February 22, 2012

Writing a Will

The following are some common reasons why a person decides to write a will and/or trust.

Avoid probate

This is probably the most common reason why a person writes a trust. Probate is the court-supervised transfer of assets from a decedent to a beneficiary or beneficiaries. The three main components are (1) the collection of the decedent's assets, (2) the satisfaction of the decedent's debts and (3) the distribution of the remaining assets to the beneficiary or beneficiaries. For example, if the decedent was a resident of Alturas, CA, their estate would be probated, if applicable, in the Modoc County courthouse as shown above. 

Of note, a will does not avoid probate as all wills are ultimately probated. Although, if the estate is not large enough, the will does not go through the formal probate process. Instead the will is merely lodged with the probate court. Prob C § 8200. This is the case when a person writes a "pourover will" in which the person's trust essentially owns almost the entire estate whereby no formal probate is needed. I have done this a few times for deceased clients. 

The two main reasons why a person would want to avoid probate is simply time and money. First, probate takes a minimum of approximately 6 months to complete, though the normal completion time is 9-12 months. The added completion time is dependent upon the court's docket. The less-clogged the probate calendar, the faster probate can be completed. Second, probate fees are particularly high. The fee is determined by taking a percentage from the estate's value. The fee is progressive such that the higher the estate's value, the larger the probate fee for the personal representative and attorney.  The personal representative is always free to waive compensation, though the attorney is probably not as likely to do so. 

Avoid estate taxes

The most commonly read post on my blog is the one devoted to the estate tax. Since I wrote the article on December 27, 2010, it has been uniquely viewed 11,966 times according to Google Analytics. The average time on the page for a visitor is 3 minutes 53 seconds.  For whatever reason, many people believe that the tax man, also known as the IRS, will come knocking on their door once the grim reaper has blown through. This is largely fantasy thinking. The estate tax affects a few small number of individuals. For example, the estate tax threshold in 2012 is $5,120,000. This means that if your estate is under that amount, your estate will owe no federal estate taxes. In case you were wondering, California does not have an estate tax for 2012. Individuals with estates that large are few and far between. Still, I am aware that the estate tax limit is set to revert back to the $1M threshold for 2013 if no legislative action is taken. In which case, thousands of individuals would be affected that were previously exempt from the estate tax. Regardless, millions of people will remain unaffected by the estate tax if it is lowered to a $1M threshold. 

Nonetheless, various trusts can be set up to avoid or delay the application of the estate tax. For instance, an A/B trust, Disclaimer trust, charitable remainder trust and a QDOT trust are all examples of trusts specifically designed to accomplish such.

Provide for the smooth transition of assets from decedent to beneficiary

If a person writes a will and/or trust they are removing the legal system's distribution scheme from the equation, known as intestate succession. In California, the probate code specifically spells out how assets are distributed to heirs. For example, if a single person passes away who does not have children or grandchildren, their assets would be distributed to their parent(s), and if no parent is living, then the assets would be distributed to their brothers and sisters. If you ever want to see what the breakdown is for your heirs, just look at a table of consanguinity (Google it). A common problem that arises when distribution is left to intestate succession is the fact that the personal representative must track down the heirs, wherever they may be. Another problem with intestate succession is that only your relatives can inherit your estate, friends are not included. Thus, if a person was estranged from their family but had a number of close friends, upon that person's death his estate would be distributed to his family unless he wrote a will, trust or designated beneficiaries through non-probate means. Moreover, a surviving boyfriend or girlfriend would not be entitled to anything under the laws of intestate succession. 

An additional benefit for writing a will and/or trust is the fact that a person can stipulate the terms of the inheritance. A few clients have expressed a concern that their children were not as responsible as they desired. The fear was that the child would inherit the money and immediately engage in frivolous spending given their spendthrift mentality. For example, a guardianship of the estate for a minor automatically terminates at age 18, the age of majority in California. Prob C § 1600(a). Thus, the spendthrift child's inheritance, if in a guardianship, would have no spending limitations placed on it post-18. The child would then be free to spend as they see fit.  In light of this, a trust established for a child's benefit can specify its purpose. Many trusts often state that the trust will be used for health, education, maintenance and support. The key is that the trustee, rather than the child, will ultimately make the determination as to trust distributions and allocations. Yes, this scenario does create a "trust fund baby" situation, although I would prefer that to a situation where the child spends the money on frivolous items.