A Trust? A Will? Why So Important?

[00:00:01] Speaker A: Well, welcome back to real estate and more. I'm your host, Michael Hatfield. Many home buyers and sellers find themselves with questions on how to vest their new home. This morning, I have highly regarded Walnut Creek attorney Franklin Parrish, who has published and practiced law in estate planning and trust administration for more than 30 years, as our guest. Welcome to the show, frankenous. [00:00:26] Speaker B: Thank you, Michael. It's a pleasure to be here. [00:00:28] Speaker A: Why do you enjoy law so much? [00:00:31] Speaker B: I'll tell you, I think the thought where we say counselor, and that is really what I feel. I do a great deal of the time, and that is counseling individuals or advising individuals not telling them so much what to do or what not to do, but to alert them as to what options they have so that they can make an informed decision. And after all, you can't do proper estate planning or clients cannot make informed decisions unless they're aware of what options they have. [00:01:07] Speaker A: Absolutely. And you've been doing this for more than three decades. You don't even look that old. [00:01:12] Speaker B: I can't believe it. Time goes by. [00:01:15] Speaker A: As I see it from the real estate side, there are two critical actions that a home seller or buyer needs to make. The first one is that they need to have an estate plan, which is involving at least a will and a trust, and more about that in a moment. But they also need to invest their property ownership in an entity that will work for their estate plan. Is that not correct? [00:01:40] Speaker B: That is correct. And, you know, quite often when I meet with individuals, for example, a married couple, and I always inquire as to how their assets are titled. And with regards to real estate, of course, we're looking at how does the name appear on a grant deed? Of course, that's public record. The question is, for a married couple, how are your grant deeds titled? Many individuals will say, well, we own them together. And I always think to myself, well, that's very nice to say we own them together. But how do you own them together? Do you own them in joint tenancy? Do you own them as community property? Do you own them as tenants in common? And each one of these forms of co ownership have different consequences. And so consequently, that is the beginning point of asking individuals, how are these assets titled? And then alerting them to the impact of it. [00:02:40] Speaker A: Most married couples are community property in this state, so they'll vest something as joint tenancy with the right of survivorship. What does that mean? [00:02:50] Speaker B: Joint Tennessee with right of survivorship is not community property. Even though we live in a community property state, it needs to be clearly stated on a deed as community property. Community property offers a major benefit, and that is an income tax benefit, which at the death of the first spouse, the property receives a 100% step up in income tax cost basis. So in other words, the survivor could sell the property for its fair market value and pay zero in income tax. Now, that is true for community property. That is not so with regards to joint tenancy. So even though we're in a community property state, unless the deed actually shows community property on it, it is not community property. [00:03:48] Speaker A: Very interesting. So our escrow officers are really the ones that will take this after a buyer has taken advice from their estate planning attorney person such as you, someone with experience, we hope. And then he's going to talk, or they're going to talk with their escrow officer, and then they're going to vest their property appropriately. Now we see a lot of them real estate that are vested in the trust. The trust. Why is a trust so important? [00:04:18] Speaker B: In California, trust is a separate document from your will. A trust allows you. The primary benefit of the trust is that it allows you, if you become incapacitated, that the assets titled in your trust avoid having any type of court supervision. In other words, it avoids a guardianship. It avoids a conservatorship and a guardianship. And a conservatorship, in reality, simply is another term for a living probate. We constantly hear that a goal of proper estate planning is to avoid probate. Probate is the process of the distribution of assets governed by your will. And where probate is involved, a court proceeding is involved. The typical probate process in Contra Costa county in the Bay Area typically will take up to two years. By comparison, if a client, whether married or single, establishes a revocable living trust, in other words, a separate document established during your lifetime. It is a trust. It is, in effect, a contract. You are the creator of the trust, the settlor. You are also the trustee or the manager, and you are then the beneficiary for your lifetime. You retitle or fund the trust. Funding. Another synonym is retitling. So you're retitling or taking title to assets, including real estate, in your name, as trustee of your revocable living trust. If you're a married couple, husband and wife may be co trustees. Single individual. You transfer the asset into the trust and as a result of that, you have complete control over it. You avoid any problems in the event you become incapacitated at date of death. The assets in the trust do not go through probate. In addition, the trust is different than a will. A will only becomes effective at death by comparison. The trust is effective immediately. When you establish it, you transfer assets into it. You don't have to have a separate tax id number. You continue to have your own Social Security number. At date of death. The trust transcends death. In other words, suppose you decide, well, at my date of death, I want the assets to be retained in trust for the benefit of my children or my spouse or whomever until they attain x ages. You can do that. [00:07:06] Speaker A: Okay, so going back just a little bit, Frank, the reason that we want to have a trust for a layman like me is that it avoids the cost of a two year, let's say two year probate, where it goes through the courts. And it, to me like a trust is like a separate person, but it's you at the same time. So you are actually controlling everything that happens with your revocable living trust, and you are maintaining ownership of your assets. And if something does happen, your spouse will just, or your trustee will automatically take over and minister without having a tax event. Is that correct? [00:07:46] Speaker B: You are correct. But the main point I think that needs to always be for clients to focus on while they may have a document entitled a revocable living trust until they actually transfer assets into it. In other words, retitle assets, the trust is not effective. [00:08:08] Speaker A: Say that again. [00:08:10] Speaker B: Until you actually take title to assets in the name of the trust, it is not effective. In other words, you have not avoided problems in the event of incapacity. And clearly, if the trust has not received title to, in particular real estate during your lifetime, and those assets pour over into the trust, a date of death, they're going to have to go through probate. And all of that can be easily avoided if you go through the complete process. And the process primarily in estate planning, is to complete a questionnaire in advance to we focus with individuals on helping them decide not only where they want their assets to go during their lifetime as well as a date of death. But then who do you want to be, the trustee or the successor trustee? These are all issues which, there's no necessarily right or wrong answer, but it's simply alerting individuals to what options they have so that they can make an informed decision. [00:09:22] Speaker A: So what is the difference between a trustee and a successor trustee? [00:09:25] Speaker B: The primary consideration? They're what we define as a fiduciary role. In other words, they're acting in the best interest of the beneficiary of the trust agreement individual or the entity. It could be a bank for that matter, as trustee, the trustee has the authority to manage the assets for the benefit of the beneficiary, and that is the current trustee. But if that entity or individual cannot act, then you have appointed or you nominate in the trust agreement a successor trustee, and likewise, you have an alternate successor trustee. Many times clients confuse and attorneys confuse as well this terminology of fiduciary roles. In other words, under a will, you have an executor, and if that person cannot act, then you have a successor executor, and if that individual or bank cannot act, then you have an alternate successor under a durable power of attorney, which is a different document from your will. So different documents and a trust. Durable power of attorney deals with appointing an individual, not necessarily an attorney. It's a term of art. Under a durable power of attorney, it's a document. It's effective immediately. It, quote, s transcends incapacity or endures incapacity. It is durable. And the individual that you have named to act in your behalf or on your behalf is your, quote, attorney, in fact. And if that person cannot act, then you have an alternate, and then you have a successor, alternate attorney. In fact, the attorney, in fact, authority is in most cases, effective immediately. If you become incapacitated, the attorney, in fact, will act and handle things for your benefit. [00:11:30] Speaker A: So my question is, so we have a trustee. That's virtually when a person can act on behalf of their own affairs, but then if something happens, you pass away or becoming incapacitated. Now you've got a successor trustee that takes over and runs your business affairs. Just to recap what I believe you said, the durable power of attorney, that's a little bit different thing. That's basically talking about your capacity to conduct your own business. [00:12:02] Speaker B: Good point. Here is the main difference. You recall I mentioned with regards to a trust, it transcends death. It can continue on at your date of death on for the benefit of a spouse, for children, third party, whomever. By comparison, under a durable power of attorney, it is effective immediately. However, at date of death, the power of attorney immediately terminates. Now compare that to the trust that transcends death. So why would you want or need a durable power of attorney if you have a trust? And the answer is not all assets can be transferred or retitled into a trust, you may ask, well, then what are those assets? Primarily, they are retirement accounts, iras, 401K, pension, profit sharing. None of these assets can be retitled into or fund a trust. They always remain in the participants name. So what do we look at? There we're looking at who you've named as a beneficiary and an alternate or a successor beneficiary. And in many times, clients have failed to name a successor beneficiary. And as a result of that, those proceeds, which for no reason should go through probate, ultimately end up going through a probate process. It's costly and it's unnecessary, but the durable power of attorney is a separate document from your will, from your trust. It can be effective immediately. It terminates at date of death. [00:13:51] Speaker A: Wow. Lot of information there. With all of this great information, we're going to have to take a short break. Be right back. Welcome to the real estate minute with re Max expert Michael Hatfield. Michael, what traits should we look for in selecting an agent? Look for a deal maker with a positive attitude who will work tirelessly for you. An agent who is adept in multiple offer situations, drafting contracts, marketing and advertising. A client's home is familiar with multiple cultures, experienced in mortgage financing, inspections and escrow is a huge asset to his client. What can you do as a plus for clients? Your agent is your eyes and your ears, one who works behind the scenes on your behalf. A great attitude, working well with others and keeping clients priorities. Number one is a given for us. Call 925-32-2775 now to schedule an appointment or complimentary home analysis. For excellence in real estate. Call the Michael hatfield at 925-32-2775 or go to michael hatfieldhomes.com dot. Now back to our show. Lot of information. My head's a little bit spinning. I hope some of our listeners are also. So, as an aside, just to give us a chance to catch up with you, it may be interesting for some of you to know that Frank is a proud holder of the Eagle Scout merit. And for that is, it's a amazing accomplishment for a young man. In fact, I lost a really good friend a few years back and then was able to help his son achieve the Eagle Scout rank. We actually built some barn owl boxes as part of the the project, but it wasn't easy. And then the second thing is, when I was flying, I had a guy I was checking out. He came from the military. He was becoming a new copilot for the airline, and he had flown the SR 71. And I looked at him and I said, that's really something to have flown the SR 71. And he looked at me and he said, you know, probably not as much attention from that as I get from being an eagle spout. So congratulations on becoming the Eagle Scout and doing that. So let's talk about the setting up of an estate plan. So they fill out the questionnaire, and then where do you go from there? Just simple steps. [00:16:19] Speaker B: The questionnaire and some individuals, you know, we provide this in advance of the initial consultation, say you can complete it, you know, in advance. Some clients may be completing it on their way to the office. The main thought is the questionnaire serves as an outline for that initial conference. It causes people to think about issues that they have never given any thought to before. For example, a young married couple with minor children. It is a critical issue that they have an estate plan for one very simple and important reason. Where minor children are involved, the will of that client, not the trust the will appoints who you want to have care and custody of your child. In other words, a guardian. If you and your spouse are a single client, if you are deceased, where do you want your child to go? Who do you want to have care and custody of that child until they are 18? And that is governed by the will, that is not governed by the trust by comparison. And I always come back and share with individuals that size of an estate is not synonymous with complexity. You can have a very modest estate, say, under $500,000, and it can be ungodly complicated if you have gone through a marital separation, if you have a child who has special needs, you can have a whole host of complexities that have nothing to do with the state size. But it's important, therefore, to be able, and that is what the questionnaire is intended to do, is cause individuals, as I said, the guardian, begin to think about those issues. The other consideration in that questionnaire is to say, okay, well, you have assets, and we go through and provide a financial statement. And now, where do you want those assets to go? In most cases, clients will say, if it's between husband and wife, you know, we want each other to have the benefits of it for the remainder of our lifetimes. And, you know, the date of death of the survivor would have continue on for the benefit of our kids. And then the question is, well, if that is the case, at what ages? At what ages do you want the funds to be distributed to a child as an adult child? And most individuals will say, well, gee, that wouldn't be a 21. Well, that's possible, but it doesn't have to be. You could have it continue on to. Do you want a 21 year old to receive everything in lump sum, outright at once? In most cases, the answer is no. So if you don't want that to occur, you can define that in the trust, you can say they have the right to the income off these assets, and then you structure it as to when do you want the funds to be distributed? For example, we could say a third at 25, half at 30, the balance of 35. Or then you may say, or the issue could be brought up well, but who would be managing these funds for the benefit of our son or daughter? And that individual is the trustee. And if that person cannot act, then who would you want? And then we go one step further and say, well, but what if a child dies during the administration of his or her trust? Where would the assets be distributed? And typically you say, well, it should go to their children, if they have any, that would be grandchildren. And then again, you still go through the same scenario of asking, would it go to them outright, or would it be retained in trust for their benefit until they attain certain ages? [00:20:28] Speaker A: Wow. Lot to know and really good stuff. Let's talk taxation for a minute on and estate tax and income taxation. Obviously, there are different types of taxes. Can you just sort that out for us real quick? And does California have an estate tax? [00:20:43] Speaker B: California does not have an estate tax, at least not at this time. And I doubt that. I don't see the chance of that happening, at least in the foreseeable future. We do have a federal estate tax. That tax impacts very few individuals. The current exemption from federal estate tax for a single individual in 2023 is $12,920,000. So I share with you an individual who has more than $12,920,000. Is a nice problem to have. The vast majority of us don't have that. And as a result of that, the estate tax issues are not as prevalent for individuals as they were several decades ago. But the income tax impact is. And the impact of income taxation on inheritance. The general rule is there is no income tax when you inherit an asset other than an IRA or a pension or profit sharing. And the distribution out of an IRA, the typical IRA, not a Roth IRA, but a traditional IRA or a traditional 401K plan, it is all ordinary income iras. 401K plans, yes, they can be inherited by a beneficiary designation, but they are not designed for inheritance. Iras are designed for primarily one purpose, and that is retirement income to the recipient, the participant. The major impact of income taxation on other assets, other than iras, other than 401 plans, is dealing with proper titling. And that is a single individual, if they have assets, a brokerage account, and is titled in their trust. And therefore, as we mentioned earlier, it avoids probate and then at date of death, based on the current federal tax laws, it receives a new cost basis at date of death. And so the capital gain that the client would usually incur on the sale or liquidation of those investments is completely avoided at date of death. In other words, it gets a 100% step up in income tax cost basis. So the successor trustee could liquidate the stock portfolio, sell the real estate, what have you, and the trust would realize zero income taxation, a major, major benefit that most clients simply are not aware of. [00:23:40] Speaker A: Now, let's kind of switch gears back to the vesting of title. For a home, there's sole ownership, community property. Community property with the right of survivorship, joint tenants. Joint tenants with right of survivorship. Can you can also hold it in a trust or another entity? What is usually the order that people look at? Do they put it in their trust to hold the asset, or do they do community property? Normally, if you've got the trust, you certainly, I think, would want to use the trust. Is that not correct, or am I still learning over here? [00:24:17] Speaker B: You are correct. The trust is clearly the preferable way of owning real property because it keeps the titling private. Two, it avoids probate, and as we mentioned earlier, for a single client, or even for a married couple, if it's treated as community property in the trust, date of death of the first spouse or date of death of the client, it gets a 100% step up in income tax cost basis. So that's a major benefit. What format is most advantageous to the client to achieve their objectives, and if the objective is to avoid probate, to keep their affairs private, to make sure that assets are managed for the benefit of an individual. You see, Michael, you can establish a trust for the benefit of a third party, for a child, for example. And those assets that you fund into that trust for the benefit of the third party, those assets can be made immune from the claims of their creditors. So if they're ever sued, if they ever go through a divorce, those assets that you have placed in trust for the benefit of a child are immune from creditor claims. It's a major, major benefit you can do for third parties, for children, that which you cannot do for yourself. [00:25:50] Speaker A: Thank you, Frank, for being on the show and giving us a piece of what it is to be an estate attorney and a will and trust, and an expert in all of those. [00:26:00] Speaker B: Michael, a sincere pleasure being here. Thank you. [00:26:02] Speaker A: Well, thank you for coming on the show, Frank, and it was very nice morning talking and taking the legal approach to estate planning and importance. Of properly vesting one's home and their assets and their estate plan. And if you would like to connect with Mister Frank Parrish, just give us a call. You've got our number. It's all over the place and we'll connect you right up with him. You've been listening to real estate and more interesting people, topics of the day and of course real estate. Listen to archived real estate and more shows at michael hatfieldhomes.com forward Slash Radio. That's michaelhatfieldhomes.com radio. Tune in next week and until then, have a very blessed week. The views and opinions expressed are based on current economic and market conditions and are subject to change. Information on the show provided for illustrator purposes only and does not constitute professional or legal advice. Information from sources deemed reliable but accuracy and completeness not guaranteed. Michael Hatfield and the Michael Hatfield Re Max team have no liability for information discussed on the show. Consult with qualified professionals prior to taking action. We at the Michael Hatfield re Max team enjoy representing our valued clients. If you or someone you know is interested in buying or selling and wishes to schedule a complimentary appointment with the Michael Hatfield re Max team, call us at 925-32-2775 that's 925-32-2775 or go to our website michael hatfieldhomes.com dot. I'm Michael Hatfield. Thank you for listening today. Join us next Saturday for the next real estate and more when we again sharpen our focus on hows the market. Join us next Saturday and have a wonderful week. Best wishes and blessings to you. Dre 014936.