Nobody likes to think about their own mortality, but we should always be thinking about our loved ones. Estate planning is something that needs to be done by everyone and failure to properly plan an estate and affairs in case of the unexpected can have dire effects on a family.
Estate planning ranges from the complex to the very simple. Whether a person is very wealthy and needs to tie in their estate planning with effective tax planning to avoid the Draconian estate tax, or the person is of modest wealth and simply needs to plan for their health care decisions in case they are unable to make those decisions for themself, everybody needs to consider their estate plan.
When we discuss basic estate planning in California we are typically talking about the preparation of a will, revocable living trust, durable power of attorney, and an advanced health care directive, which is a medical power of attorney.
A will is a document that allows a person to dispose of their assets how they want to have them disposed instead of pursuant to state law in situations where a person does not have a will. A will names the executor of an estate, which is the person in charge of managing the estate and disposing of the person’s assets pursuant to their wishes. If a person does not have a will or does not name an executor, state law will decide who has priority to become the executor. A will also nominates guardians for minor children. A will is a public document that must be lodged with the probate court upon a person’s passing. The probate process is the court supervised process to change title to assets upon a person’s death.
To avoid the publicity of a probate, a person could consider the use of a revocable living trust to dispose of their assets. In this situation, a person will have a will that pours all the assets of the decedent into the trust. The trust then takes the place of the will and disposes of the assets. The trust is a private document and does not need to be lodged with any probate court. The trust will have a trustee who is the person that carries out the terms of the trust and disposes of the assets as required by the terms of the trust.
The durable power of attorney, or POA, is a document that provides a person’s agent the power to deal with financial affairs when the person is unable due to incapacity. Even if a person has a trust, they should also have a POA as there are situations where a trustee of a trust would not have the requisite authority to conduct a transaction for another person. For example, a trustee can prepare and sign a tax return for the trust, but cannot sign and file one for an individual without the POA.
Lastly, the typical estate plan will include the advanced health care directive, or AHCD, which is a person’s medical power of attorney and instructs loved one as to the type of medical care desired when the person is unable to communicate those wishes for themselves. Among other things, the AHCD can instruct an agent as to the extent of pain relief a person wants to be provided, artificial nutrition or hydration, or when medical treatment should be halted.
Once the aforementioned basic estate planning documents are in place, many estates should then consider additional planning for the unexpected. For business owners, this may include a buy-sell agreement between partners or shareholders to purchase the decedent’s share of a business they own upon their passing. For the business owner, this may also include family planning to ensure the smooth transition of a business to the next generation. There may be some children that want to continue the business of their parents and other children who only want to receive their rightful share of their parents’ estate. In these situations, the estate planner will create the necessary agreements to handle the transition of the business to the next generation and possibly counsel as to the use of life insurance to fund the buy-out of a party from the business.
For non-business owners, depending on the value of the estate and the age of the clients, additional planning may include discussions involving life insurance or long term health care solutions. For example, for a young couple with young children early in their careers that do not have a lot of assets yet, estate planning will likely include a discussion on life insurance to provide for their spouse and possibly provide funds for college for their children.
For some, estate planning will encompass a simple will, POA and AHCD. For others estate planning will encompass a will, trust, POA, AHCD, and other sophisticated tools – such as family limited partnerships, irrevocable life insurance trusts or grantor retained annuity trusts – to tame the estate tax.
Estate planning is planning for the unexpected and the expected. Do not let this happen: “Did you hear about Carol? Bob was only 40 when he died unexpectedly and he did not have a will or any life insurance for Carol and the two young kids. "
The author is a Partner at Calone and Harrel Law Group LLP who concentrates his practice in all manners of taxation, real estate transactions, corporate, partnership and limited liability company law matters. He is a certified specialist in taxation. He may be reached at 209-952-4545 or