1. Estate Planning Basics Presented by Margaret (Margo) Felt Attorney At Law 572 Saco Terrace Sunnyvale, California 94089 (650) 283-7311 margaretfelt@cawillsandtrusts.com This presentation is for general informational purposes only and does not constitute legal advice. These materials are intended for California residents and may not reflect the most current legal developments. You should speak one-on-one to a qualified advisor for individual planning.

2. 2 Workshop Purpose What is estate planning? Who needs estate planning? What are the basic documents that make up a typical estate plan? How do you go about getting an estate plan in place? Questions

3. 3 What is Estate Planning? Estate Planning is utilizing the laws of wills, trusts, property, insurance, and taxes to: ensure you and your family are cared for upon your incapacity or death maximize your estate; minimize costs and taxes carry out your wishes for property disposition carry out your wishes for your health care

4. 4 Who Needs Estate Planning? Who Needs Estate Planning? Everyone! Regardless of: how old you are whether or not you are married whether or not you have children whether or not you own real estate whether or not you are “wealthy” Okay, you don’t need estate planning if: you own no real estate and have less than $150,000 in assets, you don’t care who gets your stuff or if they fight about it, and you are absolutely sure you are never going to be incapacitated (I hate to break it to you, but you are going to die someday)

5. 5 Reasons for Estate Planning Ensure your desires are met for transferring your property; specify your wishes rather than having state law determine distribution Arrange for care of minor children and dependents (guardian and financial) Avoid probate and/or conservatorship, and the associated costs and delays Minimize taxes Protect assets Provide for ready cash to be available for immediate needs upon your death Name a person to handle your financial and medical needs in case of your incapacity Confirm wishes for funeral, burial and organ donation

6. 6 Estate Planning Documents Will Revocable Living Trust Other inter vivos and testamentary trusts Durable Power of Attorney for Property Management Advance Health Care Directive (Living Will) Nomination of Guardian Community property agreement Documents to assist in funding trusts Beneficiary Designations (such as retirement plans and life insurance) Consider having your attorney, financial planner, accountant, and insurance agent meet as a team to get the most out of their collective expertise and to review your estate plan as a whole.

7. 7 Understanding Probate What is Probate? Probate administration is the court-supervised process for distributing assets. The idea behind the probate proceedings is that the deceased is no longer around to manage property or see that their wishes are carried out, so the judge watches out for the interests of family and creditors in paying debts and distributing the deceased’s assets. The Probate Administration Process:  The will is filed with the local court* and authenticated, or if there is no will, the court determines who stands to inherit under state intestacy laws  Personal representative is appointed  Notices to relatives and creditors are published in local newspapers  Assets are identified and inventoried  Assets are appraised  Creditors make their claims against the estate  Family members may contest the will  Debts and taxes are paid  Court costs, attorneys’ fees, and accountants are paid  The remaining property is distributed * Probate is typically in the county of the deceased’s residence, but if real estate is owned in another state, a separate probate may be required in that state as well.

8. 8 Understanding Probate Reasons why you want to avoid probate: Costly – estimated at about 5% of the gross estate Lengthy process – typically takes two to three years Funds are tied up during the process Complicated court procedures Usually need an attorney Public record Real estate in another state may require probate in that state as well Note that avoiding taxes is not on the list! Avoiding probate does not reduce estate taxes. Reasons why you may want to go through probate: If you have a lot of creditors with large sums of money involved, you may want to force those creditors to come forward in the forum of the probate court, particularly if they are contested claims If you think somebody will contest your distribution, the probate process provides a specified period and process for bringing the contest forward You may want a court to oversee the process of distributing your assets if you have concerns about your wishes being honored

9. 9 Understanding Probate How do you avoid probate? Certain assets, or assets held in certain types of ownership, do not need to go through the probate court to be distributed. Therefore, utilizing these assets and ownership types removes property from your “probate estate.” In addition, California allows certain exceptions to the fully-supervised probate proceedings. Items not in your probate estate: Revocable living trusts Joint tenancy property Payable on Death / Transfer on Death holdings Life insurance IRAs, 401(k)s, profit sharing plans Lifetime gifts (outright or to a trust) California exceptions to supervised probate: Community Property Petition The surviving spouse can avoid full administration by petition Affidavit Procedure When the gross value of an estate is less than $150,000 in personal property, or less than $20,000 in real estate, summary administration is available

10. 10 Taxes in a Nutshell Tax consequences in the following areas should be considered in thorough estate planning: federal estate tax federal gift tax generation-skipping transfer tax state death or inheritance tax federal and state income tax capital gains tax property tax

11. 11 Federal Estate Tax The federal government imposes an estate tax on the net value of all the property you own at your death. Your estate includes your ownership interest in jointly held property, property held for your benefit in a revocable trust, life insurance proceeds, annuity payments, retirement plans, property you own outside of the US, and may also include the value of certain property transferred within three years before your death. Exemptions and deductions may result in no tax actually being owed.

12. 12 Federal Estate Tax Personal Estate Tax Exemption You can transfer up to the “applicable exclusion amount” to whomever you want, tax free. For 2015, the applicable exclusion amount is $5,430,000. This amount is adjusted each calendar year for inflation. Amounts over the applicable exclusion amount will be subject to tax unless another exemption applies (such as the marital deduction or the charitable deduction). Estate Tax is tied to the Gift Tax, with its associated Gift Tax Exemption Taxable gifts made during your lifetime will reduce (“use up”) the applicable exclusion amount from estate tax available on your death. Portability If all qualifying requirements have been met, a spouse may be able to utilize any unused applicable exclusion amount of his/her deceased spouse. Thus, it may be possible to pass up to $10,680,000 tax free.

13. 13 Federal Estate Tax Portability – Things You Should Know You will lose portability of your first deceased spouse if you remarry and survive the second spouse (you will have only the second spouse’s remaining unused exemption amount). There is no index for inflation for the amount of exclusion from the deceased spouse – it is set at whatever the amount was at the deceased spouse’s death. There is no portability of exemption from generation-skipping transfer tax. A federal estate tax return must be filed on time to elect portability. Subject to changes in the law. If you leave your assets outright to your surviving spouse, he or she can do whatever he or she wants with them. * Compare relying on Portability to use of a Bypass Trust, discussed below.

14. 14 Federal Estate Tax Marital Deduction Property left to your spouse, either outright or in a “QTIP Trust,” is exempt from estate tax due to the marital deduction, as long as your spouse is a US citizen. This deduction does not apply to unmarried couples. The personal estate tax exemption discussed on a prior slide can be used for a non-citizen spouse or your unmarried significant other. In addition, in the case of a non-citizen spouse, you might consider a Qualified Domestic Trust (QDOT) or the special gift tax rules to gain additional tax benefits. Charitable Deduction All property left to a tax-exempt charity is exempt from estate tax due to the charitable deduction. The charity must be a tax-exempt organization according to IRS regulations.

15. 15 Annual Exclusion Gifts Under current federal tax law, in 2015, a person can gift $14,000 per donee per calendar year and not pay gift tax. The gift must be of a “present interest” to qualify as an annual exclusion gift – that is, there can generally be no strings attached to the donee’s access to the gifted asset. The recipient pays no income tax on the mere fact that the gift was made, though there will likely be income tax owed on earnings from holding the gifted asset. For gifts to minors in a CUTMA account, be aware of the “kiddie tax” (investment income greater than $2,000 is taxed at parent’s marginal tax rate). For gifts to minors, gifts can be made to a “custodian” of a CUTMA account (which can be held up to age 25 in CA) or to an irrevocable trust that contains “Crummey” withdrawal rights or is a 2503(c) Minor’s Trust. You may pay tuition or medical expenses for someone else and qualify as an annual exclusion gift, provided you make the payment directly to the institution. Contributions to 529 Plans qualify as annual exclusion gifts and you can spread a $70,000 gift over 5 years. (But need to file a gift tax return if over $14,000.) Any transfer where you irrevocably give up your rights to an asset without receiving anything of value in return is likely deemed a gift. A federal gift tax return needs to be filed for any gifts that do not qualify as annual exclusion gifts.

16. 16 Property Tax California real property is generally subject to property tax reassessment upon a change in ownership of the property. There are various exemptions that are available to avoid reassessment, such as the “parent-child exclusion,” but proper preemptive planning is generally needed to make sure the exclusion applies. For example, if you would like to transfer your residence to one of your children, and other assets to the other children, property tax planning can help ensure your estate planning maximizes the use of the parent-child exclusion and avoids a deemed sibling to sibling transfer (with no exemption).

17. 17 Property Ownership How you own property can have a significant impact on your estate plan, for example, in determining what rights you have to give away, what value will be used for estate taxes and tax basis, whether probate is required, creditors’ rights, etc. Types of Joint Ownership: Community Property Joint Tenancy With Right of Survivorship Community Property With Right of Survivorship Tenancy in Common Various types of business ownership, such as partnership, LLC, etc.

18. 18 Reasons for Using Trusts Avoid probate (and its associated costs and delays) Minimize taxes (not automatic) Arrange for property management for minor children Take care of a dependent with special needs Exercise property control Specify final beneficiaries Provide for current wife and children from first marriage Make charitable gifts Protect assets (with proper planning) Arrange for property management for beneficiaries that are irresponsible or bad money managers Facilitate administration of property ownership in multiple states Arrange for property management in case of your incapacity Maintain privacy

19. 19 Trust Basics The trustee becomes the legal owner of the property. Property must be re-titled to the name of the trustee (referred to as “funding the trust”). The trustee has responsibility to manage the property and owes fiduciary duties to the beneficiaries. Trusts can be revocable or irrevocable (revocable living trusts become irrevocable at death). Trusts can become operational during life (inter vivos) or at death (testamentary). For revocable living trusts, you do not need to maintain separate tax records. You continue to report income on your personal income tax return. For irrevocable trusts, a separate tax id number is needed, separate accounting, and separate income tax filing.

20. 20 Trust Basics Settlor – the one(s) who create the trust and who provide the assets for the trust Trustee – the one(s) who manage the trust; trustees hold title to the trust assets and must manage these assets according to the terms and directions of the trust document Successor Trustee – the one(s) who takes over managing the trust property after the incapacity, death, or request of the initial trustee Beneficiary – the one(s) who receives the benefit (principal and/or income) of the trust property Life Beneficiary – a beneficiary who receives an interest in property during their lifetime, typically income from the property but may include some limited right to invade the principal; at their death property is transferred automatically to the remainder beneficiary, the property does not become part of the life beneficiary’s estate Remainder Beneficiary – a beneficiary who receives the property outright at the death of the life beneficiary Trust Estate – the assets that are transferred into the trust Trust Document – the legal document where you establish the terms and conditions of your trust Principal and Income

21. 21 Common Types of Trusts The following is a list of some of the common types of trusts used in estate planning: Revocable Living Trust Bypass Trust QTIP (Qualified Terminable Interest Property Trust) “QTIPable Bypass” Trust QDOT (Qualified Domestic Trust) Child’s Separate Share Trust or Family Pot Trust Spendthrift Trust Special Needs Trust Generation-Skipping or Dynasty Trust Irrevocable Life Insurance Trust Grantor Retained Trust, including QPRT (Qualified Personal Residence Trust) Charitable Trusts Intentionally Defective Grantor Trust These trusts may be used in combination with each other, or with other estate planning devices.

22. 22 Revocable Living Trust A revocable living trust is a legal document that controls the assets that you put into the trust, and the trust becomes the legal owner of those assets. You specify in the trust document how you want the property to be managed, who is to manage it, what should happen in the case of your incapacity, and how the assets should be distributed at your death. You, or you and your spouse, are typically the initial trustees. Because it is revocable, you can change or revoke the trust at any time (as long as you are mentally competent). The trust becomes irrevocable upon your death, so that your property is distributed according to your wishes. The trust terminates after all the property has been transferred. A living trust can be established for one person alone or jointly for a couple.

23. 23 Revocable Living Trust Probate Avoidance Upon your death, the person you named as successor trustee in the trust document steps in to manage your property. The successor trustee distributes the property according to the terms of the trust document and there is no probate required. This only applies to the trust estate, the assets that you transferred into the trust. Because the successor trustee distributes property according to the terms of the trust document and does not need to go through probate, the distribution process can move along quickly and in private. Estate Taxes Just by putting property in a living trust, you do not save on estate taxes.

24. 24 Bypass Trusts In setting up a Bypass Trust, you name a life beneficiary to receive certain rights to the trust property during their lifetime, such as the right to receive income, a right to live in the family home, or perhaps limited rights to the principal. When the life beneficiary dies, the property passes outright to the remainder beneficiary you designated. Using this type of trust allows you to keep control over the final distribution, while taking care of others during their lifetime, and also may utilize your personal estate tax exemption. The property you put into trust is considered part of your estate, so your estate tax exemption may be used. The property is not considered a part of the life beneficiary’s estate since they are not the legal owner, so upon their death, it is not part of their taxable estate (unless for example a QTIP trust is involved). The trust becomes irrevocable at your death and is administered according to the trust document.

25. 25 Bypass Trust Planning Bypass Trusts have often been used in prior years by married couples to save on estate taxes. This planning is sometimes referred to as “AB Trust” planning. Everybody is entitled to the personal estate tax exemption (discussed above under Federal Estate Tax as the “applicable exclusion amount”). Using an AB plan ensures that couples make the most out of each of their personal exemptions. Leaving everything outright to a spouse, takes full advantage of the marital deduction upon the first death, but limits use upon the second spouse’s death to only that spouse’s personal exemption or requires a “portability” election, with all of the required facts, to utilize the deceased spouse’s exemption. By leaving up to the amount of the personal exemption in trust, and the balance to your spouse, you take full advantage of the personal estate tax exemption and the marital deduction. At the death of the first spouse, the “A trust” or the “Survivor’s Trust” is created with the surviving spouse’s outright interest in the property, and the “B trust” or the “Bypass Trust” is created for the bypass portion that gives income to the surviving spouse for life, and then will go outright to the remainder beneficiaries, typically the children, at the death of the surviving spouse. The B trust never becomes part of the surviving spouse’s estate, the first spouse used up their personal exemption and the surviving spouse still has their exemption to use on the A trust. The A trust remains revocable and the B trust is irrevocable. With “ABC Trust” planning, a third trust is created with any amount above the first spouse’s personal exemption or based on “portability” income tax planning. The “C trust” or the “QTIP Trust” is set up to qualify for the marital deduction so that no estate tax is due at first death.

26. 26 Bypass Trust/QTIP Trust To qualify for the marital deduction, a QTIP Trust requires that all trust income be distributed to the spouse beneficiary. A Bypass Trust does not need to require mandatory income distribution – it can be set up to require all income be distributed to the spouse, or to be distributed at the discretion of the trustee. If the spouse beneficiary is to serve as trustee, then distributions should either be of all income or income for the “health, education, support, and maintenance” of the spouse. You can specify whether your spouse should have any rights to the principal of the Bypass Trust and/or the QTIP Trust. If the spouse beneficiary is to serve as trustee, then distributions of principal should be limited for the “health, education, support, and maintenance” of the spouse. Other beneficiaries, such as children, can be included as beneficiaries of the Bypass Trust, but the QTIP Trust can only be for the benefit of a spouse (to qualify for the marital deduction). However, if any California real property will be held in the Bypass Trust, make sure that the only beneficiaries of that trust qualify for an exclusion from property tax reassessment, if avoiding reassessment is a goal (for example, include “children” but not “descendants”). Your spouse can be trustee of the Bypass Trust and/or the QTIP Trust, but consider potential conflicts of interests with the remainder beneficiaries. In allocating property among a Survivor’s Trust, a Bypass Trust and/or a QTIP Trust, the advisor should consider the anticipated estate tax of the surviving spouse versus the capital gains tax consequences to the remainder beneficiaries, as the assets of the Bypass Trust will generally have an income tax basis valued as of the date of the first spouse’s death, while the Survivor’s Trust and QTIP Trust will generally have an income tax basis valued as of the date of the surviving spouse’s death.

27. 27 During Joint Lives At Death of 2 nd Spouse At Death of 1 st Spouse Revocable Living Trust Survivor’s Trust (revocable) QTIP Trust (irrevocable) Bypass Trust (irrevocable) Children -trust or -outright Estate Taxes Retirement Acct Bene Designation: -Primary – spouse -Secondary – children – or trust or custodian Life Insurance Bene Designation: -Trustee of Trust 1. Survivor’s SP + ½ of CP 3. Balance 2. Balance 1. Tax due, if any *No estate taxes due SP = Separate Property, CP = Community Property 2. Amount of current estate tax exemption or QTIP? 1. Tax due, if any 2. Balance Bypass Trust: established at 1 st death Survivor’s Trust & QTIP: established at 2 nd death Income Tax Basis:

28. 28 Minor Children - Guardians When estate planning involves minor children there is the question of who will care for the children (who will be the personal guardian), and how should property be left to the minor children. The question of personal guardian is one that must go through the probate process and is often addressed by naming the preferred caretaker in a will or a nomination of guardian document (still, the court must approve it). How property should be left is not necessarily tied to the personal guardian. One person may be responsible for the child’s care and supervision, while another has the role of managing the finances.

29. 29 Minor Children–UTMA or Trust Minor children have limited legal capacity to manage and control their own property. If property is left to a child without any provision for how that property is to be managed, the court will appoint a property guardian. Property guardians are subject to on-going court review. In order to avoid the administrative requirements of a court- appointed property guardian, you can leave property to a minor child in a trust or through a custodianship under the California Uniform Transfers to Minors Act. Though a custodianship may be easier to create than a trust, it has some limitations. Property management and the age for outright distribution to the child are established by the statute, rather than by you, as in the case of a trust.

30. 30 Child’s Trust/Family Pot Trust When utilizing trusts for minor children, you can use either a Separate Share Trust for each child, or a Family Pot Trust, which is a pool of money for multiple children in one trust, or a combination of both, such as a Family Pot Trust until the youngest child finishes college, then split into Separate Share Trusts. In the case of a Family Pot Trust, it is up to the trustee to balance the needs of each of the children in spending the pool of trust assets. By using a trust to leave property to minor children (whether an individual child’s trust or a family pot trust), you name a trustee to be responsible for managing the property and specify any requirements you may like to add regarding how the property is managed or distributed. You can also specify distributions of principal in certain stages and the age at which the trust should be terminated with outright distribution to the child, such as ¼ of the principal at age 25, half of the balance at age 30, and the entire balance distributed at age 35, etc. You may also want to consider “lifetime” trusts for children (minor or adult) to provide funds to the child during his or her lifetime while providing tax and creditor protection benefits.

31. 31 Getting Your Plan in Place Do-it-Yourself/On-Line Programs/Hiring an Attorney CA Statutory Will; Uniform Statutory Form Power of Attorney; CMA Advance Health Care Directive Kit Issues with On-Line Programs Beware of “Trust Mills” You usually don’t know something is wrong with a poorly done estate plan until it’s too late to fix it Finding a qualified attorney Ask around – ask friends, financial advisor, accountant, or insurance agent for recommendations Super Lawyers or Martindale-Hubbell “AV” or “BV” rating Certified Specialist in Estate Planning, Trust and Probate Law

32. 32 Wrap Up Questions? Next Step – make an appointment to get your estate plan in place! Enjoy the peace of mind of knowing you have taken care of yourself and your family.