Modern Estate Planning Blog

You love your family and only want the best for them. So you go to a lawyer and have a California trust prepared because you want to make sure your family is well taken care of in case something happens to you.

You feel a weight lift from your shoulders and cross “do estate plan” off your list and feel like all your ducks are in a row. You place your legal documents on a shelf or in a drawer and you don’t think about them again because “it’s done”.

This scenario plays out countless times each year, but if this is all you do, you and your family may be in for a rude shock! The “set it and forget it” mindset can create a false security leaving you thinking you have taken care of everything when in reality you haven’t.

Why? Because life is all about change.

You may never have stopped to think about it, but your California trust was created based on a snapshot of your life at the time in conjunction with the estate laws, overlaid by some good guesses. So how can you expect your trust to work for you when you need it if things have changed?

Every year something about your situation will change, and every three to five years you can count on some major change happening. It might be your relationship with the people in your life. You might have more children, lose a loved one, move away from friends, end friendships and start new ones. You might have a life altering accident. You could hit the lottery or otherwise make it big, or receive an inheritance. You buy property and sell property, open new accounts and close others. This is to say nothing of our ever changing laws.

You might ask, if my plan’s not up to date how bad could it be? Let’s look at a few simple questions.

What if your assets are not owned the right way?

It’s an unfortunate reality today that many California estate planning lawyers do their clients a disservice by not emphasizing the importance of transferring ownership of your assets to your trust – it doesn’t happen automatically even if you have a schedule of assets attached to the trust.

If your assets are not owned by your trust and something happens to you – either you become incapacitated or you die – your family could be looking at an expensive court process called probate with all its associated costs and time delays.

Some of your assets, or maybe all of them if your never put anything in your trust, may not be available for your family to use immediately, and since anyone can go look at your probate file at the courthouse (and in some counties online!) the public will know not only what you own, but who it will go to and how old they are. If your plan has all the right pieces, your Will (you did get a Will with your trust didn’t you?) might give everything to your trust, but if you don’t have a Will or it was not coordinated with your trust, or your assets were held jointly with someone else, your assets may not go where you want them to. All of this will make life messy for your family as they mourn your loss by appointing an executor to resolve any disputes over your estate.

What if you have a beneficiary that is financially immature or has substance abuse issues and your trust leaves the assets outright to him?

Best case, the money is spent in a very short period of time and what you worked so hard for is simply squandered. Worse case, your beneficiary uses the money in a way that is harmful to him. I once spoke with a woman whose father died and left an inheritance to her son (his grandson). The young man had a severe substance abuse problem and mom was concerned that if he had a ready source of cash he would buy drugs and overdose in a short time. She wanted to know if there was anything that could be done to put strings on the money.

At that point there were only two choices, and both needed the cooperation of the substance abusing son. The first choice was to seek a conservatorship, but the young man would need to consent – highly unlikely. Second, the son could set up a trust for himself and have someone else as mange it, but then his access would be limited, again not something he would be likely to agree to. If grandpa had a better understanding of the implications of his plan or had updated it based on more recent information about his grandson the funds could have been protected and used in a way to improve this young man’s life.

What about assets that have beneficiary designations?

These assets are not owned by your trust and therefore not controlled by your trust, unless your trust is the beneficiary. Typically these assets include retirement accounts, life insurance, and annuities, but could also include bank and investment accounts. Two problems occur with these assets. First, you may have forgotten who your beneficiary is, and second, you may have named the wrong kind of beneficiary – both mistakes occur frequently.

When you are young and just starting out or are unmarried the logical choice is to name your parents or siblings as beneficiaries. But then you marry and forget to change the beneficiary designation to your new spouse. If something happens to you the current beneficiary designation controls and your spouse is left out.

If you are married and do change the beneficiary the most obvious choice is to name your spouse and then your minor children; that is if you have a backup at all. If you divorce and forget to change the beneficiary your ex-spouse will end up with the asset. There are many cases on just this topic and the result is not pretty. The new spouse and/or the existing kids are left out and the ex-spouse takes it all.

What about naming minor children?

Well, sounds good, but because children under the age of 18 cannot legally manage assets the probate court gets involved and a guardianship must be created. If you did not name a guardian the judge will choose for you. AND worst of all, your kids will get the money when they turn 18. Think for a minute about the first thing an 18 year old is going to do when they get their hands on the money. That’s right, a new car, probably a fast car and likely a whole heap of trouble. Use your imagination.

If your child is not a minor but a person with special needs the situation is even more unpleasant. If your child receives government benefits (SSI, Medi-Cal/Medicaid, etc.) their benefits will be taken away until their inheritance is spent! If the assets had been given to this child in a special needs trust your child would have been able to keep his government benefits and use the funds to improve his quality of life.

And let’s not forget about those financially irresponsible or substance abusing beneficiaries. There goes your hard-earned cash!

Finally, what if the law changes?

I have seen plenty of these cases, too. A plan that was created in the 1980s or even early 1990s was based on estate tax laws with much lower limits than what we have today. At that time, an estate over $600,000 would pay estate tax (this includes your retirement and life insurance). Compare that to today where no tax will be paid until your estate is over $3.5 million. Many older plans included estate tax planning that required the trust to split into 2 pieces, with one of those pieces being unchangeable. This strategy is fine and even desirable if you need to minimize estate taxes or want some asset protection (provided the right language is also included), but what if your estate is no longer taxable or what if you never understood what your plan did from the beginning. Now your spouse dies and you are stuck with an outdated plan that doesn’t really fit your situation that you never understood and creates more headaches than it fixes.

If your plan is not up to date it is nothing more than a big paperweight.