Where There's a Will, There's a Way...Trust Me
By Nicholau Adams, Attorney
So you’re a parent now: Congratulations! Let’s do the checklist. Crib? Check. Car seat? Check. Various bouncing and/or swinging contraptions strategically located throughout the home? Check. Estate plan? Eh, not so much…
Even if you already have an estate plan, you are on this website because you recently had a child, which means your estate plan might need updating. Estate planning is a dynamic process. People change, assets change, laws change, families change — and your estate plan needs to reflect those changes. For all the new parents reading this without an estate plan, now is the time to get something in place. Why, you ask? Well…Because someday you are going to die, and you don’t know when.
If that sounds a little harsh, I will lighten it by including that I am going to die too. We all are going to die. We learned this sometime after college when we did about a dozen (give or take) things that should have killed us. It is different now though, right? You hold a new precious life in your arms, and you will do everything in your power to make your child’s life better and happier, and you will take care of yourself so you can take care of your child…But, what happens if you’re not there anymore? Can you still make your child’s life better?
Here’s the good news: YES. You can. But it’s going to take some planning.
The Estate Plan
Your estate consists of everything you own when you die, including your home, bank accounts, investments, personal property, retirement plans, and any business interests. Estate planning is the process of deciding who will get your assets and how you would like them transferred after your death — but for parents it also involves designating a guardian for young children and a representative to make financial and medical decisions for you if you become incapacitated. Thus, a basic estate plan consists of a will, a durable power of attorney for finances, a medical directive, and often times a living trust (more on that later).
For us new parents, the will is the most important document in this list, primarily because it allows you, the will writer (“testator” in legalese), to tell the court exactly who you want to be guardian(s) of your child(ren) should you die or become incapacitated. It also allows you to dictate how and to whom you want your assets distributed, and it gives you the power to nominate someone to shepherd these written wishes to fruition (your “executor”). Conversely, if you die without a will (“intestate”), the court will decide who becomes the guardian of your children, state law will determine how most of your assets are to be distributed, and the court will appoint someone to carry this out.
I probably have already convinced some of you (specifically, those of you that have ever dealt with the court system) to at least draft a will. But if you are instead thinking to yourself, “Well, my sister who lives nearby has already said she would be happy to take my child should something happen to me, and she and her spouse are gainfully employed, they have two kids of their own, so obviously the court will appoint her as guardian of my child,” please remember this is called estate planning. As in, planning for anything.
Do you and your sister ever go shopping together? To the ballgame?
How about skydiving?
I know it gets grim — and sounds rather unlikely — but there is a chance you could die or become incapacitated at the same time as your sister, and if you do not write a will, then you cannot nominate an alternative.
Or, maybe, it’s you and your spouse that go skydiving and die together (sorry, skydivers). How is the court supposed to know, for example, that your estranged mother-in-law is crazy and has too much time on her hands? The evil mother-in-law might just petition the court for custody before your sister, and your sister may not be able to convince the court the children should live with her in her stable home instead. Yikes!
As for your assets, even if the state would distribute them where you want them to (i.e., to your children), it might not be when. For instance, if your children are under eighteen years old, a guardian of the estate will be appointed to hold and manage the assets until they are distributed — outright — to your children at age 18. Remember when you were 18? This might not be exactly the age when you want them to be receiving a significant amount of assets. With a will, you can create a trust on your death to hold the assets for your children until the age you specify. That is called a testamentary trust because it is created through your will; however there is another type of trust that makes a testamentary trust unnecessary.
The Living Trust
Unlike a will, which becomes effective upon your death, whereby all property must go through probate court, a living trust takes effect while you're still living. You transfer property into the trust, yet you still have control of the trust: you can make changes or additions, and you still have access to your assets. You are the original trustee, and you name a successor trustee to administer the trust and to distribute your assets when you die or become incapacitated. Your successor trustee essentially acts as your executor without court supervision. He, she, or it (many people name a bank) holds property for your beneficiaries and distributes it out as you specify. There are a number of reasons why many people include trusts in their estate plans. In California (and many other states), a primary reason is that property distributed via a living trust is generally not subject to probate after you die.
Probate is a court proceeding in which the estate of the decedent is divided according to a will, or if no will exists, according to state law. The documents filed in the proceeding are public record, and some people might not want the public to know their financial situation and/or the disposition of their assets. Also, in California, the probate process usually takes about 10-18 months (sometime longer) to complete, and it involves a lot of paperwork, time, and money.
Unlike most states, California law makes it standard procedure for probate lawyers and the executor to charge, as their fee, a percentage of the gross value of the assets that go through probate. California’s probate code sets out the following percentages:
- 4% of the first $100,000 of the gross value of the probate estate
- 3% of the next $100,000
- 2% of the next $800,000
- 1% of the next $9 million
- 0.5% of the next $15 million
The key word above is the italicized word, gross (on many levels). With real estate values the way they are in many California cities right now, if you own a home, it is an especially good idea to think about planning to avoid probate after your death. For example, if you leave a $1,000,000 gross estate, the fee is $23,000 each for the attorney and for the executor (many executors waive their fee if they are a beneficiary because the fee is income taxable and inheritance is not…attorneys do not waive their fee). You can avoid these fees and the whole probate process by including a living trust in your estate plan.
Estate planning gives you the power to make tough, thoughtful decisions for your children if you were to die tomorrow. As things change, your estate plan may change, but it always boils down to two essential choices: (1) tell the court and/or someone else you trust (your successor trustee) what you want for your children and assets, or (2) let the court decide for you.
Where there’s a will, you get to tell the court the way, but your estate is probated. Where there’s a trust, you get to tell your successor trustee what you want and avoid the court system. For many, this is a better way.
Questions? Feel free to comment below.
Now, go out and live that wonderful life.
An Oakland, CA-based father of two, Nicholau Adams is an associate attorney with Osterloh & Orta LLP, representing clients in estate planning, probate, and trust administration matters.