Andrew M. Meinzer
Attorney & Counselor at Law
3848 West Carson Street
Torrance, CA 90503
(310) 375-3350 Fax (310) 375-3550
December 8, 2007
This brief synopsis is to provide an understanding of basic estate planning based on California law. It necessarily touches on other subjects, including Probate, Powers of Attorney, and Conservatorships.
The purposes for having a good estate plan are many. A good estate plan provides for distribution of one’s assets on death to chosen persons and entities. Ideally, a good estate plan will avoid the time and expense of Probate, and for married couples, it will minimize estate taxes payable on death. The most important—and often overlooked—purposes for having a good estate plan, however, are to provide during a period of incapacity (1) a vehicle through which one’s assets can be managed for his or her benefit, and (2) a mechanism for one’s health care decisions to be made according to his or her wishes.
If one dies without a Will, one is said to have died “intestate.” If one dies intestate, then his or her assets will go through a formal Probate, and they will be distributed to his or her “heirs at law” according to the statutes contained in the Probate Code. In other words, when a person dies without a Will or a Trust, his or her assets will be distributed to his or her family as provided by law, regardless of whether that result was desired.
If one dies with a Will, one is said to have died “testate.” If one dies testate, then his or her assets are distributed by the Executor named in the Will to the persons and entities named as beneficiaries of the Will.
Some of the benefits of dying testate are obvious. One is able to choose the Executor to carry out the terms of the Will; in contrast, with intestacy, anyone can serve as Administrator of the Probate administration, although there is a preference for family members. Further, with a Will, one is able to provide for distribution of assets in the way he or she desires, including make specific gifts of property to specific persons and entities.
Other benefits of dying with a Will are less obvious. If one has minor children, he or she can nominate a Guardian in the Will to provide care to such minor children after the parent dies. Similarly, one can streamline the Probate process (thus minimizing the time and cost) by specifically authorizing his or her Executor to administer the Estate according to the Independent Administration of Estates Act. Further, through a Will, one can waive the normal requirement that the Executor post a surety bond to protect the assets of the Probate; waiving the bond requirement could be beneficial to the beneficiaries of the Will because the cost of the bond is borne by the assets of the Probate Estate.
A Will, however, provides no benefit during life because it remains dormant until the death of the person that executed it. Further, a Will does not avoid the time and expense of Probate, although as discussed above, it can streamline the Probate process.
The parties to a Will are as follows:
a. The Testator is the person that executes the Will.
b. The Executor is the person named in the Will to carry out the
terms of the Will.
c. The beneficiaries are the persons named in the Will to receive
distributions on the death of the Testator.
A Will must satisfy certain requirements to be valid and enforceable.
Specifically, the Testator must have “testamentary capacity.” Testamentary capacity is understanding the nature of the act of signing a Will, having familiarity with one’s assets, and having knowledge of one’s relatives.
A Will also must be in writing. A formal Will must be signed by the
Testator and two witnesses being present at the same time, witnessing the Testator sign his or her name and acknowledging that the Testator understood that the document is a Will. Beware of preprinted forms at office supply stores and on the Internet because they often due not comply with local laws.
Regardless whether one dies intestate or testate, there will be a Probate. A Probate is a formal court proceeding designed to pay a decedent’s debts and then distribute all of the decedent’s remaining assets.
The Probate process is time consuming because the Probate court generally closely monitors the acts of the Administrator or Executor of the Estate, and he or she must obtain prior court approval of many acts. Further, obtaining such prior court approval means that the attorney for the Administrator or Executor must prepare a petition and file it with the court requesting court approval, and then after the petition is filed with the court, the parties must wait weeks or months for the court to hear the petition. A typical Probate lasts at least one year in California.
The Probate process can be costly. The Executor or Administrator is entitled to a fee for his or her services, and such fee is a percentage of the assets of the Probate estate. Similarly, the attorney for the Executor or Administrator is entitled to the same percentage fee, plus possible extraordinary fees for extraordinary services. With the high value of real estate in California, fees based on a percentage of the assets can be very high. Further, additional costs of a Probate include fees to file petitions with the court and the cost of the surety bond.
Revocable Living Trust
A Revocable Living Trust is designed to avoid the time and expense of Probate, minimize estate taxes payable on death (for married couples), and provide a vehicle through which one’s assets can be used for his or her benefit and one’s health care decisions can be made according to his or her wishes if incapacitated.
A Trust is an arrangement through which one person or entity manages property for the benefit of another person or entity. A Trust is a Living Trust when it is effective during the life of the person that created it. Further, a Trust is Revocable when the person that created the Trust retains the power to terminate the Trust or modify its terms. Thus, a Revocable Living Trust is an arrangement through which one person or entity manages property for the benefit of another person or entity when the arrangement is effective during the life of the person that created it, and he or she retains the power to terminate it or modify its terms.
The parties to a Trust are as follows:
a. The Settlor (or Trustor) is the person that creates the Trust.
b. The Trustee is the person that manages the property of the Trust according to the terms of the Trust.
c. The beneficiaries of the Trust are the persons or entities that benefit from the Trust (received distributions of property from it).
A Trust generally will have an initial Trustee followed by Successor Trustees designated to assume responsibility after the initial Trustee is unable or unwilling to do so.
Similarly, a Trust generally will have a primary beneficiary followed by contingent beneficiaries. Usually, the contingent beneficiaries would receive no distributions of property from the Trust unless or until termination of property distributions to the primary beneficiary.
As with a Will, the Settlor must have capacity when executing a Trust, and the Trust must be in writing. In contrast to a Will, however, a Trust must have property; this requirement will be discussed in more detail below.
Trusts exist in many varieties. There are Living Trusts (i.e., effective during the life of the person creating it), and there are Testamentary Trusts (i.e., contained in a Will and ineffective until the death of the person creating it). There are Revocable Trusts (i.e., subject to modification and termination by the person creating it) and there are Irrevocable Trusts (i.e., generally not subject to modification or termination by anyone). Similarly, different kinds of Trusts are employed to satisfy different kinds of goals.
This synopsis, however, is focused on the Revocable Living Trust designed to avoid the time and expense of Probate, minimize estate taxes payable on death (for married couples), and provide a vehicle through which one’s assets can be used for his or her benefit and one’s health care decisions can be made according to his or her wishes if incapacitated.
Generally, a person (or a married couple or domestic partners) creates a Revocable Living Trust and makes himself or herself the initial Trustee and the primary beneficiary. Thus, after transfer his or her property into the Trust, he or she continues to manage the property (as Trustees) for his or her benefit (as the primary Beneficiary) just as he or she did before creating the Trust.
In addition, he or she names contingent Beneficiaries to receive the Trust property on his or her death, and names Successor Trustees to assume the management responsibility if he or she loses capacity or dies. Thus, the Revocable Living Trust provides a mechanism for transferring property directly to beneficiaries on death without a Will or a Probate. And it provides a mechanism for management of one’s property for one’s benefit during life on loss of capacity because the person that creates the Trust is usually the primary Beneficiary, and the Successor Trustees will assume responsibility for managing the Trust property for him or her on incapacity or death.
Because the Successor Trustees will have great authority, the Settlor must exercise great care in selecting Successor Trustees. The Successor Trustees must be responsible and trustworthy. Further, one or more of the Successor Trustees should be younger than the Settlor (especially when the Settlor is a senior citizen) to ensure availability of the Successor Trustee to carry out the terms of the Trust after the death of the Settlor.
To be effective, the Trust must be funded. A Trustee has authority over, and the terms of the Trust apply to, only those assets that are funded into the Trust. In other words, after a person creates a Revocable Living Trust, he or she must change title to his or her assets from his or her name to the name of the Trust. This requirement is generally a mere formality with a Revocable Living Trust because the Settlor usually serves as the initial Trustee; thus, the Settlor transfers his or her assets to himself or herself as Trustee of the Trust. Although it may be a mere formality, it is imperative that such transfer be accomplished. If it is not, then the Successor Trustees will have no assets over which to exercise control in order to manage them for the benefit of the Settlor (on the Settlor’s incapacity) or to distribute them to the Contingent Beneficiaries (on the Settlor’s death).
The nature of a Revocable Living Trust is such that it is nearly transparent during the life of the Settlor. Real property transferred into the Revocable Living Trust is not reassessed for purposes of property taxes. Further, the Settlor will continue to file individual income tax returns. Similarly, the Settlor need not apply to the Internal Revenue Service for an Employer Identification Number; rather, the Settlor will continue to file tax returns under his or her own Social Security Number.
Further, for married couples, property transferred to a Revocable Living Trust maintains its character as either separate property or community property.
Another benefit of a Revocable Living Trust is that it is mostly private. The only people entitled to know of the Revocable Living Trust’s terms are those people interested in the Trust. In contrast, with a Probate, the terms of the Will and all petitions filed with the court become part of the public record; further, court hearings occur in court rooms that are open to the public.
Documents in Support of Revocable Living Trust
Because the Revocable Living Trust must be funded to be effective, a good estate plan will include a Schedule of Assets, a “Pour-Over Will”, and a General Assignment of Assets. Without going into detail, each of these items is designed as a back-stop in case the Settlor does not transfer title to one or more assets into the name of the Revocable Living Trust. In such case, these items are available to ensure that all assets are transferred into the Trust—even after the Settlor has died.
Many people seek to have their property distributed on death to intended recipients by making such intended recipients joint tenancy owners of property. Although joint tenancy ownership can accomplish this goal, it generally should be avoided as an estate planning technique.
One loses control of an asset when he or she makes another person a joint tenant of the asset. Making another person a joint tenant effectively conveys to that person a present ownership interest in the property. Consequently, creditors of that person could seek satisfaction from the joint tenancy property. This fact is especially problematic for a senior citizen that makes a child or someone else a joint tenant to the senior citizen’s home. If the joint tenant becomes bankrupt or divorced or has other creditors, there is a very real chance that the senior citizen could lose his or her home in satisfaction of the joint tenant’s obligations.
Further, compared to receiving the property as an inheritance on death,
there are negative tax implications for the person made a joint tenant. An explanation of such negative tax implications are beyond the scope of this synopsis, however.
Another use of joint tenancy occurs frequently with senior citizens. Unable or unwilling to manage their own finances, senior citizens often place a child’s name on a bank account as a joint tenant. Usually, the reason for doing this is to empower that child to manage finances and pay bills for the senior. The problem is that senior citizens too often do not realize that, by doing so, they have done estate planning. In other words, due to the nature of a joint tenancy interest, the child that is made a joint tenant of a bank account will receive all of the property in the bank account on the senior citizen’s death—to the exclusion of any other children or relatives of the senior citizen.
For these reasons among others, joint tenancy ownership should be avoided as an estate planning and property management technique. The better alternative is to place all assets into a Revocable Living Trust for the benefit of the senior citizen. Any assets that are left outside of the Revocable Living Trust can be managed for the senior citizen’s benefit through a power of attorney.
Powers of Attorney
A Power of Attorney for Financial Management is a document wherein one person (called the Principal) names one or more persons (called Agents) to manage his or her finances for him or her on incapacity. A good estate plan will include a Power of Attorney for Financial Management as a means for managing a person’s property that is not transferred into the Revocable Living Trust.
A Power of Attorney for Health Care is a document wherein one person (again, called the Principal) names one or more persons (again, called Agents) to make his or her health care decisions for him or her on incapacity. A good Power of Attorney for Health Care will also include an Advance Health Care Directive stating desires regarding medical treatment. With a good Power of Attorney for Health Care, the Principal has named Agents to make health care decisions for him or her, and in addition, has provided specific guidance in writing to ensure that the Agent acts consistent with the desires of the Principal.
Without a good estate plan consisting of a Revocable Living Trust and Powers of Attorney for Financial Management and Health Care, an individual that loses capacity to manage his or her own finances and personal care will likely require a Conservatorship. Unless one has named Successor Trustees of a Revocable Living Trust or Agents of Powers of Attorney, there is nobody with authority to make decisions for him or her—not even his or her spouse or domestic partner.
In such a case, establishing a Conservatorship is the only way for anyone to gain authority to make financial and healthcare decisions for a person lacking capacity. Like a Probate, a Conservatorship is a formal court proceeding; however, in the case of a Conservatorship, the court appoints a person or entity as Conservator to make all of the decisions for the person lacking capacity (the Conservatee). Further, the Conservatee is stripped of all rights to act on his or her own behalf.
Like a Probate, a Conservatorship is time consuming and costly because of constant court supervision and the requirement that many acts to be taken for the Conservatee’s benefit require prior court approval. As discussed above regarding Probate, obtaining such prior court approval means that the attorney for the Conservator must prepare a petition and file it with the court requesting court approval, and then after the petition is filed with the court, the parties must wait weeks or months for the court to hear the petition.
A Conservatorship endures until either the Conservatee regains capacity, or more likely, until the Conservatee dies.
Every adult with substantial property (e.g., in California, a house alone is substantial) should have a good estate plan, especially if he or she is approaching the age when medical conditions can lead to a lack of capacity or death, or if he or she has a minor child that will need to have a care provider in the event that the parent loses capacity or dies.