INTRODUCTION TO ESTATE PLANNING PART: 3 - MAY 2024

For the next few months, we will be revisiting an article series written by Willaim R. Remery, an Elder Law Attorney. If you enjoyed March's Introduction to Conservatorships and April's Intro to Estate Planning, enjoy this continuation of the series.

This is the second in a series of articles on estate planning. In the first article I discussed the basic process of effective estate planning, with an emphasis on considering all available options and considering as many different issues as you can think of, rather than focusing solely on one option (such as a will or a trust) or focusing on only one issue (such as tax planning, Medi-Cal planning or avoiding probate.) In this article I will begin to go through that planning process by looking at the most common estate planning option and see how it addresses or fails to address various concerns. In the April issue of “Newsworthy Notes” I included a chart listing the various estate planning options across the top and the planning concerns or issues along the side. It may be useful to refer to that chart as I go through the planning process in this and future articles. 

The most common estate plan is to have no plan at all! Many people do not even begin to consider estate planning, at least until they are nearing retirement age. Some people feel that making a will or other estate plan will somehow hasten their deaths. Most people simply procrastinate, by putting off estate planning like a trip to the dentist.  

Most people actually have a partial estate plan but don’t even realize it. For example, buying life insurance or purchasing an annuity constitutes an estate plan, at least as to a portion of the person’s assets. Likewise, putting bank accounts into joint tenancy form or “in trust for” title actually constitutes estate planning as to those accounts. 

The consequence of having no estate plan, or an incomplete estate plan, is that, at death, any assets which do not pass to a beneficiary or surviving joint tenant will pass under the rules of “intestate succession.” “Intestacy” simply means that the decedent is not directing where the assets pass with a testamentary document. Instead, the legislature directs where the estate will pass pursuant to default rules of heirship and succession.  

Every state and foreign country has its own rules of intestate succession. Those rules can vary widely. A decedent’s personal property, including everything except real estate, normally passes pursuant to the heirship rules in effect in the state where the decedent is “domiciled” at the time of the decedent’s death. The domicile is the place of permanent residence, regardless of any temporary residence in winter vacation homes, or due to military relocations or temporary employment moves. Real estate, on the other hand, normally passes pursuant to the rules of intestate succession in the state where the real estate is located. That means that people who own real estate in states other than their state of domicile may find that their property passes to different heirs, or to the same heirs but in different proportions, in each state.  

In some states property will escheat to the state if there are no close relatives living at the time of the decedent’s death. California’s intestate succession rules are contained in the California Probate Code and include a detailed procedure for determining heirship, with the property escheating to the state only if absolutely no blood relative can be found. I have been involved in many estates where property passes to very distant relatives whom the decedent never even knew. In one estate heirship was traced back through the national census records of 1850 to find fourth cousins many times removed. In other estates I have had to obtain family records from cemeteries and churches in Europe and South America to prove heirship on behalf of distant relatives. Although the property in those estates did not escheat to the state of California, the decedents would certainly have been very surprised to know that their estates had passed to such distant relatives due to their failure to make any other estate plan. 

A typical estate involves a spouse and children, or a predeceased spouse and children.  In those cases, the intestate succession rules in California provide as follows: 

if there is a spouse, all community property (meaning property earned during marriage) goes to the surviving spouse; 

separate property (i.e., property owned prior to marriage or obtained by gift or inheritance during a marriage) passes one-half to the spouse and one-half to the child if there is only one child, or one-third to the spouse and two-thirds to the children where there is more than one child; 

the share of a predeceased child passes to that child’s children (but not to the child’s own surviving spouse); 

if there are no children, separate property passes one-half to the decedent’s surviving spouse and one half to the decedent’s parents, or to their issue if the parents are deceased. 

There are special rules in cases where there is a predeceased spouse and no children or issue of parents surviving. In that situation, the portion of the estate attributable to the predeceased spouse will pass to the close relatives of the predeceased spouse. However, the rules are rather technical regarding the kind of property in the estate and how long the decedent survived the spouse. Those technical rules are beyond the scope of this article.  

However, as you can see, having no estate plan may actually result in a plan of inheritance which is even more complex than would be the case if the decedent had left a will! The problem is that the plan is set up by the California legislature and not by the decedent.  

While the “no plan” option costs nothing to set up, the estate passing in intestacy must follow the same court procedures that are followed in probating a will. It is subject to the same court fees, attorney fees and administrator’s fees that would be payable in a proceeding to probate a will and will be subject to the same delay that is inherent in probating a will. The only advantage in not having a will is that no one can contest an estate that passes in intestacy. Only a will or trust is subject to being contested. In fact, a successful will contest actually results in the estate passing in intestacy.  

Where there is no estate plan, an estate will normally pay maximum estate taxes.  However, if the total estate is less than $600,000 and the decedent has not made any major gifts during the decedent’s lifetime, there will be no federal estate taxes. Although California abolished inheritance taxes back in 1982, other states still have inheritance tax which may result in the taxation of even relatively small estates. One positive tax aspect of having no estate plan is that, as with property passing under a will or a revocable trust, any property passing in intestacy will go to the beneficiary with a “stepped up” tax basis, meaning that the value of the property at the date of the decedent’s death will be treated as the original purchase price when the heir ultimately sells the property. That “basis” figure will be subtracted from the selling price to determine whether there is any taxable gain. Any appreciation which accrued prior to the decedent’s death will escape taxation.  

If the property had gone to the heir as a gift during the decedent’s life, or passed through an irrevocable trust, it would get a “carry-over” basis, meaning that some or all of the appreciation which accrued during the decedent’s life would be subject to tax when the heir eventually sells the property. This is particularly important where the family home was purchased for only a few thousand dollars many years ago and appreciated greatly in value during the seventies and eighties.  

Having no estate plan leaves a person with maximum flexibility during life, as the property is not tied up in a trust, annuity, insurance policy, or other estate planning device.  However, in the absence of a durable power of attorney, it will leave the person without estate management assistance during life should the person be unable at any time to care for his or her own financial affairs. 

Finally, the failure to plan will subject the decedent’s estate to dissipation during life prior to qualifying for long term Medi-Cal and will subject whatever is left to a Medi-Cal claim for benefits received by the decedent or the decedent’s spouse during the decedent’s life.  That means that the decedent will obtain the minimum possible Medi-Cal benefits and repay the maximum amount at death. 

On balance, there is little to be said in favor of having no estate plan, other than possibly avoiding a will or trust contest among contentious relatives. In the next article in this series I will discuss the advantages and disadvantages of the next most popular estate planning option... the Last Will and Testament. 

William Remery, Esq., can be found in PRO’s Wellness Village at ParkinsonsResource.org/WilliamRemery.