ANDREW M. MEINZER
ATTORNEY & COUNSELOR AT LAW
3848 West Carson Street
Suite 220
Torrance, CA 90503
(310) 375-3350 Fax (310) 375-3550
October 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.
Intestacy
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.
Testacy
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.
Probate
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.
Joint Tenancy
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.
Conservatorship
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.
Conclusion
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.
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