Essentials of an Estate Plan
Many people feel confused about what they need to get their estate in order. Here are the essentials of a basic estate plan:
1. Will. Your Will is a legal document in which you give certain instructions to be carried out after your death. The role of an executor is to identify and gather all assets, identify all debts and potential claims against the estate, safeguard and protect assets including any real estate investments, and carry out the provisions of the Will for distribution of assets, payment of expenses, claims, taxes, and any debts, account for all services and finally, distribute the balance of the estate. In estate planning, Wills accomplish things that Revocable Trusts cannot, for example, the testator can nominate guardians for minor children and provide a vehicle for the executor to place estate property in trust.
2. Power of Attorney. A Power of Attorney is a written instrument in which one person (the “principal”) designates another (the “agent” or “attorney-in-fact”) to act on the principal’s behalf in private affairs, business, or some other legal matter. If a power of attorney is made “durable” it remains in effect after the incapacity of the principal. Generally, a durable power of attorney is only effective until the principal’s death, revocation of the power by the principal, or termination of the power by its terms.
3. Advance Health Care Directive. Health Care Directives allow you to state your wishes regarding your health care treatment. You are able name an “agent” who will carry out your wishes and give detailed instructions about what actions should be taken for your health if you are no longer able to make decisions for yourself due to illness or incapacity.
4. Trust. A Revocable Living Trust is a legal entity in which legal title and management of specified property is vested in a trustee who administers the property for the benefit of a designated beneficiary. The person creating the trust is called a Settlor and usually names himself or herself as trustee. Revocable Trusts are commonly used in California as tools for transferring a person’s property at death and managing property during periods of incapacity. On the Settlor’s death, the property is deemed owned by the Trust rather than by the client for the limited purpose of determining whether court supervision is required. The trustee, or successor trustee, then distributes the trust property as provided in the trust document. Trust assets may include real estate, stock in a closely held corporation, stocks and other securities held by brokerages, small business interests, patents and copyrights, and precious metals, valuable works of art, valuable stamp or coin collections, and other tangible assets of value.
Most people create a Revocable Trust for the primary purpose of avoiding probate. There are two major reasons you want to avoid probate: It is time consuming and expensive. Probate is a court-administered process that typically requires the assistance of an attorney who is entitled to receive fees payable from the decedent’s estate. In California, those fees are set by statute which can be significant and not always necessary. Specifically, the fees are 4% of the first $100,000 in assets, 3% of the next $100,000, 2% of the next $800,000, and 1% of the next $15,000,000. By way of illustration, if a simple estate with $400,000 of assets (this is gross value and does not consider any debts on the property), the required fee to the attorney and executor would be $11,000 each. While the executor fees can be waived if the heirs are serving in that role, the attorney fees are likely unavoidable. Additionally, court fees and expenses are usually several thousand dollars and appraisal fees can equal as much as .1% of the value of the property.
A Trust is not the only way to avoid probate. For example, California does not require a probate proceeding if the gross estate totals less than $150,000. And other assets that transfer to your heirs automatically upon your death are not subject to the terms of your Will. These assets have a beneficiary designation and will transfer directly to recipients without going through probate. Some examples of assets that have a beneficiary designation include joint tenancy; life insurance; retirement accounts; and pay-on-death accounts (also called “POD’s” or “Totten Trusts”).
Here are some factors to consider when deciding whether to set up a Revocable Trust:
a. Substitute for Conservatorship. A Revocable Trust can serve as a substitute for conservatorship, avoiding the necessity of court proceeding and annual accountings if you become disabled. Your property can be handled by the person of your choosing and without the supervision (or protection) of the court.
b. Privacy. Unlike a Will, which is a public document, Trusts are private.
c. Transition Planning and Distribution of Assets. Revocable Trusts provide uninterrupted trust administration after your death. You have more control over how and when your assets will be distributed. Unlike other probate-avoidance devices, such as titling property jointly with right of survivorship or establishing payable on death accounts (insurance, IRAs, pensions, bank accounts), a Trust, like a Will, is more likely to preserve your intended plan of distribution.
d. Estate and Income Taxes. As a rule, Revocable Trusts are tax neutral and provide no tax savings over using a Will. If you are married however, any taxes owed at the first death can be deferred until after the death of the surviving spouse. With a Revocable Trust, the Settlor is taxed as if the Trust were not in existence. There is no requirement to obtain a taxpayer identification number or file a separate return for your trust.
If you have any questions or need help planning your estate planning your estate. Call or email me today to get started! (949) 387-8707