Estate Planning FAQ

Why You Need to Plan Your Estate

Many people do not have a will, trust, or estate plan. They believe that upon their death their estate will be distributed to their children and/or spouse in the manner that they would have desired.

Unfortunately, for those who do not have a will or estate plan California has an estate plan for you. The California laws which govern your estate upon your death dictate that your children will receive two thirds (sixty-six percent) of your separate property (if you are married and have two or more children), or one half (fifty percent) of your separate property (if you are married and have only one child). Your community property (which may comprise a large share of your estate) and the balance of your separate property will all be left to your spouse or domestic partner. This may leave your children with much less or much more than you wish for them to receive. Conversely, it may leave your spouse or domestic partner with either less or more than you wish for them to receive.

In addition, a guardianship of the estate will generally have to be set up to control any amounts that are left directly to your children (even if one parent is still living); and the care of your children may require a court to create a guardianship of the person (this will not be required if one parent is still living).

The naming of a guardian of the estate (someone to safeguard the children’s property) by a court is a procedure that may delay the timely transfer of assets to your children. More importantly, the investments which a court will allow for a guardianship are generally very conservative; this is in order to preserve the assets for the children. These investments, which must be conservative, may not keep up with inflation, and they may not be the type of investments which you would choose for your child.

Maintaining a guardianship (for the estate) is generally an expensive procedure which requires continual filings with the court (eating away the children’s assets over time). Additionally, the children, by law, are entitled to the assets held by the guardian when they turn eighteen. This may not be in the best interests of the children, or it may not be what you would have wished for them. Many eighteen year olds might be inclined to squander their assets without much thought to their future.

By law, the assets that are left to your children will be left to them equally. That is, if you have two children, each will receive one half of the assets; if you have three children, each will receive one third of the assets. This too, may not be what you would have planned, and might not be in the best interests of the children. For example, one child might have special needs which must be attended to and paid for; or one child might decide to attend Stanford and go on to graduate school. That child is only entitled to receive an equal share in the assets, even though it might be in that child’s or another child’s interests to have access to more than an equal share in order to pay for special educational, physical, or psychological needs.

Lastly, the costs of probating your estate may be much higher than you would have assumed. For example, attorney’s fees and executor’s fees, which are based on the value of the gross estate, are calculated by a state mandated formula. The fees are 4% of the first $100,000 of the estate, 3% of the next $100,000, 2% of the next $800,000, and 1% of the next $9,000,000 of the estate. (These amounts must be paid to both the attorney and the executor.) In other words, the executor and attorney fees required to probate an estate which consists of $750,000 (including outstanding loans) will be $36,000! Although this represents less than 5% of the estate (or more if there are loans outstanding), this is a significant amount of money which will not be passed on to the heirs of the estate.

Avoiding the Pitfalls

As the above makes clear, there are many reasons why you should plan your estate. A will is the document that usually appoints the guardian(s) of your children. Additionally, a will usually sets out who you want to inherit your property, and in the amounts that you specify. A will can also contain a trust for the benefit of your children, in the case of the simultaneous death of the parents, or the death of a surviving parent. Such a trust can specify that the special needs (including the unforeseen future needs) of a child are met, and can specify the exact ages that any assets are distributed to the children.

Probate costs can be eliminated (or greatly reduced) by the use of a living trust. In the above example, probate could be completely eliminated if most of the estate assets are placed in a trust, thereby saving the estate $36,000 in probate fees. Moreover, the use of trusts can double the amount of assets that can pass to heirs tax free (see the section on trusts immediately below).

Using Trusts to Reduce or Eliminate Federal Estate Tax

Through December 31st, 2012, the value of an estate which can pass federal estate-tax free is five million dollars ($5,000,000). Thus, any individual with an estate valued at less than $5,000,000 can pass that estate on to their heirs free of federal estate tax. Unfortunately, if a married couple has assets valued in excess of $5,000,000, their estate could potentially be subject to estate tax if they do not engage in proper estate planning. With proper estate planning, (the use of a trust, for example), a couple with assets valued up to ten million dollars ($10,000,000) can completely avoid federal estate tax. This is accomplished because the use of a trust allows both spouses to take advantage of the $5,000,000 exclusion amount, thereby doubling to $10,000,000 the amount that can be passed on to heirs free of estate tax. (Beginning on January 1st, 2013, the laws are subject to change, and we’ll have to wait for the changes to be announced before proper estate planning can be implemented at that time.)

Advantages of a Trust

You control, through the trust instrument, the way assets are managed and disposed of, either at death or during incapacity.

  • No probate
  • No conservatorship
  • Avoid or reduce estate taxes
  • Potential to avoid creditor claims

Elder Planning: Proper Estate Planning Can Avoid a Conservatorship

A conservatorship is a legal process whereby a person who becomes incapacitated is placed in the legal care of another. Because a conservatorship is costly and time consuming, it is not generally recommended, and can be easily avoided with proper estate planning.

The easiest way to avoid a conservatorship is simply to name a person in durable powers of attorney (for finances and for health care) who can take care of matters in case of incapacity. This is a very simple process, but unfortunately, one which many people fail to attend to (a trust can also be very helpful in avoided a conservatorship). A lack of planning may result in a conservatorship, which can be a burden because of the numerous court filings and detailed record keeping, and the necessity of hiring an attorney to aid in the complex process. In addition, conservatorships are public matters which require continued court supervision, and which often result in familial discord.

If you have not provided for proper estate planning, elder care, or if you need help in planning your estate call for a 20-minute phone consultation (leave a message if necessary), or e-mail us to schedule one.