Introduction to California Estate Planning

Transcription

1 The Law Office of Joshua K. Merkel Introduction to California Estate Planning 1

2 INTRODUCTION TO CALIFORNIA ESTATE PLANNING A free resource created and provided by the Murphy Canyon Road Suite 100 San Diego, CA Tel: (619) Fax: (619) Estate Planning Asset Protection Business Planning 2

3 TABLE OF CONTENTS 1. Introduction What is Estate Planning Major Advantages Protect Your Assets Protect Your Family Avoid Probate Avoid or Minimize Taxes Plan for Your Incapacity Understanding Your Finances Main Estate Planning Documents Wills Types & Requirements Pourover Wills The Probate Process Trusts Revocable Irrevocable Trust Administration Other Important Planning Documents Power of Attorney Advance Health Care Directive About Us Disclaimer

4 1. INTRODUCTION I created this PDF as a free resource for Californians interested in learning about estate planning basics. Many people have friends or relatives that have estate plans, and have a general idea that plans are important, but yet take no action because they are largely unaware about the process. My hope is to eliminate some of the mystery, fear, and anxiety associated with estate planning and show people that an estate plan should be an integral part of an adult s life. The more you know about estate planning, the better estate planning decisions you ll make. Of course, you should work with an experienced attorney to get your plan in order and rely on his or her expertise in recommending a plan tailored to your goals. However, having a good understanding of the process and of the different planning tools available will allow you to effectively communicate your goals to your attorney. The end result? A superior estate plan. 2. WHAT IS ESTATE PLANNING & WHY IS IT IMPORTANT? I assume that you re reading this because either you know creating an estate plan is important, or you want more information to decide if a plan is a good option for you. In the vast majority of instances, some form of estate planning should absolutely be part of your life. First, let s talk about what estate planning is and then discuss why it s important. Creating an estate plan is the process of identifying and categorizing your assets and finances in a purposeful, tailored way. Things like real estate, bank accounts, and family heirlooms are what one typically think about as being part of an estate, but also included are insurance policies, retirement plans, tax considerations, incapacity, and debt (to name a few). Estate planning involves managing your real and personal property while you re alive, and controlling what happens to all of it when you aren t. It s a process that will go exponentially smoother if you compile a team of professionals and experts: a CPA, financial planner, insurance agent, and of course, attorney. What you may pay them now can save your estate tens or even hundreds of thousands of dollars down the road. Working with your team will allow you greater control of your estate today, and will ensure that your loved ones are provided for in the manner in which you want. Estate planning is certainly not a process reserved for the wealthy. Rather, the earlier you begin planning your estate, the easier it will be to control your assets, protect your loved ones, and enjoy your estate during your lifetime. 4

5 2.1. The Six Major Advantages of Estate Planning A complete list of each and every benefit of estate planning would be several pages long. So instead of giving you that list, I ve identified the six major advantages of establishing your estate plan. These advantages include the ability to control your assets; protect your family; avoid probate; avoid or minimize taxes; plan for your potential incapacity; and understand in detail your financial situation Control Your Assets Perhaps this aspect is what most people think of when they hear estate planning. Having the ability to take control of your estate is the fundamental purpose of planning. In fact, if you die without a will or a trust (which is referred to as dying intestate ) your estate will be distributed by the court according to the Probate Code. This can result in, for example, estranged relatives receiving significant portions of your assets. However, by creating an estate plan, you decide who gets what, not the state Protect Your Family If you die and have minor kids, how will you make sure they re provided for? What if you child has special needs? By creating an estate plan, you can name a guardian for your children. You can also create a conservatorship, set up a trust for a minor s benefit, or create a special-needs trust for a disabled child. An estate plan can do all this, and more, and will ensure that your kids are protected Avoid Probate Probate is a process where the court oversees the distribution of you estate according to your will (discussed in greater detail below in section 3.1.3). The process can take well over a year, and because of related attorney and administrative fees, is very expensive. Further, the process is public, so personal family dynamics may no longer be family secrets. Using a trust-based estate plan will avoid probate, saving time, money, and frustration Avoid or Minimize Taxes Federal estate taxes are steep and can substantially reduce the extent and value of your estate. So can gift taxes. If your estate is potentially subject to taxes, proper planning can reduce or completely avoid your would-be tax liability. Give loved ones or charities your assets, not the government! 5

6 Plan for Your Incapacity People are living longer these days, and with longer life expectancies come increased chances of incapacitation. If you become incapacitated and do not have a comprehensive estate plan in pace, you d have to endure the cost and potential embarrassment of court proceedings to appoint your conservator. Using a trust and an advanced health care directive, you can ensure your affairs will be handled as you intended, outside of court Understand Your Finances For an estate planning attorney to recommend a strategic plan, you need to provide detailed, allinclusive information about your finances. Doing this forces you to truly understand the state of your finances, gaps in insurance, need for tax & accounting help, and/or financial planning advice. While tedious, it s absolutely necessary and will uncover issues at a time that they can be fixed. Being able to understand and appreciate the state of your financial affairs will substantially reduce unwanted surprises in the future. 3. MAIN ESTATE PLANNING DOCUMENTS An estate plan is controlled by one main document, which is either a will or a trust. Whether you have a will-based or a trust-based estate plan should be a decision made with the assistance of an experienced estate planning attorney as each has its own advantages and disadvantages. Your objective should be to establish a plan that gives you the best ability to realize your own specific goals Wills Simply defined, a will is a legal document that sets forth how you want your property handled when you re no longer around. It is a fundamental estate planning tool, and every estate plan should include a written will in one form or another. Wills are testamentary, which means they are triggered only upon your death (unlike revocable trusts, discussed below). Generally speaking, wills are less complex to draft as compared to trusts. This means wills are usually marginally less expensive to have created by your attorney. In some cases, if your estate is small enough, meaning it s under a certain monetary amount, a will could be all you need for estate planning purposes. As of this writing, the statutory amount set in California is $150,000. That means if your estate is worth $150,000 or less, you may be able to avoid full probate (the 6

7 probate process is discussed below). If the value of your estate is greater than $150k, and probate will likely be necessary, a revocable trust plan is very likely more suitable. Also, a will can be used in ways that a trust cannot: e.g., burial instructions and appointment of a guardian for minors cannot be included in a trust. This shows again that even if you chose to have a living trust as your primary estate planning tool, a will is still necessary. You should also know, though, that not every piece of your estate can be included in a will. For example, certain community property, pay-on-death accounts, retirement plans, and life insurance policies already have built-in beneficiaries, so a will cannot control the disposition of these items. Another key aspect of a will is that while you re still alive, you are free to change or revoke your will in parts or in its entirety. So as you experience life changes, like the acquisition of real estate of the birth of a child, you can easily revise your will to accommodate these things. Adequate will drafting should include instructions for handling of your property as it presently exists, and should also anticipate changes to the estate, which is where an attorney s expertise comes into play. In a nutshell, the above are the basics of a will in California. Most estate plans use wills in combination with other planning devices, but the will remains a necessary aspect of proper, careful estate planning Types & Requirements In California, there are some different will types. These include witnessed; holographic; statutory; and uniform international wills. A witnessed will is the traditional will prepared by your attorney. It is a typed document that must comply with certain requirements to be held legally valid, such as being signed by the testator (person whose will is being signed), and being witnessed simultaneously by at least two people who know that the document being signed is actually a will. Today, witnessed wills are very common methods of creating a will. A holographic will is a will that is handwritten by the testator. This kind of will does not need be to witnessed, but the material provisions need to be written and signed entirely in the handwriting of the testator. California also has a statutory will, which can be found in the Probate Code in section Statutory wills can also be found at the California State Bar s website, as well as in stationery stores. These types of wills are very basic, but can be very useful in certain limited circumstances. And, you can complete one for free, which is obviously another benefit. And next there s the uniform international will. These wills can be useful if you 7

8 have property or live in another country, and were created under the Uniform International Wills Act Pourover Wills A pourover will is used in concert with a revocable trust as a precautionary measure. It acts as a safety net, catching all the property and assets that you forgot or failed to include in your trust, and then pours those assets into the trust. Here s a (simplified) example: you set up a revocable trust into which you transfer all your assets, which includes a house and $100,000 in cash. Three years later you buy a small vacation home, but fail to title that home in the name of the trust. As a result, the vacation home is not considered part of the trust. Then two years later, you die. If you had a pourover will in place, it would catch the vacation home and pour it into the trust. Once the assets are poured into the trust, they will be administered by the terms of the trust. It s important to also note that if the amount of assets in the pourover will is greater than $150,000, they will have to go through the full probate process. This fact alone should give you enough incentive to ensure that you transfer all necessary property into your trust. If you have an existing trust, make sure you have a pourover will in place. It s a simple document that can save your family unnecessary frustration and confusion The Probate Process Any discussion of wills in California would be incomplete without reference to the probate process. Probate in California gets a bad rap. People view the probate as a lengthy, expensive, and stressful process, and unfortunately, it certainly can be. Probate is when the court supervises the administration of a decedent s (person that has died) estate. Probate is necessary whether or not a decedent died with a will (called dying testate ) or without one (called dying intestate ). If you have a trust-based estate plan however, the probate process is usually avoided, and the estate is distributed through the trust administration (see section , below). Probate is a continuous process that begins when a Petition for Probate is filed with the court. Probate ends when the court issues the final discharge. However, depending on the size of the estate, a lot of things must occur between the start and finish, and there are several opportunities for someone to contest the will, delaying the process even further. 8

9 Once all necessary individuals and entities have been notified of the probate, there is a court hearing, where the court makes sure everyone has been properly given notice of the hearing and that the will (if there is one) is legal and valid. If the court is satisfied that all the mandatory requirements are met, it will issue and order admitting the will to probate (again, if there is one) and will approve the executor. The executor is the person who is responsible for identifying the estate assets, distributing those estate assets to the beneficiaries, paying any taxes, and generally putting the will into effect. The court will also oversee the actions of the executor to make sure the distribution goes as it should and once the distribution has been completed, the court will issue a final Discharge order, which ends the probate process. Probate in California is a long process that requires patience. Since beneficiaries, heirs, creditors, and others can dispute actions taken during probate, the process can be made much longer, ultimately delaying the distribution of assets to the beneficiaries. The procedure is complex, and even with modestly sized estates, it s a great idea to have an attorney help you through the complexities. However, probate can be avoided in its entirety with a revocable trust. So, if your estate is controlled by a trust instead of a will, the court will not be a default part of the distribution of the trust assets Trusts Trusts have become very popular estate planning tools in California. The two types of trust are revocable trusts (also called living trusts), and irrevocable trusts Revocable Trusts A revocable trust, like a will, is a very commonly used estate planning tool. Revocable trusts allow you to organize and manage your property during your lifetime, but their primary purpose is as a means to distribute your property after you die. As its name implies, these trusts are freely revocable by the settlor (person for whom the trust is created). So, again like a will, you can change the language and contents of your revocable trust whenever you d like while you re alive. Unlike wills, revocable trusts are not testamentary, meaning they are implemented during your lifetime not only upon your death. One of the best reasons to create a revocable trust is probate avoidance. Probate is discussed above, and is the process by which the courts oversee the distribution of your estate; for example, if you have a will, the court ensures that your intentions are lawful and are carried out. The probate process is long, commonly lasting a year or more, and as such can get very expensive as 9

10 administrative and legal fees accrue. With a trust, your family saves the time, cost, and frustration of the probate process. Also, probate is a public proceeding, so you can keep your estate and family dynamics a bit more private with a trust. The other major benefit of using a revocable trust is seamless property management if you become incapacitated. With a trust, you can appoint a successor trustee that will step into your management role when you are no longer able. Why is this important? Because if you only have a will and become incapacitated, you have to go through the expense and time of conservatorship proceedings. So, generally speaking, a revocable trust can be a very useful time and money saver for your estate. Revocable trusts are not without a few minor drawbacks, though. Trusts are more difficult to draft and create than wills, so they re usually more expensive. Furthermore, property put into a trust must be re-titled to be in the name of the trust. This can be a time consuming endeavor. There are also records and accountings that must be timely and regularly maintained regarding the trust, which may be considered tedious. Finally, there may be instances in which you would actually want your estate to be probated. For example, if you have a contentious family where despite proper planning you foresee disputes and disagreements over the distribution of your estate, then allowing the court to intervene may actually be more efficient than otherwise. In all, revocable trusts should absolutely be considered when you begin planning your estate. Their relatively minor drawbacks are far outweighed by their advantages Irrevocable Trusts Irrevocable trusts share the fundamental planning purpose of revocable trusts, which is to transfer property to a trustee who oversees the trust and distributes the trust property to the beneficiaries. However, there are significant differences between irrevocable and revocable trusts. In general, irrevocable trusts are not as commonly implemented as revocable trusts because they are useful in only certain, limited instances. Once you put part of your estate into an irrevocable trust, you lose your rights to that property. Unlike a revocable trust, where you remain in control of your estate up until your death, the assets put into an irrevocable trust are immediately considered to be removed from your estate. In addition, and perhaps more significantly, the person who gives up the property may be subject to immediate gift taxes. And, when you irrevocably part with pieces of your property, you are no longer able to enjoy that property and you can no longer use that property in the future. So, for 10

11 example, if you put a chunk of money into an irrevocable trust for the benefit of your children, you want to be confident that you will continue to have sufficient funds on which to live should the unexpected occur, like an unforeseen layoff or illness. So, what are the benefits of irrevocable trusts and why are they used? When you decide to place assets into an irrevocable trust, as stated above, those assets are immediately removed from your estate. So, when you die, your estate has already been diminished by the amount of the property in the irrevocable trust. Herein lies the benefit of this type of instrument the property held in your irrevocable trust will not be part of your estate for estate tax purposes. Accordingly, removing property from your estate can reduce the value of your estate for tax purposes, saving money as a result. In a related vein, irrevocable trusts are also useful to reduce your income tax. If you put an income-generating asset into an irrevocable trust, that income will no longer be yours for income tax purposes. This, again, results in tax savings. Irrevocable trusts are complex things. They are tricky to draft. They require a lot of planning and intelligent cost-benefit analyses. While they may lead to tax savings for the person creating the trust, such savings may be moot if the resulting gift taxes levied against the beneficiaries are excessive Trust Administration Trust administration accomplishes the same basic tasks as probate: making sure a decedent's property goes where it should in accordance with his or her wishes and with applicable law. The major difference between trust administration and probate is that the administration of a trust is not a court-supervised activity. In practice, this means that trust administration is generally much quicker and cheaper than probate. This reason alone is why many people prefer trusts-based estate plans. Trust administration is undertaken by the trustee of the trust. Trustees are specifically named in the trust document, and can be your relative or, trustees can also be institutions like a bank who specialize in trustee services or a professional fiduciary. Once the decedent dies, the trustee will find and inventory all of the property that was in the trust and have it appraised. Getting the assets appraised will give the trustee the ultimate value of the estate, and depending on the value, the trustee is also responsible for ensuring all necessary tax returns are filed. Trust administration also entails dealing with the beneficiaries and heirs, sending notices of the 11

12 decedent's death, and at all times acting according to what the trust states. All of these duties, and many others, comprise what is called the trustee's "fiduciary duties." These duties are established by the California Probate Code and are taken very seriously by the courts. Many trustees are unfamiliar with the administration process, as well as all the laws that govern it. Even the best intentioned trustees can make mistakes, and these mistakes can become the basis for a lawsuit against the trustee. That is why choosing your trustee is such an important decision. 4. OTHER IMPORTANT ESTATE PLANNING DOCUMENTS In addition to wills and trusts, a complete estate plan should include a few other documents. These include a power of attorney and an advance health care directive Power of Attorney Preparing for the potential of your incapacity is an essential element of a properly developed estate plan. A power of attorney allows you to nominate another person to manage your finances if you are unable to do so yourself. So, if you become incapacitated but have a power of attorney in effect, your estate will still be controlled by someone you trust. There are a few different types of powers of attorney, and each should be drafted to meet your specific needs. These different types include general, limited, durable, and nondurable powers of attorney. It should also be noted that powers of attorney are freely revocable. General powers of attorney grant another person the very broad authority to manage your property and conduct business on your behalf. Limited powers of attorney, on the other hand, allow a person to act on your behalf in only certain, discrete ways according to the explicit authority you grant him or her. Durable powers of attorney are those created upon your incapacitation, and which remain in effect thereafter. Conversely, nondurable powers of attorney are those that are created for a specific period of time or for a specific event. For example, if you are in Europe for business and are unavailable to sign an important document, you can allow someone to sign on your behalf. When that single event is complete, the power of attorney ceases. Finally, powers of attorney can be drafted to be effective immediately, or effective upon incapacitation. The authority granted by a power of attorney document can include, for example, the power to handle real estate; secure loans; collect from creditors; pay off debt; access a safe deposit box; 12

13 create, modify, or revoke a trust; name beneficiaries; handle insurance and retirement accounts; fund a trust; and make or revoke gifts. As mentioned above, powers of attorney are an essential element of a comprehensive estate plan. They re relatively simple documents that are worth their weight in gold Advance Health Care Directive Health care planning, in the context of estate planning, refers to the instructions you provide about end-of-life and other related decisions. Like powers of attorney, health care planning allows you to ensure your wishes are met even if you are incapacitated or otherwise unable to impose your wishes yourself. The primary way to record your health care plans, and make them legal and enforceable, is through an Advanced Health Care Directive. With an advanced directive you can nominate a conservator; ensure that your treatment is provided by certain doctors or hospitals; allow or refuse medical testing and / or surgery; make clear your wishes about being kept on life support; make clear your wishes for pain relief medication; order an autopsy; order the disposition of your bodily remains (burial, cremation, e.g.); and donate organs. Note that there are pre-formatted forms that you can complete yourself. One such form is a statutory form, which is free and the other is one promulgated by the California Medical Association, which is not free. The CMA form is very widely used in California. 5. ABOUT US I m Josh Merkel, the principal and founding attorney of my law firm, the. You can find my website at You can Like me on Facebook at and follow me on Twitter at While I currently devote my practice exclusively to estate planning, asset protection, and business planning, and have for years, I have a diverse legal background. To the benefit of my clients, the diversity of my background makes me a more capable estate planning attorney than most. I ve litigated hundreds of 13

14 cases, representing both plaintiffs and defendants, as well as representing insurance carriers and government entities. Perhaps more significantly, I ve litigated several will contests and trust dispute cases. My litigation background has significantly informed my estate planning practice as I ve seen firsthand how creditors try to get to assets, how poorly-worded estate plans can create lengthy and contentious litigation, and how economics can drive litigation instead of factual merit. This extensive, real-world legal background has given me a unique perspective when counseling my clients on their estate plans, and allows me to draw on my substantial experience to creatively meet my clients' legal needs and avoid the pitfalls that may be unanticipated by less skilled counsel. 6. DISCLAIMER The materials in this document are intended to be for informational purposes only and are not intended to be treated as legal advice. Each legal problem depends on its discrete, specific facts, and different jurisdictions have different laws and regulations. Because of these differences, you should not act or rely on any information from this document without seeking the advice of a competent attorney licensed to practice law in your jurisdiction. The attorney(s) of the Law Office of Joshua K. Merkel practice primarily in California. The firm makes no representation that materials on this web site are appropriate or available for use in jurisdictions other than California. In the event the materials do not comply with the rules of a particular jurisdiction, the firm is unable to assume representation that would otherwise arise from that communication. Per IRS Circular 230: any U.S. federal tax advice or statement(s) provided in this site are not intended or written to be used, and cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein. 14

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