Estate Planning FAQs
NOTE: This section will help address many of your questions about estate planning. However, the information contained in this section is for educational purposes only and does not serve as legal advice or opinion. Your place of residence, particular circumstances, or changes in the law may affect whether the information in this section applies to you. You must consult with a tax or estate planning professional licensed in your state before using or relying on any of the information in this section.
Table of Contents
You want to ensure your affairs are properly managed if you become incapacitated. Your estate plan can and should provide for management of your financial affairs and your medical care in the event you become incapacitated.
You want to protect your family on your death. A properly-drafted plan preserves wealth and provides for the disposition of your assets to loved ones after your death. In some cases, it may be appropriate to set up a Living Trust so that a person with financial experience can manage your assets for family members who are too young or inexperienced to handle financial matters or to help protect your children from creditors. Assets in a Living Trust are not subject to probate.
You want to save on estate taxes. As of January 1, 2023, if on death, your assets (including life insurance and pension benefits) total over $12.92 million, a properly-drafted estate plan could save your family estate taxes (money that should go to your loved ones, not the government).
The cost depends on many factors. Generally, the more complicated the plan, the higher the cost. Fees may range from as low as $8,000 for a basic estate plan for a single client to as high as $100,000 for more advanced estate planning.
Can I make changes to my estate plan after I sign it? How much will it cost to make changes?
Some parts of your plan may be “irrevocable” and cannot be changed. For example, if you give assets away, you cannot get them back. Some people want to set up trusts to fund the college education of their children or grandchildren and these trusts usually are irrevocable.
You can change your Will or Revocable Living Trust at any time. Amendments to your plan are typically charged on an hourly basis. However, you might need an entirely new plan (costing as much as or more than your original plan) if your circumstances materially change or if there are significant changes in the law.
If you are interested in creating or updating an estate plan for your family, please contact us to obtain an information packet and to schedule a meeting. The information packet will provide important information about your family’s circumstances and objectives, save time during our meeting, and get you thinking about the kind of plan you want. After reviewing your information packet, we will be in a better position to advise you about your estate planning options.
Please also provide us with a copy of the Grant Deed to your home and any other real property you own, a copy of your title insurance policy/ies, a copy of any partnership or operating agreements of companies you own, a copy of any bank/brokerage statements, and any other relevant documents. If you already have an estate plan, please also provide us with copies of your current Will, trust, power of attorney, health care directive, premarital agreement, buy-sell agreement, partnership agreement, and any other documents that might be relevant to our discussion.
Probate is a court-supervised proceeding. A probate judge will decide whether you have left a valid Will, and the judge will then appoint an Executor, whom you can designate in your Will. The Executor will make a list of your assets, pay your debts, file any required tax returns, manage and invest your assets, and prepare an accounting of all income and disbursements during this time. When the Executor’s work is done, the judge will issue a court order transferring to your designated beneficiaries the legal title to your assets. If you die without a Will, also referred to as dying “intestate,” the probate judge will still appoint a Personal Representative or Administrator to manage your estate but your assets will be distributed to your heirs according to California intestacy laws, which may or may not reflect your wishes.
Probate can last anywhere from 6 months to three years.
Generally, any assets that you own in your individual name must be probated.
Many assets do not go through probate, including assets held in a Living Trust, joint tenancy assets, bank trust accounts, assets such as life insurance, annuities, IRAs and retirement plan benefits that have a designated (non-minor) beneficiary, and assets passing to a surviving spouse.
The cost depends mainly on the size of the probate estate. There are fees payable to the probate court and to a court-appointed appraiser (these can run several thousand dollars), but the main costs of probate are the fees payable to your Executor and the Executor’s attorney for the work they do. In California, state law sets a fee for “ordinary services” by the Executor and the Executor’s lawyer. As of 2014, that fee is based on the estate’s gross assets and income, as follows:
4% on the first $100,000,
3% on the next $100,000,
2% on the next $800,000,
1% on the next $9,000,000,
And lower fees above that.
If you name co-Executors, they split one fee. The fee is the same no matter how long the probate takes (although as more income is earned, the amount of the fee will increase). Depending on the size of the estate and the work done, the Executor and the Executor’s lawyer may also charge extraordinary fees for extraordinary services such as tax-related work, litigation, or the sale of real property.
A “Revocable Living Trust” (also referred to as a revocable trust or a living trust) sets forth a legal relationship between the creator of the trust (often referred to as a “Settlor,” “Trustor,” or “Grantor”), the beneficiaries of the trust assets, and the trustee who manages the trust assets for the benefit of the beneficiaries. If you establish a Revocable Living Trust, you can be the initial trustee and designate a successor trustee to serve upon your incapacity or death.
Just signing a Revocable Living Trust will not avoid a probate. A Revocable Living Trust allows you to avoid probate only if, during your lifetime, you transfer legal title to your major assets out of your individual name and into the trust (this is often referred to as funding your trust).
You still will need a Will to deal with assets that have been left out of the Revocable Living Trust, either intentionally or inadvertently. (For example, you might inadvertently forget to transfer a small bank account into the trust). This kind of Will is called a “Pour-Over Will” because the Will directs the probate court to “pour over” your estate into the trust.
You can control all of the assets in your Revocable Living Trust, serve as the initial trustee, and retain the right to revoke or amend the trust at any time during your lifetime.
The successor trustee can start managing your trust immediately after your death for the benefit of your family or any other designated trust beneficiaries.
You can minimize (and in certain cases entirely eliminate) estate taxes through a properly-drafted Revocable Living Trust. A trust established under a Will (known as a “testamentary trust”) can also be drafted to minimize taxes.
If you become incapacitated, the successor trustee can immediately start managing your trust assets for your benefit, thereby avoiding the need for a costly and time-consuming conservatorship proceeding. However, there are other approaches that you can use to avoid a conservatorship, such as a Durable Power of Attorney. Also, community property is not subject to a conservatorship if one spouse is still competent.
A Revocable Living Trust will not protect your assets from creditors. However, a Revocable Living Trust (or a testamentary trust) can protect assets held for your beneficiaries from their creditors after your death.
The best way to hold title to your house depends on many factors, including whether you own your house alone or with another person, whether that other person is your spouse, to whom you want to leave the house on your death, the income tax basis in the house, and whether you have a Revocable Living Trust.
To transfer real estate into a Revocable Living Trust, you will need to sign and record a new deed. (There should be no property tax reassessment on transfers of a primary residence and certain other real estate to a Revocable Living Trust.) To transfer partnership interests, securities, and deeds of trust to a Revocable Living Trust, you will need to execute “Assignments.” To transfer your existing bank and brokerage accounts to a Revocable Living Trust, you will need to change title on the accounts or close the accounts and transfer the funds or securities to new accounts owned by the Revocable Living Trust (the internal policies of your financial institution will determine which course you will need to follow).
The Executor and successor trustee are often individuals you trust and who have some business acumen. This may be a family member or friend or it may be a bank, trust company, or private professional fiduciary.
The guardian of your minor children should be an individual (or individuals) who is willing and able to raise your minor children if you are unable to do so, because of incapacity, death, or another reason. You should choose someone with whom your children will get along and who would have the time, ability, and inclination to look after them. Obviously, the guardian should be someone who has a similar philosophy to yours on how to raise children and who would respect your wishes on such matters as religion and schooling.
If you are considering naming someone much older than yourself (for example, your parents), consider whether they will have the stamina and tolerance for noise that it takes to raise children through the age of 18. If the guardian lives in another city, how will the children react to the move? Will the children be easily accessible to other members of your family? Is there a big gap in the standard of living you enjoy and that which the guardian enjoys?
If you leave assets to a minor child outright, then the court must establish a guardianship to manage the assets for the child. This is both expensive and cumbersome. When the child turns 18, he or she will receive the assets; but it may harm the child to receive your assets at such a young age.
The California Uniform Transfers to Minors Act (CUTMA) lets you transfer assets to a custodian who will administer the assets until your minor child reaches the age of 21 (if you make a lifetime gift) or the age of 25 (if you make a gift at death).
Finally, you can transfer assets to a minor through a trust. A trust protects young or financially inexperienced beneficiaries and can also save taxes. The trustee will make distributions to the child or for the child’s benefit according to the distribution instructions you set forth in the trust document. You can control the date when the trust ends and there is generally no limit on the age of distribution. You can also keep the assets in trust for the child’s lifetime. Assets held in trust for a child can be protected from the child’s creditors and from the child’s spouse (or ex-spouse) while the assets remain in trust.
Each child can have his or her own trust or you can set up one single, common trust (or “Pot Trust”) for all children until the youngest reaches a certain age. There are pros and cons to each approach.
Using separate trusts means that if one child goes to a very expensive school or has high medical costs, the other children’s shares cannot be used to subsidize that cost. Older children do not have to wait for the younger children to reach a certain age before they receive their inheritances. By contrast, a “Pot Trust” allows the funds to be available for all the children while they are growing up and getting an education. When all the children have achieved a certain age (typically 21years), the trustee then divides the remaining trust assets into separate trusts for the children. The Pot Trust is generally used where there may be insufficient assets for each child to have his or her own trust or if the Settlors wish to ensure that all of the trust’s assets are available to all the children in the event of medical emergencies, unequal educational expenses, etc. When there is a big age gap between the oldest and youngest child, the Pot Trust may force an older child to wait a long time to receive his or her inheritance. There is also the risk that one child’s needs may exhaust the entire Pot Trust.
The age depends on your philosophy and the maturity of the child. Some people do not like the idea of ruling from the grave and they provide for distribution when the child turns 18. Others feel that a child should inherit money only when the child is more mature.
Often, a trust will provide for distribution in installments. Most people learn how to handle money only by handling (and losing) it; and most people do not have the opportunity to handle money until they are in their mid 20’s, at the earliest. A fairly common provision is that the child will receive one-third of the assets at 25, another one-third at age 30, and the balance at age 35. Thus, if a child were to spend all the assets distributed at age 25, he or she would still have the other two installments to enjoy later. However, some people prefer to set the ages later, to force their children to earn their own living and become productive members of society, or to assure that some funds will be left when the children are in their retirement years.
Finally, some people believe that assets should remain in trust for the child’s lifetime in order to afford the maximum protection against creditors. Sometimes (especially with large estates) there may be substantial tax benefits if you keep part of the inheritance in trust for the child’s life.
Planning for Incapacity
Without a Durable Power of Attorney or Revocable Living Trust, a court probably would have to appoint a conservator to act for you if you became incapacitated. California law lists the relatives who have priority in being appointed as your conservator or you may nominate a conservator while you have the capacity to do so. The court supervision, accounting, and reporting requirements are similar to those in a probate estate, except that the court also requires additional investigations and reporting in order to protect the incapacitated person from unscrupulous or inept conservators.
By giving another person your “Power of Attorney,” you authorize him or her to sign your name and take other actions for you concerning your assets. A “Durable” Power of Attorney remains effective even if you become incapacitated. Typically, a Durable Power of Attorney only becomes effective when you are no longer able to handle your own affairs, although you may prefer to make it effective immediately.
There are some assets (like social security benefits or retirement accounts) that you cannot assign to a Revocable Living Trust. There are other assets that you may simply forget to transfer to your trust. Therefore, a Durable Power of Attorney is important if you want to avoid a conservatorship.
With an “Advance Health Care Directive,” you authorize another person (your “agent”) to make your medical decisions for you when you are no longer able to make such decisions yourself. Your physician can act on your agent’s orders without incurring liability for doing so. Your Directive can express your wishes about being kept alive on life support systems if you are in a vegetative state and other end-of-life preferences. It can also express your wishes regarding organ donations and the disposition of your remains.
Under California law, the “Living Will” is part of the Advance Health Care Directive, which can state your desire not to be kept alive artificially on life support systems.
The person designated as Executor or successor trustee is typically also named as the agent (or attorney in fact) under one’s Durable Power of Attorney.
The person named as agent for the Advance Health Care Directive should be someone who will carry out your wishes regarding your medical care, life support, and the disposition of your remains. This person need not be the same person to whom you delegate responsibility for your assets under your financial power of attorney.
In general, estate taxes are taxes imposed on the value of assets that you own when you die. Generally, if the net value of your assets passing to someone other than your spouse is more than an “applicable exclusion amount,” there will be a tax.
California does not have a state estate tax or inheritance tax. The federal estate tax for 2023 is 40% of your estate in excess of your available lifetime estate tax exemption amount. In 2023, the exemption amount is $12.92 million per person. This amount is adjusted for inflation each year.
The estate tax is completely distinct from income taxes and other taxes. Note that if you own assets in a state other than California, or if you own assets outside the United States, then there can be additional state or foreign estate taxes or inheritance taxes.
If your spouse is a United States citizen, there are no estate taxes on assets passing to that spouse, either outright or in certain kinds of trusts, because there is an unlimited marital deduction for assets passing to a surviving spouse. (There are special, complex rules if your spouse is not a United States citizen, despite your spouse’s legal residence in the U.S. or immigration status.) Note that the unlimited marital deduction allows only for a deferral of estate taxes on assets passing to a surviving spouse. All such assets remaining in the surviving spouse’s estate at the surviving spouse’s death will be taxed at that point.
As long as your surviving spouse receives all the income for life from your assets, and no one other than your spouse receives the benefit of these assets while your spouse is living, you can take advantage of the unlimited marital deduction and still control who receives those assets at your spouse’s death. This entails using a “QTIP Trust” as part of your Will or Revocable Living Trust. (If you wish, your spouse can also have the right to receive principal from the QTIP Trust for living expenses.)
You should make gifts if you want and can afford to do so. If you have more than enough assets to enjoy for the rest of your life, including emergencies, you should consider making gifts. Making lifetime gifts takes property out of your estate and is thus an easy way to reduce your estate taxes. Lifetime gifts will retain your income tax basis (whereas gifts made at your death receive a new basis equal to the value of the asset as of the date of your death).
Each person can give $17,000 to each beneficiary each year without incurring any gift or estate taxes. In addition, you can pay any person’s school tuition (directly to the educational institution) and any person’s medical bills (directly to the health care provider) without incurring any gift taxes, regardless of the amount of your gift. Finally, up to $12.92 million given away during your lifetime will not give rise to any gift taxes. (However, any part of this $12.92 million exemption used during your lifetime will not be available to reduce your taxable estate when you die.)
There is a special rule for gifts to a beneficiary through a Section 529 “college savings plan” run by a state government, such as California’s Golden State ScholarShare Savings Trust (www.scholarshare.com). As noted above, a person is entitled to give $17,000 per year to a beneficiary without incurring any gift taxes. With a qualified 529 Plan, a person is entitled to gift up to five times the annual exclusion amount of $17,000 (or up to $85,000) in one year without incurring any gift or estate taxes. However, if you were to make such a gift in year one, you could not make a tax-free gift to that same beneficiary over the next four years (the gift effectively “uses up” an equal amount of your annual exclusion gift for that beneficiary for the year of the gift and the four following years). Still, this can make sense because the beneficiary’s fund begins to earn income on the full amount of the gift beginning in the first year you make the gift. Regardless of the size of the gift in any given year, a qualified 529 Plan is an attractive estate planning device for several reasons. Although the donor remains the owner of the funds and retains control over the account, including the ability to change the named beneficiary, to withdraw funds from the account (subject to a penalty if used for other than qualified educational purposes), to transfer ownership of the account, and to name a contingent account holder, the contributions to the account are excluded from the donor/owner’s gross estate for estate tax purposes. Moreover, when used to pay qualified educational expenses, the income on the account grows tax-free for both state and federal purposes and is excluded from the donee’s gross income. Another significant benefit for the beneficiary is that the 529 Plan is not considered an asset of a student for purposes of federal student financial aid. Parties considering a 529 account should consult a tax expert because there are complex tax implications that may not be obvious.
Generally, you can make gifts to your spouse without paying gift tax. Although such gifts are technically subject to tax, there is an offsetting unlimited marital deduction for assets passing to a spouse. (Again, there are different rules if your spouse is not a United States citizen.)
You can make gifts to a spouse or child in trust. Technically, the $17,000 annual gift tax exclusion does not apply to gifts made to a trust. However, if you want to use the child’s $17,000 annual exclusion gift in connection with a gift to a trust, then the trust must contain a withdrawal power and you have to give the child a window of opportunity (generally 30 days) during which to withdraw the funds that you have put into the trust. If you make a gift to a spouse in trust, the trust has to satisfy certain requirements to qualify for the marital deduction referred to above.
The GST tax is a transfer tax imposed on all gifts and distributions from you (or a trust established by you) to a grandchild (or great-nephew or great-niece) or an unrelated persons more than 37.5 years younger than you. The primary device for not paying the tax is the GST tax exemption. Each individual is given a GST exemption equal to the applicable exclusion amount, which is $12.92 million in 2023. Because of the GST tax exemption, the GST tax usually is relevant only in larger estates.
When a GST tax is imposed, it is imposed at the highest estate tax rate and is imposed in addition to the estate or gift taxes on transfers. Generation-skipping transfers are subject to tax at a flat rate of 40%, in addition to the gift or estate tax that will be payable on the transfer.
Gifts made during your lifetime using your $17,000 annual exclusion may save both estate and generation-skipping transfer taxes. It is therefore desirable to make these gifts if you are in the financial position to do so. Similarly, you should consider optimizing your $12.92 million GST tax exemption by giving some or all of this amount to grandchildren. Alternatively, you could carve this amount out of your regular lifetime gifts and leave it in trust for children during their lifetimes and then to grandchildren after the children die.
Life insurance is an important part of many estate plans. It can provide cash liquidity at the time of death to pay estate taxes. It can provide an “instant estate” to replace your salary and thereby provide for and protect your family. Finally, because it is possible to have the proceeds of life insurance excluded from your estate for estate tax purposes, it may be an effective way of lowering your estate taxes.
The amount of life insurance will depend upon several factors, including the amount of cash that your heirs will need to pay taxes and other expenses; the amount of liquidity you leave to your heirs (outside of insurance proceeds) with which to pay taxes and other expenses; the standard of living that you want your heirs to have after your death; and the available cash that you have to pay the premiums.
The cost of life insurance will vary according to the type of insurance, your age and health, and the amount of protection you want. Generally, the type of life insurance you buy will depend on how long you plan to keep the coverage. For example, if you are buying the insurance to help cover estate taxes on a valuable closely-held business, a policy that builds cash value (such as a whole life policy) might make the most sense because the need for cash will not likely go away. If you are taking out a policy to supply a standard of living for your children until they finish college, then a term insurance policy (which does not build cash value) may be sufficient because you can anticipate that these heirs will become self-supporting after a certain time.
Because estate taxes are usually payable only after the death of a surviving spouse, if you are buying insurance to help pay the estate taxes, you may want to consider buying a survivorship or “second- to- die” policy. This kind of policy pays off only after both spouses have died, but it is usually less expensive than buying a policy on the life of one of the spouses. Term insurance (which does not build cash value and becomes extremely expensive after age 70) can be bought on an annually increasing premium basis. Alternatively, you can pay somewhat more and have the premium fixed for 15 or 20 years.
Usually, life insurance is income tax free, but is still subject to estate taxes. The only time life insurance proceeds are not subject to estate taxes is if you have surrendered all “incidents of ownership” over the policy and the policy is not payable to your estate.
Life insurance can be free of estate tax if the policy is owned by the person you want to name as beneficiary, or by an Irrevocable Life Insurance Trust (ILIT). As its name makes clear, an ILIT is an irrevocable trust – one that can never be changed. Thus, it is very different from a Revocable Living Trust.
However, not everyone wants or needs to give up ownership and control of their insurance, especially where the policy has a large cash value or where the insured’s children are very young or where there is no likelihood of an estate tax. In that case (where you are the owner), the policy will be subject to estate taxes when you die (but, of course, subject to the possible use of the marital deduction and the exemption amount discussed above). If you continue to own your policy, it is preferable to name your Revocable Living Trust as either Primary or Contingent beneficiary. In general, you should not name your estate as the beneficiary of a life insurance policy because then the proceeds will have to go through probate.
When you or your beneficiary withdraws money from a traditional IRA or other retirement plan, there will be income tax. The IRA and retirement benefits also will be subject to estate taxes. Excise taxes can apply if you take money out of the plan early.
The choice of beneficiary can affect how much you must take out of your plan during your lifetime and who will inherit the plan assets when you die. The choice of beneficiary is a complicated decision that cannot be answered easily. If you are married, your spouse may benefit from these plans without paying any estate tax and may be able to defer paying income taxes.