Estate Planning
IN STATE OF CALIFORNIA
Living Trust
Because probate is time-consuming, potentially expensive and public, avoiding probate is a common estate planning goal. A living trust (also referred to as a “revocable trust,” “declaration of trust” or “inter vivos trust”) acts as a will substitute, although you’ll still also need to have a short will, often referred to as a “pour over” will.
How does a living trust work? You transfer assets into a trust for your own benefit during your lifetime. You can serve as trustee, select some other individual to serve, or select a professional trustee.
In nearly every state, you’ll avoid probate if all of your assets are in the living trust when you die, or if any assets not in the trust are held in a manner that allows them to pass automatically by operation of law (for example, a joint bank account). The pour over will can specify how assets you didn’t transfer to your living trust during your life will be transferred at death.
Essentially, you retain the same control you had before you established the trust. Whether or not you serve as trustee, you retain the right to revoke the trust and appoint and remove trustees. The trust doesn’t need to file an income tax return until after you die. Instead, you pay the tax on any income the trust earns as if you had never created the trust.
A living trust offers additional benefits. First, your assets aren’t exposed to public record. Besides keeping your affairs private, this makes it more difficult for anyone to challenge the disposition of your estate. Second, a living trust can serve as a vehicle for managing your financial assets if you become incapacitated and unable to manage them yourself. A properly drawn living trust avoids conservatorship proceedings and related costs, and it offers greater protection and control than a durable power of attorney because the trustee can manage trust assets for your benefit.
A lawyer! Don’t try to do it yourself. Estate and trust laws are much too complicated. You should seek competent legal advice before finalizing your estate plan. While you may want to use your financial advisor to formulate your estate plan, wills and trusts are legal documents. Only an attorney who specializes in estate matters should draft them.
Selecting a guardian for your children
If you have minor children, perhaps the most important element of your estate plan doesn’t involve your assets. Rather, it involves who will be your children’s guardian. Of course, the well-being of your children is your top priority, but there are some financial issues to consider:
- Will the guardian be capable of managing your children’s assets?
- Will the guardian be financially strong?
- Will the guardian’s home accommodate your children? Taking the time to name a guardian or guardians now ensures your children will be cared for as you wish if you die while they’re still minors.
Whether you choose a will or a living trust, you also need to select someone to administer the disposition of your estate — an executor or personal representative and, if you have a living trust, a trustee. What does the executor or personal representative do? He or she serves after your death and has several major responsibilities, including:
- + Administering your estate and distributing the assets to your beneficiaries,
- + Making certain tax decisions,
- + Paying any estate debts or expenses,
- + Ensuring all life insurance and retirement plan benefits are received, and
- + Filing the necessary tax returns and paying the appropriate federal and state taxes.
A trustee’s duties are similar but related only to assets held in the trust — plus he or she would also serve should you become incapacitated. An individual (such as a family member, a friend, or a professional advisor) or an institution (such as a bank or trust company) can serve as executor, personal representative, or trustee. Many people name both an individual and an institution to leverage their collective expertise. Nevertheless, naming only a spouse, child or other relative to act as executor or personal representative is common, and he or she certainly can hire any professional assistance needed. But make sure the person doesn’t have a conflict of interest.
For example, think twice about choosing a second spouse, children from a prior marriage, or an individual who owns part of your business. The desires of a stepparent and stepchildren may conflict, and a co-owner’s personal goals regarding your business may differ from those of your family.
Also make sure the executor, personal representative or trustee is willing to serve. The job isn’t easy, and not everyone will want or accept the responsibility. Even if you choose an individual rather than a professional, consider paying a reasonable fee for the services. Finally, provide for an alternate in case your first choice is unable or unwilling to perform when the time comes.
