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California Estate Planning [Guidance for Getting Started]

San Diego Citi Scape to Illustrate Estate Planning to Fit CA Lifestyle

When you need directions, the two most important pieces of information are where you are now and where you’re trying to go.  You can’t rely on just any map – you need a map that takes you to the destination you want to reach.  And it’s nice to have a guide who knows the terrain and can help you avoid speed traps. California estate planning can be especially frightening because the terrain is as treacherous and diverse as the physical landscape in this beautiful state. This article will propose to to provide that map of the lay of the land to get you started on your California estate planning journey.

Creating a California Estate Plan That Fits Your Life

Estate planning isn’t all that different.  Planning an estate is a process that involves organization of assets to achieve desired outcomes.  First and foremost, it’s about setting financial and family goals – particularly but not exclusively goals relating to transfer of assets upon death – and figuring out the best way to reach them.  We don’t all have the same objectives, so each estate plan needs to be tailored to the individual circumstances and priorities of the person making the plan.  The job of an estate-planning attorney is to help you define your goals, to provide the roadmap as well as the right tools for the expedition.

Young Couple in California to Demonstrate Estate Planning Need

California Estate Planning Objectives

A well-crafted estate plan can do much more than just ensure your estate is transferred to the correct heirs in the correct amounts (though it can certainly do that, too).  A solid plan can maximize the legacy you leave behind for loved ones by mitigating taxes, fees, and transaction costs.  And an organized estate can allow for efficient estate administration, thereby saving heirs time, stress, and expense.

By removing ambiguity, a good estate plan significantly reduces the risk of future family conflict.  Unfortunately, we’ve all heard stories about family members fighting it out in court over a deceased relative’s estate. A decedent who leaves no uncertainty about his or her final wishes, though, can nip these sorts of ugly squabbles in the bud.

Estates can also be planned in a way that avoids or reduces the need for probate.  This is an especially important consideration in California.  Not only is the probate process public, but California law provides for fees to probate attorneys measured as a percentage (as high as 4.00%) of an estate’s gross value.  Keeping some or all of your estate out of probate court can therefore significantly increase the inheritance your heirs ultimately receive.

Even more, the California probate process often lasts for an entire year and can go on even longer for complex estates.  And, in most cases, heirs don’t actually receive distributions until the end of the process. On the other hand, certain estate-planning strategies available to Californians allow for nearly immediate transfer.  Approaches for avoiding probate include joint-tenancy ownership, POD and similar designations, and some of the many varieties of trusts available to California estate planners.  It’s not always possible for even a well-planned estate to avoid probate entirely, but even a partial reduction in the portion of an estate that goes through probate can save surviving family members time, administrative costs, and inconvenience

The ultimate purpose of estate planning is to help you define and reach your objectives, which don’t necessarily have to revolve around finances.  An estate plan can address, among many other things, important end-of-life healthcare decisions, funeral arrangements, and disposition of final remains.  Or, an estate plan might include vital provisions for the care of minor children or for a disabled loved one.  Sometimes, the objective of an estate plan is not organization of assets for distribution after death but to secure continuing eligibility for Medicaid or similar benefits.

Until you really give it some careful thought, it’s not always easy to decide exactly what your estate-planning objectives are.  It’s for that reason that the estate-planning process is designed to encourage careful consideration and analysis that might reveal important goals that weren’t immediately apparent.

How Does the California Estate Planning Process Work?

The estate-planning process typically begins with an initial discussion during which you explain your circumstances and your attorney takes notes and asks questions. In many cases, one or more follow-up conversations – over the phone or in person – are necessary to give your attorney a good understanding of the basic circumstances and what you are generally trying to accomplish.

Goal setting is also a big part of the estate-planning process.  To help determine where you are now, where you want to be, and how best to get there, you and your attorney take inventory of your financial and family situation.   You catalog your assets and liabilities, taking into consideration any anticipated changes.  It’s not uncommon for something that didn’t seem all that important at first to end up being a big part of an estate plan.  So, it’s important to be as thorough as possible when gathering information.  Your attorney will help you identify areas to be addressed that you might not have originally considered.

With all of this information in mind, you next evaluate your goals, priorities, and needs, and start to develop a strategy for accomplishing your objectives.  Your attorney advises you on the various estate-planning instruments and strategies available and the pros and cons of each.  Once you have a solid plan nailed down that you’re completely comfortable with, your attorney prepares the necessary paperwork.

Before you start signing anything, your attorney will ask you to review all of the documents closely and verify that they conform to the overall plan.  It’s important that you ask questions and ask your attorney to explain anything you don’t understand.  A good estate-planning attorney won’t hesitate to review the documents with you in detail until it all makes sense.

The final part of the process is to begin executing documents and implementing the plan.  This includes signing and recording documents that need to be recorded, and transferring assets as appropriate.  For instance, if your estate plan involves a trust, the trust needs to be funded by officially transferring assets into the trust.  This might mean recording a new deed for real estate or changing the name on an account with a financial institution.  Likewise, if you’re using a POD designation to facilitate a non-probate transfer, you need to complete and submit the right form to the bank.  As with the estate-plan paperwork, you shouldn’t hesitate to ask your attorney questions you have about making transfers.  Or you can have your attorney handle the transfers for you if you’re not familiar with the protocol.

It’s not unusual for the circumstances of an estate to change, or for people to change their minds, after an estate plan has been developed and implemented.  If that happens, you should communicate the changed circumstances to your attorney early so that you can alter your estate plan accordingly.  It’s not too hard to amend or revoke many legal instruments.  Others, such as irrevocable trusts, are very difficult to change absent action by a judge (and sometimes not even then).  The important thing is that you discuss any issues with your attorney and have him or her explain how best to address the changes.

What Does Estate Planning in California Involve?

Every person and estate are unique, and there’s no one-size-fits-all estate plan that works for everyone.  A California estate planning attorney is a worthy guide to help you create and implement a comprehensive plan that uses the strategies best suited to your situation and priorities.  Although the many specific aspects of estate planning could fill a multi-volume book (and indeed have), we have found certain tools and considerations to be of particular importance in many California estates.

Preparing a California Last Will and Testament

Most people are familiar with the concept of a California last will and testament (or just “will”).  In a nutshell, a will is a formal document allowing the “testator” (the person making the will) to make binding decisions relating to important issues that will need to be resolved after the testator’s death.   Wills frequently set forth instructions for distribution of the testator’s assets to designated heirs; for the testator’s funeral and disposition of final remains; and for the care of the testator’s minor children.  Among other things, a will can also establish a testamentary trust – a trust that comes into existence upon the testator’s death and is usually funded with assets bequeathed to the trust in the will.

Appointment of an executor is one of the most important decisions you make when you create a will.  An executor is the person empowered to act and make decisions on behalf of the estate and to carry out the testator’s instructions as set forth in the will.  Family members, close friends, and personal attorneys are common choices for the executor role.  You will want to select someone you trust and know is available, willing, and competent to perform the duties.

To be valid in California, a will must be signed by an adult testator of sound mind, along with two adult witnesses with no interest in the will.  Amendments to an existing will (known as “codicils”) must meet the same requirements and should clearly and unambiguously spell out any changes being made.  For small and very simple estates, the “California Statutory Will” published by the state legislature is a fill-in-the-blank form that meets California Probate Code requirements.

California estate planning law also recognizes what is known as a “holographic will” – a will written by hand in the testator’s handwriting and including a recognizable signature. Estate-planning attorneys do not generally recommend holographic wills, as they are more vulnerable to challenge and less likely to be well-thought-out.

Upon the testator’s death, his or her will is submitted to probate and administered through the probate process. Unfortunately, the probate process in California tends to take a while and can be quite costly.  Bearing this in mind, estate-planning attorneys often recommend strategies that allow some or all of an estate to pass to beneficiaries outside of probate.  But, even if an estate plan tries to avoid probate, a will can still be useful for addressing any recently acquired or overlooked property and providing instructions not related to asset distribution.

California Trust Planning

A trust is a fiduciary relationship under which a designated person (the “trustee”) manages assets placed in the trust by a grantor (or “settlor”) on behalf of named beneficiaries.  There can be overlap among the three roles, so the grantor might also be the trustee or the beneficiary in some trusts.  Importantly, though, the trust itself exists as a separate entity capable of owning property on its own behalf.

“Living trusts” are often described as an alternative to a will, which they sometimes can be. But, in many estate plans, a will and one or more trust are used in conjunction to achieve the desired results.  Technically, a “living trust” means a trust created while the grantor is alive, as opposed to a “testamentary trust,” which is created through a will and becomes effective upon the grantor’s death.  However, in the estate-planning context, “living trust” usually refers to a type of inter vivos revocable trust that allows the grantor to continue benefiting from assets during life and efficiently transfer those assets outside of probate after death.  Estate planners often combine living trusts with “pour-over wills” transferring into trust any assets not yet in the trust at the time of the grantor’s death.

Frequently, the grantor of a living trust acts as trustee while alive and appoints a successor trustee to distribute trust assets to named beneficiaries upon death.  The distributions must be made in accordance with directions provided by the grantor in the declaration of trust.  Thus, the grantor of a living trust can effectively leave distribution instructions similar to those provided by a testator in a will.  But assets in a living trust do not become part of a decedent’s probate estate, saving time and expense and avoiding the publicity of probate.

Living trusts are just one of the many varieties of trusts available in California estate planning.  Other, more specialized trusts that often come in handy include irrevocable life insurance trusts (“ILIT,” a trust formed to own a life insurance policy), charitable remainder trusts (“CRT,” a trust that ultimately benefits a charity while reserving income from trust assets to the grantor for a defined period), special needs trusts (a trust that provides for a disabled beneficiary without jeopardizing eligibility for Medicaid or other government benefits), and spendthrift trusts (a trust that provides for a beneficiary without risking attachment by creditors).

Once you’ve defined your goals, you and your attorney will be able to determine which (if any) of the many types of trust are appropriate for your estate.

Taxes and Asset Protection in California

Two core goals of many estate plans are to maximize the legacy provided to heirs by reducing estate taxes and then to protect assets from wasteful spending or attachment by heirs’ creditors.  While the federal estate tax currently allows an $11.4 million exemption (as of 2019), amounts beyond that exemption are taxed at rates as high as forty percent.  California doesn’t have an estate tax yet. However, a bill is pending before the California legislature which, if enacted, would impose a tax on estates over $3.5 million starting in 2021.

Numerous approaches are available for minimizing the tax liability of California estates.  Creative gifting, specialized irrevocable trusts, strategic life insurance, and family limited entities are among the many strategies that can pass wealth to the next generation while mitigating estate tax liability.  Most of these strategies work by removing assets from your taxable estate prior to death – either by transferring the assets to an irrevocable trust or directly to beneficiaries in a manner that doesn’t trigger or reduces gift taxes.  The best approach, of course, depends on the individual estate.

Sometimes, the IRS is less of a concern than the potential for profligate spending by an heir – or for attachment by that same heir’s creditors.  In that case, several forms of irrevocable trust can help to ensure that designated beneficiaries – and not their creditors – benefit from trust assets while at the same time preventing beneficiaries from rapidly depleting the assets held in trust.

With a spendthrift trust, for instance, neither the grantor’s nor the beneficiaries’ creditors can reach trust assets.  A third-party trustee manages the trust and makes distributions to beneficiaries as directed in the declaration of trust.  Under California law, a grantor cannot also be a beneficiary of a spendthrift trust.  In estate planning, though, beneficiary creditors (and spending) are the concerns more commonly addressed by spendthrift trusts.

Asset protection can also involve organizing your estate so that sufficient liquidity is available to your executor to cover administrative costs, taxes, and any creditor claims.  If, for instance, an estate consists primarily of illiquid assets – such as real estate or equity interests – an executor may be forced to sell assets to obtain the cash necessary to pay all estate obligations.  This can result in the loss of assets you would have preferred to keep in the family.  The executor also might not be able to obtain as high a price as what would have been possible with more time to find a buyer.  To avoid this kind of problem, a prudent estate plan might include an ILIT to hold a life insurance policy with proceeds sufficient to meet the estate’s liquidity needs without increasing estate taxes.

California Advance Directives

(Living Will, Medical and Durable Powers of Attorney in California)

An important part of California estate planning concerns what are called “ancillary documents”.  Advance directives are important decisions made ahead of time in writing in the event of future incapacity.  You are essentially spelling out your preferences in advance to avoid future confusion.  Living wills and powers of attorney (POA) are the two most common forms of advance directives.

A living will is a document describing the types of medical treatment you consent to receiving, or do not want to receive, if you ever become incapacitated.  A living will commonly declares the circumstances under which the signer wants to be kept alive on life support and identifies specific death-delaying treatments physicians should not employ in the event of incapacity due to a brain injury, coma, or a terminal medical condition.  By executing a living will, you remove ambiguity over your true wishes and reduce the potential for conflict between loved ones in a highly stressful situation.

A medical POA is a document authorizing another person, typically a close relative or trusted friend, to make healthcare decisions on your behalf should you reach a point where you are incapable of deciding for yourself.  Absent a valid medical power of attorney, a court usually appoints a relative to act as guardian and make medical decisions on behalf of an incapacitated person.  The advantage of executing a medical POA in advance is that you have the opportunity to select someone you trust unreservedly and who you know understands your wishes.  And your family avoids the delay and legal fees involved in requesting appointment by a court.

In California, living wills and medical POAs are usually combined within a single document known as an “Advance healthcare directive.” To be effective, an advance healthcare directive must be notarized or bear the signatures of two witnesses, neither of whom can be the signer’s healthcare provider or employee or agent thereof.  One of the two witnesses must be unrelated to the signer and must have no interest in the future estate.  If the signer is then receiving care at a skilled nursing facility, a patient advocate must also witness the form.

The California Department of Justice publishes an Advance Health Care Directive Form that, when properly filled out, meets statutory requirements for living wills and medical POAs.  The form also includes optional selections for organ / tissue donation.

Another power of attorney document, referred to as a durable POA or financial POA, is not usually included within a healthcare advance directive but can also be useful for individuals in the process of planning their estates.  A durable POA authorizes the person appointed under the document to make legal and financial decisions on behalf of the signer.  A durable POA can be written so that it takes effect immediately upon signing or so that it does not kick in until the signer is physician-certified as incapacitated.

Medicaid (“MediCal”) Planning and Elder Law in California

“Medicaid planning” is the process of arranging an estate in a manner that allows an individual to ensure qualification and continued eligibility for the need-based Medicaid program.  Sometimes, careful Medicaid planning can be the difference between access to quality healthcare and the unfortunate alternatives – insufficient care or none whatsoever.  The dilemma is particularly pronounced for seniors in need of costly long-term care.  All too often, they find themselves between a rock and a hard place – unable to either pay out-of-pocket for nursing-home care or qualify for Medicaid.

A well-thought-out Medicaid plan helps an applicant qualify for assistance while preserving as much wealth as possible.  To secure eligibility for California’s Medi-Cal program covering long-term care, an applicant cannot have assets valued at more than $2,000 ($3,000 if spouses are jointly applying).  Fortunately, though, certain assets, including an applicant’s residence, are not counted.  As a result, shifting wealth from countable to “noncountable” assets is a popular Medicaid planning strategy.

California’s “lookback period,” at 30 months, is only half as long as the five-year lookbacks in most states, so, in many cases, California residents are able to qualify sooner than in other states.  Medicaid planners can also utilize certain trusts to preserve wealth without triggering the penalty – or to minimize the penalty period assessed.

California does not have an income cap for long-term care Medi-Cal, but any income received by a program beneficiary, minus Medicare premiums and any applicable personal needs and spousal allowances, must be paid to the provider as a “share of cost.”  Under appropriate circumstances, though, a Medicaid beneficiary’s “share of cost” can be reduced by shifting income to a spouse who is not receiving Medicaid.

Along with Medicaid eligibility and estate-planning, an experienced elder law attorney can provide representation or other assistance in probate court, conservatorship and guardianship proceedings, and administrative proceedings relating to Medicare, veterans’ benefits, and Social Security.

Formulating a sound estate plan takes time and attention to detail, but, with the guidance of a knowledgeable attorney, the process can be pleasant and highly beneficial to you and your family.  If you are thinking about developing an estate plan, scheduling an initial consultation with an experienced California estate-planning attorney is a good first step.

Steve Gibbs, Esq.