Understanding Estate Planning

Estate Planning is the process of creating legal documents that nominate individuals to act for you if you are incapacitated and that direct the disposition of your assets when you die. An estate plan is not reserved only for the wealthy. Common documents prepared are: Last Will and Testament, Revocable Trust (also known as a Living Trust or a Family Trust), Powers of Attorney for Finances and Healthcare, Nomination of Guardianship for Minor Children, and other supporting documents.

What is an Estate?

Everything a person owns during their life or at death is their “estate.” This can be as little as one bank account, or as much as 3 homes and millions or even billions of dollars. An estate also includes an individual’s debts. Regardless of the value of the assets, all property you own at death - whether it is cash, investments, a residence, a mortgage, retirement accounts, life insurance, jewelry, a car, or the painting you bought on vacation in Italy - is included in your “estate.”

What is Probate Court and a Probate Proceeding?

When someone dies, their estate is subject to a court process which is meant to pay their debts and distribute their estate to their heirs. That court process is called a Probate proceeding and it takes place in a Probate Court in the county of residence of the deceased person. Unless the deceased person put their wishes in writing before death in a document such as a Will or a Trust, the Probate Court follows the California Probate Code to distribute the deceased individual’s estate to their heirs. For example, if you die without a Will or Trust and you are not married, but you have 2 children who survive you, the default rule is that both children will receive equal shares of your estate.

In California, Probate Proceedings take a long time, and they are expensive. In recent years, the average uncontested Probate Proceeding in California takes 15-22 months to complete (contested proceedings can take years). Attorneys are awarded statutory fees based on the value of the estate and can walk away with a huge chunk of the money that would otherwise have been distributed to your heirs or beneficiaries. Probate Proceedings can be simplified or avoided entirely by establishing an estate plan which expresses your wishes for who will receive your estate at death.

What is a Trust?

A Trust, often referred to as a Living Trust or Revocable Trust, is simply a contract used for estate planning. The Trust allows you to manage the assets you put in the Trust for your own benefit while you are alive, then, at death, the Trust distributes the Trust’s assets to the beneficiaries you identify in the Trust.

You set up the Trust by acting in two separate capacities:

1. You are the Settlor of the Trust (AKA the founder of the Trust), and
2. You are the Trustee of the Trust (AKA the manager of the Trust).

Using a Trust to hold title to your assets does not limit, prohibit, or change anything about how you use or spend your money while you are alive. You can freely spend, withdraw, invest, encumber, loan, and use your assets and money just as you did before your Trust was created.

Why is a Trust used rather than a Last Will and Testament?

There are many advantages to using a Trust, too many to address here, but to name a few:

• Avoid Probate: A Trust and the assets titled in the name of the Trust are not subject to a Probate court proceeding at death unlike when a person dies with or without a Will, in which case a Probate proceeding is required.
• Flexibility for Beneficiaries: A Trust is more flexible and provides additional benefits that a Will cannot achieve. For example, if you set up a Trust, you can add strings or requirements for beneficiaries to be able to inherit their share. The most common example of this is requiring a beneficiary to attain a certain age before being entitled to receive their inheritance. This cannot be done with a Will.
• Trusted Successors: A Trust permits you to appoint a Successor Trustee whom you believe will best manage your estate after your death for the benefit of your beneficiaries. This is particularly important for parents with minor children where the Trust may be managed by their Successor Trustee for many years for their children’s benefit.
• Living Documents: A Trust can be freely amended, revoked, or changed in any way after it is established (i.e. the documents are alive!). The document can grow with you and your family and can be personalized and updated as you and your children age.

Top 5 Motivators for Establishing an Estate Plan

The Top 5 life events that motivate individuals to establish an estate plan are:

Do you have a child or children?

Without a doubt, the number 1 reason people establish an estate plan is if they have children. An estate plan allows you to set up legal protections for your children, including nominating guardians for your minor children, directing the disposition of assets to your children, and to make the administration of your estate simple, fast, and stress-free for your kids and other family members.

Estate planning documents are flexible and can be changed or amended at any time in the future. For example, if you have another child or want to make other changes after establishing the initial documents, this can be done.

Do you own a home, multiple homes, or other real property?

In California, if you have assets (a home, bank accounts, investments, retirement accounts, etc.) whose value collectively exceed $184,500 when you die, your estate must go through a probate proceeding. Given that the median home price for a home in California is $800,000, most homeowners will face a probate proceeding if they do not establish an estate plan. Probate is slow, expensive, and opens the door to in-fighting and competing claims for assets amongst family members and other heirs.

California also has very advantageous property tax benefits for children and grandchildren who inherit California real property. These exemptions from property tax reassessment save families hundreds if not thousands of dollars by maintaining the same property tax basis for generations. Careful planning must be considered to avail yourself of these tax savings.

Do you own a business?

You have worked hard to grow and maintain your business. Whether you are the sole owner or a partner with others, an estate plan ensures that your business ownership interest is protected and distributed as you wish to ensure the continued success of your life’s work if you cannot be there to manage it yourself.

Also, part of an estate plan is planning for temporary or permanent incapacity. If you were unable to work, whether temporarily or permanently, your estate plan can and should nominate someone to take over decision making authority for your business without additional court intervention, cost, and delay which can be problematic for your business and your employees.

Are you at or near retirement age?

You made it! Your work is done and now it’s time to kick up your feet, enjoy your family, and maybe travel to a new destination or two. Your hard work and personal responsibility have put you in a position to retire, but there are also concerns about what happens to your assets and family if you need living assistance, in-home care, or expensive medical treatments. An estate plan helps to address these important considerations and protect your hard-earned money and assets.

Additionally, an estate plan allows you to gift your money and property to your family or beneficiaries how you see fit at death, including the ability to put strings and restrictions on the inheritance for all or certain beneficiaries who may otherwise waste their inheritance. After all, you worked your whole life to benefit your family, don’t let it go to waste. An estate plan helps to protect your estate and your beneficiaries, so they can fully enjoy their inheritance.

Peace of Mind:

Imagine the relief you will feel knowing that you have taken the proper steps to protect your estate, your family members, and any other loved ones. Getting your affairs in order is not only for the wealthy or the elderly; it is a lifelong obligation to ensure your loved ones are protected and to ease the burden on them when you pass away. By establishing an estate plan, your family will be able to better care for you in the event of incapacity and diminished abilities as you age, and they will be able to properly grieve your loss without additional stress, time, and money being spent on unnecessary legal proceedings after death.