Probate
Revocable Living Trusts
A Living Trust is a special legal entity created by preparing and executing a formal trust document, declaring that you are holding certain property "in trust." You retain the right to revoke (or cancel) the trust at any time, or to take the property back out of the trust.
Because the Living Trust is revocable, it is treated as a fictional entity during your lifetime. You pay taxes on any trust income during your lifetime, and your creditors could seize trust assets to pay your debts, just as if the trust did not exist. This is because you still retain full control over the trust assets.
However, at your death, the Living Trust becomes irrevocable (since you are no longer around to revoke it), and takes on new life as a truly separate legal entity. All property owned by the Living Trust is not subject to probate, because neither you nor your estate own the assets. However, the probate court has authority to resolve disputes about the Living Trust, and the Living Trust usually remains liable for your debts (including any estate taxes).
If a husband and wife jointly create a revocable Living Trust, then when one spouse dies, the Living Trust usually is designed to split into two parts: one contains the surviving spouse's property and remains revocable (typical called the Survivor's Trust), while the other part becomes irrevocable and is usually earmarked for the use of the surviving spouse, with any balance remaining at the survivor's death passing to the couple's children (typically called the Bypass Trust). However, many different trust arrangements are possible, each with different legal and tax consequences.
If you properly transfer your property into a revocable Living Trust, then your estate will not need to pass through probate at your death. A properly drafted Living Trust also can serve to reduce or eliminate federal estate taxes. If you fail to properly transfer assets into a Living Trust, you may lose the benefit and your estate may be subject to probate anyway. For example, if you fail to transfer your home into the Living Trust, it will be a probate asset after both spouses have died.
Planning For Incapacity And Disability:
Advance Health Care Directives, Living Wills, and Powers Of Attorney
A major consideration for any estate plan should be planning for incapacitation or mental incompetency. If you are incapacitated, someone else must make health care decisions for you. California law defines who can make the decisions if you fail to provide instructions. However, only you know who would be best to make decisions for you, and your comments about medical treatment and life-sustaining measures are important.
An Advance Health Care Directive (previously called a Durable Power of Attorney for Health Care), naming an agent to make health care decisions and providing some guidance and limits for the agent, is an excellent vehicle to plan for this possibility.
When you complete an Advance Health Care Directive, you should indicate your specific desires regarding medical treatment, or any circumstances in which you might want life-sustaining treatment withheld. In addition, you may want to specify who may (or may not) visit you in the hospital, and who will be responsible for funeral or burial arrangements.
A Declaration Pursuant to Natural Death Act (California's form for a "living will") may also be appropriate for some clients as a supplement to the Advance Health Care Directive.
In addition to the health-care decision-making issues discussed above, you should consider preparing a general Durable Power of Attorney for financial matters, so that someone can manage your property if you are incapacitated. A durable power of attorney might also include authority for your "agent" to transfer your assets into a living trust (to avoid probate at your death) and to make small gifts (up to $13,000 per recipient per year) on your behalf to your relatives or others. The power of attorney may also include authority for your agent to make arrangements for your personal care, to store or sell your property, and even to arrange for the care of your pets.