Estate Planning 101

Many of my trust clients need an estate planning “refresher” when they want to make changes to their existing estate plan. Whether or not you have done your estate plan, I hope you will find this newsletter useful; feel free to save or share it.

TITLE IS EVERYTHING!

The general rule is that if you die owning more than $150,000 in assets which are titled in your name (as an individual), at death, that title needs to be transferred to a living person. This transfer process is called PROBATE and it happens whether or not you have a Will.

If you have a Will, then you get to direct who receives title to your assets. If you do not have a Will, then the State of California has a plan for which of your next of kin will get title to your assets.

In California, the probate process is a court supervised event which is expensive. Attorney fees are calculated as a percentage of the value of the assets being probated and the Executor is entitled to be compensated at the same rate. To give you an order of magnitude, a probate estate worth $500,000 will generate $13,000 in attorney fees, $13,000 in Executor compensation, and approximately $1,500 in costs.

The probate process is also time consuming. In Los Angeles County, where I practice, it will take at least a year to complete the probate process; longer if there is litigation or other issues that need to be addressed.

The probate process is public. All the documents filed in the probate proceeding can be viewed by any member of the public.

HOW DO YOU OWN ASSETS DURING LIFE WITHOUT OWNING THEM AT DEATH?

Joint Tenancy. If you hold title to an asset with another person as joint tenants, there is an automatic right of survivorship which means that the surviving joint tenant owns the asset outright by operation of law. Probate, however, will be required at the death of the surviving joint tenant.

Note that transferring title to your current assets to joint tenancy with right of survivorship with another person results in your making an actual gift of one half of that asset to the other joint tenant. If the value of the this gift is more than the annual gift tax exclusion amount, you are required to file a gift tax return with the IRS (Form 709) and report that you have made a gift in excess of the exclusion. This is true even though you will likely not be required to pay a gift tax at the time of filing.

Living Trust. If you hold title to an asset as a Trustee of your living trust, then at your death, your trust, and not you as an individual, owns the asset. You will already have appointed a Successor Trustee who has these tasks: 1) take control of all assets titled in trust name; 2) pay all legal liabilities of the deceased trust owner; 3) pay all taxes owed by the trust owner or the owner’s estate; and 4) distribute the remaining assets as the trust owner directed in the trust agreement. These are similar tasks that an Executor does in handling a probate estate; the difference is that one process is court supervised and the other, generally, is done privately. The Successor Trustee has certain legal obligations to the trust beneficiaries at the death of the trust owner.

WHAT IS NOT CONTROLLED BY A WILL OR A LIVING TRUST?

You can own title to certain assets, such as retirement plans or life insurance, which are not controlled by the terms of your Will or your living trust. This is so because those assets will be distributed at your death directly to whomever you have named as a designated beneficiary. If, however, you have not named a beneficiary for either of these assets, then those assets will be subject to the probate process and they will pass to whomever you have named in your Will or to your next of kin under the California rules of intestacy (a term that means there was no Will).

SCHEDULE OF ASSETS DOES NOT TRANSFER TITLE

When you create a living trust you generally give the attorney a list of all of the assets that you own and you discuss what you want to have happen to those assets at your death. The attorney usually itemizes all your current assets (but not the retirement accounts since they have a designated beneficiary) on a schedule that is attached to your trust document.

It is very important to note that merely having an asset on the schedule DOES NOT, without additional action by you, transfer title to the asset from you an individual to you as the Trustee of your living trust. Once you create a living trust, you will have to transfer legal title of your assets to yourself as Trustee. Failure to do so may result in having to go through a probate process at your death.

ONGOING MANAGEMENT OF THE TRUST

Establishing a living trust means that you have entered into a written arrangement with yourself to hold title to your property in a specific legal way (as a Trustee).

Once you have transferred title of your current assets to your living trust, you can ensure that there is no probate at your death by ACQUIRING ALL FUTURE ASSETS as Trustee of your trust. Any time you are dealing with a financial asset, you should be thinking that you are acting on your behalf as a Trustee.

This means that when you decide to get a Certificate of Deposit at a new bank, open the new account as Trustee of your trust.

If you sell your residence and buy a new home you take both of those actions as Trustee of your trust.

Make sure that title on your brokerage accounts for your stocks, bonds, and mutual funds shows that the account is registered (and the statements are sent) to you as Trustee of your trust.

You want to buy a new car? Consider purchasing it as Trustee of your trust.

Contact me if you have any questions.