Asset and Wealth Protection

a blog by attorneys for individuals and businesses

Your Default Estate Plan, Part II

Holocaust survivor and New York real estate developer Roman Blum left no instructions for the distribution of his $40 million fortune when he passed away in 2012. Since he had no living relatives, the entire amount is likely to revert (“escheat”) to the State of New York.

In Part I, we discussed the financial and physical consequences of the failure to set up an estate plan. In this post, we will explain how the State of California handles distribution of the assets of someone who dies “intestate” (without a valid will).

Distribution in California in the absence of a valid will

California’s laws of intestate succession outline how a person’s estate will be distributed in the absence of a valid will. Note that the term “issue” refers to direct linear descendants – children, grandchildren, great-grandchildren, etc.:

  • Surviving spouse, two or more children or their issue. The surviving spouse inherits all of the community property and quasi-community property. The surviving spouse inherits one-third of the decedent’s separate property, and the children (or the issue of any predeceased child) shares the other two-thirds. California Probate Code §§ 6401(a), (b), and (c)(3)
  • Surviving spouse, one child or their issue. The surviving spouse inherits all of the community property and quasi-community property. The surviving spouse inherits one-half of the decedent’s separate property, and the child (or their issue, if the decedent’s child has also passed away) inherits the other half. California Probate Code §§ 6401(a), (b), and (c)(2)(A)
  • Surviving spouse, no children or their issue. The surviving spouse inherits all of the community property and quasi-community property. The surviving spouse inherits one-half of the decedent’s separate property, and the decedent’s parent or parents inherit the other half. If the parents are both deceased, the parent’s issue (meaning, the decedent’s siblings or nieces/nephews if a sibling is not then living) will split the one-half separate property share. California Probate Code §§ 6401(a), (b), and (c)(2)(B)
  • Surviving spouse, no children, and no other close relatives. The surviving spouse inherits all of the community property and quasi-community property. If there are no living issue, parents, siblings, nieces or nephews, the spouse will get all of the separate property as well. California Probate Code §§ 6401(a), (b), and (c)(1)
  • No surviving spouse. If there is no surviving spouse, the entire estate will be distributed to the decedent’s children, or their issue. If there are no issue of the decedent, the decedent’s parent(s) will inherit. If the parents are both deceased, the estate will go to the parent’s issue (the decedent’s siblings or nieces/nephews if a sibling is not then living). Next in line are grandparents and their issue (the decedent’s aunts, uncles, and cousins). If there are no grandparents, aunts, uncles, or cousins, then the decedent’s stepchildren may inherit. If there are also no stepchildren, other next of kin will be sought out, with those claiming the nearest ancestor receiving a priority claim over the one-half share of the decedent’s separate property estate. If there are no next of kin, then the relatives of the decedent’s spouse will inherit. California Probate Code § 6402
  • No heirs at all. If, as in Roman Blum’s case, no heirs can be found at all, the entire estate will escheat to the State of California. California Probate Code § 6404

How "issue" inherit

Probate Code § 6402 utilizes rather strange language when explaining how issue take a deceased parent’s share: "the issue take equally if they are all of the same degree of kinship to the decedent, but if of unequal degree those of more remote degree take in the manner provided in Section 240." What this means is that descendants will share any amount of their deceased parent’s inheritance. For example, suppose you have three children – Jack, Jane and Jill. When you die, Jack was still alive, Jane had predeceased you with one child, and Jill had predeceased you with two children. Jack would inherit his share (1/3), Jane’s one child would take her share (1/3), and Jill’s two children would split her share equally (1/6 each). Expressions typically used in estate planning documents to achieve this result include “to my then living issue by right of representation,” or “to my then living issue per stirpes” (literal translation: “by root or stocks”).

San Francisco Estate Planning and Tax Firm

Too many people delay their estate plans, usually with disastrous results. An estate plan is not a death wish, it is merely a series of documents that set forth your wishes, provide your family with security - and you with peace of mind. Call the estate planning and tax attorneys at Moskowitz, LLP for a consultation.  

Your Default Estate Plan, Part I

Our October 19, 2016 post "Don’t Delay Your Estate Plan!" highlighted the colossal mess that Prince Roger Nelson (the artist formally known as Prince) left his heirs by failing to do any estate planning before his death. Prince was not the only multimillionaire to have neglected his affairs - Bob Marley’s wife spent three decades battling numerous claims on his $30 million estate, and Jimi Hendrix’s siblings spent the same amount of time fighting over licensing agreements related to Hendrix’s image.

The thought of preparing an estate plan (will, trust, power of attorney and advance health care directive) may not seem all that pleasant, but it is a crucial component of the management of your household affairs. If you don’t do you estate plan yourself, the government will decide things for you:

Management of your assets in the event of your incapacity

If you are incapacitated, and do not have a living trust and/or powers of attorney in place, a conservatorship of your person and of your estate will need to be established through the court. Any qualified person may petition for the role, with preference given to your spouse, children and other close relatives. Most actions taken on your behalf will need to be approved by the court, and periodic court hearings will take place on your condition. California conservatorship fees (court filings, attorney’s fees, fees to the conservator) are considerably higher than management of assets during incapacity that are conducted privately through a living trust.

Care of your person during your incapacity

Without an Advance Health Care Directive (a combined living will and healthcare proxy), your family will have no guidelines to follow if you are ever incapacitated and are unable to make your own healthcare decisions. The Nancy Cruzan case in the 1980s brought this important issue to national attention, when a young woman’s parents spent more than eight years in court for the right to withhold food and water to their daughter, who was in a permanent vegetative state.

Care of your minor children and their inheritance

For parents of minor children, estate planning is crucial. A living trust can provide your children with a suitable trustee to manage their inheritance until they are ready to take control of it – with specific guidelines regarding distributions for education, setting up a business, buying their first home, and designation of the age in which the principal will be paid out to them. Their guardians should be also chosen by you and named in advance in your will – if you don’t do this, guardians will be appointed by the court if their other parent is not able to care for them.

Probate and tax consequences

Without advance estate planning, your estate will likely be subject to probate (California’s fees are among the highest in the country, beginning at 4% of an estate of $150,000 or more) and it could be subject to the highest estate tax rate (40%).

In Part II, we will cover California intestate succession, i.e., what happens to your assets if you die without a will.

Keeping Your Estate Plan Current

In 2013, the U.S. Supreme Court issued a ruling that sent a clear message how important it is to keep your estate plan up to date. The case centered on a dispute between the widow of Warren Hillman and his ex-wife. Hillman, a federal employee, owned a Federal Employees Group Life Insurance (FEGLI) policy with a death benefit of $124,558. Hillman neglected to change the beneficiary designation on the policy following his divorce and remarriage, and when he passed away in 2008 his ex-wife Judy Maretta collected on the policy. Hillman’s widow, Jacqueline Hillman, sued to recover benefits.

The subsequent court battle lasted five years and went all the way to the Supreme Court. The widow argued that Virginia law revokes a divorced spouse’s beneficiary in favor of a widow or widower (Va. Code Ann. §20–111.1(A)), but the Court ruled that a federal employee’s choice of beneficiary cannot be overridden by a state statute. Hillman’s ex-wife was therefore entitled to keep the money.

The importance of beneficiary designations

Many people take out life insurance policies and set up retirement accounts, never giving a second thought to their named beneficiaries. These policies and accounts should name not only a primary beneficiary, but also an alternate/contingent beneficiary who will collect the proceeds if your primary beneficiary predeceases (dies before) you.

If you pass away without a living designated beneficiary on a life insurance policy or retirement account, the account will be paid out to your estate and will be subject to probate. Your estate will not only incur unnecessary probate fees, but your beneficiaries will be unable to roll over the retirement proceeds to their own retirement accounts – as a result, additional taxes may be assessed on the distribution.

Updating your estate plan

When your living trust is established, it will be accompanied by a schedule of assets held in trust that should be updated at least once a year. It is generally a good idea to review all of your documents every few years to ensure that they consistently reflect your wishes. As can be seen by the results of the Hillman case, documents and beneficiary designations should be updated after every major life event, such as:

  • Marriage
  • Divorce
  • Birth or adoption of a child or grandchild
  • Illness, disability or death of a spouse, child or other relative
  • Receipt of a large gift or inheritance, opening or closing a business, buying or selling a house or other major asset, or any other major change in assets and investments
  • Death or change in circumstance of your executor, trustee, or choice of guardian for your minor children

California estate planning attorneys

The estate planning and tax attorneys at Moskowitz, LLP routinely work with existing estate plans and with the development of new ones. Call our San Francisco offices at (888) 829-3325 for more information.