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Estate Planning FAQ

Estate Planning Frequently Asked Questions San Ramon, Califronia

Q.  What is estate planning?

A.   Traditional estate planning is the process of preparing for the orderly and efficient transfer of assets at death.  It usually involves preparing wills or fully funded revocable living trusts and often encompasses life insurance planning through irrevocable life insurance trusts.  Estate planning is also living planning.  If you have minor children, estate planning is planning for the support of yourself, your spouse, and your children should you become disabled.  Your planning should include funds for school, day care, medical expenses, and college and graduate school, as well as the regular budgetary expenses of running your household.  In addition, estate planning may include retirement planning, gift and income tax planning, and creditor protection planning.

Q.  Which bodies of law govern the estate planning process? 

A.   The Internal Revenue Code and its regulations set the rules for federal estate and gift taxes, income tax, and generation-skipping tax.  The federal courts adjudicate these rules when there is a difference of opinion between the taxpayer and the IRS.  Each state has its own statues with regard to inheritance, estate, and gift taxes, as well as wills, trusts, general and limited partnerships, and so on.  Its courts interpret these statutes with case law whenever there are disagreements as to what they say.    

Q.  Do I really need to plan my estate?  Won’t the laws of intestacy distribute my assets to my wife or family members?

A.   Many individuals rationalize not planning by believing that their wealth will “automatically” pass to loved ones anyway or that “going through court administration is not a big deal,” or that “when you’re dead, who cares.”  When you don’t plan your estate, your state will do so for you.  The “laws of intestacy” – dying without a will or a will substitute such as a revocable living trust – are the state’s way of writing your estate plan for you.  Each state has it’s own way of distributing its citizens’ wealth, but, in general, each jurisdiction gives a major share to the surviving spouse and the balance to the surviving children more distant (or to others related to you somehow by blood).  The usual ration between the respective spouse’s and children’s shares is generally 50/50, but it can vary depending upon factors such as second marriages.  Without your own estate plan, your family will be subject to unnecessary probate and administration costs, as well as estate taxes if you have a taxable estate.  And, worse yet, your assets may not pass to the individuals whom you love the most, namely, your spouse, children, and grandchildren; in the amounts you want them to have; and at the times you would like your loved ones to receive them, especially if they are too young, too inexperienced, or just incapable of managing their inheritance.  Certain probate avoidance techniques, such as joint tenancy, beneficiary designations or pay-on-death accounts, can be just as bad as dying intestate.  You can easily solve these problems with basic estate planning.  

Q.   I had my estate planning documents prepared several years ago.  Do I need to have them reviewed periodically?

A.   If you are like most people, your personal and financial situation today is nothing like it was when your children were in diapers or were still in college.  Or your financial situation today is nothing like it was before you retired and received your employer’s retirement plan distribution.  It is just wishful thinking to believe that once a will or trust is drafted, it rarely, if ever, has to be revised.  Estate planning is lifetime planning, and it is always evolving as your life changes, whether through births, deaths, divorce and remarriage, changes in your finances, and so on.  It is a dynamic process that seeks to capture the dynamics of your situation as it currently exists.  In addition, the laws periodically change.  Planning one’s estate is like trying to hit a moving target. As you age, the target moves.  As such, wills or trusts, and all other estate planning techniques, must be reviewed regularly – at l every 3 years – in order to be certain that they are still on target.  

Q.   What is the greatest enemy of the estate planning process?

A.   The greatest enemy of estate planning has to be procrastination.  Incredibly, it is our nature to feel that we are immortal and will always have the proper amount of time to do our estate planning.  This thinking ignores the many lifetime benefits of estate and financial planning.  Each of us must ask ourselves:  “If I do not plan, whom will it hurt the most?”  “How much will it cost if I don’t plan?”  And, “How much do I really care about my loved ones and their financial security?”  

Q.   Why don’t more people plan their estates?

A.   Professionals often hear such comments as “What do I care how much money my kids get after I am dead; nobody ever left me anything.”  Or, “Whatever they receive will be more than I did.”  Many professionals believe that such statements camouflage one of the main reasons why more people do not estate-plan:  because they are more frightened about running out of money while they are alive than they are of their heirs’ paying estate taxes after their deaths.  They are fearful and insecure about the amount of their resources, and this fear does not generally have much to do with the actual resources at hand.  It is felt just as strongly by people with estates of many millions of dollars as it is by people with modest estates.  Also many people do not realize the very real problems of probate and estate tax that many seriously affect their families until they have personally experienced them after the deaths of their parents or close family members. Even though some people can minimize the importance of reducing estate taxes, it is difficult to minimize the impact of 50 percent maximum federal estate tax brackets and 71 percent maximum brackets when estate taxes are combined with generation-skipping taxes.  We’ve seen affluent taxpayers spend hours with their CPAs or tax attorneys trying to save every last dollar in income tax and yet ignore the much larger impact of federal estate tax.  

Q.   Are the tax benefits of estate planning really worth it?

A.   With proper planning, it is possible to get most families down to a near-zero estate tax level.  This may equate to saving thousands or even hundreds or thousands of dollars.

Q.   In general, what do I have to do to “zero-out” my estate tax?

A.   For many families, proper use of basic estate planning tools such as the revocable living trust is sufficient to zero-out the estate tax.  For families with large estates, more sophisticated strategies may be necessary.  In order to reduce estate taxes, families and individuals must first be willing to give up ownership of a portion of their accumulated wealth.  Notice, we say “ownership,” not “control.”  The federal government taxes what you own; it does not, generally, tax what you control.  Wealthy clients who have taken the time to educate themselves in planning strategies begin to get comfortable with the fact that they can still control their assets even though they do not have technical legal title to them.  However, how much, and in what mix, they should divest themselves of ownership presents a daunting planning challenge, one that is usually met successfully through the assistance of competent estate and financial planning advisors who will use sophisticated computer programs to test the cost-benefit ratios of various estate planning strategies and interpret the results.  These industry software programs allow professionals and their clients to make informed decisions by utilizing their own particular criteria regarding which assets should be transferred, and in what amounts, to various estate planning vehicles designed to reduce, if not altogether avoid, egregious gift and estate taxes.  The variables in these software studies should include at a minimum the yield on all assets from the date of the plan until life expectancies, sources of retirement income and protected benefits, and, most importantly, conservative estimates on the family’s need for funds to support an ongoing lifestyle consistent with the family’s history and protected needs, all of which should be indexed for inflation.  Once it is determined that there is enough in the way of liquid assets to maintain a family’s lifestyle, clients and their advisors can explore the alternatives for minimizing estate and gift taxes.  Since the clients are deeply involved in the creation of the analysis, advisors can help them determine their comfort zone with each alternative – a process similar to determining risk tolerance for investing. In the end, the best plan is not the one that produces the best numbers but, rather, the one with which the individual or family is most comfortable.

Q.   When should my children be brought into the estate planning process?

A.    It is not unusual for people to feel uncomfortable about discussing their estate planning matters with their children.  Long before a family crisis, it may make sense to provide your children with an overview of your estate plan and your intentions with regard to their inheritance.  Laying out everything in a pleasant, businesslike setting will go a long way in resolving any differences that may come up after you are gone.   

Q.   What are the basic estate planning goals?

A.   Estate planning should achieve four major goals:

A.    Avoid probate.

b.   Give what you have to whom you want, the way you want, and when you want.

c.    Control your assets while you’re alive and when you are disabled.

d.    Save every tax dollar, professional fee, and court cost possible.

Keep in mind that these are the major goals for most people.  You will undoubtedly have a great many additional objectives that will be unique to your own situation.

Q.   What is probate?

A.   Probate is a legal process conducted in the probate court to effect the transfer of ownership of assets from a deceased person to the deceased person’s heirs.  The term “probate” actually refers to the proving of the validity of a will.  A will is not valid until proved so in court.  Once the validity of the will is proved, the probate court administers the will under its jurisdiction.  In addition to this death probate, there is also living probate (or "conservatorship"), conducted when a person becomes incapacitated.  So a more complete definition of probate is that it is the process in which a court takes control of your assets if you are no longer able to manage them yourself, either because of death or because of mental disabilities.  Probate costs vary greatly among the states; nonetheless, probate is time-consuming and potentially expensive.  For these reasons, avoiding probate should certainly be incorporated into the goals of an estate plan.

Q.   If I have a will, don’t I avoid probate?

A.   Many people mistakenly think that by having a will they are avoiding probate.  However, just the opposite is true.  A will guarantees probate because the purpose of probate is to prove the validity of a will.  

Q.   What is so bad about probate?

A.   There are numerous reasons why it is best to avoid probate, and this is true even in states like Florida or Nevada, where the probate process is considered to be less complex and relatively simple:

A.    Expense:  The costs associated with probating your estate, including attorney fees, probate costs, appraisals, and so on, generally range from 3 to 8 percent, depending upon the state in which you live. In some states, such as California, this percentage is applied against the gross value of your assets before subtracting mortgages or other liabilities.

b.   Delay:  Probate takes time – and it many states can easily take a year or more before settlement – and heirs can suffer financial hardship during this needless waiting period.

c.   Complexity:  If you have property, such as real estate, in more than one state, your heirs will likely face separate probate proceedings in each state where the property is located.  These multiple probates, called ancillary administrations, can significantly add to the cost and time delay of settling an estate.

d.   Public:  The probate process is totally public.  Some companies make it a practice to have salespeople and other employees read probate proceedings in order to ascertain financial information about the inheriting individuals and families; thus, families may be needlessly exposed to “fortune hunters.”  This public court process also makes it easier for unwanted third parties such as ex-spouses, in-laws, and creditors to contest the estate.  

Q.   What are the basic methods used by financial professionals to help their clients avoid probate?

A.   To reduce the risk of probate, the most widely used technique is the revocable living trust.  Any assets held in this trust are not in any way subject to the probate process.  In other words, they are protected from probate.  Although there are limitations to any trust arrangement, if the client’s objective is to avoid the cost, delays, and publicity inherent in the probate process, a revocable living trust is often the technique financial professionals recommend to their clients.  Another interesting way to avoid probate is through joint tenancy, in which property is titled jointly with rights of survivorship between spouses.  Jointly titled property can be a viable will substitute.  But, once again, the client’s objectives and goals have to be considered because the disadvantages of owning property jointly, including its adverse estate tax consequences on the second death, generally far outweigh its advantage of avoiding the probate process.  Other probate-avoidance techniques used in some circumstances by professionals are pay-on-death (POD) accounts and beneficiary designations.  Utilization of these techniques has to be assessed on an individual basis, and anyone considering these options should definitely consult with a financial professional or attorney before implementing them.  Ultimately, joint tenancy, POD accounts, and beneficiary designations are advisable only in a small percentage of nontaxable estates (less than $200,000 total value) that do not have any real estate, nor any “family complications” such as second marriages or “his,” “her,” and “our” children.  

Q.   What does a will do?

A.   A will allows a decedent to direct the flow of assets at the time of his or her death.  Without a will or a will substitute, one is said to have died intestate.  As a result, the state of the decedent’s domicile will determine the distribution of assets in accordance with that state’s intestacy law.  A will is a revocable during life, inoperative until death, and applicable to the situation that exists at death.  A will does not control property that is held in joint tenancy with rights of survivorship; such property passes to the surviving joint tenant outside of the will.  Life insurance, annuities, IRAs , and qualified plans pass by beneficiary designation outside of the will unless they name the decedent’s estate as the beneficiary.  Parents with minor children use their wills to nominate guardians in the event that the children are left orphaned.  Wills can create testamentary, or post death, trusts, or they can direct that specific assets be distributed (“poured over”) to preexisting living trusts at the deaths of their makers. Wills cannot, however, take care of their makers in the event that the makers become disabled.  

  Q.   How do we choose between a will and a living trust?

A.   The choice of a will-centered estate plan or a living trust-centered estate plan should be determined by your goals but usually is determined by a comparison of the key advantages and disadvantages of each type.  A will:

A.    Can be easily contested

b.   Guarantees probate and the attendant expenses, time delays, and publicity, as well as potential ancillary probates

c.   Can provide instructions only for the care of the maker’s spouse and/or the maker’s family after the maker’s death; it cannot provide for the care of the maker and his or her family during the maker’s disability or incompetence

A properly drafted, fully funded living trust:

A.    Avoids both living and death probates

b.   Is private and not a matter of public record

c.   Is a legal contract that can cross state lines and control the maker’s property in multiple states

d.   Takes care of the maker and the maker’s family in case of disability

e.   Provides for the care of the maker’s spouse and/or the maker’s family after the maker’s death

An experienced attorney, CPA, or financial professional can assist you in additional comparisons specifically pertinent to your situation.

Note:  A living trust-centered estate plan still includes a will so that, if any assets are not in the trust at the maker's death, they can "pour over" to the trust through the will.  

Q.   What is a living trust?

A.   A living trust is a legal document that an estate planning lawyer drafts.  It resembles a will in that it provides your directions for the management and distribution of your assets upon your death.  Unlike a will, however, a living trust also contains your instructions for the management of your assets in the event of your disability.  You are the maker of the trust agreement, and you are a life beneficiary of the trust (a person who enjoys the use of the properties of the trust) or you and your spouse are life beneficiaries of the trust.  You must name a trustee (manager) of your trust; if you like, you can name yourself as your own trustee.  You transfer, or re-title, your assets from your name to the trustee of your trust – a process commonly referred to as funding the trust.  This means that you, as trustee of your own trust, maintain full control over the property in the trust while you are live, file your tax returns as you always do, and can buy, sell, or give away property in the trust.  You can amend or alter the terms of the trust or revoke them in their entirety any time you wish.  By transferring your assets to your trust, you maintain control of the assets during your life but have removed those assets from the probate process after your death.  Upon your death, the trust may terminate or may continue for the benefit of your family, depending upon your instructions.  Most often the trust includes instructions specifying that upon your death or upon the death of the surviving spouse your children or other loved ones will become the remainder beneficiaries, the persons who enjoy the remaining property of the trust.  You may name your children, a bank, trust company, relative, or friend to be your successor, or backup, trustee should you die or become unable to serve as the trustee.  Regardless of whom you choose, your trustee is legally obligated to manage your trust property as you instruct in the document, and must do so under the strictest of fiduciary standards.

Q.   How does a revocable living trust avoid probate?

A.   Because your property is in the name of your trust, and your trust – unlike you – cannot become incapacitated, it does not have to go through a living probate ("conservatorship") process.  Because your property is already titled in the name of and owned by your trust at your death, there is no need for the probate court to effectuate transfer of ownership from you, as the deceased, to your heirs.  The trust merely continues on according to the instructions that determine its operation.  It is specifically designed to function without bureaucratic red tape when its maker becomes disabled or dies.         

Q.   How important is it to have a revocable living trust if I become disabled?

A.   A major reason for having a revocable living trust, and one that many experts consider more important that avoiding probate, relates to your potential for becoming incapacitated.  You are four to six times more likely to become incapacitated than you are to die in the next year, according to insurance industry morbidity statistics.  Therefore, it is important for you to plan for the possibility of your or your spouse’s disability so that the two of you can be cared for in the manner you desire during a period of incapacitation.  Without a living trust that provides for your care during any disability, your loved ones will have to take you through the legal process of a living probate, or conservatorship, with the help of lawyers and the probate judge.  Even though your spouse or adult children would most likely be appointed by the court to manage your affairs, they would have to report annually to it and would be subject to all the legal costs and red tape of the court system.  This court process may last much longer than a death probate – it continues for as long as you are disabled.  A revocable living trust allows you to choose, in detail, how you want your affairs handled and lets you set the priorities that you wish followed.  Furthermore, your successor trustees will be able to manage your affairs beginning the moment you are incapacitated without the intervention of any court or government agency, which would cause delay in continuing your financial affairs.  The entire conservatorship process is cumbersome and needlessly bureaucratic and can easily be avoided with a living trust plan.  

Q.   I want to control how my family receives my wealth.  Can a living trust help with that?

A.   Although wills can contain instructions for distributing assets to heirs, wills may be subject to continued court involvement.  On the other hand, revocable living trusts can also contain instructions for distributing assets to heirs, and trusts avoid probate court.  Because of these benefits, as well as others inherent in such trusts, the revocable living trust is recommended over the will in most situations.  A revocable living trust provides flexibility, enabling you to control how and when your assets will be distributed to loved ones or charity after your death.  You may, for example, pass assets with “strings attached.”  Many practitioners believe that clients should never leave anything of any consequence to their loved ones outright, or “free of trust.”  They believe that everything should be left in trust for the heirs’ benefit in order to protect the heirs in a way they cannot do for themselves.  If you chose to follow this philosophy, you could, for example, specify in your trust that each of your children is to serve as his or her own trustee (or along with co-trustees) for his or her lifetime and that the trust provide for your children’s needs as they arise.  In this way, you have allowed each child to manage his or her own funds in the way he or she desires; yet, by retaining everything in trust, you have to some degree protected each child’s assets from the claims of creditors, which could easily arise from a failed business venture, an overzealous litigant (e.g., as a result of an auto accident), or even an ex-spouse in a divorce.  You may also avoid a possible second estate tax when your child dies and the assets pass to your grandchildren.  By leaving assets in trust, you may be concerned that you will be over controlling your children after your death.  But you can provide as much latitude to your children as you like:  your attorney drafts the terms of the trust in accordance with your wishes.  Thus, the terms can be as restrictive or as nonrestrictive as you choose, on the basis of your knowledge of each child’s situation.

Q.   What are the disadvantages of a trust?

A.   Some people see expense and funding as drawbacks to trusts.

A.    Expense – One objection to a revocable living trust is that it is more expensive than a will.  True enough, at l initially, Wills have been priced very low for years by attorneys who count on reaping the probate fees in years to come.  Executors of wills do not have to retain the attorneys who drafted the wills as the probate attorneys, but most do.  A living trust-centered plan is only initially more expensive than a will.  The cost of a will and its after-death probate administration almost always exceeds, by a large amount, the cost of funded living trust and its private after-death administration.

b.   Funding – Some people find it annoying to have to change ownership of their property to their living trusts.  It can be time-consuming to have to determine what they own, how they own it, and how to fund each of the assets properly to the trust.  But this process has to be done only once and, with the help of professional advisors, can be easily accomplished.  If people think it is annoying for them while they are alive and well, think of what a problem it will be for their loved ones if they become disabled or die.  The choice is this:  People can either “probate” their own estates themselves while they are alive or pay the courts and lawyers to do it for them after they are no longer around to answer questions such as, “Where is the deed to the house?”  Most people who have gone through the funding process, one asset at a time, report that they feel a great sense of relief and peace of mind knowing that they finally have their records in order.

Q.   If I have a living trust, do I still need a will?

A.   Yes.  A living trust document can be a very powerful estate planning tool, but a comprehensive estate plan should also include a pour-over will – a last will and testament.  Under the law, you can name guardians for your minor children only in a will, and a new will makes clear that the trust now governs your estate plan.  A pour-over will also serves as a safety net.  Once you create a trust, you must always remember to transfer your assets into the trust.  If any of your assets are not in the trust at the time you’re your death, the pour-over provision in the will instructs your personal representative, or executor, to place them in the trust so that they can be managed and distributed according to your trust instructions.  Any assets controlled by the pour-over will may have to go through probate.  You should periodically review your trust-centered estate plan to ensure that all your assets are titled in the name of the trust or, in some cases, that the trust has been named the beneficiary of assets such as life insurance, IRAs, and retirement plan funds.  

Q.   If I have a living trust, will my family avoid paying estate taxes?

A.   This is one of the biggest misconceptions that people have with respect to living trusts and estate planning.  A properly funded living trust avoids probate when you pass away.  However, probate and the federal estate tax have nothing to do with one another.  In order to save federal estate taxes, your lawyer must incorporate estate tax planning provisions into your living trust; and, generally, a living trust can only reduce (not in all cases eliminate) estate taxes and only if you're married.

Q.   My property is titled in the name of my trust.  Is it protected from lawsuits?

A.    No.  Most living trusts are revocable, which means they can be revoked, amended, or canceled at the discretion of the maker.  Because you control the assets in the trust as the trustee and you can revoke the trust as its maker, funds in a living trust are at the same risk in the event of a judgment against you as they would be if they were titled directly in your name.  However, your trust may be designed to protect your assets from your beneficiaries’ spouses and creditors after your death. We have designed one of the most cutting-edge tools in Living Trust planning -- the "Personal Asset Trust" (an asset protection trust for your beneficiaries' inheritance).

Q.   Who should be my trustee while I’m alive?

A.   You can act as your own trustee, thus eliminating any professional fees.  Also, as your own trustee, you can retain the same control over your assets and do anything with them that you want just as you did before establishing the trust.  If you prefer, you can select another individual or an institution, such as a bank or trust company, to serve as your trustee or to serve as a co-trustee with you.

Q.   Can I name more than one trustee?

A.   Yes.  You can name as many co-trustees to act together as you like, but more than three can be cumbersome when actions need to be taken.

Q.   Does every trustee have to receive a fee?

A.   It is usually advisable to provide in the trust document for the “reasonable and customary trustee’s fee as permitted by state law” or to refer to an institution’s fee schedule so that the trustees will be encouraged to act and be compensated for their work.  If you have appointed co-trustees, it is usual for them to divide the trustee fee on the basis of the duties each fulfills.

Q.   What do trustees charge?

A.   Each institution has its own fee schedule, and the amount charged under that schedule will vary depending upon the extent of the services that are rendered.  In general, however, a trustee’s annual fee runs from 1/2 of 1 percent of the value of the assets being managed, depending upon the degree of management involved.  It is very common for family members and close friends who are named as co-trustees to forgo all or a major portion of the fees they would ordinarily receive.  However, in certain circumstances there may be income and/or estate tax benefits to their taking the fees.

Q.   What does funding a trust mean, and why is it important?

A.   Once a revocable living trust is implemented, it needs to actually become the owner of your assets.  The process of transferring ownership to the trust is called funding the trust.  In some cases, funding also includes naming the trust as beneficiary of annuities, life insurance, IRAs, and retirement plans.  Trust funding is vitally important because without it your trust is largely ineffective and you will have wasted your time and money creating it.  Think of it this way:  Your trust is a brand-new automobile, and you are its proud new owner.  It looks great, smells wonderful, and has every driving convenience available.  But if you don’t put gas in the tank, it can’t function to take you anywhere.  It might as well be a lawn ornament.  It’s the same for your trust:  your property is the gas that makes it run.

Q.   We have property in more than one state.  Can we put all our property into one revocable trust?

A.   Yes, and this is one of the greatest advantages of the revocable living trust.  Without a trust, not only will the property you own in the state where you are legally domiciled be subject to probate, but the property you own in another state will go through an ancillary probate in accordance with that state’s laws.  For example, if you own a home in California and own land in Florida, your heirs will have a probate proceeding in California and an ancillary probate in Florida – whether you have a valid will or not.  By funding both properties into your single living trust, you eliminate the need for both probate proceedings.  

Q.   How can I obtain help with funding my living trust?

A.   There are several resources you may want to consider when funding your living trust.  The first is the attorney who drafts your estate planning documents.  Usually, he or she will need to file the deed of your trust for any real estate that is being placed in your trust and may fund your non-real estate assets for you or give you letters or instructions that will help you transfer those assets.  However, your CPA, CFP, or financial advisor can also help with retitling non-real estate assets or with completing forms to name your trust as beneficiary.  Examples of such assets are bank accounts, investment accounts, and IRAs.  Considering how important it is to have your assets properly titled once your revocable living trust has been created, it may be wise to seek the assistance of all your advisors in funding your trust.

Q.   Our trust is long and filled with very personal information.  Do we really have to give a copy to the bank, the brokerage house, and so on, just to find it?

A.   Your bank and brokerage firm need to know who has authority to act on behalf of your trust, as this information will insulate them from potential legal liabilities.  It is usually sufficient to provide these companies with a document sometimes called a memorandum or "certification" of your trust, rather than giving them the entire trust.  The memorandum or "certification" usually shows the name of the trust and a list of the trustees and successor trustees.  It may be accompanied by the Trustee’s Powers section of your trust or an abbreviated listing of the authority you and your successor trustees have over assets that are placed into the trust.  It may also contain copies of signature and notary pages.

Q.   Do we have to file a different income tax return for our trust?

A.   Assuming your living trust is revocable, which means you maintain control over it and can make changes to it until your death or legal incapacity, you will not have to file a trust income tax return while you are living.  You can continue to file a trust income tax return while you are living.  You can continue to file your single, joint, or separate personal tax return using your Social Security number as usual.  At your incapacity or death, a separate tax return may be required for the trust.  The successor trustee should seek proper professional advice on preparing this return.

Q.   Isn’t joint tenancy the simplest and easiest estate plan?

A.   Joint tenancy with the right of survivorship is probably the most common form of estate planning and, to a certain extent, the simplest and easiest form.  When the first tenant dies, the jointly owned assets are, by operation of law, distributed to the other tenant; thus the assets avoid probate when the first spouse dies.  But, compared with alternative forms of planning, joint tenancy may be, for many estates, the worst estate planning method of all.  For most people, the primary reason for titling assets jointly is to avoid probate.  The truth, however, is that joint tenancy merely postpones probate; it does not totally avoid it.  For example, Mike and Mary, husband and wife, own a home in joint tenancy.  If Mike dies first, Mary will become the sole owner without the need for probate or another court action.  However, when Mary subsequently dies, a probate proceeding will be necessary to transfer ownership of the home to her heirs.

Q.   Since joint tenancy delays probate, why shouldn’t I use it?

A.   There are several reasons to avoid using joint tenancy in your estate plan.  You may find yourself defending against a lawsuit because you hold an asset as a joint tenant and are now being held responsible for the other tenant’s actions.  For example, if you were to title your automobile jointly with a child who later gets into an accident, you could be named as one of the defendants in a lawsuit relating to the accident.  Or you may have an accident with the car and unnecessarily expose your child to a lawsuit because of your own negligence.  With joint tenancy you may lose control of bank accounts, stock accounts, mutual funds, annuities, and so on, as either joint owner can access or sell such assets without the permission or knowledge of the other owner.  And if one owner has a problem with a creditor or lawsuit, the other owner may lose the asset through garnishment or another court action.  Some jointly titled assets, such a real estate, cannot be sold without both owners’ signatures, so a problem arises if one of the owners decides not to sign.  The only option may be to file a lawsuit so that the court can partition the asset and then order its sale.  Joint tenancy can also result in an unintended disinheritance.  For example, Dick and Barb each have a child and grandchildren from previous marriages.  The most valuable asset in their estate is their “dream” lake home.  Let’s assume that Dick dies first.  As the surviving joint tenant, Barb now owns the entire home and can leave it to her child and grandchildren when she dies, thus disinheriting Dick’s child and grandchildren.  Or suppose Barb, with good intentions, creates a joint tenancy after Dick’s death with her child and Dick’s child, but her child predeceases her, leaving Barb and Dick’s child as the joint owners.  On Barb’s death, Dick’s child will become the sole owner, with no legal obligation to share ownership with Barb’s grandchildren.  Barb would have unintentionally disinherited her own grandchildren because she used joint tenancy.  There may also be gift tax implications resulting from putting your property in joint tenancy with people other than your spouse.  For example, my neighbor, Louise, purchased a new home and titled it in joint tenancy with her stepdaughter.  By doing so, Louise made a gift to her stepdaughter equal to 50 percent of the value of the home.  Because of the amount of the gift was considerable, a substantial gift tax was the unintended result.  Joint tenancy has other drawbacks:  Beneficiaries receive the assets all at once, even when they are not able to manage them; the assets may be subject to a court conservatorship if you become ill or disabled before you die; you may need the joint tenant’s consent and signature to transact business; there may be more estate taxes if you are married or after your other joint tenant dies; and the assets may be immediately subject to claims of your beneficiaries’ spouses and creditors after you die.  Joint tenancy with right of survivorship is not the simple estate planning device that many people believe it to be.  Many advisors never recommend it.  In contrast, virtually all the problems discussed above can be avoided with a properly drafted revocable living trust.

Q.   Why is joint tenancy with right or survivorship a poor way to title my marital assets?

A.   Most people seem to have a love affair with joint tenancy.  For a husband and wife whose joint estate does not exceed their $2 million combined exemption amount ($1 million for individuals), joint tenancy may be adequate for estate tax purposes.  It does not, however, help avoid probate upon the death of the surviving spouse or upon the simultaneous deaths of both spouses.  For couples having estates larger than the combined exemption amount, this type of joint tenancy can subject a family to federal estate taxes that could have been easily avoided.  This is because the spouse who dies first cannot use his or her exemption amount.  If you hold property jointly with a spouse, at your death only your 50 percent of the property may receive a “step up” in basis (cost basis “stepped up” to fair market value at date of death).  This means that if your spouse desires to sell the property after your death, he or she may have to pay unnecessary capital gain taxes on his or her 50 percent of the property, which did not receive the step up.  If you live in a community property state (like California), you will likely want to re-title your marital assets as community property or, even easier, establish a written community property agreement (if allowed by your state statutes) in order to receive the additional advantage of the step-up-in-basis income tax benefit on 100 percent of your marital assets.

Q.   What are the obstacles to creating a smoothly working, carefully coordinated estate plan in families composed of second marriages?

A.   With second marriages, estate planning can become very complex and emotional.  Often one spouse, or both spouses, has been married multiple times and has children from one or more of the previous marriages as well as the current marriage.  All of these relationships must be explored to determine what provision will be made for each class of heirs.  Each spouse has individual decisions to make about his or her own children and grandchildren and about how and what he or she will leave to the other spouse.  There are also many issues relating to who will control the assets after one spouse dies and how the assets will be distributed after the death of the surviving spouse.  One of the most perplexing planning situations arises when a current spouse is close in age to the children of the previous marriage.  The older spouse must decide if he or she will leave assets to the younger spouse to defer estate taxes until the younger one’s subsequent death, thereby making the children from the previous marriage wait perhaps many years until the death of their stepparent to receive their inheritance.  The older spouse must also decide if the surviving spouse will have any right to determine whom his assets will go to after his or her death.

Q.   I have heard that I should formally disinherit my disabled son to protect his government benefits.  Is that the only way I can do so?

A.   If you have an adult handicapped child or some other disabled family member who is potentially eligible for or is collecting Medicaid (in California, known as "Medi-Cal"), Social Security income, or Social Security disability benefits, you may want to disinherit this individual in your will to avoid disqualifying him or her for future government benefits.  One of the requirements for Medicaid eligibility is that an individual must have less than very little in countable resources.  The receipt of an inheritance will temporarily disqualify the individual for Medicaid benefits until the inheritance is spent down.  Alternatively, prudent parents often leave the disabled child’s share under the trusteeship of a special-needs trust to provide supplemental income to augment the available government benefits.  State Medicaid authorities continue to attack trusts holding assets on behalf of Medicaid recipients, so you will want to work with an attorney who specializes in this area to ensure that you can provide for your son but not disqualify his government benefits.

Q.   Can you explain what a special-needs trust is and how it works?

A.   Medi-cal pays medical expenses for the poor and disabled but has limits on the amount of assets that a recipient can own or earn during each year that benefits are paid.  A special-needs trust keeps assets available for the benefit of disabled beneficiary without disqualifying the beneficiary from government assistance programs.  The trust must be carefully drafted so that it does not interfere with qualification for government aid.  If a disabled beneficiary’s interest in a trust is deemed by the government to be an available resource, it may disqualify that loved one from receiving government benefits.  A well-drafted special-needs trust will include a "bailout" provision if the government claims the assets are an available resource, so the trust assets can be distributed to a responsible and trustworthy individual to then apply them for the benefit of the disabled beneficiary, without the beneficiary losing his government benefits.

Q.   Can a "Medi-Cal" eligible recipient refuse his or her inheritance in order to protect continued Medicaid eligibility?

A.   Although a qualified disclaimer will redirect the inheritance to some other person, for purposes of Medicaid eligibility, the inheritance will be treated as having been received and then transferred by the Medicaid recipient.  This results in the loss of benefits.

Q.   If I become incapacitated, who will make my financial decisions?

A.   This is a very good question and one that very few people address before becoming incapacitated.  If you should become incapacitated without having done prior planning for that contingency, the probate court, with all its administrative bureaucracy, will appoint a guardian over your person and a conservator over your financial affairs.  These individuals or institutions may or may not be the persons or organizations whom you would choose were you able to do so; and even if they are, you will incur the expenses and delays of the judicial process.  In order to bypass this bureaucratic process, your living trust should appoint your disability trustees and should contain all your post-disability instructions for providing for you and those persons dependent upon you.  In addition, in a separate document known as a durable power of attorney, you should authorize one or more individuals to transfer property that is not in your trust only to your trust so that your disability trustees can use it to care for you during your disability under the terms of the trust.

Q.   What if I don’t have a living trust?

A.   If you do not have a trust, you can use a durable power of attorney to name one or more individuals to act in your stead with regard to your property.  The durable power of attorney may allow the attorney-in-fact to act in your place to sell your assets, transact business, or do whatever he or she feels is necessary to care for you during disability.  However, a durable power of attorney may not be as easily accepted by third parties (escrow companies, banks, brokers) as would a living trust.

Q.   Can you tell me more about a durable general power of attorney?

A.   It is a written document that specifically gives authorization to others to act on behalf of its maker after he or she becomes disabled.  It is very common for trust makers to name more than one person to hold such a power.  Powers of attorney almost always give the holders the ability to buy, sell, or lease assets, sue on a maker’s behalf, collect from creditors, and even operate a maker’s business.  They also usually grant certain tax powers such as the right to sign and file income tax returns and the right to make or disclaim gifts.

Q.   What is the significance of the term “durable” in a power of attorney?

A.   The term “durable,” when coupled with “power of attorney,” means only that the power is expressly intended to, and in fact does, survive the disability of the document’s maker.  A power of attorney that is not durable becomes invalid as soon as its maker is disabled.

Q.   Should we write our burial instructions in our will or trust?

A.   Although you can do so, your will or trust might not be consulted before your burial, so using either document to convey burial instructions is generally not a good idea.  Whether or not you have prepaid funerals, burial plots, or other final plans, leaving a letter of final instructions that details the “where,” “what,” and “how” can greatly help to reduce the overwhelming stress your loved ones will be under at that time and is an extremely thoughtful gift you can leave to them.  Grief and/or guilt can lead to many misinterpretations of your thoughts and set in motion actions that might be contrary to your wishes.  This is why your letter of instructions is so very important. 

Q.   What is a living will, and how is it used?

A.   A living will (also referred to as an advance healthcare directive) is a document in which a person states whether or not life-sustaining procedures should be used to prolong his or her life.  This document is given legal authority under the Natural Death act or the right-to-die statute within each state.  With modern medical technology improving by the minute, the possibility of prolonging life can go far beyond what we’ve ever imagined.  Yet many people are unwilling to suffer the loss of their dignity and possibly their net worth as the necessary payment for prolonging their lives when death is imminent and irreversible.  In short, they want to retain the right to control decisions regarding their medical care, including the withholding or withdrawing of life-sustaining procedures.  The living will laws typically contain safeguards to ensure peace of mind, such as a requirement that two physicians examine the patient and determine that recovery is no longer likely before life-sustaining treatments may be withdrawn.  A person who creates a living will can revoke that document at any time by destroying it, directing its destruction, or signing a written revocation.

Q.   What is a health care directive, and do I need one in addition to a living will?

A.   The health care directive is a documents, authorized by the laws of most states, that allows a person or persons or your choosing to make your medical decisions for you if you cannot.  It covers decisions on issues that may arise before you are terminally ill – such as operations, transfusions, nursing care, various treatments, and tube feeding.  You should probably have a health care directive in addition to a living will (although in some states, like California, the two may be combined into one advance healthcare directive document).  It is important that you periodically review your living will and power of attorney for health care to be sure they still comply with your state’s laws and have not expired.

Q.   Should we leave instructions on how we want our personal property distributed?

A.   Yes, you should write a memorandum of tangible personal property to control the manner in which you want your possessions distributed. 

Q.  If I'm married, must my spouse accompany me to my initial meeting?

A.  Yes. If you come without your spouse, we will probably ask you to reschedule. We simply can't afford to make a legal mistake -- one that could seriously affect you and your loved ones in the future -- if there is any indication at all that there may be joint/community property. On rare occasions, when it can be clearly shown by proper documentation that all assets are your separate property alone, we will meet with you individually. Sometimes, a married couple has community property and one or both spouses also have separate property; in that case we may meet with one spouse alone regarding their own separate property.

Q.  How long does it take to setup (or upgrade) my Living Trust (or complete other planning)?

A.  Generally, at the conclusion of your initial meeting, we schedule another meeting about 4 to 6 weeks later, at which time we review your documents with you and sign them. When emergencies arise, we may complete your planning in as little as 2 or 3 days (at an additional "expedite" charge).      

Q.  What will estate planning cost?

A.  When we have met with you, and diagnosed your specific situation and needs, we will quote you a fixed fee (not hourly or an estimate), in writing. The decision to proceed is then yours. We do not begin or charge you for work before you have given us your written consent and provide an agreed deposit. (Once you are an existing client, we may sometimes proceed with further work based on your verbal approval and without a deposit).

Note: We charge a $150 consultation fee for all clients.

Q.  Once I set up my Living Trust, what ongoing legal fees are there?

A.  Generally, none that are required every year. However, we do advise that you come in for a free review meeting at l every 3 years, because your situation and desires change, your relationship with and needs of beneficiaries change, laws change and new planning techniques are developed. We find that, over a lifetime, most people will make several changes or upgrades to their Living Trust (and other estate planning). When we meet and determine what changes you desire or we recommend, we then quote you a fixed fee, in writing, depending upon the nature of the legal work to be done. You should also know that when we provide additional services to you as an existing client, we always discount your fee from what we charge the general public since you have already invested with us.

Q.  Don't I get all future changes to my Living Trust for free?

A.  A professional law firm simply can't afford to promise all future work for free, unless they charge you a huge fee up front! Think about it... if you get an operation from a doctor, will he provide all future operations for free? Once we meet and diagnose exactly what changes you want or need, we quote you a fixed fee, in writing, based upon the work to be done and then it's up to you. We believe that's the fairest, most professional way to do business.

any person or company who promises you all future changes are free is probably not going to be around long enough to do them or is making their money somewhere else (like selling you high commission life insurance or annuities)!

    Note:  Some of these FAQs were excerpted from the copyrighted book "21st Century Wealth" of which Philip J. Kavesh was a co-author, along with Robert Esperti and Renno Peterson (Quantum Press, 1999).

See related Page: Life Care Planning FAQ




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