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  • A Fresh Approach. Comprehensive Estate Planning.
  • A Fresh Approach. Comprehensive Estate Planning.
  • A Fresh Approach. Comprehensive Estate Planning.
  • A Fresh Approach. Comprehensive Estate Planning.

What is Estate Planning?

Put simply, estate planning is the process of creating and implementing a plan to make sure that both you and the people you love will be taken care of if you are ever unable to take care of yourself and your family. Estate planning involves two things: articulating and appointing. You will articulate specific wishes and will appoint specific people to carry out those wishes. The process of estate planning is summarized in this diagram:

First Step of Estate Planning: Articulate.

Second Step of Estate Planning: Appoint.

Many people mistakenly believe that estate planning is just for the wealthy, but that couldn't be further from the truth – in fact, every individual who has reached the age of eighteen years should have some type of estate plan in place, regardless of asset level. Estate planning is not merely about who gets what when you’re gone – rather, estate planning involves creating, implementing, and maintaining a plan to ensure that you are taken care of if you are ever alive but incapacitated and to make sure that your spouse and children are taken care of if you are deceased.

Many people mistakenly believe that estate planning is just for the wealthy, but that couldn't be further from the truth…

 

Dealing with Incapacity.

Estate planning involves putting legal documents in place to ensure that if you are ever incapacitated, a person of your choosing (your spouse, child, parent, friend, etc.) will be able to make financial, health care, and personal care decisions for you. Without proper estate planning, if you are ever incapacitated, your loved ones will be forced to go through a lengthy and expensive court process to get legal authority to manage your assets, pay your bills, pay for your family’s needs, consent to medical procedures for you, and make health care and personal care decisions on your behalf (for example, to terminate life support or choose an assisted living facility and health care providers for you).

What if there comes a time that you can’t take care of yourself? Without the proper documents, your family will have to go to court, spending time and money, for the right to take care of you.

 

Nominating a Guardian.

Estate planning also involves putting legal documents in place to ensure that if you are deceased, a person or persons of your choosing will raise your children. In the absence of formally nominating a guardian, your parents/in-laws/siblings/friends will be forced to petition a court (again, a time-consuming and expensive venture) for the right to care for your children. An effective estate plan can also provide guidance regarding how you would like your children to be raised and how the money available for your children’s care should be used. In addition, an estate plan can give authority for day-to-day care of your children to one individual while giving authority for financial decisions for your children to another trusted individual – thus providing checks and balances and ensuring that there is oversight regarding the money that should be used to raise your children.

How would you raise your children? An effective estate plan can provide guidance to your guardian.

 

Distributing Your Estate.

There are three options when it comes to estate planning:

1. Do Nothing.

2. Execute a Will.

3. Execute a Revocable Living Trust as the Basis of Your Estate Plan.

If you choose to DO NOTHING, this will happen on your death:

  • California law will kick in and will determine who inherits from you, how much they inherit, and when they inherit;
  • Your estate (if valued at more than $150,000) will have to go through a formal probate before it can be distributed, which will eat up your beneficiaries’ time and money;
  • Your beneficiaries may have to pay a hefty estate tax bill upon inheriting from you.

If you EXECUTE A WILL ONLY (and no revocable living trust), this will happen on your death:

  • Most likely, your minor beneficiaries will receive their entire inheritance, no strings attached, upon reaching the age of eighteen;
  • Your estate (if valued at more than $150,000) will have to go through a formal probate before it can be distributed, which will eat up your beneficiaries’ time and money;
  • Your beneficiaries may have to pay a hefty estate tax bill upon inheriting from you.

Executing a REVOCABLE LIVING TRUST allows you to avoid the pitfalls described above for people who either take the “do nothing” approach or who only execute a will. In addition to avoiding probate and minimizing estate taxes, a thoughtfully prepared revocable living trust empowers you to determine who inherits from you, how much they inherit, and when they inherit. This is particularly useful if you will have minor children or young adults as beneficiaries.

In the absence of an estate plan that says otherwise, a minor child beneficiary will inherit their full share upon turning eighteen years of age. As you can imagine, receiving a large inheritance at a young age could actually harm that child by perhaps railroading plans for continuing education, not to mention encouraging unwise spending practices.

This is also often the case for young adult beneficiaries. For many young adults, they are set up for success if they receive an inheritance spread out over a number of distributions, e.g., 1/3 upon earning a Bachelor’s degree or reaching the age of twenty-five years, 1/3 upon reaching the age of thirty years, and 1/3 upon reaching the age of thirty-five years. For many young adults, wisdom and maturity develop with each successive distribution, and lessons are learned, thereby inspiring confidence in handling money and a setting them on a path toward a lifetime of success with handling finances.

An inheritance should help, not hurt, your heirs. A thoughtfully prepared estate plan helps you to accomplish this.

 

A well-designed estate plan also allows your estate to AVOID PROBATE altogether. By creating a revocable living trust and funding that trust with your assets, you are empowering your trustee to manage or distribute all of your assets on your death with no court involvement whatsoever, thereby saving time and money for your beneficiaries.

Finally, a properly-drafted estate plan empowers you and your spouse to MINIMIZE or even ELIMINATE ESTATE TAXES altogether, which, depending on the size of your estate, could save your beneficiaries tens of thousands, hundreds of thousands, or perhaps even millions of dollars of your hard-earned money.

Proper estate planning empowers your heirs to minimize or even eliminate estate taxes.

 

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What Is Probate?

Probate is a court-supervised process, used to transfer assets from a deceased person to a living person. In California, probate is unavoidable if a person dies without the proper estate planning documents in place and owns more than $150,000 in assets. The only way to avoid probate is by implementing a well-designed estate plan, and many people are surprised to find out that a will does NOT avoid probate. You have probably heard that you should avoid probate at all costs, but do you know why? There are several reasons; most notably, probate restricts your family’s access to your assets, is expensive, time-consuming, public, and completely unnecessary.

…many people are surprised to find out that a will does NOT avoid probate.

 

Restricted Access To Assets.

During probate, your family has no immediate access to cash. Your assets will be frozen, and therefore unavailable to your spouse, children, or anyone who depends on you financially. There is petition that can be filed with the probate court to free up some assets, however, going through that process is expensive and time-consuming. It can take weeks or months to gain access to those assets; in the meantime, your family is forced to foot the bill for all of your final costs without using your money – funeral, utilities, property insurance, taxes, storage fees, attorney’s fees, etc. Avoiding probate allows your family to have immediate access to cash to pay bills.

Probate is expensive.

The fees for probate are set by law, and are calculated based on the GROSS VALUE of your estate, i.e., based on everything you own, but nothing you owe. That means that if you purchased a home worth $1 million, and you have a $990,000 mortgage, the probate fee will be calculated based on the $1 million value, not based on your $10,000 equity. The estimated probate fee would be $46,000 to transfer your $10,000 equity!

The following chart represents sample estate values and estimated probate fees.
Gross Value of EstateEstimated Probate Fee*Probate Fee with Proper Estate Planning
$250,000 $16,000 $0
$500,000 $26,000 $0
$1,000,000 $46,000 $0
$2,500,000 $76,000 $0
$5,000,000 $126,000 $0
$10,000,000 $226,000 $0

*The probate fee represents the fees authorized by the California Probate Code, and additional special fees may apply. The probate fee is split between the attorney that handles the probate of your estate and your executor/administrator. The probate fee is not a tax; it is charged in addition to any assessed estate taxes. These estimated probate fees are for informational purposes only and should not be considered nor relied on in place of legal advice; these fees are a general estimate based on California Probate Code Section 10810's general provisions and are not fact-specific.

Probate Is Time-Consuming.

In California, probate can last anywhere from nine months to two years, and as mentioned above, during that time, all of the assets are frozen, and therefore not available to your spouse/children/people you support. On top of this, most actions needed to wrap up an estate have to be approved by a judge. It can take months to get a judge's approval of the executor’s decision to continue or sell the deceased person’s business, repair or sale of real estate, and the abandonment of worthless assets (e.g., a timeshare with high annual maintenance fees). While the executor is waiting for approval, expenses associated with assets such as these eat away at the value of the estate. Avoiding probate saves your family time, money, and hassle.

Probate Is Public.

This means that anyone can find out what your assets were, what your debts were, and who is inheriting from you. Anyone can, at any time, go to the courthouse and obtain a copy of a deceased person’s probate file. Avoiding probate keeps your family and financial information private.

Probate Is Completely Unnecessary.

There is a much easier, faster, less stressful, less expensive, and completely private way to transfer your assets on your death. The best way to avoid probate is by creating and funding a revocable living trust. In particular, if you create a living trust and transfer ownership of your assets to your trust, your property is transferred at death by contract rather than under the laws of probate. Probate laws apply only if there is no living trust in place - that means that if you have a will but no trust, or have no will and no trust, your estate will go through probate.

The best way to avoid probate is by creating and funding a revocable living trust.

 

Why Do You Need a Living Trust?

A living trust, also called a revocable living trust, is an agreement between you, the creator of the trust, and you, the owner and manager of the trust estate. You, as owner and manager, agree to hold title to property and manage the trust property for the benefit of the beneficiaries of the trust (you are also the beneficiary). A living revocable trust is named this way because it goes into effect when you are alive and can be changed or revoked at any time while you are alive and well. In your trust document, you will nominate a back-up trustee to manage or distribute all of the property of the trust if you are incapacitated or deceased.

There are four primary benefits of creating a revocable living trust:

1. A revocable living trust empowers your estate to avoid probate.

2. A revocable living trust helps you plan for the possibility of incapacity.

3. A revocable living trust helps you to protect your beneficiaries by allowing maximum flexibility and control over the distribution of your estate.

4. A revocable living trust allows you to minimize estate taxes and expenses to your beneficiaries.

A Revocable Living Trust Empowers Your Estate to Avoid Probate.

Probate is a court-supervised process, used to transfer assets from a deceased person to a living person. In California, probate is unavoidable if a person dies without the proper estate planning documents in place and owns more than $150,000 in assets. The only way to avoid probate is by implementing a well-designed estate plan, and many people are surprised to find out that a will does NOT avoid probate. You have probably heard that you should avoid probate at all costs, but do you know why? There are several reasons; most notably, probate restricts your family’s access to your assets, is expensive, time-consuming, public, and completely unnecessary.

…many people are surprised to find out that a will does NOT avoid probate.

 

Restricted Access to Assets.

During probate, your family has no immediate access to cash. Your assets will be frozen, and therefore unavailable to your spouse, children, or anyone who depends on you financially. There is petition that can be filed with the probate court to free up some assets, however, going through that process is expensive and time-consuming. It can take weeks or months to gain access to those assets; in the meantime, your family is forced to foot the bill for all of your final costs without using your money – funeral, utilities, property insurance, taxes, storage fees, attorney’s fees, etc. Avoiding probate allows your family to have immediate access to cash to pay bills.

Probate Is Expensive.

The fees for probate are set by law, and are calculated based on the GROSS VALUE of your estate, i.e., based on everything you own, but nothing you owe. That means that if you purchased a home worth $1 million, and you have a $990,000 mortgage, the probate fee will be calculated based on the $1 million value, not based on your $10,000 equity. The estimated probate fee would be $46,000 to transfer your $10,000 equity!

The following chart represents sample estate values and estimated probate fees.

Gross Value of EstateEstimated Probate Fee*Probate Fee with Proper Estate Planning
$250,000 $16,000 $0
$500,000 $26,000 $0
$1,000,000 $46,000 $0
$2,500,000 $76,000 $0
$5,000,000 $126,000 $0
$10,000,000 $226,000 $0

*The probate fee represents the fees authorized by the California Probate Code, and additional special fees may apply. The probate fee is split between the attorney that handles the probate of your estate and your executor/administrator. The probate fee is not a tax; it is charged in addition to any assessed estate taxes. These estimated probate fees are for informational purposes only and should not be considered nor relied on in place of legal advice; these fees are a general estimate based on California Probate Code Section 10810's general provisions and are not fact-specific.

Probate Is Time-Consuming.

In California, probate can last anywhere from nine months to two years, and as mentioned above, during that time, all of the assets are frozen, and therefore not available to your spouse/children/people you support. On top of this, most actions needed to wrap up an estate have to be approved by a judge. It can take months to get a judge's approval of the executor’s decision to continue or sell the deceased person’s business, repair or sale of real estate, and the abandonment of worthless assets (e.g., a timeshare with high annual maintenance fees). While the executor is waiting for approval, expenses associated with assets such as these eat away at the value of the estate. Avoiding probate saves your family time, money, and hassle.

Probate Is Public.

This means that anyone can find out what your assets were, what your debts were, and who is inheriting from you. Anyone can, at any time, go to the courthouse and obtain a copy of a deceased person’s probate file. Avoiding probate keeps your family and financial information private.

Probate Is Completely Unnecessary.

There is a much easier, faster, less stressful, less expensive, and completely private way to transfer your assets on your death. The best way to avoid probate is by creating and funding a revocable living trust. In particular, if you create a living trust and transfer ownership of your assets to your trust, your property is transferred at death by contract rather than under the laws of probate. Probate laws apply only if there is no living trust in place - that means that if you have a will but no trust, or have no will and no trust, your estate will go through probate.

The best way to avoid probate is by creating and funding a revocable living trust.

 

A Revocable Living Trust Helps You Plan for the Possibility of Incapacity.

As was mentioned previously, as long as you are alive and well, you are the trustee, or owner/manager of all of the property of your trust. If, however, you are ever in the position where you are living but are unable to make financial decisions for yourself or pay your own bills, your back-up trustee is then allowed to step in and manage your assets in your place and on your behalf (e.g., paying for your care, your mortgage, insurance, the needs of your children, etc.). In the absence of this arrangement, if you were to find yourself without capacity and with no one authorized to manage your finances, your loved ones would be forced to petition the court for a conservatorship over you; this is a legal process that is arduous, time-consuming, very costly, and like probate, can be avoided altogether if you have a revocable living trust.

What if there comes a time that you can’t take care of yourself? Without the proper documents, your family will have to go to court, spending time and money, for the right to take care of you.

 

A Revocable Living Trust Helps You Protect Your Beneficiaries by Allowing Maximum Flexibility and Control Over the Distribution of Your Estate.

There are three options when it comes to estate planning:

1. Do Nothing.

2. Execute a Will.

3. Execute a Revocable Living Trust as the Basis of Your Estate Plan.

If you choose to DO NOTHING, this will happen on your death:

  • California law will kick in and will determine who inherits from you, how much they inherit, and when they inherit;
  • Your estate (if valued at more than $150,000) will have to go through a formal probate before it can be distributed, which will eat up your beneficiaries’ time and money;
  • Your beneficiaries may have to pay a hefty estate tax bill upon inheriting from you.

If you EXECUTE A WILL (and no revocable living trust), this will happen on your death:

  • Most likely, your minor beneficiaries will receive their entire inheritance, no strings attached, upon reaching the age of eighteen;
  • Your estate (if valued at more than $150,000) will have to go through a formal probate before it can be distributed, which will eat up your beneficiaries’ time and money;
  • Your beneficiaries may have to pay a hefty estate tax bill upon inheriting from you.

Executing a REVOCABLE LIVING TRUST allows you to avoid the pitfalls described above for people who either take the “do nothing” approach or who only execute a will. In addition to avoiding probate and minimizing estate taxes, a thoughtfully prepared revocable living trust empowers you to determine who inherits from you, how much they inherit, and when they inherit. This is particularly useful if you will have minor children or young adults as beneficiaries.

In the absence of an estate plan that says otherwise, a minor child beneficiary will inherit their full share upon turning eighteen years of age. As you can imagine, receiving a large inheritance at a young age could actually harm that child by perhaps railroading plans for continuing education, not to mention encouraging unwise spending practices. This is also often the case for young adult beneficiaries. For many young adults, they are set up for success if they receive an inheritance spread out over a number of distributions, e.g., 1/3 upon earning a Bachelor’s degree or reaching the age of twenty-five years, 1/3 upon reaching the age of thirty years, and 1/3 upon reaching the age of thirty-five years. For many young adults, wisdom and maturity develop with each successive distribution, and lessons are learned, thereby inspiring confidence in handling money and a setting them on a path toward a lifetime of success with handling finances.

An inheritance should help, not hurt, your heirs. A well-drafted estate plan helps you to accomplish this.

 

A Revocable Living Trust Allows You to Minimize Estate Taxes and Expenses to Your Beneficiaries.

In addition to minimizing expenses by avoiding probate and thus minimizing attorney and executor fees, a revocable living trust allows married couples to maximize their allowable estate tax exemption, which could save their beneficiaries thousands, if not hundreds of thousands of dollars in estate taxes.

The estate tax is a tax that is owed by the estate of a deceased person, but only if the person dies while owning assets in excess of a certain amount, known as the “estate tax exemption.” The estate tax exemption is set by the federal government, subject to change, and has varied significantly from the date of its creation. The following chart gives a snapshot of how the estate tax exemption amount and tax rate has changed in the last several years.

YearEstate Tax ExemptionTop Estate Tax Rate
1997 $600,000 55%
2002 $1,000,000 50%
2009 $3,500,000 45%
2011 $5,000,000 35%
2014 $5,340,000 40%
2015 $5,430,000 40%

In 2015, for example, anyone who dies with assets in excess of $5.43 million will be taxed at a rate of 40% on any assets above the exemption amount. However, a properly drafted revocable living trust will allow a married couple to avoid some, if not all, of the estate tax.* Additional strategies for minimizing and eliminating taxes can be identified during a meeting with an estate planning attorney.

A thoughtfully-drafted estate plan with a revocable living trust offers many benefits, both to the person(s) creating the trust and to the beneficiaries, including: avoidance of probate, planning for incapacity, maximizing flexibility and control of estate distribution to protect beneficiaries, and minimizing estate taxes and expenses.

*Disclaimer: The estate tax exemption and tax rates described here are for informational purposes only and should not be considered nor relied on in place of legal advice. You should seek advice from a qualified estate planning attorney who is licensed in the state of California to design a plan that fits your circumstances.

Estate Tax

In addition to minimizing expenses by avoiding probate and thus minimizing attorney and executor fees, a revocable living trust allows married couples to maximize their allowable estate tax exemption, which could save their beneficiaries thousands, if not hundreds of thousands of dollars in estate taxes.

The estate tax is a tax that is owed by the estate of a deceased person, but only if the person dies while owning assets in excess of a certain amount, known as the “estate tax exemption.” The estate tax exemption is set by the federal government, subject to change, and has varied significantly from the date of its creation. The following chart gives a snapshot of how the estate tax exemption amount and tax rate has changed in the last several years.

Year Estate Tax Exemption Top Estate Tax Rate
1997 $600,000 55%
2002 $1,000,000 50%
2009 $3,500,000 45%
2011 $5,000,000 35%
2014 $5,340,000 40%
2015 $5,430,000 40%

In 2015, for example, anyone who dies with assets in excess of $5.43 million will be taxed at a rate of 40% on any assets above the exemption amount. However, a properly drafted revocable living trust will allow a married couple to avoid some, if not all, of the estate tax.* Additional strategies for minimizing and eliminating taxes can be identified during a meeting with an estate planning attorney.

*Disclaimer: The estate tax exemption and tax rates described here are for informational purposes only and should not be considered nor relied on in place of legal advice. You should seek advice from a qualified estate planning attorney who is licensed in the state of California to design a plan that fits your circumstances.

Durable Power of Attorney

What is a Durable Power of Attorney?

A durable power of attorney (also called a financial power of attorney or a power of attorney for property) document should almost always be included in an estate plan. In this document, the person signing the document (the principal) designates someone else (typically the back-up trustee, referred to as the “attorney in fact”) to control property and to enter into transactions on behalf of the principal under certain circumstances.

The majority of financial powers of attorney do not go into effect until at least one doctor has determined that the principal does not have legal capacity to enter into financial transactions on his/her own behalf. This type of power of attorney is called a “springing” power of attorney. However, powers of attorney are sometimes created to be effective immediately upon signing (rather than waiting for the requirement of a doctor to declare the principal unfit to handle their affairs). This type of power of attorney is referred to as a “non-springing” power of attorney.

A springing power of attorney ensures that the powers granted go into effect only when the principal is incapacitated. No one has control over the principal’s assets until that time. A power of attorney document may explicitly state that the powers are not granted until a doctor (sometimes more than one) declares in writing that the principal is not mentally or physically capable of entering into financial transactions. The benefit of the springing power of attorney is that the principal is not subjecting himself/herself to possible fraud or mismanagement of his/her finances by an attorney in fact while he/she is alive and well. On the other hand, the burden of the springing power of attorney is that going through the process of being declared incompetent to handle one’s own finances is not pleasant, either for the principal or for the attorney in fact, which is often the principal’s spouse, child, or friend.

A non-springing power of attorney goes into effect immediately, which means that the principal, while still well enough to make financial decisions, gives immediate control of his/her assets and financial affairs to someone else. The benefit of the non-springing power of attorney is that the principal can allow a trusted friend or family member to assist him/her with managing his/her finances when he/she becomes overwhelmed with handling finances. The burden of the non-springing power of attorney is that the principal is giving up control when he/she is still capable of managing his/her finances, which can be difficult emotionally and which then subjects the principal to possible fraud or mismanagement of his/her assets by the attorney in fact.

What Happens when a Durable Power of Attorney Goes into Effect?

A power of attorney does not give instructions regarding the distribution or management of assets in terms of how assets will be managed and distributed; rather, it is a means of designating an attorney in fact, who will then have legal authority to sell and manage the principal’s assets on behalf of the principal during his/her lifetime, in the event the principal is ever incapacitated. The attorney in fact will typically have full discretion and authority to manage the assets as he/she sees fit, subject to any specific instructions that may be given in the power of attorney document. Any assets for which a principal desires to give specific management instructions, however, should typically be transferred to a living trust, with the living trust including specific instructions for how those assets are to be managed. Because the attorney in fact and trustee are typically designated to be the same person, that person has the ability to manage 100% of the principal’s financial affairs - the attorney in fact is able to transfer assets to the living trust, make payments on behalf of the principal using trust assets or non-trust assets, etc. If the trustee and attorney in fact are not the same person, then the trustee has authority only over the assets in the trust, and the attorney in fact has authority over only the assets outside of the trust. Designating the trustee and attorney in fact as one and the same allows for streamlining of financial decisions.

Advance Health Care Directive

An advance health care directive is sometimes referred to as a power of attorney for health care or a living will. These terms are often used interchangeably and may have different meanings to different estate planning attorneys. Most commonly, a power of attorney for health care refers to a document by which a person (referred to as the “principal”) grants authority to another person to make health care decisions for the principal if he/she is ever incapacitated. The common use of the term living will refers to a document by which a person gives instructions related to end-of-life decisions (i.e., when life support should cease).

The advance health care directive combines the terms of both a power of attorney for health care and a living will into one document. In this document, the principal designates an agent (referred to as a “health care agent”) to make health care and personal care decisions on behalf of the principal if the principal is incapacitated. In addition, the advance health care directive includes specific instructions regarding end-of-life decisions, disposition of remains (burial, cremation, etc.), and donation of anatomical gifts. The principal may give additional related instructions in this document or in a memorandum attached to the advance health care directive.

Why is an Advance Health Care Directive Important?

In the absence of instructions to the contrary, doctors are obligated to treat patients in accordance with the Hippocratic Oath, which mandates that a doctor does everything possible to keep a person alive, under any circumstances. While some people choose to give end-of-life instructions consistent with the Hippocratic Oath, many people choose to give instructions to cease life-sustaining treatment if a doctor diagnoses the person as brain-dead. The decision belongs entirely to the person and an estate planning attorney can incorporate just about any instructions that you might wish to include, or no instructions at all (leaving the decision to the discretion of your health care agent). The point, of course, is that an advance health care directive gives you the power to make your wishes clear, whatever your wishes might be.

Another important piece of an advance health care directive is the HIPAA authorization. The Health Insurance Portability and Accountability Act of 1996 placed restrictions on doctors and hospitals on giving out medical records and health care information for their patients without patient permission. A HIPAA authorization states in writing that doctors and hospitals are authorized to give out all (or some) health care information to specific designated persons. This is extremely valuable in the event that you, the principal, are injured and unconscious. This gives your health care agent access to your medical records so that your agent can make informed decisions regarding treatments, diagnostic tests, etc. on your behalf.