Estate Planning

Estate planning is a topic most people would much prefer to avoid. Especially among the young, contemplating how one's property should be distributed in the event of one's death is not a comfortable task. Nevertheless, it is your right to dictate how your property is to be distributed in the event of death. If you do not make this decision, your state will make it for you. State intestacy laws mandate that individuals who die without a will or living trust will have their property distributed according to a pre-set statutory scheme. Therefore, to prevent the state's rules from dictating the distribution of your assets, you should write a will or living trust to state your wishes exactly. Your attorney can assist you in drafting your will or trust, and can advise you of the possible legal consequences of each option you may be considering.

In particular, married couples who have assets in excess of $675,000.00 should consult an estate planning attorney in order to minimize the impact of federal estate taxes in the event of death. Although married persons may leave an unlimited estate to each other without imposition of any estate tax, upon the death of the second spouse, federal estate taxes will be due unless the couple has properly planned their estate in advance of the death of the first spouse. With careful planning, a married couple with combined assets up to $1.35 million dollars may avoid federal estate tax. Note that the limits on assets subject to federal estate taxes will increase for decedents dying in future years as follows:

1999: $650,000.00;

2000-2001: $675,000.00;

2002-2003: $700,000.00;

2004: $850,000.00;

2005: $950,000.00;

2006, and thereafter: $1,000,000.00.

Living Trust or Will?

The living trust has found much popularity and is often advertised as the solution to the "horrors of probate." There are advantages and disadvantages to each instrument which one should be aware of before deciding on either. Before rushing to a decision to draft a living trust, consider that no person alive today can testify as to whether he or she got what they expected from the trust. Although beneficiaries may be able to describe what occurred, they often were not involved in the initial estate planning process.

To better understand what a trust can do as opposed to a will, consider what probate is: Probate is the court supervised collection and distribution of a decedent's assets. When an estate is "probated," a probate court will appoint a personal representative to gather the decedent's assets, pay the decedent's debts, and distribute the assets to the decedent's beneficiaries under a will or to the decedent's heirs at law if the decedent died without a will.

If the decedent has written a will, the will is filed with the probate court and the decedent's property is distributed in accordance with the will. If no will was written, property is distributed to the heirs according to statute.

Holographic Wills

A holographic will is a handwritten will. It is highly recommended that you do not create a holographic will. Although holographic wills are recognized in California, they can cause severe problems in probate; especially if a decedent had written another will prior to or after the holographic will offered for probate. To ensure that your estate will be distributed as you intend, you should only create a formal, typewritten will with the assistance of an attorney, and executed and witnessed under the proper legal ceremonial circumstances. Attorneys' fees for the preparation of a will are usually quite reasonable. The legal fee for the proper preparation of a will is a small price to pay to ensure the proper distribution of your estate.

Whether property passes by will or intestacy, in all cases, as assets are collected, and debts are paid, the personal representative must make the assets productive for the benefit of the estate. The entire process takes time and requires court approval before assets may be distributed. Most individuals find it necessary to engage an attorney to assist in the probate process.

Although attorneys' fees in probate are set by statute, and must be approved by the probate court, attorneys fees can easily run into the thousands of dollars. A properly established living trust does avoid probate, but whether it ultimately saves legal and/or accountants fees varies on a case by case basis for larger estates. For smaller estates (not subject to federal estate inheritance tax), a properly established living trust will avoid probate for estates otherwise subject to probate (in many situations no probate will be necessary even if the decedent died without a will).

When a living trust is prepared, an individual, (or married couple), with the assistance of an attorney, writes a trust document, creating an abstract entity known as a trust. The individual or couple (known as the "settlor(s),") then transfer assets to the trust. The settlor(s), names himself trustee of the trust with the power to manage all the trust property. Upon the death of the trustee, a successor trustee, named in the document takes over the duties of the initial trustee--in effect acquiring the rights to the property previously enjoyed by the initial trustee. In this way, probate is avoided. The living trust is popular for its use in avoiding probate, and saving legal fees at death. Bear in mind, however, that attorneys fees for establishing a living trust involving estate tax planning may run into the thousands of dollars.

People are often drawn to the trust concept because it is generally a private document. It is usually not filed with a court; therefore anyone not named in the trust will not have an opportunity to review it.

Despite the avoidance of the expense of probate, there is no distinct tax advantage to a living trust, and there will be legal fees involved in establishing the trust. In trusts established as estate tax planning devices, a successor trustee or trust beneficiary will generally need to hire an attorney and a CPA to administer the trust and to ensure that the necessary steps are taken to take advantage of the tax savings established by the trust. Remember, however, that a living trust will not save an estate any more inheritance taxes than a properly drafted will can save an estate.

Although a living trust generally is not filed with a court, use of a living trust may not guarantee privacy. For example, if a living trust transfers any real property, the trust may need to be recorded with the county clerk to effectuate the transfer. Once the trust has been recorded, it has become a public document available for all to see. Furthermore, in the event of any dispute among beneficiaries of a trust, the trust may be filed with probate court as part of litigation involving the trust.

Another drawback of a living trust, is the continuing need to properly transfer one's assets to the trust during life, and to be certain to name the trust as the owner of any newly acquired property. This means any real estate one owns must be re-titled to name the trust as the owner, as well as bank accounts, stocks, mutual funds, etc. Any property not owned by the trust upon the death of the trustee may need to be probated. Therefore, when choosing to use a living trust as an estate planning tool, you should also create a will as a "back-up" device. A pour-over will can distribute property inadvertently not held in the name of the trust pursuant to the terms of the trust. In the event the pour-over will is probated, it is possible that the use of a living trust has had the effect of increasing estate expenses. The settlor may have paid a substantial fee to the attorney to create the trust, only to have the estate ultimately subject to probate, and legal fees charged for the probate. Therefore, when creating a living trust be certain to establish title to all assets in the name of the trust!

By contrast, a will does not require re-titling of assets. A will affects all property owned by the decedent in his or her name alone at death, and can usually be written without the need to make significant changes to property owned by the drafter (also known as the testator).

Finally, although probate fees can be saved by use of a living trust, the attorney's fees and accountant's fees for administering the trust upon the death of each spouse can run into the thousands of dollars for estates involving tax issues. These fees could be greater or less than the fees that would be charged if the estate were probated instead (although there is little or no choice whether to probate an estate after death). Each estate varies depending on the types of assets involved, the diversity of the assets, the beneficiaries, and other factors.


Durable Powers of Attorney

When planning your estate, you should consider creating a durable power of attorney (DPA) and a durable power of attorney for heath care (DPAHC). The DPA enables you to name someone else (known as an "agent") to care for your property and/or make personal decisions for you in the event of your incapacity. This relatively simple document will save you the expensive and tedious process of obtaining a court-appointed conservator to deal with your property in the event of your incapacity. Of course if you later regain capacity, your appointed agent's authority may be revoked.

A durable power of attorney for heath care (DPAHC) can authorize another individual to make decisions for you regarding heath care and treatment in the event you are unable to make these decisions for yourself due to illness. You may elect to make your wishes known in this document regarding life-sustaining treatment in the event of irreversible incapacity. Although a "living will" may also state your wishes regarding life sustaining treatment, statements you have made in your DPAHC will be given legal priority over statements in your living will. Your attorney will be able to explain the consequences of each document in greater detail. Although the DPA, DPAHC and Living Will are available as commercially prepared forms, you should consult an attorney to explain each document in greater detail and to avoid making any technical mistakes which could cause the document to be unenforceable.

For more information read Understanding California Durable Powers of Attorney