Estate Planning

 

If thinking about an estate plan makes you feel uneasy, you are not alone. Contrary to popular thinking, an estate plan is not only for directing the disposition of your assets upon your death.

An estate plan is also essential to protect you if you become ill or incapacitated. By default, the California Probate Code and other legislation would direct what would happen upon your incapacity or death. A well-drafted estate plan would allow your personal representative to manage your personal care and financial assets in line with your wishes.

Why do I need an estate plan?

Incapacity Planning

 

In your estate planning documents, you would designate someone to make financial, legal, and healthcare decisions for you if you become unable to make those decisions for yourself.

Probate Avoidance

 

 In California, probate is a court-supervised administration of a decedent’s estate. Probate is often a lengthy and expensive process. 

Disposition of Assets

 

If a person dies without a will or trust, her assets will pass to her heirs as provided in the California Probate Code in a manner called intestate succession. A summary of the intestate succession plan is described below. Clients frequently desire to customize their distribution plans and prefer to have a will rather than relying on the Probate Code.

Provide for Minor Children

 

In the unlikely event of both parents’ passing, your estate planning documents would outline your wishes regarding guardianship and care provisions for your minor children.

Complete Estate Planning Package

1. Revocable Trust

Common terms: Settlor (Trustor), Trustee, Beneficiary, Trust Estate, Living or Inter Vivos, Testamentary, Fiduciary

A revocable trust is the cornerstone of estate plans in California. These trusts are also referred to as living trusts because you create them during your lifetime. You can revoke or amend a revocable trust at any time. Revocable trusts are popular in California because it allows your estate to avoid probate administration. Unlike wills, trusts are private documents, and only those individuals with a direct interest in the trust have any right to know of trust assets and distributions. The trustee of your trust can manage, allocate, and distribute your assets at your death, without court involvement.

2. Wills

Common terms: Testator, Executor, Beneficiary

The will only controls property that is subject to probate. This generally means property held in your own name, property held as tenants in common, or in California, community property. These types of properties may include bank accounts, investment accounts, real estate, and personal property held in your name only.

A will that is drafted to work in conjunction with a revocable trust is called a pour-over will. This means that the trust is named as the beneficiary in your will. It is best to properly fund your trust, but if you miss something, a pour-over will acts as a safety net to capture assets inadvertently left out of the trust.

Your will is also where you would nominate guardians for your minor children.

3. Durable Power of Attorney

Common terms: Principal, Agent

A durable power of attorney allows you to appoint someone to act in your place, if you are unable to manage your own financial affairs. The document is called Durable because the authority continues even though you may be deemed incapacitated or unable to take care of your own affairs. The Durable Power of Attorney expires immediately after you die.

Without a Durable Power of Attorney, you may be faced with your family needing to request a very lengthy and expensive legal process called a conservatorship (or guardianship if under 18 years of age) so the court can appoint someone to manage the affairs of the incapacitated person.

4. Advance Health Care Directive

Common terms: Patient, Principal, Health Care Agent

An advance health care directive allows a person that you appoint, known as your health care agent, to make healthcare decisions when you are unable to do so yourself. One of the most important instructions your Advance Healthcare Directive can have is instructions for someone to represent you in dealing with healthcare professionals and to carry out your instructions if you were to become hospitalized or incapacitated.

Advanced Estate Planning

An effective estate plan will take into consideration your current assets as well as the anticipated increase in value of your existing estate. In anticipation of your family’s needs, you should take steps to preserve your estate and protect it from excessive costs and taxes. Ultimately, the goal will be a stress-free and orderly settlement of your assets to your chosen beneficiaries upon your passing. Estates that are or may become subject to the estate tax would benefit from more advanced planning techniques. 

 

  1. Lifetime Estate and Gift Tax Exemption Amount

    Generally, when you die, your estate is not subject to the federal estate tax if the value of your estate is less than the exemption amount. For people who pass away in 2021, the exemption amount will be $11.7 million (it's $11.58 million for 2020). For a married couple, that comes to a combined exemption of $23.4 million.

    Gifts that you make during your lifetime are generally counted against your exemption amount. There are a few exceptions, such as gifts that are less than the annual exclusion amount. 

  2. Annual Exclusion

    The annual gift exclusion amount for 2021 is $15,000. What that means is that you can give away $15,000 to as many individuals—your kids, grandkids, their spouses—as you’d like with no federal gift tax consequences. A husband and wife can each make $15,000 gifts, doubling the impact. Separately, you can make unlimited direct payments for medical and tuition expenses. Making gifts in excess of $15,000 annual exclusion gifts is counted against your lifetime gift/estate tax exemption.

  3. Irrevocable Trusts

    Irrevocable trusts cannot be revoked or amended. Despite their restrictive nature, there are some circumstances where irrevocable trusts are warranted.

    To Minimize Estate Tax - Irrevocable trusts can be drafted such that the assets contributed to them are not included as part of the estate of the donor. The initial contribution to an irrevocable trust may or may not use some of the settlor’s exemption amount, depending on the technique used.  

    To Become Eligible for Government Programs - Disabled beneficiaries on Medicaid and Supplemental Security Income have stringent income and asset limitations — if they own or receive too much money they can lose these and other government benefits. Irrevocable trusts can shelter income and assets, so these limits are not exceeded. For example, parents can create a “special needs trust” to give money to a disabled child without disqualifying him from government benefits. The beneficiary must not have substantial control over the trust, otherwise the trust assets would be counted as the beneficiary’s own assets. 

    To Protect Assets - Protecting your assets from creditors usually requires a trust to be irrevocable, and the beneficiary cannot also be the trustee. California law does not permit someone to transfer assets to an irrevocable trust in contemplation of a lawsuit. More commonly in California, irrevocable trusts are those which are created to hold a gift or inheritance. 

  4. Charitable Giving

    A charity can be the beneficiary of a relatively simple revocable trust or irrevocable trust. Other strategies using charitable trusts can provide benefits to charity as well as to your family or yourself. 

    Charitable Lead Trust - A charitable lead trust lets you provide a payout to a charitable cause during your lifetime (or a term of years) and preserve assets for other beneficiaries, such as children or grandchildren. The value of the remainder gifted to your descendants will be a taxable gift if the trust is funded during your lifetime, or subject to estate tax, if the trust is funded at your death.

    Charitable Remainder Trust - If you have substantially appreciated assets (such as real estate or stocks), you can reduce current capital gains tax on the assets by contributing the assets to a charitable remainder trust. You can also give a portion of the current value of your assets to charity, and generate a payout from the trust to yourself or someone else during your lifetime, or for a specific term.