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What Is Incapacity Planning?

Many people understand the value of estate planning that prepares for the eventual death of the estate’s owner (known as the decedent) and allows the estate to be distributed according to the decedent’s wishes. But all too often, the estate’s owner may lose control of the estate not because of their death but because they’ve become temporarily or permanently incapacitated while still alive.

In California, incapacitation is legally defined as someone being of unsound mind, without understanding, or suffering from mental deficits. That could be related to situations such as someone being in a coma or suffering brain damage after an accident. It means the person is no longer mentally competent to manage their affairs, at least for the time being.

Incapacity planning prepares for that possibility. Just as wills and some types of trusts prepare for the estate owner’s death, incapacity planning prepares for the temporary or permanent mental incapacity of the estate owner while they’re still alive. It determines who will handle the various financial and legal matters on the estate owner’s behalf until they recover or until they pass.

This type of planning can also determine who can make healthcare decisions for the incapacitated person and also handle questions of where the person should live if they’re not able to live independently at their home. Creating a power of attorney and healthcare directive is crucial to avoid a conservatorship and choose the people who will handle these matters if you cannot. In addition, trusts can also address incapacity when it comes to trust assets.

What Is a Trust?

A trust is a financial arrangement in which assets are placed and managed by a third party known as the trustee. Technically, the trust owns the assets rather than the estate owner. The trustee doesn’t own the assets but is responsible for managing them and overseeing their distribution at the estate owner’s death.

There are numerous types of trusts that can be used for various purposes. One primary reason people create trusts is that the assets held in a trust don’t have to go through probate, meaning the details of the assets and their distribution remain private, unlike assets that are handled through a will that usually have to go through probate. Probate is a public process.

What Types of Trust Could Be Used for Incapacity Planning?

While there are many types of trusts, many are designed for estate distribution upon the estate owner’s death. The type of trust used for incapacity planning is called a revocable living trust. In a revocable living trust, the asset owner places all relevant assets into the trust but appoints themselves as the trustee. They name someone to be a successor trustee who will take over management of the trust if the original trustee becomes incapacitated. If the original trustee doesn’t become incapacitated, they still have control of the trust.

Besides being an excellent incapacity planning tool, a revocable living trust is highly adaptable. The trustee can move assets in or out of the trust as needed. They can also change who the successor trustee is if circumstances warrant it.

What Should I Look for When Choosing a Successor Trustee?

In many ways, choosing a successor trustee is similar to choosing an executor for your will. It’s a choice that shouldn’t be made lightly. Family members are frequently the first choice, and that works if they meet the following qualifications.

• Trustworthiness. Do you trust the person to abide by your wishes? The best way to determine this is to have a frank discussion with the person you think should be the successor trustee. This is especially important for decisions regarding healthcare options and where you might end up living if incapacitated. If you don’t think you could trust someone to pay back a $50 loan or keep a secret, they’re probably not a good choice to be your successor trustee.
• Financial understanding and condition. Depending on the size and complexity of the trust, the successor trustee may have to make complicated financial decisions on your behalf. It’s vital that they understand the basics of those decisions. But it’s also essential that they be financially sound themselves. Someone struggling with debt may not always be relied upon to do the right thing.
• Preferably not a beneficiary. Legally, a trust’s beneficiary can be a trustee, but that should be avoided if possible. The trustee could end up in conflict with the other beneficiaries, especially if the others think they are mismanaging the trust for their own benefit.
• Good communication. A trustee should be able to communicate promptly and effectively with anyone involved with the trust, whether beneficiaries, bankers, lawyers, or anyone else. This especially comes into play if the trustee has to make healthcare decisions. They need to be able to inform healthcare professionals clearly–and possibly very assertively–as to what the incapacitated person’s wishes are.
• Strong organizational skills. Because the trustee may be tasked with paying bills and filing taxes for the incapacitated person, among other things, it’s critical they know how to manage their time and meet deadlines. If they don’t, errors such as filing taxes late or not at all could cause additional fees and penalties that could eat away at the trust’s assets.

What Should I Do if I Need Help Setting Up a Trust as Part of My Incapacity Planning?

Call Cava & Faulkner at 916-685-1225 for a free consultation. Every estate is unique, and we’ll go through the specifics of yours to determine the best approach to protect you in the event of you becoming incapacitated. Having plans in place, even if you never need them, can be reassuring for you and your loved ones.

Does Business Ownership Matter for Estate Planning Even if the Business Is Small?

Unless you plan to shut the business down in your lifetime–and even then, while no one likes to think about it, unexpected things happen–having an estate plan that includes the business, even if it’s small, is vital. There are a number of factors involved which, if not planned for legally, could be left to probate court to determine–and that may end up with outcomes that aren’t anywhere near what the business owner would have wanted.

What Should Be Included in an Estate Plan Pertaining to a Small Business?

There are many considerations that should be discussed with relevant parties (business partners, family members, potential buyers, etc.) and then made legally binding with the relevant estate planning tool (there are more tools than just wills). Here are a few things every business owner should think about.

• Successors. If the owner wants someone to take over the business through inheritance, those successors should be identified and their roles clearly defined. Often, with a small business, a family member, such as a son or daughter, may stand to inherit the business. It’s vital that they not only be informed of the future inheritance, but that they’re trained in the business’ workings. Ideally, they’d work with the owner before the transition ever took place, but at least they should understand the business, how it works, the bookkeeping behind it, and any future plans. Then, the successors need to be named in the estate.
• Sales agreements. If there are multiple business owners, planning for what happens when one dies or becomes incapacitated is essential, too. There are specific contracts that can be drawn up specifying whether the other business owner(s) can buy the remaining percentage of the business, how the business should be evaluated, and potentially what the sales price should be.
• Legal and tax situations. Whether the business is to be inherited or sold, there are significant legal and tax implications for the estate and whoever eventually becomes the owner. There may be estate or gift taxes to take into consideration. Consulting with both an estate planning attorney and a financial planner who specializes in small businesses can help develop a plan to minimize those situations as much as possible and get that plan into the estate plan as soon as possible.
• Business Valuations. As noted earlier, the business should undergo a financial evaluation to determine how its value is assessed, both for inheritance and for sale. But this is likely something that should be done on a regular basis, as changes in the business can change what the overall business is worth–and those changes could lead to amending the estate plan.

What Types of Estate Planning Tools Should a Small Business Owner Consider Using?

There are several tools available. Because every estate and small business is unique, the estate plan should be, too. What works for one small business estate plan may not work as well for another. Talking to an experienced estate planning attorney is the best way to determine what’s suitable for your situation. In general, these are some of the tools that are frequently used.

• Trust. A legal trust can be an excellent mechanism for helping a small business owner pass the business assets to the named successor. This can be done via a will, but with a trust, the assets don’t go through probate, and there may be financial advantages to using a trust, especially when it comes to taxes. Probate is a public process, and many business owners prefer to keep the details of their business private, which a trust can do.
• Life insurance. Many people think about life insurance in terms of paying for things like funeral expenses, but they’re also valuable in replacing lost income when the business owner dies. The funds can also be used to buy out someone else’s share in the business in order to keep the business in the family.
• Buy-sell agreement. As discussed above, it’s possible that the deceased owner’s share of the business may be sold to another owner or an employee. Having an agreement set in place before it’s needed can make that process smoother with less conflict.
• Financial power of attorney (POA). Very few estates involving small businesses should be without one of these. A financial POA designates someone who is legally authorized to act on the owner’s behalf with regard to running the business and making business decisions if the owner is incapacitated. This is not meant to handle the business after the owner dies, but if they become unexpectedly unable to handle the business (for example, if they’re in a car accident and end up in a coma). The idea is that if the owner recuperates, they can return to the business. If they pass away, the rest of the estate plan is activated, and the business is managed by those requirements.

What Should I Do if I Need Help Setting Up an Estate Plan to Include My Small Business?

Call Cava & Faulkner at 916-685-1225 for a free consultation. We fully understand that it’s not just the personal aspects of your estate that you want to protect but the business you’ve worked hard to establish and maintain. Our team of experienced, knowledgeable estate planning attorneys can look at everything involved in your estate and help you decide how you want it handled and what’s best for everyone and everything, including the future of the business.

What Is Probate?

Probate is a legal process through which the assets of someone who has passed away (known as the decedent) are distributed to the heirs. Under California law, probate is required if someone dies without a will and has an estate worth more than $184,500 (that figure can change with time). It’s also required for decedents who had a will with property that is subject to probate. Because probate is a process that goes through the courts, it can take time and cost significant sums of money, two things the heirs would likely prefer not to use. It’s vital to understand that there are exemptions to what’s required to go through probate and methods of estate planning that can help bypass it.

What Is Exempt from Probate in California?

California law specifies several assets that are considered non-probate property, including the following.

• Assets below the current value threshold of $184,500.
• Assets owned jointly by spouses and designated as “community property with right of survivorship.”
• Assets owned jointly by the decedent and another person (as long as the decedent passes away before the other person).
• Any assets (such as bank accounts and life insurance policies) that list a beneficiary as payable on death (POD) or transfer on death (TOD).
• Assets held in the decedent’s living trust (more on this below).

What Is Usually Subject to Probate in California?

Generally, any property owned solely by the decedent (including items listed above) that was not transferred to a trust or designated as a POD or TOD. This can also include jewelry, artwork, and intellectual property.

One area that will have to go through probate regardless is assigning a guardian to a minor child orphaned by the decedent’s death. If there’s a will that specifies who should be the guardian, that will need to be approved by probate. If there is no will or the will doesn’t name a guardian, the probate court is responsible for designating one.

What Is a Revocable Living Trust, and How Does it Help Avoid Probate?

A revocable living trust is an estate planning tool that allows the estate’s owner to place assets into the trust’s ownership. The trust is managed by a trustee, which can be the estate’s owner or someone else of their choice. The estate’s owner can change or revoke the trust at any time in their life, as long as they’re deemed mentally competent.

The trust dictates who the beneficiaries will be once the estate’s owner passes away. This may sound similar to drawing up a will, but a will often ends up in probate, while a trust bypasses it altogether. This allows the distribution of the trust’s assets to be settled more quickly and at a significant savings and lower cost than going through probate court.

What Is Required to Set up a Revocable Living Trust?

This type of trust requires a creator (also known as a grantor), which is the person who puts their estate assets into the trust. It requires a trustee to manage the trust assets, and it requires that a beneficiary or beneficiaries be named to inherit the trust’s assets on the grantor’s death.

It’s important to know that the trustee is not allowed to manage the assets in the trust for their own personal benefit. They must manage the assets in the beneficiaries’ best interests.

Often, people assume trusts offer tax benefits. Some may, but revocable living trusts usually do not.
It’s also important to understand that this type of trust does not provide asset protection. That means the assets in the trust could be subject to claims from creditors. If this is a potential concern for your estate, it’s highly recommended that you work with an experienced asset protection attorney to tailor your estate plan with that in mind.

Are There Other Types of Trusts That Help Avoid Probate?

There are several with varying restrictions and goals. These are two popular choices.

• Irrevocable living trust. This is essentially a living trust that, once it’s finalized, cannot be changed. The grantor cannot change or revoke it. It’s exceedingly rare that legal exceptions are made once the assets are moved into the trust’s ownership. However, it has some benefits that the revocable living trust doesn’t. It may have tax benefits for the inheritors, and it’s not subject to creditors’ claims. For that reason, it’s also a valuable option for someone whose career might make them more prone to lawsuits.
• Special needs trust. If there’s a family member with special needs, the grantor can set up a trust that will provide assets managed by a trustee on behalf of the special needs person. This is especially useful if the beneficiary is unable to manage their own finances. It’s also valuable in that assets in this type of trust aren’t considered to be under the beneficiary’s control. Then, the beneficiary can remain eligible for various government benefits, including Social Security or Medicaid, as the assets won’t be taken into account when determining their need and eligibility.

What Should I Do if I Need Help Setting Up an Estate Plan that Can Avoid Probate as Much as Possible?

Call Cava & Faulkner at 916-685-1225 for a free consultation. Our team of knowledgeable, experienced estate planning attorneys knows that you want to do everything possible to transfer your estate to your designated heirs in the easiest way possible while avoiding unnecessary public exposure. We can walk you through the specifics of your estate and explain the various options available that can help reduce the need for probate.

Inheritance and estate planning can be complex processes, and often, the person drawing up the estate plan wants to find a way to enable beneficiaries to avoid paying estate or other types of taxes. Here’s what you need to know about what’s possible in California.

What Is an Inheritance Tax?

An inheritance tax is a tax assessed on an inheritance a beneficiary receives from someone in a specific state. For example, if someone lives in a state where inheritance taxes are collected and passes away, their beneficiaries would likely have to pay that state inheritance taxes on the inheritance.

Does California Collect Inheritance Taxes?

California does not levy estate or inheritance taxes. That means that if the person with the estate (known as the testator) dies in California and leaves money to beneficiaries, the state won’t collect estate or inheritance taxes on it. Those funds are not considered income by California.

However, if someone lives in California and inherits money from someone who dies in a state where such taxes are collected, they will likely have to pay them in that state. Some states have exemptions for small inheritances, such as $10,000, while others don’t.

If California Doesn’t Collect Estate or Inheritance Taxes, Does That Mean the Inheritance Is Tax-Free?

Not necessarily. When talking about California’s inheritance tax policies, we’re only talking about taxes on the state level. There are also taxes on the federal level to consider. While the Internal Revenue Service (IRS) does not tax inheritance as income, meaning the beneficiary doesn’t have to report it on their tax filings in the year they received it, the IRS may view it through the lens of capital gains. Capital gains occur when someone inherits something, such as property, and later sells it at a profit. The amount of the profit could be taxed as capital gains by the IRS.

The IRS will also seek an estate tax on estates valued at more than $12.92 million (in 2023). If the estate’s overall value is lower than that, it will not assess the estate tax.

How Can I Find Out if an Estate Tax Will Affect Me or My Beneficiaries?

This is when it’s an excellent time to work with an experienced estate planning attorney. When people think about their own estates, they often only consider certain bank accounts. In fact, legally, an estate is much more than cash. An estate is comprised of anything of value, including real estate, valuable artwork, vehicles, business interests, copyrights, and annuities–and these are only a few of the things that make up an estate. It’s possible that even if bank accounts don’t add up to the minimum estate tax level, adding in the actual value of these other assets could push it over the limit and lead to a taxable situation. A knowledgeable estate planning attorney can help you identify assets you may have forgotten about or didn’t realize would be included in the definition of “estate.”

How Can Estate Taxes Be Avoided or Minimized?

If your estate reaches the federal threshold for estate tax, there are steps you can take to minimize the tax impact. While a will is a valuable document for estate planning, putting assets into a trust is another avenue. Using a trust may not avoid all the federal estate taxes, but there are times when it can help reduce them. Here are some types of trusts that may help. Every estate is unique, so the solutions mentioned here are not one-size-fits-all, nor are all these the only solutions available.

These are simply examples of different options:

• Dynasty trust. This is sometimes referred to as the generation-skipping trust, which unfortunately doesn’t accurately portray how the trust works. In this trust, the estate is put into a trust that has a maximum amount allowed, and the trust passes that amount to the estate owner’s child and then to their grandchild.
• Irrevocable gifting trusts. These gifts are given to others that can’t exceed $15,000 per year and have a lifetime cap. As long as those maximums aren’t exceeded, the recipients should receive the money without taxation.
• Irrevocable life insurance trust (ILIT). A life insurance policy that names a spouse as the beneficiary won’t owe taxes when paid out. But if the policy lists someone else, such as the policyholder’s children, they could be expected to pay tax. An ILIT is a workaround for that.
• Spousal lifetime access trust (SLAT). A SLAT allows someone to put large amounts of assets into this trust to benefit the other spouse (or sometimes children). That allows the amount to be reduced from the shared estate. Only one spouse controls the trust.
• Personal residence trust. This allows someone to put personal real estate into a trust and give it to their children while retaining the right to continue to live there.

It’s important to understand that all of these trusts have numerous, complicated requirements to fulfill. Contact us with any questions.

What Should I Do if I Need Help Setting Up an Estate Plan?

Call Cava & Faulkner at 916-685-1225 for a free consultation. Our team of knowledgeable, experienced estate planning attorneys understands how important it is for you to have your estate distributed according to your wishes and that you want to take every step possible to ensure that happens. Every estate is unique, and we can guide you through the specifics of yours to determine the best approach that could potentially minimize any tax liabilities for the beneficiaries.

Many people are familiar with the concept of drawing up a will to plan for estate succession. But wills aren’t the only type of estate planning tool available. Trusts are another way to plan for the future. In some cases, they act as a replacement for a will, while in other cases, they work together with a will. Each estate is unique. Here’s what to know about trusts in California.

What Is a Trust?

A trust is a financial arrangement in which a third party (known as a trustee) manages assets held for beneficiaries. The estate owner (known as a trustor) transfers the assets to the trust. While this is similar to a will in that the named beneficiaries will ultimately receive the assets, there are some significant differences.

Trusts don’t go through probate, unlike many wills. Probate is a public process, so the terms of the will, how it’s distributed, and to whom becomes part of the public record. Because trusts don’t go through probate, it’s a private matter.

Trusts can often distribute assets more quickly than a will can because of being able to avoid probate.

It’s possible in some cases that using a trust will reduce court fees and other estate costs and potentially reduce estate taxes.

What Types of Trusts Are Available in California?

There are many different types of trusts in California, all with different benefits and nuances. This is not a comprehensive list but includes many of the most commonly used trusts. If you’re unsure which of these might work for you or have needs that don’t appear to be met with any of these, contact an experienced estate planning attorney to learn what other options might be available.

Revocable Trust

A revocable trust (sometimes referred to as a living trust) is one in which the trustor can continue to manage and change throughout their life. Once the trustor passes, the beneficiaries receive the assets assigned to them without going through probate court. But as long as the trustor is living and competent, they can make changes to the trust.

The beneficiaries will receive none of the assets until the trustor passes away.

Irrevocable Trust

When a trustor sets up an irrevocable trust, they lose the ability to revoke the trust if they change their mind later. That can seem like a disadvantage, but there are advantages to irrevocable or revocable. These are often used for long-term care and retirement planning, as once the assets are transferred to the trust, they can’t be included as assets or income when determining whether or not the trustor is eligible for Medicaid.

Life Insurance Trust

This irrevocable trust allows any life insurance assets to be passed to beneficiaries after the trustor’s death without activating any estate taxes.

While a life insurance policy will ask for named beneficiaries, they may have to pay taxes without this type of trust.

Special Needs Trust

This type of trust is used for people with disabilities. It can be an essential part of protecting their future, as when set up correctly, the person with disabilities can receive funds from the trust without it counting against them when determining Medicare or Medicaid (or other government support) eligibility.

Charitable Trust

When someone would like to leave some or all of their assets to a nonprofit organization, a charitable trust is an excellent mechanism to do so. There are multiple ways to create this type of trust, including the possibility of allowing interest-only disbursements for a period of time before the bulk of the assets are transferred.

Generation-Skipping Trust

As the name implies, this is a trust designed to ensure assets go to grandchildren rather than children. If set up correctly, this type of trust may keep the trust assets to remain untaxed.

Bypass Trust

Married couples frequently use this. Each spouse sets up a revocable (living) trust, and each specifies that if the assets of one will pass to the other’s trust upon the trustor’s death. This usually makes the assets safe from gift or estate taxes as it’s passed to the surviving spouse.

Pet Trust

This is an increasingly popular option that allows pet owners to arrange in advance for their pets to be cared for if something should happen to the original owner. The trust can provide funds for the pet’s needs (food, veterinary care) and often includes a stipend for the person caring for the pet.

Is There Something a Trust Can’t Do?

While there are many things different trusts can do, there’s one crucial thing that none of them are able to handle, and that’s assigning guardianship of a minor child. This is a situation in which having both a trust and a will may be the best solution.

Only a will can legally name a guardian for orphaned minor children. Without a will, the courts will name a guardian, who may or may not be someone the parent would have wanted.

What Should I Do if I Need to Set Up a Trust?

Call Cava & Faulkner at 916-685-1225 for a free consultation. Because there are multiple types of trusts available, each with its own pros and cons, working with experienced, knowledgeable estate planning attorneys can help you through the decision process of what’s best for you and your estate. We understand how important it is for you to ensure your estate is handled precisely as you want it to be.

When someone dies before drawing up a will that specifies how they want their estate handled, that’s known as dying intestate. Without a will, it’s up to the court to determine how any assets will be distributed and to whom. Here’s what you need to know.

What Happens When Someone Dies Without a Will in California?

Precisely what happens when someone dies intestate in California depends on a number of factors, as every case is unique. However, in general, an estate owned by someone who died intestate must go through California’s probate court, as specified in California’s intestate succession law.

That means the court, rather than the deceased, determines how the estate will be distributed. If the deceased had no assets, this isn’t a problem. But if there were assets, they must be registered with the probate court.

Another critical factor in not having a will applies if there were minor children who were orphaned by the death of the intestate person. A will provides a legal process to assign guardianship to the children as chosen by the deceased. If there’s no will, the probate court has the responsibility of choosing a legal guardian for the children.

How Does Probate Court Determine How to Distribute an Estate When There’s No Will?

California’s intestate succession law is specific about how assets will be distributed, and the emphasis is on surviving family members, with the caveat that survivors must outlive the deceased for at least five days (120 hours) in order to be eligible for the inheritance. The court prioritizes the family tree in this order.

• Spouse or registered domestic partner. This person will receive all the community property and half of the separate property (the difference between community and separate property is explained below). However, if the spouses were legally separated at the time of one’s death, the surviving spouse is no longer eligible for any inheritance.
• Children. Usually, children will receive half of the couple’s separate property divided equally among them if there is more than one child. If a child is deceased but has surviving children of their own (which makes them the intestate deceased’s grandchildren), those children will receive that portion of the inheritance.
• Parents. Suppose the deceased has no surviving spouse, registered domestic partner, or children or grandchildren, but they do have surviving parents. In that case, those parents will receive the assets of the estate divided equally between them.
• Siblings, nieces, and nephews. If none of the family members listed above are alive, any siblings and their offspring will receive the assets. The siblings receive the assets first, but if one or more siblings are deceased but have surviving children (nieces and nephews), those children receive the sibling’s portion.
• Grandparents or descendants of grandparents. If none of the family members listed above are alive, any remaining grandparents or their descendants are eligible to receive the estate.
• Distant relatives. If all of the above are deceased, the California probate code allows the court to try and determine if there are more distant relatives (second and third cousins, etc.) that are surviving to award the estate to.
• No surviving family members (as far as can be known). When this happens, the estate is taken by the state of California.

The bottom line is that someone who dies intestate will have their assets given only to family members. If the estate owner doesn’t want family members to have the assets or wants to give some of the assets to friends or organizations such as nonprofits, the only way to ensure that happens is to draw up a legal will. No friends or organizations can receive any part of the estate without a will.

What Is Community Property and Separate Property in California?

As noted above, the court will examine assets to see which ones were community versus separate property for spouses. That’s an important distinction. Here’s how California law views property in a marriage.

Community property (sometimes called marital property). This is basically any assets acquired by the couple during the marriage, whether it’s real estate, bank accounts, investments, etc. When someone dies intestate but has several assets that were jointly owned, the spouse automatically receives those assets without having to go through probate. It’s important to note that some gifts and inheritances may not be considered community property. If there’s uncertainty as to whether or not a specific gift or inheritance is considered community or separate property, it’s advisable to work with an experienced estate planning attorney.

Separate property. Each party in a marriage may have had assets that they owned before the marriage, including real estate or bank accounts. That’s considered separate from the marriage, as are most gifts or inheritances that arrive during the marriage, as long as they’re directed to one spouse only. These are considered separate as long as they weren’t rolled into the community property. Once a couple has legally separated, any assets they acquire from the point of separation are also considered separate.

What Should I Do if I Need to Begin Drafting a Will?

Call Cava & Faulkner at 916-685-1225 for a free consultation. Our team of experienced, knowledgeable estate planning attorneys understands how important it is to ensure your wishes are followed after your death. A will is a vital tool for helping that to happen. There may be other tools, such as trusts and powers of attorney, that can also help, but a will is a great place to start.