Frequently Asked Questions about Estate Planning, Living Trusts, etc.

Frequently Asked Questions

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1. Why do I need an estate plan?

First of all, let me say that you don't need to do anything at all. You don't have to create an estate plan. You don't have to visit the doctor, you don't have to go to the dentist. You can do your own taxes and manage all your investments. If you think about it, there is nothing you really "have to" do. However, creating an estate plan is an excellent idea if you want to avoid some major family and financial disasters. Wealthy families are wealthy for a reason. They know how to use the legal tools available to us us to preserve their wealth. They don't lose needless amounts of money to taxes, the courts, attorneys, etc. They plan ahead. We can learn from them and take a page from their playbook. Most of us spend a considerable amount of time and energy in our lives accumulating wealth. As we do this, there also comes a time to preserve wealth both for our enjoyment and for future generations. A solid, effective estate plan ensures that your hard-earned wealth will pass intact to those you intend to be your beneficiaries, instead of being siphoned off to government processes and bureaucrats. Estate planning documents make sure your family has the documents needed to help you if you cannot help yourself and after you've passed away.

2. If I don't have an estate plan, what will California do with my estate?

If you haven't created an estate plan, California has already created one for you. The government's estate plan is called "Intestate Probate" and guarantees government interference in the disposition of your estate. "Intestate" means dying without a will. Documents must be filed and approval must be received from a court to pay your bills, pay your spouse an allowance, and account for your property and it all takes place in the public's view. This court-supervised transfer of assets is called probate and can take a year or so to accomplish. It also costs thousands of dollars in most cases.

Then there is the matter of the federal government's estate taxes. There is much you can do in planning your estate that will reduce and even eliminate death taxes, but you don't suppose the government's estate plan is designed to save your estate from taxes, do you?

3. What's the difference between having a will and a Living Trust?

A will is a legal document that describes how you want your assets distributed at death. It's simply a wish list of where you want your assets to go upon your death. The actual distribution, however, is controlled by a legal process called probate, which is Latin for "prove the will." Upon your death, the will becomes a public document available for inspection by all comers. And, once your will enters the probate process, it's no longer controlled by your family, but by the court and probate attorneys. Some people assume the will controls the distribution of all their assets. This is a common error and assumption.

A Living Trust avoids probate because your property is owned by the trust, so technically there's nothing for the probate courts to administer. Whomever you name as your "successor trustee" gains control of your assets and distributes them exactly according to your instructions.

There is one other big difference. A will doesn't take effect until you die, and is therefore no help to you with lifetime planning, an increasingly important consideration now that Americans are living longer. A Living Trust can help you preserve and increase your estate while you're alive, and offers protection should you become mentally disabled.

4. What would happen if I were mentally disabled and had no estate plan or just a will?

Unfortunately, you would be subject to "living probate," also known as a conservatorship in California. Basically, a guardian must be appointed to you - to take care of you physically and also take care of your finances. This person is called the "conservator" and you would be the "conservatee." If you become mentally disabled before you die, the probate court will appoint someone to take control of your assets and personal affairs. These "court-appointed agents" must file a strict accounting of your finances with the court. The process is often expensive, time-consuming and humiliating. If you set thing up with an estate plan, you can avoid the entire process of conservatorship.

5. If I set up a Living Trust, can I be my own trustee?

Absolutely. In fact, most Living Trusts have the people who created them acting as their own trustees. If you are married, you and your spouse can act as co-trustees. And you will have absolute and complete control over all of the assets in your trust. In the event of a mentally disabling condition, your handpicked successor trustee assumes control over your affairs, not the court's appointee. Instead of handling things in your individual capacity, you are going to handle things as your own trustee.

6. Will a Living Trust avoid income taxes?

No. The purpose of creating a Living Trust is to avoid conservatorship, probate, and reduce or even eliminate federal estate taxes. It's not a vehicle for reducing income taxes. In fact, if you're the trustee of your Living Trust, you will file your income tax returns exactly as you filed them before the trust existed. There are no new returns to file and no new liabilities are created. Other benefits of the living trust include keeping your affairs private and saving the family thousands on legal expenses.

7. Can I transfer real estate into a Living Trust?

Yes. In fact, in most cases, all real estate should be transferred into your Living Trust. Otherwise, upon your death, depending upon how you hold title, there will be a probate in every state in which you hold real property. When your real property is owned by your Living Trust, there is no probate anywhere.

9. Aren't living trusts only for the rich?

No. A Living Trust can help anyone protect his or her family from unnecessary probate fees, attorney's fees, court costs and federal estate taxes. In fact, you'll probably find a Living Trust offers substantial benefits for you and your family. I always tell clients: "The less you have, the more you have to lose!"