Although no one likes to think about dying, there are good reasons to prepare for your inevitable event by setting up a plan to distribute one's estate after death. A person's estate consists of all his or her property and possessions, including bank accounts, real estate, furniture, automobiles, stocks, bonds, life insurance policies, retirement funds pensions, and death benefits. If a person plans well, his or her estate can be passed on after death quickly, easily, and subject to fewer taxes. This chapter discusses the most common estate planning tools-wills and trusts. Living wills (called natural death act declarations in California Estate Planning, Wills &Trusts California), and conservatorship are discussed in the Elder Law Chapter.
A will is the most common document used to specify how an estate should be handled after death. Anyone designated to receive property under a will is called a beneficiary. A will can be simple or elaborate, depending upon the size of the estate and the wished of the person who makes it the testator. Many types of post-death instructions may be included in a will. A will may dictate who should recede specific items of furniture, artwork, or jewelry. A will may name a guardian who will even be used to disinherit a child if the testator does not want the child to receive any part of the estate. The options for what a person can do with a will are varied, but there are limitations.
Each state sets different formal requirements for the creation of a legal will. In California, a person must be at least 18 years old in order to make a legal will. In addition, he or she must be of sound mind, which means that the individual has no mental disability that prevents him or her from understanding the full nature of the document he or she signs.
In California, a person can make a will in one of three ways. A handwritten will, also called a holographic will, is valid in California provided that all of the material provisions of the will are handwritten by the testator, and the will is dated and signed by the testator. A handwritten will does not have to be notarized or witnessed, but having it signed by witnesses is a good idea.
California law also provides for a fill-in-the-blanks form will. The form will is designed for people with modest estates. It allows a person to leave the state to his or her children or spouse, and also allows that estate to give money to another person or charity. The form will also provide for the naming of a guardian and an executor. form wills can be ordered from the California State Bar. Third and finally, a will can be prepared to be a third party, usually a lawyer. A lawyer who prepares wills also can give advice regarding The many ways to leave the property and the tax consequences. This type of will must be signed by the testator in the presence of a least two people who are not beneficiaries under the will. These witnesses also must sign the will.
Individuals must sign their own wills, but if they are illiterate or otherwise incapacitated, they may direct another person, in the presence of witnesses, to sign for them. A will is valid until it is revoked or superseded by a new will. Individual provisions in a will can be changed by a codicil, which is described below. It is not necessary to hire an attorney to create a will. Anyone can create a will, as long as he or she pays outlined above. Making a will to disperse a small estate is particularly easy if the testator uses the form will. The simplest will in history ever to be declared valid by a court contained only three words. “All to wife.” However, a lawyer's guidance is very helpful to deal with complicated property holdings or an estate with many assets, especially if they are located in several different places. An attorney can ensure that the transfer of a way that minimizes the survivor's tax liability. In addition, a complicated estate may require documents other a will, such as a trust agreement, to ensure that all of a person's wishes are carried out
A will typically appoints someone called a personal representative to carry out the specific wishes of the decedent. The personal representative should be a trusted friend or family member who should be made fully aware of his or her duties before the decedent dies. A personal representative must do many things, including collect and manage the decedent's assets, collect any money owed at the time of death, sell any assets, if necessary, to pay estate taxes or representative is allowed to charge a fee for doing this work, choosing a friend or family member who is also a beneficiary to fill this role may be a good choice, because he or she may opt not to charge the full amount allowed by law. To ensure that the personal one or more contingent personal representative who can take over the responsibilities of the primary personal representative if the primary personal representative is unable to assume the responsibilities of the position.
If a person does not name a personal representative in his or her will, State law establishes the order in which a probate court appoints relatives to act as personal representative. If none of these family members agrees to be the personal representative, the probate court may appoint a professional administrator to do the job.
A person with minor or dependent children may name in a will a guardian to care for those children should there be no surviving parent. If a person fails to name someone to assume the role of guardian, the probate court appoints someone. The person chosen by the court will usually be a close relative or friend, but it may not be the person the parent would have chosen. It is important that the potential guardian understand the provision of the will and be willing to accept the responsibilities of being a guardian. Also, it is wise to name an alternate guardian should the primary guardian be unable to accept the responsibility. Of course, the selection of a guardian for children is likely to influence how the parent wants to distribute his or her property. The parent may want to give property to someone only if the recipient accepts guardianship of the child. In this way, the guardian is given the financial resources to care for the child.
People drafting wills often use the opportunity to plan for the possibility of their own incapacity. By preparing a document called a Durable power of attorney, they can give another person of their choosing full legal authority to act on their behalf should they become unable to handle their personal and financial affairs. Without a durable power of attorney, a person's family might need to go to court to have someone appointed to handle the person's legal affairs. If a power of attorney is made part of the will, it is essential that the will be made known to family members before the testator becomes incapacitated. If a will is kept secret, locked away in a safe deposit box until a person dies, it will be too late for the durable power of attorney provisions to be useful. Some people also use a document called a durable power of attorney for health care to make health care decisions in advance should they subsequently become incapacitated. Creating a durable Power of attorney for health care is discussed in the Elder Law Chapter.
In California, spouses acquire possessions, and real estate called Community property. Spouses own this property equally and therefore only one-half of the community property can be included in each spouse's will. In order to protect spouses and dependent children, Some laws prevent a person from disinheriting a spouse or child. In California, a testator can disinherit a spouse in a will if any of the three testators' failure to provide for the spouse in the will was intentional and that intention is apparent in the will. Second, a spouse has disinherited if the testator provided for the spouse be making a transfer outside the will, and the testator intended that the transfer is in lieu of a testamentary provision. The intention is shown by statements of the testator, from the amount of the transfer, or by other evidence. Finally, a spouse may make a valid agreement waiving the right to share in the testator's estate. Occasionally this happens through a prenuptial agreement. For example, a second spouse may agree that an entire estate will go to children from a first marriage.
Absent one of these three circumstances, a spouse who is not otherwise provided for a will receives a share in the decedent's estate consisting of the testator's one-half of the community property or quasi-community property plus a share of the separate property of the testator equal to what the spouse would have received if the testator had died intestate, up to one-half of the value of the separate property. A person may legally disinherit a child be clearly specifying in a will that the child not receive any of the estates.
There are other limits to a will. Anything owned in joint tenancy with another person will go to the surviving joint tenant. Arrangements must be made to end the joint tenancy before death if one joint tenant does not want the other to inherit the jointly held property. Because there may be significant tax consequences in doing so, these changes should be made only after consulting an attorney. Some possessions are not considered part of the estate because they are already promised to someone else. For example, a testator may not specify in a will that someone other than the beneficiary of a life insurance policy gets the benefits described in the policy. However, a person may designate his or her estate as the beneficiary of a life insurance policy. In this case, the money from the policy will be added to other estate assets and will be distributed according to the will. Similarly, the money from a retirement plan goes to the persons named on the plan, regardless of whether they are beneficiaries in a will. Laws designed to uphold public policy also limit what can be done with a person's assets after death. For example, conditions in a will encouraging someone to do something illegal or immoral in order to inherit money or property would not be enforceable.
The provisions of a will are valid until they are changed, revoked, destroyed, or invalidated by the writing of a new will. Changes or additions to a will may be included in a document called a codicil. Codicils must be written, signed, and witnessed in the same way as wills. Wills are not changed legally simply by crossing out existing language or writing in new provisions. In order to avoid making a new will or codicil each time a person's possessions change, a will can specify that personal property is to be distributed according to instructions outlined in a separate document. A person than revises the separate document as often as necessary, without observing all of the formalities required to change the will itself.
If someone dies with a will that is not up-to-date, people may not be provided adequately. For example, a person chosen to be a personal representative or guardian may have died or fallen out of favor with the author of the will, or a favorite charity may no longer exist. A significant amount of case law has dealt with how a probate court is to proceed with a will that has become unenforceable because of changed circumstances. These headaches can be avoided if a will is reviewed at least every two years and revised for major changes in tax laws, for personal events such as births, deaths, marriages, divorces, or for significant changes in the size of the estate. In California, a divorce automatically revokes any distribution to the former spouse, It is also a good idea to review a will if its author moves to another state, because the new state of residency may have different inheritance and tax laws.
If a person does not have a will or has not adequately planned for the distribution of his or her estate at death, survivors may face a complicated, time-consuming, and costly process. Often survivors wind up having to pay more taxes on their inheritance than they would have paid had there been a will or other estate planning tool. To provide for surviving friends and relatives, or to support favorite causes or charities, a person should plan for the distribution of his or her estate after death. With planning, an estate can be distributed as fairly as possible with as little tax burden as legally allowed. When a decedent leaves no will or other comparable estate planning tool, he or she is said to have died intestate. Jurisdiction over wills and trusts is in the superior court sitting in probate.
When a person dies intestate, the probate court steps in to divide the decedent's estate, according to a formula provided by the state inheritance laws, Under the state inheritance laws, the probate court uses formulas set by the legislature to divide the deceased person possessions among any surviving relatives. A probate court applying the state inheritance laws first deducts from the estate the funeral expenses and any unpaid medical bills, taxes, Family allowance expenses, and other debts owed. If the decedent was married, the surviving spouse receives all of the community property. If the decedent has a surviving spouse and no children, parents.
Goes to the spouse. If there is one child, grandchild, parent, or siblings, The surviving spouse receives one-half of the intestate estate and the other surviving relative receives the other half. If there is more than one child, more than one grandchild, or at least one child and one grandchild, the spouse receives one-third of the intestate estate, and surviving children and/or grandchildren receive equal shares of whatever is left of the estate after the spouses share is deducted. If one of the decedent's children dies before the decedent that child's share passes to his or her living descendants. Anyone entitled to inherit a portion of an intestate decedents estate is known as an heir
One problem with relying on a probate court applying state inheritance laws to distribute an estate is that it may not distribute the estate in the manner the decedent would have wanted. State inheritance laws only recognize relatives. The inheritance laws never permit the probate court to support a decedent close friend, lover, or favorite charities. If no relatives are found, the estate goes to the state. Clearly, for most people writing a will or creating a trust is advisable.
A trust is another estate-planning device frequently used to manage the distribution of a personal estate.
To create trust, the owner of the property (grantor) transfers the property to a person or institution (trustee) who holds legal title to the property and manages it for the benefit of a third party (beneficiary). The grantor can name himself or herself or another person as the trustee. A trust can be either a testamentary trust or a living trust. A testamentary trust transfers the property to the trust only after the death of the grantor. A living trust, something called an inter vivos trust, is created during the life of the grantor and can be set up to continue after the grantor's death or to terminate and be distributed upon the grantor's death. Unlike a will, which in some cases can be drafted without the help of an attorney, a trust should never be drafted without the aid of a lawyer. Many complex laws regulate trusts. Trusts must be carefully structured if they are to take into account the size and composition of the estate and take advantage of beneficial tax laws. An experienced attorney should always assist in drafting a trust so that it is valid, Meets the needs of the estate, and does not conflict with any previously drafted will.
Trusts have many advantages over wills. The advantages depend on whether a living trust or testamentary trust is chosen. All trusts have the advantage of allowing the grantor to determine who receives the benefit of the money, when it is received, and what conditions a must be met. If a spouse is unable or unwilling to manage assets, if children are minors or are unable to handle money responsibly, or if a beneficiary is disabled, creating a trust can be a better way of passing on assets. Creating a living or testamentary trust is an especially popular way of providing for beneficiaries future educational or medical costs. Some advantages are particular to living trusts. First, a living trust can give its grantor substantial tax advantages. Second, possessions held in a living trust are not subject to estate administration by the probate court after the grantor dies. Survivors do not have to reveal the details of any possessions held in trust through the public filing process that takes place during probate. In addition, if the grantor owns real estate in another state, establishing a living trust fo the title to that property may allow survivors to avoid probate in the other state. A living trust can free the grantor from the burden of overseeing his or her financial affairs because a trustee manages all the assets of a living trust. More importantly, a living trust allows a trustee to manages the trust funds in the event that is a creator becomes incapacitated or mentally or physically unable to oversee his or her possessions. If a living trust contains all of a person's assets, then he or she may not need a will, And his or her survivors may be able to avoid probate, If only part of a person's possessions is held in living trust, then a will is necessary to distribute those items in the estate not placed into a trust. However, a “pour-over upon death into a pre-existing living trust.
The primary disadvantage of a living trust is that it involves the loss of some flexibility and control over one's assets. Unlike a will, which becomes effective only at death, a living trust becomes effective immediately upon its creation. For the person who wants to retain unrestricted control over his or her estate, as well or testamentary trust is a better estate-planning tool because it can be changed at any time prior to death. The primary advantage of a testamentary trust is that it allows the grantor to retain unrestricted control over his or her estate. A testamentary trust becomes effective only upon the death of its grantor. Like a will, a testamentary trust can be changed at any time prior to death. The primary disadvantage of testamentary trusts is that they do not take advantage of the beneficial tax treatment given to living trusts. Because a testamentary trust only takes effect when the grantor dies, the grantor cannot enjoy any tax advantage during his or her life also, most testamentary trusts must go through probate. Revocable and Irrevocable TrustsA living trust can be either revocable or irrevocable. As implied by their names, a revocable trust can be changed or revoked after its creation, while a person signing an irrevocable trust gives up the right to change or revoke the trust. A revocable trust quite often is devised to supplement a will and/pr to name someone to handle the grantor's affairs should the grantor become incapacitated. A trust usually must be made irrevocable if the grantor wants to avoid income or estate taxes. Tax authorities consider the grantor of a revocable trust to be the owner of the property because he or she still controls the property. For this reason, income from assets held in a revocable trust must be reported as income to the grantor for income tax purposes. At the death of the grantor, property in a revocable trust is included in the estate for calculating estate taxes. An irrevocable trust often is designed to be the beneficiary of a life insurance policy. Such a life insurance trust also may spell out how the policy money is distributed to survivors. In addition, irrevocable trusts often are set up to manage money given to minors and to charities. Finally, an irrevocable trust can be used to transfer assets to another person in the event that the grantor requires expensive medical care. Although doing so may protect the grantor's family by ensuring that the cost of medical care does not wipe out the family fortune, it may make the grantor intelligible to receive federal and state medical assistance.
With few exceptions, the estate of a person who dies owning property in his or her name cannot be legally distributed without first going through probate. Only if a decedent left the entire estate to a spouse, Or if the entire estate is worth no more than $60,000, or if all of a decedents property is held in joint tenancy or in trust, can the survivors avoid probate? Probate operates either formally, with court supervision, or informally, without court supervision. Whether formal or informal, the first duty of the probate court is to determine whether the decedent left a valid will. If the decedent left a valid will, the probate court oversees the process of settling the estate according to the terms of the will. If the decedent did not leave a will or if the probate court determines the will is invalid, the probate court applies the state inheritance laws, described earlier, to the estate.
Informal probate is designed for small estates in which court supervision or adjudication is not required because the estate has no uncertainties, legal disputes, or complex administrative requirements. If a public administrator is appointed as a personal representative, the public administrator can summarily dispose of a small estate in accordance with state statutes. A public administrator may engage an attorney to handle at least a portion of his or her duties even under informal probate. When the probate court formally supervises distribution, its responsibilities may include:
Overseeing the distribution of estate assets, including payment of State and federal taxes
Hearing any contested claims by creditors or others seeking to collect from the estate
Choosing a personal representative when one is not named in the will
supervising the actions of the personal representative, including the payment of state and federal taxes
Deciding which possessions are subject to estate administration determining a decedent's true heirs
Ruling on the legitimacy of any claims outstanding against the estate
Supervising the transfer of assets to beneficiaries named in the will
Overseeing a guardians use of property placed in trust for the benefit of children or dependents
Making out will do not guarantee that survivors avoid all distribution problems, but a carefully drafted will can minimize their time in court.
A carefully created estate plan can considerably reduce the tax burden on an estate. Although California no longer has an inheritance tax, More than $600,000 must file an estate tax return and may be liable for payment of federal and California estate taxes. The federal government's inheritance tax scheme is quite complicated. Under Federal tax law, a person is allowed to leave $600,000 tax-free to one or more individuals, other than a surviving spouse. The surviving spouse is entitled to receive an unlimited amount tax-free. If the estate is a very large one, however, and the entire estate is left to the surviving spouse, the surviving spouse may lose the option of giving $600,000 tax-free to individuals of his or her own choosing. An experienced tax attorney can create trusts that will allow both spouse to pass on a total of $1,200,000 free of estate taxes.