Gianesin Law Firm

What Is The Ultimate Goal Of Proper Estate Planning?

Key Takeaways:

  • There are a number of essential goals in estate planning. The first goal that an estate plan needs to accomplish, is establishing beneficiaries and the stipulations on how your assets will be dispersed.
  • If you are a part of a couple, estate planning must also consider issues such as how the remaining spouse will be taken care of once the first spouse passes away.
  • Estate plans must also name a trustee for the estate. If a person has adult children, they often fulfill this role, but not always. Individual adult friends and family members can also be trustees.
  • In addition, professional, third-party trustees are available, and are often an attractive option to prevent in-fighting and disagreements among beneficiaries.
  • In most cases, it is highly advisable not to leave beneficiaries large lump sums of money and/or property without stipulations attached, especially if they are not financially savvy or literate.

When I set out to make an estate plan for you, together, we need to accomplish several things.

The first thing we need to do is to cover all financial and medical issues. We talked about this briefly in the last paragraph.

The financial issues we set out to cover in an estate plan include questions like who the owner (trustor) of the estate, wants to give their assets to (i.e., naming their beneficiaries), as well as which beneficiary is to get which assets, and when those assets are to be distributed to them. I will discuss this part of estate planning further later in this article.

The financial issues addressed in an estate plan also include questions like how the owner of the estate will handle their medical issues in case of emergencies. For example, let’s say that the estate owner is married and both the owner and their spouse get into an accident and are incapacitated, and therefore are unable to make medical decisions from themselves.

Normally, with married couples, spouses are the designated healthcare proxies (i.e., the person who can make decisions on their spouse’s behalf if they are medically incapacitated). However, a hypothetical scenario in which both spouses are incapacitated raises the need to name a trusted third person to make those medical decisions in their stead.

Another similar issue addressed by estate plans for married or partnered people, is making certain that your spouse is cared for. Perhaps the most important part of an estate plan—especially with families that do not have children from different marriages—is the protection of ones spouse for the rest of their life. In the vast majority of cases, spouses do not pass together. When one spouse dies, there’s usually one spouse left, who then has to use the proceeds from their spouse’s estate plan in order to finance their lifestyle.

Yet another essential thing to accomplish in estate planning is finding a trusted person to act as the trustee for the estate. Most of the time, the surviving spouse becomes the trustee, but if that spouse is unable or unwilling to act, typically a trusted child or their children will act as trustees. However, there are instances where adult children do not serve as trustees.

There are many potential reasons why an adult child would not serve as a trustee. Perhaps the couple does not particularly trust their child or children, or has a child that is not necessarily sophisticated enough to act as a trustee. Perhaps there is dissension among the children about who should be the trustee, and choosing any one of them would cause unwanted tension and conflict. It should be noted that in cases like the last example, all of the siblings can in fact act as co-trustees, but we certainly would want to find a smooth and seamless way to put that into place, in order to reduces or avoid conflict as much as possible.

When someone does not have children or does not opt to name any of their children as a trustee, they can choose another trusted person to serve in that position. Often, people choose an independent attorney or CPA, or what we call a “fiduciary” (a person or company that acts as a trustee). Though a trustee can decline payment (and might do so if you appoint a personal friend or relative), trustees are entitled to fees, and hired trustees will collect reasonable fees. These fees are based upon the value of the estate, and/or the specific tasks required of the trustee. In many instances, the trustee gets paid a certain percentage of that estate value.

Picking a neutral third party is often an attractive option because it avoids conflict among potential trustees, and it also avoids arguing among the beneficiaries about how the trust should be administered. Professional third-party trustees also come with certain professional guarantees that personal trustees cannot promise. For example, in California, professional trustees have to be insured to operate, in accordance with California’s Fiduciary Act.

At this point, I would like to return to the first thing an estate plan has to accomplish, as discussed in the beginning of this article. That is, giving one’s assets to those people who you want to give them to, maybe with some conditions.

There are many ways that this can play out in estate plans. Let me give you some examples.

Sometimes, people simply want to distribute their assets to beneficiaries outright. Other times, people feel uncomfortable doing so. The hesitance comes in to play more often in cases where a larger estate is being handed to an adult child who may be somewhat irresponsible with money.

As previously stated, it is my experience that handing financially irresponsible or inexperienced people a large amount of cash with no stipulations doesn’t tend to end well. More likely than not, the person winds up squandering or misapplying the money. For this reason, I always advise estate planning clients facing this situation to set up a plan that allocates the cash to the beneficiary over a period of time.

I should note that another phenomenon I notice in these cases where someone inherits a large sum of money is that it tends to make people lose incentive to go on and create a fulfilling life for themselves. I have seen it hundreds and hundreds of times. If beneficiaries expect a large check at some point, their incentive to create a meaningful and financially rewarding life for themselves goes out the window, because they know they’ve got that large chunk of cash coming down the road. In my experience, this happens very consistently, in approximately 95% of the cases I have seen.

One of the main ways that I have helped people avoid this for their beneficiaries, is to create a sub-trust and giving the beneficiary a small amount of income over a period of time. Then, over a period of time—maybe 20 or 30 years—you can allow them to have access to the principal for purposes of buying a home or their retirement. The options are endless.

By setting things up this way, you create an incentive for the beneficiary to continue working so that they’re not living off the assets from the estate. This will help them to create a meaningful life for themselves, while also giving them a step up with regard to saving for their retirement. It may allow them time during their retirement to do other meaningful projects without the burden of having to create extra income.

The other thing that I can do, is to create a meaningful distribution plan to motivate people to do things that are important. In other words, for younger beneficiaries, we can give them money in a way that incentivizes them to obtain a trade or profession, such as giving them tuition money, or incentivizing them with room and board distributions, if they go to college. You may choose to help your beneficiaries buy a house, which is an important contribution many trustors choose to make in helping their beneficiaries create a life for themselves and gives them a step up.

Even in meaningful distribution plans, though, we want to create some controls. Let me give you an example of some of the issues that often arise, especially when you have either a primary residence or home that is passing to beneficiaries.

I had a situation recently where a trustor decided to pass their beautiful vacation home in a ski resort to their children. In cases like this, I have learned over the years that estate planning requires you to face several important issues.

The first issue, is that at least one of those beneficiaries (in this case, one of the three children of the trustor) will at some point in time need their share of the value that is tied up in the home in order to meet some other obligations or to make monetary life decisions. At that point, they will often be unwilling to further contribute to maintenance and repairs.

The second issue is that the home in question is going to need to be maintained. This means paying property taxes and association dues if there’s a homeowner’s association, as well as paying for repairs and maintenance over the years. This is an especially major point in California, where these costs can run into many thousands of dollars. If the beneficiaries do not have the financial wherewithal to support the continued payment of fees, taxes and maintenance—or if some of the beneficiaries do, but not all of them—then there will very likely be serious conflicts and disagreements among them about how they should handle these fees.

The third issue is that somebody always needs cash and wants to sell his/her interest. In this case, perhaps they need cash, are just not into skiing anymore, or they moved out of state or abroad. When one beneficiary wants to sell their interests, suddenly the other beneficiaries are feeling pressure to sell the home.

So, if the goal is allowing the beneficiaries to keep the home, we need to structure the estate plan to support that goal. This means not just handing the beneficiaries a house as tenants-in-common, but rather handing it to them with some conditions.

To this end, you can employ many different conditions, but the ones I suggest most commonly allow the other beneficiaries to buy any beneficiary out who wants to be bought out of their interest in the home.

If the buy-out plan fails, or if there’s not sufficient resources to maintain the house and it needs to be sold, this beautiful gift that may be worth more than a million dollars is slated to go to children who are now fighting over it. At that point, whatever grandiose plans that the trustors had in creating the great family legacy property is now torn up by bickering or confrontation, because somebody either doesn’t want be in the project anymore or doesn’t want to finance the maintenance of the project.

Therefore, it’s important that I address those issues in the estate plan, because the last thing you and I want, is to have a gift that creates a breakup of the siblings after their parents’ death.

For more information on Ultimate Goal Of Proper Estate Planning In CA, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (949) 287-8884 today.

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Legal Disclaimer: All information in this document is meant to be general and educational in nature only and should not be relied upon as legal, business, or tax advice for your specific situation. Most discussions refer to laws and regulations as applied to a California corporation or other entity and these can vary by location, as can other factors in certain situations within California. It is always best to consult with an experienced business attorney before taking any action. This material is copyrighted. Any replication, use of, or any discussion as a result of these articles violated copyright law and does not create an attorney-client relationship.

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