Estate Planning / Family Matters

Estate Planning is defined as the process of determining how your wealth and assets should be transferred to the heirs of your choice: your children, grandchildren, friends, families, charitable causes, etc., and then deciding which legal tools and structures to use to best meet your estate planning goals. Although lawyers and others like to call this process Estate Planning, a better description would be Inheritance Planning.

An estate plan is to ensure that you are taken care of the rest of your life and that your wealth is transferred to the people you want to have it. A good estate plan ensures these goals are accomplished with as much efficiency and as little cost as possible. A good estate plan also can smooth family relationships, while a bad estate plan makes bad family relationships worse and even turns good relationships into bad ones. After establishing how you want your estate’s assets to be distributed, you can consider ways to reduce taxes and avoid probate.

An estate plan addresses the management and distribution of an individual’s property and financial obligations after their death, with financial tools such as wills, revocable living trusts and power of attorney.

Estate planning is one of the most important actions a person can take to provide for their loved ones before dying. Estate planning helps transfer property and provides life insurance, disability income and long-term care insurance to family, friends and loved ones with few legal hurdles.

There are two reasons that a Revocable Living Trust fits most estate planning needs. First, the revocable living trust facilitates probate fee avoidance. Probate fees are substantial; for example, probate fees can exceed $40,000 for an estate with a gross value of $1,000,000.00. Any assets that are transferred into the trust during the life of the client are not included in the probate estate and avoid inclusion in the probate fee calculation. Second, trust administration is usually simpler, faster and more private than estate administration through a public probate process.
Establishing a revocable living trust is a wise decision for the vast majority of Californians, thus, revocable living trusts are very common and very mainstream. Banks and financial institutions are completely familiar with the trust method of holding assets and are very accommodating in helping clients to change title to their assets.

Incorporating a Trust into your Estate Plan:

– Avoids, or significantly reduces the need for probate.
– Manages property in the event you are incapacitated.
– Prevents children from irresponsibly spending an inheritance.
– Ensures the surviving spouse is taken care of.
– Saves time and money for your loved ones when you pass away.
– Easily amendable as life changes.
– Easy to fund.
– No additional tax consequences after setup.

If you pass without an effective estate plan in place in California and have assets exceeding $150,000 (as indexed for inflation), your estate will need to be administered by the state through a process called probate. Probate is the legal process of passing property from a deceased person to their beneficiaries or heirs. Probate is necessary to transfer title to property such as bank accounts, real property and automobiles which the decedent owned at death. A personal representative, an executor, if named in the will, or an administrator, if appointed by court, will be approved by the court to probate the decedent’s estate. The personal representative’s duties include notifying all creditors of the decedent’s death, filing an inventory and appraisal listing all assets, and the court-appointed referee will appraise the assets. The personal representative also must file the decedent’s tax returns and pay any taxes from the estate. 

The probate process can be very cumbersome, time-consuming, public and expensive. A properly created estate plan can avoid the process in its entirety and save the decedent’s beneficiaries a great deal of time and money. The probate process generally takes a year to complete so long as the procedures detailed in the paragraph above are properly completed. An additional drawback of the probate process is that probate entirely lacks privacy as the filings with the probate court are a matter of public record. Most importantly, the probate process can be very expensive, especially in the case of larger estates.

(The probate code provides for a sliding scale for attorney and administrator fees. Probate Code Section 10810 provides that the attorney for the personal representative shall receive fees equal to 4% of the first $100,000 of the estate; 3% on the next $100,000; 2% of the next $800,000; 1% on the next $9,000,000; one-half of 1% on the next $15,000,000; and a reasonable amount to be determined by the court for all amounts above $25,000,000. Probate Code Section 10800 provides that the personal representative is also entitled to fees in the same amount. Additional fees may be awarded for extraordinary work.)

A properly drafted and executed estate plan can avoid the probate process. The deceased person’s assets will be in the trust and the successor trustee will have the task of distributing the assets according to the trust’s instructions. This process is referred to as trust administration and although it is not without some cost, it will generally result in substantial savings when compared to the probate process. The trust administration is also carried out in private and it is not made public record like probate. There are no statutory waiting requirements to distribute assets of a trust unlike probate’s requirements. Also, there is no court supervision, so the successor trustee does not have to go to court and receive permission before acting.

There are a number of events that may require you to update your estate plan. A change in your family relations, economic position, employment status and external factors requires an evaluation of your estate plan to determine whether it should be changed. See the lists of examples below.

Changes In Family Relations

• Marriage
• Dissolution of marriage
• Death of a spouse
• Changes regarding a child, grandchild or another beneficiary
• Birth of a child
• Death of a child
• Marriage of a child or dissolution of a child’s marriage
• Adoption of a child
• Medical issues of a beneficiary
• Substance abuse issues of a beneficiary
• Financial irresponsibility of a beneficiary

Changes In Economic Position and Employment Status

• A substantial increase or decrease in asset values
• Change in insurability
• Change of employment
• Change in business interests
• Property acquired
• Change in health or health of spouse
• Retirement

External Changes

• Changes in laws
• Change of residence out of state
• Death of executor, trustee or guardian

It is especially important for married couples with estate plans executed prior to 2012 to have their estate plans reviewed in light of the introduction portability of the deceased spouse’s unused estate tax exclusion. Many estate plans drafted before this change require the mandatory funding of a bypass trust upon the death of the first spouse, which may lead to unnecessary administrative expenses and taxes.