Charting a Course for Family Security

FAQ

Q: WHAT IS A REVOCABLE TRUST?

A:  A revocable trust is simply an agreement between you and a "trustee".  The trustee can be a trust company, an individual (including yourself) or a combination.  The trustee is someone you "trust".  You transfer some or all of your assets (including bank accounts, investments, real property such as your home) into the name of the trust.  The trustee manages the trust, invests the assets in the trust and distributes these assets according to the provisions set out in the trust agreement.
  
Since the trust is revocable, you retain the power to amend or revoke it.  You therefore retain complete flexibility and control over your assets until such time as you become incapacitated, decide to resign or die.
 
You might compare a revocable trust to a company in which you are the president and sole stockholder.  It is much simpler than a company because you donít have to issue stock, file anything with the state, have board meetings or file separate income tax returns.  You continue to be in charge during your lifetime, but you avoid guardianship in the event of incapacity and you avoid probate at the time of your death.

Q: HOW IS AN IRREVOCABLE TRUST DIFFERENT FROM A REVOCABLE TRUST?

A:  When you set up an irrevocable trust you cannot later change your mind and revoke or cancel the trust.  Generally you set up an irrevocable trust when you want to transfer assets to another person but not have that person have control over those assets until some later time.

Q:  WHAT ARE THE PRIMARY ADVANTAGES OF A REVOCABLE TRUST? 

A:  With respect to your assets which are placed into your revocable trust, if you become incapacitated there is no need for a court supervised guardianship to manage those assets and upon your death there is no need for a probate proceeding to administer those assets.

Q:  IF THE VALUE OF MY ESTATE IS LESS THAN THE ESTATE TAX EXEMPTION, DO I NEED A TRUST? 

A:  Yes, to avoid probate here and in other states where you own real estate; to avoid a court supervised guardianship if you become incapacitated; to protect your privacy; to provide asset protection for your beneficiaries; and, to provide estate tax savings for your children through lifetime (generation-skipping) trusts.

Q:  DO I NEED A WILL IF I HAVE A TRUST?

A: Yes.  This is usually called a pour-over Will.  It is like a cup which pours into a bucket, the bucket being the trust.  If you should die without placing all of your assets into your trust, the Will pours those assets through probate and into your Trust.  It is used as a backup in the event you did not fully fund your trust.

Q:  CAN I BE MY OWN TRUSTEE?

A: Yes, if you wish to continue managing your own assets you may serve as your own Trustee.  If you wish to have professional management of your assets then you might consider a professional Trustee such as a bank or trust company.

Q:  CAN I ADD TO OR WITHDRAW ASSETS FROM MY REVOCABLE TRUST AFTER IT HAS BEEN CREATED?

A: Yes.  You have complete control to add assets to or withdraw assets from your revocable trust.

Q:  IF I MOVE TO ANOTHER STATE, IS MY TRUST STILL VALID?

A: Yes, but it should be reviewed by a qualified estate planning attorney in that state to take into account any specific state law requirements.  We can give you names of qualified attorneys in other locations.

Q:  IF I OWN REAL ESTATE IN ANOTHER STATE, CAN I PUT THIS INTO MY HAWAII REVOCABLE TRUST?

A: Yes.  In fact, that is one of the reasons for setting up a revocable trust.  By placing out of state real estate into your revocable trust you can avoid an ancillary probate proceeding in those states when you die.

Q:  ONCE I SET UP MY TRUST, ARE THERE ANY ONGOING LEGAL EXPENSES?

A: Depends.  If you later change your mind about your selection of successor trustees or beneficiaries, you may wish to make an amendment to your Trust.  That would incur additional legal expenses.  This is no different than after building a house you decide to remodel.  There are additional expenses for the remodeling.

Q: IS SETTING UP A REVOCABLE TRUST EXPENSIVE?

A: Not when compared to the costs of not setting up a revocable trust.  The costs of a court-supervised guardianship in the event of incapacity and the costs of probate at the time of death would generally far exceed the costs of setting up a revocable trust.  Revocable trusts could also save considerable expense to the children by protecting their inheritances after you die from loss through creditors' claims or divorce.

Q: IF I PUT MY HOME IN JOINT TENANCY WITH MY DAUGHTER, WILL I AVOID PROBATE?  IF SO, WOULDN'T THIS BE LESS EXPENSIVE THAN SETTING UP A TRUST?

A: Yes you will avoid probate or rather postpone probate until the second to die of you and your daughter.  By placing your daughter's name on title with you as joint tenant, however, you are then subjecting the home to the risk of her creditors' claims, possible forced sale in the event she should get divorced, loss of control and flexibility since she is now an owner, a reversion of the property back to you if she should die before you and you lose the opportunity to leave the home to her in a lifetime trust over which she would have control and use but would be protected from many of her creditors and also protected in the event she should get divorced.

Q:  I AM MARRIED.  SHOULD MY WIFE AND I USE ONE TRUST OR TWO TRUSTS?

A: If your combined estate is under the estate tax exemption and you do not expect it to grow over that exemption during your lifetimes, then it might be simpler and less expensive to use a joint trust rather than two separate trusts.  This assumes that when one of you die you want everything to go to the other without any restrictions.  If your estate exceeds the federal estate tax exemption amount or you anticipate it will grow over the exemption then using two separate trusts would be the better plan.  That way, through proper planning, you and your wife would be able to make use of both of your exemptions rather than just one exemption.

Q:  WHAT OPTIONS SHOULD I BE CONSIDERING IF MY ESTATE EXCEEDS THE ESTATE TAX EXEMPTION AMOUNT? 

A: You may wish to transfer your life insurance into an irrevocable trust to remove it from your taxable estate and you may also wish to begin making gifts to your beneficiaries to reduce the size of your taxable estate.

Q: IF I PLACE MY ASSETS INTO MY REVOCABLE TRUST, WILL THESE ASSETS BE PROTECTED FROM MY CREDITORS?

A: No. As a rule of thumb, any assets which you retain a string to pull back, a creditor could also pull the same string.

Q: IF I PLACE MY ASSETS INTO A REVOCABLE LIVING TRUST WILL THIS AFFECT MY INCOME TAXES OR MY REAL PROPERTY TAXES?

A: No.  A revocable trust is considered a "grantor" trust.  Your income taxes, right to capital gains tax exemption, real property taxes will all stay the same.

Q: IF I OWN REAL ESTATE TOGETHER WITH OTHER PERSONS, CAN I STILL PLACE MY PORTION INTO A REVOCABLE TRUST?

A: Yes.  You could transfer your portion into your trust as a tenant in common with the other owners.  If the real estate is joint tenancy with right of survivorship, by transferring your portion into your trust you would be terminating the right of survivorship attribute and converting the property into tenancy in common.

Q: DO THE TRUSTEES WHO TAKE OVER AFTER I DIE HAVE TO BE HAWAII RESIDENTS?

A: No. 

Q: IF I PLACE MY RENTAL REAL PROPERTY INTO MY REVOCABLE TRUST WITHOUT GETTING THE MORTGAGE COMPANY'S CONSENT, WHAT PROBLEMS MIGHT I FACE?

A: Most mortgages contain a "due on sale" clause.  This would allow the mortgage company to accelerate the loan if you transfer your real estate into a revocable trust without first obtaining the mortgage company's consent.  This rule does not apply to your personal residence, however.

Q: DO I HAVE TO GO BACK TO THE ATTORNEY EVERY TIME I PUT ADDITIONAL ASSETS INTO MY TRUST OR TAKE ASSETS OUT OF MY TRUST?

A: No.  You might compare the attorney that set up the trust to the contractor that built your house.  You can move the furniture in and out of the house without contacting the contractor.  It is the same with a trust.  You can transfer your bank accounts, stocks and bonds, insurance, etc. into and out of your revocable trust without contacting the attorney.

Q: IF I PLACE ASSETS INTO MY REVOCABLE TRUST, WILL I HAVE PROBLEMS IF I WISH TO SELL THAT PROPERTY?

A: No.  You can sell property directly from your revocable trust without complications.

Q: IF I WISH TO CHANGE THE TERMS OF MY REVOCABLE TRUST, HOW DO I DO THAT?

A: Your attorney can assist you by preparing an amendment to your trust.

Q: WHAT IS A GENERATION SKIPPING TRUST?

A: A generation skipping trust is a trust which skips a generation for estate tax purposes.  One example might be to provide in your revocable trust that after you die your trust divides into separate trusts for each of your children.  You could appoint each child to be trustee of his or her own trust, have the right to withdraw and use the trust for purposes of their health, education, maintenance and support and even have the power to decide who gets their trust when they die among anyone other than their own creditors or estate.  Thus the child would have substantial control and flexibility and use of their trust.  When the child died, however, this trust would then pass to their children (or whoever they appointed it to) without being taxed in their estate.  This would skip a generation of taxes.  The maximum amount each individual can place into a generation skipping trust (and avoid generation skipping tax at the death of the beneficiary) is $1,500,000.  This adjusts each year based on the cost of living index.

Q: WHAT IS AN IRREVOCABLE LIFE INSURANCE TRUST?

A: This is simply an irrevocable trust into which you place your life insurance policies.  Since it is irrevocable, you cannot later change your mind.  You could name your spouse or one of your children as the trustee.  If you live for three years after the transfer, the life insurance proceeds will not be included in your taxable estate for estate tax purposes at the time of your death.  Upon your death, the trustee would collect the insurance proceeds and would then use those proceeds for whatever purposes you designated in the irrevocable life insurance trust agreement.  This could be for the benefit of your spouse for your spouse's lifetime and then for the benefit of your children for their lifetimes.

Q: WHAT IS AN INCENTIVE TRUST?

A: An incentive trust might be a trust that you leave for the benefit of your children after you die which provides incentives for them to do certain things such as complete their education, live a productive life, etc.  For example, such a trust could provide that each year the trustee would distribute to the child an amount equal to what that child earned during the year.  The trust could also provide incentives for the child to continue his education with rewards for certain grade point averages.

Q: WHAT ARE SOME DIFFERENT WAYS THAT I CAN PROVIDE FOR THE DISTRIBUTION OF MY TANGIBLE PERSONAL EFFECTS UPON MY DEATH? 

A: One way might be to allow your children to divide your tangible personal effects between them as they agree and then name an arbitrator in the event there is disagreement.  Another way would be to leave a list.  The list could be referred to in your trust but be separate from the trust.  You could add to or subtract from the list without having to change the trust provided you dated and signed the addition or deletion.  A third way might be to set up a system under which each child selects one item in turn in rotation until all items are selected.  Any combination of the above could be put together as well.

Q: I HEARD THAT IF I HAVE A WILL, MY ASSETS WOULD NOT GO THROUGH PROBATE.  IS THIS TRUE?

A: No.  A Will is simply the direction to the probate court as to who is selected to be in charge and who is to receive your assets when probate is terminated.  The determination of whether your assets go through probate is whether those assets are held in your individual name.  Assets held in joint tenancy with right of survivorship avoid probate as well as assets held in a revocable trust.  Additionally, there is a $100,000 exemption from probate for non-real estate assets in the State of Hawaii.

Q: ARE LIFE INSURANCE PROCEEDS SUBJECT TO TAX WHEN I DIE?

A: Life insurance proceeds are included in your estate for federal estate tax purposes, but are not subject to income tax.  These are two separate taxes.  The answer is therefore "yes" with respect to estate tax and "no" with respect to income tax.

Q: HOW OFTEN SHOULD I REVIEW MY WILL OR TRUST?

A: We generally recommend that you review your estate plan every three to five years.  There may be circumstances, however, that would indicate an earlier review:

  • Change in family circumstances (divorce, death, birth, marriage, illness, attitude change, financial irresponsibility)
  • Change in economic condition
  • Change in the law
  • Move to a different state
  • Death of a trustee, personal representative or guardian

Q: WHAT HAPPENS WHEN ONE SPOUSE DIES?   DOES THE OTHER SPOUSE RECEIVE ANY GUIDANCE FROM YOUR FIRM?

A: Yes.  We will meet with the surviving spouse and any other successor trustees to inform and educate them regarding their responsibilities as trustee and the procedures required to carry out the terms of the trust.

Q: MY HOME IS WORTH HALF OF MY ESTATE.  I WOULD LIKE TO LEAVE MY HOME TO MY DAUGHTER, BUT I HAVE THREE CHILDREN AND WOULD LIKE TO TREAT THEM EQUALLY.  ANY SUGGESTIONS?

A: Yes, several: One would be to purchase a life insurance policy to increase your estate size; another would be to leave your home into a Residence Trust for your daughter's use as long as she wishes to live there and pays the expenses of the home and  when she decides to move elsewhere, wishes to sell the home or passes on, the home could then be sold and the proceeds divided among all the children; still another solution would be to give your daughter an option to purchase the home after your death at its appraised value.  She could fund the purchase with life insurance on your life.  

Q: WHEN MY HUSBAND PASSED ON, OUR HOME WAS HELD JOINTLY AND THEREFORE CAME TO ME AUTOMATICALLY WITHOUT GOING THROUGH PROBATE.  WOULDN'T IT BE MUCH SIMPLER FOR ME TO DO THE SAME WITH MY DAUGHTER?

A: This might be simpler, but entails some risks and possibly expenses later which could be avoided by using a Revocable Living Trust.  Following are some risks:

  • Your home would be subject to the claims of your daughter's creditors.
  • You would need your daughter's permission to sell.
  • Your daughter could put her husband's name on title without you knowing.
  • You could lose the opportunity to leave the home to your daughter in a generation-skipping type trust over which she would have control as trustee, could withdraw for purposes of her health, education, maintenance and support, and could even be given the authority to decide who would get the home or its proceeds upon her death.  Such an arrangement could result in substantial estate tax savings at your daughter's death (the home or its proceeds could pass on to your grandchildren tax-free) and provide a measure of creditor (and divorce) protection for your daughter during her lifetime.

Q: IS THERE A WAY I CAN GIVE MY HOME TO MY CHILDREN NOW AT A REDUCED TAX COST AND AT THE SAME TIME CONTINUE TO LIVE IN THE HOME FOR MY LIFETIME?

A: If you reserve the right to live in your home for your lifetime, the entire value of the home, valued at the date of your death, would be pulled back into your estate for estate tax purposes.  You could, however, place your home in a Qualified Personal Residence Trust (QPRT) and reserve the right to live in the home for a stated number of years which you would determine at the time you set up the Trust.  You could save substantial estate taxes by using this method because you would be getting the home and future appreciation of the home out of your taxable estate.  The transfer tax cost would be substantially reduced because of your reservation of the right to live in the home for a number of years.  The hitch here is that you have to outlive the stated number of years for this plan to work.  When the Trust terminates, the home then distributes to your children.  Since you are still alive, you would then either move to another home or enter into a rental agreement with the children to continue to use the home for the balance of your lifetime.  This gives you the opportunity to get additional assets to your children in the form of rental payments.  One negative to this planning opportunity is the loss of the income tax step-up in basis at the time of your death.  A proper analysis could determine whether the overall benefit of getting the home to your children at a reduced transfer tax cost and keeping the future appreciation out of your estate would outweigh the loss of the step-up in income tax basis.


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Honolulu, HI 96813

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