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The information provided below is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation. If you would like to schedule a free consult call, you can contact us by clicking here.
How an estate plan can address various “what-ifs”
Estate plans are intended to take a lot of the guess work out of what should happen if something unexpected comes up in the future. The information below describes some possible what-if scenarios, and how the estate plan documents often address those scenarios.
What if something happens to a named beneficiary?
If a named beneficiary passes away before the client, then most trusts provide that the pertinent share will be distributed as follows: first, to the named beneficiary’s surviving lineal descendants (children), and second, if there are no surviving descendants, then the pertinent share is usually divided among any other named and surviving beneficiaries.
What if all the beneficiaries are gone?
In the extremely rare event that none of the named beneficiaries survive the client, and no descendants of named beneficiaries survive, then usually, the trust estate would be distributed to the client’s next closest relatives, though this provision can be customized if a client wishes to do so.
What if the people named in charge of the trust or will are gone?
Trusts and wills usually have backup nomination terms, in case all of the named people are unavailable to serve as Successor Trustee or Executor. For example, in many trusts, the beneficiaries can select a new Successor Trustee, by majority vote, or by unanimous agreement. When appropriate (such as when all the beneficiaries are still young), the Successor can be limited to “licensed professional fiduciaries” only — people who are licensed by the State of California to administer trusts. If the beneficiaries disagree on the choice of a Successor, then a petition can be filed in court for a local judge to select a Successor.
What if one or more of the beneficiaries is too young to handle inheriting a lot of money?
A well drafted trust will contain a “minimum distribution age” provision. Anyone younger than the stated age (say, 25 for example) will not receive their share of the estate directly, even if they are already over 18. Instead, the Successor Trustee will manage that beneficiary’s share of the estate, according to a detailed set of laws known as the Prudent Investor Act. Under the law, the Successor Trustee must invest the share in safe, long term investments. The Trustee may only spend portions of a young beneficiary’s inheritance on expenses deemed important and reasonable: health, education, or support and maintenance, after taking into account other sources of money available to pay a given expense. Otherwise, the money is left alone to accumulate, and when the beneficiary reaches the stated distribution age, they receive their inheritance.
What estate plan documents do you need?
This post is a follow up to my last post about the various estate plan documents and what they do.
There is no one-size-fits-all approach to estate planning. People do not need a full-blown estate plan at all times. Why not? Because estate planning is all about managing risks, and risks vary throughout a person’s lifetime. So, your document needs will change over the course of your lifetime.
Have you been to a baby shower recently? A housewarming party? A wedding? A high school or college graduation? All of these occasions are good times to think about planning for the future. If you are reading this post, I encourage you to share the information with your loved ones.
In California, if you are a homeowner, then you should have a revocable living trust to avoid Probate. If you own a home, then you have probate risk, because the maximum probate exclusion amounts (as I posted back in April) are significantly lower than the average value of a California home. Probate is time consuming: in many California counties, the process can take 2 years or longer. And the statutory probate commissions and court fees are expensive: for a $1 million estate, the statutory commissions total $46,000.00 (these fees can be higher on court approval, for “extraordinary” services like selling a house during the probate), and court-related fees (filing fees, legal publication fees, and probate referee fees) will average a few thousand dollars. How does one avoid probate risk? The most comprehensive way, where the client retains the most control, is with a living trust.
When a person has a trust, they also have a special kind of will, often called a pour-over will. This will is limited by design, because the trust does all the work of a traditional will.
For people who don’t own enough assets to have probate risk, a simple will, combined with Pay-on-Death designations, is often a suitable estate planning alternative.
Every competent person over 18 should have a Durable Power of Attorney and an Advance Health Care Directive, to avoid conservatorship risk. Having incapacity documents is just as important as having estate specific documents, because incapacitated people who don’t have proper documents have to go through an expensive and time-consuming court process called Conservatorship.
Parents of minor children should have a Nomination of Guardians, to state their choices for people to act as guardians for their children.
Estate plan documents and what they do
One of the most common questions about estate plans is: What’s the difference between a trust and a will? In California, the difference is big if you’re a homeowner. Basically, having a properly prepared and funded trust means avoiding Probate, while having just a will (or worse, no estate plan) means the estate will have to go through Probate.
Here is a brief overview and description of the various estate plan documents, what they do, when we use them, and the title of the person in charge. For more information about common questions and estate planning issues, click here. To schedule a free consultation, click here.
Declaration of Trust: This is the document that allows a client’s loved ones to avoid Probate. The Trust document also contains most of the instructions for carrying out the estate plan after a person dies: who is in charge of winding up the client’s affairs, how and to whom assets will be distributed, backup plans as needed, and how to deal with possible disputes. Clients fund the Trust in various ways: by the document’s own language, by a separate written declaration that all of the client’s assets are intended to be in their trust, by deeds for real property, and by Pay-on-Death (“POD”) designations with financial institutions.
When to use: The Declaration of Trust is most important after the signer has died. However, if the signer is incapacitated, then sometimes the family will use the Declaration of Trust to deal with Trust assets.
Title of the person in charge: Trustee (usually the original signer), or Successor Trustee (if the signer is incapacitated or has passed away).
Will: When a person has a Trust, their will is like a backup parachute — it’s there in case of an emergency. Since the Trust takes care of all the details, it is extremely rare to use the will to handle a person’s affairs.
When to use: After the signer has died, and even then, only in the unlikely event that something unexpected has happened related to the Trust.
Title of the person in charge: Executor.
Durable Power of Attorney: This is the document that allows a third party to manage someone’s financial affairs if they are too ill to manage their own affairs, proven by a written declaration from the person’s doctor (sometimes two doctors), or a court order signed by a judge.
When to use: When the signer’s doctor(s) or a judge has stated in writing that the signer is too ill to manage their own affairs without the aid of a third party.
Title of the person in charge: Attorney in fact.
Advance Health Care Directive: This is the document that allows a third party to speak with a person’s doctor if the person is too ill to make their own informed medical decisions, as determined by the doctor who is treating them at the pertinent time.
When to use: When the signer’s doctor determines the signer is too ill to make their own informed medical decisions.
Title of the person in charge: Health care agent.
Nomination of Guardians: This is the document that clients with minor children use to nominate people to raise their minor children if needed.
When to use: When both of a minor child’s parents have passed away or are unable to care for the child.
Title of the person in charge: Guardian.
Inheritance math
Here’s a common scenario in making trust distributions:
The trust estate contains cash (most commonly from a home sale), and some items of valuable personal property like a car. We have two or more “residual” beneficiaries who will receive equal shares of the trust estate. One of the beneficiaries wants to keep the car as part of their residual distribution.
For our example, we will use round numbers to make the math easier. We have three beneficiaries — let’s call them Huey, Dewey, and Louie — each of whom will receive an equal one third share of the residual trust estate after administrative costs, debts, and expenses are paid. We will presume that all the costs, debts, and expenses are paid for. The trust estate has $100,000.00 of distributable cash on hand, and the car is worth $5,000.00, for a total residual estate of $105,000.00.
Louie has asked to receive the car as part of his share, and Huey and Dewey have no objection. Here is how calculate the cash and “in kind” distributions to ensure the value of each beneficiary’s share is equal:
Each beneficiary gets a distribution worth $35,000.00 ($105,000.00 / 3 = $35,000.00). As we know, the cash is $100,000.00, and the car is worth $5,000.00.
Huey and Dewey each get $35,000.00 in cash. ($100,000.00 – $35,000.00 = $65,000.00 – $35,000.00 = $30,000.00).
After Huey and Dewey are paid, we have $30,000.00 in cash, and the car.
Louie gets the car valued at $5,000.00, plus the remaining $30,000.00 in cash, for a total value of $35,000.00.
All beneficiary distributions are equal in value.
What to do when the bank refuses to honor a Durable Power of Attorney
To borrow a phrase from Rod Serling, imagine if you will:
You did the responsible thing by executing an estate plan to get your affairs in order. Your documents include incapacity documents — an Advance Health Care Directive for medical decisions, and a Durable Power of Attorney for financial affairs. Some time after you sign your estate plan, you become too ill to manage your affairs. The people you named in your incapacity documents do their job: your attorney-in-fact obtains a doctor’s note to prove you are too ill to manage your own affairs unaided. However, when your attorney-in-fact goes to your bank to handle some business on your behalf, the bank refuses to honor the Durable Power of Attorney…at the worst possible time.
This scenario is becoming all too common among banks, especially large national banks. Luckily, California Probate Code Sections 4305 and 4306 provide a way to ensure that the Durable Power of Attorney is honored.
Probate Code § 4305 provides that an attorney-in-fact can sign an affidavit under penalty of perjury to confirm that the power of attorney is valid and has not been revoked or terminated. The signed affidavit is deemed conclusive proof (for the benefit of third parties like banks) that the power of attorney is in fact valid. Under Probate Code § 4305, third parties are not liable for losses incurred if they rely on the affidavit: in other words, the bank is protected if anyone claims they should not have accepted the power of attorney. So, there is no good reason for a bank to refuse to accept a power of attorney when the attorney-in-fact presents the following items: (1) the power of attorney; (2) the doctor’s note (if the power of attorney requires one before it is effective); and (3) the affidavit.
Probate Code § 4306 provides that, if a third party refuses to accept the authority provided in the power of attorney after receiving the affidavit, then they can be liable for the attorney’s fees incurred to confirm the attorney-in-fact’s authority under the power of attorney. This section is the “stick” to the “carrot” of § 4305.
If you are an attorney-in-fact for someone who is too ill to manage their own affairs, and a bank refuses to accept the power of attorney, then you should consider consulting an attorney.
Uninformed beneficiaries
Beneficiaries are often uninformed when it comes to estate administration. There are two things beneficiaries should know: (1) as beneficiaries, they have rights during the administration; and (2) the administration will take time, so a little patience goes a long way.
By law, successor trustees are required to keep beneficiaries reasonably informed about the trust administration, provide periodic accountings to beneficiaries, and act reasonably and in good faith for the beneficiaries’ best interests.
So, beneficiaries can ask for information, for example: Has the house been appraised? Could you send me a copy of the appraisal report? When is escrow set to close?
Beneficiaries have a right to receive accounting reports from the trustee (annually, or on a change of trustee, or prior to distribution), to keep beneficiaries informed of estate expenses, income, and assets in the custody of the trustee.
Beneficiaries also have the right to ensure the trustee is acting reasonably and fairly in carrying out the administration, because the beneficiaries are the equitable owners of the trust assets. The trustee is working for the beneficiaries.
Sometimes, uninformed beneficiaries mistakenly believe they have the right to nitpick and second-guess everything the trustee is doing (usually due to family history between the beneficiary and trustee). However, beneficiaries do not have the right to substitute their own judgment for the trustee. So long as the trustee is carrying out their duties competently and in good faith, the law affords trustees wide latitude in handling the details of the administration.
The uninformed trustee
In a previous post, I wrote about qualities a successor trustee should have to ensure a successful trust administration. While it should go without saying, there will be problems when a successor trustee tries to administer a trust estate if they lack knowledge and experience in dealing with legal, accounting, and tax issues. The successor trustee compounds those problems by refusing to hire experts like attorneys and accountants to assist the trustee in administering the trust estate properly.
An uninformed successor trustee often fails to complete time sensitive tasks in a timely manner. They fail to keep beneficiaries informed of the progress of the trust administration. Sometimes, an uninformed successor trustee will fail to do even the most basic tasks, like providing copies of the trust to all beneficiaries and qualified heirs at law. Often, uninformed trustees fail to keep adequate financial records. Each and every one of these mistakes is a breach of the trustee’s various fiduciary duties to the beneficiaries.
A single breach of fiduciary duty is sufficient for beneficiaries to have a successor trustee removed. Unfortunately, an uninformed trustee often commits several breaches of their fiduciary duties, and often these breaches cause financial harm to the beneficiaries. When a successor trustee’s breach of their fiduciary duties causes financial harm to beneficiaries, the trustee is personally liable to the beneficiaries for those financial losses.
If you are named as a successor trustee, keep two things in mind: (1) not only are you allowed to hire experts like attorneys and accountants to assist you, the law requires you to do so for any areas where you are inexperienced or lack knowledge; and (2) if you believe the job of administering a trust estate is not for you, then you don’t have to serve as successor trustee — you can decline to serve, and another successor can serve instead. Even if the trust instrument does not name another successor after you, the law provides mechanisms to appoint successors when necessary.
If you are a beneficiary of an irrevocable trust, and you suspect that the successor trustee may be failing in their duties, then you should consider getting independent legal advice, before an uninformed successor trustee can do real financial damage to the trust estate.
New California Probate threshold values
As required under Probate Code § 890, on April 1, 2022, the Judicial Council of California adjusted the maximum probate exemption values. Prior to April 1, a person’s estate had to go through probate if its gross value was more than $166,250.00. As of April 1, this figure has been increased to $184,500.00.
There are other categories of exemptions for specific asset types. Here is a link to the Judicial Council form that contains the relevant information.
For more information about common questions and estate planning issues, click here. To schedule a free consultation, click here.
Trustee and beneficiary rights
The real risks for most ordinary estate plans come from a lack of knowledge, which can cause your loved ones unnecessary stress in dealing with your affairs, or worse, can allow you or your loved ones to be taken advantage of by unscrupulous people.
You can protect against such risks with knowledge. If you have an estate plan, tell your loved ones that you do. If you do not have an estate plan, then once you establish your plan, be sure to inform your loved ones. Make sure your loved ones know that they have rights after you are gone. Tell the person (or people) you name to handle the administration that it’s a job, and there are real consequences if they fail to do that job properly, which is why they will need to be prepared to bring in expert tax, accounting, and legal help when the time comes.
In the next several days, I will post about how a lack of knowledge can lead to bad outcomes, and some ways to avoid those pitfalls.
For more information about common questions and estate planning issues, click here. To schedule a free consultation, click here.
When is it too late to prepare an estate plan?
As they say: “timing is everything.” When it comes to getting affairs in order through an estate plan, this is certainly true. Aside from the obvious case of passing away before executing an estate plan, there is another, often thorny situation when it becomes too late for someone to execute their own estate plan: when they are too ill to understand and appreciate the nature of the act.
I receive more than a few calls from people seeking to establish an estate plan “for” a third party, usually in response to some emergency such as a sudden illness. Unfortunately, if the principal — the person who owns the assets that will be subject to the estate plan — is too ill to make their own informed medical decisions, then under the law, the principal lacks the legal ability (called capacity) to sign a document like a trust or a power of attorney. While the principal might have the capacity to sign a will, if the principal owns sufficient assets, then their estate ends up in probate if they pass away before they recover.
The nuances of legal capacity are beyond the scope of this post, but here is a rule of thumb to keep in mind: when someone is too ill to make their own informed medical decisions, then they are too ill to sign a trust or a power of attorney. In these cases, there is another option available for the family — conservatorship court. A conservator can be appointed, with the express authority to sign an estate plan on behalf of the ill family member. Conservatorship court is not an ideal solution, but if it becomes the only way to avoid probate, then it’s the best option a family may have. Of course, people can avoid the emergency scenario by getting their estate plan completed prior to illness.
For more information about common questions and estate planning issues, click here. To schedule a free consultation, click here.