Estate Planning Nuts and Bolts and Avoiding Probate, with Attorney Jacqueline Yu

0:03 So, it's one thing to accumulate a bunch of assets and feel like you've provided for your family or yourself in case you can't work anymore. You might be able to, but accessing those assets and how much net you get to keep versus paying to the state various fees, taxes, and to third parties, attorneys, the courts. All of the are factors into accumulating the wealth that you want at the end of the rainbow. I'm excited to have today Jacqueline Yu who in is attorney specializing in estate planning, helping people who have assets keep those and then do what they want with them when they're done. Jacqueline, thanks for joining us today.

0:37 Thanks for having me, Bill. What do you think are one of two biggest surprises people discover when they accumulate assets and it's time to distribute or it's time to rely on them and they find out that they without planning they missed out on some big opportunities?

0:52 I think the two main things is avoiding probate because their asset wasn't titled correctly in into a trust. or if they have a real estate investment, it's not titled into an entity, but they forget that the entity should have been assigned to the trust. So, it's not enough to have an LLC or partnership own the piece of property. You have to have that added step to assign that interest into a trust to avoid probate. So, there's big surprise if you know, once someone passes, they go to an attorney to help them administer the estate and now they have to go through a whole probate proceeding which is time-consuming and costly because there are statutory fees involved. the second surprise that I see people you know, experience if they don't have an estate plan is the opportunities of tax planning because they didn't have the right trust in place to minimize their estate or they didn't have the right characterization of their property in place to get a tax basis step up, is what we call it. You know, so when you pass, whatever was your cost basis, usually it's the original purchase price of your home, plus cost of improvements, that's your original basis. When you die, if you own it, if you own it, then you could get a basis step up, but if it's titled in joint tenancy, for instance, or, separate property, and the married couple didn't, really intend that property to be separate, they treated it as community, then you may lose out on what we call a double basis step up, and what that means is, if it's community property, and you titled it community property first, before you transferred it to a trust, whichever spouse dies first, both halves of the spouses interest in the property gets a 100% basis step up.

2:49 And that's the value that you missed out on, or the opportunity you missed out on, because you didn't characterize the property correctly based on the titling.

2:59 Okay, so you just launched three golden nuggets here. I'm going to go back and try to take them one by one, and break them down a little bit. So, the first one you mentioned, this is the classic, right? I don't need to do a probate because I have an estate plan, and then they discover, oh, whoa, the property is still titled in my name, John and Mary Smith. So, I know in California we have a unique opportunity in some cases called a Heggstad petition.

3:22 -huh. That's really like a probate, right? You still have to file a lawsuit. yeah. You got to hire an attorney, you got to go to court, it still costs a lot of money. so, talk about when you do an estate plan, how do you make sure, can you make sure, that the assets are titled into the state, or the if like buying a lock box, you put the things in the lock box and spin the lock, versus leaving them outside the lock box?

3:47 I mean, first and foremost, we have to be comprehensive with our estate planning, and, it sta- it, I'm sorry to say, but when you do start an estate plan, you also have to do your own homework as a client. You have to let your attorney know what your assets are from the very beginning. So, when your attorney hands you a questionnaire to fill out, it's really to your best interest to fill it out as comprehensively as possible. Don't leave out anything, and if you think you may be leaving out something and it's certain asset, ask your attorney, "Should I add this in?" And more likely than not, your attorney is going to say, "Just throw it in there. Let's have everything in there and let's go over it together which asset should be in the trust, which asset may not need to be titled to the trust because it requires a beneficiary designation. And for tax purposes, it does need to be out of outside of the trust like retirement accounts. That's tax deferred. So, generally speaking, you don't want to title that into the trust from the beginning. However, to avoid probate, you do want to make sure there's a beneficiary designation in place. So, that is first and foremost the key to trying to prevent a potential probate down the road. And after you've created your estate plan, after you've signed it and you've titled assets to the trust, any future assets you acquire, if based on your attorney's instructions, usually your attorney will provide you with a summary of what belongs in the trust, what doesn't belong in the trust. Make sure it's titled in the name of the trust or run it by your attorney to make sure that it's the correct titling.

5:28 I remember I got this advice from attorney a couple of years ago in episode. And I'm as I'm talking to him, I'm looking over my shoulder which had the file cabinet that kept my trust in. I used to keep it in the file cabinet over my shoulder. And I remember thinking, "Oh my gosh, I just opened the securities account and now I had a beneficiary, so it wasn't such a problem. But still, it should be titled in my trust just, you know, for protection and it wasn't. So, during the episode I'm like writing a note to myself, "Make sure you get the assets moved over in the trust." But, it's so easy to forget because you write you write a plan, you figure you put the work in, you write the check for the money to pay for it, and you figure you're done. But, really you're not done. You have to be aware that any changes are going to affect your plan.

6:06 Right. It does require maintenance. It's like having a car, you know, your personal vehicle you know, bring it into the garage for a checkup for tuneup. It's the same thing for your estate plan. You can't just set it aside in a file cabinet, lock the key, and that's it because your life changes. Your circumstances change. You need to review it you know, periodically to see are all my assets in the trust? Do I have beneficiary designations? Or does these do these distributions still make sense? My kids are all grown up now. why do you know, perhaps you may not want to keep it all in trust for their lifetime unless there are asset protection concerns. Like, for example, if they get married, you want to keep those assets in trust to keep it a separate property. So, those are the things you always need to look into every now and then.

6:58 Yeah. And so, that requires, I guess calling back your attorney every 5 or so years or whenever the changes make and say "This change happened to me. Does it do I need to redo the trust?" I imagine sometimes the answer's yes, sometimes the answer's no. Is there ever case where enough time has elapsed where you might say, "Well, you know type of trust we did 5 or 10 years ago is different than now or the laws changed on these important issues. It's worth redoing it or it's worth restating some in key provisions." Is that part of the process of maintaining a trust as well?

7:27 Absolutely. Especially when the laws change, right? And 10 years ago, the exemption was significantly lower. And when I say exemption, we're talking about how much can you give to anyone without triggering a 40% estate tax. So, years ago, it was a million dollars, then it went up to five million dollars, and then after the One Big Beautiful Bill Act, now it's up to 15 million dollars per person, and it gets adjusted for inflation every year. And back in the day when the exemption was significantly lower, estate planners used different types of trust structures where when the first spouse dies, then half of the assets, if it's community, half, and then the separate property of the deceased spouse goes into a separate irrevocable trust. Sometimes we call that a B trust or a bypass trust, exemption trust. Those are very similar terms that we use for an irrevocable trust that holds the deceased spouse's assets. And so, back in the day, that's what we used to minimize the estate taxes when the surviving spouse dies, right? and this was before what we have now, which is called the portability election, where when one spouse dies, the first spouse, and they didn't use up their entire exemption amount, then now the surviving spouse has the ability to elect to transfer whatever was the unused exemption of the deceased spouse and add it to their exemption amount. So, now they have a much higher exemption amount when the surviving spouse passes. We have much more flexibility these days because of changes in the law. So, now, especially if, you know, there's a married couple who has who had an estate plan 10, 15 years ago, it certainly needs to be done redone entirely because the structure needs to be changed. We need to provide more flexibility.

9:26 Yeah, the laws change, circumstances change, too, but laws also change that can hurt you or help you, but you need to apply the right tools at the right time. So, the secondary you talked about was that there people who I'm in real estate you have investors all the time who buy properties and entities like LLCs.

9:43 [snorts] And it's interesting because I don't know that it's widely known or settled law. I mean, I'm not an attorney, so I can't really answer the law part but maybe there's something you can comment on. when a estate owns property in an LLC, it's one thing for the estate to sell the shares of the LLC versus the estate selling the property. And so as a real estate agent when I sell property I have a client who owns the LLC, you know, we provide the documents and they sign on behalf of corporation and they sell the property. In the state you have a administrator executor who plays that role. And the question comes in when the court requires confirmation of sale for real estate,

10:33 -huh. does the court is the court confirmation required for the sale of LLC shares versus selling the actual real estate. And I've seen a I you know, again, I'm a real estate agent I have to defer to the attorney, obviously. I've seen attorneys go both ways on that. Some require

10:52 Right. would require court confirmation and some say, "No, we're not really selling the property. We're just going to sell the shares of that LLC." And in fact, you can even sell it to let's say a trust or some other entity and then bypass it. W- So, talk a bit about owning assets in LLC. Obviously, the best practice is to have the ownership owned by the trust. But talk about the cases when if you can when it's not, what's your practice or what's your sense of what would happen when you have an LLC where it's owned by a decedent? Does the estate then need to have if it's a limited authority case, court authority or is it they can sell the shares of the LLC and maybe sell to their trust or other third party.

11:36 Sure. So, for me anyways with my practice, I do purely estate planning and transactional works. I don't go to court. I don't do any probate administration type of work. But, in terms of the what I can speak to is, you know, what are the benefits of using an LLC and owning real estate versus having the trust own the real estate directly. And a lot of it is ease of administration, right? Because now it's really the LLC that owns the real property. And so, if in the event, you know, you need to do a sale of that property, you still have the legal authority through the LLC to sell that property. It's through the operative operation agreement of the LLC or the partnership agreement, right? The legal authority's already there. It's spelled out in the entity's agreement. versus if the dece- decedent's estate or the trust owns the property, now it's governed by the trust agreement. Or in this case, if it's a probate administration, then yes, in that case, it's the decedent's estate that owns that real estate. In that case, you may need court approval for that real property sale. So, it really depends on which governing instrument, which terms govern the sale of that property. Is it through an entity agreement? In that case, you may not need court approval. Or is it owned directly by the estate? And in that case, where the court has supervision over the administration of the estate, you may need court approval.

13:19 And then the LLCs I have other advantages, obviously, of liability and banking issues and things like that. So, there's other reasons why you do that. So, again, that's why you need to consult in the planning stages of I guess you're trading off certain flexibilities. There's a cost to the LLC. There's a maintenance cost to

13:35 Mhm. filing returns and such. So, I guess you must do some sort of balancing act between the risks, rewards, costs, and benefits, and then ultimately, I guess the client has to make a decision with you, with your advice, as to what the best format is for them.

13:49 Exactly. And it also comes into play when you have, you know, several children who are going to end up owning that piece of real estate. And now there's co-ownership. It's more administratively easier if you have it owned through an LLC because now you have a governing instrument through the operating agreement or the partnership agreement that would spell out how the property's going to be managed, if, let's say, one child, one co-owner wants to sell their interest in the property, they can easily do that through that operating agreement.

14:27 And the beauty is the operating agreement has the rules spelled out. I had a case where the decedent passed and ownership of property and the other partner, you know, in this case didn't want to sell. I said, "Well, that's not your choice. You have an agreement. You signed this. These are the rules." And the in this case it was a probably estate, you know, they wanted to sell the property and based on the rules in the agreement, you either have to match the price or you know, sell your interest. And so, that's why it's so powerful to have those operating agreements. So, do you create do you create LLCs for clients? Is that something they bring to you when they have their estate plan and then you just manage what happens with it?

15:02 So, I review the LLC operating agreements and the partnership agreements. I do work alongside business lawyers and a third-party entity formation firms that have their own in-house attorneys to prepare those entity agreements. But I do review them to make sure that whatever provisions are in those agreements are consistent with my client's estate plan. And so if there's a right of first refusal there in the operating agreement, who's the who's the holder of that right of first refusal, and we want to make sure if the family wants to keep it within the family, then we need to make sure the co-owners through that entity are the family members that who are intended to hold that property down the road.

15:51 So again, you mentioned your practice that you don't do probate litigation, you don't do probate administration, you do estate planning. Do you do trust administration when somebody you've a plan for So what that means when you create a plan for a client and then they're deceased or perhaps incapacitated, they come back to you or something comes back to you to say, "Hey, can you help us with this? So-and-so's passed, so-and-so's incapacitated. What do we what do we do?" [laughter]

16:15 Absolutely. So what does that look like for you? Are you typically is is there somebody who's appointed as successor trustee and you're empowering them and advising them or do you more do you often refer them to a third party to help them with administration? What does it What's the process of administering a trust look like?

16:34 So if it's a family member or trusted friend, colleague who is named as the successor trustee, then I would assist that trustee with administering that the trust whether it's an irrevocable trust that was created by the client during their lifetime or is is it a part of the postmortem administration, meaning it's a trust that was created after the client has passed away. and so in that case, the continuation depending, of course, on the trustee's choice of asking me to continue to represent them in the trust administration, there is that continuation from estate planning to administration when I can now assist the trustee with administering the trust. And really, the whole point of it is to implement what, you know, this what we call the settlor, the one who created the trust, intended the trust to be administered. what are the terms? What are the objectives of that trust? We want to make sure that it's being implemented. So, my goal as that attorney for the trustee is to make sure that we do, you know, in actuality implement those terms, making sure that the beneficiaries are taken care of, making sure that the assets that were instructed to be sold, like real estate, some of my clients want to make sure that the real properties are sold, you know, within a few years after they pass away, that we want to make sure that that is completed.

18:04 So, one of the topics that I say the main topic that seems to affect all industries is the encroachment or movement towards or implementation of artificial intelligence and computer technology in their industries. And I think all industries have kind of like a two-pronged challenge. On one, you know, empowered consumers kind of overstate their abilities. And you know, I think we all face that ourselves individually, right? When I ask a question ChatGPT about my health, I don't start scolding the doctor and telling him how to undo his 20 years of medical experience. I But on the flip side, I think it makes me more informed patient and helps me form good questions that I can ask about and get more information on that I'm curious about. I see the same thing with real estate and with estate planning that obviously you could create an estate plan with ChatGPT in seconds. Whether it would work or not, that's a whole different question. Sometimes it would, sometimes it wouldn't. and probably wouldn't be customized to you unless you took the time to do it like you would as attorney. Talk about how you see this challenge or opportunity in your practice today. What's the real experience you're seeing as a client with incoming I'm sorry as an attorney with incoming clients? Are they challenging you more? Are they helping themselves by being prepared more?

19:26 And then how's it affect your practice as far as being able to deliver information to your clients? It goes both ways. On the one hand, it can serve as an opportunity as an aid to the client for them to better understand the whole process of estate planning, what things to consider. So in that sense from the educational part of it does become a benefit for somebody coming in and just having a better understanding of estate planning. But that's where it should stop. Right? Because you cannot really highly rely on AI to look at the nuances of what type of provisions to include in a trust agreement. when a client wants to do a DIY of their estate plan and start just trusting an AI to provide all the provisions, it doesn't mean that it covers everything that needs to be covered. For instance, if let's say you want to give a share of the trust to you know, John Smith but didn't put after that, well, what happens if he doesn't survive you? Then who gets it? If there's nothing else in place that called that creates a significant ambiguity in the trust agreement and may lead to litigation because we didn't have clear-cut instructions on what happens to the distribution of the trust estate.

20:54 That's where your attorney comes in. That's where an attorney who had you know, went to law school, have years of experience under their belt can come in and assist you to make sure that the terms of your trust are as airtight as it can be and protect it from any potential litigation in the future.

21:14 I can only imagine that a chatbot is going to recommend somebody with I happen to have two siblings. One's a one's a brother, one's a sister. I can imagine my sister, you know, going to ChatGPT and say, "Oh, yeah, have Bill and Steve, you know, be co-trustees." Now, we get along real well. But, I can just imagine, you know, we didn't grow up in we grew up fighting all the time. So, I can imagine that the chat sounds great. Oh, yeah, just split the duties equally between the siblings. That way they both have half the job. And the reality is an attorney, I'm sure you experience it probably works sometimes, but there are times where those two kids who couldn't cut a piece of cake and argue which was a fair side, they're not going to agree on the distribution of a multi-million dollar estate plan.

21:58 Exactly. And I mentioned flexibility in the beginning where you always have to look at your estate plan, you know, every now and then because part of the drafting involves, okay, how is this going to play out? Who are the decision-makers? And in practicality, are they going to get along? And if they don't get along cuz they're named as co-trustees, is there a tiebreaker? Is there somebody who can step in and say, "Okay, you two stop fighting. I have the final decision." or it's by majority vote so we can move the trust administration along as smoothly as possible. So, oftentimes when I draft my trust agreements, there's going to be if it's two co-trustees, there's there's a tiebreaker. Or if we want to exclude the assets from the beneficiary's estate through a lifetime trust that we've created under the trust agreement, we may want to include what we call a special trustee whose really job it is is to exercise certain powers for flexibility purposes. Maybe to amend certain terms of the trust if laws change in the future or administratively it may make sense to tweak a little bit this administrative provision so that we can complete the objective of the settlor, right? So, a lot of these things it's really your attorney who's going to advise you and think up of the best way to draft your estate planning documents so that one, it can avoid as much as possible potential litigation.

23:31 Two, it's as clear as possible to reflect what your objectives are. And three, that it has the right tax provisions in place under current law to make sure that you can efficiently administer the trust through the most tax efficient way, right? And you can't rely on AI and sometimes they go through a hallucinations and they bring in, you know, statutes that don't even apply when dealing with an estate plan and you always have to verify that. Don't rely on AI for that.

24:07 You can't rely on AI for creating websites. I redid my company website using AI. It was fantastic. It was cheaper. It was It's so much better than what I had before that I was paying money for. But they had little weird stray graphic, you know, text remarks in the in the weirdest places that I had to go back and edit and say, "Wow, this was like a hundred of a hundred of good stuff, but there's a couple weird little things here that you know, in a court of law those weird things become objections or problems or impediments." One [snorts] of the other areas that I think that requires an experienced attorney rather than just knowing the law is how assets get disposed because it's one thing, you know, when someone comes to you when they're in their 40s and they have a real estate portfolio they're gathering and they're young and they're vibrant and they're managing everything and everything's, you know, easy and they have a you know, management company behind them. And then, you know, when they're 65, 70, 75, some of the properties are run down, require kind of special management, require, you know, properties have gotten, you know, rental properties have gotten very specialized in who can effectively manage properties. Or a company, you know, it was very vibrant in their cash in their 40s, but in their 70s, maybe it's, you know, still worth a lot of money, but it's all equipment and you know, you know, maybe needs to be sold.

25:25 How you dispose of assets might change from the time you write the plan until the end. And if you don't foresee that, then you have to have a decision maker who's able to kind of fill in that gap. And I guess that's why we're selecting the right trustee would be so important. And that you have to maybe review the decision 5, 10, 15 years down the road, or you're stuck with somebody who's not the right person to help you.

25:46 Exactly. And that's where the succession planning comes in. And so, with my practice, it's it covers everything from the estate plan, what are the governing instruments, what is the family constitution, to the trust administration. Now we need to implement the terms of that estate plan. But also part of it is succession planning as to the real estate investments. We want to make sure that the right decision makers are in place in the operating agreement, in the partnership agreement, and that it is consistent with the terms of the trust that owns the interest in that entity. Right? And so if we want the trustee to also be maker in the entity to manage the real estate, you need to make sure that name of the trustee is in there in the operating agreement. If you have two different names, that causes a lot of issues down the road.

26:39 Right. Right. Well, I again, I think that's where it comes down to getting the right attorney rather than the right LLM or the right AI program because sometimes people, you know, will answer, then, you know, I you probe a little deeper, get a little more information about the relationship and find out, well, maybe my first answer is wrong. Maybe it should be somebody else. Maybe it shouldn't be my son. Maybe it should be, you know, my attorney or my accountant or my, you know, business partner, whatever. It should be somebody else who knows how to handle these things. I think I see I see real estate portfolios have gotten much more complicated in my career to where, you know, a family could pass down property easily 20, 30 years ago. Now, these property managements are so sophisticated to be effective that the children obviously aren't equipped to handle it. And even with a property management company, they don't really know how to make the right decisions or oversee the management properly. And so, I increasingly I'm seeing a need for somebody to step in and say, "This is really out of your league. You're better off just getting some triple net properties or other investments and getting the cash flow than you are if you're not really involved in real estate." So, again, I think that comes from experience, not from a book or not from a from a computer program.

27:50 Exactly. And then I come across questions from my clients. Well, when they directly own the investment property and they're they're just starting their estate plan, "Well, I have a property management company who's managing my investment property. Now that I'm forming this LLC or partnership agreement, why do I now need to name a general partner or why do I need to name a manager? I already have a property management company." Those are two different things. Right. Property management companies are more likely than not willing to act as managers of your LLC because or general partner of your partnership for liability purposes first and foremost. And because that entity doesn't just own the real estate, it owns the bank accounts, it owns bunch of other assets that may be thrown in there for purposes of, you know, the investment, right? And so, you the decision lies on the client to really think about, okay, who is going to be that trusted person other than myself to manage the real estate when I'm gone, when I lose capacity, and I can't just rely on the property management company who's more likely than not they're willing to act as the agent for the manager or the general partner, but they're not going to hold that responsibility as the manager or GP on the partnership. You they're going to have to you know, think through critically that succession plan.

29:21 Well, look, I Jacqueline, I know we've had a chance to chat before. I know you also were on my colleague and client Kevin Bemel's podcast. You're always such a pleasure to talk to you. I just feel like when I first start talking to you every conversation, well, you're way too nice to be an attorney. I think the answer is you found a niche where being nice is and being communicative is really critical piece of the puzzle. And comes across as very approachable. I really appreciate you're sharing with us today not just the technical legal side, but I think some of the emotion and some of the color behind those decisions. So, you thank you so much for sharing. For those who want more time with Jacqueline, her website we have up is jacquelineyulaw.com. And then if you want to reach her phone number [phone number shown on screen]. If you're driving, can't pick that up. Feel free to reach out to me. I'd be more than glad to make an introduction. Be honored to make an introduction. Jacqueline, thank you again so much for your time today. I think it also sets really high standards on what kind of services people should expect for their estate plan rather than just something off the shelf or really a personal relationship with an attorney that can help them maximize their goals. So, thank you so much for your time today.

30:33 It's my pleasure, Bill. Thank you for the opportunity. And thanks for tuning in. This is [The Estate Planning Podcast]. We get together every episode usually with estate planning attorneys, though today we I think we got really focused on helping create the documents up front which is really interesting to hear the considerations details and the process of getting that done. I hope you liked it. Please give me your comments, feedback, like, share. reach out to me at Bill Gross Probate on social media. As always make today your best day ever. Thanks so much.