Wills, Trusts and Durable Powers of Attorney
This document discusses California law only. Each
state has its own laws for dealing with wills, trusts and powers of attorney.
Durable Power of Attorney for Finances
Durable powers of attorney for finances allow
someone else to handle your finances for you. They come in two basic types:
A "springing" durable power of attorney
allows your agent to handle your financial affairs (such as paying bills) if
you become incapacitated.
If you regain capacity, your agent loses this
power – unless and until you become incapacitated again.
An "immediate" durable power of attorney
goes into effect immediately, regardless of whether you are incapacitated or
This type of power of attorney stays in effect
until a specified date is reached, a specified event occurs, or the person who
made it revokes it.
It is often used when a person is losing
capacity or when the maker is going to be out of the country for an extended
period of time.
If you don’t have a durable power of attorney
for finances and you become incapacitated, often the only thing your family (or
friends) can do is go to court and obtain a conservatorship. This can take
months and is very expensive.
Frequently your spouse (or partner) is your
primary agent, and then adult children or friends are the successor agents in
case your primary (or subsequent) agent is unable (due to incapacity, etc.) or
unwilling to act on your behalf.
Powers of attorney expire on the death of the
principal (the person giving the power of attorney) – so they cannot be used
in place of a will or trust.
Advanced Health Care Directive
In California, this used to be known as a
durable power of attorney for healthcare.
This is designed to allow your agent to make
health-care decisions for you if you are incapacitated.
Unlike with a power of attorney for finances,
an advanced health care directive cannot
be immediate; instead it must be springing. This makes sense: if the principal
has capacity, he/she should be making his/her own health decisions.
An Advanced Health Care Directive also:
Allows your agent to have access to your
Gives your agent priority over anyone else in making health decisions for you.
Allows you to express your desire regarding
life-sustaining medical treatment. For example, many people have the document
state something like the following:
It is my express wish and expectation that I
not receive life-prolonging medical treatment that merely delays inevitable
death if the burdens of treatment outweigh the anticipated benefits.
Allows you to express your desire regarding
organ donations, autopsies and disposition of your remains. (This same
information should be placed in the will and/or the trust, since powers of
attorney expire on the death of the principal.)
Frequently springing durable powers of attorney
for finances and advanced health care directives state that two physicians must
certify in writing that the principal is incapacitated. Often it’s difficult
to obtain this, since physicians are concerned about liability.
One alternative is say something like the
For purposes of this
instrument, I shall be deemed "incapacitated" if certified in writing
by any two people falling within the following categories:
My spouse, if any.
Any successor trustee to any
revocable trust created by me.
Any actual or potential agent
specified in this power of attorney.
Any actual or potential executor specified in my
The following named persons:
Any licensed physician not
related by blood or marriage me nor to any beneficiaries of any trust or will
created by me.
Unified Federal Gift and Estate Tax Credit
There is a Unified Credit against federal gift
and estate taxes as follows (based on the net
Year of Death
Individual retirement accounts are counted as
part of the net estate.
Where an irrevocable trust holds an insurance policy
and is specifically prohibited from
exercising any power normally conferred on the owner of a policy, the proceeds
of the policy are not counted as part of the estate.
Life insurance proceeds are counted toward the
net estate if either i) they are received by the estate or ii) they are received
by other beneficiaries and the deceased had any "incidents of ownership" in
Note the drop in the Unified Credit between
2010 and 2011. Everyone assumes that Congress will do something about this
before 2011, although at the moment some wags refer to 2010 as "throw momma
from the train" year.
Agreements Between Spouses Regarding the Status of Property
Sometimes spouses, as part of estate planning,
want to confirm in writing that certain property is community property or
Such agreements often provide that joint
tenancies (which have a right of survivorship) are really community property.
This creates a new income tax basis for both halves of the community property on
the death of either spouse; joint tenancy assets generally receive a new basis
only for the decedent’s one-half share.
On the other hand, with large estates (in excess
of $1.5 million), joint tenancy with right of survivorship may avoid estate
taxes since the property does not become part of the deceased’s estate. This,
though, has to be weighed against not receiving a new basis for one-half of the
Note that since July 1, 2001, the community
interest of a husband and wife may be held as community property with right of
survivorship. This provides the best of both worlds.
As of January 1, 2005, community property law
also applies to domestic partners who have registered
with the California Secretary of State.
Registration with counties, cities or employers
does not count for this purpose.
Those who have already registered do not have to
re-register unless one of the pair filed to terminate the registration at some
The tax benefits of community property, though,
will only apply with respect to California
taxes, not federal taxes.
Reason to Have at Least a Will
If you do not have at least a will, then
California law determines who receives your estate. This may not be what you
want to have happen.
Where someone dies without a will, California
will generally distribute the estate as follows:
If there is a surviving spouse, that spouse
All community property.
As to the decedent’s separate
property (if any):
All of it if the decedent did not leave any
surviving issue, parent, brother, sister, or issue of a deceased brother or
One half if the decedent has only one child or
has one deceased child with issue.
One half if the decedent leaves no issue but
leaves a parent or parents – or leaves their issue or the issue of either of
One-third if the decedent leaves more than one
child, leaves one child and the issue of one or more deceased children, or
leaves issue of two or more deceased children.
The rest goes first to the decedent’s
surviving children or, if any of them are deceased, to the children’s
If the decedent has no surviving children or
deceased children with surviving issue, the rest goes to:
The decedent’s parents, if living.
The decedent’s brothers and sisters (or
their issue if any of them are deceased).
Reasons to Have a Trust
Normally, unless a trust has been created, an
estate must be probated.
If, though, the gross value of the estate is
$100,000 or less (without
subtracting any liens, debts, deeds of trust, etc.), there are simple procedures
for distributing an estate without using formal probate proceedings.
In addition, all property that a surviving
spouse is entitled to receive may be handled with simplified
Even in these two cases, probate still may be
appropriate, though, if there are strained family relations, complex
investments, large or complex claims by creditors, or an interest in a
There are two problems with probate:
It often takes 8 to 10 months. (It can take even
longer.) During that time, if the family needs money from the estate, a motion
has to be brought and a court order obtained. In contrast, with a trust, there
is no probate and the beneficiaries receive the money immediately.
Probate is expensive. Attorneys’ fees are set
as follows and are based on the gross
estate, meaning that there is no subtraction for any liens, debts, deeds of
Four percent on the first one hundred thousand
Three percent on the next one hundred thousand dollars ($100,000).
Two percent on the next eight hundred thousand dollars ($800,000).
One percent on the next nine million dollars ($9,000,000).
One-half of 1 percent on the next fifteen million dollars ($15,000,000).
For all amounts above twenty-five million
dollars ($25,000,000), a reasonable amount to be determined by the court.
For example, if your estate is a house worth
$700,000, then the probate fees for the attorney will be $17,000 ($4,000 +
$3,000 + $10,000) – regardless of the size of any loans against the property.
The executor of a will is also entitled to
statutory fees, although the executor can waive those fees if he/she wishes (and
family members often do).
A trust can also be used for some tax planning.
A revocable trust can be set up to create, upon
the first spouse’s death, a "marital deduction trust" (which is usually
either a QTIP Trust or a Life Estate with Power of Appointment Trust) and a
"credit shelter trust" (also known as a Remainder Trust, B Trust, or Bypass
Trust). The advantage of doing this is that it effectively doubles
the Unified Credit.
Complex estates (basically those where the net
value of the estate is at least twice the Unified Credit for spouses and equal
to the Unified Credit for singles) may also use various irrevocable
trusts, certain charitable gifts, generation-skipping trusts, etc.
One example is an irrevocable insurance trust,
where an irrevocable trust is made the beneficiary of life insurance policies.
If insurance is owned by an irrevocable trust,
the insured should not serve as trustee.
Another example is a charitable remainder trust:
donating a highly appreciated piece of real property such as a residence to a
charity – and receiving a charitable donation – but retaining the right to
remain there for life.
Revocable Trust Assets
For a trust to be effective, most major assets
have to be transferred to the trust so that the trust owns them.
With real estate, this means that a deed has to
be prepared transferring title to the trust, and then the deed filed with the
County Recorder’s Office.
With stock brokerage accounts, the brokerage
company’s forms must be completed. Often the signature has to be confirmed
(witnessed) by stock broker.
With savings accounts, the bank’s forms must
It’s usually more trouble than it’s worth to
put cars (unless they are extremely valuable) or day-to-day checking accounts
into the trust.
Personal property (jewelry, furniture, artwork,
etc.) can be placed in the trust just by mentioning them correctly in the trust
Title is generally transferred to the trust by
designating the owner along the following lines: "John and Mary Smith,
Trustees of the 2005 Smith Family Trust".
Ownership of retirement accounts (IRA’s,
401(k)’s, Keogh’s) generally should not
be transferred to the trust, because doing so will trigger adverse tax
Certain items – the proceeds of life
insurance policies and survivor rights in retirement accounts – usually are
not governed by the provisions of a trust or will, since they are contractual
arrangements. Instead, one designates the beneficiaries by completing the forms
provided when the life insurance policy is taken out or the retirement account
Generally, you can change the beneficiaries at
any time by filing out the proper forms.
One exception is with retirement plans. With
these, you normally must make your spouse the primary beneficiary unless your
spouse signs a written waiver.
The beneficiaries of a life
insurance policy generally receive the proceeds free of federal income
tax. As noted previously, though, the amount of the proceeds will count toward
the net estate for purposes of the Unified Credit if the insured retained any
"incidents of ownership".
Basically, the only time married individuals
should not name each other as
primary beneficiaries on life insurance
policies and retirement accounts is when their estates (including
individually owned life insurance benefits) exceed the Unified Credit (or twice
the Unified Credit, if they have the proper type of trust) and would trigger
estate taxes. (As noted before, money that survivors receive from individual
retirement accounts counts towards the net estate for purposes of the Unified
An exception is when the surviving spouse –
perhaps due to incapacity, ill health or lack of experience in financial matters
-- may not have the ability to manage the money. In that case it may be better
to designate a trust as the recipient of the life insurance proceeds and
survivor benefits of retirement plans.
While spouses who are designated as
beneficiaries of retirement plans are usually eligible for a tax-free transfer
to an individual retirement account or another pension plan, non-spouse
beneficiaries are not.
When the retirement funds are not rolled over,
there is income tax, since any time money comes out of a retirement account
there is tax.
On the other hand, retirement plan companies can
now spread the retirement plan distributions over the life of the beneficiary
– minimizing the income-tax impact. As a result, the tax issue here is much
less of a problem than before. Contact your company for details.
In any case, contingent, secondary
beneficiaries should be named. Otherwise the money may wind up being distributed
according to the terms of the trust or will.
Naming minor children as beneficiaries may be a
problem, since the money would likely have to be held by a court-appointed
guardian. To avoid this, a trust for minors can be named as a contingent
Another problem is that if you simply name your
children as beneficiaries and one predeceases you, that child’s children will
not receive any money. Again, having a trust named as a contingent beneficiary
can avoid this problem.
Family Limited Partnerships and Family LLC’s
A family limited partnership or a family LLC is
simply a limited partnership or LLC where all the owners are family members.
A transfer of ownership to a child in excess of
the $11,000 per person annual gift exclusion will reduce a parent’s lifetime
gift tax exemption (currently $1.5 million) that is permitted under federal
estate tax laws. As a result, the value of the ownership transferred to a child
is often discounted from a proportional share of the fair market value to get
under the $11,000 limit.
There are at least two reasons to justify the
There is a substantial value in being able to
control a business, and the ownership transferred at any one time is relatively
Because there generally is no public market for
the interests in the business, it is often difficult to sell the interests
Discounts frequently range from 10% to 50%.
It is crucial
that these types of discounts be documented by a supportable appraisal, in case
the IRS challenges the discounted values.
How Often Should You Update Your Estate Documents?
Basically, you should consider updating your
estate documents when major life events occur:
The births of a baby whom you want to make a
The death of a beneficiary, agent, executor or successor trustee.
A major asset being added or transferred.
In addition, the Health Insurance Portability
and Accountability Act ("HIPAA") has imposed stringent privacy restrictions
regarding medical records. As a result, if your advanced health care directive
(or durable power of attorney for health care) does not address the HIPAA
requirements, you may want to have it updated.