Do I Need an Estate Plan?

Five Pitfalls You Can Avoid by Having an Estate Plan

1. Intestacy

The most obvious consequence of dying without an estate plan is that your assets will go to your heirs as defined by California law. You may not want that. If you are married with children, you should know that up to half of your separate property will pass to your children, not to your surviving spouse. If you have no spouse, children or grandchildren, your estate will go to your parents, then to your siblings if your parents are dead. Maybe that’s the result you would have chosen, maybe not. You might rather give a helping hand to a friend or to a charity.

2.  Estate Tax

Married people are frequently able to save on estate taxes by having an estate plan. This is so because a married couple can take advantage of both the unlimited marital deduction, paying no estate tax when the first spouse dies, as well as each spouse’s personal exclusion amount, which totals $4 million for a married couple, to minimize their estate taxes when the second spouse dies. This can only be accomplished with a trust, whether inter vivos (during life) or testamentary (in a will).

For people whose estates are substantially above the personal exclusion amount ($2 million) estate planning is crucial. There are lots of different ways to reduce the size of your estate while you are alive. You could start a gifting program, whereby you make annual gifts to children and grandchildren of the annual gift tax exclusion amount (is now $13,000) in order to systematically reduce the size of your estate and get your assets to the people you want to have them anyway. Such a gifting program could be set up so that you make your gifts to a trust, to reduce the chances that your annual gifts will be spent on PlayStation games. You could make tuition payments for grandchildren, which do not count as taxable gifts if made directly to the school.

Your gifting program could also include charitable gifts of any size, which have the added bonus of being income tax-deductible. Gifts to charity can also be made by way of a trust in such a way that either you can use the gift during your lifetime and it goes to the charity on your death, or the charity can use the gift during your lifetime and it goes to your beneficiaries on your death.

3. Conservatorship

If you have not created a living trust and a durable power of attorney you may be creating a headache for your family. If your assets are in a trust, the person you designated as your successor trustee will manage them if you are unable to. The successor trustee could transfer funds from one account to another or liquidate assets to pay for your care. Similarly, your agent under a durable power of attorney can make non-medical decisions, incur legal obligations and manage other aspects of your finances for you. By way of illustration, if because of your incapacity you  needed to hire a care giver or rent an apartment, your agent could sign the employment agreement and the rental agreement on your behalf.

If there is nobody with legal authority to manage your assets and your affairs, someone will have to petition the probate court to be appointed your conservator. This is an expensive and public process. The conservator has to make periodic accountings to the court and often has to obtain a bond in order to be able to serve. And, if you have not made an estate plan, you have no say in who will be appointed your conservator.

In addition, if you have a complete estate plan in place, you will have named an agent to make health care decisions for you in the event of your incapacity and you will have left written instructions concerning the types of medical treatments you do or do not wish to receive.

4. Probate

As you may recall from the last issue, one excellent best reason to have an estate plan is to avoid probate. There are limited circumstances where probate is desirable, but for the vast majority of people it is to be avoided. It is expensive—up to 8% of the gross estate, meaning without accounting for encumbrances, can go to executor and probate attorney fees, and that figure does not include CPA fees, filing fees, bonds, etc. Probate can take a longtime, and it is a public process. Click on this link to see the California probate fees for attorneys and executors.

5. Hazards of Joint Tenancy

A very common “estate plan” technique is joint tenancy. Often this technique is used by parents, who may have only a few assets, such as a home and a few bank and investment accounts. By adding a child to the title to their home and to their accounts, they create joint tenancies in those assets. This means that each joint tenant, the parent and the child, has an equal interest in the asset and each has a right of survivorship. It does sound like a quick and easy way to avoid probate and attorneys, doesn’t it?

There are several problems with this “plan,” however. First problem: basis. When you give your child half of your house his half gets your basis, too. If you bought the house twenty or thirty years ago, the basis is very low. However, when your child receives an asset as a result of a death, rather than as a gift, he gets a “stepped-up” basis, meaning the basis is the fair market value of the asset on the date of the death. He can turn around and sell that asset and have no capital gain—and no capital gains tax. But, if he received half of the property as a gift and only half on a death, only half of the property gets a stepped-up basis on your death. In this case, when he sells the property, he will have a capital gain that could result in a tax.

The other big problem with joint tenancy is that once you put someone else on your title the property is legally half theirs. They can withdraw money from the bank account. You cannot sell or refinance your home, and you cannot take them off your title without their consent.

Of course, everyone who uses this “estate plan” method swears that their children are honest and would never cause trouble. There is a pretty sizable body of case law indicating that not every child is completely honest when it comes to their parents’ money. Moreover, even if your child is trustworthy, if he suffers a financial adversity, like a bankruptcy or a judgment as a result of a car accident, his creditors can go after all of your child’s assets, which include your joint accounts and your home that you hold as joint tenants.

For more information click on this link to read the California State Bar’s “Do I Need Estate Planning?”

Are Your Parents (and You) Prepared?

If you are a member of that middle generation, with kids to take care of and aging parents to worry about, I encourage you to talk to your parents now, while they still have the ability to prepare for their own incapacity and death. The following suggestions are based on actual cases that I have handled for clients who did not have a chance to get all the finishing touches on their parents’ estate planning in place until it was too late and therefore very expensive.

1. Make sure you know where your parents’ estate planning documents are located.

2. Check to see that their documents include all the necessary components of a complete estate plan.

3. Make sure their documents are all signed, witnessed and notarized, as necessary.

4. Make sure their planning documents reflect your parents’ current thinking. Wills and trusts need to be reconsidered if something has changed in the time since they were drafted. A very common change is remarriage. If your parent has remarried but the will was written before the wedding and makes no mention of the new spouse, the estate plan could be derailed.

5. Make sure other documents have been updated. It is not unusual for testamentary documents to be decades old. They are still valid. However, to be on the safe side, other documents that require the cooperation of third persons for their effectiveness should be redone every few years. I have heard of many people having difficulty getting a bank to honor a Durable Power of Attorney that is more than five or so years old. If the DPOA is not honored, you may have to be appointed conservator in order to take care of your parent’s affairs in the event of incapacity. That is an extremely expensive and time-consuming process.

6. If your parents have a revocable trust, check to see that their assets have been funded into the trust. This will save you lots of money and headache down the road. Also, if your parents have refinanced their home they may have “removed” it from the trust. Check the title and make sure their home gets “refunded.” Coming soon.

To read the California State Bar’s “Seniors and the Law” click here.

Call 925-943-2741 to discuss your case with an attorney.