THE NUTS AND BOLTS OF AN ESTATE PLAN
Estate planning is the process of planning for the transfer of your assets at death to beneficiaries you choose with the goal of preserving as much wealth as possible for those beneficiaries by minimizing taxes and avoiding probate (an expensive, time-consuming and public court process). A mindful estate plan addresses strategies for creditor protection for you and your beneficiaries and also addresses any philanthropic goals. In addition, Estate Planning includes preparing for potential financial and medical scenarios where you might become incapacitated and need someone to act on your behalf.
If you don’t have a plan, the state of California has one for you, but you probably won’t like it.
When you die without a trust in place, your estate will go through probate, during which the court will distribute your assets according to California’s laws of intestacy. Your estate will be reduced by statutorily set court fees and attorneys’ fees, and your assets may go to unintended beneficiaries instead of your loved ones. In California, a will does not avoid probate. To avoid probate, your assets must be held in a trust or pass by beneficiary designation (such as with an IRA, 401(k) or life insurance policy), joint tenancy, payable on death accounts, or by some other operation of law or contract. Small estates that do not exceed $150,000 can also avoid probate via a small estate affidavit or by some other summary probate procedure. Estate planning is critical to ensure your assets avoid probate, go to your intended beneficiaries, and avoid unnecessary taxes.
Estate planning is also critical to ensure your wishes are carried out if you are unable to express them yourself due to incapacity, whether from old age or an unforeseen event. If you become incapacitated without a financial power of attorney or an advance health care directive, the court will appoint someone to manage your finances and/or health care through another time-consuming, expensive, and public court process called a conservatorship. Britney Spears’ conservatorship is an example of the pubic nature of these very personal and sensitive proceedings.
An advance health care directive tells your doctors and your family about your wishes concerning life-sustaining treatment. In a widely publicized court battle many years ago, the family of Terri Schiavo, a young woman left in a persistent vegetative state after suffering a cardiac arrest, battled for years over whether to continue her life support. She did not have an advance health care directive.
Proper estate planning helps avoid probate, conservatorships, and potential disputes among family members. The essentials of a typical California estate plan include the following 8 documents:
· Revocable Living Trust – A major purpose of the trust is to provide for the management of your assets during your incapacity and to avoid probate upon your death. In California, assets titled in the name of your trust are not subject to probate; rather, they will pass according to the terms of your trust. The trust also acts like a will in that it sets forth your desires with respect to the disposition of the trust assets.
· Certification of Trust – This document explains how title should be held regarding your trust assets and indicates the trust’s taxpayer identification number. You can usually bring this to the bank when opening an account in the name of the trust or changing the title of an existing account to the name of your trust without having to provide a copy of the full trust, which is a private document. Banks often have their own certification for you to sign.
· Assignment of Property – This short two-pager assigns your real, personal, tangible and intangible property assets to your trust. It acts like a “safety net” for any assets left outside the trust to ensure probate is avoided.
· Pour-Over Will – Your will provides that any property you own at death outside your trust which could be subject to probate because it was not previously transferred to your trust will be distributed (or “poured over”) to the trust at the end of probate. The will acts like another safety net to ensure your assets are distributed according to the terms of your trust. Generally, if your trust is fully funded (i.e., your assets are titled in the name of your trust), your will would not become operative since the assets in the trust would avoid the probate process.
· General Durable Power of Attorney – This document allows you to designate someone to make financial decisions for you if you become incapacitated and unable to manage your financial affairs. It authorizes designated agents to transfer non-trust property to your trust and to manage the assets outside your trust, such as life insurance policies and retirement accounts. It is revocable at any time and terminates once you die.
· Advance Health Care Directive – This document allows you to designate someone to make health care decisions for you in the event you are mentally incapacitated, such as in a coma, or otherwise unable to make your own health care decisions. Your agent will have the authority to decide which medical treatments you should receive. This document also allows you to state your desires as to whether you wish to be given “extraordinary” treatment to prolong your life if you are terminally ill, receive pain medication even if it hastens your death, make any anatomical donations upon your death; and be buried or cremated.
· HIPAA Authorization for Release of Protected Health Information – This document authorizes medical providers to release your confidential health care information to designated persons, typically the health care agents designated in your Advance Health Care Directive and to the persons acting as Trustee, if necessary.
· Nomination of Guardian – A Nomination of Guardian designates the persons you wish to take care of your minor children in the event of your incapacity or death. A Guardian of the Person has the same responsibilities to care for the child as a parent would and has full legal and physical custody of the child. A Guardian of the Estate is responsible for managing the child’s property and financial affairs and is typically only necessary when the child owns or receives valuable property, such as if the child inherited a house or large sum of money.
Estate Planning includes reviewing and naming beneficiaries of your life insurance policies and retirement accounts. Your attorney will make sure that both primary and contingent beneficiaries are named in case your primary beneficiary predeceases you, that a trust is named as a beneficiary if and when appropriate, and that a spousal waiver is completed when necessary. These are complex considerations that are critical to review with a professional to avoid common and costly mistakes.
Make sure to keep your plan up to date!
Even if you have an estate plan in place, it is important to review and revise your plan from time to time to ensure it reflects any changes in tax laws (like the one signed into law by President Trump in 2017), life changes (such as birth, death, marriage and divorce), or major change in your assets. It is also important to keep your beneficiary designations updated and make sure your trustees, executors, and named agents are still appropriate.
If you’d like to speak with one of our attorneys regarding setting up or revising an estate plan, please call our office at (818) 338-3252, and we would be happy to speak with you.