ESTATE PLANNING
Estate Planning is making a plan to ensure that you and those you care about can be protected should you become disabled or pass away. You need to decide what your goals are in planning your estate and take steps to implement them.
PROTECTION OF YOUR CHILDREN
You can only name a guardian for your child in a legal will. If you do not have a will, and both parents were to pass away, then in order for someone to have permanent custody of your child, that person must petition the Court in order to be granted custody. If you don’t make those plans ahead of time, and document them in a will, the person who steps forward may not be the person you would choose to raise your child. The Court will perform an investigation to review any one who submits a Petition, and make a choice as to who the Court thinks is best suited to raise your child. Your family may disagree among themselves who is best suited and initiate a costly court fight, part of which will be paid for with YOUR money.
You may name two types of guardians for your child.
Guardian of the Person - person who is to have physical custody of the child.
Guardian of the Estate - person who will be investing and handling your money.
You can name the same person for each job, or two different people. It's worth thinking it through. It is normal for the Guardian of the Estate to have to post a bond and to have to report back to the Court at regular intervals. The child is entitled to receive all such funds at the age of majority (18 in California,) whether or not the child is responsible or able to manage the funds.
Use of a Trust
You can direct the creation of a child’s trust either in a will or a living trust, to be created upon your death. By use of such a child’s trust, you can protect your child in the following ways:
making sure the money is not handed over until you feel confident that they will be mature enough to handle it
protecting from creditors through the use of a spendthrift clause
allowing for advancements if the trustee feels there is a valid reason for it
holding the money until a college education is achieved
PROTECTION OF YOUR MONEY
There are a number of ways you can plan to protect your money. Most people's goals with relationship to their money are (1) not spending it unnecessarily on fees, (2) not giving it to Uncle Sam or our Governor, (3) keeping it private, (4) protecting it from bad handling by immature children or "spenders,” and (5) having as much control as possible over their own use of it.
HOW DO ASSETS GET TO BENEFICIARIES?
Probate
Probate is a court proceeding designed to be sure that rules are followed, that funds are protected, and that a clear transfer of title takes place, unencumbered by debts. An executor is appointed to be responsible for the assets. Unless certain conditions are met, the executor must have a bond, which is like an insurance policy to protect the principal. Probate takes a minimum of six months, and a more likely time period is 1-2 years. All information that is filed is public information. If a person dies intestate or with a will, estates in California must be probated if probate assets total more than $166,250.00.
Probate Assets
property held as sole owner
or tenants in common
proceeds of lawsuits
brokerage accounts or mutual funds
held as sole owner
bank accounts held as sole owner
Non Probate Assets
Joint Tenancy assets
Assets providing for a beneficiary
Retirement plans
Annuities
Life Insurance
POD/TOD (pay on death/transfer on death) accounts
Probate is expensive. California allows fees based on a percentage of gross value(before mortgages or debt) of the assets being probated. Probate Fees (each to attorney and executor) are:
4% of the first $100,000.00
3% of the next $100,000.00
2% of the next $800,000.00
1% of the next $9,000,000.00
Example: If you have a $300,000.00 house being probated, the attorney and the executor would each get $9,000.00. This is regardless of whether you had a large mortgage or not, and only includes the house. These fees are the same regardlessness of how little actual work may be involved. Additionally, the executor and attorney can request additional “extraordinary” fees, for such things as preparing tax returns or assisting in the sale of the house.
Joint Tenancy
Joint Tenancy is an easy way to get assets to beneficiaries, and avoid probate. However, it does have its drawbacks.
putting someone onto an asset as a Joint Tenant is making a gift to that person
you may unintentionally disinherit someone
upon your death, only your share of the property may step up to Fair Market Value
opens your assets up to the other person’s liabilities
Gifting
Most people are aware that you can give up to $16,000 per year free of any gift tax. You can also pay for medical expenses or education expenses in unlimited amounts without gift tax ramifications.
Use of a Trust
You can set up a trust to hold an asset, either during your lifetime, or in a will. Since the trust is a separate legal entity, your death or incapacity will not affect its existence. To the contrary, you can use such events to trigger actions to be taken by the trust.
PROTECTING YOURSELF
Advance Health Care Directive-You can appoint an agent to make decisions in your behalf when you are unable to do so. This is a legally binding document. It can also be used to give direction as to what criteria you consider important in making decisions, and such things as the use of pain killing drugs.
Durable Power of Attorney for Property Management-You can grant an agent pretty much any powers you wish to grant. A power of attorney can also be limited to a single function. A power of attorney is only valid during your lifetime. Once you are dead, it cannot be used. Its use is mainly in handling your financial affairs during times of incapacity.
WILLS AND TRUSTS
Statutory Will
This is a fill-in-the-blanks will that was prepared by the California Legislature. Thus, it has all the correct legal wording. It is excellent in simple situations. You can use it to do the following: make specific gifts, name an executor, name a guardian, require or waive bond. Just like an attested will, it requires 2 witnesses.
Attested Will
This is a completely typewritten will. It must be signed by at least 2 witnesses, and its use is very flexible. Notes written on it in handwriting are not valid. Among the things it can be used to accomplish are:
dispose of probate assets(note, a will cannot be used to dispose of assets held in joint tenancy or assets which have a designated beneficiary)
name a guardian for minor children
name executor
waive bond for executor and/or guardian
create a testamentary trust for benefit of children or others
Holographic Will
This is a completely handwritten will. To be valid, it must indicate that it is a will, and must have the date and signature of the testator(the person whose will it is). You can do any of the things you can do in an attested will. This can be effective, but also dangerous, because you may not use the correct language, and the court’s interpretation may have different results than you intend.
If your probate assets total over $166,250.00, your assets will be probated whether or not you have a will. Having a will does not avoid probate. All it does is give instructions as to where you wish your assets to go.
Trusts
Revocable-can be changed or terminated
Irrevocable-cannot be changed or terminated. In California, trusts are revocable unless the document specifically says otherwise.
What is a trust? It is a legal entity you create to hold your assets for you. You give it directions on how to spend it during your lifetime, what to do in the case of your disability, and what is to be done in the case of your death. During your lifetime you are the trustee of your trust and you have complete control over the assets.
How does it avoid probate? A trust is a separate legal entity that survives your disability or death. If such an event occurs, the trust document has instructions on what to do. You will have decided on who is to be the successor trustee, and how the money is to be handled. You may have left instructions that the trust is to continue, so that the money can be used to care for your children until they are mature enough to handle it themselves. The instructions may make provisions for the funds to be divided up immediately. A separate trust can be set up for tax planning purposes. Any legal work that needs to be done is usually minimized, and can be paid for based on the work needed, not a statutory fee.
What will happen to me if I set up a trust?
You will discuss, review and sign the needed documents.
You will retitle your assets from your name to yourself as trustee.
You will still have complete control over investing, transferring accounts, and spending your money. You can even take it out of the trust at any point in time.
As long as you are alive, you or your Trustee will continue to file your taxes as you always have - a revocable trust is invisible to the IRS
What if I get divorced, or have Separate Property?
Each of the settlors retains the right to revoke the trust, which would be appropriate.
If you have Separate Property, you can put it into the trust, and it remains Separate. If the trust were revoked, the property would come back out of the trust as your Separate Property.
ESTATE TAXES
You should also be aware of how the Estate Tax may impact your beneficiaries. Your estate is the total of all your assets, including IRAs, 401(k), death benefits from life insurance you own on yourself, less liabilities. The estate tax rates go up to 40%. As of 2022, the amount exempt from Estate Tax is $12,060,000, which is indexed for inflation.
With such a large impact on your estate, it is important to plan and be sure to take advantage of every opportunity to avoid or minimize the tax.
WHAT DO I NEED TO DO?
As with anything that affects you in such a major way, it is important to be informed. This is just an overview of these issues. Ask your advisors questions, and read more about these topics. I would be happy to discuss your personal situation, answer any questions, and explain any confusing areas. Please feel free to call for a complimentary consultation.
ESTATE PLANNING
FOR THOSE WITH MINOR CHILDREN
There are three critical things to do concerning estate planning when you have a minor child or children. The first is to name a guardian, a person who is capable of providing for the physical and emotional well-being of your child in your absence. The second is to ascertain whether assets will be available in your estate to provide for your child. The third is to assure the appropriate handling of the assets, and determining when and how the child should receive the assets.
GUARDIAN
Choosing a person to name as a guardian for your child is a decision that you want to think through carefully. For many people, it’s an easy decision because there is a close family member that is readily available. For others, it’s a difficult process. It is also possible to name Co-Guardians who can work together for the child. A Guardian does not have to be a California or US resident to be nominated.
There are two types of guardian that can be named for your child:
Guardian of the Person-physical custody of the child
Guardian of the Estate-handles financial assets belonging to the child
The two types of guardians do not have to be the same person. This may be advantageous if the person you feel would do a great job of raising your child, but may not wish to or be suited to handling/investing large sums of money. Some advocate naming a member from each side of the family to ensure that the child retains contact with both sides of the family. Many families name the same person to handle both types of Guardianship, and many family name different individuals to manage the different types of Guardianship.
Factors you may wish to consider about your child and the potential Guardian of the Person are:
Relationship with the child
Values of the guardian
Religious Beliefs
Lifestyle and Location
Proximity to other family members
Questions you may ask yourself are: Is the person someone that the child already knows and trusts? Would the person(s) bring up your child in harmony with your values? Do your religious beliefs (or lack thereof) conflict? Are the lifestyle and location going to be a big adjustment for your child? Is your child going to be near or distant from other family members that he or she is accustomed to seeing? Does the guardian value higher education the same way that you do?
I will discuss the role of the Guardian of the Estate in the context of management of estate assets.
The Court gives this the greatest importance in making a decision as to the guardian. The law states that the Court must look to the best interest of the child in appointing a guardian. This means that the Court has the ability to name a guardian other than the one you have nominated, but the nomination of a guardian by a parent carries great weight. To appoint someone else, the Court would require great evidence to ignore such a nomination.
You may also wish to discuss these issues with the person you have in mind. Once the decision is made, it’s a good idea to discuss it with the child if he or she is old enough to understand. Often, it’s not just one of these factors that makes the decision, but a conviction that the guardian will be able to bring up your child in a environment in which he or she can thrive.
AVAILABILITY OF ASSETS
When you consider a scenario in which you are not available to earn an income to provide for your child, it is important to determine what assets would be available to do so. It is important to consider sources such as: the assets you currently own, the availability of SSI, and insurance. Two methods by which you can get an idea of your needs are as follows:
(1) Ascertain how much monthly income it takes to run the household on an annual basis. For example, you may determine that it takes $40,000 to do so. Determine what rate of return you can get on your assets, i.e. 2%. Divide the 40,000 by 2%, and you would need income-producing assets of $2,000,000 to provide the required yearly income. In addition, you would have a nest egg to provide a college education for your child.
(2) Ascertain how much immediate expense there would be upon your death, such as payment of funeral, burial, legal fees, debts such as mortgage. Total these, and then add how much you think your child would actually need for a given number of years, as well as expenses such as education. This would give you a total, which is what would be needed.
Both of these methods are greatly simplified, just to give you an idea of the concepts involved. Many financial planners and insurance agents would be happy to use their computer program to give you a more accurate estimate. Once you have calculated what you need, and compare the total to what your assets are at this time. Generally, the easiest way to fund any shortfall is insurance.
HANDLING AND SAFEGUARDING YOUR ESTATE
Now you need to plan how to make sure that the assets you leave for the care of your child are invested, spent, and distributed correctly. Some of the issues you will be looking at are:
(1) in what kind of vehicle will the assets be held?
(2) who is in charge of the assets?
(3) does the estate need to provide a bond to protect the assets?
(4) how should the money be spent?
(5) when should the child receive the money outright?
Assets which pass to your child can be held in a number of ways.
Guardian of the Estate
This person is appointed by the Court, and is responsible for reporting back to the Court on an annual basis, as to how the money was invested and spent. Money held this way, unless otherwise specified, must be released to the child when the child reaches the age of majority, which in California, is 18 years of age. If specified, it can be held until age 25. Unless you otherwise stipulate, the Estate is required to pay for a yearly insurance policy (surety bond) to ensure that the Estate is not misused. In addition, the Court will approve only extremely conservative investments, such as savings accounts, which are insured, but you may or may not feel would be appropriate.
Uniform Transfers to Minors (Custodial Account)
If you have a Will or a Trust, you can also direct that the assets be held in trust or deposited into an account under the Uniform Transfer to Minors Act in your jurisdiction. With a Uniform Transfer to Minor account, a Custodian is named, and the only responsibility for accounting is that the assets must be disbursed in favor of the child. There is no court supervision or investment guidance at all. The child or a representative who has gone to court to be appointed on behalf of the child are the only ones who can challenge how the funds are spent or invested, after the fact. Like the Guardian, the age at which the funds are released to the child, unless otherwise specified, is age 18. Similarly, it can be extended to age 25, if specified.
Trust
If the assets are held in Trust, you appoint a Trustee to handle the assets. There is quite a bit of flexibility in investing, protection, and disbursement. You can give the Trustee as much or as little discretion as you please in how the funds are to be disbursed. You can require a bond, or waive it. You can give instructions as to how the assets should be invested, or give permission for the Trustee to hire advisors, such as a financial planner to give guidance. Your Trustee can be an individual or a corporate trustee, or any combination thereof. A corporate trustee, such as a bank with a trust department, has experience in investing and disbursing the funds. Also, there is more assurance that the funds will be available, since if there is a problem, the corporate trustee has “deep pockets.” If your Trustee is a person you trust, and they somehow lose the assets, there may not be any assets available for your child’s representative to sue and obtain. Of course the flip side is that a corporate trustee generally charges an annual fee based on the size of the estate, and is only willing to handle certain types of assets. For example, if your estate includes a vacation home that you wish to hand down the generations, some corporate trustees will not handle real estate. These are questions you would want to have answered prior to naming a Trustee.
DETERMINING HOW AND WHEN
YOUR CHILD GETS THE ASSETS
Once the assets are safeguarded, you may wish to consider the question of when and how your child will have access to any principal you have left. In any of these scenarios, it is relatively easy to ensure that your child will have access to the funds for such things as food and shelter or college expenses. If there is money left over after these obligations are met, what happens to the remainder? Should it go outright to your child at age 18 or age 21? You may wish to consider the wisdom of giving it to your child in steps. Many of us have never dealt with large sums of money, and it can be intimidating to a 21 year old to come into an inheritance. Without such experience, it becomes easy to visualize a scenario in which the child does not manage to handle the money in ways that are in his or her long term interest. By allowing the child the opportunity to receive assets in several steps, the child has the opportunity to learn from the experience of dealing with a (for the child) large sum of money, as well as the ability to gain the maturity of added years prior to the next disbursement of funds. By using a trust with such provisions, you are allowing your child to learn from and be protected from his or her mistakes, in a way that allows a safe way to do so.
It is also possible to give the trustee the authority to make advances of future steps if it seems appropriate to do so. For example, your child may be 25, married, with a good job, and preparing to buy a home. In this scenario, it may very well make sense to you (and the trustee) that it would be appropriate to allow the child earlier access to funds that are available. It doesn’t make as much sense to protect the child from the consequences of his or her immaturity, if he or she has demonstrated maturity in his or her conduct. These are options that you may wish to consider in deciding whether to set up a trust as part of your estate plan.