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Will

A Will is a document which is primarily used to control the disposition of one's property at death. A Will is effective only at death. A Will can be used to establish trusts to provide for ongoing management of property for the beneficiaries after the maker of the Will (known as the testator) has died. These are known as testamentary trusts.

Besides simply describing how the testator's property is to be distributed, a Will can incorporate specific provisions designed to save estate taxes, income taxes and generation-skipping transfer taxes. If the testator is married, these provisions can also be used to save taxes upon the subsequent death of the testator's spouse.

A Will can also be used to nominate guardians for the testator's minor children, to set forth the testator's desires concerning funeral and burial arrangements, to help plan the orderly payment of the testator's debts, or to provide for the continuation of the testator's business.

Where a Will is used, it will control the disposition of all assets owned personally by the testator, whether alone or with one or more other persons. It will not control the disposition of funds having independent death benefit provisions--such as pay-on-death bank accounts, life insurance policies and retirement plans--unless the designated beneficiary is the testator's estate. It will also not control the disposition of funds held by the testator as a trustee, even if the testator created the trust and was the trust beneficiary.

Generally, if the assets controlled by the Will have a total value of $100,000 or more, a probate proceeding will be started in the local superior court. This proceeding is a matter of public record, and its conduct is determined by examining the terms of the Will in light of the provisions of the California Probate Code, which provide certain procedural rules governing all probate proceedings. This process usually takes between eight months and two years.

A Will can be easily amended by having the testator execute a document known as a codicil. A Will can also be revoked or amended by the execution of an entirely new Will.

Revocable Living Trust 

A revocable living trust, also known as an inter vivos trust, is often used to substitute for a Will. Like a Will, a revocable living trust can provide for the orderly disposition of the property it controls. However, unlike a Will, which will automatically control all assets personally owned by the testator, a trust will control only those assets which have been placed into the trust by the party creating it (the creator of a trust is known as the settlor, trustor or grantor of the trust). The process of placing assets into a trust is known as funding the trust, and is one of the most important aspects of completing an estate plan making use of a trust.

Like a Will, a revocable living trust can include provisions designed to save a wide variety of taxes. While a Will provides minimally better opportunities for income tax planning, it is fair to say that both Wills and revocable living trusts allow for the same sort of overall tax planning.

Revocable living trusts are not suitable documents for nominating guardians for one's minor children. However, this is not a meaningful handicap, as any proper estate plan making use of a revocable living trust will also include a Will executed by the settlor of the trust, and that Will can include a nomination of guardians. In this case, the Will will ordinarily be known as a pour-over Will, because its primary function is to "pour over," or add, to the trust those assets which were not funded into the trust during the settlor's lifetime.

A revocable living trust can be easily amended by having the settlor execute a document known as a trust amendment. As the name implies, a revocable living trust can also be completely revoked at any time during the settlor's lifetime.

Revocable living trusts have been the subject of a substantial amount of publicity lately, largely in the form of free seminars offered by lawyers, stockbrokers, insurance companies and others. The gist of this publicity is that such trusts are vastly preferable to Wills, and that everybody engaging in the estate planning process should opt to use a trust as the central vehicle of the estate plan. This conclusion, and the reasons given for it, should be carefully examined.

The two primary advantages cited in favor of the revocable living trust are the cost and time of the probate process. The California Probate Code provides a uniform fee scale for probate estates based upon the gross value of estate assets, and the fees are payable both to the executor of the estate and the attorney representing the executor. While the California legislature considers legislation almost annually which would do away with this "statutory fee" system, for a variety of reasons it has yet to be enacted. Additionally, so-called extraordinary fees are available when the executor and/or the attorney engage in such services as sales of estate assets, tax work and tax return preparation, or litigation. Finally, certain expenses are faced in all probate proceedings, such as the initial court filing fee, the expense of publishing the required notice of death in the newspaper, and the fee of the court-appointed appraiser (known as the probate referee).

By contrast, no automatic fees are payable as a result of administering a trust after the death of the settlor, although trustee's fees are traditionally based upon the gross value of trust assets. If sales of assets, tax work or litigation are involved, professional fees will ordinarily be incurred. There are no mandatory filing fees or publication expenses during trust administration, although it is quite common to incur appraiser's fees to establish asset values for various tax purposes.

On the other hand, it is usually more expensive to establish a trust than a Will, and all fees paid during the administration process are tax deductible. Also, the executor is often one of the estate beneficiaries, and he or she will frequently waive his or her fee so as to inherit the property rather than receiving it as a fee which would be taxed as earned income. Thus, while there may be some cost saving in the use of a revocable living trust as compared to a Will, it is usually quite a bit less than is popularly portrayed.

As to the time involved, even the simplest probate proceeding handled in the most expeditious fashion will usually take six to eight months to complete. The affairs of a very simple trust can sometimes be resolved within a few weeks after the settlor's death. However, where the estate plan incorporates tax planning provisions, or where the estate is large enough to require the filing of an estate tax return (even if no estate tax is due), in most cases a trust can be administered more quickly than an estate only at the expense of careful tax planning. It is important to repeat here that trusts offer no estate tax advantages over Wills--the gross estate for estate tax purposes has no direct correlation with the gross estate for probate or trust purposes. Where the IRS chooses to audit the estate tax return, it could take years to finalize the decedent's affairs regardless of whether a Will or a revocable living trust has been employed.

Another advantage often attributed to revocable living trusts is that they are private and do not involve any court proceedings. While it is true that opening a probate proceeding leads to making a public record of one's assets and choice of beneficiaries, in most cases this is irrelevant. For most of us, our relatives, friends and neighbors probably already have a pretty good idea of the nature and extent of our assets, and in any event they are unlikely to waste their time pouring over court records concerning our estates. Similarly, most of us have nothing shocking in our estate plans, that is, they are intended to benefit our spouses, children, grandchildren and maybe a favorite charity or two. We really don't care if this sort of plan is revealed to the public. On the other hand, those who are already noteworthy and whose deaths might be likely to attract media attention, as well as those who are disposing of their property in some "unusual" manner, might legitimately be concerned about the public nature of a probate proceeding.

As to court involvement, in some cases it is actually desirable. If one's children or other beneficiaries are likely to become involved in disputes, it is usually advantageous to have all proceedings, from the very first steps, conducted in front of a judge who can often help keep things in perspective for the parties. Despite some claims to the contrary, it is impossible to keep a trust beneficiary from going to court with a dispute--and thereby creating a public record--if he or she believes that fair treatment isn't being offered by the trustee or the terms of the trust.

One legitimate advantage of a revocable living trust which is often not appreciated is its ability to help avoid the need for a conservatorship. While the use of a trust cannot guarantee that a conservatorship will be avoided, it should be an important consideration. Conservatorship proceedings can become quite expensive, and they are often demeaning to the person being placed under conservatorship. Where a Will is used, a similar result can be achieved through the proper use of durable powers of attorney.

Finally, one should consider that a trust only works when it is properly funded and administered during one's lifetime. This takes only a little bit of effort, but many of us are not willing to devote even the minimal amount of time necessary to make a trust function properly. While a planned-for probate proceeding may not be the perfect way to administer a decedent's estate, it is certainly better than a probate proceeding which is required because the decedent failed to properly administer his or her revocable living trust during his or her lifetime.

Durable Power of Attorney for Property Management: 

A power of attorney is a document under which you, the principal, can appoint an agent, known as the attorney in fact, to act on your behalf. A durable power of attorney is one which remains effective (or becomes effective) after you become incapacitated.

A durable power of attorney for property management allows you to appoint an attorney in fact to act on your behalf in conducting a wide range of personal financial transactions. The list of transactions can be as broad or as narrow as you choose. Sometimes, the power will be effective from the date it is executed; in other cases, it will become effective only upon your subsequent incapacity. Again, the choice is yours. Special arrangements can even be included so that during periods of your full capacity the attorney in fact will be allowed to act only when you are out of the state or the country or otherwise unable to attend to your personal financial affairs.

One of the key features of a durable power of attorney for property management is its effectiveness after your incapacity. In many cases, the ability of the attorney in fact to conduct the principal's personal financial affairs after the principal is incapacitated is enough to spare the need for instituting a conservatorship of the principal's estate. In the event that this is unavoidable, the durable power of attorney for property management often includes a nomination of a conservator of the principal's estate.

Durable Power of Attorney for Health Care 

An attorney in fact appointed under a durable power of attorney for health care is empowered to give informed medical consent for you when you are unable to do so. The durable power of attorney for health care not only appoints the attorney in fact, but also sets forth the standards to be followed by the attorney in fact when making health care decisions on your behalf. This typically includes specific expression of your desires concerning extended use of life-prolonging treatments when you are comatose with a terminal illness, the administration of food and water during such periods, and other similar important decisions. In this respect, the durable power of attorney for health care is similar to a living Will, also known as a directive to physicians. However, because it is so much more flexible than a living Will, the durable power of attorney for health care has largely come to replace the living Will.

In many cases, the ability of the attorney in fact to make health care decisions for the principal is enough to spare the need for instituting a conservatorship of the principal's person. In the event that this is unavoidable, the durable power of attorney for health care often includes a nomination of a conservator of the principal's person. It also often contains statements of the principal's desires concerning funeral and burial arrangements.

Life Insurance Trust

While most people are aware that proceeds of life insurance policies are not subject to income tax, they are often unaware that those proceeds are frequently subject to estate tax in the estate of the insured. However, this is only the case where the insured possessed any of the so-called incidents of ownership in the policy within three years of his or her death.

One means of distancing yourself from the incidents of ownership in policies of insurance on your life is to create and fund a life insurance trust. The trust is irrevocable and you cannot be the trustee of the trust. However, in establishing the trust you can create provisions specifying the beneficiaries of the life insurance proceeds and the manner and timing of their receipt of the policy benefits.

Life insurance is a valuable tool in modern estate planning, but if it is not properly handled it can create new problems while solving old ones. The life insurance trust is one means of obtaining the estate liquidity benefits which can be afforded by life insurance while avoiding the problems associated with adding a large asset to one's estate.

In some cases, regardless of whether a life insurance trust will be used, it is important to amend or clarify the ownership of existing life insurance policies. In these cases, a separate document, which may be referred to as a life insurance agreement, can be helpful in establishing the appropriate ownership of the policies.

Trust for Children 

An often fruitful means of providing for a child's education is the creation of a trust for that purpose. The trust can be funded free of gift tax, and after the child reaches the age of 14 years the trust's income (essentially being earned on assets formerly owned by the parents) is taxed at the child's usually lower rates. Thus, the trust can simultaneously reduce the parents' gross estates while lowering the overall family income tax bite. If all of the funds in the trust are not used in providing for the child's education, the trust can continue until the child reaches an age at which his or her parents have decided that he or she can maturely handle the funds.

Trusts of this nature can also satisfy other purposes, such as providing for a dependent parent or fulfilling the needs of a child other than education.

Property Agreement 

In many cases a married couple will, over the years, have created confusion in the exact manner of their ownership of their assets. This can result from failure to properly segregate separate property from community property, from mistakenly taking property in the wrong ownership form, or simply by the parties wanting to change the nature of the current form of ownership. While deeds are properly used to correct mistakes concerning the ownership of real property, a property agreement can be used to clarify or correct the ownership of a wide variety of assets, sometimes including real property.