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What is Estate Planning?
While
it is difficult to contemplate your own mortality, many people find
great peace of mind from putting their affairs in order. Estate
planning is an important process that may include financial, tax,
medical and business planning aspects and which, when complete will
outline your final wishes about your children, your property and your
health care.
Estate
planning puts in place a written plan to prevent potential problems and
inconveniences to your heirs upon your death, which can include issues
ranging from court battles among family members over the custody of
minor children to devastating feuds between family members over the
distribution of assets. A comprehensive estate plan can resolve a
number of questions that arise when you die.
• What property do you own?
• Who should the property be distributed to?
• Who should be appointed guardian to care for your minor children?
• Who will be responsible for the children’s money and how and when should it be allocated to them?
• How much estate tax will need to be paid in order to transfer property ownership and can it be minimized?
• Do you want to be an organ donor and if so under what circumstances?
• What funeral and burial arrangements do you want?
Additionally,
there are many problems that arise if you become incapacitated, which
can be prevented or minimized with an estate plan that specifies not
only how your assets will be managed during your lifetime should you be
unable to manage them yourself but also the type of health care
decisions to be made on your behalf and who should make them, should
you become unable to make them yourself.
Who typically benefits from good Estate planning?
Anyone can benefit from estate planning, regardless of the size of your financial assets.
If
your estate is smaller, your plan will focus on who will receive your
property after your death, who will care for minor children and who
will manage your property and make health care decisions on your behalf
should you become unable to do so yourself.
If
your estate is larger, you may be able to additionally benefit from
planning to reduce estate taxes and to preserve assets for your
beneficiaries.
Any
estate larger than $100,000 is potentially subject to court supervised
probate. Estate planning can reduce the delay and expense of probate,
where appropriate.
What are the elements of a typical estate plan”?
Will
A
will is a written document that provides instructions for the
distribution of your property to whomever you choose, subject to
California’s community property rules. Your will does not , however,
govern the distribution of any property that passes outside your
probate estate (such as property in a trust, certain joint property,
life insurance, retirement plans, and employee death benefits) unless
it is payable to your estate. Your will designates your executor, the
person who manages your estate after death. A will is the legal
document in which you appoint guardians for minor children.
Revocable Living Trust
Trusts
are estate-planning tools that can, in certain cases, substitute for a
will, as well as help manage property during the your life. With a
revocable living trust, your assets are put into the trust,
administered for your benefit during your lifetime and transferred to
your beneficiaries, according to your instructions, after your death.
A revocable living trust starts during your life, but may be designed
to continue after your death, especially in the case of minor children.
You, as the grantor of a revocable trust, can change or revoke the
terms of the trust at any time. A revocable trust is often used as a
supplement to a will and as a vehicle to name a person to manage your
affairs in the event of temporary or permanent incapacity.
Durable Power of Attorney
A
durable power of attorney for property management allows your nominated
“attorney-in-fact” to handle financial transactions on your behalf and
manage assets that have not been previously transferred to your
revocable living trust, in the event that you become temporarily or
permanently unable to do yourself. Putting one in place prevents the
delay and expense of having to petition the court to name a conservator
on your behalf, in the event of your temporary or permanent incapacity.
Advance Health Care Directive
In
creating an advance health care directive, you nominate an agent who
can make health care decisions for you, based on your personal
preferences that you outline in the directive, should you become unable
to make these decisions on your own. The directive additionally
outlines your wishes concerning matters such as organ donation,
autopsy, disposition of your remains, burial and funeral.
What are the main benefits of setting up a Trust?
Probate Avoidance
A
revocable living trust may help avoid probate, which is a court
sponsored oversight of your estate distribution, if all assets subject
to probate are transferred into the trust prior to death. Almost
anyone with an estate of $100,000 or more can benefit from having a
living trust as estates of this size are subject to probate in
California. Probate is expensive and can cost from 2%-6% or more of
the estate's gross value in court and legal fees. Additionally, probate
is public. The value of a decedent’s estate and estate plan become
part of the public record. Finally, probate can delay the distribution
of assets to your heirs.
There
are some circumstances in which probate may be beneficial, however, as
the court is familiar with resolving disputes and will review the
distribution of the estate.
Estate Tax
The
revocable living trust also is useful for people who are subject to
estate tax. A revocable living trust does not, in and of itself, avoid
taxes. Provisions for saving estate and gift taxes can be included in
a revocable living trust or a will, however.
The
living trust can minimize the overall estate tax owed by a married
couple by fully utilizing each spouse’s Unified Credit. The Estate Tax
Credit, as mandated by Congress, currently shelters up to $3.5 million
per person from estate tax. Without proper estate planning, a married
couple may receive a single $3.5million exemption. However, if the
proper provisions are in place, upon the death of the first spouse to
die, the living trust will separate into two trusts, each of which will
receive its own $3.5 million exemption, with the result that a total of
$7 million of the couple’s estate is sheltered from estate taxes.
Family Concerns
Revocable living trusts can be structured in ways that can benefit a variety of family situations.
Re-married
spouses, with children from a previous marriage, can use a revocable
living trust to ensure kids receive their proper inheritance, while
allowing the surviving spouse to benefit from the deceased spouse’s
property.
Providing
children with sufficient funds to guide them into adulthood is a top
concern for planning families. However, leaving minor children or
young adults their inheritance outright can create a variety of
problems. California allows children of eighteen years of age to
inherit property. Without estate planning, they will receive their
inheritance, which is often a large sum of money, at this age. However
young adults have often not learned the value of work and deferred
gratification, have not attained financial planning skills, have not
refined their life goals nor have they attained their full maturity.
Because of this, receiving too much money too soon can stunt a child’s
ambition and enable him or her to fritter away an inheritance before
reaching true maturity and being able to most benefit from it.
Provisions in a revocable living trust can defer the date of
inheritance as long as you wish, while also naming a trustee to pay for
the child’s health, education, maintenance and support expenses prior
to receipt of the full inheritance. This provides invaluable oversight
to ensure that the money is not spent in an ill-advised manner, while
allowing the child the time to fully mature and the opportunity to
obtain an education and life experience.
What happens when there isn’t a will and trust?
If
you die without a will (intestate), California law will determine who
receives your property and in what percentages. California’s laws of
intestate succession reflects the legislature's best guess as to how
most people would like their assets disposed of and provides
protections for certain family members, particularly spouses and
children. The state mandated plan may or may not reflect your actual
wishes, however, and some of the protections may not be necessary in a
well functioning family setting. An estate plan allows you put your
personal preferences as to the disposal of your assets into effect.
Additionally, if the probate judge assigned to oversee the intestate
estate is unable to locate any of your relatives, your property will go
to the State of California.
Disclaimer: This article should not be construed as legal advice or legal opinion
on any specific facts or circumstances. The contents are intended for general
informational purposes only, and you are urged to consult your own lawyer
concerning your situation and any specific legal questions you may have.
Pursuant to IRS Circular 230, please be advised
that, this communication is not intended to be, was not written to be and
cannot be used by any taxpayer for the purpose of (i) avoiding penalties under
U.S. federal tax law or (ii) promoting, marketing or recommending to another
taxpayer any transaction or matter addressed herein.
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