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Estate Planning Basics

Estate Planning Basics

Choosing a Trust or Will Estate Planning Definitions
Trust vs. Will: Real Life Scenarios Pourover Will
Benefits of a Living Trust Advanced Health Care Directive
Living Trust FAQs Durable Power of Attorney
What is Probate? Conservatorship
How do I Administer a Trust? Guardianship
  Community Property Agreement

Trust vs. Will – Real Life Scenarios

When a person who passes away has a living trust is in place, their family will have an easier, less costly, and less time consuming exercise transferring their loved one’s estate. When there is only a Will, the family is forced wait far longer, endure a more public scrutiny over their relative’s estate, and pay Court filing fees as well as the attorney’s statutory rate for handling the probate administration.  In the two scenarios below, the family whose mother left only a Will ended up paying four times the hourly fee compared to the family in the first scenario. The two scenarios below illustrate why:

A Living Trust – The Better Solution

I recently met with a family whose mother had lost her battle with cancer. They brought a copy of Mom’s living trust to our first meeting. After reviewing the documents, I determined that the assets Mom owned where her residence, a money market account, her checking and savings account, and her retirement account. The living trust properly held title to her assets and clearly instructed that after her death, her children were to receive the assets in equal amounts. The family needed my help only to comply with the terms of the trust. The transfer of Mom’s assets was completed expeditiously in about four to five months. No probate court appearances were required.

A Will – The Harder Road

I met with another family who had also recently lost their mother, who died of natural causes. She had created a Will about 27 years ago stating that her remaining assets, which included her residence and a few bank accounts, were to be divided equally among her four children. Because Mom had created a Will, I informed the family that I needed to go to probate court to petition for probate administration in order to eventually transfer Mom’s assets to them. The probate process usually takes more than one year to complete due to standard probate requirements; which was true in this case as well because:

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Benefits of a Living Trust

Avoid Probate

If the trust is properly funded when you die (or become incompetent), then you legally don’t own anything in your name. This is what allows your estate to avoid probate. Probate occurs when an individual dies owning assets and either did not have any estate planning documents or had not created a Will. In that situation, it becomes necessary for the Probate Court to oversee that the decedent’s debts are paid and the balance of those assets are then transferred to the heirs. The probate process can very lengthy and expensive due to the exorbitant statutory fees. However, with a living trust, the successor trustee can distribute the trust property according to the terms of the trust quickly, privately, cost-effectively, and without Court intervention.

Avoid Conservatorship

If you become incapacitated and have not established your estate planning documents ahead of time, a conservatorship will be necessary in order to appoint someone to manage your assets and provide for your medical care. If a trust is in place, however, your successor trustee takes over the assets to the living trust, and manages the property without having to go to court for a conservatorship and without ongoing court supervision. Buffered by an Advanced Health Care Directive and Durable Power of Attorney, a conservatorship can be completely avoided.

Avoid or Reduce Estate Taxes

A Living Trust is a great tax planning tool for avoiding or reducing estate taxes. Although there is no federal estate tax in 2010, it will be reinstated in 2011. There is also the possibility that Congress will pass legislation before the end of 2010 to reinstate the federal estate tax retroactively. However, regardless of the changing estate tax laws, it is still beneficial from a tax perspective to have the living trust in place.


A Living Trust can be used to control how beneficiaries spend their inheritance. For example, does a beneficiary have a gambling problem or a drug habit? Is he/she prone to making risky investments, or irresponsible with money? A Living Trust can set conditions for a beneficiary such as when they can inherit and how much they can inherit at any given time.

Protection Against Creditors

A “Special Needs Trust” can give assets to the beneficiaries and protect those assets from those beneficiaries' creditors. But, a distinction must be made from the settlor’s (the original owner of the trust) creditors.  A Living Trust does not shelter the settlor from his or her own creditors.  A creditor of the settlor has the same right to go after the trust property as if the settlor still owned the assets in his or her own name.


Unlike a will, a trust is not a public record. So, the general public or anyone who is not a beneficiary does not have a right to know about the assets in your trust.

It is beneficial to consult an experienced trust and will attorney to help you prepare a living trust that ensures your wishes are followed and your loved ones have a smooth transition with the transfer of assets.

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Living Trust: Frequently Asked Questions

What is a living trust anyway?

A Living Trust is a legal tool that allows a person (the Trustee) to hold the creator of the trust  (the Settlor) property for the benefit of someone (the Beneficiary). Unlike a Will, a Living Trust goes into effect during the settlor's lifetime. The Trust itself is a legal entity that, if properly funded, holds title to the Settlor’s assets.

A person who creates and signs the trust is known by different names: settlor, grantor, or testator. They all mean the same thing.

Usually, the settlor will “fund” and transfer title of all his or her assets to the living trust. A trust must be “funded” in order for the settlor to realize all of the benefits of the living trust. Funding means that the trust actually owns your assets. It is similar to a safety deposit box that sits empty until you actually place items of value into it for safekeeping. (Important Exception: Retirement assets such as 401k, 403b or IRAs should not be titled to your trust to avoid adverse tax consequences.)

There is no need to worry about the fact that the living trust has legal title over the assets because in most cases, the settlor, trustee, and beneficiary are the same person (at least until that person dies or becomes incompetent). Also, the person who signed the trust into existence is usually also the Trustee, and has full management and control over those trust assets. So, until the creator(s) of the trust die or become incompetent, the management of assets doesn’t change.

What is a trustee?

The trustee is the person who holds legal title to the property in the trust. The trustee’s job is to manage the property that is titled in the trust for the benefit of the beneficiaries in accordance to the terms contained within the trust set forth by the Settlor. In short: the Trustee may not alter the terms of the living trust!

What is the trustee’s role?

A trustee has all the powers listed in the trust document, unless they conflict with California law or unless a court order says otherwise. The trustee must collect, preserve and protect the trust assets. The trustee’s fiduciary duty is to comply with the terms of the living trust and unequivocally follow the settlor’s intent.

What is a trust beneficiary?

A trust beneficiary is a person who, by the terms of the trust, has the current or future right to have the trustee pay out cash or other trust property to him or her. He or she is one of the people for whom the trust was established.

Is a living trust easy to change?

You can cancel or change a living trust at any time and as many times as you want by setting up a “revocable” living trust. The trust only becomes irrevocable when you, the settlor, die or become incompetent.

As a practical matter, it is virtually impossible to have every single asset you own transferred into your living trust at any particular time – much less at your moment of death. This is why a Pourover Will is generally included in a comprehensive estate plan.

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What is Probate?

Typically, when you hear the word “probate”, it is usually in the context of when someone has died. Oftentimes, if that individual died owning assets and either did not create any estate planning documents or only created a Will, it becomes necessary for the Probate Court to be involved in transferring the deceased person’s assets to his or her heirs. The probate process can take a long time to complete and can be very expensive due to the statutory fees associated with the probate.

However, probate does not only involve a decedent’s estate. Probate cases actually include:

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Trust Administration

When the settlor dies, California law almost always triggers some aspect of trust administration to be completed by the successor trustee. For instance, upon the death of the settlor, the successor trustee has 60 days after becoming trustee or 60 days after the settlor's death, whichever happens later, to give written notice to all beneficiaries of the trust and to each heir of the decedent.

Above all else, the primary duty of the successor trustee is to follow the instructions contained in the living trust. Usually, those instructions include paying for the settlor's funeral expenses and outstanding debts (like medical expenses and credit card bills), and then distributing the remaining assets to the beneficiaries of the trust. Each particular living trust will contain its own specific terms as to how and when those assets will be distributed to the beneficiaries.

Importantly, the successor trustee has no authority to unilaterally change the terms of the trust. It is the successor trustee’s strict fiduciary duty to comply with the provisions of the living trust and to adhere to the settlor’s testamentary intent.

What Can the Successor Trustee Do?

Generally speaking, a trustee has all the powers listed in the trust document that do not conflict with California law or are not prohibited or limited by a Court Order.

The Successor Trustee’s duty is to collect (called “marshaling assets”), preserve, grow, and protect the trust assets.  While the living trust document will set forth all of the powers of the trustee, a trustee’s powers typically include:

While the assistance of an attorney is not mandatory for trust administration, it is beneficial to have guidance in helping to ensure all the requirements of trust administration are met during this difficult time.

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Pourover Will

The benefits a living trust offers cannot be utilized unless it is funded. It is much like a safety deposit box that protects nothing unless someone places his or her belongings into it. “Funding” means that the living trust actually owns the asset. (Caveat:  Retirements plans assets such as 401k, 403b or IRAs and pension plans should not be titled to one’s living trust to avoid adverse tax implications).

Despite the best of intentions, a person may not re-title all of their assets to their living trust. Examples are if someone re-financed their home and the escrow company neglected to place the title of the house back into the name of the trust, there was a forgotten bank account, or someone never got around to re-titling the timeshare they own into the living trust.

Because of these possible exceptions, a complete estate plan needs to include a “pourover will.”  This document gets this name because the purpose of this type of will is to name the living trust as the beneficiary, hence “pouring over” those assets back into the living trust.  Then, the living trust contains the provisions that actually distribute the assets in accordance to the settlor’s (person who signed the living trust) wishes.

So, ultimately, the living trust can make all the distributions; the pourover will is just there for insurance to catch any assets not contained in the living trust. No estate plan is complete without this pourover will.

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Advanced Health Care Directive

It is in your best interest to have a properly prepared and signed Advanced Health Care Directive in place while you are still healthy and have given thought to you health care decisions.   By creating an Advanced Health Care Directive, you nominate someone (called your agent or attorneys-in-fact) to make medical decisions for you and to carry out your previously stated wishes regarding difficult medical decisions, such as whether or not to end life support.  You can also use this document to declare your wishes for organ donation.  Your agent should be someone you trust.

Read the two scenarios below for a better understanding of why an Advanced Health Care Directive is important to aid your family in following your medical wishes:

Scenario 1: Following Dad’s Wishes

Dad had a sudden stroke, causing him to be hospitalized and remain unconscious. Dad fortunately had signed an Advanced Health Care Directive nominating his eldest son to be his attorney-in-fact, and authorizing him to make medical decisions on his behalf in case of his incapacity. The doctors were able to immediately discuss Dad’s diagnosis and treatment options directly with his son. Had Dad not had an Advanced Health Care Directive, due to the privacy restrictions and the fact that there were multiple children, the hospital would decline to take instruction from any one child over another if there was a disagreement over Dad’s medical treatment.

Scenario 2:  A Difficult Situation

Mom had been admitted to an assisted care facility by her family. She has seven children, all whom worked save one. The child who did not work assumed most of the duties to care for Mom for many years. Soon, Mom’s health deteriorated and she needed machines to help her breathe. The doctors took Mom’s children aside and advised them that Mom was unlikely to regain consciousness and is in a permanent vegetative state. All the children agreed that Mom should be laid to rest and the machines turned off – save the one child who had cared for her mom those many years. She vehemently objected to the machines being shut off. Each child loved Mom and each had his or her interpretation of what was best for her. Mom never executed an Advanced Health Care Directive, authorizing an agent she trusted to follow her wishes in such an emotionally difficult situation. Because of the disagreement between her children, now only a Court Order can legally allow the machines to be turned off.

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Durable Power of Attorney

A Power of Attorney is a document that lets you appoint someone to represent you. If you sign a Power of Attorney, you are the principal. The person you appoint to represent you is called the agent or attorney-in-fact. That person is authorized to handle a specific task, like signing documents for you while you are away, or handling on-going tasks if you are incapacitated. For example, your agent can sign sale documents or contracts for the purchase of a house, to sell your car, make bank deposits, withdrawals or other transactions, to trade stocks and bonds, or to pay your bills. The list of what the agent can do on your behalf is quite extensive, but also has the flexibility of limiting the agent as to what he or she can do if you specifically state this in the Power of Attorney.

It is imperative you select someone that is trustworthy and responsible to be your agent-in-fact. The scenario below demonstrates a situation where a family would clearly have benefitted from having a Durable Power of Attorney already in place:

Dad was admitted in a long term nursing care facility and his health was worsening quickly. His children received a call from the facility informing them that Dad’s bank account did not automatically pay the last two months payments, and that he would forced to leave the facility if the late payment is not received in ten days. The children didn’t have enough money to immediately pay for the outstanding bill but know that Dad has sufficient funds to maintain the payments. What happened to that automatic bill-pay? One of the children called the bank to find out why Dad’s account was not paying the facility’s monthly bill only to find that no one in the bank would talk to her because she is not Dad’s appointed attorney-in-fact to handle his financial matters. Dad and the family overlooked the need to have him sign a Durable Power of Attorney prior to losing his mental capacity. They learned that it is too late to have Dad sign the Durable Power of Attorney, and now they need to initiate a costly and time consuming Conservatorship proceeding to access Dad’s assets and accounts.

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What is a Conservatorship?

A probate conservatorship is a court proceeding where a judge appoints a responsible person (called a conservator) to care for another adult who cannot care for himself/herself or his/her finances (called a conservatee). An example is an elderly parent who has lost mental capacity and needs the help of a responsible individual to take care of his or her financial and medical needs.

There are two kinds of conservators:

It is important to point out that you must separately petition to become a Conservator of the Person and/or the Conservator of the Estate. Becoming the Conservator of the Person does not automatically make you the Conservator of the Estate and vice versa.

Who can be a Conservator?

If a Durable Power of Attorney exists, a proposed Conservator may already be appointed. If there is no Durable Power of Attorney or if the Durable Power of Attorney does not nominate a proposed conservator, then there is a system within the law for choosing the conservator. It gives preference to the person starting at the top of this list:

Note: If the person closest to the top of the list does not want to act as conservator, he or she can nominate someone else.

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For families with minor children (under age 18), it is a good idea to prepare and sign a guardianship document. This document nominates guardians for their child/children should something ever happen to them. This avoids the risk of foster-home care and allows for a smooth transition to the proposed guardian. A Guardian assumes full legal and physical custody of the minor child/children.

Think of the guardian as a substitute parent. That means the guardian is responsible for the child’s care, including the child’s:

A Guardian manages a child’s income, money, or other property until the child turns age 18.

Also, even if both parents are living, a minor will need a guardianship of the estate (called a guardian ad litem) if he or she inherits money or assets.  In most cases, the Court appoints the surviving parent to be the minor child’s guardian ad litem.

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Community Property Agreement

California is a community property state and couples that get married in California are subject to those community property laws.  “Community property” is essentially all assets acquired by each spouse or partner during marriage while living in California. “Separate property,” on the other hand, are assets acquired either before marriage, through inheritances, or as gifts to only one spouse or partner.

Community property issues affect estate planning because spouses or partners may want to give their respective share of the “community” differently. A typical example would be if one spouse or partner wants to leave their one-half of the community to his or her children from a prior marriage and not to his or her spouse’s or partner’s children from a prior marriage.

If estate planning documents are not correctly written, litigation may ensue after the death of the settlor (the person who signed the living trust). Complications can arise in these following situations:


Once one spouse or partner mixes his or her “separate property” asset with the “community property” assets, the presumption is that the “separate property” assets become “community property” assets.  Tracing is possible to determine what assets are “separate” and what are “community”, but this process is time consuming and costly, and sometimes impossible to do if the assets have been combined for many years and moved around many times.

“Separate property” assets are improved or maintained with “community property” assets

When a spouse or partner contributes “community” funds to improve either spouse’s or partner’s “separate property” asset, the “community” gains an interest in that “separate” asset (called a “pro-tanto” interest in legalese). The percentage of the “community” received depends on variables such as on the number of mortgage payments the “community” made or how much the “separate” asset appreciated during the time “community” funds were used to pay for its expenses and maintenance, like property taxes, insurance, and repairs.

Community Property agreements come into play in a complete estate plan because California law allows couples to opt out the community property laws and instead come to their own agreement.

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