Frequently Asked Questions
Our FAQs address common questions about our services. As a leading Southern California estate law firm, the Law Offices of Michael K. Elson specializes in estate planning, probate, and trust administration. We aim to provide clear answers to your questions. If you need further assistance, please reach out to us.
Living Trust Attorney Q & A
A trust is an instrument under which a person, called a trustee, holds legal title to property for another person, called a beneficiary. You can be the exclusive trustee of your own living trust during your lifetime, keeping full control over all property held in trust. Your appointed successor trustee(s) will take charge only after your death, or if you become mentally incapacitated.
A "Living trust" (also called an "Inter vivos" trust by attorneys who can't give up latin) is simply a trust you create while you're alive, rather than one that is created at your death under the terms of your will. A revocable living trust can be amended or revoked during your lifetime.
Different kinds of living trusts can enable your estate to avoid probate, reduce or eliminate estate taxes, preserve the inheritance of your heirs, and/or set up long-term asset management. In many cases, you can accomplish most of these goals with just one carefully drafted trust.
One of the primary advantages to creating a living trust is that property left through the trust does not have to be administered through probate court before it reaches your desired beneficiaries. On the other hand, a will must be probated. In a nutshell, probate is the court-supervised process of paying your debts, giving notice to potential claimants of your estate, and distributing your property to your desired beneficiaries.
The average probate drags on for at least a year or two before the inheritors receive anything. And by that time, there's less for them to receive: in many cases, about 5-10% of the property has been eaten up by lawyer and court fees during the probate process. In addition, assets going through probate are generally subject to medi-cal liens, whereas assets held by a living trust are generally not.
Still, not everyone has to worry about probate, and some people don't need a living trust at all. If, however, you own real estate, then a living trust is a must to avoid probate.
Property you transfer into a living trust before your death doesn't go through probate. The successor trustee -- the person you appoint to handle the trust after your death -- simply transfers ownership to the beneficiaries you named in the trust. In many cases, the whole process takes only a few weeks, and there are no lawyer or court fees to pay. When all of the property has been transferred to the beneficiaries, the living trust ceases to exist. Unlike a trust, a will must go through probate.
No, however making a living trust operate effectively does require some crucial paperwork at its inception. For example, if you want to leave your house through the trust, you must execute a new transfer deed (prepared by your attorney), so that you now own the house as trustee of your living trust. And in California, you will need to use special language in your trust document and in the transfer deeds to avoid the unfavorable and unnecessary tax consequence of a property tax reassessment. This paperwork can be complex, but hiring an experienced trust attorney will ensure that the work is done correctly and unnecessary hassles will be enterely avoided.
No. A will becomes a matter of public record when it is submitted to a probate court, as do all the other documents associated with probate -- including inventories of the deceased person's assets and debts, and the named beneficiaries. When a will is probated, there must be a newspaper publication to give the world notice of the probate. The living trust and its terms, however, are completely private and do not need to be made public.
Depends on how the trust is set up. The subtrusts created from a bypass/credit shelter trust (a-b trust) or more complex qtip trust (c trust) after the death of a spouse can provide a significant degree of asset protection as to the assets held in those subtrusts. On the other hand, holding assets in a simple revocable trust doesn't shelter assets from creditors, but it can still afford significant privacy, which may discourage a lawsuit. With a simple trust, a creditor who wins a lawsuit against you can go after the trust property just as if you still owned it in your own name, however if the potential creditor does not know you own the property, they may be discouraged from pursuing a lawsuit against you in the first place.
After your death, property in a living trust can be quickly and quietly distributed to the beneficiaries (unlike property that must go through probate). By the time creditors find out about your death, your property may already be dispersed, and the creditors may not know exactly what you owned (except for real estate, which is always a matter of public record). It may not be worth the creditor's time and effort to try to track down the property and demand that the new owners use it to pay your debts.
On the other hand, probate can offer a kind of protection from creditors. During probate, known and (unknown creditors via newspaper) must be notified of the death and given a chance to file claims. If they miss the deadline to file, they forever waive any claims against the estate.
Yes, you do -- and here's why:
A pour-over will is an essential back-up device for property or other assets that you don't transfer to yourself as trustee. For example, if you acquire property shortly before you die, you may not think to transfer ownership of it to your trust -- which means that it won't pass under the terms of the trust document. But in your back-up will, you can include a clause that names someone to get any property that you haven't left to a particular person or entity. And in some cases, a pour-over will may assist with a heggstad petition.
If you don't have a will, any property that isn't transferred by your living trust or other probate-avoidance device (such as joint tenancy) will go to your closest relatives in an order determined by state law. These laws may not distribute property in the way you would have chosen.
A very simple probate-avoidance living trust has no effect on taxes. More sophisticated attorney-drafted living trusts, however, can greatly reduce or even eliminate federal estate tax for people who would otherwise be subject to these taxes.
An AB living trust is designed primarily for married couples with children. The AB trust goes by many other names, including "credit shelter trust," "exemption trust," and "bypass trust." Each spouse leaves property, in trust, to the other for life, and then to the children. This type of trust can save hundreds of thousands or even millions of dollars in estate taxes, money that will be passed on to the couple's final inheritors. It is important however to include flexible trust terms to ensure unnecessary capital gains taxes are avoided by achieving maximum step-up in cost basis on appreciated assets. In some cases this may be achieved with the use of a disclaimer A-B trust and/or a well planned portability election. It is important to note that most traditional A-B trusts, containing a mandatory credit shelter trust funding, have become obsolete for most families due to the 2018 tax law changes.
LLC - Limited Liability Company FAQ
A Limited Liability Company is a type of legal entity which affords its owners the same limited liability benefits of a corporation, with the simplicity and favorable taxation of a partnership. An LLC may have one or more owners, which are called members. As a separate legal entity, the LLC must have its own bank account, and all income and expenses must flow through this account. The LLC conducts all business in its name, and its members act as authorized agents on behalf of the company. Much the same as shareholders of a corporation are insulated from liabilities of the corporation, LLC members are protected from liabilities of the company.
The question which you have to ask yourself, is whether there is foreseeable liability in conducting the business. In other words, is it possible a substantial liability could arise? Even with insurance, there are many policy exclusions. Without an LLC, a substantial judgment could far exceed the policy limit leaving an unprotected business owner personally liable for the balance of the judgment.
No. However, you are taking great risk by not allowing your LLC to be prepared by an experienced legal professional. It is critical that the company be formed properly or it will be worthless if there is a lawsuit. And there have been some significant changes in the California LLC law as of January 1, 2014. Online software and document filing services owe no duty to their customers to make sure the proper documents are executed, or to ensure that the company is formed or operated correctly, or to notify you in the future of critical legal developments or changes in the law. If you are going to use a document filing service, you might as well set aside some time and do the work yourself. These service companies charge you to merely file a form, which you could mindlessly file yourself. It is ridiculous to utilize a filing service company to save a few hundred dollars. You definitely get what you pay for, and taking a shortcut now could cause a financially devastating surprise in the future. This firm has seen many instances of self-prepared and document service prepared LLCs, where the LLC would have been useless had a liability arisen.
With few exceptions, a multi-member LLC is taxed as a partnership and requires the annual filing of a Federal Form 1065 partnership return and a California Form 568 return. If the LLC is owned by only one member, or a husband and wife, or a living trust, then usually no separate federal return is required and only the state 568 form is necessary. The annual $800 state LLC/corporation tax is due with the tax return on April 15. In limited circumstances, it may be favorable to elect S-Corporation treatment for the LLC. Fortunately, LLCs are very flexible and may make a timely S-Corp election in any given tax year. In most instances this would be done in order to avoid the gross receipts tax which is otherwise imposed on LLCs earning over $250,000 in gross annual receipts. If the company has high gross receipts, but relatively low net profit, then this election may be favorable.
No. However, it is critical that the proper paperwork be prepared correctly. Failure to properly execute the correct paperwork and carefully utilize the narrow exemptions will result in your property being reassessed, which can be extremely difficult and expensive to reverse. This risk alone should discourage the use of an online service or paralegal.
A living trust can hold ownership interest of an LLC, so that the LLC and its assets will avoid probate. The LLC and living trust work together to simultaneously protect your assets from lawsuit liability and preserve your assets from probate, estate taxes, and court control of your assets. They can be created at the same time or independently of one another, and both can be modified or dissolved at any time by the owner.
In California, an LLC can be formed to conduct nearly all types of business, except those requiring a professional license. For example, a real estate broker, medical doctor, and general contractor may not utilize an LLC according to California law, but may operate instead as a corporation. UPDATE: The Contractors State License Board (CSLB) has finally given approval for the licensing of LLCs, as well as Corporations, to act as general contractors. ANOTHER UPDATE: The State Legislature and California Department of Real Estate are in the process to soon allow licensing of LLCs, as well as Corporations, to act as licensed real estate brokers.
The principal drawback of a typical C-corporation is the double taxation; first on the corporation's profits, and then on the shareholder owner's profits. For the larger corporation, there are advantages, which outweigh the double taxation. The owners of an S-Corporation, on the other hand, enjoy being taxed only once, like a partnership, while being afforded the same liability protections of the traditional corporate status. S-Corps are ideal for General Contractors, Real Estate Brokers and other licensed professions where an LLC may not be utilized. In many instances the LLC is preferable to both the C-Corp and the S-Corp. The LLC is particularly attractive for use in real estate investments. Unlike a C-Corporation, the LLC's profits are taxed only once. Many small business owners prefer the LLC to the S-corporation because their structuring is more flexible and once implemented, there are fewer formalities. LLCs do not require annual meetings or corporate minutes.
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