How To Set Up An Estate Plan
What makes up the “Estate”?
Estate planning is the process by which a client’s estate is conserved, invested, managed, and ultimately passed on to others. Estate planning should always begin with a careful consideration of the client’s estate. For estate planning purposes, a client’s “estate” may be regarded as all of the property that the client owns or in which the client has an interest. The client’s estate will include items that the client owns outright, as well as items held by trusts in which the client is either an income or a remainder beneficiary.
The probate estate can best be understood as all of a decedent’s assets that cannot legally be transferred to the persons entitled to receive them without an order of distribution issued by a probate court. If there is some other way of transferring those assets, they are not included in the “probate estate.”
Assets that can be transferred in other ways include such items as property held in
Trusts, joint tenancy assets, accounts in banks or other savings institutions with “pay-on-death” payees, multiple-party accounts, the proceeds of life insurance policies that are not payable to the estate or the personal representative of the estate, and the proceeds of retirement and pension funds with designated “pay-on-death” beneficiaries.
“Taxable estate” consists of all of the items of property that the client owns, or in which the client has an interest which are subject to estate taxation upon the client’s death. For estate tax purposes, the taxable estate is properly determined by first determining the value of the client’s “gross estate” and then deducting the items entitled under the estate tax law to be deducted.
Estate Planning Tools
2. Revocable Inter Vivos (Living) Trust
3. Irrevocable Inter Vivos Trust
4. Co-Ownership of Property
5. Life Insurance
6. Lifetime Gifts
7. Durable Powers of Attorney
9. Uniform TOD Security Registration Act
10. Non-probate Transfers to a Former Spouse
11. Revocable Transfer on Death Deed
The will is the most widely used of all the estate planning tools. A will is commonly understood to be a written instrument by terms of which a person (called a “testator”) undertakes to dispose of his or her property after his or her death. Although disposition of property is one of the primary functions of a will, a will may also be used for other purposes. For example, a will may be used to leave instructions respecting the disposition of one’s remains, to exercise a testamentary power of appointment, to nominate an executor, or to nominate a guardian for the testator’s minor children. If a will is effective for some other valid testamentary purpose, it is valid and enforceable even if it does not dispose of the testator’s property.
Revocable Inter Vivos Trust
A revocable inter vivos trust is a trust that is created during the settlor’s lifetime and that the settlor can revoke while still living. Revocable inter vivos trusts are commonly referred to as “living” trusts. Living trusts are very widely used in modern estate planning. A living trust can be used to create marital deduction trusts and bypass trusts, which may effect important
estate tax savings in the estates of a married couple.
Irrevocable Inter Vivos Trust
An irrevocable inter vivos trust is a trust that is created during the settlor’s lifetime and that the settlor cannot revoke. A trust may be permanently irrevocable, or irrevocable for a specified time, such as a term of years. Since a trust created in California is presumed to be revocable by the settlor unless expressly stated otherwise [Prob. Code § 15400], a trust can be made irrevocable only if the trust instrument expressly declares that it is irrevocable. Although irrevocable trusts have many uses and form a part of many sophisticated estate plans, they are somewhat less frequently used than revocable (“living”) trusts.
Co-Owernship of Property
Many persons own property in various forms of co-ownership, such as joint tenancies, tenancies in common, partnerships, and multiple-party accounts. Some of these forms of co-ownership include mechanisms by which the surviving co-owner acquires the interest of a deceased co-owner when the deceased co-owner dies. Transfers to a surviving co-owner are often described as “transfers by operation of law.” Since these transfers are automatic, they will be made even without a direction in a will or trust. Indeed, if a transfer by operation of law is required, the
transfer will be carried out even if there is a contrary or inconsistent provision in the deceased co-owner’s will or trust.
Life insurance can play an important part in an estate plan. Life insurance can provide liquidity for the payment of debts and expenses of administration after the client’s death, and provide the client’s dependents with support after the client’s death. Life insurance is often a necessity when the client is young and has children (or a spouse and children) who depend on the client’s earnings for their support. When the client’s earnings cease, life insurance can provide
those dependents with capital that can be invested to provide an income stream that will replace the client’s lost earnings.
Lifetime gifts can be useful estate planning tools. The annual gift tax exclusion, the exclusion for tuition and medical care payments, and the unlimited marital deduction, combine to provide many opportunities for wealth transferal during a client’s lifetime.
Durable Powers of Attorney
A power of attorney is a written instrument by which one person (called the “principal”) authorizes another person (called the “attorney in fact” or “agent”) to act on his or her behalf. A durable power of attorney is a power of attorney that contains words showing the intent of the principal that the attorney in fact’s authority will be exercisable notwithstanding the principal’s later incapacity. In this respect, a durable power of attorney differs from a conventional power of attorney, under which the authority of the attorney in fact terminates when the principal becomes incapacitated. Under a durable power of attorney, all acts done by the attorney in fact during the principal’s incapacity have the same effect as if the principal had capacity.
Various types of contracts can have an effect on a client’s estate plan. The most obvious of these is the contract to make a will, not to revoke a will, or to die intestate. However, other contracts that may also have important estate-planning consequences are transmutation agreements, buy-sell agreements, premarital (or antenuptial) agreements, and marital settlement agreements.
Uniform TOD Security Registration
Under the Uniform TOD Security Registration Act, securities may be registered in “beneficiary form” to be transferrable on death outside of probate administration. Designation of a T.O.D. beneficiary on a registration in beneficiary form has no effect on ownership until the
owner’s death, and registration in beneficiary form may be canceled or changed at any time by the sole owner (or in the case of multiple ownership by all then surviving owners) without the consent of the beneficiary.
Non-Probate Transfers to a Former Spouse
Non-probate transfers are a common and efficient way of transferring property to a surviving spouse at death. The Probate Code addresses non-probate transfers to a former spouse of a divorced individual. Transfer types include by instrument and property title.
Revocable Transfers on Death Deed
A revocable transfer on death deed, or revocable TOD deed, is a revocable transfer on death deed as defined in Prob. Code § 5614.
A revocable transfer on death deed is an instrument created that:
(a) Makes a donative transfer of real property to a named beneficiary;
(b) Operates on the transferor’s death;
(c) Remains revocable until the transferor’s death.
If you’re looking for a professional to help you organize your estate plan, contact our office at 1-800-233-8521 for a FREE phone consultation to discuss which tool or tools are right for you.