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What Is the Difference Between Trusts and Wills?

Wills and trusts are key components for estate planning, and both ensure that the assets listed in either reach their intended beneficiaries after the original asset owner’s death. But there are some key differences.

• Wills don’t go into effect until the estate owner passes, while trusts are usually live as soon as the creators sign the trust and the assets are transferred.
• Wills usually need to go through probate (a public process) while trusts don’t.
• Wills aren’t activated if the estate owner becomes incapacitated somehow, only after their death. Trusts are active once funded.

How Do I Choose Between a Will and a Trust?

The answer to that is: It depends on various factors, including the size and complexity of your estate and your relationship to your beneficiaries. That said, it’s crucial to understand that this doesn’t have to be an either/or situation; often, estates use both wills and trusts to accomplish their goals. That’s because each has pros and cons, or things one can do that the other can’t.

Pros and Cons of Wills

Pros:

• A will is more likely to ensure your wishes are granted than dying without a will, known as dying intestate. In the latter situation, the courts will determine the distribution of assets and only consider family members. If you want some assets to go to nonfamily members or charitable organizations, having a will is vital.
• A will is the best legal mechanism for assigning legal guardianship to any minors orphaned by your death. Note that trusts have no authority regarding guardianship of minors. If a will doesn’t exist or specify a guardian, the court will determine who the guardian will be, for better or worse. 
• A will can include your funeral preferences.

Cons:

• A will is not a private document. When the estate owner passes away, it will likely need to go through probate court, which is public. This means anyone could learn the value of the estate and the terms of the will. 
• A will may have more significant tax implications than a trust. There are many variables affecting that. 
• A will is often subject to creditors’ demands, meaning the estate may be allocated to pay off debts rather than to hand down to beneficiaries.

Pros and Cons of Trusts

There are multiple types of trusts, each with its own set of pros and cons. If you’re considering using a trust (and there are many good reasons to do so), it’s highly recommended that you work with an experienced estate planning attorney to find the trust(s) that best fits your needs. 

Pros:

• Trusts are private and usually don’t go through probate court. That means the general public has no access to any information about it. 
• Depending on the types or sizes of the trust, there may be positive tax implications. 
• Depending on the type of trust, the assets held in it may be exempt from creditors’ claims or lawsuits, making them popular with people whose careers frequently lead to litigation (doctors, lawyers, etc.). 

Cons:

• As noted above, a trust can’t legally mandate guardianship of orphaned minors. That may only be done through a will. 
• A trust can’t provide funeral preferences. 

Because of the pros and cons of each, it’s common for individuals to create both a will and trust for  a complete estate plan. That helps ensure the estate is well-planned, covering many bases and creating some privacy for the owner where necessary. 

Can a Will or a Trust Be Challenged in Court?

It’s possible for either, although it doesn’t happen frequently. Similar grounds could be used to challenge a will or a trust. In general, the person challenging either must have some logical grounds to do so, not just be annoyed that they didn’t get what they thought they should. Only those who have an interest in the assets are allowed to challenge, meaning anyone who is named as a beneficiary, is the heir of the deceased, or creditors (but again, some types of trusts are exempt from creditors). The reasons someone can contest a will or a trust include:

• Lack of mental capacity. If the person whose assets are addressed in the will or trust was deemed not of sound mental capacity, the assets may not be distributed according to their wishes. This may include someone who struggles with dementia or alcoholism/drug problems.
• Suffered undue influence or fraud. Sometimes, others take advantage of the elderly and convince them to change their will or trust to benefit the swindler rather than the honest beneficiaries. Court challenges can help determine if this was the case or, as also happens at times if the will was forged.
• Multiple wills. This may occur when someone dies while updating their estate plan. In many cases, the court will go with the most recent version.
• Invalid will or trust. If the will or trust is not written, signed by its maker in the presence of two witnesses who aren’t named in the estate plan, and signed by the witnesses, the plan may be invalid. 

What Should I Do if I Need to Begin Estate Planning?

Call Cava & Faulkner at 916-685-1225 for a free consultation. Every estate is unique. It’s best to work with experienced, knowledgeable estate planning attorneys who can go through the specifics of your estate to help determine what tactics and tools could have the best results for your estate and beneficiaries. We understand how vital it is to you to come up with a plan that meets your needs and wishes as closely as possible.

What Happens to International Property in a U.S. Estate Plan?

Not surprisingly, many high-net-worth families have property in other countries that they want to account for when they plan their estates. This situation is not to be undertaken lightly because it involves laws outside of California and the U.S. Any laws pertaining to estate planning, tax laws, and property transfer in the country where the property is located must be identified and followed, or the estate plan (or that part of it) may be invalid.

Accounting for California property can be complicated enough when estate planning, not to mention property in other U.S. states. Adding properties elsewhere makes it even more so. What comes into play is not just the ownership and tax implications but other aspects, such as the nationality of the owner (whether they are U.S. citizens, have dual citizenship with another country, or live in California but are foreign nationals).

Unfortunately, sometimes people think that if the property is in another country, they don’t have to worry about it when estate planning. That’s far from the trust, as many have learned the hard way. The U.S. takes estate planning, tax implications, and inheritances seriously, and so do many other locales.

Does Owning Property in Multiple Countries Cause a Need for Multiple Wills?

That depends on many of the factors described above, but yes, it’s possible that more than one will could be needed to protect all international property fully. Depending on the other countries involved, one will might be enough, but it’s highly advisable to work with an experienced estate planning attorney to determine what’s the right approach for your estate.

If multiple wills appear to be the best approach, having your U.S. attorney coordinate with counsel from other countries might be valuable to ensure all requirements and laws are followed. There’s also the possibility of having wills drawn up in the other countries’ primary languages, which could help ease the distribution of assets and probate-type procedures.

However, it’s vital to understand that when multiple wills are involved, it’s crucial that they be in sync with each other and follow the rules of each country, or some of them could be found invalid. In some cases, the foreign property can be dealt with as a supplemental will (such as a codicil to the first will). In other cases, carefully wording each will to clearly refer to other wills can avoid problems with wills being declared invalid.

What Is Ancillary Probate?

Ancillary probate is the term for the proceedings that may be needed when probate happens across more than one jurisdiction, such as owning property in states or countries other than where the estate owner lived. Technically, the property in those other locations is under the jurisdiction of that location, not of the U.S. home.

This can cause increased time and expenses for the beneficiaries, as multiple attorneys may need to be hired, a will’s executor will have more work to do (and if they’re being paid, they’ll earn more), and the different courts involved may not agree with each other on how the property should be distributed to the inheritors.

Is It Possible to Transfer Foreign Properties into a U.S. Trust?

It’s possible, but considerable research and time are required to verify whether every country involved recognizes trusts. Many countries don’t. Suppose the foreign property in one of those countries is placed into a U.S. trust. In that case, it can cause problems, including higher taxes or difficulties, with the ownership of the foreign property transferred to the beneficiary named in the trust.

What About Using a Foreign Trust?

Some countries offer foreign trusts. Those trusts aren’t subject to U.S. jurisdiction. However, they do offer the opportunity to use a trust, which is often a less time-consuming and costly way to transfer property to beneficiaries. They can bypass probate court and possibly offer some tax savings. They also offer better protection against creditors and other claimants to the estate. They may also offer protection from divorce claims, civil actions, or forced or false inheritance claims. That isn’t necessarily because foreign laws protect the trust from claims but because the cost and difficulty of pursuing legal measures outside the U.S. can be prohibitive. It’s also good to know that some countries are willing to enforce criminal cases and convictions from the U.S. if they involve a trust.

There are downsides and concerns to foreign trusts as well. U.S. trusts are protected by U.S. laws that don’t apply in other countries, so there may be little legal recourse if something happens to the foreign trust. Government stability is another significant factor. Anytime a country undergoes a change in government, relevant laws may change, and not always for the better.

Foreign trusts may also be subject to taxes, including from the IRS. These are all situations that should be discussed with your estate planning attorney.

What Should I Do if I Own Property in Multiple Countries and Need to Begin Estate Planning?

Call Cava & Faulkner at 916-685-1225 for a free consultation. International properties can add a layer of complexity to an already complex estate. Our team of experienced, knowledgeable estate planning attorneys can go through your property holdings to identify what countries are involved and what laws might be applicable. These are situations that require the utmost attention to detail, and our firm will endeavor to ensure every detail is accounted for.

What Are Some of the Recent Changes in Tax Law That Affect Estate Planning?

It’s easy to think of tax law as a centuries-old tradition where change is glacially slow. There’s some truth to that, but it’s also true that there have been changes in laws recently that affect estate planning, especially for high-net-worth individuals who are interested in paying as little estate tax as possible. While California itself doesn’t have estate taxes, the federal government has several that can become costly, especially as the laws change over the next year or two. Currently, the federal estate tax starts with estates valued at $13.61 million or higher (for 2024) for individuals or twice that for married couples. 

In the fall of 2023, the IRS announced a program to target high-income earners who are thought not to be compliant in filing and paying taxes. That means scrutiny is increasing for those with high incomes. This comes at a time when the 2017 Tax Cuts and Jobs Act, which doubled the federal estate tax exemption, is set to expire at the end of 2025. Congress could vote to extend the Tax Cuts and Jobs Act, but it’s not clear if they will. If they don’t, the threshold for estate taxes will drop from the minimum $13.61 million or higher listed above and could become as low as $5-6 million per person.  

So it’s worth considering taking specific actions before the Tax Cuts and Jobs Act expires in 2025, if it does.

Consider Creating a Spousal Lifetime Access Trust

A Spousal Lifetime Access Trust (SLAT) is an estate planning tool known as an irrevocable trust. That means assets are placed into the trust’s ownership and can’t be changed once the trust is finalized. The trust is set up to benefit the spouse of the person who set up the trust, who can benefit from the trust even while the original asset owner is still alive. Currently, the amount that can be placed into a SLAT without incurring a gift tax is $13.61 million. The other benefit of a SLAT is that the money placed there reduces the remainder of the couple’s estate, potentially lowering estate taxes on the assets outside the trust. 

Gifts for Children

Another way to potentially bypass steep estate taxes is to transfer assets as gifts to your children or grandchildren. The federal government does have a gift tax, but there are several exceptions. 

It’s essential to understand what the IRS considers a gift, which includes:

• Assets (stocks and bonds, etc.)
• Financial accounts (bank, retirement, or investment)
• Jewelry
• Loans with no or low interest
• Physical property (real estate, vehicle, etc.)

Suppose you’re unsure where your assets fit in terms of being subject to a gift tax. In that case, it’s highly advised to work with an experienced estate planning attorney who can help you identify what is or isn’t a gift and what might be done to avoid estate or gift taxes when transferring it to others. 

Each year, the IRS names the annual gift tax exclusion, an amount that, if not exceeded, can be given as a gift. In 2024, that amount is $18,000 per gift recipient. The amount is doubled if a husband and wife are giving the gift jointly. This is an amount that can be done annually.

However, it’s vital to understand that if the amount exceeds the annual gift, the IRS will view that as reducing the amount available in the lifetime cap (currently $13.61 million). When the lifetime exemption is exceeded, the tax rate could be as high as 40%. It’s best to talk to an experienced attorney about how to manage these gifts with as few repercussions as possible. 

Move Assets into Trusts

The larger the estate, the more likely it is to be subject to estate taxes, which can be sizable and reduce the value of the estate for the inheritors. One tactic to consider is creating a trust. That could allow you to reduce the size of the taxable estate by moving assets into the ownership of the trust rather than the person behind the estate.

However, there is an important consideration that shouldn’t be ignored. There are many types of trusts, with most falling into one of two categories: Revocable and irrevocable. Each comes with its own set of pros and cons.

• Revocable trust. As the term implies, this type of trust may be changed or canceled at any point when the person who created the trust is still living. That clearly provides flexibility, but if the trust generates any income while the creator is still alive, that will be considered taxable income to them.
• Irrevocable trust. This type of trust cannot be changed or canceled once it’s finalized, which can be concerning. However, this type of trust is more likely to be shielded from some or all estate taxes, depending on what’s contained in the trust and its overall value.  

How Can I Learn About Tax Law Changes That May Affect My Estate in California?

Call Cava & Faulkner at 916-685-1225 for a free consultation. Tax law and estate planning are both complex subjects, even more so when they intersect. There are many tactics for handling estate planning while managing taxes. Every estate is unique, and there’s no one-size-fits-all approach to creating an estate plan. Our team of knowledgeable, experienced estate planning attorneys can walk you through your estate and help determine the best approach to protect your assets for the next generation.  

How Does Owning a Small Business Affect Estate Planning?

Estate planning can often be complicated, but even more so when a small business is involved. People who have created and nurtured small businesses are justifiably proud of what they’ve accomplished. Still, they also want to ensure the business continues as long as it can, including after the founder has passed.

That’s why developing an estate plan is even more important than it usually is when the individual has a small business.

What Happens if a Business Owner in California Dies Without a Will?

Dying without a will is known as dying intestate. Under California law, if a business owner dies
intestate, any business assets will be distributed similarly to private assets. This is the order of succession.

• The spouse inherits it all if there are no children, parents, siblings, nieces, or nephews.
• The children inherit everything if the spouse is no longer living or married to the business owner.
• The spouse and children inherit in different proportions depending on the number of children.
• If the spouse and the owner’s parents or siblings survive, but there are no children, they’ll each receive portions of the estate.
• If the owner’s parents or siblings are the only survivors, they’ll inherit everything.

In some cases, family members would be the intended beneficiaries anyway. But there are many cases where the small business owner has reason not to want specific family members involved in the business, or they may prefer to leave the business to someone outside the family. Those wishes won’t be addressed if the business owner dies intestate.

Is a Will All I Need to Plan an Estate with a Small Business?

A will is a good start and, depending on the overall makeup of the estate, a will may be enough but as a rule, generally not. Other estate planning tools,, specifically a trust, is generally necessary to guarantee the outcome the business owner wishes to achieve. Every person with a business has a desired outcome, and along with this unique challenges. Here are a few of the tools that might help to determine what might work best for your estate and small business, Its vital that you work with an experienced estate planning attorney who will thoroughly discuss these tools with you.

• Life insurance policy. People often think the role of a life insurance policy is to provide financial assistance for a remaining spouse or children. But it can play another role, too–it can provide money for the family to help them if the business’ ownership changes, if they lose access to income from the business after the owner’s death, or it can be used to buy out another owner’s share.
• Trust. A trust is a way of placing the estate’s assets, including a small business, into a different type of ownership managed by a trustee. The advantages are that assets in a trust bypass probate court, so it can be less costly and time-consuming to distribute them. In terms of the small business, it can also set up the process of naming the business’ successor or require shareholders to vote unanimously to take specific actions, such as selling the business.
• Buy-sell agreement. This is a useful contract that determines ahead of tiem how one owner’s share of the business may be handled if they retire or die.
• Financial power of attorney (POA). This is a vital document for a small business owner. Unlike the above tactics, which primarily come into play when the owner dies, a financial POA is designed to go into effect if the owner becomes incapacitated in some way, meaning they’re still alive but unable to make decisions. The POA determines who the owner wants to handle their business dealings while they’re unable to. Without this POA, a business can be left unattended while other stakeholders go through court to try and gain control.

What Is a Business Succession Plan?

A business succession plan is a tool for small business owners that acts almost like a will. It sets up how the business will be handled, who will receive the business and who will run the business should the current owner become incapacitated, retire, or die..

A good business succession plan covers what happens to the business once the current owner is no longer part of it. This is a plan that is best undertaken with the assistance of an estate planning attorney as it’s complex and varies from business to business. In general, you should expect to cover:

• Ownership transition. To whom the business will transfer ownership and how that transition will happen.
• Structure. How the business should remain structured or how it should change when ownership changes.
• Future plans. If the current owner has ideas for the future they want to suggest, those can be included here.

These considerations are only a small sample of provisions you may include in your plan. However, a succession plan helps prevent disputes among stakeholders, potentially prevent severe negative, unexpected and un-planned tax consequences, and opens up conversations with the stakeholders to set expectations.

What Should I Do if I Need Help Incorporating My Small Business into My Estate Plan?

Call Cava & Faulkner at 916-685-1225 for a free consultation. We understand that while every aspect of your estate is vitally important to you, the small business you built may have a special place in your legacy. Every estate is unique and needs its own plan based on what the estate contains. Our team of experienced, knowledgeable estate planning attorneys can guide you through your estate and your small business and advise you on what might be the best way to protect both.

What Is a Health Care Directive?

A health care directive (often referred to as an advance health care directive) is a legal document that allows you to specify what you do and don’t want in terms of medical care and treatment if you become incapacitated and unable to state your preferences yourself.

Often, people think this is only valuable for elderly people, but that couldn’t be further from the truth. Unfortunately, everyday events like car accidents or undiagnosed medical conditions can cause even otherwise young and healthy people to become incapacitated. While it’s uncomfortable to consider that possibility, it’s vital for people to prepare for it and hope never to need it.

A health care directive allows you to name an agent who can make decisions on your behalf while you cannot. It can set in place a wide variety of preferences, including what healthcare
providers or institutions you do or don’t want involved, what types of care and treatment you would or wouldn’t want in specific circumstances (for example, forced feeding or breathing if you’re unlikely to survive or gain consciousness without it), and whether or not you’d want your organs to be donated.

In California, a health care directive is comprised of two parts:

• Power of attorney. This document names the person authorized to make medical decisions on behalf of the incapacitated person.
• Instructions for health care. This is the list of specific instructions the person would have wanted if they could speak for themselves.

It’s important to understand that a health care directive is not a do-not-resuscitate (DNR) order. The latter applies only to respiratory or cardiac arrest. You can have your doctor prepare a DNR for you to have in your records.

What Happens if There’s No Health Care Directive for Someone Who Becomes Incapacitated?

If someone without a health care directive becomes incapacitated, the medical professionals caring for them will likely turn to the family members closest to the invalid. While this can work

in some cases, in others, it can lead to strife and animosity if the family members disagree about what should be done and who is best suited to make those decisions. For example, if a widower becomes incapacitated and has two children who disagree on whether or not the widower would want life-sustaining treatments, the decision could end up in court in a conservatorship proceeding. That’s costly, time-consuming, and could lead to a permanent rift between the siblings. It could also lead to treatments the invalid would not have wanted, especially if they would have preferred not to be kept alive by artificial means. A judge may also be the one to choose your guardian (conservator) and this may not be the first choice for making healthcare decisions. Conservatorships and expensive, invasive and very time consuming.

To ensure your wishes may be followed, it’s vital to work with an experienced health care directive attorney who understands California law and can work with you to develop a directive that meets your requirements.

How Do I Choose a Health Care Directive Agent?

Choosing the right person to act as your health care directive agent is as important as having the directive itself. People often choose a family member, but that’s not always the best choice. The following are some of the crucial aspects of choosing an agent.

Trustworthiness. Will the person follow your wishes? If you would not want forced feeding or breathing apparatuses used, but the person you’re considering for your agent believes in prolonging life no matter what, can you trust that they’ll put aside their beliefs for yours?

Location. Choosing someone who lives far away is not ideal, as they may need to be on-site as soon as you become incapacitated.
Good assertiveness and communication skills. The agent must be able to communicate well and sometimes forcefully, both with medical staff and family members.

Note: In California, you cannot name your supervising health care provider, any employee of the health care institution where you’re receiving care, or operator or employer of a senior care facility where you live as your agent.

What Is the Process for Setting up a Health Care Directive?

As noted above, there are two documents for a health care directive, the power of attorney that names the agent and the instructions for health care. But before filling those out, it’s recommended that you spend some time determining your wishes and discussing them with close family and your attorney to ensure you’ve covered as many aspects as you can.

Once you’ve laid out your instructions for health care, you should go over them with the person you want to name as your agent. These can be uncomfortable conversations, but they need to happen so you can be sure the agent understands and will follow your wishes if necessary. You may need to consider someone else as an agent if they appear hesitant. It’s also a good idea to have a backup agent in the event that something happens to the primary agent.

Once the directive is finalized, you should provide copies to your family, the agent, your doctor, and if you’re in a hospital, senior facility, or other health organization, provide one to them as well.

What Should I Do if I Want to Set up a Health Care Directive?

Call Cava & Faulkner at 916-685-1225 for a free consultation. This is a vital document for everyone, and you’ll want to ensure it clearly reflects your wishes and leaves little room for error or misinterpretation. We can walk you through what it should include and help you determine what your specific requests are and how to make them as legally binding as possible.

What Is a Trust?

A trust is a legal fiduciary arrangement that places assets into a separate ownership usually managed by a third party, known as the trustee. Trusts are organized in numerous ways including how assets eventually make their way to the named beneficiaries. Some trusts provide protection for family members with disabilities by helping them avoid conflicts with government programs such as Medicare or Social Security. Others can provide a steady, controlled income to beneficiaries who may have difficulty managing money prudently.

One advantage of many trusts is that they avoid probate, unlike wills. That has a couple of advantages: First, it usually means the assets will be distributed more quickly when the original estate owner dies. Second, avoiding probate means that the details of the estate are private. Probate is a public function, and wills and estates that go through probate are made available for public review, while trusts remain private. Third, the cost of probate is very high and can drain assets that were meant to improve the lives of loved ones. Fourth, probate deprives a person of choosing when and how a beneficiary receives an asset so an 18 year old could inherit money which may alter the course of their life in a very negative way.

What Types of Trusts Are Available in California, and What Can They Do?

There are many. This is not a complete list, but does include some of the most commonly used trusts. For concerns about your estate’s specific needs, it’s crucial to work with an experienced estate planning attorney.

Revocable or Irrevocable Trust

Trusts are generally either revocable or irrevocable. Which is best for you estate depends on how you feel about the requirements of each.

Revocable trust. The trustor (person who moves their assets into the trust) creates the trust and has the ability to change, end, or revoke the trust at any point in their lifetime, as long as they’re deemed mentally competent. This type is commonly used to avoid probate because the trustor has the ability to make changes in the future (for example, if they come to believe someone listed as a beneficiary is no longer the best choice for certain assets, they can change those assets to go to someone else).

Irrevocable trust. With this type of trust, once the trustor moves the assets into it, they no longer have the right to make any changes, cancel, or revoke the trust. While it might seem logical that the trustor would prefer to retain control, there are circumstances in which an irrevocable trust might be the better choice. One primary reason is that assets in an irrevocable trust can’t be reached by creditors. For people who are more susceptible to being sued (including physicians and lawyers), this is a good way to ensure that a yet-unforeseen lawsuit won’t destroy the estate they’ve built up.

Special Needs Trust

If the trustor wants to ensure one or more beneficiaries who have special needs and will need a steady income for the foreseeable future can receive those without losing their eligibility for various needs-based governmental options such as Medicare/Medicaid. This is especially helpful when there are beneficiaries with disabilities that will make it difficult for them to support themselves as adults.

Life Insurance Trust

This type of trust is arranged to have life insurance payouts go directly into the trust upon the trustor’s death. It can only be an irrevocable trust, and the trustor can’t borrow money against the life insurance policy in their lifetime. But it can protect against excessive taxation at the trustor’s death.

Testamentary Trust

Unlike the other types of trusts mentioned so far which go into effect as soon as the trustor moves assets into them, a testamentary trust doesn’t go into effect until the trustor passes away. These are also irrevocable trusts.

Blind Trust

This is useful when the trustor has reasons not to want the beneficiaries to know about the trust (or the trustees appointed to manage it) because they fear there could be conflict between themselves and the beneficiaries or among the beneficiaries.

If I Have a Trust, Do I Need a Will?

If you have any assets that you don’t want to place in a trust, you should draw up a will to specify how those are to be distributed. A pour over will serves a very important purpose if your trust fails, by ensuring your beneficiaries will receive the assets that should have been distributed through a trust.

There’s also one important thing that a will can do that a trust can’t, and that’s to name a guardian for any orphaned minors. If the parents die with a trust but without a will, it will be up to the courts to determine guardianship for the surviving children. Usually the courts will look at close family members first. But to ensure the parents’ preference for guardians is followed, they must have a will.

Who Should Be Appointed Trustee of My Trust?

There are several considerations, and this topic should be discussed with an attorney. But here are a few basic things to keep in mind.

Trustworthy. The trustee must be someone the trustor can count on to carry out their wishes.

Strong personal financial track record. The trustee should not have a mixed financial background.

Communication skills. The trustee needs to communicate with a variety of people, including family members and beneficiaries.

Detail-oriented. The trustee will have to manage paperwork, accounting, and deadlines, and should be detail-oriented to succeed.

What Should I Do if I Need Help Developing an Estate Plan with Trusts?

Call Cava & Faulkner at 916-685-1225 for a free consultation. As discussed above, trusts are an excellent way to protect assets for future generations. Every estate is unique, and which trusts will most benefit yours depends on the specifics of your estate. We can review your estate and help you determine the best approach for protecting your assets and benefiting your inheritors going forward.