Estate Planning Basics

How to Protect Yourself and Your Loved Ones

• Do you have a Will or a Revocable Living Trust?
• What happens if you don't have a Will or a Revocable Living Trust?
• What is the difference between a Will and a Revocable Living Trust?
• What does a basic estate plan typically consist of?
• How do you find a qualified yet reasonably-priced estate planning attorney?
• Why do you still need a Will if you have a Revocable Living Trust?
• Why is a Financial Power of Attorney necessary?
• Why is an Advance Health Care Directive or a Health Care Power of Attorney and a Living Will necessary?
• What is a HIPAA Authorization?
• What kind of tax planning is involved?
• What about advanced estate planning for larger estates?
• How can you keep a cherished family property in the family for generations?
• What about planning for blended families?
• What can you do to protect your beneficiaries who have special needs or who need protection from potential divorce, creditors, or "predators"?
• How do you provide for your pets?
• Are you concerned about asset protection?
• How often should you review your estate plan? 

Do you have a Will or a Revocable Living Trust? 

A recent survey indicates nearly 60% of American adults do not. 

What happens if you don't have a Will or a Revocable Living Trust?

If you die without a Will or a Revocable Living Trust, your assets will pass by State laws of intestate succession.  If you are married, your assets will be divided among your spouse and children.  A child will receive his or her inheritance outright at age 18.

In addition, assets that do not otherwise pass outside of probate by beneficiary designation, titling, contractual arrangement, or by being below a specified threshold value (e.g., $150,000) will go through court-administered probate proceedings.  Probate proceedings are a public record so anyone can access information about your estate and beneficiaries.  The process can take from six months to several years to complete and your beneficiaries may not receive their inheritance until the probate is completed.

In California, where probate is particularly onerous, court-appointed administrators and attorneys hired to handle the probate are, by law, entitled to fees based on the gross value of the probate assets (not net of mortgages and indebtedness).  As an example, if the only probate asset was a home valued at $500,000, the administrator and attorney would be entitled to statutory fees exceeding $25,000 no matter what you owed on the home.  Statutory probate fees on a gross estate of $1 million, $3 million, or $10 million would total $46,000, $86,000, or $226,000, respectively.  

(See the APPENDIX at the bottom of this page for the statutory probate fee schedule and an explanation as to why real estate in California should generally be held in a Revocable Living Trust in order to avoid probate.)

What is the difference between and Will and a Revocable Living Trust? 

While either a Will or a Revocable Living Trust enable you to name someone to handle your financial affairs and distribute assets to beneficiaries at your death (an "Executor" or "Personal Representative" in a Will or a successor "Trustee" in a Revocable Living Trust), a Will only operates at death and assets passing by Will go through probate, whereas a Revocable Living Trust operates during life and death.  In a Revocable Living Trust, you can name a successor Trustee to step in to handle your financial affairs if you become incapacitated without having to go to court for a conservatorship or guardianship.  In addition, a Revocable Living Trust allows assets to pass at death completely free of probate.

A Revocable Living Trust is a private contract between you as "Grantor," alternatively referred to as "Settlor" or "Trustor" (the person granting assets to the Trust) and you as "Trustee" (the person managing the assets) for the benefit of the beneficiary (you while you are living, and others, typically your children, other individuals, or charities, after your death).  You need to transfer your assets (e.g., real estate, brokerage accounts) into the Revocable Living Trust, generally with the assistance of an attorney.  You continue to control and manage the assets as you do now, but upon your incapacity, your named successor Trustee can manage the assets without a court having to appoint a conservator or guardian.  Upon your death, your successor Trustee will distribute the assets to your beneficiaries, privately according to the terms of the Trust, thereby avoiding probate.

What does a basic estate plan typically consist of?
       1.   Revocable Living Trust
       2.   Pour Over Will
       3.   Financial Power of Attorney
       4.   Advance Health Care Directive
             or Health Care Power of Attorney and Living Will
       5.   HIPAA Authorization

How do you find a qualified yet reasonably-priced estate planning attorney?  

Having reviewed a considerable number of do-it-yourself estate plans and plans drafted by inexperienced attorneys or by those whose primary practice area is other than estate planning, we cannot emphasize enough the importance of working with an attorney who specializes in estate planning, trust, and probate law, preferably a "Certified Specialist in Estate Planning, Trust & Probate Law" by the State Bar Board of Legal Specialization (as explained under the "CERTIFIED SPECIALIST" tab) because the law in this area is very specialized, changes often, and involves complex tax matters (income/capital gains tax, property tax, generation-skipping transfer tax, gift tax, and federal estate tax). 

Be sure to choose an attorney who will provide you with a complimentary consultation by phone or in person and who will charge a fixed fee rather than an hourly rate whenever possible so you don't have to worry about unknown or unexpected costs. 

Lastly, be sure to find out whether the quoted fee includes “funding” or transferring your assets into the trust (e.g., helps change title on bank accounts, real estate deeds, brokerage accounts, business entities, etc. so that you own the assets as trustee of your Trust instead of as an individual, and that special beneficiary designations have life insurance and retirement benefits flow properly through your Trust).  To the extent possible, trust funding should be handled by an attorney.  Only that way can all your various assets be coordinated with your overall estate plan.  Moreover, an unfunded trust is why many living trusts fail and the estate ends up in probate court despite the existence of a Trust. 

Why do you still need a Will if you have a Revocable Living Trust?

A Revocable Living Trust only works as to assets that are actually transferred to the Trust.  Therefore, a Will is still typically prepared in conjunction with a Revocable Living Trust, but it is a “Pour Over Will" which serves only as a safety net - to catch any assets that may not have been transferred to the Trust before death so they can be "poured over" into the Trust at death and distributed according to the Trust’s terms.  However, all assets passing by Will will have to go through the probate process before they are transferred to your Trust.  That is why it is so important to have the Trust properly funded before death so the Will will never have to be used.  Guardians for minor children are nominated in your Will.

Why is a Financial Power of Attorney Necessary? 

A Financial Power of Attorney enables your designated agent to handle assets that might not be in your Trust upon your incapacity.  As an example, suppose you created your Trust and had it fully "funded" with your assets.  You subsequently sell your residence and buy a new one, taking title in your individual name instead of as trustee of your Trust.  If you become incapacitated, your agent can sign a deed on your behalf to transfer that property to your Trust so it can avoid probate at your death.  

Why is a Health Care Power of Attorney and and a Living Will (or an Advance Health Care Directive) Necessary? 

A Health Care Power of Attorney allows you to designate an agent to make health care decisions for you if you are unable to do so yourself.  A Living Will is used to express your preferences regarding end-of-life care.  In a handful of states, including California, both the Health Care Power of Attorney and the Living Will are combined in one document called the Advance Health Care Directive.

What is a HIPAA Authorization?   

This is a document required by the Heath Insurance Portability and Accountability Act (HIPAA) to circumvent medical privacy laws, enabling your named fiduciaries (e.g., successor trustee of your living trust and agents on your power of attorney and advance health care directive) to obtain protected health information on your behalf in order to step in to act on your behalf and make informed decisions.

What kind of tax planning is involved?  

Estate plans are drafted to minimize taxes, including federal estate taxes.  The federal estate tax is a tax that is assessed on the total value of a decedent's assets at death.  With some exceptions (such as assets subject to the unlimited marital deduction) all assets exceeding the "applicable exclusion amount" at death are subject to this tax. The applicable exclusion amount is $5.25 million per person (adjusted for inflation, so $5.45 million for deaths occurring in 2016).  To the extent the value of your assets exceed this amount at death, they will be subject to a tax rate of up to 40%.  This tax must be paid within 9 months of the date of death.  Sometimes people buy life insurance so their beneficiaries will not have to sell real estate or business interests at "fire sale" prices to come up with funds with which to pay the tax.  But many people do not realize that life insurance proceeds are also included in the taxable estate of the decedent, which can compound the problem, and even bring an otherwise non-taxable estate over the applicable exclusion amount.  With proper planning, however, life insurance proceeds can be completely kept out of the taxable estate by holding the policies in an irrevocable life insurance trust, often referred to as an "ILIT."

What about planning for larger estates? 

Certainly those whose estates exceed the exclusion amount can benefit from a variety of techniques designed to minimize or completely eliminate estate taxes as discussed under the "Advanced Estate Planning" tab at left and also in our article on advanced estate planning techniques published in the Journal of Financial Planning entitled Many Estate Planning Strategies Provide Benefits in Low-Interest-Rate Environment under the ARTICLES tab and in our recent book, The Closing Wealth Transfer Windows.

How can you keep a cherished family property in the family for generations? 

It can be difficult to keep a cherished family property such as a beach home, lake cottage, or mountain cabin in the family for generations unless thoughtful planning is done in advance.  Read our recent article published in The Journal of Financial Planning entitled Keeping the Vacation Home in the Family: Another Use for Limited Liability Companies located under the ARTICLES tab. 

What about planning for blended families? 

Special consideration is taken in drafting estate plans for blended families to address the sometimes competing interests of the current spouse and children from prior marriage(s).  Without such planning, there can be unintended and unfortunate consequences.

What can you do to protect your beneficiaries who have special needs or who need protection from potential divorce, creditors, or "predators"? 

Special provisions can be drafted into your revocable living trust (or you can set up a standalone special/supplemental needs trust) to protect a beneficiary who is receiving or applying for government benefits so that the inheritance can supplement but not compromise those benefits.  You can also protect a beneficiary's inheritance from creditors, predators, and divorcing spouses by having lifetime protective trust provisions drafted into your revocable living trust.  If a beneficiary receives an inheritance "in hand," it may be too late.

How do you provide for your pets?  

You can name a preferred caretaker for your pets in your estate plan, and if desired, leave a lump sum to the caretaker for the pets' care and support.  Alternatively, you can have pet trust provisions drafted into your revocable living trust or set up a standalone pet trust, where distributions for the pets' care and support can be made over time.

Are you concerned about asset protection? 

Many people are concerned about protecting their assets in what seems to be our increasingly litigious society.  From limited liability companies to domestic and offshore asset protection trusts, implementation of such strategies often involves a cost-benefit analysis.

How often should you review your estate plan? 

You should review your estate plan periodically because of changes in tax and other laws.  Certainly estate plans should be reviewed when there has been a significant change in assets, or when there has been a major life event such as divorce, remarriage, or the birth or adoption of a child.  Many estate planning attorneys will review existing estate plans and provide recommendations at no charge.  Be sure to work with an attorney who stays abreast of developments in this rapidly changing field and who will keep you apprised of those which may affect your plan.

Appendix

Statutory Probate Fee Schedule in California

Note: Generally if you own real estate, including timeshare interests, in California and other states, you should hold the property in the name of a revocable living trust to avoid probate in California and ancillary probates in other states (sometimes people hold real estate other than their personal residences in entities such as LLCs for business and asset protection reasons - the LLC is designed to be an asset of the Revocable Living Trust).  Sometimes people will try to avoid creating a Revocable Living Trust by adding a beneficiary to title on the property as a joint tenant so it will pass to the beneficiary at death.  However, there are some serious drawbacks to this solution.  For one, you are giving up ownership of the property now instead of at death and the joint tenant could force a sale of the property.  You are also exposing your property to the beneficiary's creditors or divorce.  For property that has appreciated in value since you purchased it, the beneficiary will lose the full step up in cost basis he or she would have received if he or she inherited it at death instead, so it could greatly increase the beneficiary's exposure to capital gains tax.  Lastly, to the extent the interest you are giving to the beneficiary exceeds $14,000 in any given year, it will "chip away" at your lifetime estate tax exemption and you will be required to file a gift tax return.  (In 2011, a district court granted the IRS permission to issue a summons to the California Board of Equalization, enabling the IRS as part of a gift tax enforcement initiative, to detect transfers such as these that were not reported on gift tax returns).  Appropriate planning, generally with a Revocable Living Trust-centered estate plan, will enable your beneficiaries to completely avoid probate court and the following statutory probate fees: