Understanding Key California Estate Planning Documents
Estate planning is an essential process that ensures your assets are distributed according to your wishes upon your incapacity and after your death. In California, several key documents form the backbone of an effective estate plan. Here, we’ll guide you through these vital documents, explaining their purposes and why they are important.
1. Revocable Living Trust
A living trust, also known as a revocable trust or RLT, is a document that places your assets into a trust during your lifetime. Here are its key benefits:
Avoiding Probate: Unlike a will, a living trust can help your estate avoid probate, which is a time-consuming and costly court process.
Privacy: Trusts are not public records, so the details of your estate remain private.
Continuity: If you become incapacitated, the successor trustee you designate can manage your affairs without court intervention.
Family Harmony: A trust clarifies your intent and should tend to minimize the prospect of beneficiary discord.
Medi-Cal Estate Recovery Avoidance: In California, assets that avoid probate are not subject to Medi-Cal estate recovery for Medicaid long-term care benefits paid on your behalf.
In a revocable living trust, you can still manage and use your assets during your lifetime. If you become incapacitated, the trustee manages the trust property on your behalf. Upon your death, the assets are transferred to your beneficiaries without the need for probate. As long as the trustmaker (grantor or settlor) is alive, there is no need to obtain a new tax identification number; your personal income tax picture will not change just because you create and fund an RLT.
In California, it is common practice for a married couple to create one joint RLT.
2. Last Will and Testament
The Last Will and Testament, commonly known as a will, is perhaps the most well-known estate planning document. A will allows you to:
Designate Beneficiaries: Specify who will receive your assets.
Appoint an Executor: Choose someone to manage and distribute your estate.
Name Guardians for Minors: If you have minor children, you can designate guardians for them. Sometimes a separate document is used.
Authority to Access Digital Assets: Today, it is more important than ever that your estate planning documents authorize your agents to access your “digital life.” To be thorough, this authority may often appear in all your estate planning documents, not only in your will.
In California, a will must be signed by you and witnessed by at least two individuals who are not beneficiaries. It’s important to keep your will (and all other estate planning documents) up to date to reflect changes in your life circumstances, such as marriage, divorce, or the birth of children.
A will used in conjunction with a living trust is known as a “Pour-Over Will.” It ensures that any assets not funded (meaning titled or placed) into the trust during your lifetime are transferred into the trust upon your death. Essentially, it "catches" any assets left out of the trust and directs them to it, ensuring that your estate plan is comprehensive and that all your assets are managed according to your trust's terms. However, this often requires probate. In California, depending on your estate’s particular facts and circumstances, your executor/trustee may be able to use a “Heggstad Petition” to “connect” the unfunded assets and the trust, without a full probate process.
3. Durable Power of Attorney
A Durable Power of Attorney (DPOA) is a document that allows you to appoint someone (an agent) to manage your financial affairs if you become unable to do so yourself. This document is essential for ensuring that your bills are paid, and financial decisions are made according to your wishes if you become incapacitated. Without a properly implemented revocable living trust or durable power of attorney, lengthy, expensive conservatorship proceedings (“living probate”) may be necessary.
A DPOA can be as broad or as limited as you choose, specifying which powers your agent will have. It's called "durable" because it remains in effect even if you become mentally incapacitated.
In California, a “statutory” DPOA is often used. In many instances, this office supplements the statutory language for a more robust and practical document. In addition, depending on your comfort, the DPOA may provide that the authority provided to the initial named agent may be effective immediately, while the successor agents’ authority becomes effective only upon your becoming incapacitated. Like trusts, a durable power of attorney for finances can be drafted to have the flexibility and utility of a “Swiss army knife.”
4. Advance Health Care Directive
An Advance Health Care Directive, also known as a living will or medical power of attorney, allows you to outline your medical care preferences and designate someone to make healthcare decisions on your behalf if you cannot communicate your wishes. This document includes:
Health Care Instructions: Specify the types of medical treatments you do or do not want.
Agent Appointment: Name someone you trust to make healthcare decisions for you.
Post-Morten Authority: Disposition of remains, organ donation, autopsy, etc.
Having an Advance Health Care Directive ensures that your medical preferences are honored and that someone you trust is making decisions for you if you're unable to do so.
It is important to note that an Advance Health Care Directive is not a Do Not Resuscitate (DNR) or Physician-Order for Life Sustaining Treatment (POLST). California law requires that you discuss such documents with your physician.
In addition, meeting with the funeral home of your choosing and implementing in advance a prepaid burial or funeral contract will make this difficult time easier for your loved ones and aid your agents in understanding your wishes for your final arrangements.
5. HIPAA Authorization
The Health Insurance Portability and Accountability Act (HIPAA) authorization is a document that permits healthcare providers to share your medical information with individuals you designate. Without this authorization, your loved ones may face difficulties accessing your medical information, which can be critical in making informed healthcare decisions.
6. Beneficiary Designations
Beneficiary designations are used for assets that pass directly to individuals outside of your will or trust, such as life insurance policies, retirement accounts, and payable-on-death accounts. It is crucial to keep these designations up to date and ensure they align with your overall estate plan. Beneficiary designations can supersede instructions in your will or trust, so regular reviews are essential. With the 2020 passage of the SECURE Act (and now SECURE 2.0) and IRS’ complex regulations, it is crucial that you discuss your retirement accounts with your estate planning attorney and that your death beneficiary designations are appropriate to your circumstances and objectives.
To be most effective, your living trust must be fully funded. This means that some assets such as bank accounts are retitled to your trust, while others, such as qualified retirement accounts, must list a certain person or persons, or your trust, as successive death beneficiaries. Again, it is critical that you discuss this with your California estate planning attorney. It is customary for many estate planning law firms to assist you in completing these tasks for an additional fee.
7. Community Property Agreement
California is a community property state, meaning that assets and income acquired during marriage are generally considered jointly owned by both spouses. A Community Property Agreement is a document that can simplify the transfer of property between spouses upon death. It clarifies which assets are considered community property or separate property and ensures a smoother transition of these assets.
While a typical estate plan may utilize a deed that transmutes (meaning changes or confirms) real property titled as “Husband and Wife as Joint Tenants with the Right of Survivorship” to community property and titles it to your trust as community property, many estate planning attorneys will refer you to a family law attorney for any additional transmutations, separate property matters, and comprehensive community property agreements.
Conclusion
Estate planning is a crucial step in securing your legacy and ensuring your wishes are honored. In California, several key documents form a comprehensive estate plan, including a Revocable Living Trust, Pour-Over Last Will and Testament, Durable Power of Attorney, Advance Health Care Directive, HIPAA Authorization, and proper Beneficiary Designations. Additional documents may include community property agreements or other marital property agreements, guardian nominations for minor children, a general “catch all” assignment of property to your trust, and other documents.
Each of these documents serves a specific purpose and, together, they provide a robust framework for managing your assets and healthcare decisions. Consulting with an experienced estate planning attorney can help you create a tailored estate plan that meets your unique needs and provides peace of mind for you and your loved ones.
Understanding and implementing these “basic” documents will not only help in distributing your assets as per your wishes but also in ensuring that your healthcare and financial matters are handled smoothly if you become incapacitated. Estate planning is not just for the wealthy; it is essential for everyone to secure their future and that of their loved ones, especially in California, where Medi-Cal, Proposition 19 (part of the property tax reassessment regime), and trust laws undergo significant changes over time. In addition, estate planning is a “team” process; your estate planning attorney may suggest that you loop in or consult with your CPA, financial advisor, life and home owner insurance agent(s), and other professionals.
