Estate Planning

I. THE LANGUAGE OF ESTATE PLANNING

 

ESTATE PLANNING : how you have arranged to transfer your real estate and personal property and provide for your loved ones after you die.

 

DECEDENT : the dearly departed

 

LAST WILL & TESTAMENT : the document which specifies who gets your property when you dies.

 

TESTATOR : You, the maker of a Last Will & Testament.

 

EXECUTOR : an adult whom you name in your will to be responsible for supervising your estate after you die and seeing to it that your expressed desires are carried out.

 

PERSONAL GUARDIAN: an adult whom you name to be responsible for raising them if both you and your spouse die or the surviving spouse can't or won't accept responsibility for them.

 

TESTATE : to die leaving a will or other living trust

 

INTESTATE : to die without any will or living trust

 

PROBATE : the name for the court-supervised legal process for paying your debts and distributing your property left by will. If there is no will or living trust, probate occurs under the "intestacy" provisions of state law.

 

DEATH TAXES : taxes imposed on the decedent's property. The federal government calls them "estate taxes." Some states call them "inheritance taxes." California has effectively no death or inheritance taxes.

 

REAL PROPERTY : real estate--the land and the buildings on it

 

PERSONAL PROPERTY : every other kind of property, such as bank accounts, stocks, cash, furniture, jewelry, clothing, your pet

 

LIVING TRUST: a legal document that is revocable and avoids probate, which you make while living, which privately transfers your property at the time of your death, directly to the people or organizations you desires. It only becomes operational upon your death. But during your lifetime, you, the maker, effectively own all property transferred in trust and can do with it whatever you want until death.

 

GRANTOR/TRUSTEE : You, the maker of the Living Trust, and who has full control and management of the property transferred in trust until your death.

 

SUCCESSOR TRUSTEE : the adult whom you appoint to handle the trust after your death, and to see to it that your expressed desires are carried out.

 

BENEFICIARY : The recipient of your property named in your living trust and/or will.

 

GIFT : property you transfer freely (not by sale or trade) to a person or institution (including property you give away during your lifetime, and at your death, depending on the context)

 

DURABLE POWER OF ATTORNEY FOR HEALTH CARE DECISIONS : a legal document which you set up in advance for what you want done regarding life support systems in case you become incapacitated and unable to express your own desires; it is effective until your death.

 

DURABLE POWER OF ATTORNEY FOR FINANCES : a legal document which you set up in advance for someone to manage your financial affairs if you become incapacitated, and is effective until your death.

 

PRINCIPAL : You, the maker of a Durable Power of Attorney

 

ATTORNEY-IN-FACT : the adult you appoint to act in your place to carry out your wishes in Durable Powers of Attorney for financial and health care decisions

 

 

II. WHAT IS AN ESTATE?

 

All property you own, minus anything you owe (assets minus liabilities). Its value is often termed your "net worth." It also includes the following:

 

THE TAXABLE ESTATE : The property subject to federal estate taxes (and any state taxes) when you die. It's the same as the value of your estate, or net worth, except that certain property included in your estate is excluded from the taxable estate. For example, for federal tax purposes, property left to a surviving spouse or to charity is excluded from the taxable estate.

 

THE PROBATE ESTATE : The portion of your estate that must undergo probate before it can be distributed to your beneficiaries. Most property left by will must go through probate. Everything transferred by probate-avoiding methods, such as living trusts, is NOT part of the probate estate. For those who plan wisely, the "probate estate" will be considerably less than the taxable estate, and some people are able to eliminate it entirely.

 

 

III. WHAT IS PROBATE AND HOW DO YOU AVOID IT?

 

Probate proceedings are generally mere formalities, since disputes about a will are rare. But probate is usually cumbersome and lengthy. In probate, the decedent's assets are ascertained, all debts and death taxes are paid, fees for lawyers, appraisers, accountants and court filing fees are paid, before the remaining property is finally distributed to the beneficiaries.

 

The average probate lasts a year to 17 months before the estate is actually distributed.

 

Although probate doesn't involve evil or corrupt officials, it is a very technical area of the law, which requires tedious, routine paperwork, which can seem very complicated to the uninitiated. Consequently, probate attorneys charge high fees for their services.

 

The wiser approach is to plan to avoid probate altogether. This can be done for most estates. The primary method is by Living Trust, which avoids court proceedings and transfers property quickly after a death.

 

IV. WHO NEEDS A LIVING TRUST?

 

Creating a living trust can be a marvelous gift to your family.

 

It will save them time, money and untold hassles after your death. With a living trust, your heirs don't face the delay or cost of probate court proceedings, and the transfer of assets is private, not a matter of public record. The successor trustee simply transfers ownership to the beneficiaries you named in the trust. In many cases, the whole process takes only a few weeks, and there are no legal or court fees to pay.

 

Setting up a living trust requires some paperwork, because you must transfer ownership of your property to the trust. For example, if you want to leave your house through the trust, you must sign a new deed, showing that you now own the house as trustee of your living trust. This paperwork can be tedious, but it is not difficult.

 

The benefit of this paperwork is that by acting in your capacity as trustee, you show that you are firmly in control of your affairs, are mentally competent and not under someone else's influence. This prevents any successful lawsuit from any disgruntled family member, to challenge your living trust on the basis of your incompetence or your being under the undue influence of some other person.

 

V. WHY YOU SHOULD HAVE A WILL

 

Everyone should make out a will, even those planning to transfer all their property by living trust. A will:

 

transfers property inadvertently overlooked when making a living trust;

 

transfers property unexpectedly acquired after the living trust is made;

 

appoint an executor for the estate; and

 

nominates personal and back-up financial guardians for minor children

 

VI. DEATH TAXES AND HOW TO MINIMIZE THEM

 

Some people confuse living trusts with tax-saving schemes. Unfortunately, avoiding probate does not have any effect on, or reduce, death taxes.

 

In theory, the beneficiary of a decedent's property is taxed rather than the property itself. But in reality, the taxes are paid out of the decedent's estate. Two factors determine whether or not your estate will be required to pay death taxes:

 

1. the value of your taxable estate, and

 

2. the laws of the state where you live

 

If your estate's net worth is less than $600,000.00, and if you have not made large gifts during your lifetime, you will not be liable for federal taxes.

 

If your estate is larger than this amount, it will normally owe federal tax.

 

However, certain types of gifts are exempt from federal estate tax, such as gifts to spouses and many gifts to charity.

 

If you are married and the total combined estate belonging to you and your spouse is over $600,000, you will want to consider tax planning if each spouse plans to leave most of his or her property to the other. If you do not, the estate of the surviving spouse will result in a value of over $600,000 and be subject to a hefty tax.

 

There are limited ways to reduce or avoid federal estate taxes, such as making gifts while you are alive, leaving property to your spouse or charity, creating certain types of trusts, especially marital estate trusts (between husband and wife), and transferring ownership of life insurance on your life.

 

VII. CHOOSING SOMEONE TO SUPERVISE YOUR ESTATE

 

Whatever way you choose to transfer your property, you must name an Executor for your will and/or a successor trustee of your living trust who will be responsible for supervising your estate after you die and seeing to it that your expressed desires are carried out. Since many people use both a living trust and a will, they name the same person in each capacity.

 

VIII. PROVIDING FOR CARE AND SUPPORT OF MINOR CHILDREN

 

If you have minor children, you will want to plan ahead for what will happen if you and the other parent (if there is one) die before your children become legal adults (age 18 in California), namely:

 

Naming the "Personal Guardian." While your nomination is not automatically legally binding, courts normally confirm the person you name if the other parent is not available;

 

Determining how much property you want to leave for your minor children, and who will supervise it. There are different legal methods to leave property to your minor children, including establishing a children's trust, which allows you to delay the age your child received his/her inheritance outright until an age you establish. This is important because many parents worry that age 18 is far too young for the responsibility of handling money and property.

 

VIII. PROVIDING READY CASH

 

A very important consideration of estate planning is to provide ready cash (called "liquidity") to pay debts, taxes, hospitalization, funeral and burial expenses, your family's living expenses, and sometimes also to take care of other beneficiaries of your estate.

 

If most of your property is to be transferred by will, your family will not get it until probate is completed. Limited amounts for family necessities can normally be obtained by petitioning the probate court, but it is wiser to plan to have sources of money available that will not require going to court.

 

If most of your property will be transferred outside of probate, as with a living trust, there is usually less reason to worry about arranging for ready cash, since property in a living trust can often be transferred to inheritors in a few days.

 

However, if most of your assets are not "liquid" (cannot easily be converted to money), you may still need to provide a source of ready cash.

 

A life insurance policy payable to a survivor or survivors is one traditional means of providing ready cash. Money held in a joint bank account can often be released immediately, or in a few days, if you plan it properly. Also, most banks offer informal trust accounts (often called "Pay-On-Death" accounts) which can be used to promptly provide the cash in the account to named beneficiaries free of probate. An advantage of this type of account is that the person named as an account beneficiary cannot take any money from the account before the depositor dies.

 

IX. PLANNING FOR POSSIBLE INCAPACITY

 

Thorough estate planning includes considering what happens if you become incapacitated and are unable to make medical or financial decisions for yourself. The Durable Power of Attorney for Health Care Decisions and the Durable Power of Attorney for Financial Matters allow you to appoint whoever you want to have the authority to act for you if you become incapacitated.

 

You (the "Principal") put in whatever conditions and limitations you want on the powers you grant the person you appoint to act for you (the "Attorney-in-Fact"). You can retain all control over your affairs unless and until incapacity occurs. These documents are reasonably short. You don't need to transfer title of your assets. You can revoke them at any time, unless you become incapacitated. No court review or approval is needed. They don't have to be filed or recorded with any governmental agency.

 

The Durable Power of Attorney for Health Care Decisions gives you a choice of three options to express your desires:

 

1. require the use of life support systems, or

 

2. prohibit the use of life support systems to artificially prolong life when you have been diagnosed as "incurably ill" or having a "terminal condition," or

 

3. delegate the decision regarding use of life support equipment to your attorney-in-fact.

 

X. FUNERAL AND BURIAL PLANS

 

There are a number of possibilities to consider, such as U.S. armed forces veterans benefit providing for burial in a national cemetery; services offered by commercial funeral homes; services offered through no-profit funeral societies; cremation; and donation of body parts to organ banks for medical transplants.