The following is an excerpt from a California Bar Association publication on estate planning that further explains estate planning:

1. 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. But estate planning encompasses much more. As you will see, estate planning may involve financial, tax, medical and business planning, as well as the preparation of a will. The purpose of this pamphlet is to summarize the estate planning process and what the process means to you.

2. 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, who do you want to take care of you?
  • If you cannot manage your estate, who do you want to do so?
  • Who should receive the proceeds of your life insurance or your retirement benefits?

3. What is included in my estate?

Your estate consists of all property or interests in property which you own. This means that the furniture which you own (regardless of whether or not you own your home or rent an apartment) is part of your estate. Your estate also may consist of money held in bank accounts, stocks or bonds, real property (including your home), life insurance or retirement benefits.

The value of your estate is equal to the “fair market value” of each asset that you own, minus your debts which include a mortgage on a home. In general, “fair market value” may be thought of as the present value of an 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 which 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 your death and the resources which 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 which you may owe.

4. 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, to care for you and to make health care decisions. You also will want to consider such alternatives as durable powers of attorney for health care and property and conservatorships of the person and estate. (See #16.)

5. Who should help me with my estate planning documents?

Professionals Should Assist in Estate Planning

Wills and trusts are legal documents which should be prepared by a qualified attorney. However, many other professionals and business representatives may become involved in the estate planning process. For example, certified public accountants, personnel managers, pension consultants, life insurance salespersons and bank officers often participate in the estate planning process. Within their area of expertise, these professionals can assist you in planning your estate.

The State Bar urges you to seek advice only from professionals who are qualified to give estate planning advice. Many professionals must be licensed by the State of California. Before retaining any professional to assist you with your estate planning, you should inquire about that individual’s qualifications.

The Costs of Estate Planning

The cost of estate planning depends upon your individual circumstances and the type of estate planning which you want to do. The cost generally will include the attorney’s charges for discussing your estate plan with you and for preparing any will, trust agreement or other legal document which you may need.

6. 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.

7. 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 revocable inter vivos 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 inter vivos 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 the revocable inter vivos trust to avoid probate.

8. What is a probate?

Many persons elect to use a revocable inter vivos trust as a will substitute primarily to avoid probate. Probate is a court-supervised process which has as 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 inter vivos trust.

Another advantage of a revocable inter vivos 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.

A number of other differences exist between a will and a full-funded revocable inter vivos trust. These differences, and whether or not they represent advantages or disadvantages for you, should be discussed thoroughly with your estate planning attorney.

9. To whom should I leave my property?

Regardless of whether you have a will or create a revocable inter vivos trust, the primary purpose 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.

10. Whom should I name as my executor or trustee?

After an individual’s death, the executor of a will and the trustee of a revocable inter vivos trust serve almost identical functions. Both the executor and the trustee are responsible for insuring that the decedent’s wishes, as expressed in the will or revocable inter vivos 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 #7). 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 which 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 include 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 inter vivos 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.

11. Does estate planning involve tax planning?

Often the creation of a will or a revocable inter vivos trust will involve substantial tax planning, particularly for larger estates. 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 which has a value of $675,000 or more. 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.

12. 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 child 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.

13. 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 addition to the popular revocable inter vivos 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.

14. 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 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.

A husband and wife may 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 recharacterizes 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. For example, one such issue may be how to maintain the separate property character of the property.

Regardless of whether you are married or whether you have separate or community property, it is important to seek competent legal advice when determining how title to your property should be held.

15. 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 designation(s) for such asset(s) with your entire estate plan.

16. 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 proceedings which allow the court to appoint who is to care for you and to manage your estate if you are incapacitated.

Alternatives to a conservatorship are a durable power of attorney for property and a durable power of attorney for health care. 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 a durable power of attorney for health care, the attorney-in-fact makes health care decisions when you can no longer make such decisions.

The foregoing were excerpts from a pamphlet made possible through the volunteer efforts of the Estate Planning, Trust and Probate Law Section of the State Bar of California.