What is an Estate Plan? Your estate is everything that you own. Your estate plan consists of the tools set in place to distribute or manage your property in the event of your incapacity or death, marriage, or divorce. These tools include a will, durable power of attorney for finance, advance health care directive, trusts, and marital property agreement.
What is Probate? Probate is a court-supervised procedure for validating a will (if there is one), paying debts, and distributing the property of a deceased person. The procedure can take about a year or longer. A total of about five percent (5%) of your estate is paid to your attorney and executor for their services.
What is a Will? A Will is a document that designates (1) your beneficiaries, including alternative beneficiaries, and (2) a "personal representative" to settle your estate and distribute your belongings.
What are the Requirements of a Handwritten Will? A handwritten will must be on plain paper (no typing or preprinting), signed and dated. A small technicality can void your will or subject it to costly court proceedings. If you have a handwritten will, have a lawyer review it.
Who is My Personal Representative? If you have a will, your personal representative is called your executor or executrix. If you do not have a will, the court will appoint a representative, called an administrator.
In selecting your representative, pick someone who is a very good record keeper and who has the time to take over your affairs. Remember, this person will step into your shoes to pay your bills, do your banking, perhaps sell your home and securities, distribute your personal effects, and deal with your heirs at a very emotional time. You can have a personal representative who lives outside of California, but consider the complications of time and distance.
How are My Assets Distributed? The Will spells out how you want your assets and personal belongings distributed. If you have a trust, the distribution will appear in the trust, instead of the will.
Why is Title to My Property Important? You may be surprised to find out that the title to your property controls its disposition. Title takes priority over your will or trust.
For example, if your assets are in joint tenancy with your son, they will pass to your son at your death. Even if your will directs the equal division of your estate between your son and daughter, the jointly held assets will pass only to your son. Joint tenancy property passes outside of the will.
The same is true of life insurance, annuities, IRA, and pensions. These assets pass directly to the named beneficiary and not under the will.
Therefore, it is very important to coordinate how you hold title with your entire estate plan.
Personal Effects Memorandum Make a written list of how your want your personal belongings distributed. This list helps prevent the heirs from arguing over jewelry, clothes, furniture and the automobile. Many people never complete this list because it is hard to come to an equal or fair division. However, keeping peace in the family can be more important than an exact equal division.
Durable Power of Attorney for Finances How would someone else manage your affairs or make important decisions for you if you were incapacitated? Sign a durable power of attorney for finances, which is a document by which you appoint a legal representative to manage your affairs if you become incapacitated. Be very careful who you select to give your durable power of attorney. You must have complete faith and trust in this person.
Advance Health Care Directives Sign an advance health care directive to appoint someone to make health care decisions for you if you become incapacitated. It expresses your wishes regarding life support and health care. This is a separate document from your durable power of attorney for finances. You may wish to appoint one person to handle your financial affairs and another to make health decisions for you.
What is a Trust? A trust is an arrangement involving three parties. You, the "Trustor", transfer property to a "trustee" who will hold or manage the property for your "beneficiary".
Revocable Trusts You can set up a revocable trust in which you remain in control of the funds and can even be the trustee. You hold title to your property in your name, as trustee. You can end (revoke) this kind of trust whenever you wish or amend the trust during your lifetime. Revocable Trusts are also called Living Trusts or Inter Vivos Trusts. These trusts can be set up to serve a variety of purposes.
Irrevocable Trusts for Tax Planning Irrevocable trusts can be used to minimize the federal estate tax which may be owing nine months after your death. If your estate is under the "applicable exclusion amount", then there will be no federal estate tax. However, if your estate is over the exclusion, then 40% of the amount over the exclusion will go to the IRS in taxes. The exclusion is per person, so a married couple can double their applicable exclusion amount before having to pay taxes.
The applicable exclusion amounts under current law are as follows:
Year of Death Tax Free: Exclusion Amount Rate of Tax 2011 $5,000,000 35% 2012 $5,000,000 35% 2013 $5,250,000 40% 2014 $5,340,000 40%
2015 $5,430,000 40%
2016 $5,450,000 40%
2017 $5,490,000 40%
Generation-Skipping Trusts An irrevocable trust that continues for the entire lifetime of your child is called a "generation-skipping trust". One of the great advantages of this trust is that it will not be taxed when your child dies, up to a certain limit. Consider this type of trust if your child has a substantial estate of his or her own.
Grantor Retained Annuity Trust You can give away assets, such as stocks, at a discounted value using a "grantor retained annuity trust (GRAT)". After you transfer assets to this trust, you retain an annual payout for a period of years. At the end of that period, the assets go to your heirs. This trust is used for making very large gifts.
Qualified Personal Residence Trust You can give away your home at a reduced value using a "qualified personal residence trust (QPRT)". After you transfer your house to this trust, you retain the right to live in the house for a number of years. At the end of the period, you continue to rent the house from the Trust. Using this trust, you can transfer your home out of your estate at a low value.
Charitable Trusts If you would like to sell an asset but hesitate because you would have a large amount of capital gain, consider a charitable trust. You can transfer the asset to the charitable trust and sell it without tax on gain. The trust can pay you an amount annually for a period of years. At the end of that time, the asset passes to charity.
Special Needs Trust If you leave your estate to a beneficiary who is receiving needs-based government benefits due to a disability, such as Medi-Cal and SSI, then your beneficiary may cease to be eligible for those benefits.
You can create a "special needs trust" for that heir so that the heir will continue to get government benefits. The trust says that the trustee may only distribute money from the trust if government benefits are insufficient to provide for the heir's special needs. The trust property doesn't belong to the beneficiary. Thus, the heir can continue to get the benefits to which he or she would otherwise be entitled.
Funeral, Burial and Other Arrangements
Preplanning your funeral and burial can save on confusion and unnecessary expenses.
Retirement Plan Beneficiaries It is critical to review the beneficiary designations for each of your retirement plans. You want to coordinate the beneficiary with your estate plan so that the right person gets the benefits. There are also important income and estate tax consequences to your beneficiary designation.
Robinson & Wilson, A Law Corporation, in Rancho Bernardo, California, represents clients throughout San Diego County and the North County Inland Corridor, including Rancho Bernardo, Carmel Mountain, Poway, Escondido, Vista, San Marcos, Carmel Valley, Rancho Penasquitos, Rancho Santa Fe, Del Mar, Sorrento Valley, Mira Mesa, La Jolla, Encinitas and Carlsbad.
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