Wills What happens if you die without a Will? Why is a "homemade" (handwritten) Will dangerous? Why joint tenancy is neither an acceptable substitute for a Will nor a good way to avoid probate Why a Will can hurt your loved ones The cost of Probate in California If I have a Trust, do I also need a Will? If I have a Trust, do I also need a Power of Attorney for finances? If I have a Trust, what if I can't make a decision regarding my Healthcare? What should I consider when selecting my Executors and Trustees? Individual Executor/Trustee Should I transfer the ownership of my Individual Retirement Account (IRA) or other Retirement Plan to my Trust? Summary of the advantages of a Living Trust HIPAA Release and Authorization
Wills 1. What is a Last Will? This is a legal document that takes effect upon death and is used as instrument to direct the disposition of your property upon death. A Will also serves the critical function of naming guardians for your minor children. In California, wills trigger probate unless the gross value of your "estate" is less than $150,000.00. When used in conjunction with a living trust, a will (then called a "pour over will") serves to leave assets not otherwise titled in your trust to your trust to determine the disposition of your property upon death. 2. How long does a Will remain valid? A Will remains legally valid unless revoked by its creator. 3. When would I need to amend my Will? Your Will should be amended when your situation changes - a birth or death in the family, a need to change your executors, or to change the guardians for minor children are common examples of circumstances triggering the need to amend Wills. 4. What if I fail to amend my Will after I have another child, get married or divorced? A California Probate Court may decide guardianship of your new child. If you get married, the California Probate Code would likely modify your plan of distribution to account for the community property rights of your spouse. It is critical that your Will is updated to reflect the changes in your life. Otherwise, your wishes may not be followed. 5. Can my Will be contested? There is no key required to gain access to the court house. In today's litigious society, there are absolutely no guarantee that your Will or any other estate planning document that you prepare will not be challenged. Your estate is liable for the legal expenses necessary to defend your Will. If you think it is a possibility that your Will may be contested, please let your attorney know. There are several defense mechanisms that can be added to your Will and other estate planning documents to eliminate or minimize this risk. 6. What happens with my tax-deferred retirement accounts, annuities, life insurance and joint accounts when I die? Accounts that have beneficiary designations will pass outside of the Probate Court system. These assets will be transferred to the beneficiaries listed. It is critical that you check your beneficiary designations regularly to ensure that these assets will be transferred to the people that you intend. Assets held in Joint Tenancy with another individual will be transferred automatically to that person upon your death, without going through a probate court. However, this can be a very risky and ineffective estate planning device. Please see our discussion "Why Joint Tenancy is neither an acceptable substitute for a Will nor a good way to avoid Probate." 7. What happens if you die without a Will? The Probate Court will decide who will administer your estate and who will become guardian of your minor children. The California Probate Code dictates who gets your money and your belongings. 8. What are the problems with leaving no Will? * An inappropriate person may be appointed by the court to administer your estate. * An inappropriate guardian may be appointed by the court. * Children will receive their share when they become "adults", at the age of 18! * The beneficiaries may not be those you would have selected if you had been prepared and had completed your own estate plan. 9. Why is a "homemade" (handwritten) Will dangerous? Handwritten Wills are easily challenged because of unclear (non-legal) language and often lack witnesses to prove the person writing the Will was legally competent. Lawsuits challenging this type of Will are expensive and usually result in a compromise, with beneficiaries you wanted to disinherit receiving part of your estate. 10. Why joint tenancy is neither an acceptable substitution for a Will nor a good way to avoid probate. If a couple is married or part of a domestic partnership, holding assets in joint tenancy is acceptable, but far from ideal. Married couples living in a community property state (such as California) can obtain a "double step-up in basis" (HUGE Tax Benefit), but most people fail to take advantage of this tremendous tax benefit by keeping assets in joint tenancy. However, adding anyone else (besides your spouse or domestic partner) as a joint tenant can create other problems, such as: * The new joint owner could misappropriate the asset. After all, you gave it to them. * Did you file a gift tax return when you added his/her name to your asset? Adding a name to an asset is a gift that could subject you to gift tax liability and potentially cause adverse consequences with respect to the Federal Estate Tax. * Do you really want to expose your assets to someone else's problems? * If the joint tenant gets involved in a divorce, bankruptcy or lawsuit, your assets may be tied up in a long legal battle and ultimately your assets could be encumbered, compromised or lost. * Joint tenancy means "automatic right of survivorship" so the surviving joint tenant will get the entire asset, regardless of what your Will or Trust says. 11. Why a Will can hurt your loved ones. A Will does not avoid probate if the gross value of the assets in your estate exceed $150,000 at your death. If your estate is less than $150,000.00, a living trust may not be required for you and your family. You should consider our "Will Package" as a planning option. Probate The cost of probate will take a large bite out of your estate. California Probate Code section 10810 sets the maximum statutory fees that attorneys can charge for a probate. Higher fees can be ordered by a court for more difficult cases. The fees are 4% of the first $150,000 of the estate, 3% of the next $100,000, 2% of the next $800,000, 1% of the next $9,000,000, and 0.5% of the next $15,000,000. For estates larger than $25,000,000, the court will use its discretion to determine the fee for the amount that is greater than $25,000,000. The fees listed below are the statutory fees used to compensate attorneys and executors in probate cases for various sized estates. If both the attorney and the executor receive a fee (the most common occurrence), the amount paid will be double that shown below. Size Of Estate Statutory Fee (evan, insert Table here) Estates are appraised by probate referees, who determine the fair market value of the assets. The fair market value does not deduct for mortgages or other debt, which can result in an appraisal of the property that is higher than the equity that the deceased person owned in the property. Probate referees are appointed by the state controller's office and they receive a fee based on 0.1% of the assets appraised. In probates that are complicated by lawsuits or tax problems, the attorney and executor can ask the judge to approve fees that are higher than those set by state law. In addition to the statutory fees, there are costs for court filing fees, appraisal fees, publication costs, and miscellaneous fees charged by the county. A typical estate might incur $1,000 to 2,000 in court costs and other mandated fees. Living Trusts 1. Is a Living Trust right for you and your family? Following are the benefits of a Living Trust. A Living Trust: * Avoids probate, thereby avoiding delay, expense and the public nature of this formal proceeding of the Superior Court. * Avoids the need for a conservatorship if you become incompetent or incapacitated. * Offers potential tax savings. * Can continue for the benefit of your loved ones * Minor children and elderly dependent parents; * Adult children with drug or alcohol problems, mental, physical, or educational special needs, or developmentally disadvantaged adult children on SSI. 2. What are the disadvantages of living trusts? Following are the disadvantages of a Living Trust. Living Trusts usually: * Cost more to prepare and fund than an estate plan involving just a Will. * Transferring assets to the Trust involves costs and paperwork (recording deeds, and the like) not required for less elaborate estate plans, such as a Will. * Administration of an Exemption Trust or Credit Shelter Trust (defined below) can involve additional effort for the surviving spouse. * Refinancing real property that is owned by a Trust may require removing the property from the Trust before the refinancing, and then titling it in the name of the Trust after the refinancing. Not all lenders require that property be removed from the Trust in order to refinance. 3. If I have a Trust, do I also need a Will? Yes, for two very important reasons: * As a safety net to "pour" assets into your Trust in case you have forgotten to put an asset into it. * To provide for the care of your minor children or other dependents.* What to consider when selecting Executors and Trustees: A. The advantages of having a Corporate Executor/Trustee * Specialist in handling estates/Trusts. * No emotional bias. * Impartial - usually free of conflicts of interest with the beneficiary. * Never moves or goes on vacation. * Never dies or gets sick. B. The disadvantages of having a Corporate Executor/Trustee * Usually little familiarity with family. * Administrative fees may be much higher. * May go out of business or merge with a Trust department you find unsatisfactory. * Often are predisposed to keeping funds under their management, rather than dispensing to beneficiaries who may have genuine needs. Individual Executor/Trustee What to consider when selecting an Individual Executor/Trustee: 1. The advantages of having an Individual Executor/Trustee * More familiar with the family. * Administrative fees are generally lower. * More efficient in modest estates or traditional family structures* 2. The disadvantages of having an Individual Executor/Trustee * Probably not experienced in handling estates or Trusts. May not be impartial. * Could have schedule conflict or live too far away to do the job properly. * Could be incapacitated at times or no longer competent when you need their assistance. Retirement Plans Should I transfer the ownership of my Individual Retirement Account (IRA) or other Retirement Plan to my Trust? NO! If you do so, the entire amount of your retirement account will be immediately taxable. If you have a Roth IRA, its benefits will not be taxable to your children or your estate. Despite a potential tax disadvantage, some people consider designating the Trust as beneficiary of all or a portion of their "Non-Roth" IRA in order to care for beneficiaries who would otherwise receive the IRA portion outright. Special-Needs Children & Medi-Cal Payments Will leaving money to a "special-needs" child who is receiving disability or Medi-Cal payments affect those benefits or payments? Yes. Leaving any part of your estate to a special-needs child who is receiving disability or Medi-Cal payments could have the effect of terminating those payments until the child has exhausted the entire amount of the bequest. If you find yourself in this position, discuss it with us privately and, together, we will carefully consider what you should do before you make any decision. There are many solutions to this potentially troublesome issue. Life Insurance Policies Should I make a Trust the Beneficiary or my life insurance policies? We normally recommend that you name your revocable Living Trust as the primary beneficiary of your life insurance. If you are married, your surviving spouse is typically a Co-Trustee of the Trust and the beneficiary of the Trust, and thus would manage any insurance proceeds paid to the Trust for his or her own benefit. In the event that the surviving spouse is legally incapacitated, the successor Trustee would have the legal authority to step in to manage and distribute the insurance proceeds for the benefit of the incapacitated surviving spouse. If you are single, or your spouse predeceases you, the proceeds are paid to the Trust and the successor Trustee then administers and distributes those funds to your contingent beneficiaries (children, grandchildren, etc.) in accordance with the distribution provisions you have outlined in your Trust. This is particularly beneficial for beneficiaries who are still minors. In the event that the net value of your insurance policy(ies), when added to your remaining estate, will cause your estate to exceed the estate tax exemption limit, we recommend an advanced estate planning device known as an Irrevocable Life Insurance Trust, which effectively removes the proceed value from your taxable estate. Summary of the advantages of a Living Trust Probate Avoidance Whether you are single, married, divorced, or widowed, if your assets exceed $150,000 (or any amount if real estate is involved), your heirs will be forced to experience probate unless you have established a Living Trust. * Avoid the delays of up to two years or more for settling the estate. * No 120-day waiting period for notice of creditors. * No need to file petitions and reports to the probate court as with a Will. * The Trust can enable your heirs' income to continue without interruption after your death. * All property or income is immediately distributable in accordance with the provisions of your Trust, and at the times you specify. * No court costs or publication expenses and no Executor's fees. Also, attorney fees are substantially reduced compared to attorney fees in probate which are set by statute and are based on a percentage of the gross asset value, not the net. * Privacy. Since a Trust eliminates probate, no information concerning the decedent's estate can become public knowledge. * Not as readily subject to challenge as a Will. Generally, Living Trusts contain "no contest" clauses or other techniques engineered to reduce or eliminate challenges. * Out of state probate is avoided. Regardless of where you live or move to, your moves do not affect your Trust. * As Trustee of your Trust, you retain complete decision-making control over your assets and may buy, sell, withdraw, or add to your Trust at any time. Built in Avoidance of Conservatorship If you become physically or mentally incompetent and cannot serve as Trustee, you can name your Successor Trustee such as a family member, a bank or a Trust company without the necessity of a court supervised conservatorship. * You then have the opportunity during your lifetime to determine whether the Trustee is doing a good job and/or whether the Trustee should continue or be discharged. * The Trustee can be given discretionary powers to provide for your comfort and support should you become incapacitated due to illness or accident. * You eliminate court action that could declare you incompetent for either physical or mental reasons. * Your Trust eliminates the cost of a court-appointed guardian for minors or conservators for incompetents. Since you eliminate the need for regular accounting to the court, you also eliminate the resulting fees. * Heirs do not have to make decisions about the management of assets which have been placed in the Trust. Tax-Saving Potential Income taxes are payable on Trust income by the individual creating the Living Trust, just as though there were no Trust. Use of an "A/B" (or "Unified Credit") Trust will preserve the estate tax exemption of the first spouse to die, which otherwise typically would be forfeited due to a failure to plan properly. Estate & Gift Tax Provisions of the Tax Relief Act of 2001 (evan: Put chart here) Gift Tax Provisions Unlike the estate tax provisions of the law, the gift tax remains in effect as it did prior to 2002 with three primary changes: * Beginning in 2008, the annual exclusion for gift tax purposes increased to $13,000; and * Beginning in 2011 and continuing until 2012, the lifetime exemption for gift tax purposes shall be $5,000,000. Reducing Federal Estate Taxes By Using a Credit Shelter Trust for Married Couples What is a Credit Shelter Trust? A Credit Shelter Trust is known by many names, including Bypass Trust, Exemption Trust, or B Trust. Regardless of the name of the Trust, its purpose is to reduce or eliminate federal estate taxes for a married couple's estate. This type of estate plan sets up an Irrevocable Trust that will hold the assets of the first spouse to die. The amount transferred to the Irrevocable Trust will not be taxed for federal estate tax purposes when the second spouse dies. How Does It Work? Let's look at how the estate of a married couple would be taxed if the couple did not have a Credit Shelter trust: Example 1: Assume that a married couple owns $2,000,000 in community property and has no estate plan. On the death of the first spouse (assuming the death is in 2013 and beyond where the estate tax credit is one million dollars per spouse), all of that spouse's assets will be transferred to the surviving spouse in accordance with the California intestate succession laws. Regardless of the amount that is transferred, there will be no federal estate tax imposed at this point. Federal law allows an "unlimited marital deduction" to be used when assets are transferred to the surviving spouse, and that deduction eliminates any tax that might otherwise be due. However, when using the marital deduction to transfer assets to your spouse, you are wasting your federal estate tax exemption. As a result of the death of the first spouse, the surviving spouse now owns the $2,000,000 estate, but there is only one $1,000,000 exemption available because the marital deduction was used to transfer the entire estate of the first spouse to the surviving spouse. If the surviving spouse dies during 2013 or beyond with an estate of $2,000,000, a tax of approximately $550,000 will be due from his or her estate. That is more than a half a million dollars in unnecessary taxes! There must be a better way. See Example 2 below. Example 2: Assume that a married couple with a net worth of $2,000,000 has set up a living trust that includes Credit Shelter trust provisions. While both of them are alive, the assets will be held in the revocable living trust. On the death of either one of them, the trust will be split into two trusts: The survivor's trust and the Credit Shelter trust. In this example, the deceased spouse's share of the estate, $1,000,000, will be transferred to the Credit Shelter trust. The "marital deduction" will not be used because there are no assets that are transferred to the surviving spouse outright. The Credit Shelter trust and the surviving spouse are two separate taxpayers for this purpose. The surviving spouse will manage both trusts, will receive the income from the exemption trust and may spend the principal of the Credit Shelter depending on how it is structured. As a result, the exemption amount for the first spouse to die is not lost because his or her assets were transferred to a taxpayer other than the surviving spouse. Although this may seem like a minor difference in the estate plan, establishing the Credit Shelter trust will save the couple's estate more than $550,000.00. If the surviving spouse dies with an estate that is not more than the exemption amount that is allowed in the year of death (if the surviving spouse dies during 2013 and beyond, the amount would be $1,000,000), the surviving spouse's estate will pay no federal estate tax. Moreover, since the Credit Shelter trust is irrevocable the surviving spouse may not alter the plan of distribution and/or transfer the assets to a new spouse or other third party ensuring the wishes of the first spouse to die are honored and protected. Your attorney will discuss with you the many different ways to structure Credit Shelter during your consultation. Advance Health Care Directive What is an Advance Health Care Directive? An Advance Health Care Directive is a legal document that a person uses to clearly state his or her wishes regarding life prolonging medical treatments such as artificial life support. In some states it can it can also be referred to as a living will or a power of attorney for medical purposes. It avoids the cost and frustration of having your loves petition the probate court to have them appointed your conservator. It is arguably the most important document in your estate planning arsenal. It allows you to designate someone to act on your behalf if you are unable to communicate your wishes to the doctor. This person, known as your health care agent, can fight for you and make sure that you are cared for properly. An Advance Health Care Directive also address issues such as organ donation and burial instructions. Each Advance Health Care Directive prepared by us is customized to suit our client's needs. HIPAA Release and Authorization What is a HIPAA Release and Authorization? The Health Insurance Portability and Accountability Act (HIPAA) is a federal medical privacy law. You see evidence of it anytime you go to a pharmacy to have your prescriptions filled or visit your doctor's office. It prevents unauthorized third parties from gaining access to your private medical information. Nevertheless, the last thing that you want is your health care agent (the person responsible for saving your life or removing life support) being denied access to your medical records to make meaningful and informed decisions. The HIPAA Release and Authorization allows your loved one to protect you by accessing your medical records and communicating with your physicians if you are unable to do so. Durable Power of Attorney for Financial Purposes 1. What is a Durable Power of Attorney for Financial Purposes? This document allows you to designate someone as your agent or attorney -in-fact to make financial decisions regarding your property and assets. It gives them the power to sign your name without the need of incurring the cost and frustration of petitioning the probate court to have them appointed your financial conservator. There are two types of Durable Power of Attorney for Financial Purposes. An immediate power of attorney takes effect as soon as you sign it and continues in existence until you revoke it. A "springing" power attorney takes effect only after you become incapable of managing your own affairs as certified normally by two of your treating physicians. All Durable Power of Attorney for Financial Purposes are revoked by operation of law when you die. Therefore, they cannot assist with any post-death issues. Your attorney will discuss with you which type of power of attorney is best suited for you. 2. Whom can I name as my power of attorney? Anyone over the age of 18 years old can be designated as your attorney-in-fact. However, this is a very powerful document and we highly recommend that you choose a loved one you trust completely. 3. Did divorce invalidate my power of attorney? You cannot assume that divorce or legal separation invalidates your Durable Power of Attorney for Financial Purposes (or any other estate planning document for that matter.) If you do not want your ex making financial decisions on your behalf, you should immediately revoke your power of attorney.