Every Californian's Guide to Estate Planning

Wills, Trusts, and Everything Else

Every Californian's Guide to Estate Planning

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Every Californian's Guide to Estate Planning

New Nolo Title

, 1st Edition

This one-of-a-kind guide covers everything from wills and living trusts to tax-saving strategies and issues that are unique to people who call California home. Every Californian's Guide to Estate Planning will show you how to:

  • avoid probate
  • name a guardian for your children
  • plan for blended families and international issues
  • pass low property taxes on to your heirs
  • work with California community property rules

Product Details

Every Californian's Guide to Estate Planning helps you understand the basics of leaving money and property to loved ones and charities, naming a guardian for children, and planning for beloved pets—with a special focus on issues unique to making a California estate plan, like:

  • how state community property rules affect inheritance and taxes
  • how to minimize capital gains for those inheriting high value real estate
  • legal and tax rules that apply to non-citizens and U.S. permanent residents
  • important issues for international guardians, trustees, and executors
  • how to make sure your heirs don't lose a low property tax rate, and
  • how to avoid California's slow and expensive probate system through options such as transfer-on-death deeds.

Includes access to essential worksheets that help you get started on writing a will, preparing a trust, choosing a guardian, leaving money to kids, naming beneficiaries, choosing agents for your health care directive and power of attorney for finances, doing a personal inventory, and more.

"In Nolo you can trust." - New York Times

When it comes to self-help legal stuff, nobody does a better job than Nolo.” -USA Today

ISBN
9781413324686
Number of Pages
360

About the Author

  • Liza Hanks, Attorney

    Liza Hanks is a Palo Alto, California attorney who specializes in estate planning for families of all ages. A graduate of Stanford Law School, she has also served as an instructor at the Santa Clara University Law School and practiced with the state of California and a prestigious Silicon Valley firm. Hanks is certified by The State Bar of California Board of Legal Specialization  as a Specialist in Estate Planning, Trust & Probate Law, and is the author and coauthor of Every Californian's Guide to Estate Planning and The Trustee's Legal Companion. She also blogs on wills, trusts, powers of attorney, living wills, estate taxes, and probate court on the law blog Everyday Estate Planning.

Table of Contents

Introduction:
What’s So Special About Estate Planning in California?

  • Why Is This Book Just for Californians?
  • What Will I Get Out of This Book?

1. What’s in an Estate Plan and Why Do You Need One?

  • Getting Started
  • Understanding Probate
  • The Workhorses: Wills and Trusts
  • Preparing a Personal Inventory and a List of Beneficiaries
  • Special Estate Planning Issues When You Own Real Estate

2. Wills

  • Making It Legal
  • A Will Is Just One Part of Your Estate Plan
  • Right of Survivorship: Property You Own With Others
  • Choosing an Executor
  • Choosing Guardians and Managing Money For Children
  • Planning for Pets
  • Preparing a Will Worksheet
  • Making a Will: A DIY Project or Not?
  • Once You’ve Done Your Will
  • What Happens If You Don’t Make a Will?

3. Living Trusts

  • What Is a Living Trust?
  • Creating a Living Trust: The Settlor’s Job
  • Casting the Play: Selecting Trustees and Beneficiaries
  • Preparing a Trust Worksheet
  • Creating a Living Trust: DIY Project or Not?
  • Transferring Assets Into the Trust
  • Pour-Over Wills

4. Estate Planning for Minor Children: Choosing a Guardian

  • Get It Done
  • What Guardians Are (and Are Not) Responsible For
  • Court Approval and Oversight of Guardians
  • Picking the Right Guardian
  • Common Problems and Some Solutions
  • After You’ve Chosen a Guardian: Talking It Over
  • Giving Guardians Some Written Guidance
  • Congratulate Yourself on Choosing a Guardian!

5. Leaving Money to Children

  • Money and Kids: The Basics
  • Custodial Accounts
  • Children’s Trusts
  • Your Backup Plan: Appoint a Property Guardian
  • Pull Your Plan Together
  • Life Insurance Primer

6. Estate Planning Across Borders

  • Resident and Nonresident Aliens for Tax Purposes
  • Estate and Gift Taxation of Non-U.S. Citizens (Resident and Nonresident)
  • How Assets Are Taxed Worldwide for U.S. Taxpayers
  • Naming International Trustees and Executors
  • Naming Guardians for Minor Children Who Don’t Live in the U.S.
  • Estate Planning for a Noncitizen Spouse

7. Yours, Mine, and Ours: Estate Planning for Blended Families

  • Community Versus Separate Property
  • Community Property and Taxes
  • Planning Strategies for Blended Families
  • Planning for Children of Different Ages
  • Putting It All Together

8. Estate Planning and Property Tax: What You Need to Know About Prop 13

  • Property Taxes in California and Prop 13
  • What Really Matters: Change in Ownership of Your Home
  • Exclusions From Reassessment That You Have to Request
  • Automatic Exclusions from Reassessment
  • Reporting a Change of Ownership

9. Death and Taxes: Income, Gift, and Estate Taxes

  • Some Background on Death and Taxes
  • Income Taxes
  • Gift Tax
  • The Estate Tax
  • Estate Tax Planning Strategy If You Are Single: Philanthropy

10. Naming the Right Beneficiaries: Retirement and Life Insurance

  • Alphabet Soup: Retirement Plans Explained
  • What Beneficiaries Have You Already Named?
  • Retirement 101: The Basic Rules of Choosing Beneficiaries and Withdrawing Money
  • Naming Beneficiaries for Retirement Plans
  • A Little Housekeeping: Cleaning Up Your Retirement Plans
  • Filling Out the Forms Naming Beneficiaries
  • Naming Beneficiaries for Life Insurance

11. Advance Health Care Directives & Powers of Attorney for Finances

  • Health Care Directives
  • Durable Power of Attorney for Finances

12. Managing Your Plan and Keeping it Current

  • What’s in Your Plan
  • Storing Your Estate Plan
  • Digital Estate Planning Issues
  • Whom to Give Copies of Your Estate Planning Documents To
  • Keeping Your Plan Current
  • How to Make Changes to Your Estate Plan

13. Finding a Lawyer and Help Beyond the Book

  • Start With Referrals
  • Do Some Research
  • Make Contact
  • Ask Questions
  • Trust Yourself

Sample Chapter

Chapter 1:
What’s in an Estate Plan and Why Do You Need One?

Read this chapter if:

  • You have been procrastinating for years and need to get started on your estate plan.
  • You want to learn about probate and how to avoid it.
  • You don’t know whether you should use a will or a living trust to create your estate plan.
  • You want to create a personal inventory of your assets and a list of your beneficiaries for retirement plans, life insurance, and any other beneficiary designated accounts that you own.

 If you’ve picked up this book, I’m assuming that you want to get your estate plan started, or update an existing one. If you don’t know quite where to start, just start here. Your will (or trust) is like the center of a wheel. The specific issues that you’ll have to consider as you make your will or trust are like the spokes coming out from that center. This chapter is meant to give you an overview of the territory before you get into the details of navigating your way from start to finish. You might not read this book in order. That’s fine. When you need to, take the time to explore a particular topic in depth, and then come back to Chapter 2 (if you decide to create a will) or Chapter 3 (if you decide to create a trust) and fill in another blank on the worksheets that accompany each chapter. After you’ve worked your way through the entire book, you can use the Fiduciary Worksheet (included in Chapter 11) to capture your choices for all of the jobs you’ll need people to fill in your plan: trustees, executors, and agents for health care and power of attorney for finance. And, even if you don’t actually want to make your own will or trust, working through those worksheets (and reading this book) will help you be prepared to work with an attorney more efficiently and effectively.

Getting Started

Estate planning boils down, really, to three things: who gets what, who does what, and how you are going to get those things to those people:

First, you have to identify your assets.

Second, you have to decide who you want to give these assets to.

Third, you have to decide how you want to accomplish the transfer of your assets to your beneficiaries after you die.

This chapter will help you get started with all three of these tasks. But not in this order.

I know it’s important to figure out what you own and how you own it. But, let’s face it, that’s also a chore, and I want you to be motivated, not dispirited. To put it another way, I want you to imagine your destination before you pack your suitcase. I think it makes the most sense to get started with your estate plan this way: First, I’ll give you an overview of how probate works in California so that you can decide the “how” question—whether it makes the most sense for you to build your plan around a will or a trust. After that, you can work on the “what” part by preparing an inventory of what you’ve got and creating a list of your key beneficiaries.

For most people, an estate plan consists of three or four main documents: a living trust, a will, a durable power of attorney for finance, and an advance health care directive. Your plan also includes the transfer of your retirement assets and life insurance, which pass to the beneficiaries named on your beneficiary forms for each such account or policy. This book explains why each of these four documents is important, what you’ll need to think about to create each one, and how to name the right people as beneficiaries for your retirement plans and life insurance policies.

But before we get started, let’s consider the word “plan.” It’s important because the alternative to making a plan, is, of course, not having one at all. People who die with no plan in place will have their property distributed according to California intestacy law; will have to go through a probate proceeding if their estate is big enough; and, if they have minor children, will have those children placed with adult guardians after a court investigation and hearing. It might work out just the way you hoped it would—but, really, what are the odds?

California’s intestacy laws leave property belonging to people who die without a will or trust to surviving spouses, children, parents, and siblings—and more distant relatives after that. (See Chapter 2, “What Happens If You Don’t Make a Will,” for more on the subject.) But if you aren’t married or don’t want your assets distributed to your family, the only way to make your wishes known and legally binding is to make a will or a trust. If you want to nominate guardians for your minor children, you have to do that in writing, too. There’s just no other way to make it clear to a judge that your partner is the best choice and that your former mother-in-law is not. Given the alternative, it’s hard to justify not putting at least a simple plan in place, isn’t it?

The Key Estate Planning Documents

Wills are the simplest estate planning tools. They are extremely flexible and provide for appointment of executors, guardians, tax savings trusts, and trusts for children. If your estate plan uses a will as its central document, your estate will usually have to go through probate before it can be distributed to your heirs. (Read more about wills in Chapter 2, choosing guardians for minors in Chapter 4, and leaving money to minors in Chapter 5.)

Living Trusts are legal entities that hold property during a person’s life and provide for a distribution plan after death. All assets in the living trust avoid probate. Living trusts are coordinated with pour-over wills to appoint guardians (if necessary) and tie up loose ends. (Read more about living trusts in Chapter 3, and about using trusts to plan for blended families in Chapter 7.)

Durable Powers of Attorney for Finance allow someone to make decisions and to manage your financial affairs for assets outside
of a living trust if you become incompetent or incapacitated.
(Read about durable powers of attorney in Chapter 11.)

Advance Health Care Directives allow you to name an agent to make health care decisions for you and state your wishes for end-of-life care. (Read about advance health care directives in Chapter 11.)

Retirement Plans and Life Insurance Policies are distributed to named beneficiaries and pass outside of your will or trust. (Read about naming beneficiaries for retirement plans and life insurance in Chapter 10.)

Will or Trust?

If you’re going to make a plan, your first decision is going to be what kind of plan you need to make—one that uses a will as the central organizing document, or one that uses a living trust to manage your property and distribute it at your death. Think of this choice as a fork in a road. Either kind of estate plan will get you where you want to go. Doing either one is far superior to doing nothing at all.

Both wills and trusts are perfectly effective, legal ways to manage and distribute what you own at death. But they differ in how long it will take to settle your estate and how smooth the road will be between where you are now and that ultimate destination. They also differ in their initial cost to set up and in the time and energy they take to maintain during your lifetime. The biggest difference of all is whether or not you want to plan to avoid probate in California—for most people that’s the determining factor in choosing a will or a trust.

Understanding Probate

Probate isn’t inherently evil. Actually, it was created with the best of intentions—to make sure that, after a person dies, their assets get distributed according to their will and that all of the estate’s creditors are paid.

A probate proceeding is a judicial process where a judge supervises the settling of an estate. After a will is submitted to the court, and determined to be valid, an executor is appointed—that’s how probate begins. The probate ends when the court issues an order detailing how the estate’s assets are to be distributed. No one gets anything until that order is issued.

If you die in California with an estate worth more than $150,000 (counting only those assets that must go through probate, which I’ll explain in a moment), your estate must go through probate, which takes place in the probate division of the superior court located in the county where you died.

 

Simple California Court Procedure for Small Estates

If the value of your probate assets is below $150,000, those assets can transferred outside of probate by using a simple affidavit procedure. For a clear explanation of this procedure and the forms you’ll need, go to the Self-Help section of the California Courts Judicial Branch website at www.courts.ca.gov/10440.htm. You can also find your local superior court on the California Courts Judicial Branch website (see www.courts.ca.gov/find-my-court.htm).

 

During the probate proceeding, the executor must notify all known creditors and publish a notice in a local newspaper to give any other (unknown) creditors the chance to come forward and make a claim against the estate. Before the estate can be closed, the executor must also prepare and submit an inventory listing the value of all of the estate’s assets. Once that’s been done and the executor has paid all outstanding debts and taxes, the probate can be closed and the executor can transfer what’s left to the beneficiaries named in the will or who would inherit under California intestacy law.

Resource

Want to learn more about California probate procedures, paperwork, and forms? You’ll find extensive information on the probate court section of your local (county) superior court website. To find yours, see the California Courts Judicial Branch website at www.courts.ca.gov/find-my-court.htm. Also, check out How to Probate an Estate in California, by Julia Nissley (Nolo). This 400-page book will definitely help you understand why people prefer avoiding probate.

How Long Does Probate Take and What Does It Cost?

Probate has to last at least four months (to give creditors time to make claims), but, in my experience, it usually takes nine months to a year for an executor to complete the process and receive a court order to distribute the assets in California. If you own property in more than one state, your estate will have to conduct probate proceedings in each of those states as well. Some states have streamlined and simplified the probate process, but California isn’t one of them.

In California, the cost of probate is based on the value of the assets in your estate (see “Costs of Going Through Probate in California,” below). My clients often think of this as a tax because the probate fee is determined by a percentage of the value of the estate, but it isn’t a tax: The statutory fees go to the attorney representing the estate and to the executor appointed by the court.

Here’s how it works: At the end of the probate process, the executor asks the court to issue an order that distributes the estate’s assets to the beneficiaries. As part of the petition, the executor also requests fees for the attorney and for the executor, based on the size of the probate estate. These fees are the maximum fees allowed under state laws for the work of settling the estate, but it’s okay to request less or to waive the fees. Most attorneys (as you’d expect) will request the full statutory fee but many executors waive the fee, if they’re also inheriting assets in the estate. Still, to calculate how much probate would cost an estate, double the statutory probate fees (which assume that the attorney and the executor each take the allowable fee).

The value of assets in your estate is the fair market value (FMV) of those assets—what they’d be worth if you sold them at the date of death. For many California homeowners, this makes probate expensive. A few examples:

If you leave your house to your children in a will, and your house could be sold for $500,000, but you owe $450,000 on the mortgage, the probate court will count the $500,000 figure as the home’s value, not the $50,000 of equity that’s actually yours. In this case, your estate would pay $13,000 in statutory fees. Here’s the math on this example, where you start with $500,000: $4,000 (for the first $100,00) + $3,000 (second $100,000) + $6,000 (for the remaining $300,000) = $13,000 in probate fees.

Probating an estate worth $200,000 would result in $7,000 in statutory fees; an estate worth $1 million would result in $23,000 in statutory fees.

An estate worth $10 million would result in $113,000 in statutory fees.

 

Cost of Going Through Probate in California

Estate*

Statutory Probate Fee

Cost of Probate

First $100,000

4%

$4,000

Next $100,000

3%

$3,000

Up to next $800,000

2%

$2,000

Up to next $9 million

1%

$1,000 per $100,000

 

* Your estate includes only assets that are subject to probate, such as cash; stocks, bonds, and brokerage accounts; personal property, such as jewelry; and property that is not in a trust, a payable-on-death (POD) account (such as a bank account), or a transfer-on-death deed (such as for your house).

What Property and Assets Must Go Through Probate

There’s some good news here. Not all of your assets are subject to probate. Probate exists to prevent fraud after someone dies. The idea is that the court steps in to make sure that the decedent’s wishes are respected and that their assets are identified and distributed to the proper people.

Assets that are held in a trust, or have a beneficiary designation, or that pass to a surviving joint tenant don’t go through probate. And this makes sense, because in these cases we already know who gets the asset (the surviving joint tenant or the named beneficiary). Those assets are going to those people because there’s already a binding legal contract that says it goes to them—we don’t need a court order to make sure that happens.

Assets Outside of Probate

The first thing that I do at an initial estate planning appointment is to draw a line down the middle of a piece of paper. On one side, I write “Probate” and on the other side I write “Not Probate.” Most of my clients don’t make that distinction. But it is important for estate planning. Judges don’t need to supervise the distribution of the Not Probate side of the diagram. And wills and trusts don’t distribute them. For those assets you’ll need to make sure you’ve designated the right beneficiaries. Your will or a trust is what you’ll need to distribute the assets for on the Probate side.

 

Two Kinds of Assets

Not Probate

Probate

Retirement assets

House

Life insurance/annuities

Investment accounts

Joint tenancy property

Bank accounts

Payable-on-death accounts

Tangible personal items

Transfer-on-death accounts

Partnerships, sole proprietorships

Transfer-on-death deeds

 

 

The most common examples of assets that won’t be subject to probate include:

Assets in a living trust. The main reason you create a living trust is to avoid probate for your assets on the Probate side of the list. In fact, the reason that I draw that line down the middle of the paper is to help my clients understand why they need a trust for the assets on the Probate side—these are the assets that would cost them time and money to send through probate without a trust. (See Chapter 3 for details.)

IRAs, 401(k)s, and similar retirement accounts. These accounts all have beneficiaries you’ve named on record with a plan administrator or investment manager. Those beneficiaries will receive any money left in those plans when you die; normally, retirement assets are not distributed to your will or trust.
(For details, see Chapter 10.)

Life insurance policies. The proceeds from a life insurance policy are often the major source of immediate cash for a surviving spouse or young children. (See Chapter 10 for details.)

Annuities. Annuities are similar to life insurance policies (discussed in Chapter 10). You sign a contract with a company in which you agree to deposit a certain amount of money, and the company agrees to pay that money back to you over a certain period. Sometimes the policies pay a benefit to survivors, and sometimes not.

Payable-on-death bank or transfer-on-death brokerage accounts. You can fill out a form with the company that holds the accounts to make them “payable on death” (POD) accounts, or “transfer on death” (TOD) accounts, which means that they will pass to the person you designated, just like the retirement accounts with designated beneficiaries. (See Chapter 10.)

Real estate with a transfer-on-death deed. As of 2016, Californians can leave real property to designated beneficiaries by using a transfer-on-death deed, as opposed to establishing a living trust. (See “Transfer-on-Death Deeds: How to Keep Your House Out of Probate,” below, for more information on these deeds.)

Property that passes automatically to a surviving owner. Any property you own with someone else and for which someone has a right of survivorship (which would typically be the case of a house you co-own with your spouse) won’t be subject to probate. The right of survivorship means that when one co-owner dies, the survivor owns the property automatically, without probate. So property you own with your spouse (or someone else) as joint tenants or community property with right of survivorship, won’t go through probate when the first owner dies. (In Chapter 7, I will discuss both of these forms of property ownership and how to tell if you hold property in one of these ways.)

Assets That Go Through Probate

When you take away any assets that will pass without probate (because you’ve designated a beneficiary or they will pass to a co-owner automatically), whatever’s left must go through probate. For most people, that means assets such as:

cash in the bank

investments, such as stocks or mutual funds

household property, including furniture, furnishings, jewelry, art, your car, your clothes, and anything else that you own, and

real estate that is not held in either joint tenancy or community property with right of survivorship or that is not subject to a transfer-on-death deed.

Example: Violet owns a house in Sacramento and two checking accounts with her husband, Jesse, as a joint tenant. She also inherited a cabin in the mountains near Truckee from her mother, which she owns as her separate property. Violet wrote a will, leaving the cabin to her niece Stella. At Violet’s death, the cabin must go through probate so it can be transferred to Stella. The home and bank accounts, however, pass to Jesse automatically because he’s the surviving joint tenant.

Tip

Probate has nothing to do with estate tax. When you die, everything you own, whether it goes through probate or not, is tallied up for federal estate tax purposes. But only the very wealthy are subject to the estate tax. Currently (in 2017), you can leave up to $5.49 million of property, plus an unlimited amount to your spouse (as long as your spouse is a U.S. citizen), without tax. (See Chapter 9 for details on the estate tax.)

Why Avoid Probate?

Most people will want to avoid probate for these reasons:

Your heirs gain nothing by probate. The court process and fees take thousands of dollars out of the estate—money that otherwise would go to your loved ones.

Most families don’t need a court to supervise the distribution of assets, assuming no one is fighting about the estate and there are no messy creditor problems to resolve. Waiting months or a year to distribute the assets to your children, for example, is just a waste of time.

Probate is a public process, so everything you file with the court (including your will) is a public document, open to all who care to inspect them. So if you want to keep the terms of your estate private, you’d want to create a living trust, which does not need to be filed with the court. (Your heirs and beneficiaries will still be entitled to a copy of the trust when you die, but it won’t be a public record at your local superior court.)

 

When Does Probate Make Sense?

Probate court can be a useful place to sort out complicated creditor issues or other weird family dynamics. If your estate is complex and you think having a public forum would help resolve problems, probate might be the right choice for you.

 

How to Avoid Probate

If your probate estate is under $150,000, your estate already avoids probate and can be distributed to your heirs without a probate proceeding or a court order. You simply need to do the simple affidavit procedure (See “Simple California Court Procedure for Small Estates,” above.)

 If your probate estate exceeds $150,000, then you have some planning to do. Many people create living trusts to avoid probate, which provides the most flexibility and works best if you want to benefit multiple beneficiaries or distribute complicated property. But trusts are not the only way to avoid probate. People with simple estates, who just want to benefit one or two people, can make use of beneficiary account designations, joint tenancy, community property with right of survivorship, and transfer-on-death deeds to avoid probate and pass their assets to their loved ones simply.

Each of these methods lets you move an asset from the Probate column of my Two Kinds of Assets diagram to the Not Probate side. For example:

You can fill out a form at a bank or an investment company to designate a specific account as a payable-on-death account. At your death, the assets in that account will go directly to the named beneficiaries.

You can record a deed with the county assessor and add a person as a joint tenant, name a transfer-on-death beneficiary, or change a community property deed to a community property with right of survivorship deed. When you die, the surviving joint tenant/owner/beneficiary will own the property and no probate will be necessary. (But there may be tax implications, so please don’t do any of these things without consulting an accountant or attorney.)

I love these techniques, and they have their place in many people’s plans, but they usually aren’t a substitute for an estate plan—beneficiary designations can’t, for example, help your loved ones care for you if you are incapacitated, help manage property for minor beneficiaries, forgive debts or loans you’ve made during life, or transfer assets to another beneficiary if the first one dies before you do.

Resource

If you want to learn more about ways to avoid probate, read 8 Ways to Avoid Probate, by Mary Randolph (Nolo). This book offers practical tips and techniques that you can use to convert bank and investment accounts into payable-on-death or transfer-on-death accounts, to own property as joint tenants or use a transfer-on-death deed, and use the small estates affidavit process to avoid probate.

The Workhorses: Wills and Trusts

For your estate plan to address all of the issues it needs to—transferring property, planning to manage property for children, addressing incapacity, and planning to minimize taxes—you need more than just a beneficiary designation or a survivorship deed. Wills and trusts are the documents that you need to make your plan comprehensive. They can be simple or complicated, that’s up to you. But no estate plan is really a plan for what happens after you die without one of these documents.

Wills

A will’s most important functions are to leave property to beneficiaries and to nominate guardians for minor children. Each person creates their own will, though married couples usually create wills that are coordinated and, if they have minor children, nominate the same guardians for those children.

At a minimum, to create a will you will need to decide who to nominate as your executor (the person who will be in charge of settling your estate) and how to distribute your property. If you have minor children, you will also need to nominate guardians to care for those children to age 18 and establish a trust to manage their property until they are old enough to manage that property for themselves.

A will can accomplish all the critical estate planning tasks and is easy and inexpensive to create. If you decide a will makes the most sense, see Chapter 2.

But now you also know that Californians have to take probate into account before deciding on using a will as their main estate planning document. Sadly, in California, probate is a slow, not consumer-friendly, and expensive process. Many states have streamlined their probate procedures and reduced probate costs. In those states, avoiding probate is not important. But we don’t live there. In California, avoiding probate can save your loved ones both time and money after you die, which is where a living trust comes in.

Who Should Do a Will

Given that probate is slow and expensive in California, and that the high cost of real estate means most of us would be subject to it at death, why do some people still use wills instead of living trusts? There are five main reasons why a will can be the right choice:

You don’t own a house.

You have minor children and your main, immediate goal is to nominate guardians.

You can’t afford to create a living trust or just don’t want to.

You don’t care about probate costs.

You have complicated creditor problems and would appreciate a court’s sorting these out.

A will is easy and inexpensive to create. In Chapter 2, I will walk you through the basics of doing just that. For young families just starting out, a will is an excellent choice for a first estate plan because it accomplishes their main goal: making sure that they have nominated guardians for minor children. Later, when a couple buys a house or acquires more assets, they can always revisit their plan and create a living trust.

For people with a small estate, or who simply don’t care that probate will cost their heirs some money and time, a will is a perfectly effective estate plan.

And, of course, there’s just financial reality. It is expensive to live in California, and we can’t always afford to do things perfectly. A living trust is usually more expensive to create than a will. Not being able to afford a living trust isn’t a good excuse for doing nothing at all. A will is a perfectly serviceable document to put in place now. When you can afford to do a trust, you can always upgrade.

Living Trusts

A living trust is a legal document that serves one main purpose: avoiding probate. By creating a living trust and transferring your largest assets (such as your house or small business) to it, your estate won’t be subject to probate upon your death. Here’s why: All of the assets owned by the trust aren’t considered “yours” at your death—these assets are owned by your trust, and not by you.

If you fund your trust properly, you will die owning only a few small assets in your own name, such as an everyday checking account, your car, and your furniture and furnishings. To the California probate system, you will look like someone who has a small estate, owning less than $150,000 (the cutoff to be considered a “small estate” in California and outside of the probate process). Your executor won’t need to get a court order to distribute your assets to your loved ones. Instead, your trustee will be able to settle your estate without court supervision or delay and for far less money than the statutory fees dictated by the state probate code.

If you decide a living trust is the right way to go, see Chapter 3. If you are in a blended family, see Chapter 7 to learn about ways that you can use trusts to take care of your current spouse or partner and children from previous marriages. Keep in mind that even if you decide to do a living trust, you’ll still need to create a simple will that works with it, but that will is different from a will that stands alone.

Who Should Do a Living Trust

Living trusts have several benefits:

Unlike a will, a trust does not need to be filed with the court and is not a public document.

Establishing a trust and transferring your biggest assets to it also makes it easier for people to manage these assets for your benefit if you become incapacitated later on—your successor trustee (the person you name to manage your trust after you die) can step in to manage these assets for your benefit at that point.

Finally, a trust can be highly customized to your needs: managing property for children with special needs; creating complex multigenerational trusts that are designed to minimize estate taxes; or setting up trusts to skillfully manage the competing demands of blended families.

While a will can be drafted to create complex trusts after your death, if you want to do that kind of sophisticated planning a trust is the vehicle to do it; if your estate is big enough for that kind of planning, probate would be expensive.

If you own a house in California, or expect to soon, or own assets worth more than $150,000 that do not have a beneficiary designation, and can otherwise afford it, a living trust is a good investment. In each case, avoiding probate will save your loved ones time and money in the end. If you anticipate being wealthy, with an estate worth $5 million or more, a trust with tax planning is a good idea. If you are in a second marriage, own complicated assets (like a privately held company), or have children with special needs, a trust also makes sense.

 

Living Trusts vs. Wills

 

Living Trust

Will

Privacy

 

Your trust is not a public record, and your trustee transfers assets without court supervision.

Your will is filed in the probate court and is a public record, and a judge supervises the settling of your estate.

Cost to set up

A bit more work than making a will; if you work with an attorney, costs more than making a will.

Simpler to set up; easily done without an attorney.

Hassle to set up

You have to actually transfer certain property to the trust. This requires filing deeds and filling out forms. It isn’t extremely difficult, but it is work.

No extra forms need to be filled out, and no property must be transferred.

What you can do with it

Leave property.

Name someone to manage trust assets if someday you can’t.

Leave property.

Name a guardian for your children.

Process after a death

Most trusts can be settled quickly, getting assets to the beneficiaries sooner than if there were a will.

Probate is usually necessary; costs more and takes longer than wrapping up a trust.

 

Preparing a Personal Inventory and a List of Beneficiaries

Once you’ve got the basic strategy in mind for your plan, the next step is to understand what you own. The best way to do this is prepare an inventory of your assets and property. Making an inventory will prompt you to gather all the information you’ll need to make your estate plan. You might even be surprised at what you find. For many of my clients, this is the first time that they’ve actually sat down and made a list of all of their myriad accounts. Alternatively, if you are one of those people who already has this information in a nice, neat spreadsheet, you’re already done!

Why Do an Inventory?

Knowing what your assets are will help make sure your estate plan properly deals with them. It might help you decide the will versus trust question, too. For example, if you don’t own any real estate, you might decide to designate your investment account and bank account as payable-on-death accounts (which avoids probate) and stick with a simple will. Or you might see that since you own a home, a vacation cabin, and an investment account, a trust is a good investment. Once you’ve completed the Personal Inventory, you can fill in the Net Worth Calculation Worksheet to see your assets all in one place.

A sample Personal Inventory and a Net Worth Calculation Worksheet you can use as templates in preparing your own are shown below.

Form

Personal Inventory and Net Worth Calculation Worksheet. The Nolo website includes downloadable copies of the Personal Inventory (for you to use to create your own inventory), and a Net Worth Calculation Worksheet (to create a list of your key assets in one place). See the appendix for the link to these and other forms in this book.

Without some organizing up front, it can take your spouse, partner, or loved ones months, or even years to figure out where your safe deposit box is or where your bank accounts and life insurance policies are. An inventory will make it a lot easier to settle your affairs and transfer assets to the right people. Worse, you wouldn’t want your loved ones to miss inheriting assets just because no one knew they existed.

If you don’t own many assets (for example, if you rent an apartment, have a small checking account, and a 401(k)), doing an
inventory should be fairly simple.

But if finding and organizing all of this information sounds daunting, remember that you can do it in small pieces. Keep in mind that much of this information isn’t likely to change often. After the initial inventory, you’ll just need to update when you open a new account, close an old one, or buy a new home. Or you can just take an annual look at the list to see what, if anything, has changed. I recommend that my clients do this in January, when they get 1099 forms in the mail for their tax returns.

As you start identifying and valuing your assets, don’t be overly concerned with exact financial figures. The inventory isn’t meant to substitute for a financial plan. The reason you want to try to place a value on your assets is so that you can determine, in a general way, how much would be left behind for your family and loved ones should you die unexpectedly.

How Assets Pass to Their New Owners

You also need to know what kinds of things you own so that you can be sure your estate plan properly deals with them all. You need to make a complete inventory and make sure that you deal with everything on the list. That’s what the rest of this book is for—but to get the best use of it, you need to do some homework first. I’ve also included a Current Beneficiaries List in this book (see sample in Chapter 10) that you can use to list the current beneficiaries of your retirement, life insurance, and other beneficiary-designated plans.

How to Complete an Inventory

Your inventory is really just a list of:

What you own. This includes your house and other real estate; all financial accounts (checking, savings, etc.); custodial accounts for children (discussed in Chapter 5); retirement plans and life insurance policies (discussed in Chapter 10); automobiles and vehicles; jewelry and other personal property; life insurance, pensions and annuities.

Where each asset is. This will help your executor find them after you die—it’s a list of where your accounts are held, or where your assets are stored.

How you own the asset (for example, whose name(s) are on the accounts).

How much the asset is worth. Don’t be overly concerned with exact financial figures. You basically want to place a value on your assets so you can determine, in a general way, how much you would be leaving behind should you die unexpectedly (especially important if you have children).

How to access an asset electronically. Many of us store lots of important information and assets online. Make sure that your loved ones know where you’ve stored these assets and how to access them.

 

Your Safe Deposit Box

If you have a safe deposit box, be sure to write down (on your Personal Inventory) where it is and (very important!) where the key is. If you are going to store your important estate planning documents in the box, know that in California it can take several weeks after someone dies for the executor or trustee to gain access to the box. (Chapter 12 discusses storing your estate plan in more accessible ways.)

 

Resource

Want to be even more organized? For a terrific book on how to organize all of your personal and family’s records, see Get It Together: Organize Your Records So Your Family Won’t Have to, by Melanie Cullen with Shae Irving (Nolo).

Special Estate Planning Issues When You Own Real Estate

If you own a home, you need to understand how you own it—legally, the way you hold title to it. This is important because if you own your home with others or create a deed that transfers ownership to another person at your death, the form of title affects who would own it upon your death.

If you don’t know how you own your house, you are not alone. Most people don’t remember what they put on the forms when they were signing that six-inch stack of papers to get their home loan. To find out, look for the grant deed that transferred legal ownership of your house from the former owner to you.

If you can’t find your grant deed, don’t panic—just read the tips below. If you have something called a deed of trust in that file folder that you have from when you bought the house, that’s not what you’re looking for. That’s what gives your lender the legal right to repossess your property if you don’t pay off the loan, but it isn’t the piece of paper that states that you own the house in the first place.

How to Order a Copy of Your Deed

If you have a copy of your deed or know how it’s owned (form of title), you can skip this section. Otherwise, read on.

Call your county’s recorder’s office or visit their website (it’s easy to find by doing an online search) to find out how to order a copy of your deed. Most counties allow you to order a copy in person, by mail, or by telephone. You’ll need to provide the following information: your name, the name of the party that sold you the home, and your parcel or tax identification number, which is on your property tax bill. You may need to search the county recorder’s online index to find out some of this information.

Forms of Property Ownership

Once you’ve found your deed, take a look and see what it says about how you own the property. Here are examples of what you might find:

John, as his sole and separate property (SP)

John and Mary as joint tenants (JTWROS)

John and Mary, husband and wife, as community property (CP)

John and Mary, husband and wife, as community property with right of survivorship (CPWROS), or

John, Mary, and Jane, as tenants in common (TIC).

Each way of owning property describes how the people on the deed share ownership and affects what happens when one of them dies.

Separate Property

Owning property as separate property usually means that the property is yours to give away at death to whomever you want. I say “usually,” though, because in California, which is a community property state, a spouse may own a share of such property, even though only the other spouse’s name is on the deed itself, if wages earned during the marriage were used to pay off the mortgage or make improvements on the property. (See Chapter 7 for a more
in-depth discussion on how spouses can own property and leave it to each other.)

Joint Tenancy

The most common way for couples to own property is as joint tenants. This means that they each own an equal share in the property and that when one owner dies, the survivor owns the entire property by what lawyers call “right of survivorship.” The surviving joint tenant gets the property automatically; property owned in this way can’t be left to others by a will or a trust. The reason that this form of property ownership is so common is that it allows the surviving joint tenants to avoid the probate process altogether. Joint tenancy is usually spelled out on a deed, but sometimes it is abbreviated as “JT.”

Community Property

 Married couples (and registered domestic partners as well) can own property as community property. That means that they each own a half interest in the property. Unlike joint tenants, owners can pass their halves by a will or trust upon their death. Community property is usually spelled out on a deed, but sometimes it is abbreviated as “CP.”

Community Property with Right of Survivorship

 California also allows married couples (and registered domestic partners) to own property as community property with right of survivorship. When couples own property this way, when one of them dies, the survivor automatically owns the entire property by right of survivorship, without a probate proceeding. Community property with right of survivorship is usually spelled out on a deed, but sometimes it is abbreviated as “CPWROS.”

Tenancy in Common

You might also see a deed in which multiple owners are listed as tenants in common, especially in cities where apartments are being sold to multiple owners in the hope of eventually converting each unit into a separate condominium. Tenants in common can divide their interests in unequal ways (one person can own 80% and another 20%, for example), and each owner can pass his or her interest by a will or trust at death. Tenancy in common is usually spelled out on a deed, but sometimes it is abbreviated as “TIC.”

To see how you can organize property information in your Personal Inventory, take a look at the real estate section of the sample form included in this chapter.

Transfer-on-Death Deeds: How to Keep Your House Out of Probate

Transfer-on-death deeds are an inexpensive way to transfer real property without having to go through the time and expense of probate or establishing a revocable living trust.

As of January, 2016, and lasting until January, 2021 (unless extended by the Legislature), revocable transfer-on-death deeds are now legal in California. (Revocable means you can change the deed any time before you die—for example, by naming a new beneficiary or selling your property.) Just as you can designate a bank account or brokerage account as a payable-on-death (POD) account, a revocable transfer-on-death deed lets you name beneficiaries for real property, such as your house. Upon your death, your beneficiaries become the property owners by filing specific legal forms, including an affidavit, a death certificate, and a notice of change of ownership. That’s it. No probate and no trust administration necessary.

The revocable transfer-on-death deed must be substantially similar to the statutory form in Section 5642 of the California Probate Code, which includes the name of the grantor, the full names of the beneficiaries and their relationship to the grantor, the property description, and a statement saying that the grantor hereby transfers all of their ownership in the described property to the named beneficiaries upon death.

Transfer-on-death deeds must be notarized and recorded within 60 days of signing to be effective and can be revoked at any time during the grantor’s life. If a beneficiary dies before the grantor does, their gift lapses and goes to the surviving beneficiaries, if any. If no beneficiary survives, the transfer doesn’t happen.

Transfer-on-death deeds can only be used for residential properties of up to four units (such as a single-family house), a condo, or a single tract of agricultural land that is 40 acres or less that is improved with a single-family residence.

To use a transfer-on-death deed, an owner of real property must have legal capacity to sign a contract (this is a higher standard than that required to sign a will), and must (obviously) be the owner of the property being transferred. Any such property transferred will still be subject to any liens or encumbrances that are attached to the real property, but it will not be subject to an estate recovery claim for Medi-Cal reimbursement because a transfer-on-death deed passes outside of probate. (If you are transferring your house to a family member, see Chapter 8, to learn about how to do that while maintaining your low property tax rate.)

Resource

To learn more about what property is exempt from Medi-Cal Recovery Laws, download “The New Medi-Cal Recovery Laws” booklet from the California Advocates for Nursing Home Reform (CANHR, at www.canhr.org/publications/PDFs/Medi-Cal_Recovery.pdf).

While convenient and inexpensive, transfer-on-death deeds are not going to solve other estate planning issues. A transfer-on-death deed isn’t the best way to transfer real property, and won’t be a substitute for a living trust or will and durable powers of attorney if you want to do the following:

leave your house in a trust, for example, for the lifetime benefit of one person (like your partner) but for the ultimate benefit of someone else (like your daughter)

plan to reduce estate taxes, or

make sure that a trusted person can maintain or sell the property if you become incapacitated.

That being said, transfer-on-death deeds are a great tool for people to do simple estate planning and a good alternative to probate.

Resource

Where to find California transfer-on-death deeds. For sample language and details on the state’s transfer-on-death deed form, see the California State Board of Equalization website at www.boe.ca.gov/lawguides/property/current/ptlg/other/5642.html. Also, California transfer-on-death deeds are available for sale from Nolo (search the store at www.nolo.com for this form).

Other Real Estate Issues Related to Estate Planning

Of course there are many more real estate issues you may want to research. A common one is how to transfer property ownership to your children or other family members in order to quality for Medi-Cal nursing home coverage. This topic is beyond the scope of this book. See an experienced estate planner or elder law attorney for advice on the subject.

Resource

More about property. For more information on property ownership (and just about every other estate planning topic), see Plan Your Estate, by Denis Clifford (Nolo). And for more information on domestic partners’ property rights, see A Legal Guide for Lesbian & Gay Couples, by Denis Clifford, Frederick Hertz, and Emily Doskow (Nolo).

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