By: David L. Crockett, Attorney, CPA
UCLA Law School , J.D. ’69, UC Berkeley ’66
901 Dove St., Ste 120, Newport Beach, CA 92660
INTRODUCTION – Below are some of the questions which frequently are asked by people when they are considering an estate plan. A proper estate plan covers many details which are important and should be discussed with the lawyer preparing your estate planning documents. These questions will help you understand some of the important matters in this area of the law. Your estate plan will be your personal instructions to the next generation and often involves hundreds of thousands of dollars or more and thus needs to be precise and understandable and legally enforceable.
1. WHAT DOCUMENTS ARE TYPICAL IN ESTATE PLANNING?
A Will, a Trust, an Advance Health Care Directive, a Durable Power of Attorney and deeds transferring your property into your trust.
2. DO I NEED A TRUST?
A trust is usually done as part of estate planning so that expensive and time consuming probate court procedures are avoided. A trust is a comprehensive legal contract for management and distribution of your assets both during your life AND upon your death. No probate court proceedings are needed.
3. WHAT IS A WILL?
A Will is a legal document which states to whom your money and property will be given on your death. A Will generally needs a probate court proceeding to legally get your executor appointed and to legally distribute your assets after your death.
4. CAN I CHANGE MY WILL OR TRUST?
Both Wills and Trusts can be changed, amended, revoked, or withdrawn before death as long as you are legally competent.
5. WHAT MONEY AND PROPERTY IS CONTROLLED BY MY TRUST?
Only what you put in your trust is controlled. Money and property which is NOT placed into your trust will require a probate court proceeding for it to be transferred after your death. There are some exemptions from probate for smaller estates.
6. WOULD I NEED A WILL IF I HAVE A TRUST?
Generally, yes. A typical estate plan will have both a will and a trust. The reason for the will is to have instructions for what money and property is not placed into the trust. Wills done along with trusts typically state that “upon my demise transfer all of my money and property into my trust”. This is referred to as a “pourover will”.
7. HOW IS A WILL CREATED?
A legal will in the State of California needs to be signed and dated by the will maker (Testator) and also signed by two independent witnesses. There is also something called a “holographic will” which is completely in the handwriting of the Testator and signed and dated by the Testator.
8. HOW IS A TRUST CREATED?
A trust is a private contract created by the trust maker (Trustor) and the person who will be the initial Trustee. Both must sign it and their signatures should be acknowledged by a notary public. The trust contract is typically called a Declaration of Trust. Also, the trust must have money or property transferred into it to be effective.
9. WHEN DO WILLS AND TRUSTS BECOME PERMANENT?
Wills become permanent and non-changeable upon the death of the Testator. Trusts become permanent according to what is specified in the Declaration of trust. Typical estate planning has a trust that is revocable and it only becomes permanent (irrevocable) upon the death of one or both of the Trustors. However, it is possible to establish a trust which is permanent and irrevocable when it is created.
10. ARE PROCEDURES ON DEATH DIFFERENT FOR WILLS AND TRUSTS?
Generally, yes. Wills will require a probate court proceeding to be able to access bank accounts, carry out the instructions and distribute the property unless the estate is below the exemption limit. Trusts will not require any court proceeding so the persons controlling the trust (known as successor trustees), can access trust bank accounts and carry out the instructions of the trust almost immediately upon the death of the Trustor.
11. DO THE DECEASED’S DEBTS AND TAXES HAVE TO BE PAID?
Yes, legal debts and income, property, and estate taxes (if any), have to be paid before distribution of the deceased’s money and property. If there is a probate proceeding, there are specific rules, forms and deadlines for handling creditors claims. If there is a trust, the procedures are somewhat different but the bottom line is that with either a will or trust the debts and taxes have to be paid.
12. WHAT IF THERE IS NO WILL OR TRUST?
If a person dies without any will or trust then that person is “intestate” and there are specific rules and formulas in the CA probate code as to how the money and property is to be distributed. Generally a probate court proceeding will be required for an “intestate estate” before anything can be distributed unless there is an available exemption for a small estate or unless the money or property is held in joint tenancy and/or with a right of survivorship.
13. CAN I AVOID HAVING TO DO A WILL OR TRUST BY PUTTING EVERYTHING IN JOINT TENANCY?
The short answer is yes but there are likely to be unfortunate and expensive income and property tax consequences. Do not ever put money or property into joint names or with the right of survivorship without first finding out from an estate attorney or Certified Public Accountant what the tax consequences will be. It is generally a huge mistake and not recommended to put your children onto the legal ownership of your house via any sort of deed or joint tenancy deed. You can accomplish the same goals through a trust and save large amounts of taxes and still have control over the situation.
14. WILL THE PROPERTY TAXES INCREASE IF I PUT MY HOUSE INTO A REVOCABLE TRUST?
When a trust is created, a deed is done and recorded with the county to transfer legal ownership into the trust. Generally, property tax law requires that property be reassessed and property taxes increased when any deed transferring legal ownership is recorded. However, there is an exemption from property tax reassessment when a transfer is into a trust for the benefit of the trust creator/Trustor. Proper forms need to be submitted to the county along with the deed to insure that the exemption is applied. Such deeds and forms are typically done by the attorney preparing the trust.
15. ARE TAX RETURNS NEEDED AS PART OF ESTATE PLANNING?
No tax returns are required. However, a part of a thorough estate planning discussion, the tax consequences regarding your estate/trust upon your demise should be explained and planned for. The way the trust is set up can have income, estate and property tax consequences.
16. IS A WILL OR A TRUST CHEAPER TO ADMINISTER UPON DEATH?
A trust is usually less costly because your estate doesn’t have to go through probate court proceedings. If you don’t have a trust or if you only have a will then a probate court proceeding will be needed except for small estates. Probate court proceedings have mandatory attorneys fees according to a state law formula. (4% of the first $100,000 of value; 3% of the next $100,000 of value; 2% of the next $800,000 and 1% of the amount over $1,000,000). If there is a trust, then the legal fees are a matter of private contract between the trustee and the attorney involved. Typically attorneys fees for trust administration are 1/3 or less of what the mandatory probate attorneys fees would be.
17. CAN CONSERVATORSHIP BE AVOIDED IF THERE IS A TRUST?
Conservatorship is a legal proceeding where somebody petitions the probate court to appoint a “conservator” if a person is unable to manage his or her personal financial affairs or is unable to care for themselves physically. Most people prefer to avoid having a conservatorship because it is expensive and time consuming and requires annual reports and accountings to the probate court. A carefully drafted trust can avoid needing a conservatorship. The trust can be drafted so that if a Trustor is unable to manage, then somebody else can step in and take over the Trust money and property and care for the Trustor. That person is typically a successor trustee of the trust. The trust can have as much detail as to how to manage things as the Trustor (trust maker) desires.
20. WHAT IS A LIVING TRUST?
A living trust is a commonly applied name to a typical revocable trust. The “living” part simply means it is created during one’s lifetime, is effective when signed and is amendable and changeable. The title of the trust document makes no difference. It is the contents of the trust document which matter. Thus you could have the “John Smith Living Trust”, or the “John Smith Revocable Trust”, or the “John Smith Living Revocable Trust”, or the “Smith Family Trust” as the name of the same trust document. The only thing which matters is the content of the document. Thus, when you ask a lawyer to review a trust, he/she will tell you that he/she needs to see the entire trust document since the name of the trust does not reveal what it provides for.