California Estate and Elder Law Helps to Understand Estate Planning Options
Living Trust Strategies for Everyone
◦ What are some basic estate planning strategies that should always be addressed?
No two individuals will have the very same estate plan. But there are strategies that we might refer to as basic estate planning strategies, be-cause they are employed in most estate plans:
1. Avoid intestacy (dying without a will or living trust).
2. Avoid the probate process to the greatest extent possible, through use of a revocable living trust instead of a will and other techniques.
3. Take advantage of basic tax code provisions that significantly defer and reduce federal estate taxes.
4. Apply the annual gift tax exclusion.
5. Name proper beneficiaries for bank accounts and pension and other retirement accounts.
6. Include directions for handling your financial affairs in the event of your incapacity
7. ‘Where there is a family business or a family farm, include provisions to enable the business or farm to be continued, sold, transferred, or discontinued as smoothly and efficiently as possible.
It is important to remember that an effective estate plan can be achieved only after a careful and detailed review of all your specific circumstances and objectives.
◦ Why should I consider life insurance as part of my estate plan? Life insurance plays three basic roles in your estate plan:
1. It provides the funds to replace your income for your loved ones upon your death.
2. It can provide the funds to pay for estate taxes, if necessary
3. It can replace any wealth that you might leave to a public or private charity (This is commonly referred to as redirecting your “social capital”—or redirecting the amount of your estate that is subject to estate tax.)
◦ How do I make my plan flexible for changes in my circumstances?
Change is the nature of our world. Over time, laws will change, our family situations will change, our finances will change. Flexibility in planning means two things. First, it means establishing a plan that does not have to be revised every time there is a change in the laws or in a family situation. Second, it means establishing a plan that can be revised to reflect a change in the laws or in a family situation.
A good professional estate planning attorney will be able to help you identify your goals in such a way that future changes in your family’s situation can be addressed now in the plan. A good planner will know how to build flexibility into the plan.
◦ What documents should I expect to have in my estate plan?
At a minimum, a proper estate planning portfolio using living trust—centered documentation will often contain:
· A section for personal and family information
· A list indicating the location of original documents
· A list of the names, addresses, and telephone numbers of professional advisors and representatives
· A list of all insurance and annuity contracts which you own, so that your intended beneficiaries will not overlook these assets
· A thorough and easy-to-understand revocable living trust agreement for you; or, if you are married, one trust for you and one for your spouse or a joint trust for both of you, if appropriate
· An affidavit of trust which contains pertinent facts about your trust that can be used to prove the trust’s existence while preserving the privacy of its detailed provisions
· Pour-over will(s)
· A memorandum of distribution to dispose of your personal effects (what form this takes will depend upon the state in which you reside)
· Special powers of attorney which designate agents to fund your revocable living trust with any assets that you may acquire after you are disabled and are unable to fund the trust yourself
· A durable special power of attorney for health care which grants your designated agent the power to make medical decisions on your behalf
· A living will which directs your physician as to when to discontinue life-support systems and invasive medical procedures
· Memorial instructions which contain your burial or cremation wishes and information on the type of memorial service that you would like to have
· An anatomical gift form which allows you to make a gift of all or part of your body for medical or dental education and research, therapy, or transplant procedures
· A property agreement which severs and terminates your joint tenancy interests to allow such interests to be properly transferred into your revocable living trust (and your spouse’s interests into his or her trust, if applicable)
· A section in which you can insert documentation of the assets which have been transferred into your revocable living trust
· A detailed letter from your attorney setting forth complete instructions for transferring assets into your trust (The Living Trust Workbook, by Esperti and Peterson, Viking-Penguin, 1994, is a complete guide on the subject.)
Living Trust Strategies with Prenuptial Agreements
◦ My spouse and I have a prenuptial agreement. How does it affect our estate planning?
Any prenuptial agreement can dramatically alter or nullify an estate plan. For example, the agreement may contain provisions for the dis-position of assets at death, and, if not, it probably defines property ownership—which property is considered separate and which is considered joint. In any event, a marital agreement will likely have a very significant impact on both tax and nontax estate planning, so it is essential that you provide your estate planning attorney with a copy of the agreement.
Because the terms of a marital agreement may conflict with the estate planning goals of one or both spouses, ethical considerations may require that each spouse be represented by a separate estate planning attorney.
◦ I have substantial assets and am thinking about getting married. Could a living trust be used to keep the assets I own before my marriage segregated from property acquired by me and my new spouse during marriage?
Yes, a living trust is an excellent way to keep separate property assets, or assets acquired before a marriage, from being commingled with assets acquired during the marriage. Since the premarital assets are in a living trust, it would be impossible to commingle them with the assets acquired during the marriage unless the commingling was intentional.
To give even more protection, consider coupling a living trust with a premarital property agreement specifying that all the assets in the living trust, along with their increase in value, interest earned, dividends earned, and future appreciation, are immune from the claims of the other spouse and his or her creditors.
To properly accomplish your desire, you must discuss your state’s marital property laws with an attorney who practices in this area of the law.
◦ I am thinking about getting married. Should I consider a pre-nuptial agreement as part of my estate planning?
Many clients find it hard to consider the need for a prenuptial agreement when they are about to be married. To them, asking their future spouse to sign such an agreement implies a lack of trust. Consequently, they miss an important opportunity for estate planning. Obviously, a young couple without substantial assets usually does not need a prenuptial agreement. But when either of the parties brings significant financial worth to the marriage or when other factors, such as the existence of children from a previous marriage, come into play, a prenuptial agreement is particularly warranted.
A prenuptial agreement can cover a wide range of topics, from sharing future earnings to waiving rights of inheritance to dividing housework. The most effective prenuptial agreements result when each party is represented in the process by independent counsel. Independent representation reduces the chance that a party will be able to set aside an agreement on the grounds of undue influence, mistake, or fraud.
Full disclosure of assets is also an important factor in creating a durable prenuptial agreement. With full disclosure, the effectiveness of a successful attack on the agreement is remote.
Living Trust Strategies for Single Parents
◦ I am a single parent with minor children. Is there special planning I should consider to take care of my children and myself?
As a single parent, it is critical that you design a plan that will designate a guardian for your minor children and a trust for the management of any assets they inherit. Generally, if you are divorced, the legal guardian will automatically be the surviving parent by law. However, there are times when the surviving parent is unwilling or unable to accept his or her parental responsibility. Therefore, it is important to designate in your pour-over will who you would nominate to be your children’s guardian in the event you have the right to do so. In addition, you should choose the person or institution you believe to be the best to serve as a trustee to manage your children’s assets. For the children’s best interests to be served, select a guardian and trustees who will coordinate their efforts to care and provide for the children.
It is equally important that you structure a plan to care for yourself and your children in the event you become disabled. One way of doing this is to use a power of attorney. Unfortunately, even good powers of attorney fail because third parties, such as attorneys, banks, and lenders, can choose whether or not they will rely on the document and act on it to release assets. Thus, at the time when you need it, a power of attorney may not be effective, and then a guardianship will be required. Another negative aspect of a power of attorney is that is does not provide any direction to the agents on what action they should take; therefore, agents can make decisions according to what they deem appropriate rather than on the basis of your directions or instructions.
The most effective disability planning tool for providing for yourself and your children is a fully funded living trust. You can include instructions for the care of your children and yourself in the event you become disabled, thereby eliminating the need for a guardianship or conservatorship to manage your assets.
By establishing a carefully drafted living trust plan and transferring your assets into it, you can avoid probate and will be well on the way to implementing a comprehensive estate plan to care and provide for your children and prevent unnecessary hardships, delays, and expenses in the event you become disabled or incapacitated.
Living Trust Strategies for Single Individuals
◦ Is a living trust a good idea for someone who is single and has no children?
Yes, if you are widowed or divorced or have never married, a living trust offers protection for your estate. It can completely eliminate living probate and death probate. Further, if properly funded, your trust will ensure that your hard-earned wealth will be distributed to those you designate in the trust in the manner that you decide.
◦ What goals should I have if I have no family?
Because more people today are choosing to remain single, and because people in general are living longer, it is becoming more common to encounter individuals who have no families. For such people, the para-mount concerns are disability planning—finding the appropriate persons or financial institutions to carry out their decisions regarding disability and health care—and determining their beneficiaries.
Usually, these individuals have lifelong friends who can carry out the decisions and/or be named as beneficiaries, or they participate in worthy causes or organizations that lend themselves to charitable planning.
Strategies for Second Marriages
◦ In in a second marriage, and I want assurance that my children will inherit my assets. How can I accomplish this goal?
First, it is important that you have a fully funded living trust—centered estate plan. In some states, a spouse’s right to make a claim for a spousal share applies only to assets passing through the probate court. Therefore, in those states, if your assets are held by a living trust, you can provide for your spouse as you deem appropriate without having your plan rewritten by a statutory spousal claim.
Additionally, if you want to provide for your spouse but also want to guarantee that any assets remaining at your spouse’s death will go to your children, you could include a specially designed qualified terminable interest property (QTIP) trust for your spouse as part of your living trust plan. Such a trust provides to the spouse during his or her lifetime all income generated from the assets held in the trust and the right to make nonproductive property productive.
If guaranteeing your children’s inheritance is a central concern, an irrevocable life insurance trust can provide you with the means to pass a definitive amount of funds to your children. If such a trust is properly drafted and maintained, not only will your children receive this benefit but you also receive the benefits of not having the life insurance included in your gross estate and not having to sacrifice any applicable exclusion amount to establish it.
◦ I want to take care of my husband but also guarantee that my children, from my former marriage, are properly taken care of. What strategies can I follow to achieve both goals?
Here are some alternatives you should consider:
1. To avoid having your children wait until both you and your husband die, consider giving them lifetime advances on their inheritance; or leave them a portion of your estate at the time of your death and the remainder after the death of your husband.
2. You can leave all or a portion of your estate in a QTIP trust. In this way, your husband gets all the income from the assets and the trust qualifies for the marital deduction; yet it preserves as much of the principal as you elect to pass to your children after your husband’s death.
3. You and your husband can enter into a post-marriage agreement that clearly sets forth the rights each of you has in the other’s estate.
Then you can each create an estate plan that will carry out your planning objectives and will be legally binding.
4. You can trust your husband to carry out your estate plan at his death. This alternative is fraught with danger, however, and should be avoided if you want to guarantee that your children ultimately receive a certain portion of your estate.
◦ My children are adults, established in their careers and financially secure. What’s wrong with leaving everything I own to my new spouse and stepchildren, who need it much more than my children do?
There is nothing inherently wrong with disinheriting your adult children. However, in making this choice, consider carefully the emotional and psychological consequences to your children. Even if your children do not need your money, they may feel hurt that you did not leave them an inheritance. If you do disinherit certain children, consider meeting with them and explaining why you have made this particular choice. An alternative way to address this would be to write a letter to them, delivered before or after your death.
◦ My spouse and I each have children from a previous marriage. Are there any special planning strategies we should consider?
When both spouses have children from previous marriages, special care must be taken in the estate planning process. There is no one solution that is right for every situation. Your estate planning team needs to understand your goals and desires for all the children. If the second marriage occurs when the children are adults, the considerations are usually financial. If the children are younger, other issues are involved.
A living trust is a particularly good vehicle for making sure that each spouse’s respective property is passed on to his or her own children. It allows you to tailor instructions to your trustee concerning the needs of family members, rather than turning control over to the court.
It is extremely disturbing to hear about situations in which one spouse received property from the other spouse and then left it to his or her own family to the exclusion of the predeceased spouse’s children.
You can easily resolve this problem by establishing a trust for the benefit of your surviving spouse and including directions specifying that the balance of your trust estate be passed to your children. You can make whatever provisions you desire for your surviving spouse. He or she can be the trustee and have access to income and principal as you direct. However, the ultimate disposition of the trust estate remains subject to your control and direction.
◦ My new bride and I each have two children from previous marriages. Do we have any special estate planning needs?
Planning for the “blended family” is among the most challenging aspects of basic estate planning. Dying with no will or a simple will almost always produces unintended consequences, frequently with disastrous results. While goal and priority setting is an important part of the estate planning process for everyone, it becomes especially important in meeting the objectives of a blended family if a proper balance between competing interests is to be achieved. Many unsuccessful second marriages might have survived, and certainly much heartache could have been avoided, if these issues had been addressed before the marriage.
◦ What are some of the competing interests in a blended family?
Here are some examples of competing interests which can be present in the blended-family environment:
· Between your children and your new spouse, who is to get what, and when will they get it?
· After the death of your new spouse, will you divide your assets among your children and your spouse’s children, or will you give them exclusively to your children?
· Are you leaving your property outright or in trust for the benefit of the children?
· Are you treating assets that were owned by you and your spouse at the time of your marriage the same as assets that are the product of the marriage?
· Do you wish to make gifts to your children or expenditures for their education and health during your life even if doing so means that your new spouse will have less after your death?
· How do couples in second marriages deal with these issues?
There is no such thing as a typical answer, not even a majority answer. Experience shows that couples vary dramatically in how they strike a comfortable balance between these competing interests. Among the influencing factors are:
· The relative ages of the two sets of children
· The respective ages of the spouses
· The relative financial, educational, health, and other needs of the spouses and their respective children
· The quality of the relationship between the spouses and their respective relationships with each of the two sets of children
Strategies for Unmarried Couples
◦ What special challenges do unmarried couples have in planning their estates?
The unlimited marital deduction applies only to couples deemed married under state law, making it harder to eliminate estate tax on the death of the first partner of an unmarried couple. One method of paying federal estate tax is to purchase life insurance on each person, using the proceeds to pay the estate tax.
◦ My partner and I are not married, but we regard each other as the equivalent of a spouse. Do we have any special planning needs?
Because the law treats married couples differently from unmarried couples, and because society makes certain assumptions when dealing with a spouse, you and your partner do, indeed, have special planning needs. First, consider carefully what powers and authority you want to give each other during a period of mental incapacity and after death. Then ensure, through a competent attorney, that you each have legally enforceable documents granting those powers and authority. Some states have presumptive statutes that make this difficult because family members are favored over others.
Second, consider writing a letter to those family members who might legally or practically presume that they will be in charge of you and your affairs in the event of mental incapacity and after your death. The letter should explain what you have done and why, and it should request that they not interfere with your wishes.
◦ My life partner and I are concerned about what will happen should one of us become incapacitated or die. Neither of our families is truly accepting of our relationship. What can we do to protect what we have?
The marriage contract imposes certain rights and obligations on a husband and wife. Such obligations include the duty to support each other and provide necessaries; in some states, there is protection from disinheritance, and so on. In the absence of such a marriage contract, the partners must fashion their own agreement.
These agreements are sometimes called living-together agreements or prenuptial agreements. They are enforceable as contracts provided that they are supported by “fair and adequate consideration,” which, in this context, generally means that there is full disclosure between the partners. Such agreements can cover almost anything the couple considers important, such as ownership of particular items of property used in the household; how jointly acquired assets are to be divided in the event of a breakup; and each partner’s obligation, if any, with respect to supporting a disabled or even unemployed partner, and for how long. Each partner should expect to carry disability income insurance and health insurance.
To protect one another in the event of incompetence or death, each of you should consider living trust—based planning, with cross designation of one another in representative capacities. This will enable each of you to retain control over your joint estate and be involved in the decision-making process. Your living trusts can also handle property distribution on death to avoid probate.
To read more about this subject and many other estate planning topics visit California Estate and Elder Law
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