EVERYTHING A BABY BOOMER SHOULD KNOW
First Things First
From an attorney’s point of view there are two ways to approach a potential client’s preconceived notion of Estate Planning. Some people believe everything they have heard and read about the Living Trust and think it is either so simple they can do it themselves, or expect it is so common they can buy a one-size-fits-all product at wholesale prices. Those people should look no further.
The best and least expensive forms for estate planning, with thorough explanations on how to use them can be found at:
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What Is Estate Planning Really All About? (Peace of mind)
Once you have determined to whom you want to give your money, the second thing estate planning is all about is not giving your money to the government. Afterall, you already paid taxes on that earned income. You don’t want your heirs to pay them again when you die.
One way of keeping your estate from going to the government is accomplished by using various “credit shelter trusts.” These trusts shift the tax burden so it does not fall on your children after the death of you or your spouse.
The popular trend in Estate Planning is to avoid probate costs and attorney’s fees by using a Living Trust, regardless of practicality. A Living Trust (see What Is A Living Trust) is not a “tax shelter trust” and is not always the right thing to do. This motivation to avoid “probate” often clouds the fact that for a trust to work you first need someone you can have confidence and faith in, no matter what circumstances may arise when you are gone.
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What Is Probate And What Are Probate Fees?
Many people do not really understand what “probate” is. When we speak of “probate” we are talking about a special legal procedure that takes place at the courthouse, and is governed by the laws in the “Probate Code.”
Probate Court does not mean it is a court found in a different location than your local Superior Court. It can be located in the same courtroom where the same judge may also preside over a civil case involving a car accident, or a criminal case involving a murder. Probate Court is in the same place you go to dispute a contract over $25,000.
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Living Trust Or Will: The Cost Of Probate Is Only Going Up.
The author is a strong proponent of trusts that avoid probate costs and attorney fees. The Living Trust’s recent surge in popularity as a way to avoid probate fees has dramatically affected the cost of administrating a Will in Probate Court.
For example, based on an estate valued at $3 million, the present filing fee to administrate the estate would be around $4,000. Considering the median house price in Santa Barbara, California is over $1 million, you can see how many people are affected by the court’s intent on making up this lost revenue by increasing probate fees.
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What Is A Living Trust
A Living Trust is a written document, similar to a set of rules that explains how your estate will be managed. It becomes effective during your lifetime rather than after you die like a Will, and is therefore called a “living” or “inter vivos” trust.
The trust document creates a legal entity such as the “Jones Trust” that can own real property, businesses, cars, and any other asset from which it can distribute assets to you and loved ones both during life and after.
The rules of the trust can be changed during your life, or completely revoked at any time. Therefore it is also a “revocable” trust. It is properly named an “inter vivos revocable trust.” Attorneys like to call it a “Revocable Trust” and everybody else calls it a “Living Trust.”
It is important to understand that although a Living Trust avoids probate, it does not avoid taxes. It can be structured to be a first step to avoiding or deferring taxes. It has no tax advantage over a Will. That is not the purpose of a Living Trust. The types of trusts used to avoid taxes are much more complicated.
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Privacy Is An Important Element Of A Living Trust.
The Living Trust avoids Probate, but there is a secondary benefit that may be considered more valuable. Avoiding Probate ensures your PRIVACY. Avoiding probate is like avoiding a long line at the DMV, or at the post office, only everyone gets to look inside your package.
When your estate is in probate court, not only can it be examined by any member of the public that may choose to do so, but it will be scrutinized by court staff, a probate referee, the judge, and perhaps an ombudsman from a governmental agency that feels their duty is to interfere with your family’s business.
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Why You Want To Avoid A Conservatorship!
Not enough emphasis can be put on this subject. A very practical way of viewing a Living Trust is as a substitute for a “conservatorship.” It is like a cure for an illness because litigation in court for a conservatorship over you is something you want to avoid like the plague.
Not only is a conservatorship proceeding expensive for your estate, but it pits many competing family members, government agencies and financial entities against each other to gain control over your assets. These competing interests range from errant relatives to court appointed “professional” conservators. These professional conservators and their entourage of health care providers and financial assistants can be a disease on your estate.
A Living Trust, on the other hand, can be designed to manage your assets in the event you become disabled or incompetent. In this fashion it works in much the same way as a Durable Power of Attorney, but is more flexible. (To be safe you want both!) The Living Trust can even be designed so that your assets are only transferred into the trust in the event you become disabled. Or if your assets are already in your trust, then only the trustee changes if you become incapacitated.
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Take It From An Anecdotal Hypothetical #1
As an anecdotal hypothetical, consider what happened to Dr. X and his wife Wilma:
Dr. X was an emergency room physician and had been married to Wilma for 26 years. They both had daughters from a previous marriage, Anna and Beatrice, who had gotten along well during their teenage years before moving out and going their separate ways. Wilma continued to take care of her husband as best as any wife can do.
In his late seventies the Dr. began to exhibit signs of Alzheimer and deteriorated quickly. He could no longer manage his estate and Wilma did the best she could with what little knowledge she had about his financial holdings. She could certainly balance a check book and knew very well the needs of running the house she had lived in for 26 years.
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Does A Living Trust Save Money By Doing Your Chores?
As discussed, a Living Trust can help avoid huge potential problems, but for most people it does not necessarily save money. Think of it like this: when your spouse or parent dies, there is a lot of work to be done by somebody. This is when you hope the trust has been properly funded and all affairs are in order, or you will end up in Probate Court anyway.
There is the funeral, the paperwork to access bank accounts, the safe deposit box (how do you get in?) the location of stocks, bonds, insurance policies, IRAs, retirement and pension funds, the management of these accounts, the paying of bills, conclusion of personal matters, selling of businesses and other real property, dealing with partners, and filing personal income tax, inheritance tax and perhaps federal estate tax returns.
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What About A Will And Attorney Fees For The Small Estate?
Whether the decedent (the person who died) has a Will or not, if the entire value of their estate, including real and personal property, does not exceed $100,000, and the heir to the estate is readily identifiable, then the property can be collected and distributed without the need of probate administration. (The value of the estate excludes joint tenancies, IRAs, insurance policies, etc.)
The heir or beneficiary can obtain their interest in personal property by using an affidavit or declaration alone. In order to accomplish the transfer of real property the heir or beneficiary must file a declaration and petition to the court requesting the estate’s real property be conveyed to them. Does that sound easy? If so, just follow the instructions beginning at Division 8 of the Probate Code.
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Attorney’s Fees
For all those Wills that are not excused from probate, much ado is made about the cost of paying attorney fees. These fees are regulated by statute and there is little argument that a huge estate valued at millions of dollars will carry a huge attorney fee based on a percentage of the estate’s value.
But little is ever said about the personal representative, called the “Executor,” who receives exactly the same compensation for his services as the attorney. Any executor has a right to waive this fee for the benefit of the other heirs to the estate, but this author has never met one.
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Are The Statutory Attorney And Executor’s Fees Worth It?
The answer depends on if you believe administration of your estate may need supervision.
When you consider the average estate for the moderately successful Baby Boomer in California is approximately two million dollars, you begin to wonder if these fees are worth it. Afterall, once you are gone there is nothing more an attorney or executor can do to save the estate money beyond what has already been planned.
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An Insider's Guide to Estate Planning
TO ESTATE PLANNING:
KNOW WHAT YOU’RE TALKING ABOUT!
Why pay money so an attorney can try and explain the difference between a Bypass Trust and a QTIP Trust, when this book will answer that question long before you have to pay for a consultation?
This guidebook helps you map out your estate plan so it goes exactly where you want it to go. It explains the tools you need to give away or preserve your money, homes, businesses, heirlooms, cars, boats, jewelry, tools, art, memorabilia, and every other artifact of life you have accumulated over the last 45 to 65 baby booming years.
Mark S. Cornwall, Esq.
210 E. Figueroa Street
Santa Barbara, CA 93101