Estate Planning FAQ’s

Estate planning is the preservation and the distribution of your assets, both during your life and upon your death. It is accomplishing your personal and family goals and easing the management of your financial and legal affairs, as well as minimizing taxes if your estate is large enough for taxes to be of concern.  An “estate plan,” generally, refers to the means by which your estate is passed on to your loved ones on your death.

Estate planning can be accomplished through a variety of methods, including:

• Revocable Living Trusts

• Last Will and Testament / Probate

• Lifetime Gifting

• Joint Ownership

• Beneficiary Designations

• Life Estates

If you die without a will or trust, the state determines who will be your ultimate heirs. This distribution plan can be found in the intestacy statute of each state. The applicable state can be either the location of your legal residence (for personal property), or the state in which your assets are located (for real estate).

If you die intestate, the transfer of your property is accomplished through a court supervised proceeding called probate that can take a minimum of a year in California, and typically longer. These proceedings generally are expensive and time consuming and tie up your property. Probate can be avoided with proper estate planning.

What is probate?

Probate is the court-supervised public proceeding used to change title to assets from the name of an individual who has passed away into the name of the living beneficiaries. It is also the process by which creditors of a decedent file claims to collect their debts and where interested parties who have a complaint regarding the deceased can file a complaint (a will contest). Even without a contest, probate can be costly and time consuming.

Probate can be avoided with proper planning. There are a number of different techniques for doing so which can be used alone or in combination.

The government allows every individual a credit against estate taxes. In the year 2013, the Applicable Exclusion Amount is $5.25 million. This means that, in 2013, estate taxes will not be owed at the time of an individual’s death unless the net value of the estate exceeds $5.25 million.

The Internal Revenue Service allows an individual to leave any amount of assets to his or her spouse without taxation. At the death of the surviving spouse, however, all assets in the estate over the Applicable Exclusion Amount ($5.25 million as of 2013) will be included in the survivor’s taxable estate; estate taxes on assets above the Applicable Exclusion Amount hits a high rate of 55 percent, in 2013.

An outright gift at death qualifies for the unlimited marital deduction for estate taxes and, therefore, there will be no tax paid on the amount left to the surviving spouse. However, the Applicable Exclusion Amount ($5.25 million as of 2013) on the estate of the first deceased spouse is lost when the second spouse dies.

When property is held in joint tenancy with rights of survivorship by two or more people, upon the death of one of the owners, all of his or her interest in the property is transferred immediately to the surviving owner.  Joint tenancy is not a substitute for estate planning; on the contrary, it is one type of estate planning; however, is not a good way to plan an estate. For married couples, joint ownership does not help to transfer the estate upon the death of the second spouse.  And there are numerous problems with putting a child’s name on the title to your property as a joint tenant.  One problem is that while it may avoid probate, creditors of the child will be able to reach the joint tenancy property while you are still alive.  Adding someone else’s name to your account may also create a taxable gift when none is expected, and may not be consistent with your ultimately desired distribution.   Other problems with using joint tenancy with children in estate planning arise if the joint owner dies or becomes disabled prior to your death.

It is a form of property ownership where, upon the death of one of the owners, all of the deceased owners’ interest in the property is transferred immediately to the surviving owners.

Yes, but this unfortunately has several problems associated with it. There is no guarantee that the surviving spouse will have time to set up a trust after the first spouse dies or will actually get around to setting up a trust, regardless of the amount of time available. This method also loses any Applicable Exclusion Amount tax advantage, because, like an outright gift, joint tenancy lumps all the assets in one spouse’s estate. In addition, the survivor will not see the increase in basis for the survivor’s interest as would happen in a community property state.

This is simply not a good way to plan an estate. One problem with putting your child’s name on the title to your property as a joint tenant is that while it will avoid probate, creditors of the child will be able to reach the joint tenancy property. It may also create a taxable gift when none is expected, and may not be consistent with your ultimately desired distribution.  Adding someone else’s name to your account may also not be consistent with your ultimately desired distribution.   Other problems with using joint tenancy with children in estate planning arise if the joint owner dies or becomes disabled prior to your death.

A power of attorney is a document authorizing someone else (your agent) to act on your behalf (the principal). The purpose of giving someone such a power in connection with your estate planning is to enable the agent to act on your behalf when you cannot act for yourself.

Generally, any individual can create a power of attorney if over 18 years of age, a resident of the state in which it is created, and legally competent. This, however, varies from state to state.

In general, an agent may be anyone who is legally competent and over the age of 18. Usually, it is a family member such as a spouse or a child. More than one person can be named as an agent. However, sometimes naming two or more individuals to act together can prove inconvenient, particularly if a power of attorney must be exercised promptly. A better course is to name one individual as agent and then another as an alternate.

A general power of attorney authorizes your agent to do almost everything on your behalf which you could do for yourself. A limited or special power of attorney authorizes your agent to perform only certain acts specifically listed in the document.

Your agent presents the power to the other party involved in the transaction and signs any necessary documents needed for such transactions on your behalf. Your agent signs “Your Name, by His or Her Own Name, Attorney-in-Fact for Your Name.”

Requirements vary from state to state, but generally a simple notarization or signing the power in the presence of witnesses is necessary.

This depends upon what the power says. It can be made effective at the time of signing or it can become effective at the time of your incapacity.

All powers of attorney done in connection with estate planning are “durable.” A durable power of attorney is simply a power of attorney that remains effective even if you become incapacitated. Generally, unless the power of attorney document specifically indicates it is durable, it is not durable and will terminate upon your incapacity. A non-durable power of attorney would, of course, be useless in connection with estate planning or disability planning.

Yes. Everyone doing estate planning should execute a durable general power of attorney for financial, property, and legal affairs. This document is also often used in conjunction with a revocable living trust to enable your agent to transfer your assets into your trust in the event you become disabled. A general power of attorney can be made effective immediately upon being signed or can become effective at the time of your incapacity, which is also called a “springing” power of attorney.

A general power of attorney is a much better way to deal with incapacity than a guardianship or conservatorship. If you become disabled, A general power of attorney authorizes your agent to act on your behalf and sign your name to financial and/or legal documents. Having a general power of attorney will generally avoid the need to go through the time consuming, expensive, and publicly embarrassing process whereby someone has to go to court to have you declared mentally or physically incompetent and then seek appointment to serve as your legal guardian and/or conservator subject to ongoing court supervision.

Yes, it is equally important to have a health care power of attorney, to make decisions with respect to your medical care in the event that you are physically or mentally unable to do so, as certified by two physicians. This document includes the type of provisions that used to be in what was commonly called a “Living Will,” allowing you to indicate your wishes concerning the use of artificial or extraordinary measures to prolong your life artificially in the event of a terminal illness or injury. You will also use this document to indicate your wishes with regard to organ donation, disposition of bodily remains, and funeral arrangements.

Death revokes a power of attorney. You may also cancel your power of attorney by signing a revocation. The best way to revoke a power of attorney is to destroy all copies. If the power is a non-durable power of attorney it will terminate upon your incapacity, while a durable power of attorney survives your incapacity.

The annual gift tax exclusion is an amount that can be given away annually without resulting in gift tax on the transfer. In the year 2013, the annual gift tax exclusion amount is $14,000 per recipient. There is no limit on the number of recipients to which qualifying gifts can be made.

Yes, but your power of attorney must specifically authorize your agent to make gifts from your assets to persons whom you would likely make gifts.  This is one area in which a power of attorney prepared by an elder law attorney may be drastically different from a power of attorney prepared by an attorney who only does estate planning.  The power of attorney prepared by an experienced elder law attorney will contain special provisions allowing your agent to engage in all aspects of Asset Protection Planning and Public Benefits Plannings on your behalf, including the ability to make unlimited uncompensated transfers in an effort to protect your assets from the forced liquidation that might otherwise be required if you were to enter a nursing home.

There is no way to force a third party to accept a power of attorney without going to court. Many banks will require you to complete their own forms to authorize your agent to write checks on your account, so it is advisable to inquire as to whether your banking institution requires such forms that can be completed in conjunction with executing a power of attorney. In addition, the IRS generally will not honor any power of attorney that does not specify the tax matter and the tax year at issue.

First, third parties may not recognize your power of attorney. Second, it can be difficult to revoke a power of attorney, especially if your agent has given copies to third parties that have honored it. Third, the agent can reach your assets without court approval or supervision. Therefore, it is imperative that you select an agent with great care and have tremendous confidence in that individual.

There are several. One a court-supervised proceeding referred to as a guardianship or conservatorship. This is not an appealing option to most people. The best alternative is the use of a living trust where assets are funded into the living trust.  However, a power of attorney is still essential even if you have a living trust.

This is a court supervised proceeding which names an individual or entity to manage the affairs of an incapacitated person. A guardianship may also include the duty to care for the incapacitated person.

A primary disadvantage to a guardianship is that it is a public proceeding, thereby exposing the incapacitated individual to embarrassment as the details of their incapacity are discussed at length. It is also expensive, and is a restrictive procedure. In addition, there is no guarantee that the end result will be in accordance with the incapacitated person’s wishes, and someone unacceptable to the incapacitated person could be placed in charge of his or her affairs. A major advantage to a guardianship is that the courts watch every move the guardian makes in relation to the assets. Some feel this provides increased protection as well as establishing the authority of a guardian as third parties must deal with the guardian due to the court’s supervision.

A Living trust is often recommended to clients as the key document in their estate plan. One reason for this is that the living trust is normally the best method for managing assets during incapacity. A major advantage of the living trust over the power of attorney is that a trustee has actual title to the assets and therefore third parties must deal with the trustee as the owner. An agent does not have title and hence third parties may refuse to deal with the agent. This is a particular problem if the power of attorney was not signed in the last year, because some financial institutions refuse to honor powers of attorney that are more than a year old.

Not only does a Living Trust provide for the disposition of your property (like a Will), but it also offers many other benefits, such as:

• Avoiding Probate During Life
• Avoiding Probate Upon Death
• Avoid Probate for Multiple Generations
• Holding Assets for Beneficiaries Indefinitely
• Avoiding Ongoing Probate
• Avoiding Estate Tax (if married)
• Eliminating Probate Tax
• Reducing Legal and Administrative Fees
• Providing Oversight by Family, not Court
• Privacy

Absolutely. While you are alive and mentally competent, you have total control over your property. You can buy, sell, improve, spend, change investments, or give away property just as you would without a trust. The trust can be modified in any way you desire or it can be completely revoked. Upon your death, the trust becomes irrevocable so that no one can change your testamentary wishes. Upon your incapacity, your alternate trustee simply steps into your shoes and manages your trust until you either recover from your disability, or until your death. For married couples, the surviving spouse still has total control over his or her share of property after its transfer to the survivor’s trust, and the trust becomes irrevocable only as to the deceased spouse’s share.

While you are alive, you act as trustee. For married couples, either one or both spouses may act as trustee or co trustees. The successor trustee is an individual whom you designate to be in charge of your trust in the event of disability or upon death.

You will need to designate one or more successor trustees. These can be individuals, such as family members, trusted friends, trusted professionals, or you could designate an institution, such as a bank or professional trust company. Individuals may predecease you, while an institution will (most likely) still exist at the time of your death. Institutions provide the benefit of experience in money management and trust administration, while family members and close friends are more “personal” and have first hand knowledge of your desires. If you choose an individual, the individual should have some business sense, or you might wish to name an individual and an institution as co trustees. The downside to co trustees is the possibility of disagreements.

Technically a law firm or an attorney at a law firm is permitted to be the trustee. However, at our law firm, we generally decline to act as trustee for our clients, as we think it is inappropriate.

A revocable Living Trust does not change your income tax liability. The Internal Revenue Service does not require any additional income tax filings when you create a Living Trust, and the same annual 1040 tax return is filed.

Generally, property taxes remain the same when real estate is transferred into a Living Trust, although laws vary from state to state and county to county. Applicable state law is determined by the location of the real property, and needs to be reviewed before any transfer is made.

There is no annual fee associated with maintaining a trust. Fees are only involved when an amendment to the trust is made which involves changing the terms of the trust, or when a spouse passes away and the surviving spouse or trustee requests assistance with the Trust Administration, or requests assistance to take advantage of certain tax benefits, if applicable.

A Pour Over Will is used first to name a guardian for minor children. Second, it protects against intestacy in the event any assets have not been transferred into the trust at the death of the trustor/owner. Its function is to “pour” any assets left out of the trust into it so they are ultimately distributed according to the terms of the trust.

Funding a trust entails transferring assets you own as an individual into the name of your trust. For some assets, our law firm makes the transfers and prepares the documents for you to sign, for example, real estate. For other assets that our law firm is unable to change for you, we will give you instructions as to how title is changed, and will provide you with the necessary paperwork. For example, to fund your trust with bank accounts, a letter is prepared for you to take to the bank to change title of your accounts. You will have to go to the bank in person to sign a new signature card as trustee of your trust. We also offer the option for you to select us to do it all for you, for some accounts it will require a power of attorney.

Although there’s nothing wrong with having your checking account in the name of your trust, some individuals like to have just their name on the checks. You can do so even if the account is in the trust, or you can simply choose to leave a small checking account outside of the trust. Other assets which are not funded into the trust are IRAs and pension plans, since moving these would be taxable events. What’s important is to coordinate the appropriate beneficiary designation with your overall estate plan. This is a complex area of planning and must be based on each person’s individual family circumstances and size of estate.

Out of state real estate is transferred into the trust by using a local attorney in that state working with our law firm. We will contact an attorney in the state where your property is located to have it transferred to your trust with a minimum of delay.

Timeshares are transferred based upon the type of ownership you have. Some time shares are a contract and are transferred to the trust by an assignment of the contract. Other time shares are a fee simple, which means you have absolute ownership. Therefore, it is transferred by deeding it to the trust.

Enacted as part of the Garn St. Germain Depository Institutions Act of 1982 (P.L. 97 320; 96 Stat 1501) a due on sale clause can not be enforced on a “transfer into an inter vivos trust on which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.” This exemption applies to residential real property containing less than five dwelling units {12 USC Sec. 1701j 3(d)}. The regulations list that the borrower in this type of situation must remain the beneficiary and occupant of the property {12 CFR 591.5(b)(vi)}. However, “occupancy” is not defined. Therefore, prudence suggests notifying the lending institution before the transfer.

During the lifetime of both spouses there is no asset protection provided by a revocable living trust. However, there may be some protection for the survivor after the first spouse dies. The trust can also be created to provide creditor protection for other beneficiaries of the trust. Other types of trusts can be created to provide asset protection for both spouses if desired. In addition, there are dozens of techniques for asset protection that do not involve trusts at all.  Contact us for more information.

Liquidity planning is part of estate planning. Generally, it is necessary to look at the estate and see if there is enough cash to pay taxes, administrative expenses, and support dependent family members. There are generally two ways to deal with the liquidity issue, either by reducing taxes and expenses which require cash, or by increasing the cash and liquidity of the estate. Techniques which reduce taxes include fully using the Applicable Exclusion Amount at death and making annual gifts. Other techniques which reduce expenses include avoiding probate and using a Living Trust. Of course, increasing the liquidity of the estate can be done through conversion of assets as well as life insurance.

A living will, more often called an Advance Directive or Advance Medical Directive, is a document normally incorporated into a Medical Power of Attorney in which you give directions for life sustaining treatment should you become unable to communicate your wishes.