California Estate Planning, Wills & Trusts
Although no one likes to think about dying, there are good reasons to prepare for this inevitable event by setting up a plan to distribute one's estate after death. A person's estate consists of all his or her property and possessions, including bank accounts, real estate, furniture, automobiles, stocks, bonds, life insurance policies, retirement funds, pensions, and death benefits. If a person plans well, his or her estate can be passed on after death quickly, easily, and subject to fewer taxes.
This chapter discusses the most common estate planning tools--wills and trusts. Living wills (called natural death act declarations in California), and conservatorship are discussed in the Elder Law Chapter.
Wills
A will is the most common document used to specify how an estate should be handled after death. Anyone designated to receive property under a will is called a beneficiary. A will can be simple or elaborate, depending upon the size of the estate and the wishes of the person who makes it--the testator. Many types of post-death instructions may be included in a will. A will may dictate who should receive specific items of furniture, artwork, or jewelry. A will may name a guardian who will take care of minor children should there be no surviving parent. A will even may be used to disinherit a child if the testator does not want the child to receive any part of the estate. The options for what a person can do with a will are varied, but there are limitations.
Requirements for a Valid Will
Each state sets different formal requirements for the creation of a legal will. In California, a person must be at least 18 years old in order to make a legal will. In addition, he or she must be of sound mind, which means that the individual has no mental disability that prevents him or her from understanding the full nature of the document he or she signs.
In California, a person can make a will in one of three ways. A handwritten will, also called a holographic will, is valid in California provided that all of the material provisions of the will are handwritten by the testator, and the will is dated and signed by the testator. A handwritten will does not have to be notarized or witnessed, but having it signed by witnesses is a good idea.
California law also provides for a "fill-in-the-blanks" form will. The form will is designed for people with modest estates. It allows a person to leave the estate to his or her children or spouse, and also allows the testator to give money to one other person or charity. The form will also provides for naming of a guardian and an executor. Form wills can be ordered from the California State Bar.
Third, and finally, a will can be prepared by a third party, usually a lawyer. A lawyer who prepares wills also can give advise regarding the many ways to leave property and the tax consequences. This type of will must be signed by the testator in the presence of at least two people who are not beneficiaries under the will. These witnesses also must sign the will.
Individuals must sign their own wills, but if they are illiterate or otherwise incapacitated, they may direct another person, in the presence of witnesses, to sign for them. A will is valid until it is revoked or superseded by a new will. Individual provisions in a will can be changed by a codicil, which is described below.
It is not necessary to hire an attorney to create a will. Anyone can create a will, as long as he or she pays close attention to the details outlined above. Making a will to disperse a small estate is particularly easy if the testator uses the form will. The simplest will in history ever to be declared valid by a court contained only three words: "All to wife." However, a lawyer's guidance is very helpful to deal with complicated property holdings or an estate with many assets, especially if they are located in several different places. An attorney can ensure that the transfer of property described in the will is done in a way that minimizes the survivors' tax liability. In addition, a complicated estate may require documents other than a will, such as a trust agreement, to ensure that all of a person's wishes are carried out.
Personal Representative
A will typically appoints someone called a personal representative to carry out the specific wishes of the decedent. The personal representative should be a trusted friend or family member who should be made fully aware of his or her duties before the decedent dies. A personal representative must do many things, including collect and manage the decedent's assets, collect any money owed at the time of death, sell any assets, if necessary, to pay estate taxes or expenses, and file all required tax returns. Because a personal representative is allowed to charge a fee for doing this work, choosing a friend or family member who is also a beneficiary to fill this role may be a good choice, because he or she may opt not to charge the full amount allowed by law. To ensure that the personal representative is someone chosen by the decedent, it is wise to name one or more contingent personal representatives who can take over the responsibilities of the primary personal representative if the primary personal representative is unable to assume the responsibilities of the position.
If a person does not name a personal representative in his or her will, state law establishes the order in which a probate court appoints relatives to act as personal representative. If none of these family members agrees to be the personal representative, the probate court may appoint a professional administrator to do the job.
Appointing a Guardian for Children
A person with minor or dependent children may name in a will a guardian to care for those children should there be no surviving parent. If a person fails to name someone to assume the role of guardian, the probate court appoints someone. The person chosen by the court will usually be a close relative or friend, but it may not be the person the parent would have chosen. It is important that the potential guardian understand the provisions of the will and be willing to accept the responsibilities of being a guardian. Also, it is wise to name an alternate guardian should the primary guardian be unable to accept the responsibility. Of course, the selection of a guardian for children is likely to influence how the parent wants to distribute his or her property. The parent may want to give property to someone only if the recipient accepts guardianship of a child. In this way, the guardian is given the financial resources to care for the child.
Planning for Incapacity
People drafting wills often use the opportunity to plan for the possibility of their own incapacity. By preparing a document called a durable power of attorney, they can give another person of their choosing full legal authority to act on their behalf should they become unable to handle their personal and financial affairs. Without a durable power of attorney, a person's family might need to go to court to have someone appointed to handle the person's legal affairs. If a power of attorney is made part of the will, it is essential that the will be made known to family members before the testator becomes incapacitated. If a will is kept secret, locked away in a safe deposit box until a person dies, it will be too late for the durable power of attorney provisions to be useful.
Some people also use a document called a durable power of attorney for health care to make health care decisions in advance should they subsequently become incapacitated. Creating a durable power of attorney for health care is discussed in the Elder Law Chapter.
Restrictions on Wills
In California, spouses acquire possessions and real estate called community property. Spouses own this property equally, and therefore only one-half of the community property can be included in each spouse's will. In order to protect spouses and dependent children, some laws prevent a person from disinheriting a spouse or child. In California, a testator can disinherit a spouse in a will if any of three circumstances is established. First, a spouse is disinherited if the testator's failure to provide for the spouse in the will was intentional and that intention is apparent in the will. Second, a spouse is disinherited if the testator provided for the spouse by making a transfer outside the will, and the testator intended that the transfer be in lieu of a testamentary provision. The intention is shown by statements of the testator, from the amount of the transfer, or by other evidence. Finally, a spouse may make a valid agreement waiving the right to share in the testator's estate. Occasionally this happens through a prenuptial agreement. For example, a second spouse may agree that an entire estate will go to children from a first marriage.
Absent one of these three circumstances, a spouse who is not otherwise provided for in a will receives a share in the decedent's estate consisting of the testator's one-half of the community property or quasi-community property plus a share of the separate property of the testator equal to what the spouse would have received if the testator had died intestate, up to one-half of the value of the separate property. A person may legally disinherit a child by clearly specifying in a will that the child not receive any of the estate.
There are other limits to a will. Anything owned in joint tenancy with another person will go to the surviving joint tenant. Arrangements must be made to end the joint tenancy before death if one joint tenant does not want the other to inherit the jointly held property. Because there may be significant tax consequences in doing so, these changes should be made only after consulting an attorney. Some possessions are not considered part of the estate because they are already promised to someone else. For example, a testator may not specify in a will that someone other than the beneficiary of a life insurance policy gets the benefits described in that policy. However, a person may designate his or her estate as the beneficiary of a life insurance policy. In this case, the money from the policy will be added to other estate assets and will be distributed according to the will. Similarly, the money from a retirement plan goes to the persons named on the plan, regardless of whether they are beneficiaries in a will. Laws designed to uphold public policy also limit what can be done with a person's assets after death. For example, conditions in a will encouraging someone to do something illegal or immoral in order to inherit money or property would not be enforceable.
Changing and Updating Wills
The provisions of a will are valid until they are changed, revoked, destroyed, or invalidated by the writing of a new will. Changes or additions to a will may be included in a document called a codicil. Codicils must be written, signed, and witnessed in the same way as wills. Wills are not changed legally simply by crossing out existing language or writing in new provisions. In order to avoid making a new will or codicil each time a person's possessions change, a will can specify that personal property is to be distributed according to instructions outlined in a separate document. A person then revises the separate document as often as necessary, without observing all of the formalities required to change the will itself.
If someone dies with a will that is not up-to-date, people may not be provided for adequately. For example, a person chosen to be a personal representative or guardian may have died or fallen out of favor with the author of the will, or a favorite charity may no longer exist. A significant amount of case law has dealt with how a probate court is to proceed with a will that has become unenforceable because of changed circumstances. These headaches can be avoided if a will is reviewed at least every two years and revised for major changes in tax laws, for personal events such as births, deaths, marriages, divorces, or for significant changes in the size of the estate. In California, a divorce automatically revokes any distribution to the former spouse. It is also a good idea to review a will if its author moves to another state, because the new state of residency may have different inheritance and tax laws.
Dying Without a Will
If a person does not have a will or has not adequately planned for the distribution of his or her estate at death, survivors may face a complicated, time-consuming, and costly process. Often survivors wind up having to pay more taxes on their inheritance than they would have paid had there been a will or other estate planning tool. To provide for surviving friends and relatives, or to support favorite causes or charities, a person should plan for the distribution of his or her estate after death. With planning, an estate can be distributed as fairly as possible with as little tax burden as legally allowed.
When a decedent leaves no will or other comparable estate planning tool, he or she is said to have died intestate. Jurisdiction over wills and trusts is in the superior court sitting in probate. When a person dies intestate, the probate court steps in to divide the decedent's estate, according to a formula provided by the state inheritance laws. Under the state inheritance laws, the probate court uses formulas set by the legislature to divide a deceased person's possessions among any surviving relatives.
A probate court applying the state inheritance laws first deducts from the estate the funeral expenses and any unpaid medical bills, taxes, family allowance expenses, and other debts owed. If the decedent was married, the surviving spouse receives all of the community property. If the decedent has a surviving spouse and no children, parents, siblings, nieces, or nephews, the entire estate, after these deductions, goes to the spouse. If there is one child, grandchild, parent, or sibling, the surviving spouse receives one-half of the intestate estate and the other surviving relative receives the other half. If there is more than one child, more than one grandchild, or at least one child and one grandchild, the spouse receives one-third of the intestate estate and surviving children and/or grandchildren receive equal shares of whatever is left of the estate after the spouse's share is deducted. If one of the decedent's children dies before the decedent, that child's share passes to his or her living descendants. Anyone entitled to inherit a portion of an intestate decedent's estate is known as an heir.
One problem with relying on a probate court applying state inheritance laws to distribute an estate is that it may not distribute the estate in the manner the decedent would have wanted. State inheritance laws only recognize relatives. The inheritance laws never permit the probate court to support a decedent's close friend, lover, or favorite charities. If no relatives are found, the estate goes to the state. Clearly, for most people writing a will or creating a trust is advisable.
Trusts
A trust is another estate-planning device frequently used to manage the distribution of a person's estate.
Mechanics of a Trust
To create a trust, the owner of property (grantor) transfers the property to a person or institution (trustee) who holds legal title to the property and manages it for the benefit of a third party (beneficiary). The grantor can name himself or herself or another person as the trustee. A trust can be either a testamentary trust or a living trust. A testamentary trust transfers the property to the trust only after the death of the grantor. A living trust, sometimes called an inter vivos trust, is created during the life of the grantor and can be set up to continue after the grantor's death or to terminate and be distributed upon the grantor's death.
Unlike a will, which in some cases can be drafted without the help of an attorney, a trust should never be drafted without the aid of a lawyer. Many complex laws regulate trusts. Trusts must be carefully structured if they are to take into account the size and composition of the estate and take advantage of beneficial tax laws. An experienced attorney should always assist in drafting a trust so that it is valid, meets the needs of the estate, and does not conflict with any previously drafted will.
Advantages and Disadvantages of a Trust
Trusts have many advantages over wills. The advantages depend on whether a living trust or testamentary trust is chosen. All trusts have the advantage of allowing the grantor to determine who receives the benefit of the money, when it is received, and what conditions must be met. If a spouse is unable or unwilling to manage assets, if children are minors or are unable to handle money responsibly, or if a beneficiary is disabled, creating a trust can be a better way of passing on assets. Creating a living or testamentary trust is an especially popular way of providing for beneficiaries' future educational or medical costs.
Some advantages are particular to living trusts. First, a living trust can give its grantor substantial tax advantages. Second, possessions held in a living trust are not subject to estate administration by the probate court after the grantor dies. Survivors do not have to reveal the details of any possessions held in trust through the public filing process that takes place during probate. In addition, if the grantor owns real estate in another state, establishing a living trust for the title to that property may allow survivors to avoid probate in the other state. A living trust can free the grantor from the burden of overseeing his or her financial affairs, because a trustee manages all the assets of a living trust. More importantly, a living trust allows a trustee to manage the trust funds in the event that its creator becomes incapacitated or mentally or physically unable to oversee his or her possessions. If a living trust contains all of a person's assets, then he or she may not need a will, and his or her survivors may be able to avoid probate. If only part of a person's possessions are held in living trust, then a will is necessary to distribute those items in the estate not placed into a trust. However, a "pour-over provision" in a will can place any possessions remaining upon death into a pre-existing living trust.