California Wills and Trusts

John Palley

Sacramento CA Estate Planning Attorney – John B Palley

California Revocable Trusts and California Wills

by: John B. Palley, Attorney

INTRODUCTION
When meeting with clients we often discuss the benefits of employing a revocable (or “living”) trust to help plan the client’s estate. The living trust becomes the centerpiece of basic estate planning for most people both due to the benefits it provides but also due to the horror stories it can help avoid. With the changes in the federal estate and gift tax rules in recent years each United States citizen can currently give away far greater amounts of money when they die without incurring the federal estate tax.

The mistake that many people make is thinking that they do not need a living trust, or even wanting to revoke the one they have, because they “only” have $400,000 in assets. This is a big mistake because the federal estate tax exemption has absolutely nothing to do with the California probate laws. Probate laws still kick in at $100,000 in assets and can be necessary for even smaller estates in some instances. Thus the value of living trusts needs to be considered for anybody who has assets!

This article is written with California laws in mind by a California attorney. The principles are the same or similar in most states but you should review the law in your state with a licensed estate planning attorney.

COMPONENTS OF A CALIFORNIA ESTATE PLAN

* Revocable “living” or “loving” Trust;

* Pour over Will;

* Power of Attorney for financial affairs or “durable power of attorney;”

* Power of Attorney for medical affairs or “living will” or “health care directive;”

* Certified Extract of Trust (or certified abstract – a summary of the trust);

* General Transfer;

* Hippa release;

* Quitclaim deed and preliminary change of ownership;

* Bank letters;

* Other asset transfer assistance depending on the case.

IMPORTANCE OF A WRITTEN PLAN
Without a written plan in place your heirs will likely encounter many problems and inconveniences upon your incapacity or death. They range the gamut from court room battles among family members over custody of minor children to relationship ending feuds between family members over the distribution of assets. Additionally, there are many problems that arise if a person becomes incapacitated. For example, if you were ever to end up in the hospital in a coma, you need someone to be in a position to make decisions for you. In these situations, it is important to have written instructions to address your personal and medical affairs. The key is planning ahead. By establishing a written plan, your wishes and needs will be carried out exactly as you desire; without the written plan in place, anything is possible! The main options to distribute your assets, after death, are a will or a living trust. A will is the more basic option which is great for causing your wishes to be followed after death but does generally require a lengthy and costly visit to the probate Court.

REVOCABLE “LIVING” TRUST
The centerpiece for most estate plans is the revocable “living” trust. There are many reasons people form living trusts. The biggest benefit of a living trust is avoiding probate. Do you know what the financial cost of going through probate is? A $400,000 estate would generate an $11,000 attorneys fee, about $2,000 in Court costs and an $11,000 Executor’s fee. Yes, almost $25,000 to collect, divide and distribute your estate after you die! The fees and costs are based on a percentage of the total assets so these numbers go up as the size of your estate goes up! Interestingly, the total estate size is based on the gross value of your assets and not the net value thus a house with a huge mortgage is valued at the fair market value and not the smaller net equity value.

A living trust is actually a pretty straightforward device. It is simply a separate entity (analogous to a corporation) that holds your assets. You retain complete control over your assets while you are alive and mentally competent. Upon your incapacity or death another person you choose (called the “successor trustee”) steps into your shoes and manages your assets for you. This successor trustee can be a relative, a friend, or a professional fiduciary (like a bank). In recent years I have seen a lot more cases where we discuss using a professional fiduciary and, in fact, discuss this option in most cases. Avoiding the probate process is critical, as your successor trustee can distribute your assets in an expedient manner to your heirs.

In addition to the shorter delay in distribution, a trust also can make it more difficult for creditors to collect money from you or your heirs; as they are forced to sue the trustee or the beneficiaries, which can be a time consuming process. Relatives wanting to “contest” the trust have a more difficult time as a trust is more difficult to get overturned than a traditional will. Of course, both the will and trust will have “no contest” clauses in most cases which dissuade contests by disgruntled family members.

A fallacy has developed that living trusts are complicated and burdensome to maintain; this is just not true. A living trust is completely revocable and amendable. This essentially means that it can provide for whatever you want; and if it doesn’t say it already, it can be added. Except for the initial setting up of a trust, where I help assure that all of your assets are “placed” into the trust (the “funding process”), you never have to do anything different with your assets than if you owned them outside of a trust.

ASSET PROTECTION
Unfortunately our society looks to the Court to settle all problems. When in doubt… SUE, SUE, SUE! With our society heading in this direction people are naturally worried about protecting their hard earned assets. Though a trust does not provide impervious walls to creditors there are some steps that can be taken, within a trust, which can increase your level of asset protection. Also, and most importantly, a properly set up trust can provide very complete asset protection to the loved ones who you leave your trust to. We will go over these options, at great length, when discussing how your trust should be set up.

PROBATE
Do you know how long a probate takes? Assuming we are able to meet every deadline, to the day, a probate can be completed in 7 months in most counties in California. However, any little hiccup, like an Executor who is a procrastinator, and your probate will take 8, 9, 10 months… and in rare cases a year or two!

Unfortunately, the fees and time delay of a standard probate may be significant. Do you know what happens if you own real estate in another state? Most people claim they do not own real estate in another state, but many people own a timeshare in Hawaii, a cabin in Tahoe, oil rights in Oklahoma or other such assets. Having to hire attorneys in multiple states is possible for clients with these type of assets and is one more very good reason to get a living trust. With a properly funded living trust these assets will pass to your heirs with ease and without having to hire out of state attorneys.

What about the first death between a husband and a wife, do you know what can happen there? Could your estate end up in probate? There is a common misconception that all assets owned by husbands and wives belong to the other, automatically, at death. Last year I was retained by a woman whose husband of five years had died. He had children from a first marriage, real estate in his name, a business in his name, lots of debt and unfortunately no living trust! In addition to the costs and delays of probate this new widow had to fight with her husband’s sister about the widow’s interest in the family business and file a lawsuit to divide real estate her husband owned. The mental drain was far worse than the financial drain though the financial cost was substantial!

CONSERVATORSHIP
Another great feature of the living trust is that it enables you to avoid the need for a conservatorship should you become incapacitated. A conservatorship is a court administered process, similar to the probate process, which costs you money and can be very frustrating and time consuming for your heirs. Avoiding a conservatorship may be even more important than avoiding the probate as it happens while YOU are still alive!

TAXES
In addition to all the problems with a probate there are also clients who face the possibility of estate tax after death. A properly drafted living trust can reduce and/or eliminate estate tax. The estate tax savings can be several hundred thousand dollars to those that have taxable estates. Also, though estate taxes are not applicable to as many people any more a poorly created estate plan can create unnecessary income taxes, in the form of capital gains tax, which can be avoided with good trust planning.

CONCLUSION
Just because your estate might be below the current federal estate tax exemption level does not mean that you do not need a trust. The costs and delays of probate are very real and have no connection to the estate tax exemption levels. All of the above can be avoided with a properly drafted and funded living trust. You can avoid the huge costs and delays of a standard probate, you can avoid any disputes at the death of either spouse and you can avoid the need for multiple attorneys if you happen to own assets in other states or countries. A living trust can save your family many thousands of dollars, avoid any delays and make sure your assets are distributed exactly as you desire! Do not let your family become subject to the expense and delay of probate… call a qualified estate planning attorney and get your living trust put together today!

Contact John today to discuss your estate planning needs.

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John B. Palley – Meissner Joseph & Palley
Sacramento Estate Planning & Probate Attorneys

1555 River Park Drive #108
Sacramento, CA 95815‎
Phone: (916) 307-4627
Fax: (916) 258-6387
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