Pertinent Definitions/Estate Planning Defined

ESTATE PLANNING: Area of law and taxation dealing with creation, protection, preservation, management and distribution of estates. (wealth from one generation to another).

ESTATES: These are the sums of all property including real estate, bank accounts, securities, insurance policies, cars, boats, household furnishings, jewelry and all other personal effects. In sum, it is everything that a person owns and all rights that he/she possesses in what they own, tangible or intangible.

PROBATE ESTATE: Any estate that totals more than $150,000 in gross value which is subject to a will; (certain assets are not subject to a will-joint tenancy-assets in trust-assets that pass under operation of law, such as beneficiaries of life insurance policies, and or IRA’s, 401K’s and the like).

TAXABLE ESTATE: Is the Net Value of all assets, including the death benefit of life insurance owned by that person. To the extent that person’s taxable estate exceeds $5,430,000 (as of 2015 indexed up each year thereafter) there will be an estate tax due on estates that at in excess of that, starting at 37% ½ and ranging upwards of 50%.

Estate Planning Objectives

  1. Maximize the amount of the estate that passes to the heirs;
  2. Eliminate or minimize estate taxes;
  3. Minimize legal costs and delays in the distribution of the estate and avoid probate administration;
  4. Minimize or eliminate income taxes;
  5. Minimize or eliminate capital gains taxes;
  6. Avoid conservatorship hearings in the event of incapacity;
  7. Provide for the management of the estate in the event of mental or physical incompetence;
  8. Provide for the guardianship of minor children;
  9. Provide for the care of children before the age of financial responsibility; and
  10. Provide for estate liquidity. (there are many other objectives, but these are the core objectives in most estate plans).

Estate Planning Challenges

PROBATE: Probate is the legal proceeding that occurs at death to: validate a will; identify Beneficiaries; review creditors’ claims; and distribute the assets to the Beneficiaries or heirs. California law requires that the will be probated if they gross value of the estate is $150,000 or greater.

In California the average probate cost is between %5 – %10 of the gross value of the estate. If a person dies without a will, the estate may be subject to probate as well under the intestacy rules. Fees and costs will occur.

CONSERVATORSHIP: Another key reason for doing an estate plan and having a Trust is to avoid conservatorships. As people live longer, there is a much greater likelihood that they will become either mentally or physically incapacitated and no longer and no longer able to handle their day to day affairs. When a person becomes incapacitated in either of these fashions, and has not made arrangements otherwise, i.e. create a Trust appointing someone to take care of their affairs during their incapacity, then a conservatorship hearing in Superior Court will be required.

Court will appoint a person or person to act as conservator(s) to be the legal authority for medical, financial and legal decisions on behalf of the conservatee. The fees can run up considerable depending on the size of the estate as there are certain annual court accountings and bonds that have to be posted as part of the proceedings. These fees as well as attorney’s fees can put a serious drain on the estate assets. Also, these hearings are public and therefore family privacy is invaded. Avoiding a conservatorship is a major goal of trust planning.

TAXATION: Upon a person’s death there may be both income tax and estate tax. With respect to income tax, certainly lifetime decisions can be made to minimize effects of taxation on death. There are different tax consequences for married couples if properties are held in joint tenancy and/or community property. These will be more thoroughly discussed in separate presentation.

It is possible for a married couple to pass $10,860,000 (as of 2015 and indexed up thereafter) of wealth to heirs without any estate tax. Without proper planning that amount is limited to $5,430,000.

Estate Planning Options

DO NOTHING: The do nothing approach gives no opportunity to conduct planning for minimization of estate taxes; income taxes; planning for incapacity; planning for care and custody of children under the age of majority if something were to happen to the parents, generally the Trustor/Trustees in a living Trust scenario. This option results generally in considerably higher probate costs, legal costs and potentially higher taxes.

HAVE A WILL: A will for an estate of gross value of $150,000 or more has to be subject to probate. A will does not provide for incapacity, and additionally a will has to be probated, generally an eight to twelve-month time frame; avoids the privacy of a trust plan, and subjects the beneficiaries and the estate to probate commissions for the executors and probate fees set by statute per the attorneys. Depending on the size of the estate, these can add up to considerable sums.

JOINT TENANCY: Joint Tenancy is a form of ownership in which two or more persons own property in undivided equal interest. There is a right of survivorship, on the first death the passing takes place automatic without a probate. On the second death, the parties will not be so lucky. There are a lot of other aspects of joint tenancy that will not be discussed here, but will be for another program.

LIVING TRUSTS: A revocable living trust is a private agreement created during the lifetime of the trustors.

Normally, the legal authority is granted from husband and wife or a single person to themselves to manage assets, make medical and financial decisions, enter into legal agreements and have the authority to transfer assets a death without going to the court and subjecting the estate to probate. A living trust is not part of a will.

If a trust is created through will, this is called a testamentary trust and does not avoid the vagaries of probate and does not avoid the vagaries of conservatorship.

Living Trust Advantages

Minimizing estate taxes:
Minimizing income taxes:
Avoiding capital gains taxes:
Family privacy:

ASSET MANAGEMENT: By creating a living Trust and placing assets into it the person establishes an excellent vehicle for asset management. In the event of incapacity or death, the assets are managed by the successor trustee strictly as outlined by the terms of the trust. Said paragraph are part of the same asset management. Normally there three entities involved in the formation of a trust: The Trustor how establishes the Trust and who conveys property to the Trust; the Trustee, how has legal title and management over the assets; and the beneficiary who has the right to the income and beneficial use of the assets. In the normal living trust scenario, the people who establish the trust are the trustors/trustees and the beneficiaries of the trust during lifetime. In the event of death or incapacity, the successor trustee and new beneficiaries come into the equation.

AVOIDANCE OF PROBATE: One of the major advantages of a living trust is it avoids the probate. Thus upon the death of either or both spouses, the assets can pass to the heirs without the court supervisions or probate admiration.

Selection of these persons, that is successor trustees, is one of the most important decisions in the estate planning process. The trust places confidence in the successor trustee, the successor trustee’s financial and business acumen, and a probability that the trustee shall carry out all the trustor’s wishes should be carefully considered. If the people who have been nominated, are unable or unwilling there can always be an opportunity to appoint a corporate trustee, such as a bank. Many banks have trust departments and will handle assets in these fashions, but do not generally want to handle estate valued under $3million and normally the fee is closer to %2 per annum of the value of the estate, plus the income less the losses.

AVOIDANCE OF CONSERVATORSHIP: As mentioned earlier, avoidance of conservatorship administration is one of the major advantages of the trust. Upon incapacity of one of the trustees/trustors the successor trustee takes over the management of the assets. Under California Law incompetency can be established by the written opinion of two physicians that the trustee is no longer mentally or physically capable or able to handle his or her affairs. This eliminates the need for a competency determination by the court and makes the transition a simple one. The other advantages will be discussed more later in future presentations.

BENEFICIARY CONSIDERATIONS: In deciding distribution of assets to beneficiaries, thought should be given to the ability of the beneficiary to handle his or her affairs. A separate challenge can be planning the trust for providing for children of a prior marriage. The third category of the subset, is to determine what age children would be capable of handling their own affairs financially, and thus be able to accept the distribution assuming the trigger events for such distribution have occurred as set forth in the body of the trust.

A separate problem that can arise is, if a person were receiving state or federal aid as a result of a disability or challenging life, then if that person receives proceeds from the trust, unless there is a “special needs trust” then they may lose their disability payments.

TRUSTEE SELECTION: One of the most important person in the estate planning is the successor trustor. This is the persons or persons who will implement the plan upon death or disability. This is often a provision of the trust that is unfortunately overlooked. In sum, a key factor in implementing a living trust approach is to make sure that the estate does not go unnecessarily to the internal revenue service through inadvertence. Furthermore, there are limitations on how much estate tax on large estates can be reduced, but the management and the avoidance of probate and conservatorships are really the corner stone of the rationale for implementing a living trust as an intricate part of one’s estate plan.