| What is Estate Planning?
Estate planning is the process of evaluating your present situation and planning for the future. It's a life long process that involves all of your assets and your plans for retirement, disability and death. Estate planning is necessary to make sure you and your beneficiaries get the most out of your estate. Just like everything else in life, planning now will save trouble later. When dealing with disability or death, the trouble saved will be to your spouse, children, friends and relatives.
Do I Need a Will?
A will is simply a document that follows certain legal guidelines and gives instructions to those who survive you regarding your estate. If you don't have a will, California law determines how your estate will be distributed whether you want it that way or not. For example, if you die without a will and are survived by a spouse and two children, they would each receive 1/3 of your estate. If that’s not what you intended, you need a will to say otherwise.
What is Probate?
Probate is court supervision of the identification and distribution of a deceased person's estate. A personal representative known as an executor is appointed to do the leg work, the assets are identified and valued, the beneficiaries are notified and the court orders how the assets will be distributed, generally according to the terms of the will. This process can take nine months or more to complete. California law allows the executor to be paid a fee for these services. In addition, it the executor needs the assistance of an attorney, the attorney is also allowed a fee. The following is the fee schedule found in Probate Code § 10810. If both an executor and attorney are required, the fee is doubled.
Size of Estate Executor Fee Attorney Fee Total Fee
$100,000 $4,000 $4,000 $8,000
200,000 7,000 7,000 14,000
300,000 9,000 9,000 18,000
500,000 13,000 13,000 26,000
700,000 17,000 17,000 34,000
900,000 21,000 21,000 42,000
1,000,000 23,000 23,000 46,000
2,000,000 33,000 33,000 66,000
Can I Avoid the Cost and Time of Probate?
Generally, estates with a gross value of more than $100,000 are subject to probate. There are several common methods of avoiding probate. First, property can be held by the owners as joint tenants. Each joint tenant has equal, undivided share of the property and a right of survivorship. For instance, if a husband and wife own their home as joint tenants, each owns an undivided one‑half of the home and if one of them dies, that person's one‑half will automatically pass to the other spouse.
Another method involves creating a trust and giving the property to the trust. One of the most common types of trusts is "living" trusts, or trusts created during a person's lifetime.
What is a Living Trust?
A living trust is a trust that is created by person (called a trustor) that owns some type of property who then gives that property to the representative of the trust (called a trustee). The terms of the trust spell out who gets to use the property, or who it is left to under certain circumstances (the beneficiaries), including the trustor's death. In a living trust, you can be the trustor, the trustee and the beneficiary. Living trusts are also revocable, which means you can change or end the trust during your lifetime.
You establish the trust, appoint yourself as the trustee and use and enjoy your property during your lifetime. For all practical purposes, the trust is treated as a fictional entity during your life time. You file taxes for yourself and include income from the trust as if you earned yourself, and so on. After you die, the trust becomes irrevocable and is treated as a separate entity. Because the trust, not you, owns the property when you die, it's not a part of your estate and is not subject to probate. As a result, you save both time and money. Remember, the statutory fee for an executor a $100,000 estate is $4,000. That amount doubles to $8,000 if both an executor and attorney are needed.
Can a Living Trust Allow Me to Control What Happens With My Estate After I Die?
Yes. You can take steps to direct your estate, even if you are married and want your spouse to have some access to the income and principle after you die. For instance, if you have children by a prior marriage and want to make sure some of your estate is distributed to those children, a trust can be established that will ultimately be distributed to them.
Can a Living Trust Help Me Reduce My Estate Taxes?
Yes. The benefit of a living trust for smaller estates is avoiding the cost and time of probate and gaining control over the distribution of assets. For moderate to larger sized estates, there are two devices that when used with a trust, can help you save estate taxes. Remember, every penny save is a penny more to be used as you direct in your trust. First is the marital deduction. A deceased spouse can pass an unlimited amount of his or her estate to the surviving spouse tax‑free. However, the remainder of the surviving spouse's estate will be taxed on his or her death. The second device is each individual's estate tax applicable exemption amount. This is an amount, $2,000,000 in 2007, which is exempt from estate taxes.
Basic tax planning for a living trust works like this. If a husband and wife have an estate worth more than their combined exemption amounts, $4,500,000 for example, on the death of the first spouse, the estate would be divided into two trusts. An "A" trust for the surviving spouse, and a "B," or bypass trust, for the deceased spouse. The B trust is irrevocable and is funded with enough of the estate to take advantage of the deceased spouse's exemption amount. In our example, this would be $2,000,0000. The balance, $2,500,000, would pass to the surviving spouse. If the size of the surviving spouse's estate remained at $2,500,000, the remaining exemption would leave a taxable estate of only $500,000.
If the first deceased spouse's estate had passed directly to the surviving spouse, and the surviving spouse's estate remained at the full $4,500,000, then $2,500,000 would be subject to taxes. A carefully drafted "A‑B" trust can dramatically reduce estate taxes.
Can I Do Anything to Plan for Healthcare Decisions or Incapacity?
Absolutely. By using an Advance Health Care Directive you can give someone else the authority to make health care decisions for you if you are unable. You can also state your wishes regarding end of life issues. For property management during incapacity, a durable power of attorney is usually prepared as a part of your estate plan.
The Bottom Line
At the end of the day, each of us wants the peace of mind that comes from knowing that we have planned as best we could to avoid probate, control our assets, and avoid taxes. To plan properly, one needs to consider his or her own goals and then select from all of the possible devices that can help achieve those goals. Proper estate planning can, indeed, give you that peace of mind.
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