Estate Planning Myths

Hansel and Gretel

Urban legends, myths and fairy tales are frequent topics of discussion. Whether you believe that Kevin from the television show "The Wonder Years" (a childhood favorite of mine) later turned into Marilyn Manson, in the Loch Ness Monster, or that Walt Disney was cryogenically frozen, are proof of the abudance of such. In terms of estate planning, old wive's tales exist in this field as well. The following are 3 examples that qualify are urban legends or substantially more fantasy than fact.

1. Public reading of a person's will

A couple years ago I saw an advertisement for Directv where the decedent's attorney was reading the will's contents to his beneficiaries. Each beneficiary waited with baited breath for the attorney to name them as the beneficiary for some desirable item such as the private jet, the family business, and in the case of one beneficiary, the decedent's Directv subscription. 

The notion that a will is read by an attorney to various individuals, who might or might not be the beneficiaries of the decedent's estate, is pure fiction or Hollywood magic. A will is never read aloud by an attorney in California. Instead the will is lodged with the probate court. Thereafter, the personal representative seeks to prove the will's authenticity whereby its distribution specifications will be honored by the probate court. If a will is uncontested, no evidence needs to be given by one of the attesting witnesses, provided the attesting witness signed in the will a declaration under penalty of perjury. CCP §2015.5.

2. Conducting a probate in private

I have been asked on a few occasions if a person can withhold a will from a beneficiary on the ground that the executor despises the beneficiary. Presumably the executor could withhold the will from the beneficiary although this subjects them to liability. Prob C § 8200(b). More importantly though, in order to prove the will, the executor must go through probate in order to complete the process. Since probate is a judicially-supervised process, anybody, whether they are a beneficiary or the peculiar people who hang out by the courthouse (there are plenty, trust me), each can inspect the documents relating to the decedent's probate. Thus, anybody could request a copy of the will or any other document filled during the process. 

Whereas probate is a public process so to speak, in that the court records are open to inspection, trust administration is generally not a public process. In a trust administration case, the distribution clauses found in the trust will generally not be subject to inspection because it is not lodged with any court. An instance where a copy would be subject to public inspection is where the beneficiaries litigate a matter relating to the trust and a copy is admitted into evidence. For example, the beneficiaries could petition a probate court to determine the validity of a trust provision. Prob C § 17200(b)(3).

Two recent celebrity deaths highlight the stark contrast between probate and trust administration. Whitney Houston's estate is governed by a will she signed a few years ago. The entire proceedings of her estate, including what she owned, the value of her assets and the identity of her beneficiaries, is subject to public inspection. Her estate is currently being probated in Atlanta, George. For those keeping track, Ms. Houston left everything to her daughter Bobbi Kristina Brown through a testamentary trust, a trust created by her will, and named her mother Cissy Houston the executor. The value of Ms. Houston's estate is pegged at $20M, which would make her estate subject to the estate tax.

Conversely, Steve Jobs wrote several trusts prior to his death. County records indicate that Mr. Jobs and his wife transferred three properties in 2009 to their trusts. Since Mr. Jobs and his wife were clearly capable of hiring highly-skilled attorneys, it is likely that the exact details of his estate will not be known unless a beneficiary initiates a court proceeding. Thus, the exact nature of Jobs' estate may be cloistered forever.

3. The government will inherit everything I own  

This is a particular favorite of mine because I have been asked this question repeatedly during in-person consultations. First the client will say that they do not want the government to inherit anything from them and then they invariably say that they do not want to pay the government anything upon their death, the estate tax.

I must say the notion of government inheritance is not necessarily a fantasy. The government could theoretically inherit your property, known as escheat, if you were to die without any living relatives and having failed to write a will or trust. The crux is that it is nearly impossible to die without living relatives.

For example, I could reasonably estimate that I have around 75 relatives living in California and maybe a 100 more scattered throughout the world. In order for my estate to escheat, all of these relatives would have to predecease me and I would have failed to write a will or trust. Suffice to say, the odds are slim to none and none left town.

Nonetheless, I have heard cases of escheat occurring. Still the cases involved instances where the decedent moved away to a remote area and cut off contact with their relatives. By moving away, the relatives were unable to notify the local probate court that they were the rightful heirs as next of kin because they did not know about the relative's death.

Escheat - Government Inheritance

One partial misconception in estate planning is the notion that the government, in this case the State of California, will inherit your property. The legal term for this is "escheat." 

While the State of California may theoretically inherit your estate, in real-world application escheat rarely happens. The reason for this is because if a person writes a will or has legal heirs, escheat is avoided. Prob C § 6800. In terms of typing a will, the formalities for such are outlined in Prob C § 6110. As for legal heirs, the California Probate Code says that heirs means "any person, including the surviving spouse, who is entitled to take property of the decedent by intestate succession under this code." Prob C § 44. What this means in everyday language is that your heirs are the people who are related to you by blood. For instance, this would include your children, nieces, nephews, cousins, uncles, aunts, brothers and sisters.

For illustrative purposes, let us assume that a person named Emmanuel had moved to California from the Ivory Coast. When Emmanuel passed away years later, he left no will because he had never got around to writing one. However, Emmanuel was survived by a second cousin who lived in Arizona named Cornelius. Cornelius and Emannuel shared the same great-grandparent, thereby making them second cousins. Upon hearing that Emannuel had passed away and that he was next of kin, Cornelius came to California to administer Emmanuel's estate as he was entitled to inherit it through intestate succession. Prob C § 6402. 

While very basic, this example demonstrates how easy it is to avoid escheat. Even if a person fails to write a will, which is common, the fact that he or she is survived by a heir will avoid the imposition of escheat for their estate. It is very difficult to find a person who lacks any heirs. If you trace your family tree back further and further, the number of heirs you have will increase substantially. Thus, escheat will most likely be avoided because you will have an heir who can claim your estate should you not write a will.

One possibility where escheat might occur is where a person moves to a far off place, say Modoc County California, and loses contact with their family. Consequently, when they pass away, nobody will know about it in order to inherit that person's estate. While plausible, technology today is so extensive today, email, Facebook, twitter, instant messaging, etc.,  it prevents people from getting cut off from their families, unless they want to be a recluse or the black sheep of the family.

Living Trust Myths

These are some more fallacies I have been asked, read and heard about in regards to living trusts:

Fiction: If I set up a trust I must file a separate tax return for the trust.

Fact: Most trusts do not require the filing of a separate tax return provided the person who drafted the trust has substantial control over it. IRC §§671-679. For example, if John Smith established a trust for his own benefit, the John Smith 2009 Living Trust, he would not need to file a separate tax return for the John Smith 2009 Living Trust. Such a trust in IRS speak is known as a “grantor trust.”

Fiction: If I transfer my house into a living trust, the house will be re-assessed for property tax purposes.

Fact: California law clearly says that if a couple or single person transfers their residence into a revocable trust that they created the property is not reassessed for property tax purposes. Rev & T C §§62(d). For example, if John and Mary Smith established a trust and transferred their 650 Rosewood Court residence into the trust, the assessed value of 650 Rosewood Court would remain the same after the transfer. This is particularly important for people who purchased their homes years ago and are acutely aware of the low assessed value for property tax purposes.

Fiction: Everything I own should always be transferred into a trust.

Fact: Due to tax and administrative reasons a retirement account and life insurance policy should not be transferred into a trust typically.

Fiction: If I do not write a will or a trust, the government will inherit my property.

Fact: To quote the character Randolph Duke from the movie Trading Places, “hogwash.” The government, namely the state of California, will only inherit your property (called escheat) if you have no relative or you do have a relative but they cannot be located. For example, there would be no escheat if your had either a spouse, child, parent, grandchild, grandparent, brother, sister, uncle, aunt, nephew, niece or distant cousins (Please click on the diagram below). Consequently, the odds of a person not having any relative alive when they die is ostensibly zilch. The cases in which escheat occurs, and it is very rare, comes about because a person moved far far away from their family. Ultimately, escheat is a very narrow exception to the rule that somebody other than the government will inherit your property.