Estate Planning: 101
As reported in The Sacramento Bee on Sunday, April 11, 2010, only 51% of Americans have signed any estate planning documents; of those only 35% have signed a will, 29% a durable power of attorney and 18% a living trust. Of perhaps greater concern is the fact that of those 51% of Americans who have signed some form of estate planning document, more than half could contain errors that may trigger huge tax and/or legal problems and expenses. Not only is it important to do proper estate planning, but it is critical to keep those documents up to date. Changes happen in our family and our finances that require us to remember that estate planning is an ongoing process.
Estate planning consists mainly of the following four documents:
- Living Trust;
- Will;
- Durable power of attorney for health care; and
- Durable power of attorney for finance.
As an estate planning attorney, I have personally witnessed the absence of these documents (or improper drafting of these documents) lead directly to costly legal disputes over dishware and furniture, minor children involved in guardianship battles, and hundreds of disputes giving rise to lifetimes of irreparable family discord.
A will is simply the legal document that controls the administration of your estate upon your death. Without one, California law will determine who receives your estate and if you have minor children, who raises your children until they reach the age of 18. Upon your death the will applies to all assets in your name that are not otherwise distributed through alternate means (i.e. joint tenancy account, pay-on-death (POD) designations, beneficiary designations).
Although effective in distributing an estate, depending on the circumstances, a will by itself is likely not the most efficient or cost effective estate planning tool. The reason is that a will is typically subject to probate - the court monitored proceeding which oversees the gathering and distribution of your estate. Because the court is involved, probate takes a considerable amount of time. A “quick” probate is likely to take anywhere from 7 months to a year. Complications in appointing an estate representative,
gathering assets, or contests among heirs can easily drag this process over many years.
Probate also comes with a hefty price tag which is set by California legislature based upon the value of your estate. For example, let’s assume Mother and Father have two children and the following assets worth $650,000: home; a couple of certificates of deposit; checking and savings account; and two cars. If Mother and Father pass away, the cost of distributing the estate to the children through probate would cost $32,000 (half payable to the estate representative and half payable to the attorney of record). Probate avoidance could have potentially provided the children with $16,000 more, each! A $1,500,000 estate raises this fee to $56,000. Probate fees are based upon the gross value of assets, not the net value.
The only way to avoid probate in California is to either have insufficient assets to warrant a probate (generally, having less than $100,000 in assets in your name upon your death and not owning any real property at your death) or to establish a living trust.
A living trust is a device that holds your assets while you are alive, that still allows you to control, access, spend and/or encumber those assets. Simply stated, a living trust, although a formal legal document, is a retitling mechanism that allows your assets to be held in a separate legal entity. While you are alive, you would be the named trustee of your living trust - the person in charge. For instance, if you and your spouse own your home as husband and wife and joint tenants, upon the death of the second spouse that property would be subject to probate. With a living trust, the deed to the home is simply retitled to provide ownership by husband and wife as co-trustees of their respective living trust. This simple procedure could potentially save time, tens of thousands of dollars, time, and perhaps more importantly, privacy. When a person’s estate is subject to probate, the details of their finances and family information becomes a matter of public record, accessible by anyone with an internet connection. Also, this procedure does not preclude you from refinancing, selling, or encumbering the property. Further, because the trust is a “living” document it can be amended or revoked in the future with minimal effort on your part.
You would likely be surprised to hear how many of your neighbors and relatives have a living trust. Unfortunately, this is generally not a hot topic of conversation at family gatherings or parties.
Turning next to the durable power of attorneys, there are two types - durable powers of attorney for finance and durable powers of attorney for health care.
A durable power of attorney for finance provides your agent, a trusted friend or relative designated by you, the power to access and otherwise deal with your finances on your behalf if you were to become incapacitated or disabled. The failure to have this document in place could lead to the initiation of conservatorship proceedings. A
conservatorship proceeding is a probate court proceeding whereby a judge determines that you are unable to manage your finances or resist fraud. I have personally witnessed a grandchild plead before the court for a conservatorship over her grandfather who was convinced that Nigerian email scams were legitimate. Had this document been in place, the family likely could have saved thousands of dollars, months in court and avoided family conflict and tension.
A durable power of attorney for health care operates in much the same regard. It provides your agent with direction regarding medical decisions that you are unable to make because of incapacity of disability. The most prominent case involving a durable power of attorney for health care, or I should say, lack there of, was that of Terri Schiavo. Terri Schiavo suffered cardiac arrest in 1993 and fell into a vegetative state. Her husband wanted to let her die a natural death while her parents wanted to keep her alive. The result: a legal battle with 14 appeals, 5 lawsuits in federal court and a Congressional subpoena. After 12 years in a vegetative state the litigation was resolved and Terri Schiavo’s feeding tube was removed. All could have been avoided had Ms. Schiavo had this simple document, which clearly stated her wishes for end of life care.
The above is intended to provide a general outline of what I consider the core estate planning documents. This article is by no means an exhaustive explanation of the above, nor is it intended to be. However, if you do not have these documents in place, or would like to have your current documents reviewed or updated, please feel free to contact my office to discuss these documents in greater detail.
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