Estate planning generally refers to the planning and preparation of wills, trusts, durable powers of attorney and advance health care directives. In most cases, these are the basic elements of an estate plan. For very large estates, however, estate planning involves more sophisticated and more extensive planning techniques.
Wills and Intestate Succession
In various forms, the use of wills to designate the distribution of property upon death goes back thousands of years. The concept has long been popularized and dramatized in literature and film. Everyone knows what a will is. People also generally understand that, even without a will, their “heirs” should inherit what they have. The manner in which property is distributed upon death when there is no will is called “intestate succession.”
The rules for intestate succession are set forth in certain sections of the California Probate Code. (Probate Code Section 6400, et seq.) The manner in which property passes is based on blood lines and the marital status of the decedent. These are the default rules that apply when a person dies without a will or trust. Generally speaking, the rules are designed to be fair. After a share is given to the decedent’s spouse (where the decedent leaves a spouse), the remainder of a decedent’s property is divided among the decedent’s children in equal shares. If a child of the decedent has died before the decedent, that child’s share is divided equally among his or her children, and if a child of the decedent has died before the decedent and leaves no children, that child’s share lapses and is distributed among the decedent’s other children. If a decedent leaves no spouse and no children, all property is distributed to the decedent’s parents. If both parents are deceased, the property is then distributed to the heirs of the parents. This means that, if the decedent in this situation had siblings, the property would then be distributed equally among the siblings, or possibly the surviving children of deceased siblings, according to the pattern of equal distribution previously described.
These default rules may work just fine in many situations and produce a fair result the decedent would have intended. But, not always. When people have not given any thought to what will happen upon their death, and are not aware of the rules of intestate succession, the rules may produce results that are completely contrary to what a decedent would have wanted. The intestate rules may produce a very disappointing outcome in very close relationships that are not based on blood. In situations of divorce and blended families, the intestate succession rules can mean that estranged children with whom the decedent had no relationship at all will receive a share of the decedent’s estate, while family members who grew up in the decedent’s home and with whom the decedent had a close and loving relationship for many years, get left out completely.
It is important to have an estate plan, even just a simple will, in order to avoid unexpected outcomes and to serve as an actual expression of one’s intentions. It is important that a will be prepared and executed in accordance with the legal requirements under California law. Otherwise, there is a risk that a will may not be legally effective or a risk that the document will require additional legal work and expense before being approved.
Trusts and Pour-Over Wills
A trust is sometimes referred to as a “will substitute” because, like a will, it is a document designed to carry out a person’s intentions for distributing property upon death. When a trust is formed, property is transferred to the trust and can then be transferred from the trust by the trustee of the trust, under the trustee’s authority to act for the trust. Usually, but not always, the maker of a trust is appointed the initial trustee of the trust and another person is named “successor trustee” under the trust, effective upon the death of the maker of the trust. The successor trustee then has the authority to transfer property from the trust after the death of the maker and according to the directions of the trust document. Perhaps because, in this manner, the trust “lives on” after the death of the maker, and can transfer property, trusts of this type are commonly referred to as “living trusts.” Living trusts are revocable trusts. They can be revoked or changed by a competent maker at any time, similar to a will. However, on the death of the maker of the trust, a living trust becomes irrevocable.
The ability of a trust to hold title to property and distribute that property upon the maker’s death is the most important difference between a trust and a will. The trustee of a trust can distribute real property and other interests under the authority of the trust document, and without the need for any judicial process or court orders. The transfer of real property and other titled property interests by means of a will requires a court decree, obtained by the filing of a petition in the probate court and the legal process known as estate administration, commonly referred to as “probate.” If a trust is properly prepared and properly funded, these types of legal interests can be transferred without going through probate or any other court procedure. Trusts are frequently promoted and touted as much better than wills especially because they can be used to “avoid probate.” When handled properly by an experienced attorney, the administration of an estate in the probate court really need not be such a dreaded process. But, the ease with which real property interests can be transferred after death by means of a trust has led to trusts becoming the preferred estate planning method for transferring real properties.
For the maker of a trust, the most critical issue is the appointment of a capable and trustworthy person to act as trustee upon the death of the maker. The very ease with which property can be transferred from a trust, without court supervision, provides greater opportunity for an unreliable person to misappropriate assets. When a will is probated, the court will in almost every instance require that the executor under the will obtain a bond, unless the will itself waives the requirement of a bond. The bond provides protection for beneficiaries of an estate from loss at the hands of the executor or administrator. In addition, in a probate case the executor or administrator of an estate must render an accounting and a proposed distribution of assets for approval by the court before property under the will is distributed to the beneficiaries named in the will. These are additional protections, but the probate court oversees thousands of cases and the degree of actual oversight should not be overstated.
Property can only be transferred by means of a trust if the property has first been placed in the trust in an appropriate manner. People sometimes forget to put property in their trusts when they form their trusts, or they receive additional property after making the trust and never take steps to put the property in the trust. For these not-uncommon situations, a complete estate plan will include a pour-over will, sometimes called a back-up will. When the maker of a trust signs the trust document, he or she will also execute the pour-over will. A pour-over will does not represent a separate plan for distribution and does not distribute any property directly to beneficiaries. Instead, to the extent that there is property not in the trust, the pour-over will distributes the property directly to the trust, to be distributed according to the plan of distribution established by the trust. It is a precaution, to make sure all property at death goes into the trust.
Sometimes there are mistakes and omissions in the preparation and funding of a trust that can cause the trust to be ineffective as an efficient means of transferring real property. Real property interests should be transferred to the trust by means of a recorded Trust Transfer Grant Deed. When this is not done, a successor trustee may discover that he or she lacks the power to transfer the real properties at all and a probate may then be required. It also happens with some regularity that, during their lifetime, makers of a trust, for one reason or another, will transfer a real property out of the trust and fail to deed it back to the trust before their death. Sometimes this happens because lenders will request that properties be taken out of a trust when making a loan on the property. Even where there has been no recorded Trust Transfer Grant Deed, a full probate may not be required if the real property is adequately identified as an asset of the trust, in the trust document. In that case, the successor trustee may petition the probate court, in a more abbreviated procedure, for an order authorizing the transfer. This procedure is known as a “Heggstad Petition,” from the name of the case in which the procedure was first confirmed as proper by the Court of Appeal.
Although a trust may be intended as a way to avoid probate, disputes can arise between beneficiaries and successor trustees, or among beneficiaries, and one party will file a petition in the probate court concerning the dispute. In these instances, the trust may be put under probate court supervision and there is then some court oversight to the distribution of trust assets. When this does happen, it will easily end up as a more expensive legal process than an ordinary probate of a will. But, of course, it also happens in the probating of a will that disputes between administrators and beneficiaries, or among beneficiaries, can add much more expense to what would otherwise be an ordinary probate case. A trust is no more immune to these problems than a probated will.
Durable Power of Attorney
A power of attorney is a written document in which one person authorizes another person to act on his behalf, or on her behalf, in relation to legal and financial matters. If properly prepared and executed, a power of attorney will be recognized and honored by banks, businesses and governmental agencies. By the terms of the document, the authority conferred by a power of attorney may be limited in scope. A broad power of attorney can confer virtually complete authority over the assets and financial affairs of the person making the appointment. Powers of attorney should be given only to persons the maker of the power of attorney has complete confidence in and should not be given out lightly. Like other estate planning appointments, they can be abused at times. But, powers of attorney can be helpful instruments in many situations. They provide an authority to act on behalf of a dependent person that is readily attainable and more economical than other procedures.
The authority under a power of attorney ends when the maker of the power of attorney dies. No property can be transferred under the authority of a power of attorney after the maker’s death. The authority under a power of attorney also ends if the maker of the power of attorney becomes mentally incapacitated. There is a legal exception to this general rule of law. A person may expressly state in a power of attorney that the power of attorney will continue to be effective in the event that the maker becomes incapacitated. This language will create what is known as a “durable power of attorney.” Durable powers of attorney are used as an estate planning tool, primarily to avoid the need for the appointment of a conservator for a person who has become incapacitated. Conservatorship proceedings are expensive and require periodic accountings. A person authorized with broad authority under a durable power of attorney can exercise a similar scope of powers as an appointed conservator, without the need for any court proceedings and without the requirement of an accounting. Durable powers of attorney can allow trusted others to assist dependent family members in handling their affairs in the most economical manner.
Typically, the maker of a durable power of attorney appoints an agent with the condition that the appointed person does not become empowered as the agent until such time as the maker becomes mentally incapacitated. This is known as a “springing power of attorney.” The powers spring into existence upon the maker’s incapacity. If the maker never suffers from mental incapacity, the powers never arise.
Durable powers of attorney can be of enormous benefit and should be included in any estate plan.
Advance Health Care Directive
The terms “durable power of attorney for health care” are also used to describe a similar document in which the maker of the document appoints an agent with authority to make health care and end of life decisions for the maker under certain designated conditions. The California Probate Code terms this kind of a document an “advance health care directive.” (Probate Code Section 4670, et seq.) The directive may also nominate a conservator, should the need for the appointment of a conservator arise. The California Probate Code provides a statutory version of an advance health care directive in its basic form. Hospitals and nursing homes make use of this statutory form and encourage the signing of directives.
In times of crisis, medical care providers will still look to available family members to make decisions for other family members without regard for signed directives. But, for the ordinary course of events, there are good reasons to plan and prepare and maintain an advance health care directive. Sometimes there are disputes concerning care and end of life decisions among a person’s close relatives. Sometimes the person closest to an incapacitated party, who knows the party’s desires and beliefs the best, is not a relative. Medical care providers are subject to strict privacy laws. Directives expressly authorizing release of the maker’s medical records to the appointed agent will allow hospitals and other medical care providers to feel comfortable sharing details of their patient’s diagnosis and condition should the need arise. In cases where a person expects to have the assistance of a friend in their time of need, they should not overlook the need to formally appoint the friend as their agent under an advance health care directive.
Development of a complete estate plan requires that thoughtful consideration be given to these issues so that an advance health care directive can be tailored to the individual desires and beliefs of the maker of the directive.
Nomination of Guardians
Parents with minor children must also give consideration to their children’s well-being under all events. For some people this means the signing of a document nominating a guardian for minor children, should they be without parents. Sometimes the decision is driven by a parent’s own life events that may highlight such concerns. The primary thing confirmed by a nomination of a guardian is the confidence of the maker in the appointed guardian. The document is not binding on the court. But, if the court has to decide a guardianship issue, great weight will be given to the parent’s written nomination.