Estate Planning 101 - The Basics1
by
Laurence P. Dugoni, JD, CPA
Barulich Dugoni Law Group, Inc.
400 South El Camino Real, Suite 1000
San Mateo, CA 94402
Meeting with a lawyer can often be an intimidating and overwhelming process. The law
is complex! Now, add to this complexity, a light hearted discussion about the care of your
children, remarriage by your spouse, large amounts of money going to taxes, children from
another marriage, attorney fees, court supervision, and it’s no wonder why so many people
simply do not want to even think about estate planning. However, the good news is that it
doesn’t have to be such an onerous task. Estate planning needs to take on the same level of
importance as saving for retirement or carrying basic fire insurance for your home.
The purpose of this article is to help you get comfortable with the “process” so that estate
planning is not such a confusing and overwhelming topic. In order to do that, however, we need
to understand some basic terminology and know the answers to a few questions:
What is an estate?
Simply put, it’s everything that you own. This would include real estate, bank accounts,
investment accounts (e.g. stocks, bonds, mutual funds), life insurance, retirement accounts (e.g.
401(k)’s, IRA’s), business interests and tangible personal property (e.g., art, jewelry, furniture,
clothing). It is important to know what comprises your estate because it’s not only what passes to
your heirs, but it’s also the basis for which the government levies a tax called an estate tax.
What is a will?
A will is a written document, which is enforced through the probate court, with
instructions for disposing of your estate after you die.
What is probate?
Probate is a court supervised administration of your estate, whether by will or by
intestacy (no will). In general, this involves determining the validity of your will, inventorying
and valuing your estate, paying your creditors, paying your administration costs and distributing
your estate to your beneficiaries.
1
This article is intended to be used for informational purposes only and should not be construed as legal
advice. Seek competent legal counsel for advice on any legal matter.
Should I avoid probating my estate?
Although there are limited circumstances when probating your estate is appropriate, the
vast majority of time a probate should be avoided. Why? There are a number of reasons:
Probate is an expensive process. The attorney fees and executor commissions are
statutory (defined in the law), and must be paid before your estate can be distributed to your
beneficiaries. For example, if your estate is valued at $2,000,000 (which can simply be the value
of your home in Burlingame – well, maybe not lately), then your statutory legal fees and
executor commissions are $66,000 ($33,000 to both the attorney and the executor).
Probate is also a time consuming and lengthy process. Probate courts are back logged
with cases and attorneys have many clients. It can take several years to wade through the probate
process depending on the complexity of your estate and the sophistication of your lawyer.
Probate is a public process. Because your estate is under court supervision and because
courts are public forums, the terms of your will and the composition of your estate, can generally
be seen by members of the public.
How can I avoid probating my estate?
There are several ways to avoid probating your estate but the most common and best way
(at least in this author’s opinion) is to create a trust during your lifetime called a living trust.
What is a living trust?
A living trust is a revocable document that is similar in purpose to a will. It is called a
“living” trust because you create it during your lifetime. It specifies who gets your estate, when
they get it and how they get it - just like a will. However, unlike a will, a living trust avoids
probate at your death because your assets are not owned by you, but rather by the trustee of your
revocable trust (if this concept is difficult to understand you can think of it as the trust owning
your assets). During your lifetime you serve as the trustee, and upon your incapacity or death,
someone you have nominated in your trust assumes this role as the successor trustee.
Another key distinction between a will and a trust is that a will does not take effect until
your death. Therefore, if you become incompetent or incapacitated, there is no one to manage
your estate. This may result in another court supervised procedure called a conservatorship. For
many of the reasons discussed above for avoiding probate, a conservatorship is something that
should also be avoided the vast majority of time.
Is it correct that once I sign my living trust there isn’t anything else that I need to do?
NO! This is probably the biggest misconception about living trusts. Most people believe
that if they have a living trust they don’t need to do anything further. Trusts are not selfactivating.
First, you must “fund” your trust. This is the physical process of changing title on your
assets from your name (or if married, from your name and your spouse’s name), to yourself as
trustee.
Second, if you die, your estate must still be administered (the terms of the trust carried
out) or there could be adverse income and estate tax consequences later.
Are there any tax consequences of creating a living trust?
No. With limited exception, a living trust is ignored for income tax purposes. Your
income taxes do not change and there are no additional tax returns required.
A living trust is also ignored for property taxes as well. Your property will not be
reassessed or result in higher property taxes.
For married couples, failing to create a trust may actually result is additional estate taxes
upon the second spouse’s passing. Each person has a $2,000,000 estate tax exemption.
Therefore, if done correctly, a married couple can protect up to $4,000,000 of their assets from
estate taxes. However, if one spouse dies and all their assets are distributed to their spouse
(which would generally be the result with a basic will or with no will at all), the deceased
spouse’s $2.0M estate tax exemption is lost! Consider this: the estate tax rate is 45%. This means
that the loss of one spouse’s estate tax exemption could result in an additional $900,000 in estate
taxes ($2,000,000 * 45%) being paid upon the second spouse’s death.
Proper tax planning is an important consideration in estate planning. Reducing or
eliminating taxes assures that your beneficiaries will receive the most from your estate.
However, most parents with young children are just as concerned (if not more concerned) about
who is going to love and raise their minor children, in addition to making sure their minor
children get the most from their estate.
How do I set up trusts for my children?
Your child’s trust is generally created pursuant to the terms of your living trust. Your
living trust will tell the trustee how and when they should distribute the assets to your child. The
assets of your child’s trust can be used for whatever uses you specify. Common uses are for his
or her health, education, support, to purchase a home, and start a business.
What’s a guardian and how do they play a role in my estate plan?
A guardian is the person you name in your will or trust who steps into your shoes as a
parent. As a father of four, I recognize this can be the most stressful and difficult part of estate
planning. The thought of someone else raising your kids can turn your stomach. However, it is
better that you decide who this person is rather than a court. The guardian must be someone who
will love and raise your kids as you would (to the extent that is even possible). It can be a family
member but it does not have to be. Legally, the guardianship terminates when your child turns
18.
What is an Advance Health Care Directive?
An Advance Health Care Directive is a document that helps to ensure your health care
wishes are known if for any reason you are not able communicate them yourself. The person you
name in your Advance Health Care Directive will have legal authority to make decisions about
your medical care if you are unable to do so yourself. An Advance Health Care Directive also
allows you to state your desire about receiving life-sustaining medical treatment if you are
terminally ill or in a permanent vegetative state.
What are final instructions?
Your final instructions include such “fun” things as how you want your remains disposed
of, whether you want to be cremated, what funeral arrangements you’ve made, the location of
your cemetery or burial plot, whether you want a memorial service, whether you want a religious
service, who will prepare your eulogy, and even how much you want expended on all such
matters. For example, my wife wants a big party with good food and good beer and absolutely no
meatloaf and no Bud Light!
How do I know if I have a complex estate?
The following items can present some complexities that may require special attention and
discussion with your estate planning counsel:
-Second marriages;
-Children from prior marriages;
-Separate property;
-Children with special needs and/or disabilities;
-Spouses who are not citizens;
-Pending lawsuits;
-Closely held family business;
-Large Estates.
How much should I expect to pay for my estate plan?
It depends. It generally depends on the complexity of your estate, the sophistication of
your lawyer, and what you want to accomplish. You should expect to spend a couple of thousand
dollars for competent estate planning counsel, but many of the factors listed above can impact
your fees. Larger estates generally cost more because they warrant additional planning.
Regardless, since there is no “one-size-fits-all” estate plan, you need to sit down with counsel
and bare all. Don’t hide issues or assets because your plan is only as good as what you have
communicated to your lawyer.
What should I look for in selecting my estate planning lawyer?
You want a lawyer or a law firm whose practice focus and specialty is in estate planning
and estate administration (post mortem) work. Also, so much planning and administration work
is driven by various tax issues that you want to make sure your lawyer has a solid understanding
of the tax issues involved. The law is much like medicine where specialties are necessary. I don’t
go see my ear nose and throat doctor when my son gives me pink eye! Likewise, when clients
call me needing advice on family law or real estate issues, I refer them to a lawyer who
specializes in that area of the law.
You keep using the term “estate plan” - what is an “estate plan”?
Some people think of an “estate plan” as a set of documents. In reality, that’s only ½ the
answer. True, an estate plan does consist of the documents described above (as well as several
others that could not be included in this article because of space constraints), but an estate plan is
really a process. A life long process that will change over time as your family changes over time.
For example, my wife and I have changed our guardian provisions because of issues we saw with
our first guardian in how they dealt with certain teenage issues with their own children. A “onesize-fits-all” estate plan is simply a myth. Each family has unique issues, different values, and
many varying goals and objectives for their children. Lawyers write for a living. Make your
lawyer customize your estate plan so that it addresses your family’s needs and issues.