Estate Planning

State Law vs. Federal Law

Before beginning to learn about estate planning, one must first understand the difference between state law, which concerns Probate, and federal law, which deals with Inheritance Tax. Under state law, probate is required for an estate where the gross value (as opposed to the net value) of the estate exceeds $55,425 in real property or $166,250 in titled personal property (i.e., stocks, bonds, mutual funds, bank accounts, etc.).

Under federal law, the beneficiaries of your estate (usually your children), must pay Inheritance Taxes (a.k.a. Estate Taxes) where the net value of your estate exceeds $12,060,000.

What is Probate?

“Probate” is a court supervised “title transferring” process that takes place after you die. The main reason children typically have to go through Probate is that they need to transfer the “title” of their parents assets to themselves after their parents die. The typical probate court proceeding lasts a minimum of one (1) year from start to finish.

On average, the fees associated with probating an estate range from 6% to 15% of the gross value of the estate and include fees for the attorney (which fees are based on the gross value of your estate), the executor, the probate referee, bond costs, newspaper publication costs, accounting fees and court filing fees.

Why “Joint Tenancy” may create Income Tax problems?

“Joint Tenancy” is a form of holding title to property (real property or personal property). Other forms of holding title to property include: community property, tenants-in-common and a single person as their sole and separate property. Holding title as a joint tenant with someone else (usually your spouse) does not avoid probate-it only postpones probate until the death of the surviving spouse. Moreover, by holding title as a joint tenant, you adversely affect the income tax “basis” of your assets because the surviving spouse only receives a 50% “step-up” in basis following the death of the first spouse. This could result in the surviving spouse having to pay unnecessary income taxes if any assets were sold following the death of the first spouse. If you are married, it is much better from an income tax perspective to hold title to your assets as “community property”. That way, following the death of the first spouse, the surviving spouse receives a 100% “step-up” in basis and, if an asset were sold, would not have to pay any income taxes. Finally, most people are now aware of the fact that it is not a good idea to add your children on title to your assets as joint tenants; doing so means that:

  1. you need your children’s signatures to sell or mortgage your assets; the assets are exposed to your children’s creditors (including possible claims by a child’s ex-spouse in the event of a divorce); you create potential “gift tax” problems; and
  2. you create potential income tax problems for your children with respect to the “cost basis” that passes from you to your children when you make a gift of an appreciated asset.

What is a “Living Trust” and how does it avoid probate?

Simply stated, a living trust takes the place of your Will in that it merely states who is going to receive your assets after you die. A living trust avoids probate because during your lifetime (after your sign your trust) you transfer the “title” of your assets to your name(s) as trustee(s) of your trust. Later, when you die, since you do not own your assets as an individual but rather, as trustee of your trust, the assets do not have to go through the probate “title” transferring process. Your successor trustees have the full power to transfer or sell your trust assets and distribute them according to the directions contained in your trust. You still retain total control over your assets during your lifetime. When your assets change (i.e. you sell your house or move your investments to a different location) you merely keep track of those asset changes at the back of your trust in the asset schedules-you do not need to see a lawyer to do this.

You should see a lawyer if you want to amend your trust. The most common amendments involve a change of beneficiaries or a change of successor trustees.

Do I need a Will if I have a Living Trust?

Yes, but it is a special type of Will commonly referred to as a “Pour-Over Will” that works in conjunction with your trust. A Pour-Over Will acts as a safety net to place the assets that you did not transfer to the trust during your lifetime (most commonly things like your car and checking account) into the trust when you die. As long as the assets outside the trust do not exceed $55,425 in real estate or $166,250 in titled personal property, the Pour-Over Will does not have to go through probate when you die.

Of course, you may transfer your car to the trust (by going to the DMV or AAA if you belong) during your lifetime as well as your checking account (if you want to sign every check as trustee of your trust) but most people choose to avoid the extra time that would be spent in doing this since in most cases, the cars and checking accounts are worth less than $166,250 anyway.

How are Retirement Plans handled in an Estate Plan?

Retirement Plans (i.e. IRAs, roll-over IRAs, 401(k) plans, deferred compensation and savings plans, 403(b) plans) are counted as part of your estate for federal Inheritance Tax purposes, but you do not transfer the “title” of a Retirement Plan to your trust. You do not transfer the “title” of a Retirement Plan to your trust because a Retirement Plan does not go through probate if you have a “beneficiary” listed on the plan. Moreover, transferring the “title” of a Retirement Plan to your trust would cause you to have to pay income tax on the entire plan content since the IRS would view that transfer as a lump-sum distribution. Most commonly, a married person would list their spouse as the “primary” beneficiary on a Retirement Plan and then list the children as “contingent” beneficiaries in the event both spouses were to die at the same time. If you are single or widowed, you would list your children as the “primary” beneficiaries on your Retirement Plan. If you are married and have minor children, you would list your spouse as the “primary” beneficiary and the trust as the “contingent” beneficiary on your Retirement Plan.

If you are single or widowed and have minor children, you would list the trust as the “primary” beneficiary on your Retirement Plan.

Inheritance Taxes

Inheritance taxes (a.k.a. “estate taxes”) are imposed by the IRS and are paid by your estate before the beneficiaries receive it. The State of California abolished inheritance taxes by voter initiative in 1982.

Inheritance Taxes are imposed on your estate if it exceeds the “unified credit” in the year that you die. The year of your death and the net value of your estate determine the unified credit. The net value of your estate is calculated by determining the net value of all of the assets that you own at the time of your death, including your retirement plans and life insurance. In 2020 the unified credit amount is $12,060,000 per deceased person and is indexed to increase each year to keep pace with inflation.

Durable Powers of Attorney

A Power of Attorney is where you appoint an “attorney-in-fact” to make decisions for you and to care for you in the event you become disabled or incompetent before your death. Your attorney-in-fact is usually your spouse or one of your children. A Durable Power of Attorney for Health Care allows your attorney-in-fact to make health care and related decisions for you in the event you are not able to make these decisions for yourself. A Uniform Statutory Power of Attorney allows your attorney-in-fact to make financial decisions for you and to write checks and make other decisions concerning the management of your assets in the event that you are not able to accomplish these duties yourself.

Having a Durable Power of Attorney for Health Care and a Uniform Statutory Power of Attorney are both integral parts of your estate plan. Failing to have both of these documents could mean you might end up in a conservatorship proceeding if you become disabled or incompetent. A conservatorship proceeding takes place in probate court and requires that your spouse or a close family friend or relative petition the court for permission to make health and financial decisions for you; it is a costly proceeding involving attorney’s fees, court filing fees, investigative fees, accounting fees and annual reports to the court.

What is a “Living Will”?

A “Living Will” is a document where you state that you do not want to be placed on or left on life support. Many people confuse the terms “living trust” and “living will”. A “living trust”, as stated elsewhere in this website, is a document that states who is to receive your assets when you die and is designed to avoid probate. A living will works in conjunction with a Durable Power of Attorney for Health Care and allows your attorney-in-fact to make the decision as to whether or not life support procedures are warranted or should be continued. In the event that life support procedures are not warranted or should not be continued, a living will allows those procedures to be discontinued.

Without a living will, it is possible that life support procedures could be instituted or continued notwithstanding the fact that no hopeful recovery is possible. Numerous cases, including the Nancy Cruzan case, have held that without a valid living will, even close family members (i.e. parents or spouses) are legally unable to make the decision to take a loved one off life support once it has been started.

Guardianship for minor children

A guardianship proceeding is required for minor children to supervise their custody and care until they reach the age of eighteen (18). It is a costly proceeding involving attorney’s fees, court filing fees, investigative fees, accounting fees and annual reports to the court. One of the advantages of having an estate plan is that you can avoid a guardianship proceeding for your minor children and avoid the potential cost and emotional trauma that might be involved when different family members petition the court for control of your children and your estate. In your estate plan, you can appoint a guardian for your minor children; the successor trustee of your trust is in control of your assets and is vested with the power to distribute those assets for the care and benefit of your children as you direct. This way, you have left specific directions that dictate who your children will live with and how the assets will be used for their benefit, thus avoiding the court’s intervention.

You can also leave directions in your trust that state the age your children will ultimately receive their share of your estate; you can also distribute percentages of your estate to your children at specified ages. Not having an estate plan means that your children would receive their inheritance at age eighteen (18), which is usually too young for most children to make appropriate decisions concerning the management of their financial affairs.

What information do I need to start my estate plan?

Generally, your estate planning is going to require three (3) appointments once you decide to get started. All of the appointments will be with Mr. Mahony personally, who also offers a free consultation appointment if you desire before you decide whether or not to get started. Once you have decided to get started, you should bring to your first appointment the following information (no papers required):

  1. a general list of your assets, including:
    real estate, bank accounts, stocks, bonds and mutual funds retirement plans
    life insurance
  2. the approximate value of the above listed assets, but no account numbers or addresses required;
  3. the names of your children or other beneficiaries;
  4. the names of your successor trustees (and guardians if necessary);
  5. fee for planning (described elsewhere in this website)