• What is estate planning?
• What is involved in estate planning?
• What is included in my estate?
• Who needs estate planning?
• What is a will?
• What is a revocable inter vivos trust?
• What is a probate?
• To whom should I leave my property?
• Whom should I name as my executor or trustee?
• Does estate planning involve tax planning?
• How should I provide for my child?
• What other kinds of trusts are used in estate planning?
• Can the way in which I hold title make a difference?
• What are other methods of leaving property?
• What if I become unable to care for myself?
WHAT IS ESTATE PLANNING?
Estate planning is a process. The process generally has two parts. One part involves planning for the management and disposition of your property both during your lifetime and after your death. The second part is planning for your own personal and health care in the event that you are no longer able to provide for such care.
Like many people, you may think that estate planning only requires the preparation of a will, and medical and business planning. The purpose of this document is to summarize the estate planning process and what the process means to you.
back to top
WHAT IS INVOLVED IN ESTATE PLANNING?
The form of your estate plan will depend upon your particular circumstances. In planning your estate, your goals and wishes should be given the highest priority. In addition to your goals and wishes, you should consider your family and its needs and the nature and extent of your property. During the estate planning process, you will need to answer a number of important questions. Major questions concern who will receive your property upon your death and the manner in which your property will be distributed. Depending upon your circumstances, you should determine:
• Who should administer your estate after your death?
• Who should be the guardian of your children?
• How can federal estate (death) and other taxes be minimized?
• How will your executor or trustee pay for death taxes if any are due?
• How should you and your spouse hold title to your assets?
• If you cannot care for yourself, whom do you want to take care of you?
• If you cannot manage your estate, whom do you want to do so?
• Who should receive the proceeds of your life insurance or your retirement?
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WHAT IS INCLUDED IN MY ESTATE?
Your estate consists of all property or interest in property that you own. This means that the furniture that you own is part of your estate. Your estate also may consist of money held in bank accounts, stocks, real property, life insurance or retirement benefits.
The value of your estate is equal to the "fair market value" of that asset which you own, minus your debts that include a mortgage on a home. In general, "fair market value" may be thought of as the present value of as asset or the cost of currently purchasing or otherwise acquiring an asset. In assisting you with your estate plan, your attorney will need to know about the property that you own and its value. The value of your estate is important in determining whether, and to what extent, your estate will be taxed after death and the resources that you will have available in the event of your incapacity.
To help you with your estate planning, your lawyer also will want to know about your current financial situation and how your financial status might change in the future, particularly after you retire. Your lawyer should review your important personal papers and records, including any existing will, deed to real property, pre- or post marital agreements and federal and state income tax returns. Your lawyer also will need to know about any pension and profit-sharing plans in which you participate, any business or insurance you own and the mortgages and other debts that you may owe.
back to top
WHO NEEDS ESTATE PLANNING?
Almost every individual, regardless of the value of his or her estate, needs estate planning. If your estate has a small value, your estate planning may only focus upon who is to receive your property after your death. If your estate is larger, your attorney will discuss with you not only who is to receive your property upon your death, but also different ways to preserve your property for your heirs. For example, estate planning often involves planning to reduce or defer the amount of federal estate (death) taxes which otherwise might be payable on your death.
However, regardless of the size of your estate, you will want to designate who, in the event of your incapacity, is to manage your affairs, care for you and to make health care decisions. You also want to consider such alternatives as an Advance Health Care Directive. (See #15)
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WHAT IS A WILL?
A will is a traditional legal document in which you identify those individuals (or institutions) who (or which) will receive your property and possessions on your death. These individuals and institutions are commonly referred to as beneficiaries. In a will, you appoint or name an executor, who may be an individual or an institution. After your death, your executor will manage your affairs and will insure that your property is distributed in accordance with the provisions of your will. In a will, you also may name the guardian(s) of the person or estate of your minor children, make specific gifts to individuals or charities or even include burial instructions.
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WHAT IS A REVOCABLE INTER VIVOS TRUST?
A revocable inter vivos trust is also commonly referred to as a "living trust" or a "family trust." A living trust may be amended or totally revoked at any time during your lifetime, as long as you remain competent.
A trust is a written agreement between the individual creating the trust (commonly known as a "trustor," "grantor" or "settlor") and the person or institution who is to manage the assets held in the trust (commonly known as the "trustee"). The trustee may be either an individual or a bank or trust company; for a bank or trust company to act as a trustee, the institution must be licensed by the State of California.
You create a trust by executing a written agreement. In the written agreement, you give the trustee the legal right to manage or control your property; identify the persons or institutions ("beneficiaries") who are to receive income or principal; and set forth the provisions which will guide the trustee in the management and distribution of the trust property.
The trustee is a fiduciary, a person who occupies a position of trust and confidence, and is subject to strict fiduciary responsibilities. Usually, a fiduciary is held to higher standards of performance than is a person or institution who or which is not a fiduciary. Without the settlor’s express written permission, the trustee cannot use trust property for his/her own personal use, benefit or self-interest, but must hold the trust property solely for the benefit of the beneficiaries of the trust.
Often the major purpose of a revocable living trust is to avoid probate. With only a few exceptions, title to all of a settlor’s assets must be transferred to the trustee of revocable living trust to avoid probate. For example, a deed is used to transfer title to real property from the settlor to the trustee. One exception to the general transfer rule is the probate still will be avoided even though certain assets with a value of $100,000 or less are not transferred to the trustee. Other assets, such as those that are held in joint tenancy or which could pass by beneficiary designation, do not have to be transferred to the trustee to avoid probate.
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WHAT IS A PROBATE?
Many persons elect to use a revocable living trust as a will substitute primarily to avoid probate. Probate is a court-supervised process that has its ultimate goal the transfer of property from an individual who has died (the "decedent") to that individual’s beneficiaries who are identified in a will.
A probate has advantages and disadvantages. For example, if a dispute arises about the distribution of a decedent’s property, the probate court is accustomed to resolving such disputes expeditiously and in accordance with well-defined rules. Disadvantages of a probate include its public nature and, sometimes, the expense. Also, many probates are very lengthy, particularly when compared to the time required to administer the estate of a person who has created and funded a revocable living trust.
Another advantage of a revocable trust is that it enables you to have your assets managed during your lifetime, if such management is necessary or desirable, and may enable you to avoid a conservatorship, a court-supervised proceeding in which the court appoints an individual to take care of you and your property if you are unable to do so for yourself.
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TO WHOM SHOULD I LEAVE MY PROPERTY?
Regardless of whether you have a will or create a revocable living, the primary purposes of the estate planning document is to identify those persons or institutions who are to receive your property upon your death and to determine how the property is to be distributed. The beneficiaries who are to receive property must be clearly and accurately identified. Often disputes arise after an individual dies because the identities of the beneficiaries or the terms and conditions under which beneficiaries are to receive property are unclear.
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WHOM SHOULD I NAME AS MY EXECUTOR OR TRUSTEE?
After an individual’s death, the executor of a will and the trustee of a trust serve almost identical functions. Both the executors and the trustee are responsible for insuring that the decedent’s wishes, as expressed in the will or trust, are fully implemented. Although the executor is generally subject to direct court supervision, both the executor and the trustee have similar fiduciary responsibilities (see #6). For example, both a trustee and an executor must act solely for the benefit of the beneficiaries named in the trust or will.
In most instances, the settlor acts as trustee for as long as he or she is capable. Thus, the settlor continues to manage and distribute trust assets for his or her own benefit. Whether or not you should act as your own trustee is a decision that you should discuss with your attorney. If a settlor becomes incapable of functioning as a trustee, however, the designated successor trustee will act as trustee.
Persons often named as an executor or a successor trustee includes a spouse, adult children, other relatives, family friends, business associates or an institution. In determining who should act as an executor or a trustee, you should select someone who is responsible, well organized and experienced in maintaining books and records. In addition, it is useful if an executor or successor trustee has had business experience and is knowledgeable about making investments.
If a revocable living trust is part of your estate plan, and if an individual (other than a close relative) or an institution acts as trustee, you generally will have to pay an annual fee to that person or institution. The amount of compensation charged by various trustees may vary, so you might want to "shop around" before you decide whom to name as successor trustee. You also should expect to pay additional fees for any accounting, tax or investment advice that your trustee may need.
back to top
DOES ESTATE PLANNING INVOLVE TAX PLANNING?
Often the creation of a will or a revocable living trust will involve substantial tax planning, particularly for larger estate. Estate planning generally focuses upon federal estate (death) taxes, but also may encompass income, gift, real property or qualified retirement plan taxes.
Federal estate taxes are imposed upon an estate that has a value of $675,000 or more. (This $675,000 figure is scheduled to increase, gradually, over the next six (6) years until the exemption reaches the amount of $1,000,000 per individual in 2006.) Although significant federal estate taxes can be saved by proper estate planning, the planning usually must occur before death. Qualified legal advice about federal estate and other taxes should be obtained during the estate planning process.
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HOW SHOULD I PROVIDE FOR MY CHILD?
In the event of the death of both parents, a minor child is not legally qualified under California law to care for himself or herself or to manage property. A minor is a child under 18 years of age. In planning your estate, you should consider what would happen to your child if both you and your spouse died. To plan for such an occurrence, you should name a guardian to supervise your child and his or her property until the child attains 18 years of age. To provide for the management of the child’s property you also might want to consider such alternatives to a guardianship as a trust or a transfer under the Uniform Transfers to Minors Act.
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WHAT OTHER KINDS OF TRUSTS ARE USED IN ESTATE PLANNING?
Trusts serve a wide variety of needs in estate planning; they may be established for the benefit of a child, a disabled or incapacitated individual or a charity. In additions to the popular revocable living trust (see #7), one other common type of trust is a life insurance trust. The trustee of a life insurance trust holds title to a life insurance policy, and on the death of the insured, receives, manages and distributes the proceeds of the life insurance policy.
A life insurance trust allows for the organized management of the proceeds of a life insurance policy on the death of the insured. In addition, if a life insurance trust is properly created and operated, the proceeds of a life insurance policy held in the trust will not be subject to any federal estate taxes. To avoid federal estate taxes, an insurance trust must be irrevocable; that is, once the trust is signed, it cannot be amended or revoked.
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CAN THE WAY IN WHICH I HOLD TITLE MAKE A DIFFERENCE?
Estate planning should involve an examination of the manner in which you currently hold title to your assets because the form of ownership of your assets can affect your estate planning goals. For example, a change in the manner in which you hold title to assets may avoid a probate or may result in lower income taxes. Before you change title to an asset, you should understand the tax and other consequences of any proposed change. Your estate planning attorney and your tax specialist will be able to advise you.
Community Property: Joint Tenancy Property
If you are married, you and your spouse most likely hold title to your assets in either joint tenancy or community property form. (Persons other than husband and wife also may hold title to property as joint tenants.) The distinguishing characteristic of a joint tenancy is that title to the property automatically passes to the surviving joint tenant upon the death of the first joint tenant and therefore is not subject to any post-death administration. The surviving joint tenant has the immediate use and enjoyment of the joint tenancy property.
• What is involved in estate planning?
• What is included in my estate?
• Who needs estate planning?
• What is a will?
• What is a revocable inter vivos trust?
• What is a probate?
• To whom should I leave my property?
• Whom should I name as my executor or trustee?
• Does estate planning involve tax planning?
• How should I provide for my child?
• What other kinds of trusts are used in estate planning?
• Can the way in which I hold title make a difference?
• What are other methods of leaving property?
• What if I become unable to care for myself?
WHAT IS ESTATE PLANNING?
Estate planning is a process. The process generally has two parts. One part involves planning for the management and disposition of your property both during your lifetime and after your death. The second part is planning for your own personal and health care in the event that you are no longer able to provide for such care.
Like many people, you may think that estate planning only requires the preparation of a will, and medical and business planning. The purpose of this document is to summarize the estate planning process and what the process means to you.
back to top
WHAT IS INVOLVED IN ESTATE PLANNING?
The form of your estate plan will depend upon your particular circumstances. In planning your estate, your goals and wishes should be given the highest priority. In addition to your goals and wishes, you should consider your family and its needs and the nature and extent of your property. During the estate planning process, you will need to answer a number of important questions. Major questions concern who will receive your property upon your death and the manner in which your property will be distributed. Depending upon your circumstances, you should determine:
• Who should administer your estate after your death?
• Who should be the guardian of your children?
• How can federal estate (death) and other taxes be minimized?
• How will your executor or trustee pay for death taxes if any are due?
• How should you and your spouse hold title to your assets?
• If you cannot care for yourself, whom do you want to take care of you?
• If you cannot manage your estate, whom do you want to do so?
• Who should receive the proceeds of your life insurance or your retirement?
back to top
WHAT IS INCLUDED IN MY ESTATE?
Your estate consists of all property or interest in property that you own. This means that the furniture that you own is part of your estate. Your estate also may consist of money held in bank accounts, stocks, real property, life insurance or retirement benefits.
The value of your estate is equal to the "fair market value" of that asset which you own, minus your debts that include a mortgage on a home. In general, "fair market value" may be thought of as the present value of as asset or the cost of currently purchasing or otherwise acquiring an asset. In assisting you with your estate plan, your attorney will need to know about the property that you own and its value. The value of your estate is important in determining whether, and to what extent, your estate will be taxed after death and the resources that you will have available in the event of your incapacity.
To help you with your estate planning, your lawyer also will want to know about your current financial situation and how your financial status might change in the future, particularly after you retire. Your lawyer should review your important personal papers and records, including any existing will, deed to real property, pre- or post marital agreements and federal and state income tax returns. Your lawyer also will need to know about any pension and profit-sharing plans in which you participate, any business or insurance you own and the mortgages and other debts that you may owe.
back to top
WHO NEEDS ESTATE PLANNING?
Almost every individual, regardless of the value of his or her estate, needs estate planning. If your estate has a small value, your estate planning may only focus upon who is to receive your property after your death. If your estate is larger, your attorney will discuss with you not only who is to receive your property upon your death, but also different ways to preserve your property for your heirs. For example, estate planning often involves planning to reduce or defer the amount of federal estate (death) taxes which otherwise might be payable on your death.
However, regardless of the size of your estate, you will want to designate who, in the event of your incapacity, is to manage your affairs, care for you and to make health care decisions. You also want to consider such alternatives as an Advance Health Care Directive. (See #15)
back to top
WHAT IS A WILL?
A will is a traditional legal document in which you identify those individuals (or institutions) who (or which) will receive your property and possessions on your death. These individuals and institutions are commonly referred to as beneficiaries. In a will, you appoint or name an executor, who may be an individual or an institution. After your death, your executor will manage your affairs and will insure that your property is distributed in accordance with the provisions of your will. In a will, you also may name the guardian(s) of the person or estate of your minor children, make specific gifts to individuals or charities or even include burial instructions.
back to top
WHAT IS A REVOCABLE INTER VIVOS TRUST?
A revocable inter vivos trust is also commonly referred to as a "living trust" or a "family trust." A living trust may be amended or totally revoked at any time during your lifetime, as long as you remain competent.
A trust is a written agreement between the individual creating the trust (commonly known as a "trustor," "grantor" or "settlor") and the person or institution who is to manage the assets held in the trust (commonly known as the "trustee"). The trustee may be either an individual or a bank or trust company; for a bank or trust company to act as a trustee, the institution must be licensed by the State of California.
You create a trust by executing a written agreement. In the written agreement, you give the trustee the legal right to manage or control your property; identify the persons or institutions ("beneficiaries") who are to receive income or principal; and set forth the provisions which will guide the trustee in the management and distribution of the trust property.
The trustee is a fiduciary, a person who occupies a position of trust and confidence, and is subject to strict fiduciary responsibilities. Usually, a fiduciary is held to higher standards of performance than is a person or institution who or which is not a fiduciary. Without the settlor’s express written permission, the trustee cannot use trust property for his/her own personal use, benefit or self-interest, but must hold the trust property solely for the benefit of the beneficiaries of the trust.
Often the major purpose of a revocable living trust is to avoid probate. With only a few exceptions, title to all of a settlor’s assets must be transferred to the trustee of revocable living trust to avoid probate. For example, a deed is used to transfer title to real property from the settlor to the trustee. One exception to the general transfer rule is the probate still will be avoided even though certain assets with a value of $100,000 or less are not transferred to the trustee. Other assets, such as those that are held in joint tenancy or which could pass by beneficiary designation, do not have to be transferred to the trustee to avoid probate.
back to top
WHAT IS A PROBATE?
Many persons elect to use a revocable living trust as a will substitute primarily to avoid probate. Probate is a court-supervised process that has its ultimate goal the transfer of property from an individual who has died (the "decedent") to that individual’s beneficiaries who are identified in a will.
A probate has advantages and disadvantages. For example, if a dispute arises about the distribution of a decedent’s property, the probate court is accustomed to resolving such disputes expeditiously and in accordance with well-defined rules. Disadvantages of a probate include its public nature and, sometimes, the expense. Also, many probates are very lengthy, particularly when compared to the time required to administer the estate of a person who has created and funded a revocable living trust.
Another advantage of a revocable trust is that it enables you to have your assets managed during your lifetime, if such management is necessary or desirable, and may enable you to avoid a conservatorship, a court-supervised proceeding in which the court appoints an individual to take care of you and your property if you are unable to do so for yourself.
back to top
TO WHOM SHOULD I LEAVE MY PROPERTY?
Regardless of whether you have a will or create a revocable living, the primary purposes of the estate planning document is to identify those persons or institutions who are to receive your property upon your death and to determine how the property is to be distributed. The beneficiaries who are to receive property must be clearly and accurately identified. Often disputes arise after an individual dies because the identities of the beneficiaries or the terms and conditions under which beneficiaries are to receive property are unclear.
back to top
WHOM SHOULD I NAME AS MY EXECUTOR OR TRUSTEE?
After an individual’s death, the executor of a will and the trustee of a trust serve almost identical functions. Both the executors and the trustee are responsible for insuring that the decedent’s wishes, as expressed in the will or trust, are fully implemented. Although the executor is generally subject to direct court supervision, both the executor and the trustee have similar fiduciary responsibilities (see #6). For example, both a trustee and an executor must act solely for the benefit of the beneficiaries named in the trust or will.
In most instances, the settlor acts as trustee for as long as he or she is capable. Thus, the settlor continues to manage and distribute trust assets for his or her own benefit. Whether or not you should act as your own trustee is a decision that you should discuss with your attorney. If a settlor becomes incapable of functioning as a trustee, however, the designated successor trustee will act as trustee.
Persons often named as an executor or a successor trustee includes a spouse, adult children, other relatives, family friends, business associates or an institution. In determining who should act as an executor or a trustee, you should select someone who is responsible, well organized and experienced in maintaining books and records. In addition, it is useful if an executor or successor trustee has had business experience and is knowledgeable about making investments.
If a revocable living trust is part of your estate plan, and if an individual (other than a close relative) or an institution acts as trustee, you generally will have to pay an annual fee to that person or institution. The amount of compensation charged by various trustees may vary, so you might want to "shop around" before you decide whom to name as successor trustee. You also should expect to pay additional fees for any accounting, tax or investment advice that your trustee may need.
back to top
DOES ESTATE PLANNING INVOLVE TAX PLANNING?
Often the creation of a will or a revocable living trust will involve substantial tax planning, particularly for larger estate. Estate planning generally focuses upon federal estate (death) taxes, but also may encompass income, gift, real property or qualified retirement plan taxes.
Federal estate taxes are imposed upon an estate that has a value of $675,000 or more. (This $675,000 figure is scheduled to increase, gradually, over the next six (6) years until the exemption reaches the amount of $1,000,000 per individual in 2006.) Although significant federal estate taxes can be saved by proper estate planning, the planning usually must occur before death. Qualified legal advice about federal estate and other taxes should be obtained during the estate planning process.
back to top
HOW SHOULD I PROVIDE FOR MY CHILD?
In the event of the death of both parents, a minor child is not legally qualified under California law to care for himself or herself or to manage property. A minor is a child under 18 years of age. In planning your estate, you should consider what would happen to your child if both you and your spouse died. To plan for such an occurrence, you should name a guardian to supervise your child and his or her property until the child attains 18 years of age. To provide for the management of the child’s property you also might want to consider such alternatives to a guardianship as a trust or a transfer under the Uniform Transfers to Minors Act.
back to top
WHAT OTHER KINDS OF TRUSTS ARE USED IN ESTATE PLANNING?
Trusts serve a wide variety of needs in estate planning; they may be established for the benefit of a child, a disabled or incapacitated individual or a charity. In additions to the popular revocable living trust (see #7), one other common type of trust is a life insurance trust. The trustee of a life insurance trust holds title to a life insurance policy, and on the death of the insured, receives, manages and distributes the proceeds of the life insurance policy.
A life insurance trust allows for the organized management of the proceeds of a life insurance policy on the death of the insured. In addition, if a life insurance trust is properly created and operated, the proceeds of a life insurance policy held in the trust will not be subject to any federal estate taxes. To avoid federal estate taxes, an insurance trust must be irrevocable; that is, once the trust is signed, it cannot be amended or revoked.
back to top
CAN THE WAY IN WHICH I HOLD TITLE MAKE A DIFFERENCE?
Estate planning should involve an examination of the manner in which you currently hold title to your assets because the form of ownership of your assets can affect your estate planning goals. For example, a change in the manner in which you hold title to assets may avoid a probate or may result in lower income taxes. Before you change title to an asset, you should understand the tax and other consequences of any proposed change. Your estate planning attorney and your tax specialist will be able to advise you.
Community Property: Joint Tenancy Property
If you are married, you and your spouse most likely hold title to your assets in either joint tenancy or community property form. (Persons other than husband and wife also may hold title to property as joint tenants.) The distinguishing characteristic of a joint tenancy is that title to the property automatically passes to the surviving joint tenant upon the death of the first joint tenant and therefore is not subject to any post-death administration. The surviving joint tenant has the immediate use and enjoyment of the joint tenancy property.
If a husband and wife hold title to their property as community property, then each spouse has an equal present and existing interest in all such property, and each spouse is free to dispose of his or her one-half interest. When a husband and wife acquire property in California during their marriage, it is presumed to be community property and is subject to post-death administration.
If a husband and wife want to change the character of their marital property. However, any such change must be expressly consented to in writing by both parties. For example, a husband and wife may hold title to their home in joint tenancy. If they want to change the ownership form to community property, they should sign a new deed that re-characterizes their home as their community property.
Separate Property:
A married individual may own separate property as a result of owning property prior to marriage or of receiving property by gift or inheritance. When a married person owns separate property additional estate planning issues must be considered.
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WHAT ARE OTHER METHODS OF LEAVING PROPERTY?
Your estate may include life insurance or qualified or non-qualified retirement benefits. A beneficiary designation is used to identify who should receive life insurance or qualified retirement plan proceeds upon your death. A beneficiary designation is usually a document other than a will or a trust. You should coordinate your beneficiary designations(s) for such assets with your entire estate plan.
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WHAT IF I BECOME UNABLE TO CARE FOR MYSELF?
If you become incapable of managing your estate or of providing for your own care, you should determine, in advance of any such incapacity who you want to care for you and your estate.
Conservatorships are court-supervised proceeding that allows the court to appoint who is to care for you and to manage your estate if you are incapacitated.
Alternatives to a conservatorship are an Advance Health Care Directive. A durable power of attorney does not involve a court proceeding and may be effective immediately or upon the occurrence of some future event. In a durable power of attorney, you (the "principal") appoint another individual (the "attorney in fact") to make health care or property management decisions on your behalf. Under a durable power of attorney for property, the attorney in fact manages your assets and functions much as a conservator, but without court supervision. Under an Advance Health Care Directive, the attorney in fact makes health care decisions when you can no longer make such decisions.
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