In my last article, “The Model Minority” (published Aug. 30, 2014), I stated that if you own your home, paid for or not, you need a living trust to avoid probate court upon your death. This article continues the information provided by the State Bar of California in their consumer pamphlet “Do I Need a Living Trust?”
1. How are my assets put into the living trust?
Once your trust has been signed, an important task remains. To avoid court-supervised conservatorship proceedings if you should become incapacitated, or the probate process at your death, your assets must be transferred to the trustee of your living trust. This is known as funding the trust.
Deeds to your real estate must be prepared and recorded. Bank accounts and stock and bond accounts or certificates must be transferred as well. These tasks are not necessarily expensive, but they are important and do require some paperwork.
A living trust can hold both separate and community property. This makes it convenient for spouses and registered domestic partners to plan for the management and ultimate distribution of their assets in one document. (Note: While registered domestic partners have many of the same rights as spouses, be aware that federal tax law does not provide the same tax benefits for domestic partners as it does for spouses.)
If you own real estate in another state, you might (depending on that state’s law) transfer that asset to your trust as well to avoid probate in that other state. A lawyer from that state can help you prepare the deed and complete the transfer. If the real estate is located in California, a California lawyer should prepare the deed and advise you on transferring such property.
A lawyer can help you transfer other assets as well. For example, you should consider changing the beneficiary designations on life insurance to the trust. As for the beneficiary designations on a qualified plan such as a 401(k) or an IRA, you should seek a qualified professional’s advice because there are serious income tax issues.
2. How could a living trust be helpful if I become incapacitated?
If you are the trustee of your own living trust and you become incapacitated, your chosen successor trustee would manage the trust’s assets for you. If your assets were not in a living trust, however, someone else would have to manage them. How this would be accomplished might depend on whether your assets were separate or community property.
If you are married or in a registered domestic partnership, assets acquired by either you or your spouse or domestic partner while married or in the partnership and while a resident of California are community property. (Note: In domestic partnerships, earned income is not treated as community property for income tax purposes.)
On the other hand, any property that you owned before your marriage or registration of your partnership, or that you received as a gift or inheritance during the marriage or partnership, would probably be your separate property.
In California, community property could be managed by your spouse or registered domestic partner if he or she is competent. If you own separate property (or are not married or in a registered domestic partnership) and you become incapacitated, such assets could be managed by an agent or attorney-in-fact under a power of attorney (See #3); without planning, however, your separate property assets would be subject to a probate court proceeding called a conservatorship.
3. What other estate planning documents should I have?
A durable power of attorney for property management could be helpful if you ever become incapacitated. It deals with assets that were not transferred to your living trust before you became incapacitated and any assets that you receive afterward. With this power of attorney, you appoint another individual (the attorney-in-fact) to make financial decisions on your behalf.
This power of attorney, however, cannot replace a living trust because, among other things, it expires when you die. It cannot provide instructions for the distribution of your assets after your death.
You might also consider setting up an advance health care directive/durable power of attorney for health care. This allows your attorney-in-fact to make health care decisions for you when you can no longer make them for yourself. In your advance health care directive, you may state your wishes regarding life-sustaining treatment, organ donation and funeral arrangements as well. A health care directive also allows an authorized agent to access your medical information, which could be important in light of strengthened federal privacy laws.
4. If I have a living trust, do I still need a will?
Yes. Your will affects any assets that are titled in your name at your death and are not in your living trust or some other form of ownership with a right of survivorship. If you have a living trust, your will would typically contain a pour-over provision. Such a provision simply states that all such assets should be transferred to the trustee of your living trust after your death. (This does not mean, however, that your beneficiaries can avoid going through probate for these assets.)
Your will can nominate guardians for your minor children as well. Any assets held in a trust for your children would still be managed by the trustee.
5. Who should draft a living trust for me?
A qualified estate planning lawyer can help you prepare your living trust, as well as a will and other estate planning documents (see #17).
While other professionals and business representatives may be involved in your estate planning, a living trust is a legal document, which should be prepared by a qualified lawyer.
In addition, the State Bar urges you to seek advice only from professionals who are qualified to give estate planning advice. Many professionals must be licensed by the State of California.
Ask the professional about his or her qualifications. And ask yourself whether the advisor might have an underlying financial incentive to sell you a particular investment, such as an annuity or life insurance policy. Such a financial incentive could bias that professional’s advice.
A living trust is often held out as an enticement or “loss leader” by offices that are not staffed with competent and qualified estate planning lawyers. Unfortunately, some sellers of dubious financial products gain the confidence and private financial information of their victims by posing as providers of trust or estate planning services.
6. Should I beware of “promoters” of financial and estate planning services?
Yes. There are many who call themselves “trust specialists,” “certified planners” or other titles that suggest the person has received advanced training in estate planning. California is experiencing an explosion of promotions by unqualified individuals and entities that only have one real goal — to gain access to your finances in order to sell insurance-based products such as annuities and other commission-based products.
To better protect yourself, consult with a lawyer or other financial advisor who is knowledgeable in estate planning — and who is not trying to sell a product that may be unnecessary — before considering a living trust or any other estate or financial planning document or service.
In conclusion, there is more information provided in the State Bar pamphlet that would not fit in these two articles. If you would like a free copy of the pamphlet, you may order it or you can call my office at (310) 348-7272, and we will mail one to you free of charge.
Judd Matsunaga, Esq., is the founding partner of the Law Offices of Matsunaga & Associates, specializing in estate/Medi-Cal planning, probate, personal injury and real estate law. With offices in Torrance, Hollywood, Sherman Oaks, Pasadena and Fountain Valley, he can be reached at (800) 411-0546. Opinions expressed in this column are not necessarily those of The Rafu Shimpo.