As part of an ongoing effort to continue to create value for the people and communities around me, I wanted to summarize estate planning basics in the simplest language possible, to explain what an estate plan is and why is it important to have one.
WHAT IS AN ESTATE PLAN?
A set of legally binding, signed, witnessed, and notarized documents that provide instructions to your personally selected and trusted individuals on what to do with your personal possessions, real properties, bank accounts, investments, pets, social media accounts, cars, etc., and what medical decisions to make on your behalf, in case you are hospitalized, incapacitated, or pass away.
WHAT DOCUMENTS ARE PART OF A TYPICAL ESTATE PLAN?
Four major documents generally form a modern estate plan.
1. ADVANCE HEALTH CARE DIRECTIVE:
The Advance Health Care Directive is a crucial document which gives your selected agents the power to make medical decisions on your behalf, sign consents and/or releases with hospitals and/or doctors [it conforms to the Federal Laws (known as “HIPAA”) with regard to the releases], in case you are hospitalize or incapacitated. It also acts as your “living will” for end-of-life decisions. This document is required to make decisions for your healthcare.
2. LIVING TRUST:
Think of a Living Trust as a company that you organize and control during your lifetime for the ultimate benefit of your selected successors. You are the Trustor, (the person who sets up a Trust), and you are the first Trustee, (the person managing it during your lifetime). Initially, you fund the Trust by transferring accounts, property, and assets into the name of the Trust. Once you pass away, your selected Trustee will take over to settle debts, handle financial affairs, and eventually distribute your estate according to your wishes.
A Will is a document that states who gets what when you pass away. Modern Wills are commonly referred to as a “pour-over” Will, if they are connected to a Trust. Under such a Will, any assets held by you which have not previously been transferred into your Trust, will be added to the Trust at the time of your death. The purpose of this is to make sure all of your assets (whether in the Trust or not) are distributed according to the plan you created in the Trust. A Will without an existing Trust however, must go through a Court proceeding to determine the right successors, unless a limited exception applies.
4. DURABLE POWER OF ATTORNEY FOR MANAGEMENT OF PROPERTY AND PERSONAL AFFAIRS.
This is your “general power of attorney” which is a document where you name a person to manage your trust or non-trust assets in the event of your incapacity or absence. This document gives your nominated person broad powers to dispose of, sell, convey and encumber your real and personal property, but only according to the terms that you outlined in your documents.
WHY DO I NEED THESE DOCUMENTS?
1. To Avoid A Probate Proceeding and Probate Court.
When you pass away, banks, creditors, companies, your heirs, family members, and friends need the legal right and permission to take over the management of your assets, otherwise they go to waste, accrue debt, or are neglected. Furthermore, there is unfortunately often a significant disagreement between family members as to what to do with any of the above. If you don’t have any documents with instructions in place, no one has any legal proof that you meant to transfer your assets to them, or in the alternative, did not mean to have any assets to transfer to them.
The state of California has a “default” Estate Plan for you. It’s called the Probate Code, which are a set of laws to help the State distribute your property. Unless you qualify for some limited exceptions, the Court must and will distribute this property according to these laws.
The problem is that the California “default” distribution is blind to your wishes and intentions, is a public proceeding, is combative, is extremely costly, and is often very lengthy.
The Probate code distributes property like a robot. “Fair” is a hopeful word. “Blind” is a better one. Debts must be paid immediately. Everyone gets an equal share only according to your family structure. No provisions for anyone else. If none of the above, California takes the rest.
This is done through a public proceeding where everything you own is exposed, must be listed, all creditors must be notified of your valuables, and all your potential heirs, even those you might not want, are notified of your Estate.
It is often contentious and litigious, since the creditors want to get paid and are knocking on your door, relatives want a share, friends claim that something is rightfully theirs, family members say that “he promised me X”, and all of them are bringing their lawyers to the fray.
Thereafter, a substantial part of your Estate will have to pay for the costs of proceedings and the substantial and mandatory attorney fees. The fees are often into tens of thousands and they are mandatory and are taken out of your estate first. Since they are a percentage of your estate, they can grow to enormous proportions. Furthermore, the executor appointed by the Court is also entitled to fees, and those often mimic the statutory fees that attorneys get.
Finally, the Probate proceeding takes months if not years, especially if there are competing claims. 10 months is a fair average, but years are not unheard of. This delays your successors ability to access funds to pay ongoing expenses and mortgages, delays their ability to sell or buy real estate, which is often devastating to successors that may depend on it.
Having a proper estate plan circumvents this process altogether.
The way this works, is that once you create a Trust, you transfer your titled assets into the Trust name. That is all your assets become part of the Trust, which means that you personally do not own them anymore.
This means that at the time of your passing, you as an individual don’t own anything, and therefore there is no need for a Probate proceeding, since everything is in the name of your Trust.
So instead, it is your Trust specifically which outlines who gets what, when, and how. Your successor Trustee distributes the property according to your specific wishes. Everyone walks away. Probate avoided. This is such a powerful tool that this type of Trust is called a “probate avoidance” Trust. Think of it as a “Government Avoidance Trust”.
Simply put, proper estate planning documents do everything possible to avoid a probate proceeding all together.
2. To remain confidential.
Because trust documents are not submitted to the Court, and are not subject to a Court proceeding, the assets, their character, amounts, and other distributions are not made public, not subject to public scrutiny, and not subject to certain mandatory disclosures of accounts and assets.
3. To save money on taxes.
Your successors will benefit from the tax breaks, and capital gains savings, that are given when property is inherited or transferred through a Living Trust and may save thousands and thousands of dollars by doing so. Accountants regularly suggest transferring property into a Trust for this purpose specifically.
4. To have full control over who gets what and in what amount.
The most important part is control over distribution of your assets. You might want to give everything equally to your kids, or you might want to give them something to make sure they are taken care of, but leave the remainder be donated to your favorite charity. You may want your grandchildren to be provided for in a minimum amount. You may want to give a specific item, like a car or a family heirloom to a specific family member. You may want your pet to go to a specific friend who is better equipped to take care of it. Remember, that don’t have these documents, the property will simply pass on according the State’s default laws.
In addition, your instruction can protect beneficiaries from themselves, if for example they have issues with alcoholism, drugs, gambling, etc. Putting someone else in charge of their finances, or putting qualifications for distribution, until they resolve their issues, acts to protect them from themselves.
5. To have full control over who should be disinherited.
As you are free to determine who gets property, you are also free to instruct your successors not to distribute any property to certain friends or family. Sometimes certain family members fall out of favor. Sometimes they are already well off and so other people you select may benefit instead. In fact, you can only guarantee disinheritance, if you specifically mention that you want someone disinherited. The probate code does not provide for this at all.
6. To provide instructions that my children will be taken care of by the right people.
If you are a parent, these documents provide for a nomination of a Guardian who will take care of your children. Barring this nomination, children will go to a default family member, who may be not favorable, cannot be found, or worse yet, without these documents the child may be placed in foster care by the State.
7. To designate someone to make healthcare decisions if you are incapacitated.
If you are hospitalized or incapacitated, and cannot speak or act, healthcare workers, doctors, and surgeons, must get certain permissions for medical treatment. They will be at a standstill if they don’t have any documents showing who may make these decisions. Furthermore, the wrong people might make these decisions for you.
In addition, if you don’t have proper documents in place, your family members might be forced to go through Conservatorship proceedings, in order to be able to make decisions for you and for your assets. These can be very costly and complicated.
8. To provide instructions regarding your remains.
These Instructions give you the opportunity to specify how you wish to have your remains be dealt with (i.e., cremation or burial); to provide details of any prior arrangements and to designate the persons to carry out your wishes. This is especially important to bring closure to your children or beneficiaries at a time of mourning, as they often appreciate given clear instructions on your exact wishes.
9. To update your existing Will or Trust.
If you have had significant life changes since the last time you signed any of the above documents, including having children, getting married, or acquiring new property, your previous documents may no longer be effective. If you have changed your mind about certain distributions, including family members, or had a change in your financial situation, then you could really benefit from an update to your existing documents.
10. Finally, and perhaps most importantly, to have a peace of mind.
Having an Estate Plan in place will reduce at least some of your stress and uncertainty about the future. When you plan, you take control of your future and the future of your assets. When you plan, you diminish needless disagreements, friction, and fights between family members, and as a result help them move forward. Your appointed Trustee can resolve many conflicts by having your clear instructions and will often have provisions for conflict resolution if any arises. Furthermore, this is a plan that can be clearly communicated to your family now. Many of my clients walk away with a feeling of relief and disbelief that they did not do this sooner.
IS AN ESTATE PLAN RIGHT FOR ME? WHAT DO I DO NEXT?
If any of the above information is an area of concern to you, or you mentally checked any of the boxes above, or if you have further questions, contact me at any time:
I also created a check-up quiz which asks you a series of questions to help you determine whether an estate plan is right for you. The link for this check-up quiz is below.
A downloadable/printable version of the above can be found at the below link:
As always, I wish you the best of health and prosperity, and I look forward to hearing from you.
Dmitriy on behalf of Aristov Law PC