Wills, Trusts & Estates FAQ
General Information & Frequently Asked Questions
Wills and trusts are common estate planning tools. A will is a written commutation by a person directing how his or her estate will be distributed upon his or her death. An estate is the property one leaves behind when he or she dies. A trust is a legal document entitling the person to use and enjoyment of the property during his or her life and then directs how his or her estate will be distributed upon his or her death.
Why Have an Estate Plan?
Too many people have false ideas about how their estate will distributed upon their death, and what will happen to their minor children. It is important to draft an estate plan so that you and not state law or courts can address dictate wishes and concerns.
Estate planning will also allow you to determine who will be the guardian of your children, who will mange your estate and distribute your property, and who will make medical and financial decisions on your behalf in the event of incapacity.
What Happens if You Die Without A Will or Trust?
Unfortunately, for those who do not have a will or estate plan, California has an estate plan for you. The California laws on intestate distribution govern your estate upon your death. Under the California Probate Code, if you die without a will or trust, your children will receive two-thirds (sixty-six percent) of your separate property (if you have two or more children), or one half (fifty percent) of your separate property (if you have only one child). Your community property (which may comprise a large share of your estate) and the balance of your separate property will all be left to your spouse or domestic partner. This may leave your children with much less or much more than you wish for them to receive. Conversely, it may leave your spouse or domestic partner with either less or more than you wish for them to receive.
California Court will also step in and make personal and family decisions about your minor children. With an estate plan, you can decide who will be the guardian of your children. Without an estate plan, the courts must be used to determine who will be the guardian of your children, assuming your spouse does not survive you. Should your spouse survive you, he or she will be the guardian. A legal proceeding to establish a guardian will be expensive and time consuming. You may have to retain an attorney and legal fees and expenses. In addition, you will delay immediate transfer of your assets to your children, and as such, your may not be money managed as you might have wished. A court must follow conservative investment strategy and thus not maximizing your estate, and the court’s strategy may not match inflation.
Trusts
A trust is legal document wherein your property is held by a person, called the trustee, for the benefit of another person, typically you, called the beneficiary. The person creating the trust is called the settlor. A living trust is created while you are alive and is not part of your probate estate. A testamentary trust is created in a will and the property subject to that trust does pass through probate.
A trust can be revocable or irrevocable. A revocable trust can be changed or terminated by the grantor/settler at any time and for any reason. An irrevocable trust cannot be changed or terminated once it is created. There are other types of trust: special or supplemental needs trusts for disabled persons and it can be used to protect government benefits; life insurance trusts, which contain insurance policies and their proceeds; and spendthrift trusts, which prevent a beneficiary from assigning their interests or creditors for going after the trust assets to satisfy a debt.
Advantages of a Trust
There are several potential advantages to a trust, including:
- No probate
- No conservatorship
- Avoid or reduce estate taxes
- Potential to avoid creditor claims
Other Estate Planning Tools
- Advanced Health Care Directives: You can appoint a health care agent who will have the legal authority to make health care decisions for you if you become incapacitated and cannot make the decisions for yourself.
- Powers of Attorney: You can designate someone to make financial and legal decisions for you, even if you are not incapacitated; but you can determine the type and scope of the power in the document.
- Living Wills: You state the type and level of medical treatment you do or do not wish to receive if you are too ill or injured to direct your own care.
Probate
Traditionally defined, probate is the process in which your will is proved valid. Probate, now, is the court-supervised process in which the court oversees the closing of your estate. Your assets are gathered. Your property is distributed to your heirs designated in your will or if there was no will, by California intestacy laws. By probate, your debts and taxes are paid.
Probate Costs
The costs of probating your estate may be much higher than you would have assumed. For example, attorney’s fees and executor’s fees, which are based on the value of the gross estate, are calculated by a state mandated formula. The fees are 4% of the first $100,000 of the estate, 3% of the next $100,000, 2% of the next $800,000, and 1% of the next $9,000,000 of the estate. (These amounts must be paid to both the attorney and the executor.) In other words, the executor and attorney fees required to probate an estate, which consists of $750,000 (including outstanding loans) will be $36,000! Although this represents less than 5% of the estate (or more if there are loans outstanding), this is a significant amount of money which will not be passed on to the heirs of the estate.
Probate Can Be Avoided
Probate costs can be eliminated by the use of an intervivos trust as compared to a testamentary trust. Probate is not used for what are often commonly referred to as will substitutes:
- Gifts of assets, property or cash
- IRA or other pension plans with designated beneficiaries
- Annuities
- Life insurance policies
- Joint checking/savings accounts
- Jointly owned property with rights of survivorship
- Estates valued less than $100,000, or real property interests valued less than $20,000.
Elder Planning- Avoiding A Conservatorship
A conservatorship is a legal process whereby a person who becomes incapacitated is placed in the legal care of another. Because a conservatorship is costly and time consuming, it is not generally recommended, and can be easily avoided with proper estate planning.
The easiest way to avoid a conservatorship is simply to name a person in durable powers of attorney (for finances and for health care) who can take care of matters in case of incapacity. This is a very simple process, but unfortunately, one which many people fail to attend to (a trust can also be very helpful in avoided a conservatorship). A lack of planning may result in a conservatorship, which can be a burden because of the numerous court filings and detailed record keeping, and the necessity of hiring an attorney to aid in the complex process. In addition, conservatorships are public matters which require continued court supervision, and which often result in familial discord.
Trust Administration
Trust administration occurs when a person dies with a living trust, instead of a will. A trust administration is similar to probate administration except without the court process, unless a person dies with assets not included in the trust, then a probate may be required.
Many things occur during a trust administration. In sum, the process involves at least six steps:
- Secure a taxpayer identification number or retain an accountant to do so
- Inventory assets
- Determine estate tax
- Division of trust assets
- File the 706 tax form (within 9 months of death)
- Distributions to beneficiary
The trust estate cannot be closed until the Internal Revenue Service issues a “Closing Letter” certifying acceptance of the 706 return. This process can take as long as 6 month or as long as several years.
If you want to create an estate planning or need an attorney for probate, trust administration or a conservatorship, you should call our office at 619-702-2907 for a free 15-minute phone consultation.
