Many people have heard of “estate planning,” yet often don’t completely understand what it means. Estate planning is a valuable tool in the financial planning and asset management tool chest. Often times estate plans are associated strictly with death; however, that isn’t strictly true. It is true that estate planning allows individuals to direct the division of their assets after death, but the purpose of estate planning is much broader than that.
For high net worth individuals, estate planning is a key component of tax planning and minimization. The creation of an estate plan also allows us to prepare for periods where we are unable to manage our own finances and medical decisions.
Below you will find the definition of some key terms and phrases that will help prepare you for your consultation with an estate planning attorney. These key terms will also give you a basic understanding of estate planning, so you’re better prepared for future blog posts on this topic.
Living or Revocable Trust
At its simplest form, a trust is an entity created to hold assets for the benefit of certain persons or entities, with a trustee managing the trust (and often holding title on behalf of the trust). Most commonly, trusts are created by individuals for their own benefit and specify how those assets are to be divided at death, or managed at incapacity. In California, it is critical for anyone with assets greater than $150,000 to have a trust in order to avoid the costly and time consuming process of Probate. The creator of this trust retains all ownership rights and control once property is placed into the trust.
Special Needs Trust
This is a trust created for someone with a permanent or temporary disability who needs to maintain their qualification for needs-based public benefits.
An irrevocable trust is created by someone for the benefit of a third party and the creation of this trust is permanent. Once the property is placed in this trust, the original creator and grantor cannot revoke the trust for any reason. The original creator and grantor loses all rights to manage and control the property. This is a valuable resource when extensive tax planning is necessary.
Think of this as a safety net. A pour-over will is specifically designed to catch any property that was not placed into the trust. For a living trust to work, it must be funded (see definition below). Occasionally, people forget to place after-acquired property or refinanced property into the trust, if the property has a value greater than $150,000 it will require a probate to dispense with the property unless you have a pour-over Will. A pour-over will notifies the court that any property not in the trust was left out by accident and directs the court to issue an order granting the executor the authority to sign the necessary legal documentation to place the asset into the trust and allow the trust to dictate the management and division of the property.
Power of Attorney
A Power of Attorney for the management of assets identifies a designated third party who has your permission to act upon your behalf and at your direction.
A person’s children or other descendants such as grandchildren and great-grandchildren. It does not mean all heirs, but only people related directly by blood or adoption.
Capacity references a person’s ability to do something. In order to create an estate plan, the creator must have the required legal ability to enter into these documents. This requires understanding who they are, where they are, the makeup of their family, identifying the extent of their assets and clearly being able to communicate what they want to happen to those assets. One purpose of estate planning is planning for possible incapacity, which is when someone loses the ability to make their own financial or medical decisions. Incapacity can arise due to degenerative diseases such as Alzheimer’s and dementia, or from being in an accident or having a stroke.
This is a critical step in the creation of an estate plan. If your estate planning calls for the creation of a trust, you must re-title your assets so that they are in the name of your trust. Without this step, the trust is useless as there is no property within it. At Gomez Edwards Law Group, we complete the funding for all trusts.