1. What is Estate Planning?
Estate planning is a process. It involves people - your family, other individuals and in many cases charitable organizations of your choice. It also involves your assets and all the various forms of ownership and title that those assets may take.
As you plan your estate, you will consider:
- How your assets will be managed for your benefit if you are unable to do so
- When certain assets will be transferred to others, either during your lifetime, at your death, or sometime after your death
- To whom those assets will pass
Estate planning also addresses your welfare and needs, planning for your own personal and health care if you are no longer able to care for yourself. Like many people, you may at first think that estate planning is simply the writing of a will. But it encompasses much more. As you will see, estate planning may involve financial, tax, medical and business planning. A will is one part of that planning process, but other documents are needed to fully address your estate planning needs. The purpose of this pamphlet is to summarize the estate planning process and how it can address and meet your goals and objectives.
As you consider it further, you will realize that estate planning is a dynamic process. Just as people and assets and laws change, it may well be necessary to adjust your estate plan every so often to reflect those changes.
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2. What is Involved in Estate Planning?
In starting to consider your estate plan, you should ask yourself the following questions:
- What are my assets and what is their approximate value?
- Whom do I want to receive those assets - and when?
- Who should manage those assets if I cannot, either during my lifetime or after my death?
- Who should have the responsibility for the care of my minor children if I become incapacitated or die?
- If I cannot take care of myself, who should make decisions on my behalf concerning my care and welfare?
With tentative answers to these questions, you are ready to seek the advice and services of a qualified lawyer who will discuss with you the various documents which can comprise your estate plan and will provide advice concerning such issues as title to assets, taxes, and the prudent management of your estate.
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3. Who Needs Estate Planning ?
Whatever the size of your estate, you should designate the person who, in the event of your incapacity, will have the responsibility for the management of your assets and your care, including the authority to make health care decisions on your behalf. How that is accomplished is discussed below in this pamphlet.
If your estate is small in value, you may focus simply upon who is to receive your assets after your death and who should be in charge of its management and distribution. If your estate is larger, your lawyer will discuss with you not only who is to receive your assets and when, but also various ways to preserve your assets for your beneficiaries and to reduce or postpone the amount of estate tax which otherwise might be payable on your death.
If one does no planning, then California law provides for the court appointment of persons to take responsibility for your personal care and assets. California also provides for the distribution of assets in your name to your heirs pursuant to a set of rules to be followed if you die without a will; this is known as "intestate succession." Contrary to popular myth, if you die without a will, everything does not automatically go to the state. Your relatives, no matter how remote, and in some cases the relatives of your spouse, will have priority in inheritance ahead of the state. Nonetheless, they may not be the people you would want to inherit from you; therefore, a will is the preferable approach.
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4. What Is Included in my Estate?
Your estate consists of all property or interests in property which you own. The simplest examples are those assets which are in your name alone, such as a bank account, real estate, stocks and bonds, and furniture, furnishings and jewelry.
You may also hold property in many forms of title other than in your name alone. Joint tenancy is a common form of ownership which takes assets away from control by will or living trust. Beneficiary designations on securities accounts and bank accounts are alternatives which must be carefully considered as well. Finally, assets which have beneficiary designations, such as life insurance, IRAs, qualified retirement plans and some annuities are very important parts of your estate which require careful coordination with your other assets in developing your estate plan.
The value of your estate is equal to the "fair market value" of each asset that you own, minus your debts including a mortgage on your home or a loan on your car.
The value of your estate is important in determining whether, and to what extent, your estate will be subject to estate taxes upon your death. Planning for the resources needed to meet that obligation at your death is another important part of the estate planning process.
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5. What Is a Will?
A will is a traditional legal document which is effective only at your death to
Name individuals (or charitable organizations) to receive your assets upon your death (either by outright gift or in trust)
Nominate an executor, appointed and supervised by the probate court, to manage your estate, pay debts and expenses, pay taxes, and distribute your estate in an accountable manner and in accordance with your will
Nominate the guardians of the person and estate of your minor children, to care and provide for your minor children
Assets or interests in property in your name alone at your death will be subject to your will and subject to the administration of the probate court, generally in the county where you reside at your death.
The State Bar has published a pamphlet entitled "Do I Need a Will?" which provides more detailed information about wills. For information on how to order a complimentary copy, call 415-538-2280. Or visit the State Bar's Web site - www.calbar.ca.gov - where you'll find the State Bar's consumer education pamphlets, as well as information on ordering them.
For some people a California Statutory Will may be appropriate. This is a "fill in the blank" form which can be used by any California resident competent to make a will. In any event, you must execute your will in the manner required by California law. Failure to do so may invalidate your entire will. You should discuss the requirements of properly executing your will with a qualified lawyer.
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6. What Is a Revocable Living Trust?
A revocable living trust is also commonly referred to as a revocable inter vivos trust, a grantor trust or, simply, a living trust. A living trust may be amended or revoked by the person creating it (commonly known as a "trustor," "grantor," or "settlor") at any time during the trustor's lifetime, as long as the trustor is competent.
A trust is a written agreement between the individual creating the trust and the person or institution named to manage the assets held in the trust (the "trustee.") In many cases, it is appropriate for you to be the initial trustee of your living trust, until management assistance is anticipated or required, at which point your trust should designate an individual or bank or trust company to act in your place. The terms of the trust become irrevocable upon the trustor's death. Because the trust contains provisions which provide for the distribution of your assets on and after your death, the trust acts as a substitute for your will, and eliminates the need for the probate of your will with respect to those assets which were held in your living trust at your death.
You should execute a will even if you have a living trust. That will is usually a "pour over" will which provides for the transfer of any assets held in your name at your death to the trustee of your living trust, so that those assets may be distributed in accordance with your wishes as set forth in your living trust.
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7. What Is Probate?
Probate is the court-supervised process developed under California law which has as its goal the transfer of your assets at your death to the beneficiaries set forth in your will, and in the manner prescribed by your will. It also provides for the relatively quick determination of valid claims of any creditors who have claims against your assets at your death. At the beginning of a probate administration, a petition is filed with the court, usually by the person or institution named in your will as executor. After notice is given, and a hearing is held, your will is admitted to probate and an executor is appointed. If you die "intestate" (that is, without a will), your estate is still subject to probate court administration and the person appointed by the court to handle your estate is known as the "administrator."
If the assets in your name alone at your death do not include an interest in real estate and have a total value of less than $100,000, then generally the beneficiaries under your will may follow a statutory procedure to effect the transfer of those assets pursuant to your will, subject to your debts and expenses, without a formal court-supervised probate administration.
A probate has advantages and disadvantages. The probate court is accustomed to resolving disputes about the distribution of your assets in a relatively expeditious fashion and in accordance with defined rules. In addition, you are assured that the actions and accountings of your executor will be reviewed and approved by the probate court.
Disadvantages of a probate include its public nature; your estate plan and the value of your assets become a public record. Also, because lawyer's fees and executor's commissions are based upon a statutory fee schedule, the expenses may be greater than the expenses incurred by a comparable estate managed and distributed under a living trust. Time can also be a factor; often distributions can be made pursuant to a living trust more quickly than in a probate proceeding.
The advantages and disadvantages of a probate proceeding should be discussed thoroughly with your estate planning lawyer.
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8. To Whom Should I Leave My Assets?
Once you have determined who should receive your assets at your death, your estate planning lawyer can help you clarify and appropriately identify your beneficiaries. For instance, it is most important to clearly identify by correct name any charitable organizations you wish to provide for; many have similar names and in some families, individuals have similar or even identical names.
It is also important for you to consider alternative distributions of assets in the event that your primary beneficiary does not survive you.
As for beneficiaries who by reason of age or other infirmity may not be able to handle assets distributed to them outright, trusts for their benefit may be created under your will or living trust.
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9. Whom Should I Name as My Executor or Trustee?
After your death, the executor of your will and the trustee of your living trust serve almost identical functions. Both are responsible for ensuring that your wishes, as set forth in your will or living trust, are implemented. Although your executor is generally subject to direct court supervision, both the executor and the trustee have similar fiduciary responsibilities. The trustee of your living trust may assume responsibilities under that document while you are living. While you may act as the initial trustee of your living trust, if you become incapable of functioning as a trustee, the designated successor trustee will then step in to manage your assets for your benefit. An executor or trustee may be a spouse, adult children, other relatives, family friends, business associates or a professional fiduciary such as a bank. You should discuss your choice with your estate planning lawyer. There are a number of issues to consider. For example, will the appointment of one of your adult children cause undue stress in his or her relations with siblings? What conflicts of interest are created if a business associate or partner is named as your executor or trustee? Will the person named as executor or successor trustee have the time, organizational ability, and experience to do the job effectively?
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10. How Should I Provide for My Minor Children?
A minor child is a child under 18 years of age. If both parents are deceased, a minor child is not legally qualified under California law to care for himself or herself. In your will, therefore, you should nominate a guardian of the person of your minor children to supervise that child and be responsible for his or her care until the child is 18 years old.
Such a nomination can avoid a "tug of war" between well-meaning family members and others if a guardian is required.
A minor is also not legally qualified to manage his or her own property. Assets transferred outright to a minor must be held for the minor's benefit by a guardian of the child's estate, until the child attains 18 years of age. You should nominate such a guardian in your will as well. In providing for minor children in your estate plan, you should consider the use of a trust for the child's benefit, to be held, administered and distributed for the child's benefit until the child is at least 18 years old or of some other age as you may decide. You may also consider a custodian account under the California Uniform Transfers to Minors Act as an alternative in making specific gifts to minors.
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11. When Does Estate Planning Involve Tax Planning?
Estate taxes are imposed upon an estate which has a net value - in 2002 and 2003- of $1 million or more. Under curent law, that amount will increase to $1.5 million in 2004 and 2005, and to $2 million in 2006 through 2008. For estates which approach or exceed this value, significant estate taxes can be saved by proper estate planning, usually before death and, in the case of married couples, before the death of the first spouse. Estate planning for taxation purposes must take into account not ony estate taxes, but also income, gift, property and generation-skipping taxes as well. Qualified legal advice about taxes should be obtained during the estate planning process.
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12. How Does the Way in Which I Hold Title Make a Difference?
The nature of your assets and how you hold title to those assets is a critical factor in the estate planning process. Before you change title to an asset, you should understand the tax and other consequences of any proposed changed. Your estate planning lawyer will be able to advise you.
Community property and separate property
If you are married, assets earned by either you or your spouse while married and while a resident of California are community property. On the other hand, a married individual may own separate property as a result of assets owned prior to marriage or received by gift or inheritance during marriage. There are significant tax considerations which need to be addressed in the estate planning process with respect to both community property and separate property. There are also significant property interests to consider.
Separate property can be "transmuted" (that is, changed) to community property by a written agreement signed by both spouses and drafted in conformity with California law.
It is important to seek competent legal advice when determining what character your property is and how the property should be titled.
Joint Tenancy Property
Regardless of its source, if a property is held in joint tenancy, it will pass to the surviving joint tenant by operation of law upon the death of the first joint tenant. On the other hand, property held as community property or as tenants in common, will be subject to the will of a deceased owner.
Community property with right to survivorship
Married couples may hold title to their community property in their names as "community property with right of survivorship." Property held in that manner at the death of the first spouse is not affected by that spouse's will, but passes instead to the surviving spouse.
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13. What Are Other Methods of Leaving Property?
A number of assets are transferred at death by beneficiary designation, such as
- Life insurance proceeds
- Qualified or non-qualified retirement plans, including 401 (k) plans and IRAs
- Certain "trustee" bank accounts
- "Transfer on death" (or "TOD") securities accounts
- "Pay on death" (or "POD, assets, a common title on U.S. savings bonds
These beneficiary designations must be carefully coordinated with your overall estate plan. Your will does not govern the distribution of these assets.
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14. What If I Become Unable to Care for Myself?
If you do not make any arrangements in advance, a court-supervised conservatorship proceeding may be required if you become incapacitated.
Conservatorships are proceedings which allow the court to appoint the person responsible for your care and for the management of your estate if you are unable to do so yourself.
You should, therefore, select the person or persons you wish to care for you and your estate in the event that you become incapable of managing your assets or providing for your own care.
With respect to the management of your assets, the trustee of your living trust will provide the necessary management of those assets held in trust. However, to deal with assets which may not have been transferred to your living trust prior to your incapacity or which you may receive after incapacity, a durable power of attorney for property management should be considered. In such a power, you appoint another individual (the "attorney-in-fact") to make property management decisions on your behalf. The attorney-in-fact manages your assets and functions much as a conservator of your estate would function, but without court supervision. The authority of the attorney-in-fact to manage your assets ceases at your death.
An advanced health care directive/durable power of attorney for health care allows your attorney-in-fact to make health care decisions for you when you can no longer make them yourself. It may also contain statements of wishes concerning such matters as life sustaining treatment and other health care issues and instructions concerning organ donations, disposition of remains, and your funeral.
15. What Is a Living Trust?
The "living trust" described in this brochure is a revocable living trust. It is sometimes referred to as a revocable inter vivos trust, or a grantor trust. A living trust may be amended or revoked by the person creating it (commonly known as a "trustor," "grantor" or "settlor"), at any time during the trustor's lifetime, as long as the trustor is competent.
A trust is a written legal agreement between the individual creating the trust and the person or institution named to manage the assets held in the trust (the "trustee.") In many cases, it is appropriate for you to be the initial trustee of your living trust, until management assistance is anticipated or required.
In a living trust agreement:
- The trustee is given the legal right to manage and control the assets held in the trust.
- The trust provides for the persons or charitable organizations ("beneficiaries") who are to receive the income and principal on or after the trustor's death.
- The trustee is given guidance and certain powers and authority to manage and distribute the trust property in a prudent fashion. The trustee is a "fiduciary." A fiduciary is one who occupies a position of trust and confidence and is subject to strict responsibilities, usually higher standards of performance than one who is dealing with his or her own property. Without the trustor's express written permission, the trustee cannot use trust property for the trustee's own personal use, benefit or self-interest. One must hold the trust property solely for the benefit of the beneficiaries of the trust.
A living trust can be an important part - in many cases, the most important part - of your estate plan. The State Bar has published a pamphlet entitled "Do I Need Estate Planning?" which provides more detailed information about estate planning. You may obtain a free copy of the pamphlet by sending a stamped, self-addressed envelope with your request to the address listed below.
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16. What Can a Living Trust Do for Me?
A living trust can provide for the private management of your assets if you choose not to act as trustee, or when you are unable to do so, by the person or persons whom you appoint as trustee. When you are incapacitated, your trustee can assume responsibility for your assets in an accountable fashion, and manage them for your benefit without direct court intervention or supervision. At your death, the trustee acts much as an executor would, gathering your assets, paying valid debts and claims and taxes, and distributing your assets as you have directed in your living trust.
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17. Should Everyone Have a Living Trust?
No. The greater the risk of incapacity or death, the greater the need for a living trust. The greater the value of your assets, particularly if they include real estate, the greater the need for a living trust. A young, healthy individual with few assets probably does not need a living trust right now. Nor does the real estate developer who is frequently buying, selling or refinancing his or her real estate holdings want a living trust to hold those assets. On the other hand, many people recognize that a living trust will be helpful in the future, and set up a living trust now to have it in place in the event of an accident or sudden illness.
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18. How Does a Living Trust Help if I Am Incapacitated?
If you are acting as trustee of your own living trust and become incapacitated, whoever you have named as your successor trustee will assume the responsibility for managing your assets on your behalf. If your assets are not in your living trust, someone else must manage them. How this is accomplished may depend on whether the assets are your separate or community property. If you are married, assets earned by either you or your spouse while married and while a resident of California are community property. On the other hand, a married individual may own separate property as a result of assets owned prior to marriage or received by gift or inheritance during marriage.
In California, community property may be managed by your spouse, if he or she is competent. If not, or if you own separate property or are unmarried, assets held in your name alone at the time of your incapacity are subject to the jurisdiction of the probate court in a proceeding called a conservatorship. The probate court, at a hearing, determines that, among other things, you are substantially unable to manage your own financial resources or resist fraud or undue influence, and names a person to assume responsibility for the management of your assets (a "conservator") accountable to the court on a regular basis.
That person may be someone whom you have nominated to act as conservator, or, if you have not, may be your spouse or another family member. While conservatorship proceedings are designed to provide you with protection and security at a time when you are vulnerable or incapable of managing your assets, the proceedings are public in nature. Because of the substantial court intervention, a conservatorship proceeding can be costly as well. Compared with a well-managed living trust conservatorship proceedings may also be less flexible in managing real estate or other interests.
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19. How Does a Living Trust Help at my Death?
Assets held in your living trust at your death can be managed by the trustee of your living trust and distributed in accordance with your directions in the trust. The trustee is also accountable to your beneficiaries for the trust assets held for their benefit after your death. The trust is not under the direct management of the probate court at and after your death and, therefore, the value and the nature of your assets and the identity of your beneficiaries do not become a public record. At your death, however notice must be given to all of your heirs and to all beneficiaries of your living trust, advising them, among other things, of their right to obtain a copy of the living trust.
If your assets were in your name alone at your death, then they would be subject to probate. Probate is the court-supervised process developed under California law which has as its goal the transfer of your assets at your death to the beneficiaries set forth in your will, and in the manner prescribed by your will. At your death, a petition is filed with the court, usually by the person or institution named in your will as executor. After notice is given and a hearing is held, your will is admitted to probate and an executor is appointed. A full inventory of the assets held in your name alone at your death is filed with the court and the probate continues until your estate is ready for distribution and the court approves the final distribution of your estate. Probate can take more time to complete then the distribution of your trust following your death. Assets held in a living trust can be more readily accessible to beneficiaries than those in a probate. The cost of a probate is often greater than the cost incurred by a comparable estate managed and distributed under a living trust.
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20. Who Should Be the Trustee of My Living Trust?
As noted, many people act as their own trustee until their incapacity or death. Others determine that they need financial assistance and management of their assets simply because they are too busy or too inexperienced or simply don't wish to have the responsibility of day-to-day management of their financial affairs.
Perhaps the most important decision for you to consider is your choice of a trustee to act in your place. As you have read, your trustee will have considerable authority and responsibility, is not under direct court supervision, and will assume that responsibility either during your lifetime (if you so choose), if you become incapacitated, or at your death.
A trustee may be a spouse, adult children, other relatives, family friends, business associates or a professional fiduciary. The professional fiduciary may be a bank or trust company which must be licensed by the State of California. You may also provide for co-trustees. You should discuss your choice with an estate planning lawyer. There are a number of issues to consider. For example, will the appointment of one of your adult children cause undue stress in his or her relations with siblings? What conflicts of interest are created if a business associate or partner is named as your trustee? Will the person named as successor trustee have the time, organizational ability, and experience to do the job effectively?
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21. What Are the Disadvantages of a Living Trust?
Because living trusts are not under direct court supervision, a trustee who does not act in your best interests or in a prudent fashion accountable to you or your beneficiaries may, in some cases, be able to take advantage of the situation to a greater extent than would be possible had the trustee been under direct court supervision, which provides such safeguards as court accountings and, in some situations, a bond.
In some cases, the cost of preparing a living trust and other estate planning documents will be higher than the cost of simply preparing a will. However, in more complex estate plans, the difference in cost may not be significant.
Once created, the trust must be "funded ." The funding of a trust is simply the transfer of assets from your own name to whomever is acting as trustee of your living trust - be that you or some other person. Deeds to real property must, therefore, be prepared and recorded, bank accounts transferred, and stock and bond accounts or certificates transferred as well. These are not necessarily expensive tasks but they are important ones and require some paperwork to complete in order to make your trust effective.
People in certain businesses (for example, real estate development) sometimes find that having a living trust creates excessive problems in the operation of the business when it is necessary to deal with a third party such as a title company.
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22. If I Have a Living Trust, Do I Still Need a Will?
Yes. Your will affects any assets which, for one reason or another, were held in your name alone at your death and not in your living trust or in some other form of ownership. With the living trust, your will usually contains as its primary provision for the distribution of your estate, a "pour over" provision, which simply directs that any assets held in your name be transferred at your death to your living trust. Of course, a probate is not avoided with respect to those assets which are transferred to your living trust by your will.
Your will may also nominate the guardians of the person and estate of your minor children, to care and provide for them.
23. Does a Living Trust Save Estate Taxes?
No. While a living trust may contain provisions which can postpone, reduce or even eliminate estate taxes, similar provisions could be placed in a will to accomplish the same tax planning.
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24. Does a Living Trust Pay Income Taxes?
Not during your lifetime. For so long as you are either the trustee or a co-trustee, no income tax returns are required to be filed for your living trust. The taxpayer identification number for the trust is your Social Security number, and all income and deductions related to the assets held in the trust are reportable on your individual income tax returns. When you are no longer a trustee of your trust, then information returns must be filed by the trustee, reporting all of the income and deductions relating to the trust assets to the IRS and attributing them to your personal return; no additional tax is assessed by reason of the living trust. After your death, the income taxation of the living trust is similar to that applicable to a probate estate.
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25. What Other Estate Planning Documents Should I Have?
A durable power of attorney for property management deals with assets which have not been transferred to your living trust prior to your incapacity or which you may receive after your incapacity. In such a power, you appoint another individual (the "attorney-in-fact") to make property management decisions on your behalf. This document, however, cannot replace the living trust, inasmuch as, among other things, it cannot dispose of your assets in accordance with your wishes at your death.
A durable power of attorney for health care allows your attorney-in-fact to make health care decisions for you when you can no longer make them yourself. It may also contain statements of wishes concerning such matters as life sustaining treatment and other health care issues and instructions concerning organ donation, disposition of remains and your funeral.
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26. What Other Kinds of Trusts Are There?
Testamentary trusts are trusts which are set forth in your will and which, therefore, cannot provide for any management of your assets during your lifetime. Testamentary trusts can, however, provide for young children and others who need management of their assets after your death.
Irrevocable trusts are trusts which, immediately upon their creation, are not amendable or revocable by you. These are generally tax-sensitive documents. Some examples include irrevocable life insurance trusts, irrevocable trusts for children, and charitable trusts. A qualified estate planning lawyer should be consulted with respect to these documents.
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27. How Do I Transfer Assets to My Living Trust?
Once your trust has been signed, a very important task remains to be accomplished. In order to achieve your objectives of avoidance of court-supervised conservatorship proceedings if you are incapacitated or probate at your death, assets must be transferred to the trustee of the living trust. As discussed above, this is known as "funding" the trust.
A living trust can hold both separate and community property. If community property is held in a living trust, then both spouses are the grantors. Care must be taken to carefully designate the property held in a living trust by married persons as either separate or community property.
If you own real estate in another state, it is appropriate to transfer title to that asset to your trust, to avoid probate in the other state; you should consult with a lawyer in that state to prepare the deed and to advise you with respect to such a transfer. As for California real estate, a California lawyer should prepare the deed and advise you about the transfer of that asset.
Your lawyer can also advise you as to the title and process of transferring other assets. For example, you should consider changing beneficiary designations on life insurance to the trust. As for beneficiary designations on a qualified plan, such as a 401 (k) or IRA, serious income tax issues require the advice of a qualified professional concerning the appropriate beneficiary designation on those assets.
Provided by the State Bar of California