Estate Planning Overview & FAQ

What are the Purposes of an Estate Plan?

There are four main purposes of an estate plan that everything you may ever discuss in the context of “estate planning” can be categorized:

• plan for the management and disposition of your property while you are alive and after your death;
• plan your health care if you become unable to take care of yourself;
• plan for the continued care of your children or your other dependents;
• ensure that you pay as little estate tax as possible.

Estate Plan Considerations

Before you can implement you estate plan, you must consider the following important questions (it’s not necessary to know the answers now, but these questions will be answered through the estate planning process):

• Personal Representative.  Who do you want to name as your first, second and third choices to be the personal representative of your estate?  Your personal representative is responsible for collecting your assets after death, administering your estate, opening a probate if necessary, distributing property to your beneficiaries, completing your last tax return and paying any taxes and other debts of your estate from your probate assets.
• Guardian.  If you have minor children, who do you want to name as your first and second choices to be the guardian(s) of your children?  A guardian is responsible for raising and caring for the minor children.
• Conservator.  If you have minor children, who do you want to name as your first and second choices to be the conservator(s) of your children?  A conservator is responsible for administering and accounting for any property owned by the minor children.
• Title to Property.  How should you and your spouse hold title to your assets?  Should it be as community property, community property with right of survivorship, joint tenancy or another form?
• Healthcare.  If you cannot care for yourself, who do you want to make decisions about your healthcare?
• Property Management.  If you cannot manage your financial affairs, who do you want to give the power to manage your financial affairs and spend your money?
• Beneficiary Designations.  Who should receive the proceeds of your life insurance policies and your retirement benefits?  Make sure you have properly designated your primary and alternate beneficiaries for all insurance policies and retirement plans.
• Living Trust.  Should you create a revocable trust to provide for a spouse or children, federal estate tax savings, asset management or to control property distributions until children are mature and able to manage your property?
• Federal Estate Taxes.  Is your estate large enough to be subject to federal estate taxes?  If so, what can you do to eliminate or reduce your potential estate tax liability?   If your estate may owe federal estate taxes, how will the taxes be paid?

Who Needs an Estate Plan?

Most adults should have an estate plan, regardless of the value of their estates.  Everyone should designate the person or persons who are to manage their financial affairs, care for them and make health care decisions in the event they become incapacitated.  An estate plan is necessary to name the beneficiaries who will receive your property after your death.  If your estate has substantial value, a good estate plan can assist in preserving your property for your heirs and reducing or eliminating federal estate taxes on your death.

Factors That Require Estate Planning

If any of the following situations apply to you, you should consider adopting an estate plan to accomplish your objectives:

• You own real property or personal that you want to give to one or more beneficiaries who would not inherit the property if you were to die without a Will.
• You have children under age 18 for whom you need to designate a guardian or a conservator.
• You have children from another marriage and you want them to receive a portion of your property.
• You want to give property to friends and/or charities or schools rather than family members.
• Your estate may be subject to federal estate taxes, i.e., the value of your estate assets less your liabilities and deductions is more than the exclusion amount.  See "When Is an Estate Subject to Federal Estate Taxes" below.
• You want to eliminate or reduce your federal estate tax liability.
• You want to pick the person or persons who will be responsible for your financial affairs if you were to become incapacitated.
• You want to pick the person or persons who will be responsible for making health care decisions for you if you are incapacitated.
• You want to state your medical treatment desires, donate your organs, provide for burial or cremation, or do not want to be kept alive by life support if you are in a terminal condition.

What is Probate?

Probate is a Superior Court procedure by which probate assets belonging to a decedent are collected and administered by the decedent's personal representative and transferred by the personal representative to the beneficiaries named in the decedent's Will, if a person dies intestate (without a Will), California’s laws determine who receives the property by default.  The personal representative is also responsible to pay the liabilities of the decedent from the probate assets.

What are the Advantages of Probate?

One advantage of probate is that when a notice to creditors is published, all debts and liabilities of the decedent are terminated with respect to creditors who fail to file a claim against the estate.  Another advantage of probate is that the probate court can resolve any disputes involving the decedent's estate and disposition of its assets.

What are the Disadvantages of Probate?

The probate process can be expensive, time-consuming and invasive.  In California, estates must pay statutory probate fees for attorneys and personal representatives that are based on the gross value of the estate (without any reduction for debts or mortgages) that starts at 4% of the estate value (for each the attorney and personal representative) and drops to 1% for estate values in excess of $1.0 million.  Legal fees, court fees and other costs must be paid before your assets can be fully distributed to your heirs.  And, if you own property in other states, your family/heirs may be required to go through multiple probate processes in each of these states.

Probate takes more time than non-probate transfers, which will depend upon the number of heirs, complexity of your estate assets and whether there are any challenges to your will.  A good rule of thumb is between nine months to two years.

Estates that go through probate become matters of public record.  Any one can examine the probate court's file, including the inventory of probate assets.  Nothing can be distributed or sold without court and/or executor approval, so if your family/heirs need money to live on, they must petition the court for a living allowance.

What Property Avoids Probate?

Whether assets will be subject to probate depends on several factors.  The following types of property are not included in a decedent's probate estate and therefore avoid probate:

• Property that is held in trust.
• Property owned as joint tenants with right of survivorship or community property with right of survivorship is not included in the probate estate of a decedent.
• Property that is held by a third party that passes to one or more designated beneficiaries by virtue of a contract such as life insurance proceeds, retirement plan assets subject to a valid beneficiary designation and financial institution "pay on death" accounts.

Many persons elect to use a revocable living trust as a will substitute primarily to avoid probate.

Who Gets My Probate Estate If I Die Without a Will or Trust?

If you die intestate (without a Will), California’s laws determine who receives your property by default. In California, the distribution would be to your spouse and children, or if none, to other family members. California’s plan reflects the legislature's guess as to how most people would dispose of their estate and builds in protections for certain beneficiaries, particularly minor children. That plan may or may not reflect your actual wishes, and some of the built-in protections may not be necessary in a harmonious family setting. A will allows you to alter California’s default plan to suit your personal preferences.

When Is an Estate Subject to Federal Estate Taxes?

If on the date of your death your estate exceeds the applicable exclusion amount, your estate may have to pay federal estate taxes.  The exclusion amount depends on the year of death and is as follows:  (i) $2,000,000 in 2006, 2007 & 2008, (ii) $3,500,000 in 2009; (iii) no estate tax in 2010 (estate tax temporarily repealed); (iv) $1,000,000 in 2011 and beyond.  If an estate is subject to federal estate tax, the value of the estate over the applicable exclusion amount is taxed at the beginning rate of 46 percent.

What Documents Are Included in an Estate Plan?

A basic estate plan generally consists of the following legal documents:

• Last Will & Testament.  A Last Will & Testament is a legal document in which you identify the beneficiaries (people and/or companies or charities) who will receive your property after your death.  The Will names a person or company to manage your affairs and is responsible to see that your property is distributed as provided in Will.  The Will may also name the guardian(s) of your minor children, the conservator(s) of property that belongs to minor children, make specific gifts of property and include burial instructions.
• Revocable Living Trust.  The term "living trust" is generally used to describe a trust (a) which you can create during your lifetime, and (b) which you can revoke or amend whenever you wish to do so. You can also create an "irrevocable" living trust, but that is permanent and unchangeable and is almost exclusively done to produce certain tax results beyond the scope of this summary.Like a Will, a living trust can provide for the distribution of property upon your death. Unlike a Will, a living trust avoids probate at death.It can also (a) provide you with a vehicle for managing your property during your life, and (b) authorize the trustee to manage the property and use it for your benefit (and your family) if you should become incapacitated, thereby avoiding the court from controlling your assets at incapacity or appointing a guardian for that purpose.
• Advanced Health Care Directive.  An Advanced Health Care Directive is a document in which you may declare who will make healthcare decisions (including mental health care decisions) for you if you are unable to make those decisions for yourself.This document will also state the conditions under which you do not want your life to be prolonged and do not want life-sustaining treatment, beyond comfort care, if that treatment would serve only to artificially delay the moment of your death.  Your Advanced Health Care Directive may also state that if you are in a terminal condition, you do not want cardiopulmonary resuscitation, drugs, electric shock, artificial breathing, artificially administered food and fluids, or to be taken to a hospital if at all avoidable.
• General Power of Attorney for Financial Matters.  This is a document that grants one or more people the power to manage your financial affairs if you become unable to do so or if you want a person to handle these things for you.  The holder(s) of your power of attorney have the legal power to make binding decisions that affect your money, property, and other assets, including, paying your bills and spending your money.  Without a power of attorney, your family may be required to obtain a court-supervised conservator to manage your financial affairs. A power of attorney terminates on your death.

What is a Last Will & Testament?

A Will provides for the distribution of property owned by you at the time of your death in any manner you choose (subject to California’s forced heirship law that prevents disinheriting a spouse and, in some cases, children, unless certain conditions exist).  Your Will cannot, however, govern the disposition of properties that pass outside your probate estate (such as certain joint property, life insurance, retirement plans and employee death benefits) unless they are payable to your estate.

Wills can be of various degrees of complexity and can be utilized to achieve a wide range of family and tax objectives. If a Will provides for the outright distribution of assets, it is sometimes characterized as a simple Will. If the Will establishes one or more trusts, it is often called a testamentary trust Will. Alternatively, the Will may leave probate assets to a preexisting inter vivos trust (created in your lifetime), in which case it is called a pour over Will.  The purpose of the trust arrangement (as opposed to outright distribution) is to ensure continued property management and creditor protection for the surviving family members, to provide for charities, and to minimize taxes.

Aside from providing for the intended disposition of your property to spouse, children etc., there are a number of other important objectives that may be accomplished in your Will.

• You may designate a guardian for your minor child or children;
• You may designate an executor of your estate in your Will;
• You may choose to acknowledge or otherwise provide for other individuals, such as a stepchild, godchild, parent or family friend.

Good planning can also enhance your support of religious, educational, and other charitable causes.

What is a Living Trust?

The term trust describes the holding of property by a trustee (which may be one or more persons or a corporate trust company or bank) in accordance with the provisions of a written trust instrument for the benefit of one or more persons called beneficiaries. A person may be both a trustee and a beneficiary of the same trust. A trust created by your Will is called a testamentary trust and the trust provisions are contained in your Will.

If you create a trust during your lifetime, you are described as the trust's grantor or settlor, the trust is called a living or inter vivos trust, and the trust provisions are contained in the trust agreement or declaration. The provisions of that trust document (rather than your Will or California’s intestacy statutes) will usually determine what happens to the property in the trust upon your death.

A living trust may be revocable (subject to change and terminated by the settlor) or irrevocable. Either type of trust may be designed to accomplish the purposes of property management, assistance to the settlor in the event of physical or mental incapacity, and disposition of property after the death of the settlor of the trust.

What are the Advantages of a Trust?

The reason most people create a trust is so that their assets avoid probate.  Assets that are held by the trustee in trust are not subject to probate and may be managed and distributed by the trustee or successor trustee immediately on the death of the trustor.  The assets held in trust avoid the expense, time and inconvenience associated with probate.

Unlike a probate where everything about the probate estate is a matter of public record open for inspection at the courthouse, trusts can be used to keep confidential the names of the beneficiaries and the nature and value of the property held in trust.

A trust can also be used to eliminate or reduce federal estate taxes.  However, neither of those goals will be achieved unless the trustor actually transfers his or her property into the trust before death.  To get real estate transferred to a trust, the trustor must sign and record a deed conveying the property to the trustee.  The title to other assets must also be changed to name the trustee as the legal owner of the property.

Trusts are not only for the wealthy. Many young parents with limited assets choose to create trusts either during life or in their wills for the benefit of their children in case both parents die before all their children have reached an age deemed by them to indicate sufficient maturity to handle property. This permits the trust estate to be held as a single undivided fund to be used for the support and education of minor children according to their respective needs, with eventual division of the trust among the children when the youngest has reached a specified age. This type of arrangement has an obvious advantage over an inflexible division of property among children of different ages without regard to their level of maturity or individual needs at the time of such distribution.

What is a General Power of Attorney for Financial Matters?

A Power of Attorney gives one or more persons the power to act on your behalf. The power may be limited to a particular activity (e.g., closing the sale of your home) or general in its application, empowering one or more persons to act on your behalf in a variety of situations. It may take effective immediately or only upon the occurrence of a future event (e.g., a determination that you are unable to act for yourself). The latter are "springing" Powers of Attorney. It may give temporary or continuous, permanent authority to act on your behalf. A power of attorney may be revoked at any time by written notice of revocation to the person named to act for you.

The person named in a Power of Attorney to act on your behalf is commonly referred to as your "agent" or "attorney-in-fact." With a valid Power of Attorney, your agent can take any action permitted in the document. Often your agent must present the actual document to invoke the power. For example, if another person is acting on your behalf to sell an automobile, the motor vehicles department generally will require that the Power of Attorney be presented before your agent's authority to sign the title will be honored. Similarly, an agent who signs documents to buy or sell real property on your behalf must present the Power of Attorney to the title company. The same applies to sale of securities or opening and closing bank accounts. However, your agent generally should not need to present the Power of Attorney when signing checks for you.  Click to learn more about Powers of Attorney.

What is an Advanced Health Care Directive?

An Advanced Health Care Directive is your written expression of how you want to be treated in certain medical conditions. This document permits you to express whether or not you wish to be given life-sustaining treatments in the event you are terminally ill or injured, to decide in advance whether you wish to be provided food and water via intravenous devices ("tube feeding"), and to give other medical directions that impact the end of life. "Life-sustaining treatment" means the use of available medical machinery and techniques, such as heart-lung machines, ventilators, and other medical equipment and techniques that will sustain and possibly extend your life, but which will not by themselves cure your condition. In addition to terminal illness or injury situations, most states permit you to express your preferences as to treatment using life-sustaining equipment and/or tube feeding for medical conditions that leave you permanently unconscious and without detectable brain activity.

An Advanced Health Care Directive applies when you grant someone else the authority to make medical decisions in the event you are unable to express your preferences. Most commonly, this situation occurs either because you are unconscious or because your mental state is such that you do not have the legal capacity to make your own decisions. Normally, a single individual is appointed as your health care agent, though quite commonly one or more alternate persons are designated in the event your first choice is unavailable.

Most people think of Advanced Health Care Directives in the more extreme end-of-life situation where a decision to use medical treatments may prolong your life for a limited period of time and not obtaining such treatment would result in your death. It does not mean that medical professionals would deny you pain medications and other treatments that would relieve pain or otherwise make you more comfortable.