Trust Funding

The biggest problem that I normally find with estate plans is that the super majority of plans that I review for potential clients (that were done by other law firms) are partially or completely unfunded. As noted in my prior post, a trust is only effective when property is held by the trustee for the benefit of the individuals selected by the settlor.

If no property is transferred, then the property will not pass according to the terms of the trust. You may have the most intricate disposition plan where the trustee is supposed to hold the property for one or more beneficiaries in a manner that took the attorney hours to draft, but if the property is not transferred to the trustee then it is nothing more than a piece of paper that has no legal effect.

Additionally, any property left outside of the trust will be subject to probate proceedings in California if the aggregate value of the property left outside of the trust is over $100,000. This creates a situation where a client paid for some estate planning that may be exactly what they wanted, but the probate still occurs with all of the problems highlighted in my other posts on the probate process in California. If it goes through probate the court will generally apply the intestate succession rules to determine who will receive the property (if no other will exists). This is also problematic as the intestacy statutes generally dispose of assets in a different manner than people do when they choose their own disposition plan.

One way to avoid this problem is to have a certain type of will called a pour over will. This type of will tells the court to place all of the assets into the trust that were left outside of the trust upon the death of the individual. This does not avoid the probate, but it will ensure that the assets pass according to the wishes of the decedent through the trust.

The best way to prevent this issue is to make sure that all real estate is transferred by a new deed to the trustee of the trust, make sure all checking/savings/regular investment accounts are changed from individual accounts to trust accounts, and that proper beneficiary designations are made on assets such as life insurance, 401(k) accounts, IRA's and similar assets with designated beneficiaries. Other assets such as closely held businesses and other unique assets should be discussed with the attorney to determine how to transfer them to the trust or ensure that they avoid the probate process entirely.

What is a Trust and why should I consider using one?

Many of my clients have no idea about what a trust is when they first come into my office. Some of them have had an experience as a beneficiary of a trust and others have even been the trustee of a family member's trust, but when you ask them to explain the concept they generally have a difficult time doing that. For those of you who are looking for answers to the probate questions and issues that I have been blogging about, the first step in taking care of your family and avoiding probate is the revocable trust (sometimes called the Living Trust or the Family Trust).

A trust is simply an agreement between two people with an intended individual or list of beneficiaries. The individual who sets up the trust is called the Settlor (sometimes called the Grantor or Trustmaker by some attorneys) and that person gives legal title to one or more assets to one or more Trustee who holds and manages the assets for one or more specified beneficiaries. The Trustee is required to hold, manage, and administer the assets of the trust pursuant to the specific provisions that the Settlor sets up. For example, if I give a friend an investment account to hold for the benefit of my son and draft a document that instructs him to distribute all income from that property to my son on an annual basis and to distribute the principal to my son on the following schedule (one third of the principal when he reaches the age of 25, one half of the remaining principal when he reaches the age of 30, and the remaining principal when he reaches the age of 35), then I have created a trust. This is a very simple distribution plan and it can be as simple or as complex as you like. Several of my clients build in incentives for their children to work (matching W-2 or 1099 income on an annual basis), to avoid certain behaviors (allowing the trustee to withhold distributions if the child or beneficiary is abusing drugs), and other provisions to create a custom distribution plan that matches exactly what you want to accomplish.

After drafting the trust pursuant to a client's wishes, the next step is to fund the trust. This is as important of a step as the drafting of the trust and too often I review estate plans from other law firms and attorneys that are not properly funded. My next post will deal with this important step and discuss what happens when a trust is not funded at all or partially funded.

What happens when I do not have any estate planning documents in place? (Part 1)

The following question is often asked to me: “If I don’t do any estate planning documents then what will happen to my assets when I pass away?" This question often arises when one becomes overwhelmed with the process of doing proper estate planning or they do not want to think about their own mortality. Sometimes these individuals pass away without doing any planning at all and any assets that do not pass automatically by operation of law (such as a named beneficiary on a life insurance contract, a surviving joint tenant on a deed, or a beneficiary by a number of other methods), will go through the probate process and be subject to some specific provisions of the California Probate Code.

This situation is generally called dying intestate and it occurs when someone passes away without providing instructions to the court in a properly executed or holographic will. Many people fail to understand that the surviving spouse may not receive all of the assets that go through the probate of the intestate estate (especially if the decedent had property that is characterized as separate property instead of community property) as separate property is treated differently than community property. This often occurs because in many marriages the husband or wife will hold certain property before marriage and instead of changing it to be community property they continue to hold it as separate property during the new marriage. Under these facts, the separate property does not pass completely to the surviving spouse. Unfortunately I have had more than one client come to me in this type of situation and there is nothing they can do to keep the property from passing directly to the children of the marriage, the children from a prior relationship, or to the decedent’s other family members. If a beneficiary is a minor as well (under the age of eighteen in California), then this can add the extra expense of a proceeding to appoint a guardian over the estate of the minor. This reason alone is why it is very important to not only have a will in place, but also to avoid the Court system entirely by doing proper trust planning.

I will be writing several posts on this topic regarding the intestate provisions of the California Probate Code. If you have questions about how your own estate would be distributed under these provisions, do not hesitate to contact me to discuss them.

Bonds and Independent Administration in California Probates

In my last post on California Probates I went over several reasons why the probate system in California is not the preferred way to transfer wealth to your beneficiaries. Even with those shortcomings, many people choose not to do any planning during their lifetimes and they instead decide to either pay for a simple will that follows the statutory formalities or to do a holographic will (a will entirely in that person’s handwriting as authorized under section 6111 of the California Probate Code). The main reasons for this is that they either do not want to spend the money during their lifetimes or they feel that the problems with the probate system will be changed before they pass away. Either way, those people are continually looking for ways to improve their personal representative’s experience during the probate process. Here are a couple of issues for a person to consider when they are doing their simple will or a will in connection with a comprehensive estate plan.

First, as noted previously, many judges will honor a decedent’s request to waive bond if they explicitly indicate this in their will. The individual must waive bond for any of the named personal representatives to act. This will in many cases eliminate the need for the estate to spend thousands of dollars per year on an insurance policy that is not needed in many of the estates. Otherwise, if the bond is not waived, the court will generally require the bond and if the estate cannot pay for this cost, then assets will need to be sold in order to satisfy the payment. I have also seen a judge require a bond in a probate where the will explicitly waived bond. The reason in that specific case was that none of the named individuals in the will wanted to act, so they either had a different relative act in that capacity or a public fiduciary was appointed by the Court. Either way, the judge decided that the will only waived bond for those specific named individuals, so make sure that you name enough alternative personal representatives to make sure that one will act. Also, you will want to make the bond waiver language extremely broad if you want the Court to waive the bond.

Second, in California there is a section of the Probate Code beginning with section 10400 that is called the Independent Administration of Estates Act. This section allows a personal representative to do many things during the administration of the estate without going to court for approval on each individual action. At the end of the probate when the final petition is filed, the representative must disclose what actions were taken under these powers, but as long as the representative acts within the powers under these sections, the result is that the entire process takes much less time (especially in those counties where there is only one probate court that handles a great number of probate cases, such as Orange County). The probate code indicates that any personal representative can petition the court for these powers unless the will indicates that the estate may not be administered pursuant to these provisions (California Probate Code section 10404). However, my personal experience has shown that some judges will not allow these powers to be used unless the decedent gave express authority to administer the estate under these provisions in their testamentary will. The only potential downsides are that your personal representative can take actions under these provisions without immediate Court approval (so make sure you pick a trustworthy person for your personal representative!), and some judges will only allow these powers to be granted if the personal representative posts a bond, thereby allowing more flexibility but increasing the expenses to the estate (I haven’t experienced this in Orange County, only in Los Angeles County). Therefore, if you want your personal representative to have the most flexibility, your will should expressly authorize all of the listed personal representatives to act under the Independent Administration of Estates Act.

In closing, please note that if you are concerned about security over flexibility for your heirs then you may not want to waive bond and you may not want your personal representative to have the independent administration powers. In my experience with the estates that I have handled, the clients overwhelmingly want more flexibility than more security when they understand what the bond costs and how the independent administration can speed up the process. However, there are many situations where there are family conflicts and issues that parents can foresee between the beneficiaries. In these situations a bond and requiring the longer Court procedures may be the best option available. If you have further questions about how these decisions can affect your estate and your family, contact your attorney to discuss the matter or email me at zieboldlaw@gmail.com or mziebold@ferruzzo.com.

Starting with a new Firm

Many of my readers have emailed me and asked why I have not posted over the last month. For those of you who do not know, I have accepted a job offer with the law firm of Ferruzzo and Ferruzzo in Newport Beach, California. I will continue to practice in the areas of Estate Planning, Probate, Taxation, Partnerships and Corporations with my main focus being on estate tax planning for the high net worth individual. My new contact information is as follows:

Ferruzzo and Ferruzzo, LLP
3737 Birch Street, Suite 400
Newport Beach, CA 92660
949-608-6900 (phone)
949-608-6994 (fax)
www.ferruzzo.com

Pro Bono Work

It is interesting to ask an attorney what he or she thinks about doing Pro Bono work. From discussions with my colleagues and attorneys that I have met from the big firms, most people do not even consider doing pro bono work as they have billable hour requirements and other commitments in addition to family matters and the rest of life. This mindset often leads to attorneys having a reputation for being focused only on money or the bottom line and not what is wrong with society.

One of my practice areas involves forming and aiding in the ongoing operations of tax exempt organizations as defined in the Internal Revenue Code. I already work with a number of churches, ministries, and other charities in this regard and I am interested in helping those organizations that would greatly benefit from 501(c)(3) status but who are not able to retain an attorney to do this work. Based on this, if you are a church, ministry, charity, organization, or any other group that has struggled with this area of the law, feel free to contact me at zieboldlaw@gmail.com or mziebold@ferruzzo.com. We can then discuss your organization and determine if I would be able to help you based on my current workload and my other Pro Bono commitments.

The California Probate System and Why it Should be Avoided.

Potential clients often ask questions about what the California probate process is and why they would want to avoid it. Simply stated, a probate is the Court proceeding where a decedent’s debts are settled and the remaining assets are distributed. If the deceased has no will, this distribution would be handled pursuant to the intestacy provisions of the probate code. If there is a will, the assets are distributed pursuant to those instructions. The good news is that there is a procedure under section 13100 and following of the California Probate Code that allows a person’s estate to avoid the probate process if it is under a certain amount. The bad news is that the limitation is $100,000, which means that the majority of estates in Orange County will go through this process. In these cases where the estate must go through the probate process, the family or heirs will mostly likely be left in a worse position than they would be if other planning had been done. The below reasons describe why it is ideal to do at least some basic estate planning if your California estate will be over $100,000.

The first consideration is the time involved to complete a probate. I do most of my probate work in Orange County where there is one probate court for the entire county (of over 3 million people). This means that your hearing will often be set at least six to eight weeks after the date you schedule it and occasionally longer if the court has a backlog of cases. In my experience, a simple probate generally takes more than a year to finish, and if there are multiple creditor issues, complex sales of estate assets, or fights involving the beneficiaries this estimated time may be extended to more than two years. In some other counties, such as Los Angeles, there are multiple courts that handle these proceedings and the time to complete the probate may not be as long.

The second issue is that everything in a probate is part of the public record. This means that anyone can go to the courthouse and find out the value of the assets involved, which beneficiary received those assets, and at a minimum the name and mailing address for those people. If you want to keep the contents of your estate and who inherited what confidential, the probate system must be circumvented.

Third, in many instances the court will require the personal representative of the estate to obtain a bond over the probate estate. A bond is an insurance policy that provides monetary compensation to the beneficiaries of an estate if the personal representative misappropriates the assets. Unfortunately, on a million dollar estate, they can cost several thousand dollars per year. If the Court orders a bond, it must be obtained and paid for by the estate. The good news with this is that you can waive this requirement in your will and in many instances the Court will honor your wishes. However, the bad news is that even in those instances where the will waives bond and all of the beneficiaries waive the requirement, the Court still has the authority to require one. I have personally represented an estate where all of the beneficiaries waived this requirement and the Judge in that probate proceeding decided that he wanted a bond in that case anyway. This ended up costing the estate over two thousand dollars per year during the probate.

Fourth, there are high costs involved in administering the probate itself. The Court filing fees in California are charged on a sliding scale based on the value of the assets within the estate. Then there are additional fees for the probate referee, who must value the assets in the estate for the court, fees to the attorney for the estate, and the fees to the personal representative. These fees are set by statute, so no attorney can charge more than this, and I am unaware of any attorney who will accept less to handle a probate.

California Probate Code section 10800 provides the compensation of the Personal Representative and section 10810 provides the compensation for the attorney. They mirror each other, so effectively what is paid to one person is paid to the other as well, unless one waives their right to compensation under that probate proceeding. The statute states that for “ordinary services," the estate will pay to each person the following:

• 4% of the first $100,000
• 3% of the next $100,000
• 2% of the next $800,000
• 1% of the next $9,000,000
• .5% on the next $15,000,000
• A reasonable amount determined by the Court for any amount over $25,000,000

As you can tell, on a simple million dollar probate (which could easily be just a personal residence in Orange County), the fees to be paid to the attorney and the personal representative for ordinary services are $23,000 each. This figure does not include any services that are not considered to be ordinary in nature, for which both are compensated over this amount. In this case, the total costs could be over $50,000 before the probate is complete. If the majority of the estate contains real estate or other illiquid property, the heirs are either forced come up with the money to pay these substantial fees or the estate assets will be sold through the process to pay the fees.

Based on the cost alone, it makes sense for most people in California to avoid probate. All of this can be avoided for a much more reasonable cost with some simple estate planning, such as the creation of a revocable trust.

What is Estate Planning and Why Should I Consider It?

Most people that hear I do estate planning predictably respond, “I don’t have that many assets, and my family knows what I want when I die. I don’t need to do any estate planning.” Usually, these individuals have never had a major family conflict after the death of a love one and have never gone through the probate process in California. Once they experience one or the other, people generally find that the court proceedings leave the beneficiaries of an estate much worse off than they would have been with some basic planning. A well-known maxim is “if you are failing to plan then you are planning to fail.” Too often that saying comes true for families that do not take the time to do proper estate planning. Estate planning protects the assets you have worked hard for and protects your family from additional burden in a time of grief.

Once proper estate planning is completed, the client and his or her family will experience several benefits. Typically, estate planning will provide for the most efficient transfer of wealth, reducing the amount of time, fees, taxes, and burden that the family must endure. For most people in California, this planning is first focused on probate avoidance, as the probate process is long and expensive. Higher net worth clients in California and other states should also do estate and gift tax planning to ensure that their wealth passes to the chosen beneficiaries with the least amount of transfer taxes. For every estate plan, regardless of where a person lives, there will be many different considerations involving several areas of the law.

Depending on the family, these different statutes may apply: Probate Law, Trust Law, Corporations Law, Partnership Law, Federal and State Tax Law, Laws regarding Asset Protection, Bankruptcy Law, Property Law, and Family Law. A well-prepared plan should protect the client from the adverse consequences of any and all laws that could apply to them. This blog will deal with issues from all of these areas of law in the states where I am licensed (currently California, Nevada, and Arizona). I hope that you find some of the answers that you are looking for. If you have questions that are not answered in these posts, feel free to contact me at zieboldlaw@gmail.com and we can discuss your question in greater detail.