SHOULD I HAVE A LIVING TRUST?

You should seriously consider a living trust if you either:
• Own your own home or any other real property, or
• Own over $100,000 in investments and other personal property.

WHAT IS A LIVING TRUST?

A living trust is a legal document that replaces what you think of as your will. The living trust makes sure your assets go to the people you choose. It also avoids probate upon death or a conservatorship proceeding if you become incapacitated. Moreover, it allows couples to eliminate or reduce taxes. In addition, setting up a trust gives you a complete picture of your assets and compels you to get your "financial house in order" to transfer the assets into the trust.

DO I LOSE ANY CONTROL OVER MY ASSETS?

Absolutely not. You name yourself as trustee of your trust. You report to no one. You continue to control all your assets as before - to buy, sell, borrow against, give away, or do anything else you want to with your assets. In addition, you may change the trust any time.

WHAT HAPPENS IF I CANNOT ACT AS TRUSTEE?

In the trust you will name someone, typically a family member or close friend, to take over if something happens to you. We call this person the "successor trustee." This person, however, has nothing to do with your trust or assets until you become incapacitated or pass away.

WHAT IS PROBATE?

Probate is a court supervised transfer of your property to your heirs. Many people mistakenly think that having a will avoids probate. The opposite is generally true. Having only a will almost guarantees that your assets will have to be probated.

WHY ARE SO MANY PEOPLE SETTING UP LIVING TRUSTS TO AVOID PROBATE?

1. A Probate Is Expensive. In general, attorneys love probates because we are entitled to charge large fees on a probate. However, what is good for attorneys is not what is best for your heirs. In California, statutory probate fees range from 4-8% of the gross value of your estate. Court costs and appraisal fees are added to that.
On the other hand, a properly created and maintained living trust avoids probate. When you are gone, your successor trustee simply pays your last bills, reads your trust to see who gets your property, and then distributes the property. This all occurs without reporting to the probate court.

2. A Probate Means Delay. A probate takes at least six months to get your assets to your heirs. We feel this delay is actually worse than the expense of a probate because of the potential hardship and emotional drain. On the other hand, property in a living trust generally can be distributed in a few short weeks.

3. A Probate Invades Your Privacy. A probate is open to the public. In a probate, anyone can go to the court clerk's office and find out a surprising amount of information about the deceased and his or her family. A living trust, on the other hand, avoids such an invasion of privacy. No probate is needed if the living trust is set up and maintained properly. With a living trust, only your heirs and your attorney will know about your affairs.

WHAT IF I OWN REAL ESTATE IN ANOTHER STATE?

If you do not have a living trust, your heirs will likely have to go through two probates, one in California and another in the other state where you own real estate. A living trust will allow you to avoid probates in both states.

DOES A LIVING TRUST AVOID PROBATE?

A living trust enables you to avoid probate if you set it up correctly and make sure pretty much all your assets are in the trust.

CAN'T I JUST AVOID PROBATE WITH JOINT TENANCY?

For a married couple, holding their assets as joint tenants together does avoid probate upon the death of the first of them. However, as is explained below, joint tenancy may very well have a high income tax cost to the surviving spouse. Furthermore, a major problem will arise when the second spouse dies, or if both spouses die together - a probate will be required at that point. In addition, many problems are caused by owning property in joint tenancy with a child. For example, your child's creditors might try to seize your property. Furthermore, at your death, your property could end up going to only one of your children at the expense of your other children or grandchildren. A living trust can avoid all these problems.

WHY DOES JOINT TENANCY CAUSE INCOME TAX PROBLEMS FOR A COUPLE?

In short, if a couple holds appreciated property, such as real estate, as joint tenants and one of them passes away, the surviving spouse will have income taxes to pay if the property is sold. This occurs because only half of capital gains are eliminated at death under joint tenancy. The cost may be tens of thousands of dollars or even more. On the other hand, if the same couple were to set up a living trust and transfer the appreciated asset to the trust as community property, on the death of the first spouse the survivor could sell the asset and have no income tax to pay.

WHY SHOULD I WANT TO AVOID A CONSERVATORSHIP?

Medical science is making great strides, but an unfortunate consequence of longer life spans is many older people cannot manage their own affairs. If you become incapacitated by a stroke or another cause and do not have a trust and durable powers of attorney, your family may have to petition the court to have a conservator appointed for you. As with a probate, the purpose of a conservatorship is actually quite simple - enabling someone to make decisions for you. The problem is that as with a probate, a conservatorship is an expensive and complicated procedure.

Having a living trust and durable powers of attorney almost always avoids the need for a conservatorship. If you become incapacitated, whomever you have named in the trust and durable powers takes over for you without having to go to court. In particular, the "Durable Power of Attorney for Health Care," one of our basic estate planning documents, will give your family the power to make health care decisions for you, including the power to "pull the plug."

HOW DOES A LIVING TRUST ELIMINATE DEATH TAXES IN MANY CASES?

A living trust may allow a couple to effectively double the basic estate tax exemption ($1,000,000 in 2002, doubled to $2 million). For estates totaling over $2,000,000 this saves over $435,000 in death taxes. If you have a typical will which leaves everything to your surviving spouse, your children may have to pay over $435,000 in taxes that could have been avoided with a living trust.
Please note that the estate tax exemption is slated to increase as follows:

IS A LIVING TRUST HARD TO SET UP?
No. We can help you set it up as quickly as you want, even in a couple of day's time if needed.

ARE THERE ANY ONGOING COSTS?

No. A living trust does not cause any ongoing costs of management or administration. There will be no additional attorney's fees once the trust has been set up, unless later you want to amend the terms of the trust. You do not need to let us know or change any special trust list if you buy or sell trust assets in the future. In addition, please note that transferring assets to your living trust does not change your property taxes or how you file your income taxes.

IS A LIVING TRUST HARD TO MAINTAIN?

No. After your living trust has been properly set up, all you have to do is be diligent in generally putting new assets into your name as trustee of your trust.

DO I STILL NEED A WILL IF I HAVE A LIVING TRUST?

Yes. At no additional cost, we will prepare for you, what is called a "pour-over" will. It is so called because it "pours over" into the trust any odds and ends not already in the trust by the time of death. Examples of such assets would be your automobile and checking account.

HOW ABOUT THE CASE OF A SECOND MARRIAGE?

The living trust is especially necessary when a husband and wife have children from prior marriages. Without proper estate planning, it is likely that the children of one of the spouses will end up with all of the couple's property and the children of the other spouse will get nothing. A properly drawn living trust assures that the surviving spouse will be cared for, but then also assures that both sets of children will receive their rightful inheritance. A living trust is the only way to accomplish such goals and still avoid probate.

HOW STABLE ARE LIVING TRUSTS?

They have been around since the end of the Middle Ages in England. They were developed for a familiar reason - to avoid taxes, the king's death taxes. Living Trusts have become increasingly popular over the last few years for the reasons discussed above. We strongly believe nothing will change the clear advantages of using a living trust as the key to effective estate planning.


IRREVOCABLE LIFE INSURANCE TRUSTS (ILITs)

The Irrevocable Life Insurance Trust generally prevents life insurance proceeds from being subject to estate tax. Until you pass away, the trust will own nothing but your life insurance policies. Since the life insurance policy is either owned by or has as its irrevocable beneficiary the Irrevocable Trust, and since you are neither the trustee nor a beneficiary, the proceeds will not be subject to estate taxes when you pass away. Therefore, the full proceeds are available for the beneficiaries, unreduced by estate taxes. The estate tax savings are typically between 41 and 47 percent of the policy proceeds. Please contact us for more information on this fascinating planning vehicle.

Corporations | Partnerships | Limited Liability Companies

Which Business Entity Is Right for You?

At some point, most entrepreneurs and small business owners consider establishing a business entity, such as a corporation, partnership or limited liability company (LLC). What really are the benefits? What are the drawbacks? And is it worth the trouble?

The answer depends on your unique circumstances. We can help you select the best type of business entity to meet your goals, prepare the documentation to establish the entity and define the relationships among management, investors, and others, prepare maintenance and compliance documentation as your business grows, and provide succession planning to help you turn over the business to succeeding generations or buyers.

To learn about the pros and cons of different types of business entities, click here.
To learn about our services for entity formation, click here.
To learn about our services for entity maintenance and compliance, click here.
To learn about our succession planning services, click here.
To learn about our business acquisition and sale services, click here.

You may have been told by your CPA that you should incorporate, or perhaps you are interested in incorporating because some of your competitors have done so. But is a corporation really the right type of entity for you? The choice of business entity depends on legal, income tax and operational considerations. We can help you plan for and structure the type of entity that best meets your needs.

You may have heard that by forming a business entity you can reduce your taxes or limit your liability, but misperceptions are common in this area. While you may realize some modest income tax savings and succeed in limiting your personal liability to some extent, often the greatest benefits from forming a business entity are continuity of management and control, and increased access to capital.

Continuity of Management and Control. Because an entity is its own "person," it can continue its existence and activities regardless of what happens to you. For example, if you should become incapacitated or die, a formal system of organization will provide for the smooth transfer of control to a successor. Business activities will continue uninterrupted, without loss of income or other disruption.

Increased Access to Capital. Having sufficient capital available to your business often makes the difference between success and failure. Setting up an entity for your business provides security for investors in the form of limited liability, some assurance that the business can carry on if something happens to you, and an improved ability to define relationships to maximize the goals of all and avoid disputes. It also provides the possibility of some protection to you to limit your personal liability in the event of a business failure.

Attorneys in our office collectively have over twenty-five years of experience assisting entrepreneurs as well as established businesses in setting up entities, negotiating and closing capital-raising transactions, and providing general business formation advice.

Types of entities:

• A corporation is a legal "person," distinct from the owners. Just like a real person, it has assets, liabilities and certain rights.
• A partnership means shared ownership among two or more individuals.
• A Limited Liability Company (LLC) falls in between a partnership and a corporation; its members are protected from personal liability for business debts and claims.

We can discuss with you the pros and cons of each type of entity in terms of liability, tax savings, operational and capital-raising considerations, to identify the best solution for your business. Please contact us to schedule a free consultation.

How Much Can I Really Limit My Liability?

You may have heard that as a business owner/operator, if you incorporate, your personal assets will not be at risk for liabilities stemming from the business. For instance, you may have been told that you will not be personally liable for judgments, negligence and lawsuits against the business. Unfortunately, it is not necessarily so.

Incorporating can limit your personal liability as owner/operator for your employees’ actions or liability that occurs irrespective of an individual’s negligence. Incorporating also will generally limit your investors’ personal liability for business debts. However, you remain liable for your own actions. For example, if you, as the business owner, commit a negligent act, both you and the company may be liable. Similarly, if an employee is negligent, both the employee and the company may be liable. However, you as the owner would not necessarily be personally liable for the employee’s negligent act, thus providing a measure of protection for your personal assets. As your company grows and you hire more employees, this sort or protection will become more and more important. That’s where incorporation becomes more important as you take your business to the next level of success.

How Much Can I Lower My Taxes?

You may have been told that incorporating will drastically lower your taxes. But, a corporation is not a tax shelter. You may realize modest income tax savings by being able to take additional deductions, realizing some income as profits rather than compensation (subject to FICA or self-employment taxes), and through benefits planning, such as retirement accounts. By and large, however, your decision whether or not to incorporate or form another entity should be driven by factors other than taxes.

Entity Formation

Many disagreements between business partners, principals or corporate officers and directors are the result of poor planning in the initial formation of the business entity. We can help you establish your business entity with well-considered relationships among the principals and solid documentation to prevent disputes later on.

The agreements we draft to form your entity generally try to cover all bases, including withdrawal or death of a partner, principal or shareholder. We can assist you in planning ahead and developing tight, concise arrangements that will lay a solid foundation for success and prevent disputes as your business grows. Documentation may include:

• Corporate shareholder agreements, articles of incorporation and bylaws
• LLC articles of organization and operating agreements
• Partnership agreements and certificates of partnership
• Employment agreements (important for legal and tax reasons)
• Corporate minutes of organizational meetings of the board of directors and shareholders

Please contact us for further information.

Entity Maintenance and Compliance

Now that you have formed your business entity, how are you going to find the time for the paperwork involved in maintenance and compliance?

As your business grows, you can count on our diligent help with maintenance and compliance documentation so that you can focus on growing your business, rather than maintaining it. We can guide and support you with practical advice, solutions and solid documentation that minimizes risk and optimizes your chances for success.

Business Succession Planning for Closely-held and Family Businesses

You’ve poured your heart and soul into your business and it may well be the largest asset in your portfolio. But if you were to become incapacitated or die suddenly, your entire investment of time, resources and passion could be lost if you have not planned for succession. Even if you’ve just formed your business, it’s never too early to plan for succession.
We provide full business succession planning services to prepare for the transfer of a business to other family members, succeeding generations or other parties. Proper planning will minimize estate taxes and provide for a smooth transition in ownership and control. Please contact us for assistance with the following:

• Planning for a successor you can groom to take over the business
• Coordinating the transition
• Preparing purchase and sale agreements
• Handling purchase and sale transactions

Business Acquisition and Sale Services

Are you interested in acquiring or investing in a new business? Alternatively, do you own a business which you are considering selling?

Attorneys in our office collectively bring over twenty-five years of experience in representing both buyers and sellers in merger, acquisitions and sale transactions. The decisions you will make in how you effect a purchase or sale of your business will have major ramifications. For an entrepreneur considering purchase of an existing business, the liabilities you take on, and your ability to obtain recourse from the seller, will make a significant difference in the amount of return you will realize from the business. We can assist you in structuring a purchase transaction to maximize tax advantages, minimize liabilities, and optimize your chances for success after closing.

For sellers of a business, beyond just agreeing on a sales price, the manner in which you structure the sale and the terms of the transaction can make a world of difference in the amount you actually realize for your hard years of effort and risk. We can advise you in how to structure a sale to maximize the amount you will actually realize while minimizing your ongoing risks and liabilities, and we can help you negotiate the transaction and draft agreements to help you get to a swift closing on the most advantageous terms.

WE OFFER A FREE INITIAL CONSULTATION TO ANSWER ANY QUESTIONS YOU MAY HAVE ABOUT LIVING TRUSTS. PLEASE CALL DANIEL R. MORTENSEN AT (661) 799-9225 TO ARRANGE YOUR PERSONAL CONSULTATION.