Frequently Asked Questions about Estate Planning in California
What is a Will?A Will is the document often used to direct the disposition of a person’s assets at death. A Will does NOT avoid probate (see below for a discussion of probate). Not all assets of a deceased person pass under a Will. For example, life insurance proceeds subject to a beneficiary designation do not pass under a Will. Property held in joint tenancy with right of survivorship also does not pass under a Will. There are other types of assets that do not pass under a Will. Often additional documents are required to dispose of all of one’s assets on death. Generally, a Will does not become operative until a person dies.
What does Intestacy mean?A person who dies without a Will is said to have died “intestate.” If a person dies intestate in California, California law directs who receives the decedent’s probate-type assets. Often the deceased person would have directed a different distribution if he or she had made that decision.
What is Probate?Originally the term “probate” meant to prove that something was genuine or valid. Later the term was used to refer to the court proceeding that took place following a person’s death to prove the validity of a decedent’s Will. Today the term “probate” is used in even a broader sense. It now refers to the court proceeding that takes place to prove the validity of a decedent’s Will and to supervise the administration and distribution of a decedent’s estate following his or her death. Many people desire to avoid probate. There are techniques that can be used to do that. Here are some activities that take place during a probate proceeding.
When a person dies, a procedure needs to take place to assure that the decedent’s property will be transferred to his or her intended heirs or beneficiaries. Without such a procedure, someone not entitled to the decedent’s property may attempt to abscond with assets of the decedent’s estate. To prevent this from happening, the law requires that a person be appointed to administer the decedent’s property until it can be transferred to the persons legally entitled to it. Every person who makes a Will has the right to state in his Will who this person will be. A person so named in the Will is commonly known as the “executor” of the decedent’s Will. (If the decedent fails to name a person in his or her Will or if the decedent does not have a Will, the court will appoint a person to act in this capacity. A person appointed by the court who has not been named in the Will is commonly known as the “administrator” of the decedent’s estate. The “executor” and “administrator” actually perform the same functions. Because of this, the term “personal representative” is often used to refer to either the executor or administrator.)
In order for the court to appoint an executor, the person requesting to be so appointed must file a petition with the court requesting that he or she be appointed. If the decedent had a Will, a copy of the Will is attached to this petition with the request that the Will be admitted to probate.
After this petition is filed with the court, the court will hold a hearing on the executor’s appointment and on whether the Will should be admitted to probate. Before the hearing is held, however, the court requires that notice be given to the heirs, beneficiaries, and creditors of the decedent’s estate. This gives these people a chance to appear at the hearing and oppose either the admission of the Will to probate or the appointment of the person requesting to be appointed as executor. It also notifies any creditors of the obligation they have to file with the court their claims for debts owed to them by the decedent.
As soon as an executor is appointed, the court will issue to the executor “letters testamentary” (or “letters of administration” in the case of the appointment of an administrator). The letters testamentary evidence the authority of the executor to act on behalf of the decedent’s estate.
Some of the major responsibilities of the executor after his or her appointment are as follows:
- Make an inventory of the assets of the decedent’s estate.
- Pay the valid debts of the decedent.
- Pay the income taxes and death taxes owed by the decedent’s estate.
- Sell property of the decedent’s estate if necessary to raise money to pay the decedent’s debts, taxes, and other obligations.
- Invest any surplus cash of the decedent’s estate in interest-bearing accounts or in other investments authorized by the decedent’s Will.
- Collect the income generated by the assets of the estate during the period of probate administration.
- Pay the expenses of the decedent’s estate incurred during probate administration.
The entire probate proceeding usually lasts between one and two years depending on the complexity of the estate. It can, however, be longer, especially when the estate is involved in litigation. It could also be shorter than one year; however, it would be extremely unlikely for the proceeding to last any less than six months. It usually requires at least one or two months to have the executor appointed, and following the appointment, the creditors of the estate generally have four months to file claims against the estate. The court cannot order the final distribution of the estate until all claims (i.e., debts) have been paid or adequately provided for.
For the services the executor renders to the estate, the executor is entitled to a statutory fee based on the gross value of the property (i.e., the value before deducting any amounts owed on the property) of the probate estate (with some adjustments). The executor will also require the services of an attorney during the probate proceeding, and this attorney is normally entitled to a similar statutory fee (although the executor and the attorney could contract for a lower fee). In addition, both the executor and the attorney can request the court to authorize the payment of additional fees to them for extraordinary services rendered to the estate. All statutory and extraordinary fees are paid out of the decedent’s property. Sometimes the executor will waive (i.e., refuse to accept) the fees to which he or she is entitled (especially when the executor is the sole beneficiary of the estate). However, it is unlikely that the attorney will waive his or her fee.
In addition to a California probate proceeding, out-of-state property of a deceased resident of California may be subjected to a probate proceeding in the state or foreign country where the property is located. Administration of such out-of-state property is typically governed by the laws of the state or country where the property is located. Probate proceedings that take place outside the state where the decedent resided are known as “ancillary” probate proceedings. Ancillary probates can greatly complicate the administration of a decedent’s estate, as well as increase the expense of administration.
What is a Revocable Living Trust?
A trust is established when one person (commonly known as the “settlor”, “trustor”, or “grantor”) transfers property to another person (known as the “trustee”) with the understanding that the trustee will hold the property for the use or benefit of a designated person (known as the “beneficiary”). In order for the trustee to understand her obligations in administering the property for the benefit of the beneficiary, the settlor will usually sign an agreement or declaration that tells the trustee how the property is to be administered. For example, the settlor may direct that all the income is to be paid to the beneficiary during the beneficiary’s lifetime. Alternatively, the settlor may direct the trustee not to distribute the income to the beneficiary until the beneficiary reaches a certain age.
A “living” trust is a trust that is established by the settlor while the settlor is alive. This is to be compared to a testamentary trust. A testamentary trust is a trust that is created under a person’s Will. It does not come into existence until the person making the Will dies.
The term “revocable” means that the trust can be terminated by the settlor during the settlor’s lifetime. In other words, the settlor of a revocable living trust can put property into and take property out of the trust at any time during the settlor’s lifetime. The settlor of a revocable living trust also has the power to amend (i.e., change) the terms of the trust.
A distinction must be made between an “unfunded” and a “funded” revocable living trust. An “unfunded” trust is a trust to which assets have not been transferred during the settlor’s lifetime. A “funded” trust is a trust to which assets have been transferred by the settlor during his lifetime. A “fully funded” trust is one to which all (or substantially all) of the settlor’s assets have been transferred during lifetime. One of the major reasons for funding a revocable living trust during lifetime is to avoid the probate of the assets transferred to the trust when the settlor dies. Because assets transferred to the trust are not owned by the settlor at his death (they are owned instead by the trust), the assets transferred to the trust during lifetime are not subject to probate. In contrast, most assets passing into a testamentary trust must be probated.
Often on the death of the settlor, the revocable living trust becomes irrevocable. This means that no person has the right to terminate the trust before the trust agreement directs its termination.
Revocable living trusts can be set up by single persons or by married couples. Often revocable living trusts are also referred to as “inter vivos trusts” or “grantor trusts.”
How Much Does A Revocable Living Trust Cost?This is a difficult question to answer. It’s like asking how much a car costs. Although some promotional materials may make it sound like living trusts are basically all the same, that is not the case. Revocable living trusts can be pretty standard or they can be quite complicated, depending upon the client objectives, the complexity of the family dynamics, and the extent of the clients assets.
The steps to establish a revocable living trust can be broken down into four phases:
- A preliminary review of the clients objectives, family structure, and assets and liabilities.
- One or more initial meetings to review the estate planning options available and to determine the client’s desires.
- Drafting the trust and related estate planning documents (such as the pour–over Will, powers of attorney, and property agreement).
- Transferring assets (such as the home, real estate investments, brokerage accounts, bank and savings accounts, etc.) to the trust and preparing beneficiary designations (such as for life insurance policies and retirement plan and IRA benefits).
Here are some factors that may complicate a client’s trust and other estate planning documents:
- If you are married, you have a premarital agreement that I must coordinate with your plan.
- You have a disabled child that is receiving government benefits.
- You desire to exclude one or more of your children as a beneficiary.
- If you are married, you have children of different marriages, and you want your respective shares of the estate to pass to your respective children.
- If you are married, neither of you wants your share of the estate to pass to someone your surviving spouse may choose to marry after you die.
- You own assets located in another country or another state.
- You own a subchapter S corporation.
- You are a party to a buy-sell agreement.
- You own an interest in a partnership or a limited liability company.
- You want to do some generation-skipping planning (for example, an irrevocable trust for the life a child, followed by a distribution to grandchildren on the child’s death).
- You have contributed large amounts to a qualified retirement plan or IRA. (There are usually important income tax considerations involved in this situation.)
- If you are married, one (or both) of you is not a United States citizen. (Our tax laws treat non-U.S. citizens differently.)
- If you are married, you have commingled your community property with your separate property. (This can be difficult to untangle.)
- You want an estate plan that requires a lot of original document drafting. (This is more expensive because the attorney has to “reinvent the wheel” — or should I say “reinvent the Will”?)
What is “Community Property?”
For married couples, there are two property law systems in the United States: common law and community property. California is a community property state. In general, all real property in California, and all personal property wherever it is located, that is acquired during marriage by a married person while residing in California is the “community property” of that person and his or her spouse. The term “community property” also includes the earnings and sales proceeds of community property assets. However, inheritances received by a married person during marriage are the separate property of that spouse and not community property.
Unless the community property is designated as having a “right of survivorship”, when one spouse dies one-half of the community property belongs to the surviving spouse, and the other half belongs to the estate of the deceased spouse. If a deceased spouse does not specify who is to receive his or her half of the community property, that half will also pass to the surviving spouse under the intestacy laws of California.
Where community property is held with “right of survivorship”, on the death of one of the spouses, the entire community property passes “by operation of law” to the surviving spouse. The deceased spouse’s one-half community property interest does not pass under his or her Will. Closely related to the concept of community property is that of “quasi-community property.” In California, “quasi-community property” is roughly defined as being property acquired during marriage by one of the spouses while residing outside California that would have been community property if the couple had resided in California at the time the property was acquired. For most purposes, quasi-community property is treated like community property.
Unlike the common law system, when appreciated property is held in community property form, an added benefit is granted under the income tax laws with respect to this basis increase following the death of one of the spouses. Even though only one-half of the community property is taxed on the death of a spouse, both halves of the appreciated community property receive a step-up in income tax basis on the death of the first spouse to die. In contrast, this added benefit applicable to community property does not apply to property held in joint tenancy form by a husband and wife; only one-half of the appreciated joint tenancy property receives a step-up in basis on the death of the first spouse. Therefore, in the case of a husband and wife, there can be significant tax disadvantages to holding property in joint tenancy form when the property involved would otherwise be community property that has increased in value.
Some assets do not qualify for the stepped-up income tax basis, such as retirement plan benefits, IRAs, annuities, and gains attributable to an installment sale.
What is Joint Tenancy with Rights of Survivorship?
Holding the title to property in joint tenancy form is probably the most common method used to avoid probate. Probate is avoided because “by operation of law” joint tenancy property passes automatically to the surviving joint tenant (or joint tenants). Joint tenancy property does not pass under a decedent’s Will. Although holding property in joint tenancy form is the most common method used to avoid probate, it is often not the best method. There can be significant disadvantages to holding property in joint tenancy form. Some of the major disadvantages are as follows:
- In the case of a husband and wife, there can be significant tax disadvantages to holding property in joint tenancy form if the property would otherwise be appreciated community property. When the first spouse dies, appreciated community property receives a step-up in income tax basis (“basis” is a tax term that is roughly defined to mean what you paid for the property) on both halves of the property equal to the fair market value of the property at the date of death. In contrast, only one-half of the joint tenancy property will be entitled to a step-up in income tax basis on the death of the first joint tenant (be it the husband or the wife). Therefore, holding appreciated community property in community property form can result in substantial income tax savings to the estate if the property is sold following the death of the first spouse.
- Joint tenancy property passes to the surviving joint tenant. No other person has a right to the property. This may be contrary to the intent of the joint tenant who dies first. For example, a deceased joint tenant may have provided under her Will that her property is to be divided equally among her children. If the deceased joint tenant were to hold joint tenancy property with only one of her children, that surviving child would receive the joint tenancy property on the death of the parent. The other children of the parent would not receive an interest in the property. The provisions of the decedent’s Will specifying that property is to be divided equally among the parent’s children would not apply to the joint tenancy property.
- Where the joint tenants are not husband and wife, holding certain types of property in joint tenancy form can result in a taxable gift by one joint tenant to the other.
- Although holding property as joint tenants will avoid probate on the death of the first joint tenant, it will not avoid probate when the surviving joint tenant dies. As soon as there is only one joint tenant remaining, the joint tenancy is terminated. For this reason, the property received by the surviving joint tenant will pass under his or her Will on death and will usually be subjected to probate.
What is a Living Will?
In some states, a “living will” is the document used to express your desires and directions regarding the use of life-sustaining measures if you become terminally ill. California no longer allows the use of “living wills.” In California, a “Durable Power of Attorney for Health Care” or an “Advance Health Care Directive” is used instead. These documents allow you to appoint someone to make health care decisions for you if you are unable to make those decisions yourself. They also allow you to express your desires regarding what types of medical life support measures you prefer to have, or have withheld/withdrawn, if you are in a terminal condition (without reasonable hope of recovery) and cannot express your wishes yourself.
What are Beneficiary Designations?
Some assets allow the owner to direct how the asset will be distributed on death by signing a separate “beneficiary designation.” Assets subject to a beneficiary designation do not pass under a Will. Life insurance, retirement plans proceeds, IRAs, and annuities are a good example of these types of assets. An effective beneficiary designation will avoid probate if the deceased person’s estate is not named as the beneficiary.
What is a Financial Durable Power of Attorney?
A power of attorney is a written document that authorizes one person (known as the “agent” or “attorney-in-fact”) to act on behalf of another person (the “principal”). The powers given to the agent can be as broad or as narrow as the principal determines. A financial durable power of attorney authorizes one’s designated agent to manage certain specified assets of the principal. Under general law, a power of attorney is terminated on its revocation by the principal or upon the principal’s incapacity or death. A “durable” power of attorney is a power of attorney that is not automatically revoked on the incapacity of the principal. For a power of attorney to be durable, special language must be included in the written instrument creating the power.
Sometimes the principal does not want the agent to have any powers unless the principal actually becomes incapacitated. In that event, a “springing” power of attorney can be prepared. A springing power of attorney is one that does not take effect until the principal becomes incapacitated. In using a springing power of attorney form, the principal should make sure that an acceptable mechanism is incorporated into the power of attorney for determining the principal’s incapacity. Some principals prefer to have that determination made by one or more licensed physicians. Alternatively, the principal may prefer to have that determination made by a number of trusted relatives or friends.
The use of a financial durable power of attorney may make it possible to avoid a court appointed conservator of your estate in the event you become incapacitated.
What Does the Term “Descendants” Mean?
The word “descendants” (also sometimes called “issue”) is often used in estate planning documents. It generally means a person’s children, grandchildren, great-grandchildren, etc.. Here are some questions to consider in defining “descendants” in your estate planning documents (e.g., in your Will or Trust):
- Should the term be deemed to include adopted persons (such as adopted children or adopted grandchildren)?
- What if the adopted persons were not adopted until after they became adults? Should such adopted persons be included?
- Should the term encompass foster children?
- Should the term include those descendants born after the estate planning documents are signed?
- Should the term include persons born outside of wedlock? Sometimes the term “descendants” is defined unintentionally to exclude such persons.
- If each spouse has children of a different marriage, should the term be defined to include all such children or only a portion of them?
- In defining the term, are there any living children or grandchildren who should not be deemed to be included within the scope of the term (for example, a wayward child or grandchild)?