Frequently Asked Questions
It all sounds confusing to most.
Wills? Trusts? Revocable? Irrevocable? Probate? Powers of attorney?
Here are some answers prepared by our attorneys.
Estate planning is the term used to broadly describe the practice of preparing your estate to pass to your chosen beneficiaries upon your death and to allow for its management in the case of your incapacity prior to death. Your estate is comprised of all of the assets that you own- real property, bank accounts, investment accounts, business interests, annuities, life insurance, cars, jewelry and any other tangible or non-tangible items. Proper estate planning will eliminate the confusion and much of the hassle surrounding the administration of your estate. It will reduce, if not eliminate, any potential estate taxes. If you have minor children, proper estate planning will also ensure that their guardianship is given to someone that you trust to raise and care for your children properly.
Finally, proper estate planning will secure your own care should you become incapacitated and unable to manage your own financial or personal affairs before your death. There is no level of wealth or family structure that ever qualifies a person to participate in estate planning; it is recommended for everyone. At a minimum, every living adult should have a valid Will, a Durable Power of Attorney for asset management and an Advance Health Care Directive.
Most people know that a Will is a document that a person writes or has written naming the beneficiaries and Executor of his or her estate. Movies tend to make it appear that a Will is simply read in an attorney’s office after a person’s death, and that is the end of it. Unfortunately, it’s not that simple. A Will is in essence a letter to a judge and, in almost every case, its only legal purpose is to serve as the voice of the decedent in Probate Court. It directs the judge as to who should be appointed as Executor and how to distribute the assets of the estate, as expected. However, a well drafted Will also instructs the judge as to who should be appointed as the guardian of minor children, whether or not the Executor should be required to post bond, what powers and level of court supervision the Executor should have in administering the estate, and at what age and upon what terms and conditions the assets of the estate should be distributed to the beneficiaries, among other things.
WHAT IS PROBATE?
Probate is the court-supervised administration of your estate. If you die leaving a Will, the Will is submitted to the court and serves as an instruction to the judge of how you would like your estate to be distributed. The Executor that you have nominated in your Will is officially appointed by the judge to serve. There is then a period of 120 days for any creditor to file a claim against the estate. During this period the Executor is responsible for collecting and taking an inventory of the assets of your estate and reporting the value of your estate to the court and to the beneficiaries named in the Will. There is then an accounting to the court and to the beneficiaries for the expenses of administration, the debts paid to creditors, and the amount remaining for distribution. Following court approval of the report, the estate may be distributed to the beneficiaries named in the Will, after which time the Executor may petition to be formally discharged. This is of course only a barebones outline of the probate process. The entire probate process from the date of death until the entire estate is distributed can last as little as six (6) months, but often take years to complete. In the event of death without a Will (intestate), the probate process is the same; however, the court will appoint an administrator (Executor) at its own discretion and the estate will be distributed according to the order prescribed by the California Probate Code, leaving you without a say in how or by whom your estate is administered and distributed. The entire process and all documents become public record and the attorney, Executor and court fees can take a substantial chunk out of the final value of your estate, typically around eight percent (8%) of the gross combined value of all the assets.
WHAT IS A TRUST AND WHAT DOES IT DO?
At its core, a Trust is simply an agreement to hold property for the benefit of an identifiable person or entity- the beneficiary. The agreement is typically between the owner of property, the Settlor or Trustor, and the person that the owner designates to manage the property, called the Trustee. There are many types of trusts- testamentary trusts, irrevocable trusts, charitable trusts-but the most common trust is the revocable living trust. A revocable living trust is an agreement entered into between a Settlor and Trustee to hold assets for the benefit of identifiable beneficiaries. Like a corporation, a trust is an artificial entity that is allowed to own property. The Settlor transfers the title of all of his or her property to the trust, putting it into the fiduciary care of the Trustee. During the Settlor’s life, the Settlor is also usually the Trustee and beneficiary, which is completely legal, provided that the Settlor has also designated residual beneficiaries of the trust following his or her death. The trust is also revocable, which means that the Settlor has the power to amend or completely dissolve the trust at any time. This has several benefits, the greatest of which is the fact that trust property, even though completely controlled by the Settlor and Trustee, is technically owned by the trust and not the Settlor at the Settlor’s death, thus leaving the Settlor with nothing in his or her estate and avoiding the time, expense and frustration inherent in the probate process. When the Settlor dies, the terms of the trust clearly state who should serve as Trustee, who should receive the assets of the trust, and the powers and duties of the Trustee in administering and distributing the trust assets. It serves all of the same functions as a Will in probate court; however, the administration of a trust is a completely private matter with no court supervision required provided that it is correctly funded and not contested. However, trusts are more sophisticated instruments that are much riskier to create than Wills and therefore should always be drafted and funded with attorney assistance.
DOES A LIVING TRUST AUTOMATICALLY PASS WEALTH TO THE BENEFICIARIES?
While the passage of property from a trust to beneficiaries is far easier than the passage of property from a probate estate to beneficiaries, it is still not an automatic process. There are volumes full of laws governing the duties and responsibilities of a Trustee in the administration and distribution of a trust estate. Most Settlors appoint family members or close personal friends to serve as Trustees because these are the people that the Settlors trust to handle their affairs. Although these Trustees are generally very trustworthy, they are also more often than not inexperienced and entirely unaware of the myriad of laws governing trusts and the passage of wealth from trusts. These Trustees can expose themselves to great personal liability to damaged beneficiaries if they breach a duty in the administration of the trust, whether the breach is intentional or not. Therefore, it is always wise for a Trustee to consult and retain an attorney to provide advice, assistance and support in the administration of the trust rather than trying to do it completely alone.
IF I HAVE A TRUST DO I NEED A WILL?
Yes, if you have a trust you also need a Will. It is called a pour-over Will and it names the revocable living trust as the beneficiary of the estate. This serves as a safety net to transfer any assets into the trust that the Settlor neglected to transfer prior to his or her death.
WHAT IS JOINT TENANCY?
Joint tenancy is a form of ownership of property between two or more people. The fundamental difference between joint tenancy and most other forms of property ownership is the “right of survivorship.” This means that when one joint tenant dies, the other tenant automatically and immediately becomes the owner of the deceased tenant’s portion of the property. The property does not become a part of the deceased tenant’s estate. Joint tenancy ownership is identical to community property ownership or tenancy by the entirety ownership, which are terms used when the owners are married. While this form of ownership is almost always appropriate between a husband and a wife, there are substantial problems that can arise when a child or other person is named as a joint tenant. In some instances, the child or other person’s creditors may attempt to attach all of the property in a collection proceeding. Often a parent will add one child as joint tenant to property, thinking that this will avoid probate and enable the child to simply split the property with his or her siblings once the parent has passed. However, this unintentionally disinherits the other children and beneficiaries from the property and can also subject the beneficiaries to gift tax complications. Before joint tenancy ownership is ever used as an estate planning device to bypass probate or for any other purpose the advice of an attorney should be sought.
WHAT IS THE DIFFERENCE BETWEEN A WILL AND A LIVING WILL?
This is a common question because the two documents sound similar; however, they serve completely different functions. The function of the Will is described above. A living will, on the other hand, is the letter of instructions to a person’s designated health care agents and physicians detailing the person’s health care wishes, particularly the extent of allowable resuscitation measures, withholding of food and water and any specific instructions relevant to religious or other personal beliefs. It used to be that the Living Will operated in conjunction with the Durable Power of Attorney for Health Care to appoint a health care agent and give instructions. Most states still use these documents. However, in California we now use the Advance Health Care Directive, a document that combines the Living Will and Durable Power of Attorney for Health Care into one. This document is an integral part of any estate plan.
IF I HAVE A TRUST AND HAVE APPOINTED A SUCCESSOR TRUSTEE, DO I STILL NEED A DURABLE POWER OF ATTORNEY?
Yes, you still need a Durable Power of Attorney because even if you have established a well-funded trust and have nominated a Successor Trustee to act as Trustee in case of your incapacity, invariably some property will be intentionally or unintentionally left outside of the trust. For this property (most often retirement accounts smaller checking accounts and personal property) banks and financial institutions will look to a valid Durable Power of Attorney in order to determine who has the authority to collect and manage the property. A Durable Power of Attorney is a document that appoints an agent or attorney- in-fact to manage the principal’s financial affairs during any period of incapacity. It is called “durable” because it will survive during periods of capacity and incapacity. The Durable Power of Attorney is the document used to show authority to manage these non-trust assets. Where only a Will has been drafted, the Durable Power of Attorney becomes doubly important because it is the sole authorization for an agent to manage the principal’s financial affairs while the principal is incapacitated. Remember, a person’s Will does not become effective until the person’s death.