Common California Estate Planning
Questions and Answers

Q: It seems like everyone says "you've got to get a living trust" ... why is that?

A: Most contemporary estate plans for California residents use a living trust (also known as an inter vivos trust) as their foundation document. There are several reasons why the living trust is the dominant choice: to avoid the cost of probate proceedings, to avoid the delay of probate proceedings, to avoid public disclosure of the assets and debts of the decedent, to avoid public disclosure of the amounts and types of property passing to heirs, and to provide for lifetime management of property by family members or friends in the event of disability or dementia caused by advanced age.

Living trusts can also be used for estate tax planning by married couples, to provide asset protection for beneficiaries, and to ensure that an inheritance will not disqualify a special needs recipient who is on SSI, Medi-Cal, or other needs-based assistance programs.

Q: Can't you get the same results with a will?

A: A testamentary trust, which is a trust created at death by a will, can be used to achieve the same tax planning, asset protection, and special needs planning. However, if a will is used to pass property (or to create a testamentary trust), then a probate proceeding will be required. The use of a court proceeding for probate implies that the court filing fees (which can be thousands of dollars) must be paid, as well as executor and attorney fees. A probate proceeding will also create a public record listing the assets and debts of the person who passed away, as well as their choices for who will inherit property. This public record is available to anyone who cares to go to the courthouse to look at it. Many people prefer to avoid disclosure of private family financial details in the public record, and choose to avoid the probate process.

Q: Wouldn't it be cheaper to use a will instead of a trust?

A: It is true that a simple will is likely cheaper than a comprehensive trust-based estate plan; but it is also true that a Yugo is cheaper than a Cadillac. A simple will may prove to be much more expensive than a trust-based plan if you take into account the costs of probate - especially if a conservatorship (which some have called a "living probate") becomes necessary so that family can gain control of the finances when an elder becomes unable to manage their own affairs due to disease or advanced age.

Q: Wouldn't it work just as well to add my heirs to the title on my house, car, bank accounts, and so forth? Then I wouldn't need an estate plan at all.

A: Joint tenancy and co-ownership of accounts or property will work to transfer property at death - unfortunately, this approach presents substantial risks and can create terrible results if something goes wrong.

Specifically, assets held in joint tenancy are available to the creditors of any of the joint tenants. This means that an account held in joint tenancy with a child will be exposed to any creditors of the child - including the IRS and an ex-spouse in a divorce proceeding.

Joint tenants also have the right to make a total withdrawl of assets at any time - so a child who experiences financial pressure, drug or alcohol problems, or falls victim to a spouse or other person who exercises undue influence over them may withdraw money from the joint account without the knowledge or consent of the original owner. 

The regulations regarding federal estate taxes have changed quite a bit in the past several years.  In 2010, there are no estate taxes, but that could change if Congress decides to bring back estate taxes.  Property held in a joint account may be included in the taxable estate of the owner - so that in the unfortunate case where a child dies before their parent, the contents of the joint account would be included in the child's taxable estate - which means the parent may find themselves paying 46% federal estate tax on their own money, if records are unavailable to establish which person provided the funds in the account.

Joint accounts are also likely to create uneven distributions where there are several children who are intended to inherit property. If a parent has two bank accounts worth $100,000 each and two children, the parent could name one child as the joint tenant (or primary beneficiary) on each account. If the parent dies immediately, the children will then inherit equal amounts. However, if the parent then goes on to spend money in one of the accounts on food, shelter, and medical care without making corresponding withdrawls from the other account, it is likely that the parent will die leaving one child to inherit an account containing only $20,000 (the initial $100,000 less $80,000 in living expenses) while the other child inherits an account worth $100,000 (or even more, if the account is interest-bearing). It can be difficult to maintain equal balances across a number of bank or brokerage accounts to ensure an equal distribution at death.

Q: Aren't all living trusts the same? Why should I pay thousands of dollars for an estate plan prepared by an attorney when I can buy software or preprinted forms to do it myself?

A: All living trusts are not the same - in fact, there can be considerable differences in the quality of attorney-drafted estate plans, without even considering the appropriateness of a generic plan intended to be acceptable for both a 27-year old single parent or a 90-year-old multimillionaire. 

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