Keith A. Davidson describes in this video the basic requirements for creating a California Will and Trust. He refers to the basic creation elements as "formalities" and "intentionalities", terms he uses in teaching California Will and Trust creation at Chapman Law School (which he borrowed from his own Trust and Will professor, Father O'brien (thank you Father O'Brien!), who taught at Loyola Law School in Los Angeles). For those viewing this blog by email subscription, you can click on the title for a link to the video.
How does your trust help you while you’re alive? Many people think of trusts as death planning instruments--the type of thing that only operates upon your death.
But trusts have a critically important role to play while you are alive in the event you lose capacity. People are living longer and the likelihood of being physically able, but mentally unfit is growing.
Without a trust plan in place, a person and his money cannot be easily cared for. In fact, a court supervised conservatorship is required to manage the person and estate of people who lose mental capacity, but have no other safeguards in place for the management of their money and personal care.
Unfortunately, conservatorships are costly, time consuming and expose everything (and I mean everything) to ongoing court supervision. In other words, your life becomes an open book and the court decides who will make decisions for you and then tries to oversee those decisions as best it can....yikes!
Since a conservatorship takes place in court, it provides a ready forum for lawsuits. It's not uncommon for a person's children to fight over who should be named as the conservator. And those types of lawsuits can be nasty business.
But a well planned trust can avoid all of that because under the trust terms, you appoint a successor to manage your money if you ever become incapacitated. You should also have a Health Care Directive in place so that you can name someone to make your medical decisions. With these two documents properly prepared, your personal care and your assets can be quietly and easily managed until you return to full mental capacity.
So the next time someone tells you that a trust isn't necessary because it only takes effect after you're dead and gone, think again. That trust may save you a lot of time, money and public scrutiny while you’re still alive.
Back in March we offered to provide simple Wills to members of our community at no cost (you know, for free). We decided to limit the program to 20 people per month to ensure that we were not overwhelmed by requests for free simple Wills. And the response to our free Will program was overwhelming. By “overwhelming” I mean only 3 people applied for the program. Not three per month, just three overall. I guess no one believes lawyers would do anything helpful for free.
We learned an interesting lesson. People don’t trust free. In fact, each of the three people who applied for a free simple Will asked the same question “why are you doing this?” The truth is that we wanted to provide a service to our community. Simple Wills are relatively easy for us to prepare and we can’t charge all that much for them to begin with, so why not just give them away and build some good-will in the process.
Of the 3 people who took advantage of our free Will program, each of them were very grateful. But none more so than Ms. Betty Jamison who decided that she wanted to provide us some form of payment in return. So she and her husband, James, cooked up a batch of barbecue ribs and a homemade lemon pound-cake. She brought the food to our office and we ate like Kings. I never knew law practice could taste so good.
I never wanted or expected anything in return for our free simple Will program, but I truly appreciated the home cooking. Not just because it tasted delicious, but also because these people spent their time making us food. And with cooking like that, we may have just stumbled onto a new way to bill for our legal services.
The manner in which assets are titled govern how those assets pass at death. And this can override a disposition contained in a Will or Trust. All the effort people take to prepare a Will or Trust can be wasted if assets are not titled properly. This is what I call the asset puzzle.
The first part of the puzzle is knowing the possible pieces (i.e., the way in which assets can transfer at death). There are differing ways in which assets pass at death and it can be downright confusing.
For exapmle, life insurance passes by beneficiary designation. Whoever is named as the beneficiary on the form in the files of the life insurance company takes at death. It does not matter what the decedent's Will or Trust state, the beneficiary designation controls. Therefore, even though a Will may be created that leaves assets equally to the decedent's children, if only one child is listed as a beneficiary of a life insurance policy, then that one child takes the life insurance proceeds and the other children get none.
Same applies to assets titled in joint tenancy. Bank accounts, brokerage accounts, real property and cars all have the ability to be held jointly with another person or persons. When one joint owner dies, the other joint owners receive the property automatically without the need for probate. But this also means that the assets pass without regard to a Will or Trust. All too often I see children unintentionally excluded because they are not included as a joint tenants on the assets.
For some reason people think that if they have a joint tenancy over their assets one of two things will occur. Either (1) the child who takes that asset will share with the other children (even though there is no legal obligation to do so), or (2) the Will or Trust will override the joint tenancy or beneficiary designation (which is false, the beneficiary or joint tenancy overrides the Will or Trust).
This is where planning comes into the picture. Planning is NOT the act of simply having a Will or Trust. A Will or Trust is a required part of planning, but that is just the beginning. The most crucial part of planning is looking at all the assets in the estate and changing title to those assets to conform to the plan. This means filing a new deed so the house is in the Trust, for example. Changing the title on bank or brokerage accounts, ensuring any beneficiary designations go to either the Trust or the proper individuals. In other words, looking at the entire, big picture and taking all necessary action. That’s truly the definition of planning.
By the way, it's lack of planning that keeps lawyers fully employed because that is when litigation and probate ensue. And we lawyers make far more money on probate and litigation then we do on planning. So while people look at me skeptically when I plead with them to have an estate plan, I really should be pleading NOT to create a plan. So support your local lawyers, neglect your planning!
Fifty years ago, most assets passed from an individual who died to his or her family by way of Probate (by Will or Intestacy both of which require Probate). Probate is a strict, expensive and time-consuming Court process that must be completed before assets can ultimately being transferred to family members.
But today, we own assets differently than we did fifty years ago. Most of us have bank accounts, retirement accounts, life insurance, and perhaps Living Trusts. These four types of assets (or financial vehicles) constitute the core of the so-called “Nonprobate Transfers” or “Will Substitutes”, meaning each of these assets pass outside Probate if properly designated.
California law expressly allows these Nonprobate Transfer assets to pass outside the probate process, even though these assets do not comply with the formal requirements for execution of a Will (read more about the Formalities and Intentionalities of Will creation.) Accordingly, individuals can rely on beneficiary designation forms that identify who gets his or her bank accounts, life insurance, and retirement accounts at his or her death without regard to what a Will states. As a result, with proper planning, an individual’s entire estate can pass at death to his or her family members outside of the Probate system. In fact, this is one of the primary reasons why estate planners created Revocable Trust—to avoid Probate altogether.
Let’s take an example, Stewart owns the following assets:
- a home worth $400,000;
- a rental property worth $350,000;
- two bank accounts totaling $60,000;
- a retirement account totaling $500,000; and
- life insurance with a death benefit of $1 million.
Stewart’s total estate is worth $2,310,000. If Stewart’s estate passes by a Will or Intestacy, it must go through the Probate system. The attorney’s fees on this size of an estate would result in fees of approximately $40,000 (read more on how Probate fees are calculated.)
On the other hand, Stewart’s entire estate could pass by way of Nonprobate Transfers (also known as Will Substitutes), as follows:
- Stewart’s (i) home and (ii) rental property are owned by his Living Trust, which designates the beneficiaries of his home and rental property.
- Stewart’s (i) bank accounts, (ii) retirement account, and (iii) life insurance have “beneficiary designation” cards filled out designating who gets these assets on Stewart’s death.
Now Stewart’s entire estate passes outside of the Probate Court process.
Ultimately, these types of Nonprobate Transfers (or Will Substitutes) function as a private system of transferring assets at death—usually requiring less time, fewer rules, and a lower cost than Probate requires.
When creating a California Will there are a few basic steps that must be met from a legal perspective in order for that Will to be legally valid. In their simplest form, the two areas required for a valid California Will are the necessary “Intentionalities” and the required “Formalities.”
Intentionalities evidence a person’s intent to create a Will. Will creation requires intent—the person creating the Will (referred to as the “Testator” ) must intend to make a Will. And there are a number of things that can undermine the necessary intent to make a valid Will. A short list of such items include: lack of mental capacity, undue influence, fraud, and duress and menace. The full list of intentionalitiesfollows:
- Intent to create a will
- Undue influence
- Duress and menace.
Formalities refer to the formal requirements for California Will creation. For example, a Will must be in writing (no oral Wills are allowed), signed by the testator, and witnessed by two disinterested witnesses. Alternatively, a hand-written Will can be valid if the material provisions are written in the testator’s own handwriting and signed—no witnesses needed (this is referred to as a “Holographic” Will).
- Written Will
- Signed by testator
- Witnessed by two disinterested witnesses or holographic.
Using these two areas of legal requirements, you can go down the list of Intentionalities and Formalities to determine if a Will is valid or not. The lack of any one item may result in an invalid Will. For example, a Will with all the necessary Intentionalities, that is printed from a computer and signed by the testator could still be invalid if it lacks the required two witnesses. Conversely, a properly executed and witnessed Will could be invalid if the testator lacks mental capacity or if the testator is unduly influenced in making the Will.
Does that mean Wills are easy to attack? Not necessarily. In fact, a vast majority of Will contests that make it to trial fail to succeed. Of course, this could be due in part to the fact that many of the cases with troubling facts settle before trial.
Keep this list of Intentionalities and Formalities in mind as we submit further blog posts on the component areas—such as undue influence, capacity, fraud, etc.