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 "America is graying... senior citizens
are increasingly more health, independent, mobile and more
affluent than earlier generations. Consequently, they need
specialized estate and trust planning"
The strength of one's personal estate is dependent upon the
fiduciary's ability to implement the provisions of the will.
Though it's many yeas of estate and planning of its clients,
Dennis & Associates has build an enviable reputation in
this field.
As estate planners we are instrumental in implementing and
developing the estate and trust plan not only to save tax dollars
but to abide by the wishes of the client.
- Will
- Revocable Living Trust
- Durable Power of Attorney for Property
- Durable Power of Attorney for Health Care
- Insurance Trust
- Trust for Children
- Property Agreement
- Nomination of Conservators
A wide variety of documents are employed in the estate planning
process, although it is rare for any one individual to utilize
all of them in putting together his or her estate plan. Frequently
an individual will add to or change the documents making up
his or her estate plan over time.
In order to assist you in formulating
your own ideas about the design of your personal estate plan,
we have prepared this paper which briefly describes several
of the most frequently used documents and their places in completion
of the estate planning process. It is not an exhaustive list,
and the descriptions of the documents do not provide great
detail about them. Rather, this paper is intended to provide
you with an overview and some food for thought.
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.
Having the testator execute a document known as a codicil can
easily amend a Will. 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.
Having the settlor execute a document known as a trust amendment
can easily amend a revocable living trust. 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
the trustee or the terms of the trust aren't offering fair
treatment.
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.
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.
Nomination of Conservators
If you are concerned about who might be appointed to act as
your conservator in the event you become fully or partially
incapacitated, a nomination of conservators can be used to
express your desires on the subject while you are fully competent
to do so. This can be particularly important if your children
are at odds with each other, or if one of them is less than
fully trustworthy. These documents are seen less these days
as more and more people accomplish the same purpose through
provisions contained in their durable powers of attorney.
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