Overview of Estate Planning Practice

Transcription

1 Overview of Estate Planning Practice Richard S. Kinyon Genevieve M. Moore Excerpted from California Estate Planning (Cal CEB) Continuing Education of the Bar California 1.1 I. ESTATE PLANNING PROCESS Estate planning is the process of putting an individual s personal and financial affairs in order. The goals are to maximize the individual s enjoyment of his or her estate during his or her lifetime and the beneficiaries enjoyment of the estate after the individual s death. Estate planning involves Managing the individual s real and personal property during his or her lifetime and providing for the management and disposition of the property before and after his or her death; Structuring business, investment, and employee compensation arrangements to better achieve these goals; Executing testamentary and other documents to protect and manage the individual s estate during his or her lifetime, in the event of the individual s incapacity or financial misfortune, and following his or her death; Planningforpersonalandhealthcaredecisionmakingintheeventof the individual s incapacity; and Minimizing the impact of many different types of taxes. Estate administration or trust administration is the process of carrying out the individual s estate plan and administering his or her probate andtrustestatefollowinghisorherincapacityordeath.itistheprocessof 2018 by the Regents of the University of California 1

2 1.2 California Estate Planning winding up the decedent s affairs and distributing his or her assets in accordance with his or her estate plan. 1.2 A. Challenges of Estate Planning Successful estate planning presents challenges for the client as well as for the attorney. Some clients are reluctant to begin the estate planning process because it forces them to acknowledge their own mortality. Other clients find it difficult to complete the process and make final planning decisions that will become irrevocable at death. Planning may be especially difficult for a client who must decide how to provide for minor beneficiaries, for beneficiaries with special needs, or for beneficiaries whose current problems (e.g., substance abuse, creditor problems, or marital obligations) may change over time. The client also faces the practical challenges of collecting financial information from various sources and transferring title of assets to a revocable trust if one is created. Finally, the client incurs the legal and other costs of creating and implementing the estate plan. Each client has his or her own personal and family situation, assets and liabilities, and estate planning objectives that require creative analysis and customized planning. For example, a client s income or assets might be of sufficient value to make tax planning a key component of the estate plan. Or a client s main asset might be an interest in a closely held business that requires reorganization or a buy-sell agreement to carry out successful business succession planning as well as personal, nonbusiness objectives. A client s unique family situation or gifting objectives may require individually tailored arrangements, such as family partnerships or LLCs, specialized trusts, or the creation of charitable entities or trusts. The attorney s challenge is to efficiently create and implement a plan that meets the client s specific objectives and to fit these objectives into a system of divergent and complex laws: estate, gift, and generationskipping transfer tax laws, income tax laws, real property and documentary transfer tax laws, family law, corporate law, and state law constraints on the transfer of property. The attorney must keep current on changes in the law. It is often a challenge to draft dispositive provisions in accordance with the client s wishes that do not also have serious adverse tax or other legal consequences. Additionally, there is the constant challenge of explaining these laws and the proposed plan in a way that results in the client s informed consent and a general if not thorough understanding of the plan. This is particularly difficult due to frequent changes in the relevant laws by the Regents of the University of California

3 Overview of Estate Planning Practice 1.3 Although these challenges require a significant effort by both the attorney and the client, the result of a successful estate planning effort usually will be a client who is relieved to have put a comprehensive plan in place and whoisgratefulfor theassistance in orderinghis or her affairs. 1.3 B. Consequences of Failure to Plan; Intestacy as Default Estate Plan Every California domiciliary has an estate plan by design or default. Without a written estate plan, the disposition of a decedent s assets is subject to the provisions of property ownership arrangements and applicable law. For example: Property held in joint tenancy passes by operation of law to the surviving joint tenant or tenants (CC 683.2(c); see ). Property held as community property with right of survivorship passes by operation of law to the surviving spouse or surviving registered domestic partner (CC 682.1; see ). Propertysubjecttoarevocabletransferondeath(TOD)deedistransferred to the beneficiary or beneficiaries (Prob C 5652; see 7.31A 7.31D). Property subject to contractual arrangements (e.g., life insurance policies (see chap 19), annuity contracts (see chap 20), retirement plans (see chap 21), or pay on death (POD) accounts (see chap 7)) passes by beneficiary designation or by the provisions of the specific policy, contract, plan, or account. Property held in trust passes in accordance with the trust instrument. The disposition of the decedent s remaining assets is governed by the laws ofintestatesuccessionifheorshehasnovalidwill.probc Under the intestacy laws, the decedent s property will be distributed to the decedent s heirs(i.e., the decedent s closest family members) in shares generally determined by their degree of relationship to the decedent. The administration and disposition of these assets is generally supervised by the probate court in an estate administration proceeding, one function of which is to ensure that the proper parties have adequate notice of the proceeding and receive an accounting of the estate administration. In Estate of Carter(2003) 111 CA4th 1139, the court set aside a decree distributing an intestate decedent s estate when the administrator failed to give notice of administration to claimants, despite knowledge of facts indicating that 2018 by the Regents of the University of California 3

4 1.4 California Estate Planning they might be decedent s children. Small estates and property passing to a surviving spouse, however, are governed by statutory provisions(see Prob C ) that do not require a full probate administration. See 7.3, The default estate plan may work well for some people, but many people can benefit by executing wills, trust instruments, and powers of attorney, and by changing title to property and beneficiary designations in a way that facilitates a more orderly and comprehensive scheme for managing and ultimately disposing of their assets. 1.4 C. Benefits and Objectives of Estate Planning One of the key benefits of effective estate planning is that it yields a comprehensive analysis of an individual s personal and family situation and his or her assets and liabilities. The process also yields documents(be they a simple or complex will or one or more revocable trust instruments coupled with a pourover will, together with a power of attorney) that govern the administration and disposition of the individual s estate in a comprehensive manner. As a result of the process, the attorney becomes a knowledgeable adviser who can assist the fiduciary and beneficiaries with the administration and distribution of the estate following the client s incapacity or death. Successful estate planning can thus provide welcome certainty and direction at a difficult time of transition. Although clients specific objectives with respect to their estate plans will differ, most clients share certain general objectives. They engage an estate planning attorney because they want to arrange their affairs in order to protect themselves, their loved ones, and their assets, during their lifetimes (including provisions for management of their assets and decisions regarding their personal and health care if they become incapacitated) and after death. They also want to minimize the expense and taxation that can accompany the administration and transfer of assets before and after their deaths. Some clients also may want to arrange for, or at least leave a written statement of their wishes regarding, the disposition of their remains, directions for anatomical gifts, and directions concerning autopsies. See chap Planning for Personal and Family Needs One of the primary objectives of estate planning is to provide for the needs of the client and his or her dependents. A young couple with little by the Regents of the University of California

5 Overview of Estate Planning Practice 1.6 accumulated property may visit an estate planning attorney primarily to name a guardian or to create custodianships or trusts for minor children. Other clients may be motivated by the need to create a specialized arrangement for a disabled child or to provide for an aged parent. A client may have recently received an inheritance, may be the recipient of a power of appointment over a trust fund that he or she can exercise, or may wish to determine the best way to make a significant gift to a favorite charity. A client with a same-sex partner may wish to discuss domestic partner registration and its implications, or the tax and property effects of same-sex marriage, and the best ways to provide for each other. Another client may bedrivenbyadesiretopreserveorbestdisposeofaninterestinabusiness after he orsheis gone.the specificobjectives are uniqueto each client. Most clients also want to provide a plan in the event of their own incapacity. As the average life span of individuals increases, the possibility of a person becoming incapacitated at some point in his or her lifetime also increases. A client s comprehensive estate plan will therefore include arrangements for personal and health care and property management decisionmakingbyagentsorothersurrogatesintheeventoftheclient sincapacity.a wide range of planning devices may be used, from simple powers of attorney for personal and health care and financial decisions to complex trust and business succession arrangements. Often, with these types of arrangements in place, it may be possible to avoid a courtsupervised conservatorship in the event of incapacity. For a detailed discussion of incapacity planning, see chap Minimizing Expense and Taxation Another primary objective of a client s estate plan is to arrange for the administration and transfer of the client s property to others without excessive effort, expense, or taxation. This objective may be satisfied in various ways depending on the client s particular situation. For example, a revocabletrust(seechap6)mightbeusedtominimizethecost,courtsupervision, delay, and publicity that a probate proceeding can entail; and various types of lifetime and testamentary gifting arrangements (see chap 8), outright or in trust, might be used to minimize property, income, and estate taxes. Different types of entities may be created to provide for the succession of a client s business or investments with as little adverse tax consequence and expense as possible. Various devices can be used to structure the transfer of assets to take advantage of gift, estate, and generation by the Regents of the University of California 5

6 1.7 California Estate Planning skipping transfer tax deductions, credits, and exemptions. For a discussion of estate and gift tax planning, see chap 10. On the generation-skipping transfer tax, see chap 11. It also may be necessary to investigate issues that can arise if the client owns property situated in another state or outside the United States or receives or inherits property from a nonresident alien. The tax issues are complicated and can require extensive analysis to ensure that the overall expenseand taxationareaslow aspossible. See chap Planning for Postmortem Asset Management The estate plan, of course, will include provisions for the postdeath disposition or management of a client s assets. These provisions may range from simple outright bequests to the creation of complex trusts that continue for many years after the client s death. They also may include buysell agreements or other business arrangements to carry out a client s business succession planning, or investment and management directives designedtotransferpropertytoorforthebenefitofasurvivingspouseand issue. 1.8 D. Implementing Estate Plan The estate plan is only as effective as its implementation. Once a plan has been formulated, other actions may be necessary to fully implement it. Thescopeoftheseactions,andwhentheywilloccur,dependsonthetype of plan chosen Wills and Revocable Trust Transfer Arrangements If the estate plan is based on a will, after it is signed there is often little implementation required, although it may be necessary to change forms of joint ownership or beneficiary designations to enable the overall estate plan to operate properly. To implement an estate plan based on a revocable trust, however, after the trust instrument is signed, title to the client s assets generally should be transferred from his or her individual name to the name of the trustee. This may involve preparing and recording new deeds for the client s real property; changing title to bank and brokerage accounts and insurance or annu by the Regents of the University of California

7 Overview of Estate Planning Practice 1.11 ity policies; changing beneficiary designations for life insurance policies, retirement plans, and POD accounts; assigning business interests; and recording the share ownership changes of corporations, limited liability companies, partnerships, and other entities. Although the process can be tedious and time-consuming, after the trust is funded the client generally sees no substantial difference from day to day in how his or her assets are managed or taxed.the client (assuming he or she is the sole trustee) continues to manage and control the trust property as trustee, and trust income, deductions, gains, losses, and credits continue to be reported on the client s personal income tax returns Incapacity Arrangements If a client becomes incapacitated, partial administration of the estate by a fiduciary may occur before death. It may become necessary to use the client s powers of attorney or activate trustee succession provisions in the client s revocable trust instrument. The estate planning attorney can assist with these actions to keep the client s personal and financial affairs operating as smoothly as possible Transfers at Death and Continuing Arrangements Concerning Trusts The provisions of a client s will or revocable trust instrument become irrevocable and can no longer be amended after the client s death. If the client s estate plan is based on a will and if the will must be probated, the probate court of the county in which the client was domiciled generally will supervise the administration and distribution of the probate assets. However, it may be necessary to open ancillary probate proceedings if the client owns real estate in other states or countries. If the estate plan is based on a revocable trust, the administration and distribution of the so-called administrative trust assets may be handled by the trustee without court supervision, although access to the court is available to resolve problems or uncertainties, and use of court procedures may be advisable for actions taken with respect to certain trust assets. On administrative trusts, see 6.63A. When a revocable trust holds community property, generally only the provisions governing the disposition of the deceased spouse s half of the community property and his or her separate property, if any, become irrevocable and unamendable on his or her death. The provisions governing the disposition of the surviving spouse s 2018 by the Regents of the University of California 7

8 1.12 California Estate Planning half of the community property and his or her separate property, if any, continue to be revocable and amendable by the surviving spouse. Even if all the client s assets are held in a revocable trust at the time of his or her death or otherwise pass outside probate (e.g., by beneficiary designation or joint tenancy with right of survivorship), it may be advisable to initiate a dry probate proceeding; that is, by filing a petition for probate and following through with the procedural aspects of a conventional probate proceeding. However, no assets are inventoried or distributed in this process. Although there are some extra costs associated with the proceeding, it can serve to Establish the validity of the will (and the exercise or nonexercise of any testamentary powers of appointment) and the authority of the personal representative to act (should that authority be needed in the future for any reason); Implement the nomination of a guardian designated in the will to care for minor children and administer their assets; Shorten the creditor claims period from (generally) 1 year after the date of death (CCP 366.2(a)) to 4 months after letters testamentary are issued to the personal representative(prob C 9100(a)(1)); and Deal with certain assets or circumstances as well as disputed claims of creditors and others that may be enforceable against the decedent s estate generally, including property in a trust over which the decedent had a general power of appointment. Onwhenaprobateproceedingmightbeusedforpurposesofassetprotection, see California Trust Administration (2d ed Cal CEB) by the Regents of the University of California