Conversations with Law Office of Andrew Fesler
In California, our probate system is onerous. It’s expensive. It takes a long time to get through probate, and when someone passes away, if their what we call probate estate is worth more than about $180,000, it could take a year, 18 months, maybe even longer. It could be expensive, and it’s a hassle to get through. The first thing most people think of is that a trust will help avoid probate, and so they want to get a trust.
There are other documents that go along with a trust, however. You still need a will if you do a trust. You need powers of attorney to help manage your assets if you become incapacitated during your life. A lot of people don’t think about powers of attorney as much, but they’re actually the documents that people may wind up using while they’re still alive. An advanced healthcare directive obviously designates the person that you want to make medical decisions for you, and a financial power of attorney allows somebody to pay your bills, pay your taxes, collect retirement payments, etc. if you’re incapacitated during life. It really all is a package that we will usually do all at once for our client to make sure that we’ve covered all of their bases.
Because a trust is an entity unto itself that the client is creating, the trust needs to actually own all of the assets that the client wants it to transfer to their beneficiaries. Otherwise, we haven’t really accomplished anything. We can go through 90% of the trust planning and execution process and get all the way to signing the documents and, if we get a signed, completed document but we haven’t funded it, we’ve actually accomplished almost nothing. We have essentially done what would’ve been done if somebody had just created a will.
We’re going to go to probate. We’re going to have to spend a long time getting those assets through the probate process and then finally transferred into the trust. If we don’t execute a deed and have the deed recorded to transfer the client’s real estate into the trust, those assts aren’t going to pass through the trust, and they’re going to have to go through probate. If the client doesn’t go to their bank or banks or brokerage institutions and get their accounts transferred in the name of their trust, then they’re not going to have those accounts pass through the trust either.
This comes up a lot I see when clients go to, say, online drafting services and have a trust drafted and sign it. The trust may even be a document that functions, but the client then doesn’t understand how important it is to do the last step and get the document funded. The trust actually winds up accomplishing almost nothing, so I think that’s also a really important reason that going to an attorney to have the trust process put into place is really important compared to having a client, say, go online and do it on their own.
Funding a trust just means transferring all the assets that the clients own currently in their own names or name into the name of the trust, so the process varies depending on what kind of asset we’re talking about. If we’re talking about real estate, we need to create and execute a deed, transferring the property into the trust, and then getting it recorded with the recorder. I’ve had some clients that I’m reviewing documents for show up. They have this nicely executed deed, but it’s never been recorded. Those kinds of things need to be taken all the way to their end. We need to transfer checking and savings accounts into the trust, and that’s usually a simple matter of 10 or 15 minutes at the bank. The client goes in, fills out a form, signs a new signature card, and the bank transfers their current accounts into the name of their trust. We also need to transfer brokerage accounts into the trust.
Now, retirement accounts don’t actually get transferred into a trust, but we want to make sure that we, during this whole process, look at the beneficiary forms for any IRAs, 401(k)s, 403(b)s, any other qualified account because we want to make sure that the beneficiary forms either name the client’s spouse, their children, possibly their trust, as the beneficiary of those accounts. Then there are other more esoteric assets like oil and mineral rights, those kinds of things that can be a little bit more of a process to transfer but, nevertheless, are just as important. If we don’t get all those assets into the trust, we really haven’t accomplished what we want to.
When a client first calls me, the first thing I do is talk to them to get to know a little about them and figure out what it is they need. For most people, if they own a house in California and they don’t have any planning yet and they have a family, they’re probably going to need a trust package, which includes the trust document, a will or wills if they’re a couple, powers of attorney, and advanced healthcare directive, along with some ancillary documents that help fund the trust and do a few other things like transfer their house into the trust. Once we’ve decided they’re going to need a trust, the next step is I send them an intake form, which gets their personal information, some of their asset information, information about their family, and then, once that’s done, we set an appointment to discuss the intake, which can be on the phone. It can be via video conference. It can be in person. During that appointment, which lasts an hour to an hour and a half, I typically will ask a lot of questions about their family because I want to get to know my clients and all the things that might affect their planning going forward, even if the client doesn’t necessarily think it’s particularly important, and we’ll find out from that intake appointment where they want their assets to go, who they want to manage their assets in case of their demise, who they’d like to help manage their assets if they’re incapacitated, or if they need somebody to make healthcare decisions for them.
I’ll get all that information through the intake appointment, and then I’ll draft documents. Depending on how busy I am, it can take a week, couple weeks to get those documents back to them, and then they review them. I typically like to highlight the stuff that I find to be particularly important and interesting to the client, and then, of course, they can read the whole thing. They can ask questions about every paragraph if they want, but once they’ve read the draft, we do another usually shorter call to discuss the documents, make any corrections or changes they might have, answer all their questions, make sure they’re comfortable with them. Then we can finalize the documents and set a signing appointment, and that just depends on how soon the client and I am able to find an appointment that’s suitable for both of us.
We do the signing appointment, which usually takes 45 minutes to an hour, and then I take the documents and scan the signed documents into my system so I have electronic backups for the client. I collate everything together into a binder for them, give them a USB drive with the PDF electronic versions of their documents, and send everything back to them, and we then finish the funding process. I have their deed recorded to transfer their house or other real estate into the trust. The clients contact their banks to transfer their accounts into their trust. I’ll help, of course, with that process in any way I can, but of course, the banks aren’t going to let some random lawyer call up and transfer my clients’ assets away from them so they have to take care of that part.
Overall, about eight weeks is the average probably for me. If clients really want to get it done in six, we can do that. We’ve even done four, but that’s the entire process. It’s really fairly simple from the clients’ side, and from my side, I just need to make sure I get enough good information to know that I’m accomplishing what the clients want to.
The trust will, of course, control the assets that are in the trust. However, there are instances where assets can become mistitled, even if all the proper funding work was done at the time the trust was executed. For example, sometimes when people refinance a home, even if the home was in the trust at the beginning of the refinancing process, the bank may actually transfer that home back into the name of the client personally, which means now that house is no longer controlled by the trust. In that case, we would hope that on a trust review, which we recommend to have happen every three to five years, the client and the attorney would do a title search and see that that house was not titled properly. However, if something happened to the client and they pass away prior to that mistake being discovered, then we would use what’s called a pour-over will to transfer the house back into the trust at the client’s death. This process is a little more lengthy than it would be if everything was titled perfectly, but it will at least get the assets, in this case the residents, into the trust so that it can be distributed in the manner that the clients wish.
Wills also do a couple of other things that the trust also can’t do. Clients have the opportunity in their will to make their burial or cremation wishes known. Also, if the client has children who are minors and we need to name guardians for them, that will usually happen in the will document as opposed to someplace else. A will is still necessary for all clients and particularly important for clients with young children, but everybody needs one.
The simplest answer to that is because a trust will own most of the probatable assets that a person owns. The trust can’t own everything. It doesn’t own retirement plans. 401(k)s and IRAs have beneficiary forms, and so if someone is incapacitated and they need a person to take their, for example, required minimum distribution on their behalf, that is going to be something that only a power of attorney holder can do. Similarly, if the person is injured and in the hospital and needs somebody to make a health insurance claim on their behalf, that health insurance policy isn’t owned by a trust. It’s owned by the person personally, and so they need somebody who has a power of attorney in order to make that claim on their behalf. There are a lot of financial transactions that get undertaken outside the trust context, and so if a client is incapacitated, they’ll need what we call an attorney-in-fact who holds the power of attorney on their behalf to make those transactions for them.
A trust avoids probate because it’s essentially a private contract between the settlor, the creator of the trust, the trustees or trustee of the trust, and the beneficiaries of the trust because the trust owns the assets, and that’s a critical point. The trust has to own all of the assets that it’s going to transfer. If the trust owns those assets, when the person passes away who created the trust, there’s actually not a change of ownership that needs to go through the probate process. The trust continues to own the same assets, but the trustee of the trust changes. The beneficiary of the trust changes, but the trust is still the entity that owns those assets.
Because there’s no probatable change of ownership, we don’t have to file a court case, which is essentially what a probate action is, and the transfer of those assets can go much quicker. It’s much simpler. It’s also private because there’s no court case, assuming that we don’t have to file a probate. Because the trust is a private transaction, we don’t have to advertise in the newspaper that a probate is occurring and we don’t have to wait around as long for creditors. We have to wait a little bit of a time for creditors to show up, but it doesn’t have to be quite as long as if we had to file a full-on probate.
Probate’s a process by which the heirs of a person who’s passed away, either with a will or with no documents at all, “proves” that they’re the people who are entitled to inherit the assets of the deceased person. It’s a really ancient process, just like will law is really ancient. It goes back to the Middle Ages in England. In California, it can be lengthy. It takes a year, 18 months, maybe longer if there are conflicts, and it can cost between 1 and 4% of the overall estate value in attorneys fees alone. The fees are statutory so they’re locked in, and there’s really not any way to avoid them once you’re into the probate system.
Because of that and also the fact that probate is a public process, it’s a court case just like any other, and while there are some filings within probate that might be confidential, for the most part, the probate process is meant to be public so that any creditors or claimants on the estate can come forward and know that the process has begun and that the deceased person’s assets are being distributed. For the privacy reasons, for the expense reasons, and for the lengthy process that’s involved, a lot of people want to do a trust to avoid that.
No, they’re definitely not. Anybody who is old enough to be of age, so 18 years or older, who owns more than $180,000 of assets and has loved ones that they would like to transfer their estate to in an orderly fashion can use a trust. Additionally, as we’ve talked about at other times, the powers of attorney are important for literally anyone to have. We even do them for college-age kids so that we ensure that the parents of those kids can manage their assets or make medical decisions for them in case they have an accident. Really, estate planning more broadly is something that anybody who’s 18 years or older needs some version of, whether it’s a trust or just powers of attorney, but no, it’s certainly not a process that’s only for old people.
Certainly not, especially in California where the probate limit just above $180,000 in 2023. Anybody who owns a $180,000 of assets or more, when they pass away, their estate is going to go to probate. It can take quite a while and be quite expensive, and so no. A rich person needs a trust, but most middle-class people in California also would want to have a trust, especially if they have children that are younger. A trust can help manage those assets for the children until they’re old enough to do it themselves much better than you can with a will, and the process will be simpler and their lives will be less disrupted should their parents pass away because the trustee will be able to step in much quicker. No, pretty much anyone has, like I said, over about $180,000 in assets and people they love that they want to have their assets go to will need a trust.
Trusts give us some pretty powerful tools to either give a beneficiary the ability to protect themselves from bad actors: people who might sue them, divorcing spouses, bankruptcy, etc., but it also gives us the ability to designate third-party trustee to manage the assets on behalf of a beneficiary who may not be able to manage those assets for themselves safely for a myriad of reasons, whether it’s because they’re incapacitated, they have spendthrift issues, they’re younger than 18, etc. What we do for most clients these days is create what’s called a continuing trust. This trust establishes an irrevocable trust at the death of the second to die of the parents in case of a couple where the initial trust document creates an irrevocable trust that we call a descendants trust for the benefit of the beneficiary.
Now, if that beneficiary is capable of managing their assets on their own, we can name them as the trustee, and they can be trustee of their own trust. As long as that trust has spendthrift provisions, it will be the assets inside that trust that have been inherited, because they’ve been inherited from somebody else, can be protected from lawsuits, creditors, divorcing spouses, etc. If we’re concerned that that beneficiary can’t manage those assets on their own, we can name a third-party trustee to manage those assets on behalf of that beneficiary, invest them wisely, and then distribute them to those beneficiaries for their benefit and for the purposes that the client would want them to be distributed for. We don’t tend to get into listing the reasons that assets would be distributed so much as giving the trustee guidelines in the trust document for what we want those assets to be used for so that the beneficiary will use them for their benefit and not to harm themselves in the case of, say, somebody who has a drug problem or mental health issues, etc.
For most of my clients who are younger and have not become incapacitated or been diagnosed with Alzheimer’s or dementia, we will create a power of attorney, a financial power of attorney for them called a springing power of attorney that only comes into effect upon their incapacity, say they are in a coma or they acquire Alzheimer’s and get to the point to where they are incapacitated. Similarly, we’ll typically name what we call successor trustees for their trust so that that trustee only steps into the office of trustee upon the person’s death or, again, their incapacity.
As someone gets older, they may decide even before they’ve been diagnosed with dementia or Alzheimer’s that they want their children or somebody else to assist them with managing their financial affairs. What we can do in those cases is have that person execute what’s called an immediately effective power of attorney whereby the person holding that power of attorney can help them pay bills and do other financial transactions immediately without the client needing to have been diagnosed with dementia or become medically incapacitated. Similarly, within their trust, we can name somebody as a co-trustee to assist them to manage the trust assets.
Put all those things together and somebody who’s aging can transition into having somebody manage their financial affairs for them in case they become diagnosed with dementia or incapacitated without needing to upend their lives too much as they drift into incapacity like a lot of people unfortunately do these days with the prevalence of Alzheimer’s in our population. With some careful planning and making sure that we have somebody that they trust to assist them, we can really ease a lot of people’s financial burden as they get older or as they are becoming slowly incapacitated.
In California, we have a statutory form called an advanced healthcare directive, was created about 25 years ago. Prior to that, in order to name a person who could make healthcare decisions for a client in the case of they’re incapacitated, we used to create two different documents: a healthcare power of attorney and what we called a living will. All attorneys had their own forms for that. There were some commonalities among them, but it could create confusion because doctors and hospitals were being asked to interpret documents that were legal documents created by attorneys that they weren’t familiar with. Often, that could delay somebody’s care.
What California did was create an advanced healthcare directive, the Part 1 of which is a healthcare power of attorney that designates an agent or agents to make healthcare decisions in case somebody is incapacitated and then the Part 2, which essentially replaces the living will and allows that client to make their healthcare wishes known so that the agent has some guidance in making healthcare decisions for them. This is particularly in the case of what people think of end stages of life, whether somebody wants to be kept on life support basically as long as possible in case a cure for whatever they have is found or if they want their bodies to be allowed to pass away naturally and not be kept alive for an inordinate amount of time because that can be expensive and torturous for the families as well. The advance healthcare directive both allows a client to name somebody they trust to make healthcare decisions for them and also to give that person some guidance as to how they wish to have their treatment happen in case that person needs to make those decisions.
In California, we are a community property state, and at the most basic level, what that means is, for a married couple, any assets that they earn from work during the marriage or any assets they acquire during marriage are community property, 50% owned by each spouse. There are some assets if acquired even during marriage that are not de facto community property. They’re called separate property. The most important one for most people is an inheritance and, of course, the most important one that we want to deal with in estate planning.
A lot of clients come to me and see, okay, if I leave these assets to my kids, what happens if they wind up getting divorced? How do we protect them from their spouse taking half of it? The way we do that is through a continuing trust. The irrevocable trust will create a continuing trust at the death of both spouses, will hold the assets for the benefit of the child. The child can be their own trustee if there are spendthrift provisions in that trust to protect it, but that continuing trust allows the inheriting child to keep those assets in the trust and reinvest them and use them but pull the assets out only as they need them. If they’re going on vacation, they can pull the money out for the vacation and leave the rest of the trust corpus in the trust.
That makes sure that that kid never does anything to commingle those assets and possibly have them considered community property upon a divorce. It also and sometimes even more importantly gives that child the political capital with their spouse to say, look, we’re not going to commingle these assets. Not because of what I want but because my parents set up this trust and the assets are supposed to be left in the trust according to their wishes and according to their law, so we can’t commingle these assets. They have to stay in my name. I will pull them out for things we need, but they are going to remain in that trust protected from that spouse if they decide to get divorced.
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