Estate Planning
What is estate planning?
Estate planning is the process of decision making and creating documents, which allows you to control future events in the event of your death or incapacity.
The primary goals of estate planning consist of:
1) Providing instructions for the care of your children.
2) Providing instructions for your medical wishes.
3) Providing instructions for managing your financial affairs.
4) Selecting people to whom your property will pass.
5) Preventing court interference with your affairs.
6) Reducing or eliminating taxes, legal fees, and other expenses.
Do I need an estate plan?
Estate planning is not limited to just the wealthy. Almost anyone can benefit from an estate plan, regardless of age, financial status, or marital status, etcetera. The only requirement is that you have a desire to protect your loved ones.
The first thing to consider is who you will appoint to manage your financial affairs and your care in the event of your incapacity, who will manage and distribute your assets in the event of your death, and who will be the guardian of your children.
The next thing to consider is whether you will simply give outright gifts to loved ones, or whether you wish to take measures to maximize the value of your estate by reducing costs and taxes, and creating earnings.
If you do no planning at all, the court will appoint someone to make health care and financial decisions for you in the event of incapacity. The court will also appoint someone to distribute your assets according to intestate succession laws upon your death. In other words, if you die without a Will your assets may go to relatives you would not want to inherit from you. You would probably rather make these decisions yourself, so planning is imperative.
Benefits of Estate Planning
Eliminates the hassle and cost of probate.
Eliminates court interference.
Provides quick and easy control over your affairs.
Provides quick and easy distribution of your assets.
Reduces or eliminates estate taxes.
Designates a guardian and provides instructions for your children.
Ensures your medical wishes are known.
Ensures privacy of your affairs.
What is estate planning?
Estate planning is the process of decision making and creating documents, which allows you to control future events in the event of your death or incapacity.
The primary goals of estate planning consist of:
1) Providing instructions for the care of your children.
2) Providing instructions for your medical wishes.
3) Providing instructions for managing your financial affairs.
4) Selecting people to whom your property will pass.
5) Preventing court interference with your affairs.
6) Reducing or eliminating taxes, legal fees, and other expenses.
Do I need an estate plan?
Estate planning is not limited to just the wealthy. Almost anyone can benefit from an estate plan, regardless of age, financial status, or marital status, etcetera. The only requirement is that you have a desire to protect your loved ones.
The first thing to consider is who you will appoint to manage your financial affairs and your care in the event of your incapacity, who will manage and distribute your assets in the event of your death, and who will be the guardian of your children.
The next thing to consider is whether you will simply give outright gifts to loved ones, or whether you wish to take measures to maximize the value of your estate by reducing costs and taxes, and creating earnings.
If you do no planning at all, the court will appoint someone to make health care and financial decisions for you in the event of incapacity. The court will also appoint someone to distribute your assets according to intestate succession laws upon your death. In other words, if you die without a Will your assets may go to relatives you would not want to inherit from you. You would probably rather make these decisions yourself, so planning is imperative.
Benefits of Estate Planning
Eliminates the hassle and cost of probate.
Eliminates court interference.
Provides quick and easy control over your affairs.
Provides quick and easy distribution of your assets.
Reduces or eliminates estate taxes.
Designates a guardian and provides instructions for your children.
Ensures your medical wishes are known.
Ensures privacy of your affairs.
The Basic Estate Plan Includes:
•Last Will and Testament
•Advance Health Care Directive (Living Will)
•Durable Power of Attorney
•Revocable Living Trust (If your assets exceed $75,000)
•Certification of Trust (Accompanies the Trust)
•Property Transfer Documents
What is probate
Probate is the court-supervised process of:
•Validating the Will (if there is one).
•Appointing a representative to manage the affairs of the estate.
•Transferring assets to beneficiaries (with a Will) or heirs (without a Will).
•Investigating Will contests.
•Determining creditor claims.
Estates valued at over $75,000 (gross) are subject to the Probate process, with certain exceptions. The process takes from six months to over a year, depending on the complexity. It is a public proceeding and documents will remain public record indefinitely. Assets may be frozen during the process, thus prohibiting your beneficiaries from accessing money they may need for support. The process includes cumbersome reporting requirements and can be very expensive. Consequently, it is usually advantageous to avoid probate by estate planning.
How to Avoid Probate
Estates valued less than $75,000 (gross).
Assets held in Joint Tenancy or Community Property with Right of Survivorship.
Community property assets passing by Will to a surviving spouse.
Assets held in Trust.
Life insurance proceeds payable to beneficiary.
Death benefits payable under IRA, retirement plan, and annuities.
Payable on death bank accounts.
Business entities, including corporations and LLC's.
The Basic Estate Plan Includes:
•Last Will and Testament
•Advance Health Care Directive (Living Will)
•Durable Power of Attorney
•Revocable Living Trust (If your assets exceed $75,000)
•Certification of Trust (Accompanies the Trust)
•Property Transfer Documents
What is probate
Probate is the court-supervised process of:
•Validating the Will (if there is one).
•Appointing a representative to manage the affairs of the estate.
•Transferring assets to beneficiaries (with a Will) or heirs (without a Will).
•Investigating Will contests.
•Determining creditor claims.
Estates valued at over $75,000 (gross) are subject to the Probate process, with certain exceptions. The process takes from six months to over a year, depending on the complexity. It is a public proceeding and documents will remain public record indefinitely. Assets may be frozen during the process, thus prohibiting your beneficiaries from accessing money they may need for support. The process includes cumbersome reporting requirements and can be very expensive. Consequently, it is usually advantageous to avoid probate by estate planning.
How to Avoid Probate
Estates valued less than $75,000 (gross).
Assets held in Joint Tenancy or Community Property with Right of Survivorship.
Community property assets passing by Will to a surviving spouse.
Assets held in Trust.
Life insurance proceeds payable to beneficiary.
Death benefits payable under IRA, retirement plan, and annuities.
Payable on death bank accounts.
Business entities, including corporations and LLC's.
Estate Taxes
The decedent's estate is potentially liable for federal death/estate taxes. Generally, no estate tax is required for most decedents because the IRS allows a certain amount to be exempted from estate taxes (tax free).
The exemption amount allowed in 2016 is $5,450,000. Anything over this amount is subject to estate taxes. Congress has been kind and has been allowing the exemption amount to increase consistently for the past several years.
But be aware that Congress literally changes the amount from year to year, so don't hang on your hat on a false sense of security since the exemption could be reduced at any time. Just a few years ago it was only $1,000,000.
Last Will and Testament
A Will is a legal document identifying:
· The Beneficiaries who will receive assets;
· The guardian of your minor children;
· The Executor who will manage your estate, pay expenses, and distribute assets.
Advantages:
· Simple and inexpensive to create;
· Power to determine distribution of assets to beneficiaries;
· Designation of guardian for minor children;
· Designation of Executor;
· Executor's ability to operate business, sell and/or distribute assets, and make decisions;
· Elimination of the cost of the Executor's bond;
· Allows gifts to individuals or charities, none of which are covered by intestacy laws;
· Marital deductions provide tax saving;
· Allows for distribution of assets to children of those who die before decedent.
Disadvantages (compared to a Living Trust):
· Subject to Probate;
· Subject to significant expenses if the estate's gross value exceeds $75,000;
· Possible interruption in your family’s access to funds;
· Slow distribution of assets;
· No stepped-up tax basis if title to property held in Joint Tenancy;
· Public in nature.
Living Wills & Health Care Directives
A Living Will, also called a Health Care Directive, specifies your wishes regarding healthcare in the event you cannot make the decisions for yourself. The document is given to the doctor and (s)he is under a duty to honor your instructions.
A Durable Power of Attorney for Healthcare gives your agent the authority to make medical decisions for you if you are unable to make them for yourself, as discussed above. It is a good idea to combine your Healthcare Directive and your Durable Power of Attorney. In other words, your Healthcare Directive can appoint an agent to ensure your wishes are followed. Alternatively, you can create two separate documents. The Healthcare Directive will explain your medical care instructions and your Durable Power of Attorney will name an agent to ensure your wishes are followed.
Estate Taxes
The decedent's estate is potentially liable for federal death/estate taxes. Generally, no estate tax is required for most decedents because the IRS allows a certain amount to be exempted from estate taxes (tax free).
The exemption amount allowed in 2016 is $5,450,000. Anything over this amount is subject to estate taxes. Congress has been kind and has been allowing the exemption amount to increase consistently for the past several years.
But be aware that Congress literally changes the amount from year to year, so don't hang on your hat on a false sense of security since the exemption could be reduced at any time. Just a few years ago it was only $1,000,000.
Last Will and Testament
A Will is a legal document identifying:
· The Beneficiaries who will receive assets;
· The guardian of your minor children;
· The Executor who will manage your estate, pay expenses, and distribute assets.
Advantages:
· Simple and inexpensive to create;
· Power to determine distribution of assets to beneficiaries;
· Designation of guardian for minor children;
· Designation of Executor;
· Executor's ability to operate business, sell and/or distribute assets, and make decisions;
· Elimination of the cost of the Executor's bond;
· Allows gifts to individuals or charities, none of which are covered by intestacy laws;
· Marital deductions provide tax saving;
· Allows for distribution of assets to children of those who die before decedent.
Disadvantages (compared to a Living Trust):
· Subject to Probate;
· Subject to significant expenses if the estate's gross value exceeds $75,000;
· Possible interruption in your family’s access to funds;
· Slow distribution of assets;
· No stepped-up tax basis if title to property held in Joint Tenancy;
· Public in nature.
Living Wills & Health Care Directives
A Living Will, also called a Health Care Directive, specifies your wishes regarding healthcare in the event you cannot make the decisions for yourself. The document is given to the doctor and (s)he is under a duty to honor your instructions.
A Durable Power of Attorney for Healthcare gives your agent the authority to make medical decisions for you if you are unable to make them for yourself, as discussed above. It is a good idea to combine your Healthcare Directive and your Durable Power of Attorney. In other words, your Healthcare Directive can appoint an agent to ensure your wishes are followed. Alternatively, you can create two separate documents. The Healthcare Directive will explain your medical care instructions and your Durable Power of Attorney will name an agent to ensure your wishes are followed.
Powers of Attorney
A Power of Attorney is a document granting a person the power to legally act on your behalf. It usually deals with healthcare or property issues. A Power of Attorney for Healthcare grants your agent the authority to make medical decisions on your behalf. A Power of Attorney for Property grants general or specific powers to your agent regarding your financial affairs.
A Power of Attorney terminates automatically if you become incapacitated. To resolve this dilemma, a Durable Power of Attorney should be created instead. It stays valid even if you become unable to handle your own affairs. This type of document can go into effect as soon as you sign it, or you can specify that that it does not go into effect until you become incapacitated.
Living Trusts
A Trust is essentially a written agreement between the person creating the Trust (Trustor) and the person named to manage the Trust (Trustee), often the same person. A Trust is a legal entity with powers, not unlike a corporation. When the Trust is created, you transfer ownership of your assets from yourself to the Trust, and you, as the Trustee, control and manage them.
With a Revocable Trust, the Trustor may amend the Trust at any time, but it becomes irrevocable upon death. A "pour-over" Will is still needed to provide for assets that are recently acquired or were never transferred to the Trust, since it will provide for the automatic inclusion of such assets into the Trust.
Upon your death, the Successor Trustee takes over the control and management of the assets for the benefit of the beneficiaries. Your assets avoid the Probate process because they are no longer titled in your name as an individual. Rather, they belong to the Trust. The Successor Trustee simply transfers your assets directly to your beneficiaries without the need for court involvement, which eliminates attorney's fees and costs.
There are many types of trusts available for different purposes. You should consult with your attorney to determine the type of trust best suited for your needs. Some types of trusts are:
1) Revocable Trusts (most common)
2) Irrevocable Trusts
3) Bypass Trust
4) Life Insurance Trust
5) Special Needs Trust
6) Charitable Remainder Trusts
Revocable Trusts
Advantages:
Provides for management of assets if the Trustor is unwilling or unable, without Court supervision;
Trustee pays debts, taxes, and distributes assets upon the Trustor’s death;
Eliminates Probate and the associated expenses;
No interruption in your family’s access to funds;
Assets can be distributed quickly;
Minors are provided for until a certain specified age;
Protects assets from creditors;
Can reduce estate taxes;
Receive stepped-up tax basis on sale of residence;
Private in nature.
Disadvantages:
Trust must be funded (transfer title of assets to trust);
More complicated and expensive to create than a Will.
Irrevocable Trusts
Irrevocable Trusts are essentially the same as revocable trusts except....
Advantages:
The value of assets are NOT included for Estate Tax purposes, thus allowing significant tax savings;
Disadvantages:
Amendments are not permitted. Once you create the trust you cannot change it.
Bypass Trust
A Bypass Trust is essentially the same as a Revocable Trust except that two trusts are actually created, which allows a married couple to each utilize the full federal estate tax exemption.
Example of estate taxes owed without Bypass Trust:
Assume Husband’s assets are $5M and Wife’s assets are $5.45M.
Assume Husband passes and leaves his entire estate to Wife.
Assume when Wife passes her estate is still worth $10.45M.
In 2016 Wife’s allowed exemption is $5.45M, which means that her other $5million is subject to hefty estate taxes.
Compare With Bypass Trust:
Assume the same facts except that a Bypass Trust is used.
On Husband’s death, his $5M goes to Trust A.
On Husband’s death, wife's $5.45M goes to Trust B
On Wife’s death both trusts are still worth the same amount.
Each spouse can utilize a $5.45M exemption on Wife’s death.
In 2016, Wife’s allowed exemption is $5.45M and Husband’s allowed exemption is $5.45M. The estate would owe zero taxes, thus saving an incredibly significant amount of money.
Special Needs Trust
A Special Needs Trust is a type of irrevocable trust that is used for an elderly or disabled person. They are usually created by people who want to protect their elderly parents or disabled children without effecting their ability to receive government assistance. The Trust protects the person's ability to qualify for certain types of need-based government programs such as social security and Medi-Cal, whereas they might not qualify without such protection. The Trust money provides for the special needs of the individual and is a supplement to the government assistance.
Because the person who receives the Trust money has no control over the distributions, the government does not include the money when calculating the person's income determine eligibility for the program.
Additionally, a recipient could lose government assistance upon receipt of an inheritance. Thus, a Special Needs Trust if often created to provide the same protection described above.
Charitable Remainder Trusts
A Charitable Remainder Trust is a type of irrevocable trust. Such Trust allows you to make a donation to the charity of your choice and is excluded from federal estate taxes. However, you retain control of the donation and can keep any income derived from the assets during your lifetime.
Life Insurance Trust
Federal estate taxes must be paid on life insurance proceeds when the insured owns and pays for the policy themselves (this includes insurance given by an employer). However, you can eliminate the taxes by creating an Irrevocable Life Insurance Trust. The reason for this is that the insurance policy is owned and paid for by the Trust, not the decedent or the decedent's spouse. Therefore, the proceeds are not considered part of the estate.
Same Sex Couples
Without estate planning, same sex couples used to have no legal rights in regards to his/her partner whatsoever. Therefore, it was absolutely essential for these couples to create a legal estate plan.
As of late 2015, the laws in this regard are in a state of flux due to the Supreme Court's recent rulings, so stay tuned....
Asset Protection
Asset Protection is a method to ensure your assets are protected from future creditors. Consider the following methods to protect your assets:
•Insurance policies
•Homestead
•Beneficiary Deed
•Irrevocable Trusts
•Incorporation, LLC, or Limited Partnerships
•Non-profit company
•Family Limited Partnership
•Domestic Family Protection Trust
Powers of Attorney
A Power of Attorney is a document granting a person the power to legally act on your behalf. It usually deals with healthcare or property issues. A Power of Attorney for Healthcare grants your agent the authority to make medical decisions on your behalf. A Power of Attorney for Property grants general or specific powers to your agent regarding your financial affairs.
A Power of Attorney terminates automatically if you become incapacitated. To resolve this dilemma, a Durable Power of Attorney should be created instead. It stays valid even if you become unable to handle your own affairs. This type of document can go into effect as soon as you sign it, or you can specify that that it does not go into effect until you become incapacitated.
Living Trusts
A Trust is essentially a written agreement between the person creating the Trust (Trustor) and the person named to manage the Trust (Trustee), often the same person. A Trust is a legal entity with powers, not unlike a corporation. When the Trust is created, you transfer ownership of your assets from yourself to the Trust, and you, as the Trustee, control and manage them.
With a Revocable Trust, the Trustor may amend the Trust at any time, but it becomes irrevocable upon death. A "pour-over" Will is still needed to provide for assets that are recently acquired or were never transferred to the Trust, since it will provide for the automatic inclusion of such assets into the Trust.
Upon your death, the Successor Trustee takes over the control and management of the assets for the benefit of the beneficiaries. Your assets avoid the Probate process because they are no longer titled in your name as an individual. Rather, they belong to the Trust. The Successor Trustee simply transfers your assets directly to your beneficiaries without the need for court involvement, which eliminates attorney's fees and costs.
There are many types of trusts available for different purposes. You should consult with your attorney to determine the type of trust best suited for your needs. Some types of trusts are:
1) Revocable Trusts (most common)
2) Irrevocable Trusts
3) Bypass Trust
4) Life Insurance Trust
5) Special Needs Trust
6) Charitable Remainder Trusts
Revocable Trusts
Advantages:
Provides for management of assets if the Trustor is unwilling or unable, without Court supervision;
Trustee pays debts, taxes, and distributes assets upon the Trustor’s death;
Eliminates Probate and the associated expenses;
No interruption in your family’s access to funds;
Assets can be distributed quickly;
Minors are provided for until a certain specified age;
Protects assets from creditors;
Can reduce estate taxes;
Receive stepped-up tax basis on sale of residence;
Private in nature.
Disadvantages:
Trust must be funded (transfer title of assets to trust);
More complicated and expensive to create than a Will.
Irrevocable Trusts
Irrevocable Trusts are essentially the same as revocable trusts except....
Advantages:
The value of assets are NOT included for Estate Tax purposes, thus allowing significant tax savings;
Disadvantages:
Amendments are not permitted. Once you create the trust you cannot change it.
Bypass Trust
A Bypass Trust is essentially the same as a Revocable Trust except that two trusts are actually created, which allows a married couple to each utilize the full federal estate tax exemption.
Example of estate taxes owed without Bypass Trust:
Assume Husband’s assets are $5M and Wife’s assets are $5.45M.
Assume Husband passes and leaves his entire estate to Wife.
Assume when Wife passes her estate is still worth $10.45M.
In 2016 Wife’s allowed exemption is $5.45M, which means that her other $5million is subject to hefty estate taxes.
Compare With Bypass Trust:
Assume the same facts except that a Bypass Trust is used.
On Husband’s death, his $5M goes to Trust A.
On Husband’s death, wife's $5.45M goes to Trust B
On Wife’s death both trusts are still worth the same amount.
Each spouse can utilize a $5.45M exemption on Wife’s death.
In 2016, Wife’s allowed exemption is $5.45M and Husband’s allowed exemption is $5.45M. The estate would owe zero taxes, thus saving an incredibly significant amount of money.
Special Needs Trust
A Special Needs Trust is a type of irrevocable trust that is used for an elderly or disabled person. They are usually created by people who want to protect their elderly parents or disabled children without effecting their ability to receive government assistance. The Trust protects the person's ability to qualify for certain types of need-based government programs such as social security and Medi-Cal, whereas they might not qualify without such protection. The Trust money provides for the special needs of the individual and is a supplement to the government assistance.
Because the person who receives the Trust money has no control over the distributions, the government does not include the money when calculating the person's income determine eligibility for the program.
Additionally, a recipient could lose government assistance upon receipt of an inheritance. Thus, a Special Needs Trust if often created to provide the same protection described above.
Life Insurance Trust
Federal estate taxes must be paid on life insurance proceeds when the insured owns and pays for the policy themselves (this includes insurance given by an employer). However, you can eliminate the taxes by creating an Irrevocable Life Insurance Trust. The reason for this is that the insurance policy is owned and paid for by the Trust, not the decedent or the decedent's spouse. Therefore, the proceeds are not considered part of the estate.
Charitable Remainder Trusts
A Charitable Remainder Trust is a type of irrevocable trust. Such Trust allows you to make a donation to the charity of your choice and is excluded from federal estate taxes. However, you retain control of the donation and can keep any income derived from the assets during your lifetime.
Same Sex Couples
Without estate planning, same sex couples used to have no legal rights in regards to his/her partner whatsoever. Therefore, it was absolutely essential for these couples to create a legal estate plan.
As of late 2015, the laws in this regard are in a state of flux due to the Supreme Court's recent rulings, so stay tuned....
Asset Protection
Asset Protection is a method to ensure your assets are protected from future creditors. Consider the following methods to protect your assets:
•Insurance policies
•Homestead
•Beneficiary Deed
•Irrevocable Trusts
•Incorporation, LLC, or Limited Partnerships
•Non-profit company
•Family Limited Partnership
•Domestic Family Protection Trust
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The information contained herein is for informational purposes only. It is not intended to constitute legal advice or to create an attorney-client relationship. We do not make any recommendations or endorsement as to any legal issue or procedure discussed. The nature of any particular legal issue should be considered on a case-by-case basis, and the information described herein is not necessarily a guide to your individual circumstances. It is advised that you seek independent legal advice to determine your particular legal needs.
Copyright © 2003 by Rambo Law Offices