Estate Planning FAQs And Myths
Question: I already had a Will prepared, isn’t that enough?
Answer: Chances are (and based on the type of assets you own), it is not. The misconception has often been portrayed in the movies where a recently departed person’s Last Will & Testament is dusted off and the lawyer, with the family all huddled around, reads out what is “bequeathed” or passed down to each of them. This is often followed by a gasp as they find out that a majority of the extensive wealth has been left to the butler or pet dog. Again, this is Hollywood and far from reality. The process does not unravel itself or function as smoothly as just that – an expedited reading, telling who gets what. The key thing to remember is that if you have or don’t have a Will, in theory, your estate falls within the purview of the Probate Court. The Probate Court is the forum or ruling power handling and administering estate matters. In other words, with or without a Will, an estate of even modest means (gross estate consisting of certain assets totaling over $150,000 in CA) must eventually go through a process called Probate. With proper planning, Probate can be avoided. In almost all circumstances, this is a goal one should strive for. Perhaps the only limited context where one would not want to shy away from probate is one in which there is severe family strife or turmoil. In that context, the testator (person for whom the will is written) may want future Court involvement and intervention since the proceeding would be a public one and carried out through the legal system. Short of the limited aforementioned situation, most people would opt for and prefer privacy when it comes to the confidential nature of such matters and if so, the alternative known as a revocable living trust should be carefully considered.
Question: So, what is “Probate”?
Answer: Probate is the process or preceding that takes place when someone dies with or without a Will (with a gross estate of certain assets totaling over $150K, in California) and possibly in a limited context, with a Living Trust, which is not properly funded (more on this in the Pour-Over Will section). Before the decedent’s property can be distributed or passed-on to who they have selected in the instrument (Will) or by law (intestate succession), time basically stands still. The court then sets a probate period, meaning that the court halts distributing the assets of the person who has died until legal title to the decedent’s assets/property has been cleared. The probate court declares through publication (in the local paper where the decedent resided), “Come one, come all and claim your interest in so and so’s estate for they have died and you may be owed….” This is a chance for creditors (those that are owed money) to come forward, collect what may be owed to them, and then the remainder or what may be left will be distributed to the heirs/family, etc. Each state has a different value threshold over which probate becomes a necessity. In California, the current amount is over $150,000. You may be asking, so what is so bad about this? If I were to tell you that probate matters have taken as long as several years and tend to average nearly one year in California, what is the next conclusion you can make? Yes, you got it; with dragging-out a legal process comes a hefty price tag paid to probate attorneys and the “system.” Not only are you paying for the attorneys but also the Executor (also referred to as the Personal Representative), the court and all the fees/costs associated with its procedures (e.g. publication, filing fees, etc.). It has often been cited and illustrated that at the end of the entire roller-coaster process, a large sum that would have gone to the loved ones gets “skimmed off top” to pay for the aforementioned costs and fees. In fact, California, under Probate Code Section 10810, has set a matrix or statutory fee schedule. It looks something like this:
- 4% of the first $100k,
- 3% of the next $100k,
- 2% of the next $800k,
- And on…
In other words, for a probate estate with a gross value of $1M, the attorney fees would total $23,000. But one does not stop there since the executor is also paid for his/her services and time and thus, can be entitled to the same schedule of fees. This would mean another $23,000 to him/her. Already, $46,000 has been taken from the top just to pay for these two fees. In addition, one thing to keep in mind is that the word “gross” was used to describe the value of these assets subject to probate. This is a very important distinction to make and keep in mind.
The “probate estate” would be a gross value and snapshot of the decedent’s owned real/personal property that is subject to the authority of the probate court at his/her death. This means that debts, liens, and liabilities would be included in the tabulation of the “gross” amount. For example: assume that all you own is a home in your individual name worth $500,000 of which you have a $300,000 mortgage. The gross value and probate estate would be based on the $500,000 value of the home even though you in theory have only built $200,000 in equity and the rest is still owed. The aforementioned exorbitant fees associated with the probate process would be based on this “false” sense of the asset’s full value when in theory little of it is really “yours.” So, the attorney handling the probate could be paid $13,000 for fees and services as would the Executor = $26,000 off of the amount owned in actuality by the decedent ($200,000). It is no wonder that people often smirk at the mention of the word “probate.”
Not to mention, probate has a cost higher than just dollars. It is a public record. You can basically walk down to your county courthouse and pull-up the worth, debts, and who got what of people who died with a Will. Added to this, the most significant ramification of probate to many is the emotional impact that the process can have. Let’s face it. A loved one has passed. How can the healing process take place when the probate process can be stretched over a span of a few years in which you have to settle the estate of the dearly departed? There is an alternative to probate: avoid the hassles, costs, and heartaches associated with probate through a
Living Trust, also referred to as a Revocable Living Trust, inter vivos (Latin for “between the living”) trust, etc.
Question: Is “Probate” the same thing as what I hear called “estate tax”?
Answer: No. People many times mix the two terms up and think that they are interchangeable or the same. They are not. Probate is the process of clearing or establishing clean title to property or an asset, paying off any creditors, and establishing the validity of the Will before what is left can be distributed out. Estate taxes are what the federal government could impose based on an estate’s worth/value. As of 2017, Congress has permitted exclusion of $5.49 million per person. But, it is important to bear in mind that as of 2017, any amount over the exclusion would be taxed at a maximum rate of 40%. Thus, a rather large amount will be taken out of the pie once you exceed the exemption amount. Can anything be done to minimize this tax liability? Yes, proper estate planning provides an answer by permitting a married couple to retain both of their estate tax exclusion amounts. This is further explained in the Living Trust section. Side note: Although tax planning can also be done in a will that must go through probate. Based on the scenario and worth of an estate and the lack of planning associated with it, an estate could be subject to probate (i.e. assets subject to probate exceeding $150K) but not federal estate taxes (since the estate is less than $5.49M). Or, if valued at over $5.49M, an estate could be subject to federal estate tax (since it exceeds the exemption amount) but not have to go through probate (assets not of the type subject to probate or all in trust). An alternative, unfortunate, and worst case scenario that can occur, is where the estate is subject to both federal estate taxes and also must go through probate. The key thing to remember is that the two terms are not synonymous. Probate and federal estate taxes are two separate and different concepts. Furthermore, it is important to keep in mind that assets customarily not subject to probate due to having named/designated beneficiaries (such as life insurance policies, IRA and 401(k) accounts), in the absence of advanced planning, will be included in the tabulation of one’s gross estate for federal estate tax consideration.
Question: What is so advantageous about a Living Trust?
Answer: Avoids probate: A properly prepared Living Trust avoids or bypasses the oftentimes tedious, costly, emotionally wearing, and public process of probate. Many advocates believe and make the argument that this is one of the great advantages of a Living Trust over that of a Will. Estate Tax Exclusion: Estate taxes can be a factor if your estate’s gross value is over the exclusion amount delegated by Congress through The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The Estate Tax Exclusion for 2017 is set at $5.49 million per person. You may be thinking that you should skip to the next section since this exclusion is plenty to cover your estate and worth but I encourage you to keep reading. This may be true in certain cases; however, do not underestimate the value of inflation over the long haul. Needless to say, the hot real estate market observed over the last decade in California has been another eye-opener for many who thought they were of frugal means. If you bought your home before the boom in the market or invested in a plot of land or other real property, chances are that you have seen a significant increase in worth. In fact, had you foreseen this, you probably would have taken measures to have invested more! Point being, you may not think that your modest nest of assets and wealth amounts to a whole lot but you cannot predict what it will be worth in the future. As a result, why not plan for you and your loved ones’ advantage and well-being? A flexible approach and consultation with a professional who emphasizes estate planning is your best way to utilize all of the planning benefits available. If you are married, with a Living Trust, you basically get 2 exclusions (one for each spouse). For example, a couple would have an exclusionary amount of nearly $11 million (in 2017) to apply to their estate before Federal Estate Taxes became an issue were they to both pass during that time-frame. Let us speculate that one spouse died in 2016 and the other in 2017. In this example, the first spouse’s passing would create an exclusion of $5.45 million for that spouse while the surviving spouse’s death would afford a $5.49 million exclusion (since the exemption was $5.45 million in 2016 and $5.49 million in 2017). The preceding example would not play out in the same manner if the couple did not have an estate plan in order. Were they not to have proper estate planning, the first deceased spouse’s portion of the estate would pass automatically to the surviving spouse via the Unlimited Marital Deduction (as opposed to “bypassing” or being “sheltered” in the Trust). However, upon the passing of the surviving spouse, the entire estate’s value would need to be taken into account (both the share from the first spouse that passed and now the surviving spouse’s portion). Thus, where the surviving spouse to die in 2017 with an estate valued over $5.49 million, only the exclusion of $35.49 million would be applied, leaving everything in excess to receive a tax “haircut”. This amount would then be dwindled, considering that estate planning was not in effect, through probate (based on the form of assets). Long story short, the portion of the estate being passed on to loved ones could potentially be much leaner as a result of a lack of planning and the first spouse’s exclusion amount would essentially be wasted. You may be saying, “but we are of modest means, we don’t need both exemptions! So, does this mean that you cannot prepare a plan tailored specifically just for our needs?” This is answered at length in the next section but the quick answer is: Not all trusts (good ones at least) are “one size fits all!” DPA’s and Advance Health Care Directive: These are ancillary (supporting) documents that every well-drafted Living Trust package should include. They deal with what happens if you are not able to make decisions on your own behalf either due to a debilitating condition (e.g. Alzheimer’s, dementia, etc.) or something as severe as a coma. Most powers of attorney end when a person loses “capacity,” however powers of the durable kind continue even after the person is deemed incapacitated. The strength of this is that you can have whomever you elect to a one-day act in your place and have them do as you mandated in the language of the document. The Advance Health Care Directive goes as far as stating your wishes and desires regarding the end of life support and other private matters. These are choices and decisions that each individual should have the right to make as opposed to someone unknown in the medical field or worse yet, having conflicting ideologies being battled over by loved ones/family. You decide what you want under the Living Trust and its supporting documents – not another person or entity. By doing so, you are many times removing the heavy burden and potential guilt, finger-pointing that later transpires amongst families.
Conservatorship: This is a legal process where the court appoints someone called a “conservator” to pretty much chaperone either over your person (daily activities, residence, bathing, shopping, attending appointments, etc.), your estate (write your bills, balance your checkbook, etc.) or in some cases, both. This is a pretty large responsibility being handed over to a court-appointed person who many times is doing this as a profession and who has no prior history with you. Not to take anything away from these individuals who are many times caring, very responsible, and have your best interest in mind; however, don’t you think most people would rather choose a dear friend or family member for such a private relationship? You have the choice of who you want to nominate as your conservator if and when the time comes for the need for such care/support. Private: Remember that Probate is a public proceeding. Your death and financial holdings are “aired” so creditors in the public, who may have a claim to the portion of your estate, can come forward. Well, guess what? This means that in theory anyone could if they wanted to, go down to the county court and pull up your records. This would tell them what you own, what you have accumulated in your lifetime, and ultimately, who you want those things to go to. Certainly, you would prefer keeping such private information between loved ones. On the other hand, the living trust in most instances remains private in that it is only viewed by the natural heirs/beneficiaries.
Question: So will we get a trust utilizing both exemption amounts even though we have a combined gross estate much less than even one exemption amount?
Answer: The key thing to remember is that there are different shapes and sizes when it comes to trusts as well as your family’s needs and concerns. Unfortunately, there are many trust preparers out there that will try to fit you, regardless of your dynamics, in the same “mold” used for other clients. This is not the way to go. Each person and family is different and thus, each plan should be prepared accordingly. The type of trust mentioned above is an A-B or Credit Shelter Trust. In a nutshell, this means that upon the passing of the first spouse; imagine splitting all that was owned by the couple in half. 50% would then be “locked” or “sheltered” in the “bypass” (a.k.a. B, credit shelter, etc.) sub trust and becomes irrevocable. Irrevocable, meaning it cannot be changed or altered by the surviving spouse. The surviving spouse would still be able to control and mandate as he/she pleases as to their half but would not have full discretion to the decedent spouse’s share. They can draw the income produced off the sheltered trust but can be limited in other scopes. Depending on the language that was included in the document when they were both alive, the surviving spouse may also be granted “access” to a sum of the principal for health, education, maintenance, and support (commonly referred to as “HEMS” powers) or even a “5×5 Power” (the greater of $5,000 or 5% of the trust). Often, the surviving spouse in these mandatory Credit Shelter trusts, does not have unfettered discretion to reach and utilize all of the assets or enjoy the entire estate but can still have substantial access. Many clients fear this lack of control by the surviving spouse and thus ask whether there are alternatives. Now that the exemption amount is high, the tax planning purposes of utilizing a credit shelter trust are not as critical. Utilizing a credit shelter trust and wanting the surviving spouse to have full control or access, are considerations that should take place when meeting with an estate planning attorney. A Disclaimer Trust may very well be the route that should be opted for as it passes the entire estate to the surviving spouse. At that point in time, the surviving spouse then has 9 months to decide what to do. If it behooves them to do some planning so federal estate taxes are not imposed upon their passing, they can then “disclaim” a portion of the deceased spouse’s property to be locked away in the bypass trust and utilize the rest for themselves. Through the creation of a disclaimer trust, the surviving spouse is not “handcuffed” as before and the first spouse to pass does not feel as if they have limited the freedom of their beloved. With that said, the disclaimer with its full discretion approach may also not be an ideal situation where there has been a prior marriage and there are children from this prior marriage. The first spouse to die may want to retain control “from the grave” to make sure that a certain amount of their assets gets “locked-up” and guaranteed to be distributed to their child(ren) from the prior marriage. Yes, this is the case of “ the surviving spouse will run off with the pool, cabana, tennis coach” phobia. Rightfully so, even if you are well below the exemption amount listed above and thus tax planning is not as much of a concern, making sure that a child or someone else who may be “written-out” by the surviving spouse (step-parent to your child), the disclaimer trust may not be the way to go. As you can imagine, this does happen! In sum, there are different options out there when it comes to a thorough estate plan. The key thing is to communicate your concerns, fears, and wants to your estate planning attorney and more importantly, to make sure that the attorney will prepare a custom-tailored and individualized plan for you and your family’s needs.
Question: Who’s who in the Living Trust Chain?
Answer: The person setting up or creating the Trust is usually called the Grantor, Settlor, or Trustor. The person initially in charge of “running” the Trust is the Trustee (you). Trick question time: can the Settlor also be a Trustee? Yes! Why have someone else run things while you can? However, after the Settlor(s) referred to as the initial Trustee, comes the next in the cast of characters: the Successor Trustee(s). These can be adult children, family members, close friends, or even a financial institution. Make note of the main word in the trustee: “trust.” Thus, it is essential that this better be someone you truly hold to be responsible, competent, and most importantly, loyal to you, your wishes, and your family’s best interest. It is often mentioned that the most crucial or integral part of the planning process is giving a great deal of thought to whom to nominate as the Successor Trustee(s). It is not a light matter and there are a lot of responsibilities attached to the role, so think long and hard. This person need not be an attorney, CPA, or financial planner; however, the more responsible and prudent they are, the better. I like to draw upon the sports analogy of a football coach selecting quarterbacks. The coach definitely has a starting quarterback for each game. However, a good coach must also have a “back-up” in mind, as the starting quarterback is human and susceptible to injuries. The same goes for estate planning. You should definitely have the “first-string” successor trustee in mind but it is highly advised to think a few layers deep as when the time comes, your first nominated trustee may have passed away, be too old, be too far away geographically, or just flat out decline to serve in such a capacity and role. Thus, you will need to call upon the next nominated person or financial institution. Or, you may feel that certain people act well in tandem and you can nominate more than one person to serve as successor co-trustees. There are many different approaches (including the utilization of professional or private institutions as trustees and you should definitely discuss these alternatives further with the attorney). Finally, the Beneficiaries. The Settlors are the first beneficiaries and someday this is the class of member(s) receiving the distribution of your assets. These can be children, family members, friends, pet(s), a place of worship or other charity, etc. Again, remember that the Settlors are initial beneficiaries who rightfully enjoy the estate while those that eventually receive the assets are referred to as contingent or remainder beneficiaries.
Question: Can I draft my own Trust using a self-instruct book or Will planning software online?
Answer: I suppose you could- just like you could represent yourself if you were charged with committing murder or sew up your own arm after watching an episode of your favorite television medical drama. The question is would you want to? There is no doubt that the market is flooded with books, CD-ROMs, and even television infomercials that enable the creation of the documents required for a Trust. However, there is a level of intricacy, scrutiny, and judgment that needs to be taken into account. As a result, it is very important to consult with an Estate Planning Attorney. You probably do not consider your family dynamics to be just like the Jones’, Hilton’s, or any other family for that matter, so why would you want to rely on a “cookie-cutter” formatted Trust template? Remember the Latin phrase “caveat emptor” or buyer beware. The adage often does hold true-“you get what you pay for” and what could you possibly be getting for $24.95?
Question: What does “Inter Vivos” mean and is the Living Trust just a trend?
Answer: If the Latin terms intestate (without a will) and caveat emptor (buyer beware) mentioned elsewhere was not enough foreign language for you, “inter vivos” basically means “between the living.” In other words, an Inter Vivos Trust is the same as a Living Trust but it is a little bit more snazzy sounding and attorneys are used to the term. Let’s face it, if your doctor mentioned that someone suffered from “Pachyonychia congenita of the Jadassohn-Lewandowski” instead of plainly saying, “elephant nails from birth,” wouldn’t you be just a little more impressed? As for the current spike in people establishing Living Trusts, it is definitely not a fly by night fad. There is no doubt that in the last few decades it has received a great deal of hype both in the media and elsewhere. However, the concept of keeping assets in “trust” has been studied by legal historians and scholars to root back thousands of years to the burgeoning civilizations and in this country, was recognized by our forefathers who shaped and established what we now call the United States of America. Thus, the Living Trust has deep roots in not only history but from the inception of our great country and definitely cannot be labeled a “trend.”
Question: Can I change or revise my Living Trust?
Answer: Absolutely, considering that what you have created is a Revocable Living Trust. Things become a quite bit more complicated if it is an Irrevocable Trust such as an ILIT (Irrevocable Life Insurance Trust) or CRT (Charitable Remainder Trust). As the term “revocable” connotes, a Trust of that nature can be changed, altered, restated, or even revoked in its entirety. Things change over time and a good Trust needs to reflect the current state of being with amendments being an often-utilized tool. I am regularly asked how much upkeep and how often amendments and changes should be made to someone’s Trust. There really is no general answer other than your Trust should include certain assets as they are accumulated and thus have it be an accurate reflection of your estate in the present tense. This is impacted by your age and potential for family growth, activity in purchasing new assets/property, change in relationships, etc. If things have not changed though, taking a look at your documents every 3-5 years is advised. A change to a Trust is called an amendment while a change to a Will is referred to as a codicil. You should not try to change your trust by yourself any more than you shouldn’t try to draft it in the first place.
Question: Can I create a Living Trust with my Partner?
Answer: Sure, why not! Registered Domestic Partners are afforded many of the same benefits and advantages offered under a Living Trust. In fact, most of the state law rights and responsibilities of married couples also apply to registered domestic partners. Due to the relative newness of the concept though, some attention to the finer details is required. The Family Code imposes most of the California rights and responsibilities of marriage on registered domestic partners retroactively to their date of registration with the State of California- this could have been as early as January 1, 2000. As mentioned though, heightened scrutiny does need to be applied in respect to property and how it is going to be classified under the Trust. Once again, it is very important to discuss such issues and plans with an estate planning attorney.
Question: What are the advantages of Estate Planning for single people?
Answer: Proper estate planning is just as critical and crucial for the bachelor or bachelorette. Even though the double Federal estate exemption cannot be utilized, the same key factors (avoiding probate, estate tax limitations, selecting a successor trustee) are just as applicable to single people as they are to married couples. In a single person’s estate, probate cannot be put off or postponed (as in joint tenancy b/w spouses) and the problems associated with probate again apply when a single person passes away. Furthermore, the benefits of a stepped-up income tax basis by which capital gains can be minimized or eliminated can potentially be achieved via a Trust. Single persons should also play a role in their planning over medical and financial future care and who will play that role when they no longer will be able to due to diminished mental capacity. In sum, your status as “single” in no way, shape, or form limits or impedes your need to have an estate plan prepared. In fact, in many ways, it can become even more critical to do so. Again, it is recommended that you discuss such issues with an estate planning attorney.
Question: What is a “Pour-Over” Will?
Answer: This is a concept that I find clients often get confused with. A complete
Living Trust package includes what is called a Pour-Over Will. Clients many times ask “but I thought you advised me that I should have a Living Trust over simply a Will, so why do I see this Will in my documents?” The key thing to remember about the Pour-Over is that it acts as a “safety-net” or back up to the Trust. In other words, it permits items/assets that were not transferred to the Trust to be brought under the Trust after death and in essence, “poured over” into the trust. The Trust’s Executor can add left out the asset(s) to the Trust through the use of the Pour-Over Will. However, one should not become complacent with and too comfortable with relying on the Pour-Over Will. The Pour-Over Will really comes into play in the context of a trust when assets subject to probate in excess of $150,000 were left outside of the Trust and as a result, the dreaded proceeding of probate must again come into play. After the probate process is completed as to that non-trust asset (s), the asset(s) then gets transferred over to the Trust. It is in the best interest of the estate to rely on the traditional method of funding the Trust with assets when you are alive and not rely on this “pouring-over.” Please remember, avoiding probate should be an important goal. Also, it should be noted that not all assets are susceptible to probate. There are exclusions such as retirement benefits, life insurance policies, automobiles, the way property is held, etc. and most obviously, assets held in Trust. With that said, it is critical for assets that have beneficiary designations (e.g. life insurance, 401(k), IRA’s, and other plans) to have the forms relating to such policies/plans be up to date and have beneficiaries designated. It is not uncommon to find that a deceased person’s form was blank or that they had listed people that predeceased them. This now can become a problem as an asset generally not subject to probate now becomes subject to probate- since there is no viable beneficiary designated. Also, there are special income tax implications surrounding such accounts/plans and thus it is strongly advised that you discuss this further with the estate planning attorney.
Question: What is a Durable Power of Attorney for Property?
Answer: First of all, one has to make note of the word “durable.” This is a very powerful right that you as principal are granting to the attorney-in-fact or the person who you command to take over once you cannot run the show. The power is durable in that it will be in effect even if and when you are deemed to lack “capacity.” Most powers of attorney ends with the loss of capacity but not when it is of the durable kind. In fact, the power ceases only upon the passing of the principal or else revoked by the principal while he/she has capacity. In theory, the person holding such power (a.k.a. the attorney-in-fact) will step into your shoes and carry out your wishes the way you would have intended it surrounding your assets (that are outside the trust) were you yourself capable of doing such. This power is in regard to your financial assets and estate and is limited to the management of accounts, real estate and other personal property not already in a trust.
Question: What is an Advance Health Care Directive and do I really need one?
Answer: We often stress to clients that the Advance Health Care Directive is the most important document in a thorough estate planning package. Not to downplay the value of accumulated wealth, but there is often too much focus on the financial aspect of Estate Planning. I like to emphasize that decisions about health care in the event of unforeseen medical emergencies carry a great deal of weight and value. This Directive basically instructs your designated person(s) what decisions you would like to have carried out in the event you cannot make that decision or voice it on your own behalf. Like the Durable Power of Attorney for property/asset management, it again has your trusted individual that you hand-selected (often called the “Agent”), step into your role, and tell the physician your health care wishes. If you know anything about our privacy laws as a result of HIPAA, you are aware of how tough it is to release medical information and the medical charts/files to anyone other than the patient. Again, this Directive basically provides the Agent you have picked with a legal method to cut through much of the red tape. It is important to bear in mind that this only deals with health care decisions. One example where an Advance Health Care Directive would have had an impact that happened in 2005. You may remember reading or hearing about the case of Terri Schiavo, the young lady who was in a coma in Florida. Ms. Schiavo was a very young person, and those around her could not have foreseen her heartbreaking fate. Unfortunately, Ms. Schiavo did not have a Health Care Directive spelling out her wishes and wants in the event she became incapacitated. Had she, the conflict that unraveled between her husband and parents would most likely not have transpired. Either party could only have speculated as to what Ms. Schiavo would have wanted – any decision would be influenced by their own philosophies or religious/ethical standards. Had there been a written directive, the agent would have to carry things out the way the person in the coma/vegetative state wanted it-thus according to Ms. Schiavo’s Directive. This example is not meant to shock you, but illustrate that no one can predict their fate and as a result, should be prepared for such occurrences. This document, based on the circumstances, could one day become the most valued and significant piece of paper you ever sign. I often advise clients to provide a copy of their Directive to their primary health practitioner or other medical professionals to keep in their medical charts/files. If something were to arise and the patient’s medical charts are sought or if the physician is attending to them, the patient’s desires will be conveniently located with the rest of his/her medical history and notes.
Question: What is a Conservatorship and does the Living Trust address this as well?
Answer: To greatly simplify, a Conservatorship is a legal process where the court decides whether you have the mental capacity to take care of yourself (the person) or your assets (the estate) or both (person and estate). In other words, it is not entirely up to you no matter what shape you feel that you are in, physically or mentally. You (Conservatee) are brought in front of the court and have a judge put someone you probably don’t know (sometimes as court-appointed fiduciary a.k.a. Conservator) in charge of you. Again, the reality is that this person who is being given such an important role to play is at times also a stranger to you. Does not sound like an ideal scenario, does it? Your estate plan should address this rather taxing and emotional process as well. Again, a well-drafted plan includes a Nomination of Conservator provision. In it, you will select who you want to become your Conservator if you are one day deemed to lack capacity to the point that such a proceeding becomes necessary. Usually, a doctor will diagnose you as lacking mental capacity and that it is probably in your best interest for someone to look over you. Why would anyone want a stranger to play that role when it could be your spouse, child, or best friend? In most cases, the person who is nominated to play this role is the same as the agent selected in the
Advance Health Care Directive or the Power of Attorney for Finance.
Question: What does “funding” a Trust mean and is this really needed?
Answer: This is of crucial importance. Many times, I meet clients who had a Trust prepared but they either did not transfer assets under the name of the Trust or they initially did so but have accumulated much since then and have not properly titled the new assets. The Trust document, as valuable and powerful as it can be, is not magical. It cannot by its own accord take the home you have purchased and transfer it under the name of the Trust. You need to take a continued active role in this with the assistance of a professional. Thus, “funding” is another word or term used to describe placing or transferring the title of an account or asset from your name as an individual to the name of your Trust. Naturally, people next ask, “So, I don’t own the asset anymore and I won’t be able to access that account?” Not the case and far from the truth. You, as Trustor (creator of the trust), Trustee (legal owner of the trust), and the initial beneficiary (equitable owner) are not relinquishing your rights to the asset. There are consequences of not keeping active with funding. By not making a transfer of the assets to your Trust, you may be faced with probate if, as previously mentioned, the aggregate of what is left out exceeds $150,000 and is/are assets subject to probate. Once again, probate is something to avoid in most cases. There can also be significant tax ramifications and consequences for transferring certain accounts or assets into your Trust (such as annuities, plus retirement and qualified plans) so it is again crucial to speak with an Estate Planning Attorney before doing so. Furthermore, there are sometimes other avenues or options available for funding a Trust after the fact, such as a Heggstad Petition (named after the case Estate of Heggstad) and this process can potentially avoid the need for probate, but again it is crucial to utilize the expertise of an estate planning attorney in such circumstances.
Question: I already hold my home with my spouse in Joint Tenancy so I will avoid probate, right?
Answer: Yes and no. You are partly correct that probate is avoided. However, this is only upon the passing of the first spouse. Upon the passing of the surviving spouse, without any further planning, probate then becomes a necessity. In other words, when the title is held in joint tenancy, you are only postponing or putting off probate until the death of the second spouse. Not only this, but ½ of the step-up income tax basis is lost when the property is held in joint tenancy form by a couple. This can potentially result in high capital gains. In sum, the old trend or popularity of holding title, as joint tenants, should be reconsidered if you are currently holding the title as such. There are better alternatives and the preparation of a Living Trust done by a professional will address this. For instance, many homes are still held by husband and wife as joint tenants. When funded into the Trust, the joint tenancy is severed and usually transferred as Community Property (except for property retaining its Separate Property identity), which provides the advantageous double stepped-up income tax basis upon the passing of the first spouse.
Question: Is it possible to include my pet dog, cat, or turtle in the documents so they will be taken care of when I can no longer provide such care?
Answer: Absolutely! Fido or Otis is just as much a part of the family, right? If you would like your pet to receive care and companionship once you are no longer able to provide such, a well crafted Living Trust can address these desires. You can select who will be in charge of such a responsibility and many times, you can designate a portion of the money to not only pay for the maintenance and upkeep of your pet but also as a “thank you” to the caretaker for their services/dedication to your loved pet. In fact, one can again turn to the media for examples of such acts of kindness of owners to their pets. For instance, billionaire, Leona Helmsley, may have been dubbed the “Queen of Mean” however, at her death, she left $12M in trust to take care of her beloved Maltese, Trouble. This amount was later lowered to $2M by the courts. California has also recently strengthened the ability to provide for one’s pet(s) once the owner is no longer able to. Up until fairly recently, pet trusts were considered “honorary” in that they were not legally enforced. Things changed as Gov. Schwarzenegger on July 22, 2008, approved and signed into law Senate Bill (SB) 685. This law took effect on January 1, 2009, providing a greater amount of protection both to the transferor as well as to the pet(s) to ensure that the pet(s) will be properly cared for and raised the level of scrutiny to protect the animal from neglect/the opportunity for misappropriation of funds left for the care of the animal. Section 15212 of the CA Probate Code now includes language to maximize the carrying-out of the owner’s intentions, including the following:
“The intended use of the principal or income may be enforced by a person designated for that purpose in the trust instrument…” [15212 (c)] and thus a trust enforcer.
“If a trustee is not designated… a court shall name a trustee. A court may order the transfer of the trust property to a court-appointed trustee if it is required to ensure that the intended use is carried out… [15212 (d)],
“Any beneficiary, any person designated by the trust…or any nonprofit charitable corporation that has at its principal activity the care of animals may, upon reasonable request, inspect the animal, the premises where the animal is maintained, or the books and records of the trust.” [15212 (f)]
Question: I have a child who is a minor, how can I make sure that he/she is taken care of if I am not around?
Answer: I know that many people with underage children worry about the day when they might not be able to provide such care and attention. This is anxiety most if not all parents probably share at some point. With a Trust, you can have the right person manage assets designated for your children and you can also nominate a Guardian or Guardians for your child(ren) in the event you can no longer take care of them due to an illness or death. There is a large degree of flexibility with whom you can select: the grandparents, a sibling, best friend, or others close to you. As with the prior provision surrounding the care of pets, you can designate a portion that is to be allotted to the Guardian in their very important role of looking after your minor child(ren). It is safe to conclude that making such nominations and putting it in writing provides a great deal of peace of mind for the responsible parent(s). Clients often ask where this nomination is usually made. The answer is that the nomination of guardian provision will be found in the Will, usually the innocuous Pour Over Will that backs-up the Trust.
Question: I have a child with a disability. Can I make provisions for the child and make sure he/she is in good hands?
Answer: The Living Trust is a very appropriate method to safeguard and protect a child with special needs. In fact, a Special Needs Trust sees to it that your child with a disability is taken care of without jeopardizing/risking losing the needs-based government and public support he/she may be receiving. Otherwise, without a Special Needs Trust, there can be detrimental results when a child who is on government support receives an inheritance. In such a scenario, the government in theory can view the child as no longer in need of public support and thus pull/cease such payments. As you may know, caring for the needs of such a child are rather expensive and thus the inheritance can be burned through rapidly, leaving the child with inadequate support once the inheritance has dwindled. It is thus important for you to disclose such information when drawing up your trust documents with your estate planning attorney. It has been my first-hand experience that at times, clients are embarrassed to share such personal information with the attorney. Or, they do not see it as pertinent to the overall scheme of their estate plan. Again, the potential financial disaster resulting if the child loses public benefits illustrates how crucial and important of a point special needs planning really is. A complete “estate plan” again should be multi-dimensional and what is more important than the proper care and nurturing of your special needs child?
Question: My spouse, myself or both are not US Citizens, does that mean we cannot have a Trust?
Answer: Not at all. However, what you will need to be implemented in your Trust document is referred to as a QDOT (Qualified Domestic Trust). This will enable a special form of the marital deduction and other benefits that are customary for a surviving spouse under a Living Trust in which both spouses are citizens of the United States. IRC §2056 covers the Marital Deduction in which there will be no estate taxes between spouses and one gets to deduct everything left for his/her spouse. This is covered in 2056a. However, §2056(d)(1)(A) goes on to say that no such deduction shall be permitted if the surviving spouse is a non-citizen of the US. The rationale behind this is the fear that the surviving spouse will pack her (usually the case as women tend to outlive men) suitcase and bail to her “homeland” and in essence, stiff Uncle Sam of possible taxes (this explains the “policy” reason behind the QDOT which was created under TAMRA (Technical & Miscellaneous Revenue Act) in 1988. Thus, to sorta-kinda get the benefit of the marital deduction, the QDOT election must be made and this has many requirements of its own. There are special requirements that must be met and thus it is highly recommended that you meet with an estate planning attorney if this applies to you. Also, during the planning stage, the attorney should always ask you whether you are a citizen of the United States as this will impact the structure of the preparation of the documents.
Question: I am strongly associated with my place of worship or a charity; can I see to it that they get a portion of my money?
Answer: Of course. Again, you get to designate where your money will be going so assisting a church, temple, mosque, etc. are many times a viable option. Also, many feel as if they are still making an impact even though they are no longer around when they contribute a share or portion of their estate to a charity that they feel is doing noble work. In fact, I have had clients who have had no children or who wanted to distribute their wealth solely to charitable organizations. They were able to designate multiple causes and organizations and to make sure that all the causes they believed in were met by one day receiving a portion of their estate. There is no one way of doing so, thus making it once again very important to discuss the options available to you when meeting with your estate planning attorney. Not to mention, there can potentially be significant tax benefits and allowable deductions when making a donation to an IRS recognized charitable organization.
Question: Now that I have a Trust, should I share it with everyone and where should I store it?
Answer: Remember that a positive aspect of the Trust is its private nature. As a result, I recommend that you do not pass it out as the morning paper. By disseminating numerous copies, your plan becomes susceptible to alterations and face-lifts you may not have intended and you have to inform holders of the copies to return them if you want to make changes. Thus, you as the creator of the document should definitely become well versed with its language but no need to have others do the same. Our office also holds onto a “file copy” for safekeeping in the event you misplace yours or lose it through inadvertence such as theft or fire. With that said, it is strongly recommended that you keep the original in a safe deposit box at the bank (and naturally having those named as Successor Trustee(s) know which institution it is stored at and have access to the key) or in a fireproof safe at home. As a result, it is wise to let your Successors know that they have been trusted enough to be picked by you as the party(ies) to take over the “wheel” and navigate the Trust by its terms when you no longer can. Becoming a Successor Trustee is no small role so this should definitely not come to them as a surprise after you have passed on or when the baton is being handed off to your successor. Make sure that your successor knows in advance of his/her role and where to find your original document when it becomes necessary to take over. Discussing the fact that you have nominated them as a successor in your documents should take place.
Question: I had a Trust already created so my work is all done, right?
Answer: As long as nothing substantial changes. This would include no changes to the asset make-up of your estate, no developments with those you have named in the document to play the role of the successor trustee or designated beneficiaries, and no changes in applicable laws. So, if there has been an addition to your family, that child should most definitely be reflected in the documents. Or, if you have had an unfortunate falling-out with your friend who you had designated as successor trustee, this would also be an invitation to do some updating of your Trust and related documents. Family dynamics can naturally also be a call to do additional estate planning: if you have divorced since the time you had your Trust created or, the opposite scenario, where you were single and now are married. In sum, your estate plan should truly be as close of a reflection or snapshot of the present state of your estate and capture the desires and beliefs you hold. Remember, your estate plan is truly like your novel. You are writing the book as you want and picking out the characters- the protagonists being those that one day receives a distribution of your assets and the possible antagonists being those who don’t inherit but think they should. You ultimately decide how the final chapter ends by stating who gets what, when they get it and how much they get. This enables you to someday put a close to your productive and well-lived life knowing that you are not leaving matters unfinished and possibly creating torment for loved ones through probate or a poorly designed estate plan. Like many well-written literary works, it is a work in progress and can be changed as long as you have the ability (capacity) to do such.
Question: I am a plaintiff in a lawsuit as a result of my exposure to a toxic material or substance. Are there any additional or special measures that need to take place in planning for my estate?
Answer: Due to the nature of the legal work done at Brayton Purcell LLP, this is a question we are very mindful of when meeting with clients showing interest in having an estate plan prepared. If you are receiving public benefits that are “needs-based” such as SSI (Supplemental Security Income) and/or Medi-Cal (known as Medicaid in other jurisdictions), it will be extremely important to consider what needs to be done to preserve and maintain one’s benefits. This may entail the utilization of a Litigation Special Needs Trust (LSNT) also known as a First-Party Special Needs Trust. This can come by way of a court-approved trust [(d)(4)(A)] or a pooled first-party trust [(d)(4)(C)]. Thus, it again becomes critical to explain your specific situation with the estate planning attorney so the procedure and set of documents in your best interest can be ascertained and prepared. In addition, when a client is a plaintiff in a lawsuit, there should be an affirmative Assignment of any rights and interests in such claims and litigation to the Trust. This way, future proceeds, and monetary payments shall remain trust property and forego the risk of having to probate that amount. I see many of our clients who have had estate planning documents prepared by other attorneys, which lack such an integral document. This occurs either because the attorney failed to ask whether they are a plaintiff in a legal matter or the client did not disclose this very important information. Again, realizing that being a plaintiff in toxic tort litigation is in many ways different than other lawsuits, we will be happy to discuss the different options and advise you as to the most suitable course of action to take when it comes to your individualized plan. Each case is different and thus has to be treated on an individual basis. In some cases, clients who are plaintiffs in a lawsuit have not taken steps to have an estate plan prepared due to the misconception that they “don’t own much.” At the time approaching their death, this may have been a true depiction of the value of their estate. However, their case then settled and a large sum of money was to come to their estate. Again, guess what the consequences of dying without an appropriate plan entailed? You guessed it, probate! Thus, even though they did not think that their estate was of much financial “worth” at the time of their passing, money later stemming from their lawsuits and thus now to their estate had to be held up through the process of probate. This created a great deal of inconvenience to their loved ones both in having to wait a long period of time until the money was distributed to them as well as the financial costs associated with the process. In sum, please do not take the stance that you do not need a plan of some sort due to your “modest means.” It is highly encouraged that you contact us and have our estate planning attorney discuss the options and further explain the ramifications and repercussions of passing away without having an appropriate estate plan in effect.