Judge Morrison England of the U.S. District Court for the Eastern District of California has rejected the Justice Department’s request that California turn over information regarding California property transfers in connection with the federal gift tax compliance initiative. Judge England determined that the government failed to show that the information was not available through other sources (In re John Does, E.D. Cal., No. 10-mc-00130-MCE-EFB, 5/23/11).
We know that estate planning is important and you may even have witnessed the consequences of a friend or relative’s failure to plan. Still many of us do not have an estate plan in place. Why? Estate planning can be a daunting process because it requires us to deal with unpleasant topics such as death, disability and, in some cases, taxes. As a result, estate planning is too often an item that sits eternally on the “To Do” list. Failing to plan can have devastating consequences.
The purpose of this overview is to introduce you to some of the basic elements and concepts of estate planning to help you get started with the estate planning process.
What is Estate Planning?
Estate planning is the process in which you take an inventory of your assets and determine (i) who should manage your personal care and financial affairs should you become incapacitated; (ii) who will care for your minor children and their assets should you die or become incapacitated; and (iii) what will happen to your assets upon your death (who will receive your assets, how they will receive your assets and when they will receive your assets). Depending on your circumstances, estate planning may also involve business planning, tax planning, financial planning and the making of lifetime gifts. The estate planning process should also include a review of your life insurance coverage.
Your estate plan may include some or all of the following (each of which are discussed in more detail below): Nomination of Guardians, Will, Living Trust, Durable Power of Attorney and Advance Health Care Directive.
Nomination of Guardians: Nominating a guardian to care for your minor children until they reach the age of 18 can protect them from a court battle over their custody in the event that both parents die. In addition, you may nominate a guardian to manage the assets of your minor children because minors do not have legal authority to manage their own assets. Alternatively, you may want to leave assets to your children in trust to be held and administered by a trustee until an age or ages that you feel is appropriate for them to receive the assets.
The nomination of guardians for your minor children and their assets may be provided for in your will, living trust or a separate document.
Will: A will becomes effective upon death, and sets forth persons and/or organizations to receive your assets upon death. If you have a living trust, your will names your living trust as the recipient of your assets (this is referred to a “pour-over will”). In addition, a will nominates the party who will be responsible for the management of your estate, including the payment of debts and expenses and the distribution of your assets. This party is referred to as the “executor” of your will and is subject to probate court appointment and supervision.
Assets that are solely in your name at death (as opposed to those assets held in the name of a trust or in joint tenancy) will be distributed pursuant to your will pursuant to the probate process.
Probate: Probate is the court supervised administration (including the settlement of your debts) and transfer of your assets upon your death. If you die with a will, your executor, under court supervision, will distribute all assets held in your name to the beneficiaries named in your will subject to the terms thereof. If you die without a will (“intestate”) the court will appoint an administrator to distribute your assets to your heirs as directed by California law. The fees payable to your executor and probate attorney are based on a statutory fee schedule. In addition, your will, the value of your assets and all of the probate proceedings become a matter of public record which can be accessed by anyone.
Revocable Living Trust: A revocable living trust is a written agreement between the person(s) transferring assets to the trust (the “trustor(s)”) and the person(s) appointed to hold and manage trust assets (the “trustee(s)”). Generally, the trustor also acts as the trustee of their revocable living trust unless or until they are unable to manage the trust assets. During his or her lifetime, the trustor can transfer additional assets to or remove assets from the trust and change the provisions of the trust agreement at any time.
A revocable living trust becomes irrevocable on the trustor’s death as to that trustor’s share of the trust assets. The trust agreement should name one or more successor trustees who will be responsible for the management and distribution of the trust assets upon the trustor’s incapacity or death. The trust assets are generally not subject to probate upon the trustor’s death. Given the lack of court supervision following the trustor’s death, you should name only a trusted party, typically a friend, family member or financial institution as successor trustee.
A properly drafted pour-over will combined with a living trust may allow your entire estate to avoid probate, depending on the circumstances.
Durable Power of Attorney: Your Durable Power of Attorney appoints an individual to act as your “attorney-in-fact” and grants him or her specified powers with respect to your property (such as the right to buy or sell property and to transact business on your behalf). You may specify whether the authority to act as your attorney-in-fact becomes effective immediately or only upon your incapacity. By operation of law, the authority of your attorney-in-fact to act on your behalf expires upon your death.
If you have a living trust, the power granted to your attorney-in-fact will apply only to your assets that are not held in the name of the trust.
Advance Health Care Directive/Durable Power of Attorney for Healthcare (“AHCD”): Your AHCD appoints an individual as your attorney-in-fact for healthcare decisions and allows him or her to make decisions regarding your healthcare if you are unable to do so. In addition, your AHCD may also express your wishes regarding life-sustaining treatment, organ donation and other specific health care issues.
The legal fees charged for estate planning vary from attorney to attorney and depend on the complexity of your situation and your circumstances.
To get started you need to think about (i) your assets and their value, (ii) who you want to receive your assets, when and how, (iii) who you want to manage your assets if you become incapacitated or die, (iv) who should care for your minor children if you die or become incapacitated, and (v) who should make decisions regarding your personal and health care if you become incapacitated.
For more information call us at (916) 899-5060.