California Estate Planning

What is an Estate Plan? [VIDEO]

Hi, I’m Alan Khalfin, managing partner at Vaksman Khalfin. Today, I wanted to explain what is an estate plan.

An estate plan is a series of documents that essentially does three very important things. First, it distributes assets upon your passing. Second, it appoints people to make decisions for you in case of your incapacity, and third, if you have minor children it appoints guardians for your minor children should you pass away.

When setting up an estate plan, you essentially have three options. The first is no plan at all, let state law decide. The second is a will-based estate plan, and the third is a living trust-based estate plan. Today, we’re going to spend your time talking about living trust estate plans. A Living Trust vs. Will effectively achieves three important goals. First, it ensures that upon your demise your assets get transferred to your heirs without probate. What this means is that your assets will be distributed to your heirs in the quickest, cheapest, and most efficient way possible.

The way it works is assets are retitled in the name of your trust while you’re alive and because your trust survives your death and appoints people to act based on the directives and decisions that you made in your trust, upon your demise, those people also known as your trustees are able to distribute your assets to your named beneficiaries without probate. Now, why is probate so bad? Well, a few reasons. The first reason is that it takes a very long time. This is a court process, a public process that can easily take 18 months. Moreover, it’s extremely expensive with fees calculated based on the size of the gross estate.

What that means is if you have real property it doesn’t matter if there’s a mortgage on it. Fees are calculated based on the full or gross value of the property. That means that your family can easily spend tens of thousands of dollars in probate fees all of which could have been very easily avoided through a revocable living trust. The next thing that the revocable living trust does is incapacity planning. That’s very important because if you don’t appoint people to act for you in case of your incapacity, then your family must go to court, and much like probate after you pass this is called a conservatorship proceeding. It’s actually in the same courtroom as the probate court. The court appoints somebody to make decisions for you.

With a revocable living trust, you appoint those people ahead of time, and therefore they can act for you. Now, an estate plan also includes a pour-over will and in case you haven’t transferred your assets during your life into your trusts, the pour-over will will transfer those assets after your death. However, this requires the involvement of the probate court which is generally expensive, time-consuming, and, as discussed, should be avoided. We’ve talked about how an estate plan transfers assets. Now, let’s further drill down on how it achieves incapacity planning. In addition to the revocable living trust, your estate plan should also include a durable power of attorney. Now, your trustees who are appointed in the trust have the power to act for you over trust assets in case of incapacity.

In other words, if the asset has been retitled in the name of your trust, if you become incapacitated, your trustee can step in. If the asset has not been retitled, for example, a retirement account that has a beneficiary designation or life insurance with a beneficiary designation, then in case of incapacity, the trustee has absolutely no power, and instead, the power to act comes from the durable power of attorney. We also have a medical power of attorney in your estate plan which is called a advanced healthcare directive. Through this document, you appoint people to make decisions for you as far as medical decisions go in case you cannot, and also provide your wishes for your care.

You can specify your desires as far as end-of-life decisions, organ donation, and various other matters. Together with the advanced healthcare directive we also include a HIPAA Authorization Form. This is important for incapacity planning because if your decision-makers don’t have the information they need, they cannot act. Through the HIPAA Form your medical power of attorney is authorized to receive and disclose your private healthcare information. Those four documents are the main ways that we develop asset transfer upon death and incapacity planning upon life. What is an estate plan? To recap, your estate plan should do three things. First, it should transfer assets upon death. Second, it should set up people to act for you in case of incapacity.

Third, it should appoint guardians for your minor children, should you pass away. In our experience, the most appropriate and effective form of an estate plan is a plan based on a revocable living trust. For that reason, most estate plans include a revocable living trust. However, some clients choose to prepare a will-based plan, which we typically do not recommend, because a will-based plan does not avoid probate. A will-based plan, or a will, is essentially a set of instructions for a judge.

If you’re considering how to best achieve the goals of incapacity planning, distribution of assets upon death, and appointment of guardians, you’re usually better off using a living trust-based plan. Whether you decide to do a will-based plan or no plan at all, pretty much is the same thing. If you have any questions about whether a trust-based plan or a will-based plan makes more sense for you, please, give us a call. Thank you for listening.

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