Estate Planning Basics

Fog and storm clouds covering the green hills and valleys of Santa Cruz mountains as seen from Castle Rock State Park, San Francisco bay area, California

ESTATE PLANNING BASICS DURING THE CORONA VIRUS PANDEMIC AND BEYOND:

WILLS AND TRUSTS AND OPTIONS FOR CHARITABLE GIVING

MAY 13, 2020

ST. JOHN’S EPISCOPAL CHURCH

APTOS, CALIFORNIA

Myra J. Prestidge

Attorney at Law

E-mail:  myraprestidgelaw@charter.net

Phone: (831) 685-3270

The information provided in this presentation is for general information only and is not intended to be legal advice or to create an attorney-client relationship with persons who attend the talk or view these materials.  If you have questions regarding your particular situation, please confer with an attorney.

Table Of ContentsPage No.
What is estate planning? 4
What does an estate plan typically include?4
What happens if you do not have an estate plan?4-5
What is Probate? 5
When does an estate go through probate?5
What are the downsides of probate?  6-7
What are some exceptions to probate?7
Why not just add your beneficiary to your account?7-8
What are some advantages of creating a trust?8-11
What are some disadvantages of doing a trust instead of a will?11
Naming a guardian for  your child in a will11
Planning for children in blended families12
Special Needs Trusts for persons receiving income-based public benefits, such as Medi-Cal and SSI13-18
Estate Planning for Long-Term Care18-20
Pet Trusts21-22
Options for Charitable Giving  22-28

WHAT IS ESTATE PLANNING?

Estate planning is the development of a comprehensive plan for distribution of your property and possessions after you pass away and for management of your business and financial affairs and medical care if you should become incapacitated or too ill to do it yourself.

WHAT DOES AN ESTATE PLAN TYPICALLY INCLUDE?

An estate plan usually includes:

  • A will or a trust with a pour-over will;
  • A durable power of attorney for finances
  • An advance directive for health care decisions.

You may also leave a letter or video for your loved ones explaining your wishes, your values, or including a plan for your memorial services.

WHAT HAPPENS IF YOU DO NOT HAVE AN ESTATE PLAN?

Your best friend or life partner is not a relative and therefore would receive nothing.

  • How your property is distributed will usually be determined in a probate proceeding, which is time-consuming, expensive, and a matter of public record.
  • Your estate and heirs may end up paying more taxes and costs than if you had done estate planning.

WHAT IS PROBATE?

Probate is a Superior Court process that determines:

  • Whether a person died (the “decedent”) with a valid will
  • Who will be appointed to wind up the affairs of the decedent (generally the “executor” named in the will)
  • Who will receive the decedent’s property and possessions.

WHEN DOES AN ESTATE GO THROUGH PROBATE?

An estate goes through probate if the person left their property and possessions in a will (not a trust) or died without either a will or trust.

WHAT ARE THE DOWNSIDES OF PROBATE?

Probate is:

  • Time-consuming – It may take 6 to 12 months for the court to complete a probate proceeding.
  • Expensive – Probate costs include filing fees, executor’s fees, attorney’s fees, and other costs.[1]
  • A matter of public record, not private –  Anyone can examine court records and could find out how much money was in your estate, what debts were ordered to be paid out of your estate, the person(s) to whom you left gifts, etc.

WHAT ARE SOME EXCEPTIONS TO PROBATE?

The following type of assets go to your beneficiaries upon your death without going through probate:

  • Assets included in a trust.  
  • Payable on death bank accounts
  • Small estates less than $166,250 – Affidavit procedure
  • Life insurance
  • Property held in joint tenancy.

WHY NOT JUST ADD YOUR BENEFICIARY TO YOUR  ACCOUNTS AS A JOINT OWNER TO AVOID PROBATE?

You can, but doing so places your assets at risk.  If you make someone a joint owner of an account with you, the account is vulnerable to the claims of their creditors.  Also, if the person is not trustworthy, he/she could withdraw the funds from your account without your permission.

Additionally, if the person makes a withdrawal from your account, you are required to file a gift tax return with the IRS if the person has received more than $15,000 from you in one year.

WHAT ARE SOME OTHER ADVANTAGES OF CREATING A TRUST?

  • No probate is required when you die.  If you have properly transferred your assets into the trust, you can enjoy the benefits of the assets during your lifetime.  When you pass away, your successor trustee (often people are their own trustees during their lifetime) will do an inventory of the trust assets.  Next, the successor trustee will distribute the assets according to the terms you established in the trust.  The process is private, and there is no court involvement.
  • You select the persons to whom you leave your assets. After your death, your property will be distributed to the persons whom you specify in the trust.
  • You have options other than leaving a gift to  your beneficiaries outright.  Unlike a will, in which gifts pass to your heirs outright, a trust can either distribute gifts outright, over a period of time, when the beneficiary reaches a certain age, or keep the funds in trust for your beneficiaries.  This can be helpful if you are concerned that a beneficiary is not mature enough to handle an inheritance and may spend all of the money right away, has creditor problems, or is in an occupation that involves a high risk of liability.
  • You do not need to have the court appoint someone to manage a gift left to a minor child.  If your beneficiary is a minor child, he/she cannot legally manage the funds until age 18.  By keeping the funds in trust for the child, with the provision that the trustee may use the funds for purposes that you specify, such as education and support, there is no need for the court to appoint someone to manage the funds for the child. Also, the court will generally order that the funds be distributed to the child at age 18, when you might wish the funds to remain in trust until the child is older.
  • Minimizing taxes.  The trust can be designed to minimize taxes for your estate and for your beneficiaries.
    • Certain types of trusts are designed to reduce estate and gift taxes, such as by leaving assets to a spouse, gifts to charity, etc.[2]

In some cases, estate planning can also help reduce income taxes and property paid by your beneficiaries.

  • Protecting your home and other assets from Medi-Cal recovery.  Because of the high cost of care in a skilled nursing facility in California, approximately 2/3 of seniors rely on Medi-Cal to pay for the cost of skilled nursing.  After their death, the state attempts to recover the cost of care paid for by Medi-Cal from the senior’s estate.  Under legislation passed in 2017, for persons dying on or after January 1, 2017, the state can only attempt to recover its costs from assets that are in the probate estate of the senior and cannot recover from the senior’s assets that are in a trust, are held in joint tenancy, etc.  (See http://www.canhr.org/publications/PDFs/Medi-Cal_Recovery.pdf; http://www.canhr.org/factsheets/medi-cal_fs/html/fs_medcal_your_home.htm.)

WHAT ARE SOME DISADVANTAGES OF CREATING  A TRUST, INSTEAD OF A WILL?

A trust may be more expensive to prepare than a will. You must also invest time in retitling your assets in the name of the trust so that the trust provisions will apply to your assets.  Otherwise, except for assets such as pay on death accounts and property held in joint tenancy, your estate will need to go through probate when you die.

ESTATE PLANNING TO PROTECT SPECIAL PEOPLE

  • Naming a Guardian for Minor Children in Your Will.

Under California law, you may nominate the person(s) whom you would want to serve as guardian for your minor children in your will.  This person would take physical custody of your children and care for them in the event of your death.  Although a court order is still needed to appoint a guardian, the court will generally appoint the person you select, unless there is a problem.  However, if your spouse or the child’s other parent is living, he/she may be appointed as guardian.  In order to provide for the child’s financial needs, you may also wish to leave funds for the child’s support, care, and education in a trust.  For factors to consider in nominating a guardian, see https://www.estateplanning.com/Naming-a-Guardian-for-your-Child/.

  • Planning for Children in Blended Families.  An increasing number of people are married more than once or are married later in life, and may have had children or acquired considerable assets before their second marriage.  In an estate plan, parents in second marriages can provide for the children of their previous marriage by leaving gifts to them.   Doing an estate plan therefore reduces the risk that their children may be disinherited or receive less if the parent passes away and their spouse remarries and has additional children.[3]
  • Special Needs Trusts for Persons Receiving Income-Based Public Benefits, such as Medi-Cal or SSI.
  • A special needs trust helps prevent a loss of income-based public benefits for a disabled person, while providing resources for care and support.  A special needs trust helpful if you have a loved one who is disabled and receives income-based public benefits, such as Supplemental Security (SSI) or Medi-Cal, or who needs Medi-Cal to pay for skilled nursing care. For these persons, receiving an inheritance, large monetary gift, or other windfall, such as a settlement in  lawsuit, would cause a loss of their public benefits.
    • A loss of public benefits may cause problems for your loved one.  A loss of public benefits may cause serious problems for the person, such as losing medical coverage under Medi-Cal when he/she has no other health insurance.
    • How can a special needs trust help?  By putting funds into a special needs trust for the person, you ensure that the person does not lose their income-based public benefits, and the funds in the trust can be used to supplement their benefits and improve their quality of life.  (Example:  A person who is in skilled nursing and receives Medi-Cal to pay for his/her care is required to pay all of his/her income, except $30 per month, to the nursing home.  Funds in a special needs trust could be used to purchase clothing for the person, to pay for any medical or dental care not covered by Medi-Cal, a cd player so they can listen to music, a colorful quilt for their bed, etc.).
  • A first-party special needs trust can help a person under age 65 qualify for Medi-Cal to cover skilled nursing.  If the person is under age 65, they can put some of their own assets into a first-party special needs trust so that these assets will not disqualify them from Medi-Cal eligibility.[4]
  • When a special needs trust is not needed. A special needs trust is not needed if your loved one is only receiving public benefits that are not income-based, such as Social Security retirement, Social Security Disability Insurance, or Medicare.
    • Requirements for a special needs trust.  The person receiving the public benefits (beneficiary) cannot be his/her own trustee, and cannot have the power to revoke the trust.  The trust language must provide for discretionary use of the funds for the beneficiary’s benefit by the trustee. The beneficiary cannot control the funds in any way, and the trust cannot provide that the beneficiary has a definite right to receive funds from the trust. Therefore, it is important to choose a trustee who is trustworthy and will use the funds for the beneficiary’s needs.
  • What is a first-party special needs trust?  In a first-party special needs trust, a person under age 65 can use their own assets to fund the trust.  A parent, grandparent, legal guardian, or the court may also establish a first-party special needs trust for the beneficiary with some or all of the beneficiary’s assets.  A beneficiary may also join a “pooled” first party special needs trust, established by a nonprofit organization.  Upon the beneficiary’s death, the state may recover the balance left in the special needs trust, up to the amount of Medi-Cal benefits paid.
  • Third-party special needs trusts.  A third-party special needs trust is established by someone other than the beneficiary, such as a family member or friend, and is funded with assets that do not belong to the beneficiary.  There is no age limit for setting up these trusts, but a third-party special needs trust for a spouse must be established by will. The state will not seek recovery for services covered by Medi-Cal from a third-party special needs trust after the beneficiary’s death if the beneficiary was disabled.
  • Planning for the care of the beneficiary in a special needs trustIn addition to providing funds for the support of the beneficiary, persons setting up third-party special needs trust may also do a memorandum of intent that states their wishes for the care of the person, lists the person’s needs, medical providers, etc.
  • Why not just leave funds to another family member, with the stipulation that the funds be used to care for person receiving public benefits?  There is no way to enforce the obligation of your family member to care for your loved one.  Your family member may use the money to care for his/her own children or to meet a financial emergency, instead of caring for your loved one.

ESTATE PLANNING TO PROVIDE FOR LONG-TERM CARE

Unfortunately, as people live longer, many of them may require care in an assisted living or skilled nursing facility.  This care is very expensive.  According to the California Association of Health Facilities, in 2018, the average cost for skilled nursing in this state was $275 per day or $100,375 per year.  In 2019, the average cost for an assisted living facility was $4051 per month, nationwide.  Costs may be higher for some facilities, especially in  Santa Cruz County and the Bay Area. 

Medicare generally covers only up to the first 100 days in a skilled nursing facility and only if skilled care, such as physical or occupational therapy, is needed.  Medicare will not cover skilled nursing care if the patient needs only custodial care, such as help with bathing, eating, or getting dressed. (See https://www.medicare.gov/coverage/skilled-nursing-facility-snf-care).

Medi-Cal will cover care in a skilled nursing facility for patients who receive only custodial care, but except for a few pilot projects located in other counties, will not cover assisted living or board and care facilities.

Some patients are able to pay for their own care through savings or long-term care insurance.  Veterans who qualify may also be able to use the VA Aid and Attendance benefit to help pay for care at home, in an assisted living, or in skilled nursing.  However, in California, 2/3 of patients in skilled nursing facilities use Medi-Cal to pay for this care.

In order to qualify for Medi-Cal for skilled nursing, the patient must have a very low income.  As of 2020, a single person may not have non-exempt assets worth more than $2,000.  However, some assets, such as the person’s home, car, burial plot and in some cases, IRA accounts, are considered “exempt” and are not counted in determining Medi-Cal eligibility.  If the nursing home patient has a spouse who lives at home in the community, the spouse may have considerably more assets and income.  (See http://www.canhr.org/factsheets/medi-cal_fs/html/fs_medcal_overview.htm). 

In some cases, estate planning can help a senior qualify for Medi-Cal or VA benefits to help cover the cost of long-term care.  This planning benefits not only the patient, but also the spouse living at home who needs financial resources for his/her needs.

Estate planning to qualify a senior for Medi-Cal or VA benefits to pay for long-term care is complex, and often involves a strategy including limited gifting, placing assets in irrevocable asset protection trusts, and converting non-exempt assets, such as cash, into exempt assets, such as a car or paying off the mortgage on a home. 

Seniors may not qualify for Medi-Cal by simply giving away their assets to their children or other loved ones, and doing so may disqualify them from receiving Medi-Cal for several years.

If you or your spouse would like to apply for Medi-Cal or VA benefits to cover the cost of long-term care, please consult with an elder law attorney for appropriate planning.

Note:  Under state law, a skilled nursing facility that accepts Medi-Cal cannot evict a patient because he/she decides to apply for Medi-Cal.

PET TRUSTS

Under California law, you may not leave money directly to an animal.  However, you may establish a trust to care for your pet after you die or if you become unable to do so yourself.  The pet trust can be part of your revocable trust or can be done separately.  A pet trust usually leaves the animal to a trusted person to be cared for and and funds to provide for the animal’s care.

It is important to leave enough money to care for the animal for the rest of its life.

A pet trust may provide that a trusted person will care for the animal.  It is often best to designate another person as trustee to manage the funds and make sure that the designated person is taking good care of the animal.  The trustee or a nonprofit animal welfare organization may petition the court to enforce the trust.

It is also important to specifically identify the animal (perhaps through a microchip) to prevent abuses such as the caregiver substituting another animal when your animal dies in order to keep receiving the funds or staying in your home rent-free.  Additionally, you may wish to leave the remainder of funds after the animal’s death to someone other than the caregiver.

Pet trusts can be expensive to administer, because unless the estate is worth less than $40,000, the trustee must do an annual accounting, file a tax return for the trust, etc.

An alternative to leave your animal to a trusted person in  your will or trust along with a sum of money for care of the animal.  Some animal welfare organizations will also care for animals or find homes for them after the owner’s death.

OPTIONS FOR CHARITABLE GIVING

  • Outright gift to charity in will or trust.  You can make an outright (direct) gift to charity in your will or trust and qualify for an estate tax deduction.

(Example:  I leave $500 to my church upon my death.)

  • Charitable remainder trusts – In a charitable remainder trust, the donor donates assets, such as real estate, stocks, bonds, etc., to a charity recognized by the IRS as qualifying the donor for a tax deduction and receives an income tax deduction in the year in which he/she donated the assets.  You pay no capital gains taxes if the charity sells the asset.  The charity then pays you or another person designated as the “recipient” an income stream either for life or for a term of years which cannot be more than 20 years.  In a charitable annuity trust (CRAT), the recipient receives a set dollar amount each year.  In a charitable remainder unitrust (CRUT), the recipient receives a designated percentage of either the fair market value of the assets per year or the lesser of a fixed percentage of the net fair market value of the assets and the income of the trust each year.  Payments to the recipient may be made monthly or quarterly.  The trust may be set up so that a husband and wife are joint recipients, and when one spouse dies, payments to the surviving spouse will continue.    When the donor (or donor and spouse, if applicable) dies, the charity keeps the assets, and the donor’s estate gets an estate tax deduction, if he/she was getting payments from the trust or had some power over the trust, such as acting as trustee.

The donor, the charitable beneficiary, or another person can act as the trustee of a charitable remainder trust. 

Caveat: Charitable remainder trusts are irrevocable, and the donor generally cannot terminate the trust and can make only limited amendments to the trust.

An IRA or retirement account may be given to a charitable remainder trust. 

In some cases, a donor may give their personal residence or farm to a charity, and retain the right to live in the home or use the farm during his/her lifetime.  The donor gets an income tax deduction for donating their house or farm.  Upon the donor’s death, the charity keeps the home or farm, and the donor may receive an estate tax deduction.

However, mortgaged property cannot be given to a charitable remainder trust.

  • Charitable lead trusts – These trusts are similar to charitable remainder trusts, except that the donor gives money or property to the trust for a number of years or for his/her lifetime, for use by the charity.  The charity receives either a set dollar amount from the trust (annuity trust) or a fixed percentage of the value of the trust (unitrust) per year.  At the end of the term, what is left of the property or money, i.e., the remainder, either reverts to the donor or to a non-charitable beneficiary, such as a family member, designated in the trust.  The donor receives a gift tax deduction at the time of placing the money or property in the trust and in some cases, may also get a charitable income tax deduction.  The donor will also get an estate tax deduction if the remainder is distributed to a non-charitable beneficiary after his/her death.

Caveat:  Like charitable remainder trusts, charitable lead trusts are irrevocable. The donor generally cannot terminate these trusts and can make only limited changes to them.

  • Donation of IRA Required Minimum Distributions to Charity.  Under the SECURE Act, which became effective on January 1, 2020, persons are required to take required minimum distributions (withdrawals) from IRA accounts beginning at age 72.  (See https://money.usnews.com/money/retirement/iras/articles/what-is-the-secure-act). These withdrawals are usually subject to income tax.  However, if the account owner directs the custodian of the IRA account to directly transfer the required minimum distributions to a Section 501(c)(3) charity, then no income tax is due on the funds paid to the charity.  This option can help to both reduce income tax and support charities selected by the account holder. (See https://www.fidelity.com/building-savings/learn-about-iras/required-minimum-distributions/qcds).
  • Private Foundations – Persons or families having considerable wealth may also set up private foundations to fund charitable organizations and activities.  The foundation may be a trust managed by a trustee or a corporation managed by a board of directors.  Like community foundations, private foundations can fund other charities but they can also do their own charitable projects.  Donors get an income tax deduction for contributions to the foundation, and do not pay capital gains tax if the foundation sells some or all of the donated assets.  Since the assets given to the foundation belong to the foundation, not the donor, the donor’s estate does not pay estate tax on property owned by the foundation.

The David and Lucile Packard Foundation is an example of a private foundation.  Among other charitable activities, this foundation donated $55 million for the establishment of the Monterey Bay Aquarium and $100 million for the Lucile Packard Children’s Hospital at Stanford.

  • Donor advised funds – In a donor-advised fund, the donor creates a fund for a charitable organization, such as a community foundation.  The charitable organization manages the funds, and the donor advises the charitable organization regarding which charities should receive funding.  The donor receives an income tax deduction upon giving the funds to the charitable organization, even if the funds are not distributed until later.  When the donor dies, the funds given to the charitable organization are not in his/her estate for estate tax purposes, which may result in a tax savings.  For example, see https://www.cfscc.org/articles/donor-advised-funds.

The Community Foundation Santa Cruz County (www.cfscc.org) and the Silicon Valley Community Foundation (www.siliconvalleycf.org) can assist with setting up a donor-advised fund.

  • Gift Annuities – In this situation, under a contract between the donor and a charitable organization, the donor agrees to donate funds to the charity.  In return, the charity agrees to pay the donor (or the donor and his/her spouse) a fixed amount monthly or quarterly for life.  When the donor dies (or if the donor is married, when the surviving spouse dies), the charity keeps the rest of the funds.  The donor will receive a partial income tax deduction for the year in which the donation is made.  (For example, see https://plannedgifts.ucsc.edu/?pageID=12.)

Caveat:  As with any annuity product, you may wish to speak with a financial advisor to ensure that contributing to the annuity fits your financial situation.

        Thank you for attending this presentation.  Please let me know if you have questions or if I can be of assistance to you or your family.

Myra J. Prestidge, Attorney at Law


[1] Under California law, as of 2020, executor’s fees in a probate proceeding are:

  • 4 percent of the first $100,000 of the estate accounted for by the personal representative;
  • 3 percent of the next $100,000;
  • 2 percent of the next $800,000;
  • 1 percent of the next $9 million;
  • 0.5 percent of the next $15 million; and
  • For amounts over $25 million, a reasonable amount to be determined by the court.

Additionally, statutory attorney fees in a probate proceeding are the same amount.

[2] The federal estate tax and gift tax exemption for 2020 is $11.58 million for an individual and $23.16 million for a couple.  In 2021, these amounts increased to $11.7 million for an individual and $23.4 per couple. At the end of 2025, unless Congress passes new legislation, this amount will revert to $5 million for an individual, adjusted for inflation.  Currently, if you give a gifts totaling more than $15,000 per person in one year, you must report the gift(s) to the IRS by filing a gift tax return.

[3] Under the California intestate succession law, as of 2020, if a married parent dies without a will or trust and there is one child, the surviving spouse gets the deceased spouse’s half of the community property and half of the separate property. The child will receive half of the deceased parent’s separate property.  If there are two or more children, the spouse will receive the deceased spouse’s half of the community property and 1/3 of the deceased spouse’s separate property.  The children will get 2/3 of the deceased parent’s separate property, divided among the children.  If the surviving spouse remarries, he/she may choose to leave more of his/her assets to a new spouse or children from the new marriage, rather than to children of the previous marriage.

[4] Qualifying a senior for Medi-Cal or VA benefits to pay for long-term care is complex and often requires a combination of strategies, such as limited gifting, converting non-exempt assets to exempt assets, and placing assets in irrevocable asset-protection trusts.  The rules are complicated, and simply giving away assets may disqualify the person from receiving benefits for a period of time.    If you or a loved one may need Medi-Cal or VA benefits to pay for long-term care, please speak with an elder law attorney for advice on appropriate planning.

If you need an Estate Planning Attorney please contact me to schedule a consultation.

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