Estate Planning Basics

In this section, we provide the basic building blocks of estate planning, so that you may begin to understand the need for this type of service. Please read through the questions and answers and if you would like additional information, contact us.

What is estate planning?

Estate planning is the practice of arranging for the transfer of assets and the protection of survivors in the event of someone’s death or incapacity. Estate plans not only transfer property after one’s death, they assist in the transfer of the control of businesses, the establishment of guardians for dependents, the financial care of dependents, the establishment of care for the settlors, and can even help ease tax burdens.  The most common estate planning instruments are wills and living trusts. Contrary to what you may believe, even if you don’t currently posses a will or a living trust, you have an estate plan.  Your plan is what the state has set forth in the Probate Code.  Persons who want more control over the final distribution of their property or destination of their children need to plan ahead of time so that they can avoid using the state’s plan.

What is the difference between a will and a living trust?

A will is a traditional estate planning document that sets out the deceased person’s wishes or “will” for the distribution of their property or guardianship of their dependents.  A will cannot operate on its own. The person in charge of carrying out the provisions of a will is called an executor and is responsible to the probate court for the carrying out of the will’s provisions and administration of all probate proceedings. A will must be administered in conjunction with a probate proceeding of some type. The duration and measure of involvement by the probate court will depend on factors like the dollar value of assets, the number and complexity of debts, etc. 

A living trust, by contrast, is designed to operate outside of the probate court.  It, like the will, delineates the deceased person’s wishes, but because it is essentially a contract, it is not necessary for the court to oversee its administration.  The person who sets up the living trust is called the settlor and is responsible for transferring all of his or her assets into the control of the trust. This is called funding the trust. If the settlor properly funds the trust, then the probate court should not become involved in the administration of the trust after the settlor’s death. Living trusts are a great estate planning tool, but they must be used in combination with a will to ensure proper coverage in the event that the settlor does not properly fund the trust.

What is probate?

Probate is the process by which the state settles a deceased person’s debts and distributes the remainder of the assets to the heirs.  The probate process was designed to be helpful in the complete, accurate, and timely administration of estates, but is actually very time consuming and expensive. In fact, probate fees are anywhere from 2-8% of the gross value of all assets before the probate court. This is especially daunting for homeowners in California who may own homes whose mortgage is almost as high as the market value of the home. 

To illustrate, let’s take the simplified example of a homeowner whose home is worth $500,000 but who only has $50,000 of equity in it. The probate fees would be calculated on the current market value of the home ($500,000), not on the equity value.  In this example, the probate fees would be approximately $26,000 and would consume over half of the equity in the home. Good estate planning and proper funding of a trust will eliminate such a huge burden on the deceased person’s heirs and will transfer the property faster than a probate court could.

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