Estate Planning FAQ - Roemer & Harnik LLP

ESTATE PLANNING: FAQ’S

CAUTION: These are very basic responses for general information only and are limited to California law. Consult your own legal advisor about your specific circumstances.

GENERAL QUESTIONS

What is Estate Planning?

Estate Planning generally refers to planning for events following your death or incapacity. It means making very important decisions – about your loved ones and about yourself. Most estate plans include (or SHOULD include!) at least four documents: (1) Last Will and Testament; (2) Power of Attorney for financial matters; (3) Advance Healthcare Directive (also called a “living will” or “power of attorney for healthcare”); and (4) a Trust (also called a “living trust” or “inter vivos trust”).

Many plans are complete with these four documents alone. Some cases are more complex and may require additional documents and steps, such as business entity formations, specialized trusts, and more complicated tax planning. Very simple plans may not require the fourth document (Trust), but it is advisable in most cases.

I’m not wealthy. Do I still need an estate plan?

Estate Planning is not just for the wealthy. An estate plan does more than simply pass on your assets. It names someone to care for your assets and pay your bills if you become incapacitated. It names guardians for minor children. It appoints someone to make healthcare decisions for you.

When it comes to assets, most people have more than they think. Do you have life insurance? A 401k, an IRA, or other retirement plan? How about collectibles, special mementos, or family heirlooms? What about your pets? Is it possible you might inherit assets from someone else? Not everyone needs a complex estate plan, but everyone should have some sort of plan. The only way to know for sure what you might need is to consult with a professional in your area.

How much does estate planning cost?

The cost of Estate Planning depends upon a number of things. Plans for couples usually cost more than plans for single persons. Plans for special circumstances can increase the cost, such as loved ones with disabilities, non-U.S. citizen spouses, substance abuse problems, pets, etc. Many estate planning attorneys offer a free initial consultation and can usually give an estimate during that meeting.

The bigger question you should ask yourself is: Can I afford NOT to have an estate plan? If you have no plan, your estate may pay higher taxes, the State will decide who receives your property and who the guardian of children will be, and the court may have to appoint someone to care for you if you become incapacitated. Having no plan generally costs more in the end.

Will I owe taxes on an inheritance?

Yes and no – you won’t owe “inheritance” tax, but an “estate tax” might be owed, which will usually be deducted before your inheritance is paid to you. There are three types of tax that might affect an inheritance: state and federal income tax, state inheritance tax, and federal estate tax.

Income tax is only due on “income in respect to a decedent,” such as minimum distributions from inherited IRA accounts.

An “inheritance tax” is a tax on the privilege of receiving an inheritance and it is paid by the heir. Some states impose an inheritance tax, but California does not.

An “estate tax” is a tax imposed on the privilege of giving your assets away when you die. The federal government charges an estate tax, but the tax is only imposed on estates that exceed $5 million (plus an inflation factor). The $5 million exemption from taxation is somewhat like having a standard deduction on an income tax return. If an estate’s countable assets are worth less than $5 million, then no estate tax will be due. Countable assets include everything owned by the decedent, even if it does not go through probate. So it includes, for example, life insurance, IRA accounts, and jointly owned property. The maximum tax rate for estates over $5 million is 40%. If you accept property before the tax is paid, you will be liable for your share of the tax from the property you received.

LAST WILL & TESTAMENT

What Does a Last Will and Testament Do?

A Last Will and Testament can be used to nominate a guardian for minors; appoint an executor to handle your final affairs; and direct final disposition of your assets. Most people know what a Will is, but many are confused about what it actually does. A Will tells the court how to distribute that part of your property that is “subject to probate.” Not all of a deceased person’s property is “subject to probate.” Assets passing by joint ownership, or by beneficiary designation (such as life insurance or trusts) to someone other than your “decedent’s estate,” are not “subject to probate.” This means that the passing of those assets is unaffected by the terms of your Will.

Why do I need a Will if I have a Trust?

Having a Will even if you have a Trust is like having a safety net. It is very common for people to accidentally leave something out of their Trust. A good example is your home. People buy a new home, or refinance an existing one, and forget to title the property back to their Trust when they are finished. When the person dies, the house is not part of the Trust so “who gets it” is decided by the Will. Ideally, the Will states that all assets pass to the Trust. This way, final distribution of assets still follows the plan laid out in the Trust. Without a Will, the State will decide who gets any assets that are not in the Trust. That may or may not be the people you wanted to have that property.

What happens to my Will when I die?

The original of a person’s Will must be deposited with the Probate Court when someone dies. The Will becomes a public record and anyone can ask to read it. If all of the deceased person’s property is in a Trust, or already has a legal beneficiary named (such as life insurance), then the Will just gets deposited and nothing more happens in the court system. Otherwise, a “probate administration” must be started, which means that the Probate Court will decide if the Will is legal, then appoint someone to be in charge of gathering the property, paying the deceased person’s debts, and distributing the remaining property to the right people. This person is usually called the “Executor.”

What is the difference between an Executor and a Trustee?

The “Executor” and the “Trustee” are similar in some ways, but very different in others. An “Executor” only acts if someone has died. The Executor can be nominated by the deceased person, but that selection must be approved by the Probate Court. The Executor only has authority over property that is under the Will, not property being distributed by a Trust, a beneficiary form, or joint ownership. A “Trustee” is selected by you and need not be approved by the Probate Court. The Trustee handles all of the property in the Trust and his or her authority can apply not only at your death, but also during your lifetime.

What is the difference between a Will and a Trust?

There are many differences between a Will and a Trust, but the most basic differences are:

A Will only takes effect when you die, but a Trust can be operative during your lifetime and/or after your death.
Property given to someone under a Will must be distributed to them outright, with no strings attached. Property given under a Trust can be given outright, or it can remain in Trust and be supervised by the Trustee. (It is possible to setup a Trust through a Will, but the result is still a Trust.)
There is more potential to reduce your estate taxes if you use a Trust rather than a Will.
A Trust allows you to better protect your heirs from creditors, divorce, and other relatives (or step-relatives).
Property given under a Will must go through the Probate Court. That process is very expensive in California, it is time consuming, and it is very public. A Trust does not have to go through the Probate Court, can remain a private matter, the expenses of probate can be avoided, and the decedent’s final affairs can be handled quickly.

For most people, having a Trust is well worth the expense of setting one up — a cost which is, by the way, generally far less expensive than a probate.

TRUSTS

What is a Revocable Living Trust?

A Living Trust, also called an “inter vivos trust” or a “revocable living trust,” appoints someone (the “trustee”) to hold title to and manage your assets during your lifetime and after your death.

You can be the trustee of your own trust, and remain in full control, then the successor trustee nominated in your trust document will take over if you die or become incapacitated. You can change the terms of the trust, cancel the trust entirely, and add or remove assets at any time, as long as your are not incompetent.

If something happens to you, all assets in your trust can be managed, and eventually pass to your designated beneficiaries, without any probate court involvement. A trust avoids probate court, allows greater flexibility for planning, allows for delayed transfer of assets, and can be structured to provide greater protection to your loved ones.

What is an Irrevocable Trust?

A Trust that cannot be canceled or changed by its creator is an “irrevocable” Trust. Once it is setup, the Trust is final. The creator cannot take back the property, cannot change how the property is used or who gets it, and usually cannot change the Trustee. Any changes must be made by the Probate Court, which may or may not approve them.

How long does a Trust last?

A Trust can last almost as long as its creator wants it to last, but there are some limitations. Most Trusts cannot last longer than about 99 years after it creator has died. A Trust may also end early if it runs out of property, or if the value of the property is so low that it doesn’t make sense to continue as a Trust anymore. A Trust might also end early if a Probate Court orders it to end, but that usually only happens in special circumstances.

Does a Trust need to file its own tax return?

Yes and no. A revocable trust (also known as a living trust) does not need to file its own tax return. Instead, its income is included on the income tax return of the grantor (the person(s) setting up the trust and holding the power to revoke it).

An irrevocable trust must file its own tax return. This includes trusts that were initially setup to be irrevocable. It also includes trusts (and subtrusts) that become irrevocable, such as upon someone’s death.

An example of this would be when a joint living trust subdivides into a survivor’s trust and a decedent’s trust upon the death of one of the grantors. The survivor’s trust remains revocable and does not need to file its own tax return. But the decedent’s trust has become irrevocable and will now need to file its own tax return.

Whose social security number or EIN do you use for a trust?

That depends whether the trust is revocable or irrevocable. A revocable trust uses the social security number of the person(s) setting up the trust and holding the power to revoke it.

An irrevocable trust must obtain a separate taxpayer ID number, which is often referred to as an EIN. You can get an EIN number through the IRS website.

POWER OF ATTORNEY

What is an Advance Healthcare Directive, a Power of Attorney for Healthcare, and a Living Will, and what’s the difference between them?

An Advance Healthcare Directive, sometimes also called a “living will” or a “power of attorney for healthcare,” is a document that tells others what to do if you are unable to make your own medical decisions, tells them under what circumstances (if any) you would wish to be removed from artificial life support, and appoints a person you have selected to consent to (or withhold consent from) medical procedures when you are unable to do so.

What is a Durable Power of Attorney or Power of Attorney for Finances?

A Power of Attorney for Financial Matters appoints someone to manage your assets and pay your bills. It can take effect immediately, or it can be limited so that it only takes effect if you become incapacitated. A “durable” power of attorney is the kind that remains in effect even if you become incapacitated.

Your power of attorney can be a general power of attorney that authorizes someone to manage many assets, or you can have one or more limited powers of attorney that give someone authority only over specific assets. A power of attorney is only effective during your lifetime and terminates immediately upon your death.

Why do I need a Power of Attorney if I have a Trust?

Even if you have a Trust, you still need a Power of Attorney because it applies, during your lifetime, to management and control of your property that is not in a Trust. Certain property does not get put into your Trust during your lifetime and some of your rights do not belong to your Trust.

Examples include social security rights, personal income tax returns, and qualified retirement plans. Your Trustee has no authority to prepare and sign your personal tax returns or speak to the I.R.S. about your taxes. The Trustee has no power to redirect the deposit of your social security benefits or make social security and Medicare benefits elections. Your qualified retirement plan accounts cannot be titled to your Trust during your lifetime or the I.R.S. will treat that as an early withdrawal, assess taxes and penalties, and refuse to honor additional deposits or earnings as tax delayed. If they are not titled to the Trustee, then the Trustee will have no authority to direct investments, elect withdrawals, take out loans, etc. The Trustee also has no power to transfer into your Trust any property you accidentally forgot to put into it.

PROBATE COURT

What Do Probate and Probate Court Mean?

Probate refers to a division of the court that deals with Wills, Trusts, Guardianships, and Conservatorships. In some courts, probate departments also handle adoptions. To “probate” a Will means to initiate a court proceeding for recognition of the Will and court supervision of the completion of the terms of the Will.

A “probate estate” is the collection of assets (and debts) that fall within the court’s jurisdiction and subject to the terms of the Will. Many assets are not part of the probate estate and will not be governed by the Will or the probate court. Examples include some types of property owned with someone else, and life insurance or financial accounts naming a beneficiary other than the estate.

Does the Probate Court have to get involved when someone dies?

No – there are many instances where the Probate Court is not actively involved when someone dies. In fact, a lot of property never passes through the Probate Court. Jointly owned property that passes to the surviving owner; property with a legal beneficiary designation, such as life insurance; and property held in a Trust are all examples of things that do not need to go through the Probate Court.

What if a person dies and owns property in another state?

When someone dies owning property in two states, it may be necessary to conduct two probate proceedings – one in each state. Whether that will be required depends upon many factors, such as the laws of the other state; whether or not it is real estate instead of personal property; and whether or not the property is in a Trust.

How Much Does Probate Cost?

There are three components determining how expensive a probate will be: “costs,” compensation, and contests. The first component, “costs,” generally means expenses charged by third parties, such as court filing fees, publication fees, court appraiser fees, and the like. As of 2012, Court fees and publication costs usually run about $850 for an average probate. Court appraiser fees are generally around 1% to 2% of the value of the property appraised.

The second component, compensation, means the payment to the personal representative (executor or similar person) and the payment to the attorney for each of their time and services. The regular amount to be paid in a California probate is set by law, according to the below formula. “Value” means the fair market value of the assets being probated without deduction for debts or liens (such as mortgages).

4% of the first $100,000 value (= up to $4,000)
plus 3% of the next $100,000 value (= up to $3,000)
plus 2% of the next $800,000 value (= up to $16,000)
plus 1% of the next $9 million value (= up to $90,000)
for $10 million value and above, the court determines compensation

It is important to remember that the personal representative and the attorney are each entitled the resulting amount. So, for example, an estate valued at $1 million will result in compensation fees of $46,000 ($23,000 for the personal representative and $23,000 for the attorney.)

The third component, “contests,” means things beyond a routine probate. Lawsuits initiated by creditors, matters contested by interested parties, or court actions the personal representative must bring to recover property from others, are examples of matters beyond a routine probate. They may result in significant additional costs and/or compensation fees, depending upon many factors, such as the nature of the dispute, the length of time it is contested, the degree of cooperation among the parties, which court processes are used, etc.

As you can see, probate can be quite expensive. One way to avoid these expenses is to setup a revocable living trust (also called an “inter vivos” trust). Assets in a trust do not need to be probated.

ESTATE PLANNING: FAQ’S

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GENERAL QUESTIONS

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LAST WILL & TESTAMENT

TRUSTS

POWERS OF ATTORNEY (Finance, Healthcare, Living Will).

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PROBATE COURT