Broker Check

Risks of Not Having an Estate Plan

Risks of Not Having an Estate Plan:


 1.  Your loved ones will have to go through probate.

What is Probate?  Probate is what happens to your stuff when you die.  Most people want to avoid probate for many reasons.  Probate is a formal, court-supervised proceeding, it takes a long time; it is completely public; and it is very expensive.  Who has to go through probate?  Everyone who dies in the state of California with combined assets value $150,000 or more.  This is gross asset value, which means including all that you own, but nothing that you owe.  For example, if you own a house worth $500,000 with a $490,000 mortgage, the gross value is $500,000. 

 In California, probate costs are determined by the Probate Code, and are as follows:

Estimated Attorney’s Fees and Executor’s Commission without Proper Estate Planning

Gross Asset Value                                                            COST

$500,000                                                                         $26,000

$700,000                                                                         $34,000

$1,000,000                                                                      $46,000

$1,500,000                                                                      $56,000

$2,000,000                                                                      $66,000

The fees listed above do not even include any of the court filing costs, publication costs, fees for extraordinary services, and many others.  As you can see, the bulk of your estate could be eaten up by those fees. 

Another issue with probate that I’ve mentioned is that it takes a really long time.  Statistics say that probates on average take anywhere from 18 months to 3 years.  That’s on average.  It could take longer.  And during that time your estate and all your assets are frozen.

 2.  If you do not have a properly drafted trust, your loved ones are at risk of losing their inheritance due to litigation. When your estate is going through probate, notices are required to be sent to all of your potential creditors and all of your heirs, even those you have not spoken with in many years according to the law.  All of them can then file a claim against your estate.  A will is far more likely to be contested than a living trust.  That is because a will does not go into effect until a person dies, whereas a trust goes into effect as soon as it is signed and generally lasts for some time after the owner’s death.  If you are going to contest a will, all you have to do is prove that the testator was either incompetent or under undue influence at the precise moment the will was signed.  To contest a trust, you have to prove that settlor was incompetent or under undue influence not only when the trust instrument was signed, but also when each property was transferred to the trust, when each investment decision was made, when any amendment to the trust was made.  That is virtually impossible to do.  Moreover, it costs nothing to contest a will.  All a disgruntled family member has to do is object when the will is presented for probate, then hire an attorney on a contingency fee basis, and wait for the final outcome.  A disgruntled family member has nothing to lose.  On the other hand, contesting a trust generally involves a substantial commitment of time and money.  Whereas a will contest is heard in a probate court, a trust contest is heard in a civil court where there are substantial filing fees and formal procedures that have to be followed. 

Some people say that will contests are seldom successful, so why bother with a trust?  The answer is threefold: First, a will contest puts a screeching halt on the settlement of an estate.  Most will contests take a minimum of two or more years to complete and during that time no distributions can be made to anyone.  You surviving spouse and minor children will not be able to get any money out of your estate.  Secondly, defending a will contest involves lots of attorney time and results in large attorney’s fees.  Even unsuccessful will contests end up costing $50,000 or more in attorney’s fees.  Third, many will contests are settled before they ever get to court.  In that case, the estate will be further diminished by the amount of the settlement.  The best way to avoid a will contest is through a living trust.

3.  Without a trust, you cannot protect your family and preserve your assets for your loved ones. Since Probate is court-supervised, the judge will decide who will get your assets and when.  If you have a will, you can at least name people who you want to inherit your assets.  If you do not have a will, then the State of California has one for you.  It is called intestacy rules.  But even if you do have a will, it will still not preserve your assets for certain beneficiaries, for example, your minor children, disabled children and family members, your children from a previous marriage, family members who have addiction problems.  This list can go on and on.  All of your heirs will receive their share of your estate (if there is anything left after all probate fees and costs have been paid) outright at the end of a probate process.  But sometimes our intended beneficiaries just aren’t able to handle an inheritance.  Minor children are the usual suspects here.  State of California does not even allow minor children to own property, instead, the state appoints a guardian to hold property until they reach the age of 18.  Even then, parents cringe at the thought of an 18-year old getting any amount of money.  The first thing they might do is quit school, buy expensive cars, and head to Cancun.  But minor children are not the only ones who squander money.  Most experts agree that no one under the age of 25 should be given any inheritance outright because they need time to finish school and start a career.  Of course, there are many people over the age of 25 that should not have the money outright either.  If a beneficiary is eligible for certain benefits, then those benefits would be eroded under a means test if they were to receive any assets. A properly worded trust can be used to hold assets for that beneficiary while still meeting the requirements that will entitle them to receive the benefits. There are people who are spendthrifts, others are in not-so-good marriages, still others are going through bankruptcy. Giving any amount of money to those people could result in a disaster.  That’s when the trust becomes a vital part of your estate plan. 

4.  If you do not have a trust, your loved ones will be subject to a public process of estate settlement. Anyone can go into any probate court when a person dies and look at the estate file.  You can read the will, you can find out who the relatives and beneficiaries are, you can look at the claims of creditors and the list of assets, and you can find the phone numbers and addresses of estate beneficiaries.  Unscrupulous people often go through estate files to locate grieving heirs to prey on.  A living trust can prevent all of that.  A trust is private; it does not get filed with a probate court, and no one gets to look at it unless the settlor or the trustee allows it.

5.  Without a trust, the State of California will decide who will take care of your minor children.  

6.  If you do not have an estate plan, there will be no one to take care of your property upon your incapacity. One of the major concerns that many of us have today is not about dying, it is about living too long.  We see it all around us – we worry about our parents living in their own home.  We worry about their bills being paid and whether someone will walk off with their money.  In many cases, we are powerless to help them because all of their property is in their own name. If you are over the age of 50, statistically you have a 50% chance of becoming incompetent before you die.  Many people think that this can only happen to really old folks.  But young people become incompetent from accidents all the time. 

 Without doing some prior planning, the only option we have is to file a petition with the court to have a conservator appointed for them.  That’s a gut wrenching experience because all of their personal and financial affairs will have to be paraded before total strangers, and they will be forced to suffer indignity and humiliation of being declared incompetent.  Very seldom do conservatorship matters go uncontested by family members.  Family members go to court, say horrible things about each other only to get appointed as your conservator.  In those cases, a judge has to appoint a public guardian because it is considered in your best interest.  A public guardian is a bureaucrat who will take all your assets, report them to the court, and then use those assets for your care.  A public guardian will also charge an hourly fee for their services, and will be paid from your estate.  Most likely, your estate will be reduced to zero.

It does not have to be that way.  A solution is a combination of a trust and a durable power of attorney.  A DPOA allows you to designate the people you want to help you with financial affairs. There is generally no interruption in the management of your assets and no court supervision.  There is no formal adjudication of your incapacity; all your attorney-in-fact needs is a written opinion from your doctor stating that you are unable to take care of your affairs on your own.  No court involvement or conservatorship proceeding is required.

7.   If you do not have an estate plan, your family will not be able to help you with your health care needs.In 1996, a Health Insurance Portability and Accountability Act (known as HIPAA) was enacted.  The main provision of this federal law is that your personal medical information has to be kept private.  Your doctors cannot give any information to your family members about your health, your condition, treatments, etc.  Doctors get fined tens of thousands of dollars for violating the HIPAA, so they take it very seriously.  If you’ve been to a hospital, they have you fill out a stack of paper.  In that stack of paper, there is a HIPAA form.  In that form you can designate the one person the doctors can talk to regarding your condition.  But what if you cannot sign this document when you are brought to the hospital?  If you do not have an Advance Health Care Directive, your family members will have to go to a court and ask to be appointed as your guardians before they can communicate with your doctors on your behalf.  Even then, your family members will be left guessing what your wishes might be regarding a specific treatment, whether or nor you want to be kept on life support, receive blood transfusions, etc.  This will undoubtedly put additional stress on your family and may cause arguments and disagreements. 

This is another reason you have a trust.  Because included in your trust, there is an Advance Health Care Directive.  It gives a person of your choosing an ability to make medical decisions for you when you are unable to do so.  That person will be able to make an informed medical decision based on information given to them by your doctor, but more importantly, they will also have to follow your wishes regarding certain medical procedures and treatments, because those will be spelled out in the document.  So they will not have to guess.  It will give them a right to choose a hospital, a doctor, a medical facility for you based on your needs.  It will also give them a right to sign insurance claims and paperwork on your behalf. It gives that person a power to enroll you in experimental drug treatment program. It gives that person a power to enroll you in a hospice program.   This document will save your life and sanity for your family members. 

 As you can see, it is critical to prepare the proper estate planning documents to save your family thousands of dollars in probate feed, as well as provide quick and easy distribution of your assets the way you want them distributed, not the way the State of California wants them distributed.