Using a Professional Trustee or Fiduciary is a good choice if you don't have family members or friends who can be your successor Trustee
California Estate Planning
An overview on estate planning. Why to do it. How to do it. When to do it.
What is Estate Planning? What does it involve?
You’ve heard about “Wills” and “Trusts” but maybe you don’t quite know what they are. The dramatic reading of the Will by a crusty old attorney in a wood-paneled darkened law office with the family gathered around an antique mahogany conference table is the stuff of novels and movies. Wills and trusts are good fodder for stories, but do you need one?
The short answer is yes, you do. All adult humans need an estate plan.
Estate planning is not just for the rich. In fact, the essential documents of an estate plan have nothing to do with your net worth or estate taxes. More on that below.
If you are alive, you need an estate plan, because life happens, and when things happen, you need documents to allow your trusted family or friends to help you.
What are the Essential Estate Planning Documents?
Wills and Trusts are the primary legal documents included in an Estate Plan. Typically, a California Estate Plan also includes a Durable Power of Attorney, Advance Health Care Directive and HIPAA.
- Durable Power of Attorney gives someone you trust the authority to pay your bills if you can’t.
- Advance Health Care Directive gives someone you trust the authority to make healthcare decisions for you if you can’t.
- HIPAA Authorization (Medical Privacy Act Disclosure) authorizes someone you trust to talk to your doctors and nurses.
All of these documents could be needed at any time when you are alive - if you get in a car accident, experience a stroke, or are temporarily or permanently incapacitated.
Without these documents, your loved one may have to go through a court process to get a judge to appoint you or someone the judge chooses as a conservator, to make financial and health decisions on your behalf. Conservatorships are complicated and expensive and could be avoided if you have an estate plan.
Durable Powers of Attorney, Advance Health Care Directive and HIPAA are not just for older people. Anyone over 18 will need these essential documents. In fact, more and more parents are requesting these documents for their college-bound children.
A Will or Living Trust is used when you pass away. Both documents state your wishes about who you want to get your assets when you pass away.
If you pass away without a Will or Living Trust, then the state of California will decide how to distribute your assets. This is called intestacy.
How Do I Decide Between a Will or a Trust?
If you are not content with the state of California deciding how your assets will be distributed, then you will need a Will or Living Trust.
Is a Will good enough, or do you need a Living Trust? This depends on your assets. If you have assets that will go through probate, you will want a living trust because California probate is complicated, time-consuming and expensive.
The main asset that goes through California probate is your home. If you are a homeowner, your estate will be subject to probate.
The other assets that will trigger a California probate are bank and investment accounts worth more than $184,500 in total. Retirement accounts (IRAs and 401ks) don’t go through probate so long as you have named beneficiaries.
But if you are a renter, and you don’t have more than $184,500 in bank and investment accounts, a Will might be enough because you don’t have assets that would go through probate.
How Does a Living Trust Avoid Probate?
If you transfer your probate assets, like your home and your big bank accounts and investment accounts to your living trust, then your estate could avoid probate.
Transferring your assets to your Living Trust is called “funding your trust.” It’s very important that you keep your trust funded. If you have a Living Trust, but don’t transfer your probate assets to it, your estate may still have to go through probate.
And keeping your trust funded is an ongoing task. If you buy a new home, you need to make sure the new deed titles your home in your living trust. You also need to make sure title remains in your Living Trust if you refinance your mortgage. Often in the refi process, your lender will take title out of your Living Trust. If they do, you need to have them transfer title back to your living trust after the refinance closes.
Estate Planning Terminology
Estate Planning has its own terminology. Most people know the terms Will and Executor, but the general understanding of those terms may not be quite right. Here is a breakdown of the most often used terms in estate planning:
What is a Will? Your Will names your Executors, Guardians and states how you want your assets distributed.
What is an Executor? The Executor is the person you authorize to act as your estate representative.
What is a Guardian? Your Guardian is the person you nominate to raise your minor children if something happens to you.
What is a Living Trust? The Living Trust names your Trustee and states how you want your assets distributed. If you have a Living Trust, you will still have a Will, but it will be a Pour-Over Will, which directs your executor to allocate any assets not in your Living Trust to your Living Trust.
What is a Trustee? The Trustee is the person you authorize to manage your Living Trust. You, and if you are married, you and your spouse, are the Trustees while you are alive and able. Your
What is a Successor Trustee? The successor trustee is the person you authorize to manage your Living Trust if you become incapacitated or pass away.
What is a Grantor? You are the Grantor of your Living Trust. The Grantor, also called Settlor or Trustor, is the person who creates the trust.
What is a Beneficiary? While you are alive, you are the Beneficiary of your living trust. When you die, the Beneficiaries are those you choose to leave your trust assets to - usually your children. The Beneficiary is the one who benefits from the trust. The Trustee will use the trust assets for the benefit of the Beneficiary.
What is a Pour-Over Will? A Pour-Over Will is a certain type of Will that is included in a living trust estate plan. The Pour-Over Will directs all assets not already in the living trust to be allocated to the living trust.
What is a Durable Power of Attorney? Your Durable Power of Attorney authorizes your agent to manage your finances and assets if you can’t. Your Durable Power of Attorney can be immediate or springing.
What is an Advance Health Care Directive?Your Advance Health Care Directive authorizes your agent to make healthcare decisions for you. Many states call this a Living Will. California calls it an Advance Health Care Directive. This document also can include a provision to state your wishes regarding prolonging your live.
What is a HIPAA Authorization? Your HIPAA authorizes your agent to talk to your doctors and medical staff.
Revocable Trust vs. Irrevocable Trust
The technical legal name for a Living Trust is a Revocable Living Trust. A Living Trust is revocable, which means it can be revoked, amended and changed. Contrast this with an irrevocable trust, which cannot be amended or changed.
Another difference is that a revocable living trust is a grantor trust, which means the tax identification number of the trust is the Grantor’s social security number. Most irrevocable trusts have their own tax identification number (Employer Identification Number - EIN) which the Grantor or Trustee gets from the IRS.
A living trust is a foundational estate planning document that anyone with probate assets needs. Irrevocable trusts are used in special circumstances. The most common irrevocable trusts we use in our practice are Asset Protection Trusts for children, which are part of living trusts, Medi-Cal Asset Protection Trusts, Irrevocable Life Insurance Trusts (ILIT) and Charitable Remainder Trusts (CRT).
How do I Protect My Children’s Inheritance with a Living Trust?
If you plan to name your children as the remainder beneficiaries of your living trust, you have two main options: Outright distribution or Asset Protection Trust.
Writing your living trust with outright distribution provisions is simple. The provisions will state that when you pass away, your children will receive his or her share outright or direct. If your living trust assets are liquidated to cash, then each of your children will receive a check.
Writing your living trust with asset protection trust provisions will significantly protect your child’s inheritance from divorce claims and lawsuits. Most of our client’s choose to include asset protection trust provisions in their living trust.
How Do I Design My Living Trust if I am Married?
California is a community property state. If you are married, half of every dollar you earn during marriage is your spouse’s, and half of every dollar your spouse earns is yours. And assets you purchase during your marriage are half yours and half your spouses. The only assets that are separate property are certain damage awards from a lawsuit, an inheritance and whatever you and your spouse agree to in a prenuptial marital agreement.
When you and your spouse are designing your joint living trust, you need to consider what you want to do with your assets when the first of you dies.
The simplest approach is to leave all the assets to the surviving spouse, outright. At the first death, the deceased spouse’s share of the assets (half of the assets if all the living trust assets are community property) would go the surviving spouse.
With this arrangement, the living trust would remain revocable, which means the surviving spouse could change the remainder beneficiaries. If the remainder beneficiaries are your joint children, the risk that your spouse will change the remainder beneficiaries after you die is not great. But if you are in a second marriage and have a blended family, the risk may be greater.
If you have a blended family, you could design your living trust with marital trust provisions so your share of the trust assets cannot be changed. It would look like this: when the first spouse dies, the deceased spouse’s share of the assets would be allocated to a marital trust. The marital trust would be irrevocable, so the surviving spouse could not change it. More on estate planning for blended families.
Do I Need to Use an Estate Planning Attorney to Do My Estate Plan?
What is the best do-it-yourself way to create a simple living trust?
There are essentially two ways to set up your Estate Plan. You can do it yourself with DIY estate planning websites such as Legal Zoom, Wills & Trusts or Nolo Press, or you can work with an attorney.
Should I use LegalZoom for estate planning?
f you have a basic estate, online DIY estate websites like Legal Zoom, Wills & Trusts and Nolo Press might be fine. Using Legal Zoom, Wills & Trusts or Nolo Press is inexpensive and basic. And if you have a basic estate, basic documents might work.
Using a DIY estate planning website is also very convenient. You can create your documents on your computer from the comfort of your home - no need to drive several times to an attorney’s office.
What are the downsides to using online will making software?
The big disadvantage of online document assembly software is the “the documents might work” part. Often with the DIY estate planning websites, there is little or no interaction with an estate planning attorney. Which raises the issue: did you click the right buttons and make the right choices?
The thing about estate planning documents is that you don’t know if the documents will work until it’s too late, which means it’s important to have confidence that your estate planning documents will do what you want them to do.
I’ll grant you, just because an attorney drafts and reviews the documents is no guarantee the attorney will do a good job. In many cases, general practice attorneys draft documents without really knowing what they are doing. But there is a much better chance that attorney-drafted estate planning documents, especially documents drafted by an estate planning attorney, will work better than DIY generated documents.
Another disadvantage of using DIY estate planning websites is that you won’t develop a working relationship with an attorney. What if you have questions? What if you need to update your estate planning documents because you had another child, need to change trustees or guardians, need to change beneficiaries or you buy a new home?
Estate planning is not a static one-time event, it is an on-going dynamic process that will require updates from time to time. Your life, your family, your assets and the tax laws change, and your estate plan needs to be updated as needed to reflect those changes.
What About Property Taxes and Proposition 19?
In November 2020, Californians approved Proposition 19, with most voters not knowing the repercussions. Prop 19 was steamrolled through the legislative oversight and vetting process with a big push by the California Association of Realtors and was dubiously marketed as helping fire victims. What it did was eliminate one of the most valuable property tax breaks for California families - the parent child reassessment exclusion.
Proposition 19 eliminated the parent-child property tax reassessment exclusion for most families. Before Prop 19, if you inherited your parents’ home and even rental properties, the property tax on those properties would remain the same. But under Prop 19, the property tax will increase based on the assessed value of the property you inherit. For many families, the new property tax will be so burdensome that it will force the children to sell the home they grew up in. There is one exception. If one of the children moves into mom and dad’s home and makes it his or her residence, then for the most part, the property tax will not increase. Read more about California Proposition 19.
Retirement Plans and Estate Planning
In 2020, the Secure Act was passed, and it significantly changed the rules on inherited IRAs. Under the old rules, if you name your children as beneficiaries of your IRA, when you pass away, each child could stretch-out his or her inherited IRA over his or her lifetime. Under the Secure Act, most will have to distribute out the inherited IRA within 10 years, which significantly limits the period of tax free growth. Read more about the Secure Act.
What About Estate Taxes and Gift Taxes?
Under the current law, most people will not have to worry about federal estate and gift taxes. In 2022, the federal estate tax tax exemption for each person is $12,060,000, which means if your estate is less than that amount you will not be subject to an estate tax. And a married couple can double the exemption.
Note: Some states have a separate "state" estate tax. California does not have a state estate tax. California has very high taxes while you are alive, but it has no estate tax when you die. We have that going for us!
What if I Have a High Net Worth Estate?
If you have a high net worth estate that is big enough that it might be subject to the estate tax, you may need to consider high net worth estate planning strategies such as including bypass trust provisions in your living trust, using an irrevocable life insurance trust (ILIT) to own your life insurance or making gifts to a spousal lifetime access trust (SLAT). More on estate planning for a high net worth estate.
How Often Do I Need to Update My Estate Planning Documents?
Once you do your estate planning, you will need to review it every few years and update it as needed. Your life changes, and your estate plan needs to keep up.
When should you update your estate planning? Here are some things that may require you to update your estate plan:
- You bought a new home
- You refinanced your mortgage
- You had a child, or another child
- You need to change the guardians for your minor children
- You need to change your successor trustees, guardians, executor and agents
- Your children are now old enough to serve in these roles
- You want to change your beneficiaries or change what each beneficiary receives
- You want to make a gift to charity
- Your net worth has changed
- The estate, gift and property tax laws have changed
Estate planning does not have to be complicated. Most families will only need a living trust estate plan. And if you review it every few years and update it as needed, you will gain peace of mind knowing you have protected your family.