Estate Planning

When we meet with clients to discuss their estate planning needs, there are three general topics that need to be covered. First and foremost, we need to understand the clients' goals and objectives. Second, we need to understand the effects, if any, of federal estate tax. The third relates to probate and whether it is necessary to take steps to avoid probate, which is usually the case.

As to personal goals, normally that is fairly simple. As it relates to husbands and wives, on the death of the first, they generally want to provide for the other. When they are both gone, they want to provide for their children. However, there are situations where this can be more complex, such as where there may be elderly parents who need to be provided for, children from a prior marriage, or children who have special needs, such as a mental or physical disability or drug or alcohol dependence, or the like. Obviously, we need to know the particulars of the clients' needs in order to prepare an estate plan that achieves their goals.


We say federal estate taxes because California does not have a death tax. As it concerns the federal estate tax, the basic concept is that the federal government has an opportunity to look at your estate when you die and determine whether an estate tax should be assessed. There are two key components in the estate tax calculation. The first is referred to as the "unlimited marital deduction" and the second is the "unified credit."

As it concerns the unlimited marital deduction, that is exactly what it sounds like; whatever one spouse leaves to another passes estate-tax free. There may be an estate tax assessed on the death of the second spouse, but at least, as it concerns the husband and wife, they can rest assured that no tax would be due while either of them is living.

The unified credit relates to a concept that the federal government does not want to tax all estates but only what it considers to be "large" estates. As of 2012, the unified credit is $5,000,000, with a husband and wife being able to shelter $10,000,000.  Putting aside the tax aspect, a question is:  Does one spouse want to leave the entire estate to the surviving spouse with the hope of expecting that no changes will be made after the death of the first spouse or does the first spouse to die want to place restrictions on his/her half of the estate?  This can be a difficult conversation go have, but a necessary one.


The concept of probate is very important. Probate is the process followed when individuals die to make sure that their debts and taxes are paid and that the balance of their estate is distributed as they had intended. The problem with probate is that it is expensive, time consuming and intrusive.

It is expensive because both the attorney and the executor are entitled to be paid a fee based on a formula. That formula is 4% of the first $100,000, 3% of the next $100,000, 2% of the next $800,000, 1% of the next $9,000,000, and 1/2% of the next $15,000,000, with amounts in excess of $25,000,000 subject to determination by the court. The amount is calculated on the gross value of the estate, not the net. If we assume a gross estate value of $3,000,000, then the attorneys' fees would be $43,000 and the executor's fees would be $43,000 for a total of $86,000. (It is common for family members to act as executors and they will often waive their fees. However, the attorneys' fees alone are significant.) 

It is time consuming and intrusive for similar reasons. It is intrusive in that we need to account to the court all of the property (assets and liabilities) that the decedent owned at time of death. It is time consuming because, due to the fact that, as a court process, everything simply takes time; in my experience, the simplest probate takes at least 9 months to one year, and most take much longer than that.

Due to these factors, many people have sought ways to avoid the cost and expense of probate, which will lead to my discussion of living trusts, as set forth below. However, before discussing living trusts, it is important for husbands and wives to understand that, in most instances, probate is avoided on the death of the first of them since oftentimes the property they own is not subject to probate, which includes the following: 

Joint tenancy property; on the death of the first of the joint tenant, the property "automatically, by operation of law," passes to the survivor, property held as community property with right of survivorship.

IRA and 401(k) and the like generally have a pay-on-death beneficiary which is also outside of probate. 

Insurance policies generally provide a pay-on-death beneficiary, which is likewise outside of probate. 

Even when probate is necessary in a husband and wife situation, there are court procedures that make such probates simpler. As a result, probate avoidance is not necessarily critical in a husband and wife situation but, eventually, there will be a need to avoid probate on the death of the second spouse. Therefore, from a planning standpoint, it is generally advisable to take steps while both spouses are living so that probate can be avoided at a later date. 

The most common way to avoid probate is through the use of a living trust. As I begin to discuss living trusts, let me start by saying that most of the law makes common sense, but living trusts do not. "A regular trust" is fairly easy to understand. In a "regular trust," by way of example, a grandfather (the creator or trustor of the trust) gives money to a bank (the administrator or trustee of the funds) and the bank is instructed to hold the money for the benefit of a grandchild (the beneficiary) so that there is money available for the grandchild to go to college. We have all heard of these types of trusts and they make common sense. All trusts have these three parties involved: The creator or trustor of the trust, the administrator or trustee of the trust, and the beneficiary. In a living trust we have those same three parties but, at least upon creation of the trust, they are the same three parties: Husband and wife, as creators and trustors, form the trust and transfer the property to themselves as administrators or trustees of the trust for their own benefit. Again, this may not appear to make common sense, but it exists only because we have over 600 years of trust law that allow the concept in the first place.

Let me also say that living trusts have very little legal effect. They are ignored for income tax purposes, they do not protect you from creditors, etc. Their main purpose is to avoid probate.  From a purely legal standpoint, the husband and wife are no longer "owners" of the property, but the trustees are the owners. It is almost easier to think of the trust as a corporation. The husband and wife transfer all their property to the corporation (the trust) so that, when they die, they no longer own the property and it is not subject to probate. Similar to a corporation, when the president of a corporation dies, the corporation simply appoints a new president. When the trustee of the trust dies, the trust document sets forth who the successor trustee will be. Should the situation arise where the trust document fails to name a successor trustee, then there is a simple court procedure for getting a new trustee appointed.

As a result, for probate avoidance purposes, most people utilize a living trust.

A living trust also has other benefits which might come into play. One of those is "secrecy." A living trust, by its very nature, is a private document. A will, on the other hand, is filed with the court on the death of the individual and is available for anyone to see. For most people, this is not a significant issue. However, in some families, there might be situations that they do not want made public, such as the disinheritance of a child or the fact that they have a child with a drug or alcohol problem that requires special attention. These topics can be covered in detail in a trust without concern that the information will become public.

Another potential benefit is that a living trust might help avoid the need for the appointment of a conservator later in life. As we all know, people are living longer these days and some beyond their ability to take care of their own property. The living trust provides that, upon a trustor/trustee being unable to take care of their own property, then the successor trustee steps in to that role.

For more information or to discuss your estate planning needs, please contact Ross Schwartz.