â€œEstate Planningâ€ has been defined in many different ways. Simply put, however, its aim is to address a concern expressed very often among individuals seeking advice about their present and future needs. You may be among the many often state:
“I want control of my life and assets while I am alive,well, and able to do so. If I should become sick or disabled, I want to be sure that I am protected and cared for, as are my loved ones, in the manner I have chosen and by the people I have chosen. When I am no longer present, I want to be able to leave what I have to whom I want, when I want, and in the way I want. Of course, if I can, I want to save as many dollars of taxes, professional fees, and court costs as possible.”
To accomplish these goals, various tools exist to enable you to use your assets to their fullest potential during your lifetime, and to secure these assets for your loved ones after you are gone. Unfortunately, not taking advantage of these tools often results in significant reduction of assets, higher taxes, years of delay, and unnecessary heartache for those you wish to provide for. Therefore, we have included below a brief summary of the dangers of improper planning or no planning at all to help educate you in the best manner to proceed for your particular situation.
THE PITFALLS AND HAZARDS OF THE DO-NOTHING APPROACH:
Unfortunately for you and your family, a lack of proper planning may result in this method of estate planning where you leave your estateâ€™s future to the governmentâ€™s one-size-fits-all default estate plan. If you do nothing, the plans established by the Internal Revenue Service and the California State Legislature will automatically “kick-in”.
The sad reality is that under such a plan you are very likely to pay substantially more income tax, estate tax, court costs and attorneys’ fees than necessary, thereby depleting your estate and leaving much less for you to pass on to your loved ones. Further, you will also have no say as to who will receive your assets or when such assets will be passed to them. A lack of a proper estate plan will likely result in:
-No control over the distribution of your assets. You can not say who gets what;
-Probate costs that are required to be paid to the courts – up to 5% of your gross estate is lost instantly;
-Increased tax liability for yourself and your beneficiaries;
-Years of court proceedings before your estate can be distributed to your loved ones;
-No Privacy – All distributions of your estate, including how much was passed on to whom, become public records available for anyone to see;
-Thousands of dollars in attorneys fees to administer your probate proceeding;
-Unnecessary burden to your loved ones who must endure the lengthy and often contentious probate court process for years after you are gone.
THE SOLUTION: THE LIVING TRUST APPROACH
A living trust is a tool used by qualified estate planning attorneys to establish a customized, cost effective, and private solution tailored to your desires. A trust is a method by which title to your assets is held, allowing for many tax and non-tax advantages to you and your loved ones.
Some of the many benefits of establishing a revocable living trust are as follows:
-A living trust allows you to have complete control both over the distribution of your assets to your loved ones and the administration of your trust. You get to choose who manages your property and to whom it should be granted with restrictions if you so choose;
-A trust is easy to change in the event that circumstances change or you change your mind;
-Most, if not all, probate fees, attorneys fees and court costs are avoided entirely, as there is no need to involve the Probate Court, leaving a larger estate to pass on to your loved ones;
-Taxes are reduced or eliminated;
-Years of delay and court proceedings are avoided – The trust allows the immediate transfer of your assets in the way you choose;
-Complete privacy is accomplished – Your trust documents are confidential and do not become a public record in the way probate court records would;
-There is no unnecessary burden to your loved ones who would otherwise suffer through years of probate proceedings.
With a proper estate plan, you can also designate your wishes regarding the management of your assets in case of your disability, as well as your desires regarding hospitalization, convalescent care, life-saving treatment, organ donation, and funeral arrangements using advanced health care directives, powers of attorney, HIPAA waivers, and many other special tools which are briefly explained below.
A trust should, in most cases, be the primary instrument of your estate plan. It is both confidential and provides coordination of your entire estate, while being easy to establish and to change. In assisting you with a proper estate plan, a qualified estate planning professional may couple your trust with a few other tools to allow complete control over your medical, physical care, and financial arrangements. For your information, a brief summary of some of those tools follows:
ADVANCE HEALTH CARE DIRECTIVE
California recognizes a separate document called an â€œAdvance Health Care Directiveâ€ which is granted by you to another individual to authorize that individual to make health care decisions for you during any period of disability.
This power should be granted to an individual who you trust and if you so choose, who is familiar with your desires with regard to medical decisions. An Advance Health Care Directive grants specific authority to that individual to consent to or refuse treatment for you in the event you are unable to make such decisions for yourself.
Having an Advance Health Care Directive grants your family peace of mind, as without one, they will be required to spend time and substantial money to establish a conservatorship to obtain the authority to make such decisions. Also, having the Advance Health Care Directive in place prior to your disability or incapacity allows your desires to be set forth confidentially, so that they may be honored without having your loved ones endure the difficulty of having to guess what you may have wished.
DURABLE POWER OF ATTORNEY
Though unfortunate, it is wise to consider who we would wish to manage our assets in the event of our mental or physical disability prior to death. Relying on family members or friends to act under a court-appointed conservatorship is usually unwise, because of the unnecessary costs, delays and restrictions often imposed in having to go through the court conservatorship process. To avoid this process, the alternative is to grant, while you are still able and competent, the power to manage your property to an individual, family member, or a bank trust department. In California, this can be arranged through a power of attorney designed to become effective during any such incapacity.
The need for a power of attorney is minimized when oneâ€™s assets are held in the name of a living trust. With the use of a trust, the successor trustee of the trust will be able to manage your assets in the event of your disability or incapacity. However, if certain assets have been intentionally or inadvertently left of your trust, a durable power of attorney will assure that those assets are also properly handled. Therefore, a durable power of attorney is a useful tool to be drafted by a qualified professional in conjunction with your living trust.
ALTERNATE AND LESS PREFERABLE APPROACHES TO ESTATE PLANNING:
THE JOINT OWNERSHIP OF PROPERTY APPROACH
A fairly common tool used in estate planning is the joint ownership approach, illustrated where most married couples who purchase a home take title as “husband and wife as joint tenants.” For smaller estates, joint ownership of property may be an acceptable estate planning tool, as it is automatic upon death, defers probate, and provides an orderly transfer of property between two individuals. However, care must be taken in the use of the joint ownership approach as there exist certain disadvantages, such as the loss of income and estate tax-saving opportunities, loss of control of the asset, and unintended personal liability.
For these reasons, except for very small estates, the use of a living trust is usually much more desirable than joint ownership. Further, in comparison to all the alternative estate planning tools, a living trust is the most comprehensive, allowing all of your estate planning needs to be addressed in one complete package.
THE BENEFICIARY DESIGNATION APPROACH
A very widely used estate planning tool is the beneficiary designation approach. In this approach, certain types of assets, such as life insurance proceeds, IRA’s, pensions, and bank accounts are set up in such a way that a beneficiary is named to receive the asset upon your death. For tax and non-tax reasons, care should be used in properly naming these beneficiaries. Though this approach may be useful to designate beneficiaries for certain assets, it is limited as not all assets may be passed on in this manner. Therefore, a qualified professional will need to assess the benefits of using this approach, and in all likelihood, a trust will still be necessary in order to accomplish a complete and seamless transfer of all assets to your loved ones.
THE LAST WILL AND TESTAMENT APPROACH
A will is an estate planning document which is drafted during your lifetime and sets forth your wishes for after your death. A will may be used to designate the individuals you want to receive your assets and when they should receive them. A will may also authorize the payment of debts or creditors and all applicable taxes. A will can nominate the person you wish to serve as the guardian of your minor children, and sets forth your desires with regard to selling, disposing of and liquidating property, or continuing the operation of a business.
In a will, a personal representative called an â€œExecutorâ€ is named to be responsible for entering the will into probate and making distributions according to your desires.
The primary disadvantage of using a will as your only estate planning tool is in its implementation. In order to carry out the terms of a will, your personal representative is required to file a probate proceeding with the court. This process is very time-consuming, taking approximately two years to complete, and expensive, costing 5% of your gross estateâ€™s amount in probate fees alone, in addition to attorneys fees and costs. Also, because all probates are public, there is a loss of privacy regarding your affairs as your documents become public records. A living trust accomplishes every one of the goals which a will does, while avoiding probate and its costs completely in a confidential manner.
THE LIFE INSURANCE APPROACH
A life insurance policy has many benefits from an estate planning perspective. It can provide liquidity when even the best estate planning tools are used and cash funds are necessary to pay final expenses, death taxes, or to provide an inheritance for one family member so a business interest or real property can be distributed to another family member.Â Â In some circumstances, life insurance may be the only way to guarantee that this money will be available, in the right amount, and at the time needed. Therefore, life insurance should be considered as a tool in addition to, but not in place of, a trust or other estate planning documents.
Life insurance is also an effective estate planning tool to provide for loved ones when an individual has not accumulated significant assets. A life insurance policy designed to provide cash when needed most may be the only way a young family can guarantee sufficient assets for a surviving spouse and children.