Estate Planning Overview
What is an estate plan?
Definition: the process of putting an individual’s financial affairs in order and telling their loved ones what’s important to them.
- maximize the individual’s enjoyment of his or her estate during his/her lifetime;
- protect themselves, their loved ones, and their assets during their
- maximize the beneficiaries’ enjoyment of the estate after the
- minimize the expense and taxation that can accompany the transfer of assets; and
- transmit the individual’s wisdom and values to his/her beneficiaries.
Why do I need an estate plan?
If you don’t have a plan to deal with the consequences of your incapacity or death, someone else will have to decide for you. What will happen to your assets?
- The State of California will determine who your heirs are according to laws already in place. As a result, some of your property may go to some of the people you didn’t intend to share your estate with
- If you haven’t given prior written instructions, end of life issues concerning you that involve major medical decisions will be decided by your family members under great stress
- Your closest living relative may not be your choice to handle your affairs (for example an estranged spouse or child)
- Your children may be raised by someone who does not share your values on issues such as religion, education and personal responsibility
- The transfer of your assets could be unnecessarily expensive in terms of attorneys fees, court fees, appraisals of property, etc.
- The time involved in transferring your assets could be unnecessarily long, maybe as long as two years
What does estate planning consist of?
The first steps in estate planning are gathering information and “brainstorming”
- Determining what you own
- Exploring what you want to happen to your property in case of death or disability
- Determining who you want to handle your affairs in your absence
- Learning about tools which enable transfer of your property to your heirs
- Devising a plan tailored to your family circumstances, the nature and amount of your assets and your choices
- Gathering and organizing important records
In order to implement the estate plan, certain core documents need to be created:
Core documents of an estate plan:
- Will or Trust (with Pour-Over Will)
- Durable Power of Attorney
- Advance Health Care Directive
- Nomination of guardian for minor children (if required)
What is a trust and what are its benefits?
Definition: The holding of property by a trustee.
- The trust owns your assets but as the trustee you retain control of them. You can sell, transfer, and/or borrow against assets in the trust
- Trusts are usually set up to be fully revocable
- A trust has no impact on income or property taxes
- Medi-Cal and long term health care planning can be a part of the trust
- Trusts can address complex issues such as blended families, dependents with special needs, etc.
- Trusts allow you to manage your property both before (in the event of physical or mental incapacity) and after death
- Trusts allow you to postpone distributions of cash or assets until the time you consider appropriate (eg. dispose of property with strings attached)
- Trusts can allow assets to grow while making discretionary distributions to satisfy beneficiaries’ needs
How does a trust compare to a will?
- You can use, sell, mortgage and dispose of your property as you like during your lifetime
- The transfer of your property to your beneficiaries takes place after your death
- Creating a will or trust does not impact your income or property taxes
- A trust can create a plan to handle your assets in case of your disability and thereby avoid a proceeding to have the court appoint someone to take charge of your assets
- A will must be probated through the court to transfer your assets but a trust does not have to go through probate
- You can maintain privacy through a trust; when your will is probated all of your affairs become a matter of public record
Why should I be so concerned with avoiding probate?
- Probate fees are charged on the gross value of estate (e.g., the appraised value of your home, not your equity in your home)
- Probate fees are set by statute and are currently 4% of the first $100,000 of value; 3% of the next $100,000; and 2% on the next $800,000, etc.
- The median price of a home in Los Angeles County is nearly $800,000 according to The Los Angeles Times. Attorney fees for a $800,000 estate are approximately $19,000!
- 4% of first $100,000 = $4,000
- 3% of next $100,000 = $3,000
- 2% of next $500,000 = $12,000
- TOTAL: $19,000
*The above fees do not include executor’s commission (which is the same as what the attorney receives), “extraordinary expenses” such as the cost of selling property during probate, filing fees, bond, appraisals, etc.
- Probates take an average of 15 months to complete, during which time the grieving period is prolonged and assets are essentially frozen
- If a husband and wife own property jointly as either joint tenants or community property with rights of survivorship, when one dies and the surviving spouse doesn’t establish a trust, the property will have to be probated on the death of the second spouse
Why can’t I simply put my property in joint tenancy?
- The minute someone else is listed jointly on your property,
you have just inherited all of his or her past, present and
- You are vulnerable to your co-tenant’s creditor’s claims. What if:
- Your co-tenant is a high risk professional?
- Your co-tenant is in business with an unscrupulous individual?
- Your co-tenant causes an automobile accident and is
- Your co-tenant is faced with bankruptcy?
- Your co-tenant is involved in a divorce and their spouse wants
1/2 of the asset?
- You must act jointly to sell or mortgage the property
- Once you make someone a co-tenant, you have given them a present interest in the property which you cannot revoke without their consent
- Where bank accounts are concerned, there is nothing to prevent a co-owner from dipping into the account
How do I know if I need a trust or a will?
- Gross value of estate – if the total value of your estate (including cash, real estate, etc.) is over $166,250, property must be probated if it is not in a trust or otherwise provided for by contract (beneficiary designations on bank accounts, life insurance, annuities, retirement benefits, etc.). A trust would eliminate the need for probate
- Federal estate tax considerations may be addressed. A trust allows a husband and wife to each take advantage of their federal estate tax exemption whereas a will cannot
- Timing manner and dates of distribution – if you don’t wish to make outright gifts, with a trust you can tailor a plan to give gifts over time and with restrictions as well as avoid probate
- Pay now or pay later – you can pay a relatively small amount to set up a trust now or your heirs will pay a large portion of their inheritance to probate costs
Once I have my trust drawn up, when does it become effective?
- A trust is created on the date that it is signed and notarized
- Though a valid trust may have been created, it is useless unless it is funded
What is meant by the term “funded”?
- Funding a trust is the physical process of changing title to your assets from your name into the name of your trust, which may involve:
- Drawing up new deeds for your real estate and filing them with the County Recorder;
- Changing the beneficiary designations on your bank accounts, brokerage accounts, IRAs, etc. if consistent with the overall design of your trust
- Funding the trust is the all-important step in estate planning that is most frequently overlooked or not adequately explained by trust mills and attorneys who do not specialize in this area of the law
What is a Power of Attorney?
- A power of attorney may be used to authorize others to act on your behalf
- It can be general power or limited power
- It can take effect immediately, upon a determination of incapacity or at a future date designated in advance
- Power to act may be temporary or continuous
- Written notice of revocation is usually required or else it remains in effect until your death
- It will likely avoid the necessity of having the court appoint a conservator in the event of your disability. The disadvantages of the conservatorship proceeding are its expense and the emotional strain on participants in a public proceeding
What is an Advance Health Care Directive?
- Allows you to express your preferences as to how you wish to be treated in a variety of medical situations, in case of serious injury or at the end of life
- An advance health care directive, among other things, allows you to direct your physician to withhold or withdraw life-sustaining medical treatment in the event of terminal illness or permanent unconsciousness, or if the risks and burdens of treatment would outweigh the expected benefits. You also may direct that you receive treatment necessary to provide comfort and to relieve pain in a terminal situation
- You can decide if you desire life-sustaining treatment. Life-sustaining treatment means the use of available medical machinery and techniques, such as heart-lung machines, ventilators, and other medical equipment and techniques that will sustain and possibly extend your life, but which will not by themselves cure your condition
- Allows you to state your preferences regarding your funeral and burial arrangements
- Allows you to state your preferences regarding organ donation and autopsy