By Harry Gordon Oliver II
Attorney at Law

The July 11, 1994 edition of Fortune reviews Jackie Kennedy Onassis' will, her assets and describes her estate planning to include who are the beneficiaries of her estate. For example, she gave her Newport, Rhode Island property that she had inherited from her mother to her step-brother. You might ask why did the Fortune writer know what assets Jackie owned and to whom she gave them. The answer is simple. Jackie did not have a living trust and, thus, through her will, told her executors and the rest of the world much about her assets and her feelings for beneficiaries. On an individual's death, his or her will becomes a matter of public record and anyone can look at the will in the county where the individual's estate is administered. Not only can anyone review a will, but anyone can also review the various court records and documents that are filed as part of the probate administration of an estate. For example, an inventory will be filed listing each and every asset subject to probate administration and its value. If gifts are challenged by beneficiaries, the resolution or litigation will also be a matter of public record.

The Fortune article points out the sophisticated estate planning techniques that Jackie used to reduce federal and state estate and inheritance taxes resulting in more assets being distributed to her intended beneficiaries. The principal estate planning technique used by Jackie was a charitable lead trust. Through the use of the charitable lead trust she was able to reduce the estate tax otherwise payable on her death and, at the same time, ultimately increase the value of the assets that will be distributed to the beneficiaries of the trust, her grandchildren.

A will, unless the decedent's assets are not substantial, must be probated. Probate is a procedure in which a Court reviews a decedent's will, assets, etc., and determines that the assets are distributed to the intended beneficiaries after payment of expenses and taxes. Probate is (1) a matter of public record, (2) a lengthy proceeding, and (3) expensive.

In a probate proceedings various documents are filed with the Probate Court listing a decedent's assets, liabilities, property values, the intended beneficiaries, and the timing and method of distribution. Notice of hearings related to the documents must be given to possible heirs and other interested parties. The notice procedures are tedious and if notice is a day late to one person, the hearing or other action will be delayed and notice must be sent again to all parties. Anyone can go to the Probate Clerk's office and review the documents. Unscrupulous individuals may review Court files and determine that valuable assets have been distributed to elderly or immature beneficiaries and attempt to take advantage of a beneficiary. Nosey neighbors, competitors of a family business, and others can review court files to try to uncover a family's dirty linen, squabbles, etc.

Probate administration generally lasts several months, quite often more than a year and, on occasion, several years for very complex estates. During probate administration certain proposed transactions such as the sale of estate assets may have to be approved by the Court. If an estate is administered under the California Independent Administration of Estates Act, Court approval may not be required but notice must be given of certain proposed transactions and, if an interested party objects, a hearing must be held. Probate administration cuts off creditors' claims if such claims are not filed within four months after an executor is approved by the Court and proper notice given. A similar benefit is now available for decedents who established and funded living trusts.

Small estates with a gross value that does not exceed $100,000 may be transferred by an affidavit or, in the case of certain real property, by a Court Order procedure rather than a full-blown probate proceedings. The $100,000 limit does not count certain property such as property located outside of California, held in joint tenancy or a living trust, insurance, vehicles including motor homes, trailers and vessels and community property subject to a spousal property petition. Thus, summary administration may apply to an estate with more than $100,000 of gross assets. A summary administration may be used when a decedent does not have a will. State law mandates who will receive the property in such case. If the estate includes real property worth more than $10,000 a Court Order must be issued to transfer the property.

If the estate is less than $20,000 the assets may be set aside by a petition and Court Order transferring a decedent's property to a surviving spouse or surviving children.

Community property and separate property passing to a surviving spouse may be transferred without enduring the pain of a probate proceeding. A petition must be filed with the Probate Court and notice issued to all interested parties. The Court will issue an order without requiring the filing of formal documents such as an asset inventory, etc. There is no limit on the value of property that may be transferred to the surviving spouse under this procedure. Property may be transferred to the surviving spouse even if the decedent did not have a will.

On the downside, this procedure may result in substantially more estate tax having to be paid on the death of the surviving spouse if the total assets in the surviving spouse's estate are more than $675,000, ("Exclusion Amount").

Property held in Joint tenancy passes to the surviving joint tenant by operation of law. An affidavit procedure may be used to actually transfer legal title. A court confirmation procedure may be beneficial to establish that the property held in the joint tenancy form was actually community property. Tax advantages may be gained. Other property such as insurance, IRAs, etc., are distributed on an owner's death without the need of a will or trust. The assets pass outside probate based on instructions in the insurance agreement, etc.

An individual or husband and wife may avoid for the surviving spouse and other beneficiaries the aggravation of probate by establishing a revocable, often-called living, trust. A trust instrument is very similar to a will. Additionally, a short will -- called a pour-over will -- must be signed. A pour-over will transfers to the living trust any assets not already transferred.

A living trust serves the same function as a will but, for assets transferred to the trust prior to death, probate is avoided. An asset is transferred to the trust by changing title to the asset to the names of the trustees of the trust. For example, a husband and wife may transfer their community property residence to their living trust by changing title to the property to Mr. and Mrs. John Doe, Trustees of the Doe Family Revocable Trust. An agreement or assignment may be signed to transfer such items as household furniture, etc., to a living trust. Assets not properly transferred to a living trust may have to be probated. Thus, funding a trust is very important to attain one's goals.

On the death of a spouse, the surviving spouse or other trustee steps in and administers the decedent's portion of the trust. The assets, much like in the case of a will, are distributed to the intended beneficiaries, but without probate administration. Expenses of transferring the property and estate and inheritance taxes are paid the same as when a will is used. When a properly funded trust is used, the payment of expenses and the transfer of property can generally be done in a shorter time period and certainly with less bureaucracy of filing petitions, etc., with the Probate Court. Attorney fees may be 25% to 75% less than if a probate administration is required, depending on the complexity of the decedent's estate.

Importantly, the administration or the transfer of the decedent's assets is accomplished in privacy without having to file with the Court documents that can be viewed by the public. Thus, the unscrupulous are not put on notice of wealth received and neighbors will not be able to pry into the personal and financial affairs of a decedent.

The cost of properly preparing a living trust will generally be more than the cost of a will. The principal reason is that the additional steps of drafting documents to fund and actually funding a trust must be taken. In large estates this may be time consuming and, thus, costly. The fees vary from locality to locality and lawyer to lawyer. An attorney experienced in estate planning, perhaps an expert, should be employed. The general practitioner does not have the experience needed in many cases. In large metropolitan areas such as San Francisco, the cost will generally be at least $1,800, often much more. Some attorneys advertise to set up living trusts for less than $1,000. The documents are generally correct but little planning is done and boilerplate documents are often used. Such documents may not result in the best overall tax or family results because estate planning opportunities may not be discussed and given due consideration.

California probate laws set the fees that attorneys and executors may charge for probate administration. An attorney or executor may accept less than the statutory fee. A court may award fees greater than the statutory fee when extra work is required as part of the probate administration. Such extra work may include the sale of property, preparation of income and estate tax returns, continuing the decedent's business, litigation, etc. The fees for the attorney and executor are based on the gross value of the decedent's assets plus income receipts and gains and losses of principal. The fee schedule for the attorney and executor is shown in Figure 1.

Thus, for a probate estate of $1,200,000 the fees payable to the attorney are $23,150 and the fees payable to the executor will be $23,150, unless waived, for example, by a family member serving as executor. For estates in excess of $25 million, the statutory fee is a reasonable amount determined and approved by the Court.

An individual who dies without a will is said to have died intestate. In such case, the state probate laws define who will receive the decedent's assets. The intestate succession rules of the state of the decedent's domicile, the decedent's permanent residence, are generally the rules that govern.

California's rules provide that all of a decedent's community property is to be distributed to the decedent's surviving spouse. A decedent's separate property will all be distributed to the surviving spouse if the decedent did not have any children, parents or siblings alive at the time of death. Generally, the surviving spouse will be entitled to half of the decedent's separate property but may receive less depending on the number of children who survive the decedent. The other half of the separate property is distributed to the children, siblings, etc. A complex set of rules provide the actual distribution scheme depending on who survives the decedent and the relationship to the decedent.

Whether an individual chooses to have a will or living trust, the estate planning opportunities will be the same. The first $675,000¹ of assets transferred by an individual to other than a spouse may be transferred free of gift and estate tax. Thus, John Doe may give his children $300,000 during his life and $375,000 at death free of gift or estate tax. Generally, any transfer to a spouse is free of gift and estate tax. (Special rules apply if the transfer is to a spouse who is not a U.S. citizen. An expert needs to be consulted before any gifts are made to a non-U.S. citizen spouse.) Any gifts in excess of the Exclusion Amount to other than a spouse will be subject to a gift or estate tax. The gift and the estate tax rates start at 37% of the value of the gift or estate and increase to 55%.

An individual may also give away $10,000 each year to any number of donees. The $10,000 gifts do not count as part of the Exclusion Amount that may be given away during one's lifetime. This is called an annual exclusion gift but only applies if the gift is a present interest which generally means that the donee has immediate rights to the property gifted.

The basic goal in estate planning is to make sure that each spouse gives away his or her Exclusion Amount in assets so that they are not subject to gift or estate tax. This is generally done by forming an irrevocable trust on the death of the first spouse. $675,000 (or greater applicable Exclusion Amount) in value is transferred to the trust. This trust is generally called a by-pass trust. The decedent's property in excess of the Exclusion Amount is transferred to the surviving spouse in a marital deduction trust or simply transferred outright to the surviving spouse. The surviving spouse may receive the income from the by-pass trust and the principal of the by-pass trust, if needed for health, education or maintaining the normal standard of living. Thus, through the fiction of the by-pass trust, $675,000¹ of assets avoid estate tax yet a surviving spouse actually has the ability to use the property for his or her basic needs. Thus, no estate tax need be paid on the death of the first spouse.

If a will or trust transfers all of the deceased spouse's property to the surviving spouse, rather than to a by-pass trust, $237,000 or more of estate tax may have to be unnecessarily paid on the death of the surviving spouse. A disclaimer may be used to avoid the estate tax but at the cost of losing the income and principal distributions from the disclaimed property.

The formation of the by-pass trust and marital trust can be accomplished whether a will or living trust is used. There are no major estate or tax differences as a result of using a living trust or a will. As explained above, certain assets such as insurance, etc., are transferred without probate, a will or a living trust. Such property may impact a decedent's estate tax liability if the property is transferred to other than the surviving spouse.

Other documents that should be considered as part of estate planning include a durable power of attorney for health care, durable power of attorney for asset management and a declaration. A durable power of attorney for health care gives an agent the authority to make health care decisions. For example, John Doe may give his wife the authority to make health care decisions. Alternatively, if his wife is elderly or ill, he may give his children or a good friend the authority to make health care decisions. The most important decision may be whether to terminate life support. For example, Mr. Doe may decide that if two doctors diagnose that he will be in an irreversible coma, his agent has the authority to terminate life support systems which artificially prolong life.

A durable power of attorney for asset management, similar to the health care durable power, gives an individual the authority to make financial or property decisions. For example, Mr. Doe may give his child a durable power of attorney to manage assets should Mr. Doe be out of town, ill, etc.

A declaration is simply a statement to a physician that heroic life support systems are not to be used in the event of an irreversible coma. The declaration directs the withholding or withdrawal of life support procedures in such event.

Anatomical gifts may be made by an individual. This permits a decedent to give his or her body or various organs for medical purposes. This should be planned in advance with close relatives. The DMV has a form which may be attached to an individual's driver's license.

IN CONCLUSION, estate planning includes the consideration of various issues such as who will be the executor of one's estate or trustee of one's trust, who will make important health care decisions, etc. Deciding whether to subject assets to probate administration or avoid probate administration by using a living trust may be one of the most important estate planning decisions for many individuals. It may not be right for everyone, apparently it wasn't for Jackie Kennedy Onassis, but knowledgeable decisions should be made.