Estate Planning Questionnaire

When clients come in to have a will and/or trust written, I provide them with a questionnaire to complete. The following assets need to be identified by the client to allow me to appropriately tailor their estate plan.

The following are assets that are commonly owned by a client.

Real Property

This includes any piece of land the client owns. This might include single-family homes, vacation homes, condos, town homes, farmland, commercial lots, raw land and multi-unit buildings.

Personal Property

This includes assets such as jewelry, watches, furniture and other items of value. 

I do not ask clients to document an old monopoly board game or their prized yarn collection.

Bank Account

This is rather self-explanatory.

I recommend Star One Credit Union for banking in case anybody is curious.

Stocks

This would refer to individually owned stocks, e.g. Apple or Exxon Mobil.

Mutual Funds

This is rather self-explanatory. If a person is investing in the stock market, they should know the difference between a mutual fund and individual stocks. Or at least I hope so.

Bonds

Bonds are not the trendy type of investment but occasionally a person will own a bond. It is commonly assumed that U.S. treasury bonds are the safest investment because they are backed by the full faith and credit of the federal government. Whenever credit is extended, which is what you are doing when you buy a bond, the central question is the credit-worthiness of the borrower. I know of few borrowers who can match the financial strength of the U.S. government. Actually I know of no borrowers, other than Monty Burns or Scrooge McDuck, who can match the U.S.' credit.

Life Insurance

The two common types are whole and term. Most people usually have a term policy, which means that if the insured dies within the term’s period, the insurer pays the policy’s beneficiary the proceeds.

Annuity

For reference, an annuity is a right to receive fixed payments periodically for a specified duration. Black's Law Dictionary (9th ed 2009). 

Retirement Account 

This would include 401(k)s and Roth IRAs

Automobile

Yes I want to know about your 2001 Pontiac Aztek or your 1970 AMC Gremlin

Business Interests

This would include any interest the client may have in a corporation, limited liability company (LLC), general partnership, limited partnership, limited liability partnership (LLP) or sole proprietorship.

Once the client has supplied me with this information, I can start the drafting process……………. 

Retirement Accounts: Traditional IRA v. Roth IRA

The federal tax code is structured to provide benefits to those who plan for their retirement, i.e. those who set up an individual retirement accounts ("IRA"). These benefits include tax-preferential treatment for these accounts. Two commonly used retirement accounts are traditional IRAs and Roth IRAs.

In a traditional IRA, the participant contributes pre-tax earnings to the account. This contribution is often considered to be tax-deductible. In other words, if Theo earned $50,000 in 2012 and contributed $5,000 to his traditional IRA, he could write off $5,000 for this as a tax deduction. Years later when Theo retires and withdraws a portion of his traditional IRA, this withdrawal is subject to ordinary income taxation. One of the benefits for using a traditional IRA is that a person can defer realization of income taxes to a future date when their income tax liability will be presumably smaller. The presumption is that a person will earn less money during their later years than during their middle ages. For example, Theo earns $50,000 in 2012 at the age of 40. Theo retires in 2027 at the age of 65 and begins to collect social security. Theo also begins to withdraw from his traditional IRA. The benefit for Theo is that his tax burden will be less at 65 than 40 because his earnings are far less because income taxes are progressive (the more you make the more you pay). Thus, Theo would presumably have more after-tax dollars by contributing to his traditional IRA at 40 and withdrawing his money incrementally at 65 than if he never made a traditional IRA contribution in the first place. 

One of the criticisms of traditional IRAs is that there is no guarantee that it will increase in value over time. Theo could make thousands of dollars of contributions earlier in his life but if his investments go awry he might have a smaller traditional IRA than he anticipated. Conversely, if Theo had a pension he would be arguably guaranteed a certain amount when he retired. For example, I have had a few clients who had modest pensions of $2,000 per month. On a personal level, my father received a $1,200 per month pension from Lockheed Martin.

In a Roth IRA, the participant contributes after-tax earnings to the account. This contribution is not a tax-deductible expense. For instance, if Theo earned $50,000 in 2012 and contributed $5,000 to his Roth IRA, he could not write off $5,000 for this as a tax deduction. One of the key distinctions between a traditional IRA and a Roth IRA is that the former is subject to income tax upon distribution whereas the latter is not. Assume Theo creates a Roth IRA and funds it with $15,000 over a periods of years. Theo's Roth IRA grows substantially in size as Theo makes a number of shrewd investments. When Theo begins to withdraw from his Roth IRA at retirement, these withdrawals are tax-free. In contrast, if Theo had created a traditional IRA, his withdrawals would be subject to income tax.  

There are a multitude of rules and regulations that govern IRAs. This post is by no means an exhaustive explanation of all the nuances involved. Rather the point is to highlight key distinctions between traditional and Roth IRAs, (1) tax liability upon creation and (2) tax liability upon withdrawal. Each has different results for (1) and (2). 

Nonprobate Transfers

Certain types of property are not governed by a will. This is particularly important because many people mistakenly believe that property mentioned in a will automatically goes to the named beneficiary in the will. However, this is not the case in the following instances because on death, the property will pass outside of the will and thus probate regardless of what the will dictates.

1. Property held in joint tenancy

Joint tenancy is a form of co-ownership in which two or more persons own property in equal undivided interests. CC §683. For example, a deed which indicates joint tenancy would state, hypothetically, “John Smith and Mary Smith as joint tenants, with right of survivorship." Consequently, a deceased joint tenant's interest vests in the surviving joint tenant or tenants at the moment of death without requiring probate administration. CC §683.2(c). Thus, upon John Smith’s death, his interest would vest with Mary Smith regardless of what John Smith’s will states. 

2. Property held as community property with right of survivorship

This is another method of holding a house jointly between spouses or partners. CC 682.1. The rules that govern joint tenancy also govern community property with right of survivorship. Thus, either method of titling your house would produce the same result in terms of falling outside the scope of a will, namely the survivor would receive the other share of the house.

3. Payable on death bank account (POD)

A POD bank account is an account in which the holder designates a beneficiary as the recipient of the holder’s account upon the holder’s death. Prob C §5140. For example, if John Smith had a bank account and designated his wife as the POD beneficiary, it would typically goes as follows “this account or certificate is owned by John Smith. On the death of John Smith, ownership passes to the named pay-on-death payee, Mary Smith.” Prob C §5203(a)(2) Upon a showing of the holder’s death certificate, the bank will issue a check to the named beneficiary.

4. Totten trusts

A Totten trust bank account is an account in the name of one or more parties as trustee for one or more beneficiaries. Prob C §80. For example, a bank account titled “John Smith, Trustee for Mary Smith” is usually sufficient to create a Totten trust account. The assets in the account belong to the beneficiary, Mary Smith, on the death of the trustee John Smith. Prob C §5302(c). Once again, upon a showing of the trustor’s death certificate, the bank will issue a check to the named trustee. The name Totten trust gets its name from the case in which it was created, In Re Totten, 179 NY 112 (1904).

5. Joint tenancy bank account

Similar to a house held in joint tenancy, in that sums remaining on deposit in a joint account at the death of a joint account holder, belong to the surviving holder and not the estate unless there is clear and convincing evidence of a different intent. Prob C §5600. For example, if the bank account was held as “John Smith and Mary Smith” and John Smith dies, Mary Smith would be recipient of the remaining amount in the account upon a showing of John Smith’s death certificate.

6. Transfer on death securities

Akin to POD bank accounts, a stockholder may designate a beneficiary as the recipient of the stockholder’s stock upon the death of the stockholder. Prob C §§5501-5512. For example, if John Smith held General Electric stock and wanted to transfer it on death to Mary Smith, it would read “John Smith, owner of 1,000 shares of General Electric common stock, transfer on death to Mary Smith.” Prob C §5505. Again, the death certificate would need to be provided before a transfer is made.

7. Life insurance

The named beneficiary of a life insurance policy is entitled to the proceeds of such policy by virtue of the beneficiary designation on the life insurance policy and not by virtue of the decedent's will. Prob C §5000(a). For example, if Mary Smith took out a life insurance policy on John Smith’s life, she would receive the proceeds of such upon John Smith’s death, provided she showed the life insurance company John Smith’s death certificate.

8. Revocable trusts

Property titled in the name of the trustee of the drafter's revocable trust is not subject to probate provided the trust property is left to a beneficiary other than the trust's drafter. Prob C §13050(a)(1). For example, John and Mary Smith create the Smith 2009 Revocable Trust and transfer their home into the trust. The surviving spouse inherits everything and the Smith's close friend Peter is the remainder beneficiary. Upon the surviving spouse's death, Peter would inherit the property free of probate administration but not trust administration.

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.