Basic Estate Planning

Basic estate planning is the process of planning for the transfer of property in a cost-efficient manner upon death, and for planning for potential incapacity or disability.

Estate planning accomplishes three goals: it ensures property is privately passed to whom one intends without the stress and cost of probate; it outlines decisions regarding healthcare and property issues should one become disabled and unable to make decisions; and it minimizes or eliminates the exposure to estate taxes upon death. These goals are accomplished by using a combination of a living trust, will, advance healthcare directive, living will (the right to die), nomination of conservator, and power of attorney of property.

Understanding how property transfer occurs and familiarizing yourself with the fundamental concepts of estate planning is the first step.  

1. Intestate Succession: Dying without a Will. 

If one dies without a will, the State of California has a system in place to determine who receives assets through a system called probate.  Unless one changes this statutory plan using a will or living trust, the state makes the decisions and the estate will be charged a probate fee.  Probate, in its entirety, can be avoided by careful and effective estate planning. 

2. Wills

A will is a legal document which determines who inherits property upon death.  Many people make the mistake of creating only a will because they do not understand how expensive it is in the long run. This is because even with a will, the state will charge a probate fee to the estate. In order to avoid probate, one needs a will as well as a living trust and/or other trusts depending on one’s net worth. 

3. Avoiding Probate Through Joint Tenancy

Basic estate planning involves avoiding probate because of it’s exorbitant fees. A common alternative to probate is holding title to property in the form of a joint tenancy when two or more people own property together.

When one of the owners dies, the other owners "inherit" that share. However, joint tenancy only avoids probate at the death of the first individual. Upon the death of the second or the death of the last joint tenant, the property will inevitably go through probate.

4. Avoiding Probate by Creating a Living Trust 

To avoid probate, a trust is created, and all property and assets are transferred into the trust. You and your spouse or partner (if applicable) are the trustors (creators of the trust) as well as trustees (managers of the trust assets), and any and all property you own will be owned by the trust. Do not be alarmed! As trustees, you maintain all rights over the property, including and not limited to the right to sell, bequeath, and purchase property. Within the trust, you designate whom you want your property to pass to upon your death, or who you want making decisions for you should you become incompetent. Depending on your marital status, net worth, and citizenship, there are different trusts that can be used.

Many are under the wrong impression that estate planning is only for the high net worth individual. Do not make that costly error. Everybody benefits from having a proper, effective estate plan.

5. Estate and Gift Taxes

Estate and gift taxes are federally imposed on a taxable estate when one dies. The same tax also takes effect when one gives a substantial amount of property to someone during their lifetime.

          A Tax Shelter: The Unified Credit

The Unified Credit exempts certain sized estates from federal estate tax. Essentially, it is a dollar for dollar credit against federal estate taxes.  Currently, the Unified Credit is $5.45 million.
Everyone who is a citizen or non-citizen resident is eligible for a unified credit equal to a shelter of $5.45 million for estate tax purposes.  Therefore, one can bequeath this amount, tax-free, to heirs upon death.

          Unlimited Marital Deduction

The unlimited marital deduction enables a spouse to pass his or her entire estate to the other spouse free of any gift or estate taxes. The government has chosen not to tax widows and widowers, but they tax children upon the death of the surviving spouse. The unlimited marital deduction does not apply to an American married to a non-citizen. 

6. Disability / Incapacity Planning

If one becomes incapacitated in California, a court may select a conservator to manage property and make personal decisions.  With a living trust, Advance Healthcare Directive, Durable Power of Attorney, and/or Nomination of Conservator, one can avoid a conservatorship and select, in advance, a trusted individual to manage affairs.

7. Durable Powers and Living Will 

A comprehensive estate plan should include a durable power of attorney for property, an advance healthcare directive, and a living will in the event of disability or incapacity.

Durable Power of Attorney:   designates a person to handle property issues, such as writing checks and accessing retirement plans.

Advance Healthcare Directive:   delineates medical choices and appoints a person who will ensure decisions are carried out.

CONCLUSION

Everyone should have an estate plan to ensure the smooth transfer of property, to minimize or eliminate federal estate taxes, to avoid the exorbitant fees associated with probate, and to plan for one’s incapacity or disability. Because this is a complex field of law, please call me for a free consultation.