Understanding the Role of a Will and Its Limitations in California Estate Planning

A will, also known as a last will and testament, is a fundamental document in estate planning. It allows you to specify how your assets should be distributed after your death, name guardians for your minor children, and appoint an executor to carry out your wishes. However, while a will is an essential component of an estate plan, it has limitations that make it insufficient on its own for many California residents. Here’s a closer look at what a will does and why it may be limiting.

What a Will Does

1. Asset Distribution A will outlines how you want your assets, such as property, money, and personal belongings, to be distributed among your heirs after you die. This ensures that your wishes are followed and can prevent disputes among family members.

2. Guardian Appointment If you have minor children, a will allows you to designate a guardian to care for them if both parents pass away. This is crucial for ensuring your children are raised by someone you trust.

3. Executor Appointment A will allows you to name an executor, the person responsible for managing your estate, paying off debts, and distributing assets according to your instructions.

Limitations of a Will

While a will is an important document, relying solely on it for your estate planning can be limiting. Here’s why:

1. Probate Process A will must go through probate, a court-supervised process to validate the will and oversee the distribution of assets. Probate can be lengthy, expensive, and public, potentially delaying the distribution of assets and exposing your estate to additional costs and scrutiny.

2. Limited Control Over Asset Distribution A will does not allow you to control how and when your beneficiaries receive their inheritance beyond immediate distribution. For example, if you want to provide for a child’s education or protect assets from creditors, a will cannot accomplish this. Trusts, on the other hand, offer greater flexibility in managing and distributing assets over time.

3. No Protection for Incapacity A will only takes effect after your death and does not address what happens if you become incapacitated. Comprehensive estate planning includes documents such as durable powers of attorney and healthcare directives to ensure your financial and medical decisions are handled by someone you trust if you are unable to make them yourself.

4. Potential for Disputes Wills can be contested, leading to family disputes and lengthy legal battles. Incorporating other estate planning tools, such as trusts, can help minimize the risk of disputes and provide clearer instructions for managing and distributing your assets.

5. Lack of Privacy Because probate is a public process, the contents of your will and details about your assets become part of the public record. This can expose your private affairs to public scrutiny. In contrast, trusts allow for a more private transfer of assets, keeping your financial matters confidential.

While a will is a crucial element of any estate plan, it has significant limitations that can make it insufficient on its own for many individuals and families in California. To create a comprehensive estate plan that addresses all your needs and provides greater control, flexibility, and privacy, consider incorporating additional tools such as trusts, powers of attorney, and healthcare directives.

Everyone Needs an Estate Plan

Everyone needs an estate plan. If you’re reading this, you’re probably aware that you–and if you’re married, your spouse–need an estate plan. But there are other people in your orbit who need an estate plan: your young adult children. Your children over the age of 18 need an estate plan, too. Yes, even the ones who still live at home, and the ones who you claim as a dependent. Or are away at college. Especially the ones who are away at college.

Anyone over the age of 18 is a legal adult. The law does not care whether that person is gainfully employed or playing video games until 3am. Reaching 18 years of age is an arbitrary measurement, and when it’s achieved, congratulations! You’re an adult! What comes with adulthood is the ability to make your own legally binding decisions… and to prohibit others from making decisions for you. Even if those “other people” are paying your bills, claiming you as a dependent, or housing you.

Consider your typical college-aged child. They are likely over the age of 18, or very close to it. They likely do not have much life experience, and base decisions on the nearterm. They may be impressionable, or easily persuaded. Or maybe they’re just a knucklehead. If, as a result of a misguided decision, they were to become incapacitated (think: hospitalized, detained by law enforcement, involved in a crisis, etc.), no one can make decisions for them without a properly executed estate plan–e.g., will, durable power of attorney, healthcare directive. Not even their parents! You see, they’re adults. Any institutions your adult child interacts with will only want to speak to your child. University administration, banks, authorities, doctors, school officials, etc., won’t listen to anyone but your adult child. They are legally prohibited from listening to third parties, even the parents of an adult.

A young adult crisis can appear anywhere. It could be a party gone wrong. It could be from spending time with that one friend of theirs that they just can’t seem to get enough of. Maybe it was a date or hangout gone wrong. If you, as a parent, want the ability to make decisions on behalf of your adult child, they must execute estate planning documents giving you that authority. Otherwise, you are at the mercy of the local court process. And if your child is away at college, that court process might be very foreign to you, operating under laws you aren’t familiar with.

Maybe your child is in a crisis because someone injured them. With a properly executed estate plan, your child could authorize you to file a lawsuit against the perpetrator on their behalf, speak to school administrators on their behalf, speak to the government on their behalf.

It doesn’t matter that your adult child doesn't “own much”. Or that they aren’t employed, or that they live at home, or live in a dorm and come home often. None of those things matter if your child is over the age of 18, and you want the ability to make decisions on their behalf in a crisis. Everyone needs an estate plan.

Avoid the Estate Planning Banana Peel – Don’t Add Your Kids on Title to your Home

Many aspects of estate planning in California center around avoiding the need for probate court. Adding a death beneficiary to an asset or adding a co-owner on title to an asset are two ways to avoid the need for probate court when you die. Well, that sounds pretty easy. Why don’t we all just do that and call it a day?

Put simply, adding co-owners and death beneficiaries to assets only addresses one situation: that 1) you have died; 2) that the beneficiary/co-owner is alive upon your death; 3) the beneficiary/co-owner has capacity and is over 18 years old upon your death; and 4) the beneficiary/co-owner does not have creditors nipping at their heels.

There are so many other scenarios that can occur. All it takes is for any one of the four factors above to be false for your simple plan to become complicated and problematic. Besides that, there are tax implications for adding people onto title of your assets.

Let’s illustrate with a common example. A widowed parent owns their own home, and has two children. The parent figures that it would simplify everything if they add their two children onto the title of the home. That way, upon the parent’s death, the children receive the home, in equal shares, without having to go through the probate process.

What gets overlooked in the above hypothetical are the following considerations.

Death v. Incapacity

The only way to avoid probate in the above example is if the parent dies. If the parent is alive but incapacitated (think: dimentia), the children have no authority to act on the parent’s behalf by simply being co-owner of the home. They now co-own a property with someone who cannot handle their own affairs. They would have needed the parent to sign other legal documents, such as a durable power of attorney.

Similarly, if either or both children are incapacitated upon the parent’s death, probate may be necessary to receive ownership of the home unless the incapacitated child signed a durable power of attorney themself. Or, if the children are not yet adults, they cannot own the property outright without legal guardians involved.

Creditors

When the parent adds the children as co-owners to any asset, including their home, the parent is entangled with that child’s financial life, including that child’s creditors. If the child is going through a divorce, or someone is suing them for money, or the child owes taxes or other debts, or if the child files for bankruptcy, then the parent’s home is now subject to the claims of the child’s creditors. The parent may have to figure out how to get their own house back!

Additionally, if the child faces those same creditors after the parent’s death, there is no barrier between receiving full ownership of the house and satisfying those creditors’ claims. Ultimately, the child may end up losing the home to their creditors, which is certainly not what the parent intended.

Creating Capital Gains and Property Tax Problems (Click here for a brief discussion of taxes)

When the parent adds their children to title, the parent is making a lifetime gift of that portion of the home. This in itself could trigger a gift tax issue. Gift tax issues aside, typically when the parent dies, all of the capital gains built into the home are eliminated upon the parent’s death. But only the capital gains associated with the portion of the home that the parent owned at death. The portion of the home that the children now own do not receive what is called a “step up in basis”, and the capital gains for the children’s portion are not eliminated. If the parent kept all 100% interest in the home, then all of the capital gains would have been eliminated. After putting their children on title during their life, the parent is now creating a capital gains problem for the children when they sell the home.

Adding multiple children to title can also create adverse property tax implications. Even though Prop 19 has severely limited the application of the parent-child exclusion, there is still an opportunity for the parent to transfer the home to one or more children with some relief from increased property taxes. However, when more than one child is added as co-owner, the home could get reassessed when one child decides to buy another out in the future since that is not a parent-child transaction.

Co-ownership and death beneficiary designations lack any nuance. It only asks whether an owner is dead, and if the answer is yes, ownership of the asset automatically transfers to the other co-owners or to the beneficiaries in whatever condition or circumstance they find themselves. No discretion is involved to determine whether it’s a “good” situation to transfer ownership of the home to the co-owner or beneficiary. Additionally, It makes you vulnerable to your co-owners’ creditors, and could create unforeseen tax issues for your loved ones. The only surefire way to transfer ownership of your assets, with nuance and full discretion, is to create a comprehensive estate plan.

What is... a conservatorship?

This is part of an on-going series of blog posts titled the "What Is..." series, where we attempt to explain, in simple terms, common estate planning terms and concepts. To read other posts in this series, click here.    

When we started contemplating this blog post, the world was a vastly different place. Now, in the time of COVID-19, we have unfortunately seen this issue come up many times. This is how it happens: George is 42 years old. He had a high fever and difficulty breathing, and was rushed to the hospital. He was intubated and suddenly isn’t conscious anymore. He didn’t create an estate plan in advance, and did not execute any powers of attorney. 

Who can pay his bills? Who can make medical decisions for him? 

In the absence of powers of attorney, a loved one would need to petition the probate court to become George’s conservator. A conservatorship proceeding protects a person who cannot care for himself or his property. The person making the request is asking the court to appoint him or her as the conservator to make those decisions on behalf of George. The conservator may only make decisions on George’s behalf that are in George’s best interest. 

What does the conservator actually do? 

There are three types of conservatorships: 

1) of the person - in which the conservator manages one’s personal needs (physical, medical, food, clothing, shelter)

2) of the estate - in which the conservator manages one’s financial affairs 

3) of both the person and the estate - in which the conservator does both #1 and #2.

Can conservatorships end? 

Yes. If George gets better, and can manage his own finances and healthcare decisions, the conservatorship is no longer necessary and it terminates. If George passes away, then the obligations of the conservator terminate as well. 

Why do you want to avoid a conservatorship? 

1. It is a court proceeding. This means it takes place in a public forum and it can take a long time to complete. 

2. It is time that your loved one is away from you. You and your loved one want to be together, not in court. 

3. The person who is appointed the conservator may not be the person you want to be making those decisions. 

4. It can be expensive. A court maintains oversight over a conservatorship to ensure that the person is being cared for and that the conservator is meeting fiduciary obligations. Court oversight means paying an attorney an hourly rate, and paying an accountant every year to prepare “accountings” to demonstrate to the court that the conservator is appropriately using George’s funds on George.

Typically, conservatorships occur when someone loses capacity suddenly and is unable to make decisions for him or herself unexpectedly. (See our previous post on incapacity). For example, George was 42 years old and didn’t anticipate being hospitalized. He was generally healthy, and hadn’t yet executed powers of attorney. 

What can I do to avoid a conservatorship? 

It’s actually fairly straightforward. We strongly recommend creating financial and healthcare powers of attorney so that your loved ones can avoid a court proceeding and you can name who YOU want to make these decisions for you. And if it’s appropriate, a living trust can also help in times of incapacity. Contact us today for a free consultation.

You Should Really Have a Power of Attorney Right Now

We have written blog posts about powers of attorney in the past, but we want to reiterate the importance of having a power of attorney right NOW, during our shelter-in-place measures to mitigate the spread of COVID-19. 

Powers of attorney give someone else authority to make financial and/or medical decisions on your behalf without your loved one having to go to court to get that authority. 

Here are a few of the most frequent conversations we have had in the past few weeks: 

1. I’m married, so my spouse can just do it. No, just because you’re married, your spouse does NOT have authority to make financial or medical decisions on your behalf.

2. I’ll just deal with it when the time comes. When the time comes, you or your loved one may be in the hospital and already incapacitated. This means that someone would have to go to court to obtain the legal authority to act on your behalf. And, unfortunately, right now, courts are not operating at full capacity due to COVID-19. Remember that the court is also limiting in-person contact, and is only hearing emergency matters. (Not to mention that going to court involves time, expense, and a public proceeding that could be humiliating for the person who is incapacitated.)

3. I’ve been quarantined for 14 days, so I’m not sick. We hope not. We really hope not. But if you leave the house to get groceries or someone drops something on your doorstep, your 14-day clock resets. Why count days? Have a plan in place NOW, when you can and when you don’t have to rely on courts to take action. 

A power of attorney is most effective when utilized in conjunction with a comprehensive estate plan. But, if you do nothing else right now, please execute Powers of Attorney.

When It May Not Be So Simple - Family Dynamics

A lot of estate planning deals with issues other than clients’ net worth. The highest hurdles are often tethered to people and not things.

A vast majority of our clients contact us with at least one similar goal in mind: how can we care for our children when we are unable?

This may seem simple. Our clients want to leave everything leftover upon their deaths to their children in equal shares. Done deal.

Sometimes, however, there may be some… complications.

• What if their children are very young?

• What if their child has a physical or cognitive disability? 

• What if their child is incapacitated or has disabilities at the time this gift is made?

• What if their children have addiction issues?

• What if their children are financially or developmentally immature?

• What if they don’t like their children’s life partners? Or fear an acrimonious split?

• What if they want to care for their children, but not spoil them to the point where the children do not pursue their own careers or endeavors?

No one desires any of the above. But these challenges can happen, and must be met with a plan. Our clients need peace of mind that the resources left for a child actually aids that child—in the state they are in at that time, which may involve some of the above conditions. Clients need to be assured that their child’s inheritance doesn’t inadvertently hurt loved ones, or unexpectedly go elsewhere (like to an estranged spouse or lurking creditor).

Or, sometimes, the client doesn’t want anything to go to their children; or they want an uneven distribution to their children. That’s even more of a reason why they need to have a plan specifying their desires. Simply “leaving it up to them” or giving one child substantially less than another, without proper safeguards, invites litigation. And we know our clients certainly don’t want their life’s work to go into a bunch of litigation lawyers’ pockets.

We talk through these situations with clients, as well as ones with more complicated family dynamics. They are hard conversations, but so important to talk about and plan for now, while you can.

Call and schedule a consultation. We can talk about the above, or anything else specific to your situation.

What is... a Power of Attorney?

This is part of an on-going series of blog posts titled the "What Is..." series, where we attempt to explain, in simple terms, common estate planning terms and concepts. To read other posts in this series, click here.

At its core, a power of attorney is the legal authority to act for another person. It allows someone to “step into the shoes” of another person.

There are generally two types of powers of attorney relevant to estate planning: medical and financial. A financial power of attorney is sometimes called “durable power of attorney for financial management,” or just “durable power of attorney.” The medical power of attorney is sometimes called the “advance healthcare directive”, “healthcare directive”, or “living will”.

A power of attorney gives someone the power to make decisions on your behalf when you either can’t do so yourself or don’t want to do so. This may arise when you are incapacitated or elderly; it may also arise if you are out of the country and need someone to call your bank for you, or sign a check for a contractor, or something similar.

The key is to ensure that you have given someone the power of attorney in advance of when you need them to act. Once you are deemed incapacitated, it’s too late to sign a power of attorney. Without the necessary powers of attorney in place, someone will need to go to court to obtain the legal authority to act on your behalf in a time of crisis. Going to court always involves time, expense, and the public nature of court can sometimes be humiliating for the person incapacitated.

So when should you have a power of attorney? Now.

Contact us for a free consultation.

Why Would A Married Couple Need an Estate Plan?

A friend of ours recently contacted us with a question that comes up frequently enough that we wanted to share it with you:

We are married and everything that we own is held jointly/as community property. We own a house, but we don’t have any kids and we don’t have debt. Do we need a will? Do we need a trust? Why?”

To the first question: Yes. You need a will whether you have a trust or not. (Click here to read our post explaining what a will does. And click here to read about intestacy.)

To the second question: Yes. Because….

1. Incapacity. Incapacity doesn’t just mean “coma,” (although that counts too). It could be that you went into surgery and had a bad reaction to the anesthesia so you can’t quite function as you ordinarily would. Or, it could be dementia. It could be temporary, it could be permanent. But a will doesn’t let you address incapacity situations. A trust allows you to plan for incapacity. It allows you to plan for who will take care of your assets and use your assets for your benefit when you are still living. Just because your spouse is on title doesn’t mean your spouse has all the necessary authority to care for you in the event of your incapacity. (Click here to read our previous post explaining incapacity.)

2. Contingency planning. Wills do not address all contingencies. But trusts allow for lapses and contingency planning. What if your spouse becomes incapacitated after you do? What if your intended beneficiary is still a minor (younger than 18 years old)? What if your intended beneficiary has a substance abuse or gambling issue later on? What if your intended beneficiary has special needs and requires means-tested government assistance? What if your beneficiary predeceases you? These issues can be planned for in a trust in advance.

3. Probate. You’ve probably heard the term “probate” with some negative connotation. (Click here to read our previous post explaining probate.) If you have a trust, you avoid probate. Probate takes about 18-24 months; it’s a public proceeding; and it’s expensive.

So even if you are married and hold everything jointly, that may only ensure that your spouse receives your assets upon your death. But so many other scenarios can occur. We might recommend you consider a trust given your situation and desires. All of our recommendations depend on your specific family and estate planning goals. To ascertain what is best for you we would need to meet with you, in a free consultation, to understand your goals, assess and explain your options, and provide you with a recommendation tailored to your situation. Call or email us today.

Everyone Needs an Estate Plan (Example 4)

Estate planning is much more than just death planning and giving away your stuff after you die. It’s also about planning for circumstances that you may not have anticipated. 

This post is the third installment in our "Everyone Needs and Estate Plan" series. If you missed Examples 2 & 3, click here to read it.

Example 4: You’re young (but over 18), single, and healthy. You decide that since you don’t have kids, and you haven’t made your first million--yet--that you don’t need an estate plan. On your way to work, someone is texting while driving, doesn't see you, and rams right into you. You're severely injured, and the paramedics are called to the scene. You’re taken to the hospital, and you lay there incapacitated. You're still alive, but you lack the ability to make your own decisions or to handle your own affairs. We’re essentially in Example 1, except that you don’t have a spouse here. Your parents and siblings fly in from out of town, and they want to be involved with your care, they want to alert your boss as to what happened, and they also want to sue the negligent driver who caused your injuries. Unfortunately, all they are given is the bad news that they have to go to court to obtain the appropriate legal authority to handle any of your affairs on your behalf.

You're an adult. No one can make decisions for you... except you. Even though your relatives are here--your parents, at that--and they likely have your best interests in mind, no one has the legal authority to handle your affairs for you absent your permission (power of attorney) or court order (conservatorship).

Hyperbole aside, estate planning is about crisis planning before there is a crisis. Once a crisis occurs--be it a bad reaction to medication, or plain bad luck--it’s often too late to have the proper tools in place to face that crisis head-on. In all likelihood you’ll need to spend a great deal of time and money acquiring the right tools to deal with the crisis. It means more stress on top of an already stressful situation for your loved ones.

As you can see, estate planning has little to do with your net worth or your age. It is important for everyone at any age. If you’re over 18 years of age, you absolutely need an estate plan. If you have a family, especially minor children, that need for an estate plan merely increases. To determine what kind of estate plan you and your family needs, please contact us for a free initial consultation.

Everyone Needs an Estate Plan (Example 1)

Estate planning is much more than just death planning and giving away your stuff after you die. It’s really about choosing decision makers for those moments when you cannot make your own decisions. Sure, you cannot make your own decisions after you have died. But there are several other times when you can end up incapacitated (meaning, you cannot legally make your own decisions) and yet still be very much alive. Without proper planning, you may leave your loved ones stuck in a tough place if you ever become incapacitated.

Over the next few weeks, we're going to walk through a few examples.

Example 1: Imagine that you and your spouse have decided to take your young kids skiing. As you’re taking photos of the little ones having a blast, you don’t realize that you’re headed right for a tree. Before you know it, you collide with the tree, you’re out cold, and you’re rushed to the hospital.

The good news is that you’re still alive. The bad news is that you’re now incapacitated. You’re unable to make your own medical and financial decisions. This could last for hours (medication), days (coma), or a lifetime (permanent brain damage). It’s now up to someone else to make those decisions for you.

Your spouse decides that he or she is going to step in and make decisions for you, including handling your finances, dealing with the insurance company, dealing with your boss, and maybe suing the ski resort. Unfortunately, you didn’t do any estate planning, so your spouse now has to go to court and have a judge issue an order that allows your spouse to make those decisions for you. This is the key: Your spouse can’t do any of the above without the appropriate authority.

You see, just because you’re married doesn’t give your spouse the legal authority to make decisions on your behalf. You have to give your spouse (or someone else) that power before you become incapacitated. This is commonly done in a power of attorney.

The same principle applies if you have children over the age of 18. Unless your child has given you the legal authority to make decisions on his or her behalf (for example, via a power of attorney), you need a court order to have that legal authority. And getting a court order when your child or loved one is incapacitated can be stressful and overwhelming, not to mention expensive. This is why it’s important to plan ahead.

Check back next week for another example of why everyone needs an estate plan. If you would like a free one-hour consultation to discuss your estate planning goals, do not hesitate to contact us.