I get approached all the time for advice on various financial planning topics. The most common situation I see with my California clientele is they don’t have an estate plan in place.
Here’s what you need to know about why you want to get an estate plan in California.
A typical estate plan includes the following documents:
- Durable Power of Attorney
- Health Care Power of Attorney and Health Care Directive
The first two documents, wills and trusts, come into effect upon your death whereas the last two, power of attorney and health care directives, come in to play if you are incapacitated i.e. coma, Alzheimer’s, or any other physical or mental incapacity.
Wills are important for a number of reasons. First of all, it says who gets your stuff if you die. Second, and very important for those who have minor children, it’s the document where you can decide who would get custody of your kids should anything happen to you. It’s frightening how many families with small kids don’t have a will in place.
If you haven’t gotten around to putting your will together and get hit by a bus, fear not, California has one for you. It’s kind of a “default will”. But wait, what does it say about where my stuff goes?
Before we get into that, understand there are certain types of assets that would avoid being subjected to California’s “default will”:
- Property owned in joint tenancy with right of survivorship
- Any accounts that are “Transfer on Death” aka TOD account
- Your retirement funds such as IRAs, 401Ks, 403Bs where you have named beneficiaries
- Life insurance with named beneficiaries
- Any property held in a living trust
For everything else you own upon your death, California dictates to whom it goes. Without getting too much into the weeds about what the succession rules are, just know, that if you die without a will, your assets could go to people you don’t want to.
So get your will.
Okay, now that you got your will in place and you have finely dictated who gets your stuff should anything happen to you, you’re done, right? Nope. Just because you have stipulated to whom your stuff goes to, it leaves a lot to be desired on how to actually get your intended beneficiaries your earthly possessions. That’s where a trust comes into play.
So you’ve decided that you want your home to go to your children, or sibling, or whomever. If you were alive and wanted to give them your house, what would you do? You’d sign over the deed to your intended beneficiary, right? Even though your will clearly states that “this person gets this thing”, you’re not around to sign your asset over to your beneficiary. This is essentially what Probate is. I’m sure you’ve heard of it. It’s kind of a scary word but it’s just an onerous legal process to get your stuff to the people you said should have it. It’s a long process that costs your estate and ultimately your beneficiaries money.
A Trust can help bypass this legal nightmare. How? Before I tackle that, let’s first start with how a company works because it has some good parallels to how trusts can work. In a typical company, you’ll have a CEO, a president, vice president, COO, etc… When Steve Jobs passed, Apple didn’t shut down, why? Companies don’t cease due to death because there’s a line of succession to ensure there’s always someone to cut then checks, authorize things, and sign for stuff.
Similarly, that’s what a living trust does. It provides a line of succession of control.
Your stuff all gets transferred to your trust, technically your trust now owns your belongings. A bit scary, but guess who controls the trust? YOU! It’s a bit much to wrap your head around sometimes, but stay with me on this. You are now the trustee of your trust, which means you control the assets, get to use the assets, but you don’t technically own the assets.
Here’s the good news, when you die, your assets can easily go to the beneficiaries in your will because there will always be someone to sign them over. For example, my trust (with my wife) says that while my wife and I are alive, we get to control, enjoy, and do what we want with the assets in our trust. If something happens to me, my wife takes control (she becomes sole trustee). If something happens to my wife, my mother acts as trustee to distribute our assets according to our trust. If my mother can’t or won’t act as trustee, then my wife’s brother is up next. If he can’t or won’t then power goes to my brother. We have a deep bench of people to make sure that our daughter gets the stuff we leave her.
So that wraps up wills and trust. Remember, those come into play when you die. The next two documents, Powers of Attorney and Health Care Directives, are activated if a person is incapacitated.
Durable Power of Attorney aka Power of Attorney is a document that allows you to set up a line of agents who will be in charge of your finances should you be unable to do it yourself. For example, this document would be useful in determining who controls your finances, if you were in a coma. Who would pay your mortgage or sell assets to pay for hospital bills when you can’t? The power of attorney allows you to choose to have that responsibility.
Lastly, a Health Care Power of Attorney aka Durable Power of Attorney for Health Care are very similar to the previously mentioned document, except instead of choosing the people whom would be making financial decisions on your behalf, you would designate someone to make decisions about your health care. I’m always reminded about the Terri Schiavo case back in the 90’s where a young woman suffered trauma leaving her in a vegetative state. After years of being in a vegetative state, her husband wanted to “pull the plug”, but Terri’s parents did not agree. It went through over 7 years of legal battles before it was resolved. All could have been avoided with a Health Care Power of Attorney.
Not speaking to anyone’s family dynamics or anything, but I like to suggest that those you would give Power of Attorney not necessarily be the same individual you let make health care decisions. Call it a system of checks and balances. I’ve seen situations where the person holding the purse strings was also in control of health care decisions and it turned ugly quickly.
There you have it, all four documents, what they do, why they’re important, and ultimately why everyone should have them in place.
Have questions? Use the following link to schedule a time for us to tackle them: Ceasar’s Calendar