition) may
be available if that spouse's property passes outright to the survivor. However, if the
estate tax savings device of a bypass trust is used (see below), probate of a will would
usually be necessary.

JOINT TENANCY

Joint Tenancy should not be confused with "tenancy in common" or "community

property." When property is in Joint Tenancy, there is a right of survivorship. This means
that on the death of one joint tenant, his or her interest automatically goes to the other
joint tenant or tenants, no matter what the decedent's Will says. Joint tenancy has some
advantages: a. Joint tenancy is not very flexible: the interests of all joint tenants must be
equal and they are distributed immediately and automatically upon the death of a joint
tenant.
But there are serious disadvantages:

a. Joint tenancy is not very flexible: the interests of all joint tenants must be
equal and they are distributed immediately and automatically upon the death of a
joint tenant.
b. It might not give the advantage of stepped-up basis (see below) which the
community property form of ownership gives a married couple.
 c. Property in joint tenancy can be reached by the creditors of each joint
tenant. For example, if you hold property in joint tenancy with your children so
that they will get the property on your death, an under-insured automobile
accident in which they are involved could jeopardize the asset during your
lifetime.

For married couples it is now possible to hold property as "community property with
right of survivorship", thereby overcoming the problem regarding stepped up basis on the
death of the first spouse, although not avoiding the inflexibility problems inherent in a
right of survivorship.

POSSIBLE INCOME TAX SAVINGS

As mentioned above, one of the disadvantages to holding property in joint tenancy is
possible inability to take advantage of the "stepped-up basis" advantage. When a person
dies, the income tax basis of his property is "stepped-up" to its current value. If the
property is sold before further increase in value there will be no income tax payable
because the sales price is equal to its basis.
If a married couple holds property as joint tenants or tenants in common, it is not certain
that the IRS would consider it to be community property, and only the decedent's half
might receive the stepped-up basis. The survivor's half would keep the old basis and on
any subsequent sale there could be a taxable capital gain. Although the other advantages
of a trust would not be obtained, a married couple should ordinarily hold community
property as "community property with right of survivorship" (under Civil Code Section
682.1) rather than as joint tenants.
For Example: Husband and wife purchased an apartment building years ago for
$200,000. They took title as joint tenants to avoid probate when either died. They have
taken a total of $50,000 in depreciation. Their basis is, therefore, $150,000. If they were
to sell the building for $350,000 they would have a taxable gain of $200,000 and might
pay about $55,000 in federal and state income taxes.
If Husband dies before they sell the building, the basis of his one-half which passes to
wife by joint tenancy right of survivorship is increased to current value, or $175,000. The
IRS might take the position that the wife's half was her separate property, and its basis of
would remain at $75,000. If Wife sells the building for its $350,000 value, she will have a
taxable gain of $100,000 and might pay federal and state income taxes of about $28,000.

But if the couple had held the property as community property instead of as joint tenants,
the law provides that BOTH halves of the property receive a stepped up basis on the
death of either spouse. The decision of the couple in the example to avoid probate by use
of joint tenancy rather than with a Living Trust might cost Wife about $28,000 in
avoidable income taxes.

ESTATE TAX SAVINGS FOR SOME MARRIED COUPLES

In California there is no state death tax. The Federal death tax is called the estate tax.
The federal estate tax is based on the net value of the estate of the decedent. In most
cases, for persons dying after January 1, 2004, the first $1,500,000 of the estate was tax
free. Under legislation passed in mid-2001 (the "Tax Relief Reconciliation Act of 2001")
this amount, called the "Unified Credit Equivalent", increased to $2,000,000 in 2006; and
will increase to $3,500,000 in 2009. Unless there is a change in the law, the Estate Tax
will be repealed for the year 2010. It will be automatically reinstated, in 2011, at 2001
levels. Also, assets passing from one spouse to the other are exempt from the tax. Non-
exempt assets are taxed at rates varying from 37% to 45%.For example, an estate of
someone dying in 2008 with a net value of $2,800,000 and not passing to the spouse
would be liable for estate tax of about $350,000.

Because of the complete exemption for property left outright to a spouse, the estate tax
may not seem to be an immediate concern for married couples thinking only about the
death of the first of them to die, no matter how large the estate. However, a transfer of all
of the property of the first spouse to die to the surviving spouse may have the effect of
increasing the estate of the surviving spouse to the point that on his or her death the estate
will exceed the present $2,000,000 Unified Credit Equivalent and estate tax would be
due.

A Living Trust declaration may provide that on the death of the first spouse to die the
trust is split into two (or sometimes three) trusts. One of these trusts (sometimes called
the "survivor's trust" or the "A" trust), remains revocable by the surviving spouse who
typically is given the right to all principal and income on demand. The other trust
(sometimes called the "bypass" trust, the "exemption" trust, or the "B" trust) usually
contains enough property to take maximum advantage of the Unified Credit Equivalent
without producing any estate tax. It becomes irrevocable on the death of the first spouse
to die, but by its typical terms, the surviving spouse is entitled to receive its income and,
to the extent necessary to maintain his or her standard of living, its principal. On the
surviving spouse's death, the balance of the trust will be distributed, either immediately or
over time, to beneficiaries the couple have selected.

The bypass trust does not become part of the surviving spouse's estate and does not
increase that estate for tax purposes. On the death of the surviving spouse, his or her
estate is entitled to its own "exemption", reducing, or possibly avoiding estate tax
liability.

While the use of a bypass trust to save estate taxes is common in Living Trusts, it may
also be done by Will. It cannot be accomplished by holding property in joint tenancy,
though. Of course if a Will rather than a Living Trust is employed, probate will be
necessary.

FLEXIBILITY OF DISTRIBUTION

Both Living Trusts and Wills provide substantial flexibility in disposing of property. If
property is held in joint tenancy, upon the death of any joint tenant his interest in the
property immediately passes to the other joint tenant or tenants. With a Living Trust,
property need not pass immediately. It can be held, for example, to benefit a number of
beneficiaries according to particular written standards or in the discretion of a trustee.
While legally "adults" at age 18, many children are not mature enough to wisely use a
lump sum.

A Living Trust can be made the beneficiary of life insurance policies so that the death
benefits can be similarly invested, managed and distributed, rather than paid out in a
lump sum which may or may not be used for the purposes the decedent had in mind.

AVOIDING CONSERVATORSHIP

A Living Trust, particularly when coupled with a general durable power of attorney for
financial management and personal affairs, can provide property management for a
person who might someday be unable to manage his or her own assets due to advanced
age or illness.

A Conservatorship proceeding in court will involve added expense and, often,

embarrassment and psychological debilitation to both the Conservatee and the person
petitioning for the Conservatorship. Also, many transactions undertaken by a
Conservator, including most sales of property, require Court approval. An alternate
trustee, or co-trustee under a Living Trust, can manage financial matters without the
necessity of a Conservatorship. Since the trust is revocable, a settlor who disputes his or
her incapacity will not have given up any control.

ENHANCING PRIVACY
As is discussed in the sections about Probate and the avoidance of Conservatorships, both
involve court proceedings. The court's file is available for inspection and copying by
anyone visiting the county clerk's office. Names and addresses (and sometimes ages) of
beneficiaries will be made known.

In contrast, the provisions of a Living Trust are not normally matters of public record.
Neither the extent and disposition of assets nor the names and addresses of beneficiaries
need become generally known.

DISADVANTAGES OF A LIVING TRUST, or "NO FREE LUNCH"

While for many people they will be outweighed by the benefits, a Living Trust has
disadvantages and limitations:

1. Initial Paperwork: A Living Trust often involves somewhat more

paperwork than some of the alternatives discussed in this outline, and much more
than others. Because of this, attorney's fees in preparing the estate planning
documents are typically higher.

2. Need to Transfer Assets: As to many of the things a Living Trust is

designed to do, it simply "won't work" unless assets are transferred to it. For
 example, real property deeds must be signed, acknowledged ("notarized") and
recorded with the County Recorder. This is usually quite simple, but not as simple
as doing nothing. As assets are acquired or transferred, title must be taken and
given by you as trustee(s).

3. Borrowing Against Property: While a Living Trust is a perfectly legal way

to hold property, some commercial lenders use pre-printed forms and train
personnel to deal only with typical situations. When you want to refinance
property held in the trust, it is sometimes easier to "switch than fight"; to transfer
the property out of the trust, borrow the money, and transfer the property back
into the trust. The transfer back into the trust cannot, by law, be considered by the
lender a sale on which it can "call" the loan.

4. No Protection Against Creditors: It should be understood that putting your

property into a Living Trust will not put it out of reach of the claims of your
creditors. Neither will a Will or joint tenancy. The law provides certain
exemptions from the claims of creditors --the "homestead" exemption, for
example. Putting your property into a living trust does not deprive you of any of
those exemptions.

5. Extra Accounting: If a married couple have "A-B trust" provisions in their

Living Trust declaration (see Possible Estate Tax Savings), after the death of the
first spouse to die, the surviving spouse must keep separate records for the "B"
trust, and have a separate tax return filed for it. For simple estates, this is likely to
mean additional expense of a few hundred dollars per year. Of course, if the same
estate tax saving devices were accomplished by a will, the same record keeping
and tax requirements would arise.

COMMON QUESTIONS ABOUT LIVING TRUSTS, AND THEIR ANSWERS

Question: How will a living trust affect our income tax liability while we are alive?
Answer: If, as is usual, you are the beneficiaries of the trust you create, there will be no
income tax effect at all. You will continue to file your form 1040; all income, deductions,
etc. of the trust will, properly, be shown as yours.

Question. What happens to the income tax basis of property when it is transferred to the
Living Trust?
Answer: Nothing. On transfer to the trust the basis is unaffected.

Question: Does it make sense for an unmarried person to set up a living trust?
Answer: While one benefit of a Living Trust, possible estate tax savings by use of an "A-
B" trust arrangement, is not available to a single person--through a trust or otherwise--
other benefits of a Living Trust, like the ability to avoid conservatorship , might be even
more important to a single person. Since the relatively simple procedure of a spousal
property petition, discussed above is unavailable on the death of an unmarried person,
probate avoidance may be an equal or greater consideration for him or her.
Question: What happens on the death of a person who has set up a Living trust?
Answer: The successor trustee should take steps to remove the decedent's name from
accounts, etc. and substitute his or hers, as Trustee. This is usually not very complicated
and typically involves about as much paperwork as if the property had been held in joint
tenancy. In some cases, following the first to die of a married couple, the surviving
spouse must make a decision whether or not to "disclaim" all or a portion of the
decedent's estate, a decision which should be made before property is "re-arranged" and
within a few months following the death. If the estate of the deceased exceeds the
"Unified Credit Equivalent", a Federal Estate Tax return must be filed within 9 months
after the death. Under legislation passed in mid-2001 (the "Tax Relief Reconciliation Act
of 2001") the "Unified Credit Equivalent" for the years 2007 and 2008 is $2,000,000. It
increases to $3,500,000 in 2009. Unless there is a change in the law, the Estate Tax will
be repealed for the year 2010. It will be automatically reinstated, in 2011, at 2001 levels
($1,000 Unifed Credit Equivalent). While any given estate will almost always require less
"lawyering" if a trust has been properly employed than if a will has to be probated, there
is no guaranty that lawyers (and accountants) can be completely avoided following the
death.

Question: Will transfer of real estate to a Living Trust increase property taxes?
Answer: No. The law implementing Proposition 13 specifically exempts from the
definition of "change of ownership" transfers to a trust of which the transferors of the
property are the beneficiaries.

Question: Should IRAs, 401's or Keogh plans be transferred into a Living Trust?
Answer: No. Under Federal law, such transfer might be considered a premature
distribution on which not only income tax but a 10% penalty might have to be paid.
Conceptually, such plans are already held in a specialized form of "living trust."

Question: If I/we once set up a Living Trust, can the trustees or beneficiaries be changed?
Answer: Yes. During your lifetime (or the joint lifetimes of married couples), the trust
can be freely amended in that or any other respect.

FEES AND SERVICES

Note: These fees and services are offered for the great majority of "typical" estates. Of
course, for particularly complicated matters, fees may be higher but if a fee different from
those shown here would be charged, you will be advised BEFORE you incur any
commitment to pay fees at all.

The basic fees charged for "packages" containing the documents listed below range from
$1,150 for a single person and $1,550 for a married couple. (Note: if the estate (including
anticipated life insurance benefits) is equal to or greater than the "Unified Credit
Equivalent -- $2,000,000 in the year 2008 and increasing in uneven increments to
$3,500,000 in 2009 -- these fees are somewhat higher. Click on the link below for detail
on fees.). These fees include an initial consultation with Peter Bassing and the preparation
of papers listed below. Of these amounts, $500 must be paid at the end of the consultation
if you want to proceed; if you choose not to proceed, the consultation is free. The balance
is payable when the documents are completed or 60 days after drafts are provided,
whichever is earlier.

Documents Provided:

• Declaration of Revocable Inter-Vivos Trust

• "Pour Over" Will. This is a Will which provides that any property which is
not held in joint tenancy and which has not been transferred into the trust during
your life will be transferred to it. It is a "backup" measure.
• Durable Power of Attorney for Financial Management and Personal
Affairs. A power of attorney that give another person (often the alternate trustee)
the power, among others, to transfer assets to the trust which you neglected to, in
case you are incapacitated, mentally or physically.
• Advance Health Care Directive (formerly generally known as a Durable
Power of Attorney for Health Care). This allows another person to make decisions
about medical treatment in case you are not in a condition to make them yourself.
• Quitclaim Deed. This will transfer one piece of real property (often your
residence) to the trust. We will take care of recording. You will be charged $60
each for additional deeds.
• Certification of Trust. A "summary" of certain trust provisions you can
conveniently provide to third parties.

PLEASE NOTE: LIMITATION ON FUTURE REPRESENTATION. The advice Peter

Bassing will furnish is based on present applicable laws. If these laws change, it is
imperative that the estate plan be reviewed and (if necessary) changed. Changes in the
law may not affect all clients, or all clients in the same way, and as a practical matter it
would be difficult or impossible for Peter Bassing to undertake to keep all clients updated
about changes in the law. For this reason, Peter Bassing does NOT undertake the
responsibility of advising you of future changes. Should it come to your attention through
the news media or other sources that there has been a change in the tax (or other) law
relating to estate planning, you are urged to contact Peter Bassing, or another professional
advisor, for an appointment.