October 19, 2011

Estate Planning Checklist

A checklist of questions can be a very useful tool in achieving almost any objective. Writing a trust is no different. The following are some key questions that apply to every situation. Though the questions may be valued differently by some, the end result is that the following questions must be answered eventually.

1. Who will be the trustee?

A trustee is a required element of a trust. Every trust must have a trustee or else it will not be considered a trust. The trustee is the legal owner of trust property. 

Although there is an old legal saying that goes “a trust will not fail for want of a trustee.” This means that if the office of trustee is vacant there are available legal channels to appoint a trustee. For example, California law allows a trust beneficiary the ability to petition the appropriate superior court to confirm the appointment of a trustee when the office of trustee is vacant. Prob C § 172009(b)(10).

The determination of who will be the trustee is a very important question. I always tell clients that trustee selection, along with selecting beneficiaries, comprise the two most important questions they will weigh during the process. The reason being is that trustee will have control over trust property and its administration. The trustee will ultimately be the person cashing checks, depositing money, filing trust tax returns, selling real estate, etc. Thus, whoever is selected is given an enormous amount of responsibility, and the legal liability that comes with it. The importance then of selecting a competent and attentive trustee cannot be understated. The norm is to pick a close family member or friend.

2. Who will be the beneficiary or beneficiaries?

Ah yes, who gets all your property when you pass on eventually. It should be noted that there is no right to inheritance, except for spouses in light of community property law. A child, niece, neighbor, family dog, etc. has no vested inheritance right in your estate. A person is free to leave their estate to anybody essentially, subject to spousal constraints, without any legal recourse. So you could leave your trust estate to a charity, your alma mater, the federal government or even your pet subject to certain qualifications.

Invariably the chosen beneficiary or beneficiaries are spouses and then remainder to children. For example, Harry and Wendy, a married couple, have two children Samuel and Donna. Harry and Wendy write a trust in which the surviving spouse will inherit the deceased spouse’s estate. Then when the surviving spouse passes away, Samuel and Donna will inherit such estate equally. For all but a few trusts I have written, this is the exact method of distribution that has been chosen by clients.

3. Should I even write a trust?

Writing a trust is not necessary, in my opinion, unless you own a home or have children or both. First, one of the key benefits of writing a trust is probate avoidance. Just about every asset can be disposed of through beneficiary designation. A person can list a bank account beneficiary, a stock beneficiary, an IRA beneficiary, a life insurance beneficiary, etc. The one glaring exception is that of real property. California law does not permit a person to name a beneficiary of their home. Thus the default rule for transfer of real property, generally speaking, is probate. However, real property owned in trust is exempt from probate. Yet if a person does not own real property, then this benefit is inapplicable. Second, if a child inherits a large sum of money, namely over $5,000, then a court-supervised guardianship is needed to oversee their estate. I would like to believe, regardless of contemporary economic constraints, that most parents have more than $5,000 to leave to their children. If the inheritance if distributed outside of a trust, a guardianship is likely needed. Still, if a person does not have a child, this benefit is irrelevant.     

Obviously attorneys have a direct financial interest in wanting clients to write a trust. However, I never encourage clients to write a trust if it is unnecessary, namely the client(s) lack a home and children.

4. How much should we spend for a trust?

One of the great trust myths is the fallacy that writing a trust eliminates the need for post-death administration. In reality, the same steps for trust administration are patterned after the probate process essentially. The result is that there will be significant time and expense for both situations. However, trust administration is a non-judicial process whereas probate is a judicial process, which generally shortens the amount of time involved and likewise reduces the amount of cost involved. Whenever I talk about fees with a client, I always bring up that trust administration will almost always be more expensive than writing a trust. So when I quote them a fee of $1,500 hypothetically, I also include that trust administration may easily cost $5,000. The takeaway is that a person should not look at just the initial step, writing a trust, but the entire process, writing a trust and its administration, when gauging how much they are willing to spend.