Woody Allen once said, "I’m not afraid of death; I just don't want to be there when it happens." While of course he was (mostly) joking, the truth is that most people do not want to think about death either, and that is why most people never get around to estate planning. Trusts & Estates classes at most law schools begin with someone having a problem with a trust or will, but may gloss over, for example, the difference between the two, or which documents make up an estate plan (and why).
For lay people, the area is a big mystery. Even for some lawyers, the basic vocabulary of estate planning may be confusing. Common questions like “Is a living trust right for me?” and “Isn’t a simple will enough?” seem like they would be fairly easy to answer. Yet a Google search on this topic is likely to leave people lost in the details and can cause more confusion than help. If you become familiar with the basics of estate planning and its basic terms, you will be able to help clients who have simple questions—or at least know when you will need to direct your clients to someone with estate planning experience.
The starting point for estate planning is to say in advance, “If I can’t take care of my children, healthcare, or finances because of incapacity or death, then here is who I want to have do so for me, and this is what I want them to do.” Several legal documents are required to accomplish this goal.
Children come first, and a will says who you would choose as their guardians if you were unable to care for them. Every parent needs a will. Next, an advance health care directive addresses health care issues such as life support, organ donations, etc. Together these two documents cover children and healthcare, and that leaves one item: handling your finances in case of death or incapacity.
A durable power of attorney allows someone of your choice to manage your finances during incapacity, and a will says who inherits your property after death. The problem that arises when you only have a will, however, is that after death, you’re not around to sign papers transferring property out of your name and into the names of your beneficiaries. So how does property get transferred out of a deceased person’s name and into the next person’s name? Typically the deceased person’s family has to go to the probate court to have the property transferred for them by court order. In California, this requires 12 to 18 months on average to complete, and, because of the high value of real estate in San Diego, generally costs a minimum of $10,000 to $20,000 in legal fees alone. With a will, then, your property will be inherited by the people you designate, but not without significant time, effort and money being spent first to get that done.
Living trusts can solve the problem of time and expense. People use living trusts to avoid probate. To understand how a trust works, think of a box with the word “trust” written on top. If you put your assets in the box, then they are safe from probate. This is because the way to put assets in the box is to change the name on them from “John Doe” to “John Doe, Trustee of the Doe Trust.” With that done, probate becomes unnecessary because assets don’t need to be transferred out of John Doe’s name after his death because he does not own assets in his name anymore, but rather as trustee of his trust. And in the trust, John Doe will have appointed “successor trustees” to transfer the property in the trust to his beneficiaries after his death instead of relying on the probate court to do that for him.
Some additional benefits of trusts are that an “A/B” trust can increase married couples’ protection against taxes and creditors. For minors who are beneficiaries, a trust allows an older, wiser person to manage minors' inheritances until they are old enough to do so responsibly. Note that trusts can be set up either as part of a living trust which avoids probate, or they can be written into a will, which would require probate.
Potential downsides of living trusts are that they initially require more time and money to set up than wills do. Also, professional advice is needed to tell you which assets to put in your trust, and how to do so. On the other hand, the cost to set up a will plus the cost of probate will usually far exceed the cost of a trust. Similarly, the time required to put assets into your trust is a small fraction of the time required for probate.
These terms form the big picture of the major building blocks of an estate plan, and are something you can use as a foundation to build on as you learn more about the area and start fielding questions from your clients.