No one wants to think about dying, which is probably why most adults have not created their will or trust. But if you love your family and don’t want them to suffer even more after you are gone, having your estate documents done can be a great relief to them. It can also save your family a huge amount of money. Let’s dive in and see how easy it is to create your estate planning documents.
Overview of typical estate planning document
- Advance Health Care Directive – For everyone age 18 and older. Find free templates online, or through your healthcare provider.
- Will – For anyone who owns assets. Free or nominal fee for a simple will.
- Revocable Living Trust – You want this if you exceed the probate limit or own real estate. Work with an attorney.
- Financial Power of Attorney or Durable Power of Attorney – For people who pay bills and taxes. Usually included with a trust.
- Guardianship instructions – If you have minor children. Can be included in your Will or Trust.
- Beneficiary designations – Everyone. Check your accounts online for which ones allow beneficiaries.
Advance Health Care Directive
Also called a Living Will or an Advance Medical Directive, the Advance Health Care Directive (AHCD) is essential for everyone 18 years and older. This document spells out what care you want if you can’t speak for yourself. You might think it is obvious who should make your care decisions if you are incapacitated, but your healthcare provider or the laws of your state might assume something different, so specify exactly what you want. Your healthcare provider can supply you with a form or find one online. Give a copy to your healthcare provider and anyone named as a decision maker.
Last will and testament
If you have children or own property and assets, you absolutely need to have a will. The alternative is that the state will decide how to distribute your assets and who should take care of your children. Does that sound like a good idea?
The good news is that a basic will is really cheap and easy to create. A reputable online service like Nolo can sell you a will maker specific to your state. If your situation is more complicated, such as owning a business or having significant assets, you should talk to a lawyer.
Revocable Living Trust
The goal of a revocable living trust is to avoid the expense and delay caused by your estate being subject to probate. In some states probate is very complicated. In California, probate is known to be slow and expensive. Setting up a trust can save your family from having to pay large fees to lawyers and it keeps your financial affairs private. If you have young children, a trust can specify what happens if both parents die, including who will serve as guardian and how the money they inherit will be managed.
With a revocable living trust, you still have complete control over your assets while you are alive. You can spend money, sell assets, add and remove things from the trust, and change who will be the trustee after you die.The trust requires effort to set up, but once that is done there are no restrictions on how you use your money.
For the rest of this article, when I say “trust” I am speaking of “revocable living trusts.” There are lots of kinds of trusts for other purposes and I’m not covering those. Also, all my examples are for probate and trusts in California because that’s where I live and have the most information. If you live elsewhere you can look up the parameters specific to your state, which can vary greatly from California.
To avoid probate without a trust, almost all your assets must have an alternate way of being transferred to beneficiaries. What’s left after these transfers must be valued at less than $184,500 to avoid probate (2023 limit). For example, assets that can be distributed and not counted toward probate are:
- Life insurance
- Retirement accounts with named beneficiaries
- Pension plan distributions
- Bank and brokerage accounts with a “payable-on-death” beneficiary named
- Assets held in joint tenancy
- Vehicles and vessels that the DMV will allow you to transfer without probate
What isn’t on that list is real estate. If you own real estate on your own or with a spouse or domestic partner, your heirs will benefit greatly from you having a trust. Upon the death of the first person in a couple, the property transfers to the survivor without probate, but when the second person in a couple dies, any property worth more than $184,500 will be subject to probate. That determination is done on the full value of the property ignoring how much is owed on the mortgage. Other states have different guidelines, but if you are in California and you own real estate, I’m pretty sure you will want to have a trust.
A trust may seem expensive to create. If you go to your family attorney, they might charge you $5,000 or more. I’m frugal, so I found an attorney who specializes in trusts and charges less than $1,000 for the complete, uncomplicated trust package. Nolo.com offers a DIY Living Trust package for people with simple estates. This all may seem like a lot of effort and money but consider the cost of California probate: if you own a house worth one million dollars, statutory probate fees start at $46,000. A trust is cheap compared to those fees.
I can’t stress this enough: The trust only contains what you put into it. A lot of people miss this point and don’t follow through on retitling their assets in the trust. If your real estate and financial accounts are not within the trust, then they are subject to probate and your trust is pointless. And I’ll tell you now, moving assets into the trust sucks. Every financial institution has a different process and you will hate it, but you must persevere.
What to move (retitle) into your trust:
- Real estate. This is done by sending the proper forms and fees to the country clerk and might require a notary. If you refinance your mortgage they will put the title back in your name and you need to change it to the trust again. Don’t forget!
- Bank accounts and brokerage accounts. Each institution will have their own process and it may require a notary.
- Small business interests.
- Patents and copyrights.
- Very valuable items, such as art, antiques, coin collections, and precious metals. These just need to be named in the trust document unless they have their own title documents.
- Expensive vehicles and vessels should be titled in the trust. Do that through the DMV and tell your insurance company.
What doesn’t go in the trust:
- Retirement accounts must not go in the trust because they are associated with an individual and have to stay that way. Use the beneficiary designation to determine who inherits these accounts. Retirement accounts are not subject to probate.
- Life insurance doesn’t belong in the trust because the proceeds go directly to the beneficiaries and are not subject to probate.
- Cars, boats and motorhomes are optional to title in your trust. The California DMV allows the transfer of vehicles and vessels without probate and the value of these items is not included in the probate limit. If you prefer to title vehicles and vessels in your trust, the easiest time to do it is when you purchase them, so keep it in mind the next time you buy.
A well written trust will make your wishes clearly known, will consider tax implications, will leave a succession plan for your business, will have provisions for the ongoing care of dependents, and will be administered by a competent successor trustee that you have carefully selected.
A revocable living trust in not a one time thing that you file away and forget. As you open new accounts and acquire assets, you need to put them in the trust. Every few years you should give your trust a read through to make sure it still reflects your wishes for your beneficiaries and who you want as successor trustee. Every decade or two, you might need to do a trust restatement with an attorney to get in line with current laws.
Financial power of attorney
A financial power of attorney (POA) lets you designate who will make financial decisions for you if you should become incapacitated. This will provide for the essential services of paying your bills and filing your taxes if you are unable to do that yourself, thus avoiding a huge financial headache. The attorney that does your living trust will probably include this document.
Guardianship instructions for minor children
Nothing is more important than making sure your children are well cared for if something should happen to you. Guardianship designation is typically included in the writing of a Will or Living Trust, which is another reason to get these things done now.
Beneficiaries
Make sure your beneficiary designations on retirement plans, pensions, annuities, and life insurance are complete and correct. If the beneficiary designation is missing it can subject these accounts to probate. Keep in mind that your beneficiary designation will take precedence over anything you say in your will or trust. Periodically check these designations, especially when you have any kind of change in your family, like a marriage, divorce, birth or death. Incorrect or incomplete beneficiary information can cost your family time and money in court, so make the extra effort to keep them up to date.
Conclusion
There are other estate planning documents that apply in specialized situations. If you have a more complicated life, like owning a small business, having business partners, multiple marriages, children with more than one partner, the need to protect assets from lawsuits, dependents who will need care as an adult, or numerous other life situations, you will want to talk to an attorney about the types of trusts and planning that will be best in those cases.
Estate planning documents aren’t particularly difficult, so get started today. Your family will benefit so much from you getting this done. And while you are thinking about it, ask your parents if they have their estate planning documents done and whether they have reviewed them recently.
