The two most frequent types of calls I receive from potential new clients are the following: (1) Calls from people wondering the cost of an “estate plan”; and (2) Calls from people insisting that he/she needs a “living trust” and wondering the cost of creating a living trust. On their face, the calls seem sensible. We’ve all heard that if you “put” your property into something called a “trust” then you’ll avoid bad words like “probate” and “taxes”. It sounds like a no-brainer. However, the majority of callers throwing around buzz words and wondering price only indicate to me that there is missing a general discussion about what the hell we are even talking about. What is an estate plan? What is a trust? Does anyone really need these things?
What is an Estate Plan?
An “estate plan” is a general term for the arrangements you have made for your property after death, and sometimes for your person and property during some moments of your life (think: coma). An estate plan may include documents such as wills, trusts, powers of attorney, and health care directives. Estate plans may reference or include financial planning such as life insurance policies, retirement planning, and family partnerships. Estate plans may also last well beyond your death (ever heard of “trust fund kids”?). So, as you can imagine, it’s tough to really price an estate plan. It can be very simple–a will, a power of attorney, and a health care directive–or very complicated, employing all those words used in the prior sentences. It really comes down to your goals and wishes.
That being said, my blanket advice is that everybody should have a will and advanced health care directive, at the least. A will is useful because you can nominate an executor (the person who will be “tying up” all your loose ends, paying your creditors, filing your tax returns, etc.), you can distribute your property to your chosen beneficiaries (and more importantly exclude your undesired beneficiaries), and you can nominate a guardian in the event that you have minor children that you leave orphaned. A health care directive lets your doctor know who you appoint as your agent to make decisions on your behalf in the event that you are alive, but unable to make your own decisions (again, think coma). One main benefit of a directive is to avoid the Terri Schiavo incident, where a patient’s parents’ want different medical treatment than the patient’s husband. A health care directive also instructs your agent on end-of-life decisions (“pulling the plug”), on burial instructions, ceremonial instructions, organ donations, autopsies, etc. It’s a great document and easy to prepare. The cheapest and quickest way to draft one is to get a form from your doctor.
So, uh, do I need a living trust or what??
My estate planning experience has repeatedly taught me one thing: people LOVE trusts. They want it, and they want it badly. The word conjures up associations with wealth, control, security, and freedom from taxes. The reality is that it’s not for everyone, and they sometimes create more problems than solutions. The following are the main reasons why holding property in trust may be a good idea. If you don’t fall within one of the following reasons, chances are that you probably don’t need a trust as part your estate plan.
1. Avoid Probate. The word “probate” seems to cause fear in the minds of many, but not many people actually know what it is. When a decedent’s estate (fancy word for “dead person’s property”) goes through probate court, the court appoints someone to marshal and value the estate assets, to pay any creditors, and to distribute the property to the rightful beneficiaries. That’s it. The appointed person is usually the executor named in the will, or someone who petitions the court in the event there is no will (called an administrator). This process can take between 9 and 12 months, depending on the complexity and size of the estate. It can also cost a significant amount in fees. For an estate worth a $1 million, the estate will need to pay the executor/administrator AND his/her attorney about $24,000 EACH. Keep in mind that in the Bay Area, having just one house in the estate pushes the value of the estate to at least $600,000. Property held in trust, for purposes of probate, will not be counted as estate property. So the property is not subject to the probate procedures. This reduces the value of the estate–so lower fees–and also allows for the property to pass at a significantly sooner time.
2.Avoid Estate Taxes. The ‘T’ word! There it is. Just how property is taken “out of” your estate for probate purposes, oftentimes placing property in a trust will also take it “out of” your estate for estate tax purposes. This isn’t always true, so be sure not to assume all property held in trust is always estate tax free. Avoiding estate taxes is more recently becoming a not-so-important reason to hold property in trust. Since December 2010, Congress has allowed for a $5 million exemption for estate taxes. This means that unless you die with over $5 million of property, you will not be subject to federal estate taxes. If you’re reading this blog, you don’t own $5 million worth of property. The exemption level has a sunset provision (meaning that it terminates) this December. Last I checked this is an election year, so keep your eyes on that exemption amount come New Year’s Day.
3. Control Beyond Death. A power of attorney and health care directive both last until death. This means that once you die, any power of attorney you have out there or health care directive both terminate. Conversely, a will does not speak until death. You can have in your will that you give to your daughter your red Ferrari, and you neither need a daughter nor a Ferrari for the will to be valid (however, one may question your sanity). Once you die, the will “speaks”. However, once probate is closed, that’s it. A trust allows you to control your property from “beyond the grave”. A trust, unlike a will, must be funded with property you currently own, and it must name beneficiaries who currently exist. Beyond that, you get to dictate its terms. If you die with a minor child, you can provide that the child’s necessaries are covered but that no trust property is distributed until the child graduates college… or until the child marries… or whatever you want (so long as it’s legal and not against public policy). Minors are prohibited from owning property. They can’t legally enter into contracts. So, if you have a minor child and have a will leaving the minor property, the property will either need to be placed in a blocked account until the minor turns 18, or someone else will need to hold the property for the minor when you die. Both are rotten situations. The former requires that property sit untouched and uninvested for what could be years, and the latter requires an unreal level of faith in another human being to act in the best interest of your now-orphaned child. A trust allows someone to have control over his/her property beyond death, including providing for minors. The same can be true for pets. (Yes, there are pet trusts).
Phew! That’s a lot to digest!
What was intended to clarify the muddy waters of estate planning seems to be confusing in itself. I hope this post has at least been a good starting point for thinking of an estate plan for what it is–a tailored arrangement done during life to account for your loved ones and your property when you die. It’s not just for the wealthy. Indeed, with some strategic life insurance policies and effective estate planning anyone can care for their family in the event of an untimely death. Please do not hesitate to contact me to discuss any of the above in more detail.
Preface: Probate attorneys fees are set by statute. A lawyer’s fees in probate are not necessarily increased or decreased by more involvement with the realtor selection process.
Under ethical rules promulgated by California, lawyers must refrain from making contact with a person represented by a lawyer. The lawyer may only communicate with that person’s legal representative. This is to ensure that one lawyer does not undermine the relationship between attorney and client and to also keep the dialogue between lawyers, as opposed to splintered discussions between lawyers, parties, and lawyers with the parties themselves. However, this ethical rule is, as far as I know, unique to the legal profession. Accountants may speak to anyone else, even if that person has an accountant. Doctors may speak to any else, even if that person is the patient of another doctor.
It may seem ridiculous to limit accountant or doctor communications, but there are a few circumstances where I think people would benefit from limited communication from certain professionals. One of those circumstances is within the probate realm. As an estate goes through probate, the assets are inventoried and oftentimes sold so that the assets can become liquid to distribute to beneficiaries (e.g., a house is sold so that it can be “split” between multiple beneficiaries who do not want to live in and maintain the house). In this situation where the estate’s real property is sold, a realtor is often used to market and sell the property. The broker is hired by the estate’s personal representative (the executor or administrator).
While the personal representative of the estate is often represented by an attorney, there are no limits as to whom a realtor may contact like there are for lawyers. Therefore, a realtor can keep an eye out for the public notices denoting recent probate filings (all public records) and then cold-call each and every representative of each new probate filing. It’s something akin to ambulance chasing, except it’s more like hearse chasing! As you can imagine, the realtor has a financial interest in getting the listing–the commission. The realtor will also try to steer the client toward early marketing and to forgo any court confirmation of the sale in order to get his commission quicker and easier. Sometimes this meddling by the realtor undermines the attorney’s representation of the personal representative. Once that probate is filed and the notice is posted, the personal representative of the estate is literally bombarded by realtor phone calls, flyers, mailers, personal visits, etc. It gets overwhelming. The personal representative often feels pressure to sign the listing before he/she has authority to act on behalf of the estate. It’s ugly.
If there is a place other than the legal industry where there should be limited communication with represented individuals, this is surely one of them. With the stress of going through the funeral process, sifting through a dead person’s records and property, and answering to heirs who want their distribution of the estate, the representative must also deal with greedy realtors looking to score a listing. When trying to counsel the client to be very careful in choosing the realtor, the realtor oftentimes convinces the personal representative that the lawyer is merely dragging his/her feet. It can be an ugly push-pull. If realtors were required to communicate with the estate representative through his/her attorney, then this predatory behavior would at least be hindered. In this case, more lawyer involvement is beneficial.
We’re all going to die. I don’t mean that in a Chicken Little sort of way. I mean that in a stating-the-obvious sort of way. The jury is still out as to what happens to us after we die, but one thing that is fairly certain is that once you die you have little say over what happens to your property, to whom you give your property, and any other instructions you’d like to make from “beyond the grave.” Of course, you can have a say if you properly draft and execute a will.
Wills are cheap and easy to create. I even saw a commercial on TV where a famous lawyer advertised will drafting services online for less than $100. Even still, there are few people out there who have a will. Statistics vary, but one study shows that 55% of adult Americans do not have will.
If that’s the case, it seems like it’s not that big of a deal to die without a will, right?
Not exactly. When someone dies without a will, the person is said to have died intestate. For those keeping score at home, that means “without a will.” When you die intestate, your property (which becomes your estate’s property, since you’re dead and all) is distributed using your state’s intestacy statute. Well, we all know what intestate means, but what exactly does statute mean? A statute is a law created by the legislature, or law-making body of the government (think, Congress). So somewhere in the California Code (Probate Code sections 6400, et seq. to be exact) there is a statute (remember, that just means “law”) that says where a person’s property goes if he or she dies intestate. Well, that then suggests that if you don’t have a will when you die, then the legislature decides who gets your property.
Who cares? I don’t even own anything!
The cool thing about a will is that it doesn’t “speak” until you die. So it can dispose of property that you don’t even own yet. You don’t have anything now, but what if you start accumulating property? Or what if you are later the beneficiary of someone else’s estate? Or you marry someone else who has some property? Just as importantly, you can “cut” people out of any share of your estate if you so decide.
Let me use an example to illustrate an extreme circumstance where a will would certainly clarify any ambiguity. Hypothetically, let’s assume Harry is in a relationship with Wendy. Harry and Wendy have a child, Cheryl. Unfortunately, Harry and Wendy start having problems and decide to split up. They were never married. Harry moves on, and although he remains a loving father to Cheryl, he decides to marry his new girlfriend Greta. Greta has two children from her previous marriage. As tragedy would have it, Harry chokes on a pretzel and dies. Harry never got around to drafting a will. Under California’s intestacy statute, all of Harry’s community property and one-half of his separate property go to his surviving spouse, Greta. When Greta dies, all of her property (including the property she acquired from Harry’s estate) is now disposed of through her will, or if there is no will, by the intestacy statute. In other words, unless Greta provides for Cheryl through her own will, Cheryl will have to somehow intervene in order to assert her rights, if any, to take some of her father’s property. However, if Harry had a will providing for Cheryl, then disaster could be averted… or, at least Harry’s true wishes would be clear.
So, what’s the point? I still don’t have any more property than when this post began.
The point is that peoples’ living situations are changing constantly. These days, a Thanksgiving feast involving ex-spouses, step-children, biological children, half-siblings, etc., are commonplace. Divorces are par for the course. People are living longer and dying with considerable amounts of property. Property is being re-characterized all the time. Everyone should take the time to at least consider drafting a will.