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10 Things all Californians Should Understand about Estate Planning

Law Office of Jonathan D. Alexander, Esq.

Losing a loved one is a somber, sad event. Dealing with the aftermath is difficult for family, relatives, and friends. Besides the emotional toll, survivors have an unenviable task. They must determine how to transfer or inherit property from the person who died.

In estate planning terminology, the person who died is the decedent. The property he or she leaves behind is the decedent’s estate. To transfer or inherit property often involves going to probate court. It’s complicated dealing with the courts and a decedent’s property. Probate is time consuming and can be expensive but there is some good news. With proper estate planning you can avoid probate. Every Californian should understand how.

It doesn’t matter who you are. If you own real estate, have kids or a spouse you should have an estate plan in place. If you don’t have some type of estate plan, your family and others who may inherit your property may suffer. They will be at the mercy of California’s probate system.

To avoid probate, most of my clients choose a comprehensive estate plan. A comprehensive plan includes the following documents:

  • Will,
  • Living trust,
  • Durable power of attorney for finances, and
  • An advance health care directive.

My mission with this blog is simple: To educate you about the importance of estate planning. Spending a little time and money now will save your loved ones heartache, delay, and expense.

Here’s what you’ll learn in this post:

  • How to Get Started
  • What is Probate
  • The Assets that Pass Through Probate (and those that don’t)
  • Reasons to Avoid Probate
  • How to Avoid Probate
  • Is a Will Enough for You
  • Whether you need a Living Trust
  • How to Identify your Assets (creating a personal inventory)
  • Special Real Estate Issues
  • Resources to Actually Start Planning

10. How to Get Started with Your Estate Plan. Three Steps and the Foundational Estate Planning Documents.

Estate planning consists of 3 steps:

  • Identifying your assets,
  • Deciding who gets your assets, and
  • Deciding how to transfer your assets to your beneficiaries after your die.

The foundational estate planning documents are:

  • Wills,
  • Living trusts,
  • Durable power of attorney for finances, and
  • Advance health care directives

Most folks also have retirement accounts and insurance policies. Your estate plan must also arrange the transfer of these accounts and policies. You must ensure you’ve named the proper beneficiaries on any policies and accounts.

Below I’ll explain how to identify your assets and beneficiaries. First, we’ll dig into some definitions.

Every well-crafted estate plan includes a will. A will is an individual’s written declaration of his or her wishes about the transfer of his or her property after death. A will’s primary function is to pass your property to people that you choose. A will also ensures that there are guardians for your minor children.

A will won’t, by itself, allow you to bypass probate. In California an estate worth $166,250 is subject to probate. Only assets of certain type count in this calculation, see paragraph 8 below.

A living trust is a legal document created during an individual’s lifetime where a designated person, the trustee, is given responsibility for managing that individual’s assets for the benefit of beneficiaries. A living trust’s primary purpose is to avoid probate.

If you create a living trust and transfers your large assets to the trust, you can avoid probate. At your death, the trust owns the asset not you. If you fund your trust the right way, your estate will fall under the $166,250probate threshold. Funding is another way of saying transferring.

A durable power of attorney for finances is a legal document that authorizes your agent to make decisions about money and property. If you become ill or injured and cannot manage your finances, you’ll need help. A durable power of attorney for finances allows you to name a trusted person to:

  • Pay bills,
  • Make bank deposits,
  • Manage investments,
  • Collect insurance or government benefits and
  • Handle other money issues on your behalf.

An Advance Health Care Directive is a legal document that allows an individual to choose an agent to make healthcare decisions on his behalf in the event that he cannot. This document allows you to do two things:

  1. State your desire about the use of life sustaining medical treatment, and
  2. Name a health care agent for making health care decisions about your doctors, medications, and procedures you might need.

9. What is Probate?

If you die in California with an estate valued at more than $166,250, the estate must go through probate. Despite what you may have heard, probate isn’t evil. It is a judicial process created to a distribute person’s assets after his death according to a will. During probate a judge supervises the settling of an estate.

Probate originated to prevent fraud when someone dies. A court supervises the process to enforce the wishes in a decedent’s will. The court identifies assets and makes sure the right people get them. The downsides to probate are that it is a public process, time consuming and it can be expensive.

Probate consists of the following steps:

  1. Filing a petition in probate court,
  2. Issuing notices to heirs and creditors,
  3. Proving the will if necessary,
  4. Collection of the estate’s property,
  5. Paying valid creditor claims,
  6. Paying taxes, if necessary, and
  7. Closing the estate by the probate court.

The entire case can take between 9 months and 1.5 years. Sometimes, it takes much longer.

You should understand that some assets are not subject to probate. These assets do not count towards the $166,250probate threshold.

8. Which Assets Pass Through Probate and Which Do Not?

Not every asset passes through probate. The “probate estate” is the property that is subject to probate. When I meet with a client for the first time, we identify the probate estate. We create two columns on a spreadsheet and start distributing assets. The first column is “Probate Assets” and second column is “Non-Probate Assets.”

This is a critical distinction for estate planning. The probate court only cares about the probate estate. Judges don’t oversee non-probate assets transfers. Wills and trusts do not distribute these assets. For these assets you’ll need ensure you’ve designated the correct beneficiaries.

Wills and trusts distribute the assets in the “Probate” column. Correct beneficiary designations distribute the assets in the “Non-Probate” column.

Probate AssetsNon-Probate Assets
Cash in a bank accountJoint tenancy property
Real Estate not held in joint tenancy, community property with a right of survivorship or that is not subject to transfer-on-death deedLife insurance/annuities
Investment accounts (stocks or mutual funds)Payable-on-death accounts
Sole proprietorships, partnershipsRetirement accounts
Household property: furniture, cars, clothes, jewelryTransfer on death accounts
Transfer on death deed

Moving Assets Out of the Probate Column

You can move the assets out of the “Probate” column with proper estate planning. When you place assets in a living trust you can remove them from the probate estate. That’s the point of creating a living trust.

The labeling exercise above demonstrates the value of the living trust. Failure to create and fund the living trust will land you in probate if you meet the $166,250threshold.

You can create a living trust and transfer assets to the trust. You do that by make the living trust the legal owner of each asset. Transferring assets into a trust can be tedious. You should transfer only high value items to your trust.

Remember, assets with designated beneficiaries or some form of right of survivorship aren’t part of the probate estate. You don’t need to transfer them to your living trust to avoid probate. This includes your life insurance policies, retirement accounts, payable-on-death accounts, and transfer-on-death accounts.

Now, for the nitty gritty on probate and why you should avoid it with proper estate planning.

7. Reasons to Avoid Probate: It’s Expensive, Time-Consuming, and Lengthy.

The cost is reason enough to avoid probate. In California the cost of probate depends on the value of the probate estate. The probate fees go to the attorney and to the court-appointed executor. The fees are maximums set by statute. Executors often waive fees, especially if they are inheriting assets. Most attorneys, on the other hand, request the full fee. To estimate probate cost, assume the executor and attorney demand the max fee.

The court values the probate estate at fair market value. The price someone would pay on the open market today. For homeowners probate is expensive. Here are some examples:

Your home is worth $1,200,000 but you owe $400,000 at the time of your death. The court will value the property at $1,200,000 not the $800,000 you have in equity. Your probate fee equals $25,000. The fee is 4% of the first $100,000 (or $4,000). Then 3% of the next $100,000 (or $3,000). Then 2% of the next $800,000 (or $16,000). Then 1% of up to the next $9,000,000 (here 1% of the remaining $200,000 or $2,000) A total of $19,000.

  • A probate estate worth $300,000 has a probate fee of $9,000.
  • A probate estate of $1,500,000 has a probate fee of $28,000.
  • A probate estate worth $5,000,000 has a probate fee of $63,000.

Remember, your probate estate consists only those assets in “Probate Asset” column. See paragraph 8 above.

This is the primary reason to avoid probate. With proper estate planning, you can avoid probate. And a fraction of the cost. I offer my clients the convenience of flat fee billing. I also provide a 100% satisfaction guarantee. Visit my service fee page for more (and schedule a free consultation while you’re there).

Besides the cost, my clients prefer to avoid probate because it’s public. No one relishes the thought of their private life (or death) becoming public record.

My clients prefer the privacy afforded by a living trust. Assets in a living trust are not subject to probate. You won’t have to file your trust in court. Your beneficiaries may need to disclose it or at least a summary of it to certain parties. These third parties may include insurance companies, county assessors, and stock plan administrators. This summary is the certification of trust. These third parties will request a copy of the certification. It provides them comfort that they are doing business with an authorized individual.

Finally, probate does not benefit your heirs and it is time consuming. By statute, probate must last at least four months to provide notice to creditors. Probate usually lasts from 9 months to 1.5 years and sometimes much longer.

6. How to Avoid Probate?

As you have read above, only probate estates valued at more than $166,250are subject to probate. You’ve also learned that not all assets are part of the probate estate.

To avoid probate, you’ll need to ensure that your probate estate is small. You do that by placing your large assets that are subject to probate in a living trust. You’ll also ensure that non-probate estate assets have the proper beneficiary designations.

If you take these steps, you’ll avoid probate. You can, of course, do the work yourself. Or you can save yourself time, considerable legwork and headache, and hire me to help you. Click here to schedule a free consultation.

5. Whether a Will Enough for You?

Now you have a feel for probate and how to avoid it. The next question is: Which type of estate planning is right for you?

Do you need a comprehensive estate plan or is a will enough?

The attorney answer is, as you may have guessed, it depends. There are a few situations where a person may use a will without a living trust:

  • You have minor children and your primary intent is to arrange for guardians,
  • You don’t own a home,
  • You don’t want a living trust or cannot afford one,
  • You’re not worried about the cost of probate,
  • You need a judge to help figure complex issues with creditors.

A will is a fine start to estate planning. For a young couple with a new baby setting up a will is part of starting a family. Once they buy a home, start investing, and get more assets a comprehensive estate plan will be a better fit.

The same goes for folks with a smaller estate. They can put a will in place now and upgrade later. A word of caution, if you don’t get around to upgrading your estate plan, your heirs may find themselves stuck in probate.

4. Who Needs a Living Trust?

Is a living trust right for you? It could be. There are many benefits to doing a living trust. In California, a living trust isn’t a public document. There is also the fact that it makes your estate much easier to manage for your heirs. You can customize a living trust to meet the personal needs of your family.

Most of my clients use a living trust because they fall into one or more of these 5 categories:

  • Own a home in California,
  • Own investments worth more than $166,250,
  • Own a very large estate. In this instance, a living trust with tax planning provides significant benefits,
  • Are in a second (or third) marriage. Blended families have special estate planning issues,
  • Have a child with special needs.

3. How to Identify Your Assets & Beneficiaries: Creating a Personal Inventory

Regardless of the type of estate that you create. You’ll need to gather some critical information. You will need to draft a personal inventory. A list of your assets and property.

Identifying your property will help you determine the type of estate you need. If you don’t own real estate or investments valued over $166,250, a will might suffice. But, if you have a home, vacation house, and investment account, a living trust is the best choice.

Below at paragraph 1 I’ve linked to my resources page to get you started with your estate. I’ve included a “Personal Inventory and Net Worth Calculator” spreadsheet. Filling it completely will get you started on the right track.

If you don’t have a personal inventory in place, it may take your spouse or loved ones months or years to sort out your estate. Besides the time it will take, you wouldn’t want your loved ones to miss out on assets they never knew you owned.

To complete the inventory, you’ll be describing:

  • What you own
  • Where it is
  • How you own the asset. For example, the name on the account.
  • How much the asset is worth. This need not be an exact figure. An estimate is fine.
  • How to access the asset online. Make sure you have a list of your digital life. Include usernames, passwords, and email accounts.

2. Important Real Estate Issues

To get your estate planning rolling, you will need to know how you own your home. That is, how do you hold title to your property? If you’re not sure don’t worry. Most people don’t know.

You can find this information on your grant deed. This the document that transferred legal ownership from the prior owner to you. If you cannot locate the grant deed, you can order a new copy.

Most California counties allow you to order a copy of your deed over the phone, online, or in person. To order a copy of your deed you’ll to provide:

  • Your name,
  • Prior owner’s name, and
  • Your parcel or tax identification number from your tax bill.

On your grant deed, you can see how you hold title. Your deed might have one of the following:

  • Michael, as his sole and separate property (SP)
  • Michael and Maria as joint tenants with right of survivorship (JTWROS)
  • Michael and Maria, husband and wife, as community property (CP)
  • Michael and Maria, husband and wife, as community property with a right of survivorship (CPWROS), or
  • Michael, Maria, and Joe, as tenants in common (TIC)

The grant deed describes the parties’ ownership and what happens when one of them dies. Let’s examine each of the forms of ownership described above.

If you own property as separate property this means you can give it away to whomever you wish when you die. Be aware that California is a community property state. If you paid the mortgage on a separate property with community property wages, your spouse may have an ownership share.

Most couples own property as joint tenants. This means that they both have an equal share in the property. When one owner dies, the survivor owns the entire property. This is the legal principle called “the right of survivorship.” The surviving joint tenant gets the entire property and can avoid probate. Property owned in joint tenancy cannot be left by will or trust.

Owning a property as community property means you’re married or in a registered domestic partnership. Mazel tov! Like joint tenants each party owns a one-half interest in the property. Unlike joint tenants, community property owners can pass their share by will or trust.

Community property with a right of survivorship allows survivors to bypass probate. It also provides capital gains tax benefits.

Owning a property as tenants in common means that each of the owners owns a percent of property. This ownership share is a called an “undivided interest.” An undivided interest means that each tenant in common owns part of the property. The parts are not identified. Each owner has the right to use and possess the property regardless of the percentage owned. Tenants can pass his or her interest in the property at death through a will or trust.

1. Resources to Get Your Estate Plan Started

I’ve created a resources page to get you started. It’s linked here. It includes a personal inventory and net worth calculator.

The next step is to arrange a time to meet with me to get your estate plan started. I look forward to helping you protect your loved ones and create a lasting legacy. Please click here to schedule a meeting.

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