Wills & Trusts Summary: Common Estate Planning Documents (updated for 2013)

Below are some descriptions of common estate planning documents.  Some of them will apply to you, and some of them won’t, but reading through them will help you gain a greater understanding of the estate planning process and the options that are available to you. Knowing more about these documents will also help you answer some important questions that will come up during the process, including what you would like to do with your property, how you would like to accomplish those goals, and who you would like to involve in the process.

You don’t have to tell anybody what your will (or the rest of your estate plan) says, but you should tell your executor and close friends or relatives where to find it. It should be kept someplace safe and secure, such as in a fireproof safe at your residence or office. A safe deposit box is fine for keeping a copy of your estate plan, but it should not be the only place you keep it, as it may take a long time for your family or agents to legally gain access to your safe deposit box, and they will need your estate plan documents in order to do so.

It is a good idea to also keep a list of your assets and debts. This will be extremely helpful to your executor, trustee, conservator, attorney-in-fact, or anybody that needs this information to help you with your finances if become incapacitated or die. Include bank accounts, safe deposit boxes, stocks and bonds/brokerage accounts, real estate, and other assets and debts. You should also keep a list of your professional advisors, and/or let each of them know about the others, to encourage communication and teamwork, and ensure that the proper people are contacted when you die or become incapacitated.

Will

A will is the most basic estate planning document, but it is also very versatile. The most common and well-known function of a will is to explain how you wish your assets to be distributed when you die. However, a will can be used to accomplish a wide variety of goals, including establishing a trust (a “testamentary trust”), transferring assets into an existing trust, nominating guardians of minor children, detailing burial or cremation wishes, helping plan for the orderly payment of debts, or providing for the continuation of a business. Essentially, a will can control what happens to all assets you personally own when you die, whether you own the entire asset or only a share of it.

A will does not take effect until you die, and does not control assets held in trust, or assets with independent death benefit provisions, such as life insurance policies, retirement plans, or pay-on-death bank accounts where beneficiaries have been specified (unless the beneficiary specified is your estate). A will also does not control property held in joint tenancy with right of survivorship.

However, even if all of your assets are things like life insurance that will be transferred on death, assets held in a living trust, or property owned in joint tenancy, you should still have a will. If the other joint tenant(s) dies before you and the property is in your name alone, it will be subject to your will. If a named beneficiary of your life insurance, stock, or bank account dies before you do, the assets may then be payable to your estate. If you receive an unexpected asset that isn’t otherwise accounted for, it could be subject to your will. And things like appointing a guardian for your child or specifying your burial wishes can be taken care of in your will, even if it doesn’t dispose of any assets. If you have a trust, your will may additionally serve as a backup plan – it can “pour” assets into the trust, and determine what happens if your trust is invalid.

Further, if you die without a will or other applicable estate planning documents, state law and the probate court will determine who gets your assets and who takes care of your children, and they may not choose the same people you would have chosen.

A will does not take effect until you die, and can be revoked or amended at any time before then, so long as you remain legally competent. In fact, you and your attorney should review your will periodically: changes in your personal or financial situation, and changes to the law (especially tax law), may mean that your current will no longer does everything you want it to. However, you should not change your will by crossing things out and writing in corrections; a will and its amendments must meet certain legal requirements in order to be valid, and modifying them this way may invalidate the documents. 

If you have moved to California from another state with a will that is valid under the laws of that state, California will honor that will. However, you should still have a licensed and qualified California attorney review your will, since California law will govern the probate of your will if you are a resident of California when you die, and the California probate process is very different from many other states. If you move to another state, you should have a qualified attorney licensed in your new state review your will to make sure it will carry out your wishes under the laws of your new state of residence.

Probate

When you die, your will is subject to probate. If you die without a will or other estate plan, all of your assets will be subject to probate. Probate is a court proceeding during which your executor, the person whom you have nominated to manage the distribution of your assets (one will be appointed by the court, if you haven’t nominated one), notifies your beneficiaries and heirs, winds up your affairs, pays your debts, and distributes your assets. A judge supervises the proceeding and ensures that things go forward in accordance with your will and with the law. Probate can take anywhere from one to two years, subject to a number of factors, and generally requires the payment of various court fees, attorney’s fees, and executor’s fees, which are based on the value of your estate at death and can be quite costly.

While time and cost are often cited as drawbacks of using a will and subjecting your assets to probate, supervision by a judge from start to finish can be helpful under some circumstances, especially where there is the potential for disagreement between beneficiaries or family members. Hearings may be held to resolve any problems that arise, such as when someone contests the validity of the will or claims that the executor is not doing their job appropriately. Other methods of estate planning, such as trusts, are subject to their own costs, which should be taken into account when planning your estate. In addition, many types of conflicts and challenges which increase the cost and time required by probate will increase the cost and time required to wind up your affairs whether you have a will, a trust, or any other type of estate plan, and trusts can sometimes end up in court if somebody contests any aspect of the trust administration.

Factors that can affect the cost and amount of time required to close probate include the complexity of your estate, the capability of the executor, the willingness of beneficiaries and family members to work together, any challenges filed contesting the will or any of the actions by the executor, and the quality of the estate plan in place. Outside factors such as court budget cuts and backlogs will also affect the timeline.

A simplified probate procedure may be available to transfer assets to a spouse or Registered Domestic Partner, or to deal with estates containing assets worth less than $150,000.

Durable Power of Attorney for Property

A Durable Power of Attorney is used to designate an agent to manage your assets and make financial decisions on your behalf if you become incapacitated or otherwise unable to make your own decisions. Your agent, also known as your attorney-in-fact (note that this does not have to be an actual attorney, it can be anybody you trust to make decisions for you), could be authorized to manage any of your assets that are not in a trust. Such authority can be limited to special circumstances, or it can be general. You can also provide for a springing power of attorney, which only becomes effective at a specified future date or event, rather than taking effect when the Durable Power of Attorney is drafted. You can authorize your agent to simply pay your bills, or you can empower them to handle nearly all of your affairs. No matter what authority you give your agent, you should choose someone trustworthy and capable of doing a good job.

A Durable Power of Attorney expires when you die, and cannot provide instructions for distribution of your assets after your death. This is where the will comes in.

A Durable Power of Attorney for Property can be revoked or amended at any time, so long as you remain legally competent.

Advance Health Care Directive/Durable Power of Attorney for Health Care/Living Will

An Advance Health Care Directive (AHCD) lays out your wishes regarding life-sustaining treatment, organ donation, funeral arrangements, etc., so that your agent, family members, and doctor will be informed about what you want when it comes time to make these decisions.

An AHCD authorizes an agent or attorney-in-fact (note that this does not have to be an actual attorney, it can be anybody you trust to make decisions for you) to make health care decisions for you if you become unable to do so. It also allows your authorized agent to access your medical information. An AHCD can be revoked or amended at any time, so long as you remain legally competent.

Once your Advance Health Care Directive has been finalized, you should give copies to your health care agent, your alternate health care agent, your doctor, and your family. Talk to your family about what you want, so that they understand your views on life-sustaining treatment and other health issues, and will work with you to follow your wishes when the time comes. If you are admitted to a hospital or nursing home, bring a copy.

Revocable Living Trusts, aka Revocable Inter Vivos Trusts, aka Grantor Trusts

When you create a living trust, your assets are transferred into the name of the trust, which is administered for your benefit during your lifetime and transferred to your beneficiaries when you die. There is generally no court involvement in the management of a trust (unless something goes wrong), but it’s not automatic, either.

If you create a living trust, it is common to name yourself as trustee and retain control of the assets during your lifetime. You can revoke or modify your living trust at any time while you remain legally competent. The terms become irrevocable when you die, so that your wishes must be followed. You should name at least one successor trustee (an individual or institution) to take over the management of your assets if you become unwilling or unable to continue as trustee.

Putting assets into the trust is called funding the trust. In order to fund the trust, deeds must be prepared and recorded for real estate, and bank accounts, stocks and bonds, accounts, and certificates must be transferred into the name of the trust. This process is not necessarily expensive, but it does require paperwork with each institution where you hold an account or policy.

A trust can hold both separate property and community property. If you own real estate in another state, you may want to transfer that asset to your trust to avoid probate in that other state (depending on that state’s laws). A lawyer from that state can help you prepare the deed and complete the transfer. If you own property in more than one country, you should consult an attorney in each country where you own property, as different countries often have very different laws in this area, and the perfect estate plan in one country may result in higher taxes or other negative consequences in another country.

For beneficiary designations on qualified plans such as 401(k)s or IRAs, you should seek a qualified professional’s advice because there are serious income tax issues that may arise.  Generally, tax-deferred financial accounts should not be placed into a trust, as any change in ownership triggers an immediate tax bill. However, there are specific trusts designed to handle distribution of 401(k)s and IRAs, and may be beneficial in circumstances where there are substantial retirement accounts, the beneficiaries are very young or irresponsible, or you want to maintain a level of control over their distribution.

Trusts may be designed to minimize estate taxes, though for many clients under current law income taxes and capital gains are a much bigger concern. These should also be taken into consideration when designing any estate plan. No income tax return is required to be filed on behalf of the trust during your lifetime; instead, income tax will be continued to be paid by the trust creator on their own individual or married income tax return. After your death, the trust becomes a separate taxable entity and may need to file a separate trust tax return under different income taxation rules.

Who does not need a trust?

People with few or no significant assets and simple estate plans may not need a trust. Married couples with no significant assets and no kids, who intend to leave their assets to each other, may not need a trust. However, even in these cases a trust may provide some benefits, and everyone's circumstances are different and should be discussed with an attorney. A trust may still be quite beneficial for incapacity planning, to ensure that you can be taken care of without court interference if you become ill. If any beneficiaries have special needs, or are not capable of handling money responsibly, a trust should be considered.

However, everyone should still have a will, whether or not they have a trust, and without a trust your advance health care directive and durable power of attorney will be even more crucial in case you are ever temporarily or permanently incapacitated. As a result, these documents should be updated or ratified regularly.

Who does need a trust?

People with significant assets, especially real estate, have a greater need for a trust. People who anticipate or want to protect against losing the ability or willingness to manage their own assets may also benefit from a trust. Anybody who either has special needs resulting in public benefits through SSI, Medi-Cal, or similar, or is considering leaving assets to someone with special needs, should definitely consider a trust as it may help preserve public benefits eligibility.

Disadvantages of a trust

By default, there is no court supervision of a trust. This is generally a good thing (saving time and money), but in some cases court supervision may be a good idea and remains an option if the trustee feels it would be beneficial. However, court supervision is required for most wills, and for most cases where there is no valid estate plan in place. The upfront cost of preparing a trust may be a little higher than the cost of preparing a will, though this cost is often made up in other ways. Most trustees will need to hire an attorney to make sure that the trust is administered correctly once the person who established the trust (the “settlor” or "grantor") dies, but the cost and time commitment should be less than the cost and time required for probate. You should choose your trustees or successor trustees carefully, to be sure that they are trustworthy and capable of doing a good job.

If you wish to borrow against property held in a trust, or refinance an existing mortgage on the property, lenders may require that you take an additional step - removing real property from the trust by a deed before they will agree to a loan on the property. It is critical that the property be put back into the trust after receiving the loan, in order to avoid missing out on the benefits provided by your trust. Trusts are only helpful if they contain your property.

Finally, even if you have a trust, you still need a pour over will, and any assets not in the trust at the time of your death will be subject to the pour over will (and may not avoid probate).

Important Differences Between a Will and a Living Trust

Probate proceedings are public record, and wills do not avoid probate. The records are kept at the courthouse, and in some counties are accessible online. Anybody that is interested in your probate case can request copies of the case files.

Trusts are not public record, and are much more private. However, heirs and beneficiaries still have a right to a copy of the trust upon the death of the person who created the trust. Creating a trust does not guarantee that the court will not get involved, but creating a trust and properly funding and maintaining it will greatly reduce the likelihood of court involvement and increase privacy.

Probate generally takes more time and expense to administer than a trust, and can be a very stressful way to distribute assets and pay debts after a loved one's death. Trusts generally simplify the process, though they don't make it automatic.

Other Types of Trusts

Testamentary Trusts

Testamentary trusts are established based on instructions in your will. They are established after the probate process, and do not affect the management of your assets during your lifetime. They can provide for young children and others who would need someone to manage their assets after your death, and impose limits on spending for beneficiaries who may not be mature enough to wisely handle large amounts of money just yet. Testamentary trusts can also be used to protect assets from people you don’t want to have access to them after you’re gone. But since they require probate to trigger them, they do not avoid probate and do not allow for incapacity planning during your lifetime.

Irrevocable Trusts

Irrevocable trusts can’t be amended or revoked once they are created. They are often created for tax purposes. You should be absolutely sure about your wishes for any assets that you are considering putting into an irrevocable trust before you do so. Examples of irrevocable trusts include irrevocable life insurance trusts, irrevocable trusts for children, and charitable trusts.

Special Needs Trusts

Special needs trusts are set up for people with physical or mental disabilities who either can’t manage their own assets, or would be disqualified from receiving public benefits if they were to inherit any assets. Most public benefits programs have very low income and asset limits, and inheriting even a small amount could disqualify beneficiaries from SSI, Medi-Cal, Medicare, and other programs that they depend on for housing and medical care. If you provide care for someone with special needs, or are considering leaving any assets to someone on public benefits, you should consider a special needs trust. 

Tax Considerations

Assets left to your spouse, so long as they are a U.S. citizen, or to any charitable organization, are not subject to estate tax upon the first spouse’s death. Any estate tax that might be due is essentially delayed until the death of the second spouse. 

Assets left to anyone other than your spouse, including your kids, will be taxed if that portion of your estate totals more than $5.25 million (as of 2013). The exclusion amount is essentially doubled for married couples, as each spouse is entitled to the $5.25 million exclusion. Keep in mind, however, that gifts made during your lifetime generally count toward this exclusion cap as well.

In addition, you can give assets worth up to $14,000 (2013) per year per beneficiary while you are still alive, without being subject to gift tax. In other words, you could give up to $14,000 worth of cash or assets to as many different people as you want, each and every year, without paying gift tax on the gifts. For married couples, each spouse is entitled to the $14,000 exclusion, for a total of $28,000 per year per beneficiary for the couple.

You can also pay medical expenses or tuition for anyone, if payments are made directly to the educational institution or medical provider, without owing any tax on the gift.

However, in addition to gift and estate tax consequences, you should also be aware of the potential for income tax, capital gains tax, property tax, and generation-skipping tax consequences, and should consult your attorney or CPA before making decisions based on the potential tax consequences.