Estate Planning in California: Your Ultimate Guide

Talking about your future can seem worrisome–and maybe kind of superfluous.

Why plan for things you can’t control anyways? From another angle, even talking about estate matters can be downright stressful, as people might not enjoy talking about their finances (especially during unknown economic times). These are all fair and valid concerns, but they miss the core of estate planning: it is an act of radical empathy.

Planning for your future through an estate plan doesn’t need to be complex, stressful, nerve-wracking, or worrisome. It just needs to be intentional.

At the end of the day, you want to make sure that the future of your loved ones are secure by way of your estate plan.

With this empathetic framework in mind, we’ve decided to create a massive, all-in-one guide on estate planning in the state of California. If you’ve ever wondered how to start thinking about your future, this is the best place to begin.

In its most basic form, estate planning is the process of arranging the transfer of one’s assets in anticipation of their death.

This might mean naming beneficiaries on accounts or life insurance policies so that in the event of your passing, those closest to you will be able to live their lives as financially comfortable as possible.

Estate planning also focuses on strategizing the transfer of those assets in ways that are the most tax-efficient, to preserve the greatest amount of wealth possible for your loved ones.

On the other hand, estate planning is also a means to provide direction for those you love. Choosing to intentionally plan the distribution of your assets after death can mitigate stress, family breakdown, anxiety, and other negative factors that only add to the grief loved ones are facing. A well-planned estate simplifies the entire estate settlement process.

In addition to ensuring financial security and wealth distribution for your loved ones, estate planning offers two key benefits: ensuring your family is taken care of and mitigating family disputes.

Ensuring family care

One of the pillars of successful estate planning isn’t related to taxes, financials, or legal strategies: it is simply taking care of those you love. Drafting a will, for example, allows you to ensure your family will retain assets from your estate as per your wishes–not according to the intestacy laws of California.

From a different angle, not having a plan in place for helping those to make decisions and care for you when you are incapacitated may cause immense confusion and grief. Loved ones may not know how to decide on the type of care you want without your wishes formally laid out in a medical power of attorney, for example.

Even from a financial perspective, creating a comprehensive estate plan remains an act of empathy for your loved ones. With 1 in 4 Americans seeing estate planning as a greater need due to inflation, it's no surprise that planning for the future will help your family feel safer amidst economic uncertainty.

Considering the matter from a tax perspective, making strategic decisions now will help those who matter most have more financial support when they need it most. Estate planning isn’t all numbers.

Mitigating family disputes

When you correctly plan an estate, you choose which assets go where, how much is paid to whom, and effectively remove much of the “guesswork” that goes along with dealing with the death of a loved one.

It’s no secret that money can cause heirs of your estate to become greedy at worst, and misdirected at best. Leaving a will, living trust, or irrevocable trust, allows you to provide direction to your family when you aren’t there. This removes any conflicting ideas that family members may have about your last wishes that may be a major point of contention among those who loved you most.

Further, certain types of accounts can be established so as to automatically transfer ownership to the designated heir upon your death. Prudently planning your estate not only helps with family drama but also reduces their workload.

Now that we have surveyed the basics of estate planning and why it is a key act of empathy for those around you, let’s look at some of the most common estate plans used. Some of these terms may be quite familiar, and others foreign. Regardless, a comprehensive estate plan will always include at least one of the below pieces.

Last Will and Testament

A last will and testament, or “will” is a legal document that sets your wishes for your property and assets after you pass away. Through this instrument, you can appoint guardians for your children, and appoint an executor to manage your estate. If the term estate seems confusing, think of it as the collection of all your assets and property you owned at the time of your death. A will directs those around you how you want those assets to be dealt with.

When people think of a will, they might conjure up an image of an expensive and complex document, that only lawyers know how to parse. But, this isn’t the case at all. In California, there are many different types of wills. Here’s a short list of the most common:

• Holographic Wills - This is the most simple type of instrument. It is simply a hand-written document by the testator (the person who created the will) that outlines their wishes after death.

• Statutory Wills - This type of will follows a specific format and doesn’t necessarily require an estate professional to fill it out. You can find a free template of a statutory will in California under California Probate Code Section 6240 (page five is when the template begins).

Revocable Living Trusts

Similar to a will, a revocable living trust lays out conditions for a trustor to assign management of their assets to a chosen third party called the successor trustee. The conditions that trigger these trusts could be death, incapacitation, major life events, or simply the creation of the trust. The successor trustee then distributes the assets to the beneficiaries as per the terms of the trust.

Because these trusts are revocable they can be revoked or amended during the life of the trustor/grantor (the individual who created the trust), without permission from the beneficiaries and successor trustee. This allows for a large amount of flexibility in the case of life events altering a person’s assets of possible beneficiaries (e.g. you have more children).

Irrevocable Trusts

Irrevocable trusts, a popular estate planning document in California provides individuals with the means to transfer their assets to an independent legal entity - the trust itself - managed by a trustee for the express benefit of designated beneficiaries.

Notably, these trusts cannot be altered, amended, or dissolved by the grantor without obtaining consent from the beneficiaries. The inflexibility of irrevocable trusts offers significant advantages, including asset protection, estate tax reduction, and bypassing the probate process, which is particularly beneficial in California, where probate can be time-consuming and expensive.

In creating an irrevocable trust, grantors relinquish control over assets placed within it, effectively removing them from their personal estate. As a result, these assets escape estate taxes upon the grantor's passing and remain immune to claims from creditors. Despite the benefits, individuals must carefully weigh the ramifications of transferring assets into an irrevocable trust, given the decision's typically irreversible nature.

Engaging an accomplished estate planning attorney is crucial to determine if an irrevocable trust is the optimal choice and to ensure its proper structuring to meet the grantor's goals while complying with California trust regulations.

Powers of Attorney

At its most basic level, a power of attorney (POA) is a legal document that gives another person–called an agent–the right to make decisions on your behalf.

These are typically used when a person no longer has capacity to make medical decisions and requires someone to make them for them. Powers of attorney are also used when an individual requires someone else to make financial decisions on their behalf.

There are many different kinds of powers of attorney you can utilize in California, containing terms as to when they activate or the breadth of their power. Below is a brief description of each.

• Durable - These kinds of POAs are long-lasting. Once fully signed and effected, they come into effect immediately until they are revoked or destroyed.

• General - General powers of attorney are designed for financial and general decision-making. They give the agent the ability to make all financial decisions for you so long as you are in a state of incapacity–unless it is a durable POA.

• Limited - Also called a specific power of attorney, limited POAs are quite narrow to allow for only certain decisions to be made by the agent that are explicitly listed within the document.

• Financial - Similar to a general POA, financial powers of attorney only transfer financial decision-making authority to the agent.

• Medical - In the event you are incapacitated mentally a medical POA gives your agent the power to make healthcare decisions for you.

It’s crucial to note that while powers of attorney aren’t necessarily the most complex estate planning document, the legislation surrounding incapacitation in California is highly complex. If you are looking to draft a POA in California, we recommend reaching out to an estate professional.

Advance Health Care Directives

Similar to a medical power of attorney, an advance health care directive is a document that, as defined by California Probate S. 4701 is “an individual health care instruction or a power of attorney for health care.” Though an advance health care directive and a medical POA are similar, there are notable differences.

For one, it not only outlines who will be your agent to make decisions for you, but it also lets you outline the end-of-life care you want to receive, organ donation options, and choosing your primary physician for your care.

Another helpful way to think of an AHCD is to view it as an all-in-one medical care decision-making package. In California an AHCD is made up of four parts: a medical power of attorney, a living will, organ donation wishes, and a choice of a primary physician.

Special Needs Trusts

As with any other type of trust, special needs trusts (SNT) or supplement needs trusts are designed to hold and transfer funds for those that are mentally or physically disadvantaged. They help provide disabled individuals with financial help without disqualifying them for medical benefits based on their income levels, such as Medicaid, or Supplemental Security Income (SSI).

This is possible due to how the funds from the trust are classified. Typical of any other trust type, SNTs are created by a grantor–typically the person(s) seeking to help the disabled individual–have a trustee to manage the funds, and a beneficiary to receive the assets. Because these funds are not counted as personal income, the trustor will not be inadvertently disqualifying the beneficiary by increasing their annual income.

Special needs trusts that are set up by a third party that is not the beneficiary are known as third-party trusts. SNTs that are created/funded by the individual who is the beneficiary are known as first-party trusts. These are much less common, but allow disabled individuals a strategic option to control their funds to ensure their government programs stay intact.

Living Wills

Living wills are very similar to advanced healthcare directives and medical powers of attorney due to the fact they lay out your wishes as to how you want to be taken care of–should your health decline. As with living trusts, living wills are able to be revoked or amended throughout the creator’s lifetime as they see fit. A living will usually comes into effect once you have reached a level of health decline. However, this legal document is flexible enough for you to change your wishes if your health improves. Living wills are another strategic method to ensure your wishes are met when they can’t be communicated.

There are many varied legal instruments used to ensure an estate plan is properly created and executed. At its core, estate planning is based on relieving the stress and financial burden of your passing by preparing your wishes for your health, finances, and family members after your death. Now that we have examined the legal pieces involved in such an endeavor, let us turn to the core elements any successful estate plan will contain.

Designation of Beneficiaries for Retirement Accounts & Life Insurance Policies

As noted above, a beneficiary is anyone you designate to receive assets or property from various sources. When it comes to retirement accounts and life insurance policies, making sure you appoint beneficiaries to receive your assets in case of your death is key.

Luckily, making this change doesn’t need to involve complex legal instruments, just signing off to state who will receive assets from the account or policy.

Keep in mind that there are two kinds of beneficiaries you can elect: primary and contingent. A primary beneficiary is the first person to receive your assets from the account/policy should something happen to you. A contingent beneficiary is the person designated to receive these assets should the primary beneficiary die before, or at the same time, as you. Making sure to have both kinds of beneficiaries elected is a prudent idea.

If a beneficiary is not named, it could be unclear how your assets will be dealt with at your death. If you hold funds in a 401(k), your assets will likely be subject to probate and not be available for quite some time.

Naming a Guardian for Minor Children

Another core aspect of any good estate plan involving parents is the naming of guardians for children.

A guardian is someone appointed to care for a child, and manage their property, while still allowing the parents to keep parental rights. In the context of estate planning, naming a guardian is a way to ensure your children are properly taken care of no matter what may happen to you and your partner.

One way to also plan for any eventuality is to appoint emergency guardians. These are legal guardians whose authority as such comes into play when a crisis occurs–rather than you or your family members trying to navigate it and go to court.

In such an emergency, the emergency guardian(s) will be able to make medical decisions for the child, keep them enrolled in school, and help them with any financial issues.

Making Medical Decisions on Behalf of Another Person

Another component of smart estate planning is preparing those around you to take care of you in the event something should happen. Rather than leaving your wishes unknown, or even not properly communicated, setting up a medical power of attorney, advanced health care directive, or living will, will allow your family members to immediately care for you as you would have wanted.

This component of a successful estate plan is centered on empathy. No one wants to try and wade through complex medical procedures and decisions not knowing how their loved one would want to be treated. Making your medical wishes known is key to planning your estate wisely.

Arguably the most costly and lengthy part of the estate administration process is probate. This process is whereby the decedent’s will is verified (if applicable) and ensures their assets are distributed according to their wishes or the laws of the state. Unfortunately, even if a will was in place, if any property was held in the name of the decedent upon their death, probate is required.

Because of this, an effective estate plan will not only have a will but also focus on key ways to avoid or lessen the probate process. Two of these strategies are utilizing living trusts and joint tenancy ownership structures.

Transferring Assets to a Living Trust

One of the less complex ways to avoid probating your assets is by placing them in a living trust. Because of the flexibility inherent in a revocable living trust, you will still be able to use and benefit from the assets while you are still alive. But, because the assets are no longer in your name, they will not need to be probated under California law for them to be transferred to the beneficiaries.

Having your assets/property in a living trust may also confer the following benefits:

• Lower tax rates after death

• Can be managed by a professional to increase income

• Only requires a single document to implement

• If assets were owned in other states, they can be transferred into the trust to avoid ancillary probate

Living trusts in California are arguably one of the most efficient and non-complex steps to completely avoid probate on certain properties and assets. However, it is important to keep in mind that not all assets should be placed into a trust given some of the tax consequences that may result.

For example, transferring a 401(k) into a living trust will likely require a withdrawal and thus trigger income tax that could have otherwise been avoided. If you’re planning on moving assets into a living trust, we recommend meeting with one of our estate accountants.

Joint Tenancy Ownership

Another sophisticated way to avoid probate for certain assets in your estate is by holding property as a joint tenant. Joint tenancy is a special type of ownership recognized in California that allows two or more people to hold property in equal shares. When one of the co-owners passes away, their share of the property goes directly to the remaining party without having to go through probate.

In the case of married partners owning property together, the right of survivorship allows property owned by both of them to transfer to the other without the need for probate. Section 682.1 of California’s civil code outlines this type of property transfer.

Although, there is one stipulation that you must be aware of when dealing with property held in joint tenancy: the joint tenancy will override any will or trust agreement in place that states otherwise. It is imperative that you take care to understand exactly where your property will go upon your passing and why, especially when co-ownership is involved.

Transfer On Death (TODD)

In the realm of estate planning in California, transfer on death deeds also abbreviated: TODDs serve as a valuable tool for streamlining the transfer of real estate assets to designated beneficiaries. By utilizing a TODD, property owners can avoid potential complications associated with the probate process and ensure a smooth, efficient transition of ownership. Moreover, this estate planning mechanism maintains the grantor's flexibility, as they retain the right to make changes to the transfer as they see fit.

While we at ClearEstate think absolutely everyone should have an estate plan to help their loved ones make the best of a hard situation in the future, some demographics are at risk of facing less-than-optimal situations without a plan in place.

Adults with Property or Assets

Anytime assets are involved, an estate plan should be, too. Because any assets owned are subject to probate after death, if you want to avoid or reduce the complex–and highly expensive–probate process, an estate plan is the proper approach.

From another angle, if you’re a single adult with property in your name, you could be putting your friends and family members in a tough situation if they aren’t aware of your wishes regarding those assets. Creating an estate plan brings peace of mind to you, and your loved ones.

Married Couples and Domestic Partnerships

If you are married or in a domestic partnership, chances are you could be at risk for your property/assets not going where you want them to be. The chance of this happening also increases when you have had previous marriages or domestic partnerships and property could still be owned jointly–with someone you are not currently with.

If there are children in the picture, making sure that their appropriate guardians are listed is also essential. In the event something were to happen to both you and your partner, your children could end up with someone you may not have chosen.

At its core, estate planning is ensuring your wishes are properly met and left to legislation or chance, and that those wishes are met with the least amount of fees and complications possible.

Is it possible? Yes. Is it simple? Probably not.

Our team of estate planning experts has ample amounts of experience with California regulations to make sure your wishes are met and your family is taken care of. Book a free consultation today; no strings attached.