Last updated: 26 Nov 23 08:31:40 (UTC)

Estate planning can help you rest easier

L.A. Times, Oct, 2007, BY KATHY M. KRISTOF

It wasn’t until after Eleanor Barkelew got married a second time that she grappled with estate planning. She and her husband each had a child from a previous marriage, and the couple didn’t want to create hassles for the family after they died.

“If the parents involved don’t make the decisions about how things are going to go, it leaves it to the children to battle things out,” Barkelew said. “We didn’t want that to happen.”

About 70% of Americans die without a will or other estate plan, experts say, even though most people say they’d like to save their heirs the time, taxes and costs that can add up when no estate planning has been done.

Barkelew, 69, will tell you why: People don’t like the subject matter.

“You have to confront the fact that you’re not going to be around. That’s not a comfortable thing to think about,” the Torrance resident said. “I have a lot of friends who are even older than I am, who keep saying they’ve really got to take care of these things. I’m afraid something is going to happen to them before they do.”

Would that be a disaster?

Possibly, but not necessarily, said Mary Randolph, a California lawyer and author of “8 Ways to Avoid Probate.”

When you die without a will or trust, your estate – meaning your assets – generally gets swept into a process called probate, in which a court decides, based on state law, who gets what. Usually that means that what’s left of your estate after your debts are paid goes to your surviving spouse and children. If there is no surviving spouse or children, your assets go to your nearest relatives by blood or adoption.

For some families, this formula isn’t half bad, Randolph said.

For example, for a childless married couple who want the surviving spouse to get everything, or a single parent who wants to leave his assets in equal shares to his adult children, state inheritance laws will place the assets in the right hands.

But introduce complications – such as a blended family, children who don’t get along, a husband and wife who came into the marriage with separate property, or intended heirs who aren’t your closest relatives as defined by the state – and the likelihood grows that the wrong people will get your assets, said Mitch Gaswirth, a partner in the Century City office of law firm Proskauer Rose.

How do you prevent that? The simple answer is to plan. The tools you’ll need will depend on exactly what you want to do. Here are five key issues to consider.

Writing the will

Almost everyone needs a will, Randolph said. If you have children you need a will to name guardians for them in the unlikely event that you and your spouse die at the same time.

If you don’t have children, you probably need a will to ensure that your money and personal property go to the people you want it to go to.

And even if you rely on a trust instead of a will to specify where your assets should go (see “Is a trust for you?” below), you probably need a will to deal with any property you might forget to put in the trust.

If your wishes are simple and you’re articulate enough to state them clearly, you don’t need an attorney to write a will, Randolph added. In most states, including California, you can execute a do-it-yourself will by handwriting your bequests and signing and dating the document.

If you’d rather not take such a bare-bones route, will-writing software is inexpensive and easy to use. You also can buy forms that you can fill out to create your will.

But if you have complex desires or heirs with issues – such as drug problems, an inability to handle their own affairs or just a failure to be responsible – you’d be wise to have an attorney help prepare the document and consider bequeathing options.

The downside to a will is that it doesn’t keep your estate out of probate.

Should you avoid probate?

Many people decide to avoid probate because it’s time-consuming, costly and quite public.

It typically takes six to 18 months to probate an estate, said Ed Long, director of Healthcare and Elder Law Programs Corp., a Torrance-based nonprofit that aids seniors.

The cost varies by the estate’s size. Under California law, an estate with $150,000 in assets has to pay its attorney a $5,500 fee. The executor is entitled to the same amount. Add in miscellaneous expenses, such as appraisal and court costs, and probate can easily eat up close to 10% of the value of the estate.

The fees on bigger estates are smaller as a percentage of assets, Gaswirth of Proskauer Rose said, but there’s a catch. If you own a $1-million property with an $800,000 mortgage, you might figure you’d be leaving to your heirs a $200,000 estate. But probate court figures differently. It would value your estate at $1 million. The attorney and executor for an estate that size would cost as much as $46,000, leaving just $154,000 for heirs after the mortgage is paid.

If these costs seem high, remember that they’re set by law, not by a free market.

“The fees have nothing to do with the value being added to the estate,” Gaswirth said.

In addition, because probate is a court proceeding, it is a matter of public record. Anyone can view your probate file and learn how much money you had and to whom you left it.

So why wouldn’t you want to avoid probate? When there are lots of creditors and warring heirs, probate can be helpful.

“Probate can be a protective device,” Gaswirth said. “It’s designed to bring order out of chaos. Occasionally, freezing things and having a judge say to warring parties, ‘Sit down, shut up and we’ll get to you,’ can be an effective way to go.”

Free ways to bypass court

There are many ways to avoid probate, and the simplest methods are free.

To figure out whether you can avoid probate completely at no cost, you need to make a list of your assets.

With certain types of assets – such as bank, brokerage, mutual-fund and retirement accounts – you can keep them out of probate by simply filling out a form.

Let’s say you want to leave your certificate of deposit to your niece. You ask the bank for a “payable on death” form, fill it out and give back to the bank. If you die while the CD account is open, your niece needs only to show up at the bank with your death certificate and her identification, and she’ll get the money. The CD stays out probate’s reach.

An investment or retirement account or an insurance policy can be passed to heirs in a similar way by naming a beneficiary. As long as the beneficiary survives you, the assets go directly to that person, bypassing probate.

A word of caution: It’s important to keep your beneficiary designations up to date as your wishes change, Randolph said. The designations can’t be changed with a will or trust.

When one Arizona couple divorced, for example, the husband retained under the settlement some bank accounts that he had designated as payable on death to his wife. But he failed to change that designation after the divorce. When he died, his ex-wife got the money in those accounts – not the result he envisioned. His will, which reflected his post-divorce wishes, had no jurisdiction over those assets.

What if you own a home? Keeping it out of probate can be tricky. Technically, you can pass real estate directly to your heirs by making them joint tenants – co-owners of the property. But Randolph doesn’t advise it.

The reason: A joint tenancy is irrevocable. So you can’t change your mind and disinherit your joint tenant, no matter what the person does to show he or she doesn’t deserve to get the house. And if your joint tenant gets into legal or financial trouble or gets divorced, your property could be at risk. For example, the joint tenant’s creditors could demand that you sell your home to help pay his or her debts.

That’s not all. Want to refinance the property? You need the joint tenant’s permission. Want to sell? Same deal.

A handful of states allow “transfer-on-death” trust deeds to pass real estate to a beneficiary, but California isn’t one of them, Randolph said.

So what do you do if you own real estate and want to bypass probate?

Is a trust for you?

One of the most popular estate planning tools is called a revocable living trust, a legal entity that you can make the owner of your assets. In the document that creates the trust, you spell out how your assets should be disposed of after you die and name a trustee (generally yourself), who manages the assets in the trust while you are alive and well.

You also name a “successor trustee,” who manages the assets when you can’t, including after your death. If you’re married, generally one spouse is the trustee, and the other spouse is the successor trustee. When one spouse dies, the survivor updates the document to add a child or trusted advisor to serve as the next successor trustee.

What are the benefits of a living trust?

  • It’s flexible, giving the trustee complete control of the assets and the ability to change the document at any time.

  • All assets – including your home and investment property – that you put in a living trust pass to heirs without going through probate. This is particularly helpful for people who own property in several states because they could otherwise be subject to probate in multiple locations, Long of Healthcare and Elder Law Programs said.

  • With a trust, only you, your trustees and heirs need to know details of your estate. Nothing is filed in court.

  • A trust sets up a procedure to handle your finances in the event that you become incapacitated before you die.

  • Creating a trust can also serve as a backdrop for some simple estate-planning techniques, which can save a well-heeled family a small fortune in federal income tax.

What are the drawbacks? Trusts can be costly to set up and maintain. You need an attorney to draft the document, and you’re likely to consult with this attorney (or another one) several times before you die to update the trust and to put newly acquired assets into the trust.

Barkelew of Torrance, for example, formed her trust in 1990 with her husband, costing them $1,300 to have the document prepared. They paid $350 to modify the trust 11 years later because a number of estate planning laws had changed. Two years later, they added durable powers of attorney and made a few other fixes for $650. This year, after Barkelew’s husband died, she amended the trust again to reflect a new successor trustee and make a handful of other changes, setting her back $1,250.

In today’s market, it’s likely to cost $1,500 or more to have a trust prepared – considerably more if you have complicated wishes, a blended family or an estate worth more than $2 million. (People with big estates would be wise to set up a secondary trust, often called an A-B trust, to save on federal income taxes.)

Another note of caution: If you refinance your home or other real estate, most lenders require the property to be taken out of the trust and put back in your name, at least briefly. The cost isn’t significant, said Long. But forgetting to put the property back in the trust is. A home unintentionally left outside the trust must go through probate, defeating the purpose of creating the trust in the first place.

Even if you have a trust, you still need a will, in this case something called a “pour-over” will. It simply designates to whom any property you forget to put in the trust before you die should go. (That won’t necessarily save those forgotten assets from probate, but it will ensure that they’re divvied up as you specified in the trust document.)

Tying up loose ends

One of the toughest challenges for heirs is ascertaining their benefactor’s assets and debts to ensure that the bills get paid and that money isn’t simply overlooked, Long said.

You can do your heirs a huge favor by jotting all that information down and giving that list to your trustee or attorney – or simply telling your heirs where they can find the information.

Long also suggests that you fill out an advance healthcare directive, in which you designate someone to make decisions about your medical care in the event that you become incapacitated. The directive also allows you to specify your wishes under certain medical circumstances.