CJT’s Top 10 List


Myth #10:    A revocable Trust should hold all of the settlor’s assets.  This is incorrect.  Qualified retirement assets, like IRAs, 401(k) plans, pension and profit sharing plans, and 403(b) plans (tax sheltered annuities) should not be transferred to the revocable Trust while the employee participant is still living.  A change in ownership of the retirement account to the revocable Trust would be classified as a taxable distribution from the retirement account.  In such case, there will be an income tax on the entire retirement account at ordinary income tax returns. 

Myth #9:      On the death of the first settlor, the surviving settlor (spouse) always has full control over the Trust assets.  This is incorrect.  Some Trusts are designed to split into two or three different shares after the first death.  If this is the case, then one or more of these shares will likely be irrevocable.  If so, then the irrevocable share will almost always have restrictions (imposed for estate tax reasons generally) on how the surviving spouse spends the principal.  In addition, the surviving spouse serving as Successor Trustee will owe fiduciaries duties to the remainder beneficiaries of the Trust.  Under California law, the remainder beneficiaries can demand certain information and the surviving spouse as Trustee is required to provide it.   This is true even where no distributions are required to be made during the surviving spouse’s lifetime to anyone other than the surviving spouse. 

Myth #8:      If a settlor dies owning assets that are not in the settlor’s Trust, then the Settlor’s Will must be probated to transfer those assets.  This is not true.  Depending on the nature and value of the assets which are omitted from the Trust, they may be able to pass outside of the normal probate process by right of survivorship, beneficiary designation, spousal property petition, small estate affidavit and relating summary petitions.

Myth #7:      The assets of settlor, who has established a revocable Trust during lifetime, will never need to be probated when the settlor dies. This is incorrect.  Assets in a revocable Trust at the time of the settlor’s death will avoid probate.  However, if the settlor owns assets in his or her own name, which he or she failed to place into the Trust and which have no valid contractual beneficiary designation, then it is possible that those assets will need to be probated, depending on their value.

Myth #6:      Parents can only give their children $13,000 per year.  This is incorrect.  The $13,000 per year limitation relates to nontaxable gifts, for which no gift tax return is required to be filed.  Under current law, a parent can make additional gifts, aggregating $5,000,000.00 during the parent’s lifetime, without having to pay any gift tax.  However, the parent is required to file a federal gift tax return to report the gift and report the use of the parent’s $5,000,000 exemption.  (Note:  The $5,000,000 gift tax exemption is scheduled to be reduced to $1,000,000 on January 1, 2013.  CJT remains hopeful that new legislation will be passed to extend the $5,000,000 gift tax exemption indefinitely.)

Myth #5:      A beneficiary, who unsuccessfully sues the Trustee for breach of fiduciary duty and removal, will lose his or her share of the Trust if there is a No Contest Clause.  This is incorrect..  Legal actions in California by beneficiaries to keep the Trustee honest will never result in forfeiture of the beneficiary’s interest.  It is against California’s public policy for a No Contest Clause to discourage beneficiaries from bringing actions against Trustees who may have committed wrongdoing.

Myth #4:      Wills are a lot easier to challenge than Trusts.  This is inaccurate.  Both can be challenged with the filing of a single petition to the probate court.
Myth #3:      Revocable trusts (also known as living trusts) eliminate estate taxes.  Only Wills require the payment of estate taxes.  This is incorrect.  Tax planning within a Trust may reduce estate taxes in the same respect as tax planning within a Will may reduce estate taxes. 

Myth #2:      Whenever a decedent’s assets need to be probated, then a large portion will go to the government to pay estate or inheritance taxes.  This is not true.  Under current law, only estates of decedents with values in excess of $5,000,000 will owe any estate taxes, which will be owed entirely to the federal government.  The separate California estate tax has been abolished.  In California, the probate process may be required for estates as small as $101,000.  In fact, most probate estates in California are well under the $5,000,000 threshold for the payment of federal estate taxes. 

Myth #1:      There is no Trust administration required on the death of either settlor. Only Wills require administration.  This is untrue.  Trusts require some administration on the death of first settlor and the second settlor, even with the smallest estates. 

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