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Estate Planning Frequently Asked Questions

What is Estate Planning?

Estate planning means taking steps to manage the care and finances of a person in the event of incapacity or death.  Estate planning includes the bequest of assets to beneficiaries and the settlement of estate taxes.  Estate planning may include designating guardians for minor children.  Estate planning can also enhance your legacy, such as through ethical wills and charitable giving.

Some of the significant estate planning steps can include:

  • Discussion of your goals, wishes, and needs
  • Making a list of your assets
  • Coordinating among your estate planning attorney and your other professionals, who may include an accountant, financial planner, and life insurance agent.
  • Creating a will for assets
  • Creating an ethical will
  • Creating a trust, if appropriate, and transferring assets to the name of the trust
  • Selecting a family member or friend to be a guardian, if needed, for minor children
  • Considering life insurance and long-term care insurance
  • Considering steps to reduce estate taxes, which may include lifetime transfers to family and friends, life insurance, gifts of fractional interests, and charitable giving
  • Designating beneficiaries on retirement accounts and life insurance policies
  • Creating a power of attorney for healthcare decisions
  • Creating a power of attorney for financial decisions
  • Naming a proposed conservator if one should ever be necessary
  • Signing an authorization for healthcare providers to discuss your medical condition and records with designated persons
  • Setting up durable power of attorney (POA) to direct other assets and investments
  • Making funeral arrangements

Should I Write My Own Estate Planning Documents?

You may have seen ads from out-of-state online services run by non-attorneys, but who have a giant disclaimer telling you to consult with an attorney before signing all the paperwork you just downloaded.  You may have seen a book or software with do-it-yourself forms.  If so, you should also read the news stories of the expensive, unforeseen problem that these plans can cause, as described, for example, in this article from Forbes.

Your best option is to get your legal planning done by a trusted local attorney.  If you use a form, you have no competent advice regarding whether you are completing it properly, let alone options that may better suit your situation.

Will I Owe Estate Taxes?

The true answer is nobody knows, because Congress can change, and for the last several years has changed, the exemption amount every year.

In 2012, the exemption amount is $5.12 million per person or $10.24 million for couples.  The exemption includes assets transferred by gifts during lifetime and bequests at death.  Estates are taxed at 35% on assets above the exemption amount (plus administrative expenses and charitable gifts).  Only about 50,000 estates will be subject to the tax in 2012.

In 2013 the exemption amount drops to $1 million per person, but many expect Congress to increase that number.  Because the gift and estate tax is a small part of the government’s income, but has a large political impact, Congress tends to postpone making decisions.  It could well be that Congress will not decide until late in 2013 how much taxes are owed by the estates of people who pass away that year.

Because of the uncertainty, and the high exemption amount this year, many families are choosing to make substantial gifts in 2012.  It is anticipated that the gifts this year will be counted toward a $5.12 unified gift and estate tax credit even if the number is reduced in future years.

What Is A Will?

A will is document that sets forth who will receive a person’s property after death.

The will becomes a public document after death, when it is filed with the probate court, and “probate” is opened.

A will can govern the disposition of some or all of a decedent’s assets.  The disposition of other assets may be determined by a trust, or by a beneficiary designation such as on a life insurance policy or retirement account, or by real property laws governing, for example, joint tenancies.

Wills must be executed with certain formalities to be valid.

Wills, in general, can be revoked and amended an unlimited number of times.  People, usually spouses, can also enter into an agreement with another regarding a will or reciprocal wills, and those agreements may prevent changing a will.

What is an Ethical Will?

An ethical will is not a legal document.  An ethical will is a writing in which a person may record hopes, prayers, history, guidance, instructions, and values for the survivors.  The document may take the form of one or more letters.  Contemporary ethical wills are often videos.  Along with personal items like jewelry, lifetime letters, and collections like recipe cards, an ethical will can be a comfort and a remembrance for a person’s survivors.

What is a Trust?

A trust is an imaginary box into which a person places all or some of that person’s assets.  Once in the box, the use and distribution of those assets during life and afterwards are governed by the trust agreement.

Like nesting boxes, a trust may have subtrusts inside them.  These subtrusts may provide for the use and distribution of certain assets, for example jewelry or an apartment building.  Or, a subtrust may be for the benefit of certain beneficiaries, such as a surviving spouse, or minor children or grandchildren, or an adult child who would benefit from another person managing the assets that person will inherit.

A trust can be revocable, meaning it can be revoked or amended, or irrevocable, meaning it cannot (easily) be revoked or amended.  Changes to an irrevocable trust may be approved in appropriate situations by a court.

What is a Special Needs Trust?

A special needs trust is a particular type of trust to hold assets for a disabled person of any age.  The trust is tailored to address the specific needs of the disabled beneficiary for life.

The trust can be structured so as to be used as a supplement to government benefits.  Even in situations where a family may have significant resources now to help a disabled family member without resort to government assistance, a special needs trust should be established to address the disabled person’s care, to position the disabled person to receive government benefits in the future if appropriate, and to protect those assets from creditors.

What are those Acronym Trusts?

Trust attorneys have an arsenal of techniques to minimize gift and estate taxes, and these include the more exotically-named trusts like the ILIT (irrevocable life insurance trust), QDOT (qualified domestic trust), QPRT (qualified personal residence trust), IDGT (intentionally defective grantor trust), IDIT (intentionally defective irrevocable trust), CLT (charitable lead trust), CRUT (charitable remainder unitrust), CRAT (charitable remainder annuity trust), NIMCRUT (net income with makeup CRUT), and CST (credit shelter trust).

What is a Dynasty Trust?

A dynasty trust is a trust that can continue forever (at least as long as there are assets remaining).

Most states, like California have a limit on how long a trust may continue before the assets are distributed.  That term is 21 years plus the lifetime of the person who lives the longest at the time the trust is formed.

The states that permit a dynasty trust, like Delaware and South Dakota, derive income because of the steps you must take to avail yourself of those state’s perpetual trusts.

What is a Pet Trust?

A pet trust is a recent development governed by California Probate Code section 15212.  A pet trust holds money to pay for the care and feeding of the beloved pet for the remainder of the pet’s life.  The trust can be a separate document, or can be a subtrust created under another trust or will.

The less formal alternatives are still valid.  For example, a will or trust could leave the pet and money to a relative or friend, with a (non-enforceable) request that the pet be cared for.

What is a Durable Power of Attorney for Healthcare?

The durable power of attorney for healthcare (DPAHC) is a document by which a person designates another person who can make medical decisions if a person is not able to make those decisions for himself or herself.  As long as the person is able to make his or her own medical decisions, the DPAHC has no effect.

A DPAHC is sometimes known as a living will or an advance health directive.  The best known use of a DPAHC is for end-of-life decisions for the terminally ill.  In addition, DPAHC’s can also govern a range of other decisions such as pain medications, guidelines for surgery, and organ donations.

A form of the DPAHC is set forth by California law.  There are rules about how the document must be signed and witnessed.  The document may be amended or revoked.

Once completed, copies of the DPAHC may be provided to a personal physician and local hospital so that they are on file in the event they are needed.  The person appointed to make decisions should also have a copy.

What is a HIPPA release?

The Health Insurance Portability and Accountability Act (HIPAA) protects the privacy of medical information. The law generally prohibits a person’s doctors and hospitals and other health care providers from releasing health care information unless the patient has signed a HIPAA release.

A HIPPA release designates one or more people with whom healthcare providers may discuss a patient’s medical condition and treatment options, and to whom they may provide copies of medical records.

What Is Probate?

Probate is the court process to distribute property under a will, or if a person passes without a will, under the intestacy laws.  The probate court is also a place for creditors of the deceased person to file claims.

Probate is a matter of public record.  The fees for the executor and the executor’s attorney are set by statute.

What Is Community Property (or Joint Tenancy) With Right Of Survivorship?

This is a common form of real estate ownership between spouses, and it avoids probate at the death of the first owner.  However, the right of survivorship means that  the surviving owner is entitled to the entire asset, regardless of what other estate planning documents may direct.  The right of survivorship, used in place of a trust or other entity to hold title to real estate may not meet a person’s goals, such as ensuring that a portion of the real estate eventually goes to the children of the first owner who passes away.

What Does Intestacy Mean?

If a person dies without a will or trust, that person is said to die “intestate.”  Many people believe that if a person dies without a will that person’s property goes to the state; but that is not correct. The California legislature has enacted laws that determine who will inherit that person’s assets.  That law divides a decedent’s property among relatives based primarily on bloodlines.

What Is A Power Of Attorney for Financial Decisions?

A power of attorney for financial decisions allows a person to appoint another person to make financial decisions for him or her.  The power can take effect immediately, or when a future event happens (called a “springing” power).  In the area of estate planning, powers of attorney are generally springing, and become effective upon one or more physicians stating in writing that the person lacks mental capacity to make financial decisions.

The power can be limited, such as to sign a particular document or type of document, or broad to govern every conceivable type of financial transaction and decision.  The power may state who should be appointed conservator if one is needed.

The power must be notarized if the agent is to have the power to buy or sell real estate.  The power may be amended or revoked.

What is a Conservatorship?

If a person is mentally or physically incapacitated by reason of age or illness, there may be the question of who will care for that person and who will handle the person’s assets.

Some or all of these issues may be addressed in a trust and powers of attorney, or decided informally among family members, but some issues may not.  There may be disagreement among friends and family closest to the incapacitated person regarding the choices to be made, such as whether to keep someone at home with assistance or to move the person to an appropriate facility.  Sometimes the nature of the incapacity causes unreasonable opposition from the proposed conservatee to the efforts being made by friends and family.

In any situation where court intervention is needed to assist with a person’s care and financial decisions, a friend or family member, or even a social services agency, can seek a court order appointing one or more people (a family member, friend or a professional) as a conservator to make care and financial decisions for the conservatee, and then obtain court orders approving the decisions made.