As I revise this article in September 2009, I’m once again reminded of the importance of Estate Planning for estates of all sizes. One of my long-time clients recently passed away at only age 59 years. On the very same day, I received a call from a distraught woman, explaining that her sister had passed suddenly without a will or trust in place at age 49 years. The sister was not rich but did own a small condo worth just under $400,000. One month later, an 86 year client of mine was diagnosed with first stage Alzheimer’s.
In the case of my client, we’d planned their estate carefully many years ago and when the husband suddenly passed, the estate plan did its job. We completed the process of transitioning the assets in two meetings over a couple of weeks, allowing the wife the time to grieve without financial pressures. It’s not going to be so simple with the 49 year old female who passed without an estate plan. In Los Angeles county, the lawyer estimates the time to transition the assets will be between 12-18 months and the total costs are estimated to be approximately $11,000.00*. We’ve already paid nearly $1,500 just in filing fees and costs (some lawyers will draft a simple trust for this amount) Does a trust for real estate sound more attractive already for Southern California residents? And for those who think an estate plan equals a "living trust for when you die", my 86 year old client illustrates perfectly the importance of another part of the estate plan discussed below, powers of attorney. Conservatorships are expensive, time consuming and extremely cumbersome. My other client’s children are now managing their Mom’s estate and preserving her assets while paying for her needed care without court interference, conservatorship, annual accountings and inventory filings in superior court. This is all money saved that they will later inherit.
Here are some of the most frequently asked questions I get:
Why Do I need an Estate Plan? I don’t have an Estate.
Anyone who owns assets has an estate. With increased life insurance, increased home values, the effects of inflation, and larger retirement accounts, many have larger estates than they realize. Furthermore, Congress continues to target estates as a source of revenue. You may not need complicated trusts or a sophisticated gifting program, but you should develop an estate plan to ensure that your current and future assets will be distributed to your beneficiaries with maximum ease and minimum cost. Remember, if you haven’t prepared your own estate plan, then your state will dictate a plan for you when you die.......one that you and your beneficiaries may not like.
What’s involved in Estate Planning?
In a nutshell it involves the consideration of (but is not limited to):
- Organizing and inventorying the estate’s assets and then evaluating how best to hold title to them
- Review of any past wills, Powers of Attorney, Medical Powers of Attorney & Living Wills.
- Checking and monitoring designated beneficiaries for any 401(k) plans, individual retirement plans, pension plans, insurance policies, annuities and other investments
- Discussing various Trusts or other entities for management and control during lifetime or upon death
- Evaluation of any Insurance needs for end of life issues
- Projecting net Worth and evaluating the need for more advanced estate planning
- Estate Taxes
What will an estate plan do for me?
A tailored, well prepared estate plan can accomplish several things:
- Provide effective, centralized management of your estate during your lifetime, even if you become disabled.
- Direct the distribution of your estate after your death, according to your wishes.
- Minimize state and federal estate taxes.
- Ensure that your estate will have sufficient cash to pay any taxes the estate may owe.
- Avoid Probate. Some estates can be tied up in court and their assets eaten away by taxes and legal fees.
- Minimize the emotional as well as financial burden on your estate’s beneficiaries.
Where do I start?
Begin the estate planning process by determining your net worth. Your net worth statement, sometimes called a balance sheet, is a snapshot of the current financial health of your estate: the total value of all the assets you own and in whose name, plus all that is owed to you, minus all your debts. Once you know what assets and liabilities you have, you can start to design an appropriate estate plan. You will always need an attorney at law to draft estate planning documents and because estate planning can be exceedingly complex, no one boilerplate plan fits all estates. This is where consulting us first really helps. It helps you understand the need for a comprehensive plan and, thanks to the preparation of statements of net worth, cash flow, asset inventories and how they are titled together with the financial expertise we bring to the table, it helps the lawyer quickly identify potential problem areas so that he/she can develop appropriate solutions working as part of a team and without wasting hours of expensive, billable time in preplanning conferences.
How important is the issue of ownership in an estate plan?
Ownership of property is an overlooked estate planning issue. For example, couples commonly have joint tenancy, or joint ownership of their assets. This allows the assets to bypass the sometimes costly and slow probate process. But joint tenancy is not always the most appropriate or cost effective form of ownership when it comes to distributing estate assets upon death. Particularly larger estate will pay a heavy price for joint tenancy. Assets transferred directly to the spouse become part of the surviving spouse’s estate and the personal exemption (the amount that can be passed to one’s beneficiaries without estate taxes, currently 3.5 million dollars per person in 2009) is lost forever. Ownership may be an even more important issue if you’re single, or if you share ownership with a relative or friend. Taylor & Associates, together with your estate planning attorney can review the ownership of your assets to determine the best ownership form.
I’m still young. Do I really need a will?
Absolutely! The lady that passed, whose sister I am now assisting was 4 years younger than me and I feel as fit as a fiddle. My trust, wills and powers of attorney were written in 2001 (after I took my own best advice) and revised after the birth of my daughter. As many as 70% of Americans don’t have wills, yet a will is critical regardless of your age or the size of your estate. A will specifies who receives what assets when you die. If you have young children, a will can set up a testamentary children’s trust for them and designate a guardian. Michael Jackson was sensible enough to have engaged in estate planning and by naming the people he chose as guardians for his children, he prevented what could have been a nasty fight for custody in probate court, particularly if his father Joe Jackson had sought custody. Dying without a will, known as dying "intestate", means the state will dictate how your assets are distributed and who will look after your children. For example, you may want all of your assets to go to your spouse, but if you don’t have a will the state may decide that half goes to your spouse and half to your children (who may not be old enough or mature enough to handle it), or half to your parents if you have no children. Dying without a will can also increase the cost and the time for legally distributing your estate (known as probate). Update your will regularly. A will drafted before 1981 is out of date because of major tax law changes since then. Your personal circumstances may have changed or your net worth may have increased or decreased, warranting revisions in your will. A will alone may not minimize estate taxes or provide other important components. Remember, in some states a will may be all you really need, in States like California and other high population density areas, any person owning real estate may need a trust.
What are a power of attorney, a medical power of attorney and a living will?
A power of attorney is a legal document that allows you to designate a representative to perform certain duties for you in the event you can’t. If you become incapacitated or ill, for example, the representative could write checks or make legal decisions on your behalf. A medical power of attorney (sometimes called a health care proxy) gives a designated representative the power to make medical decisions for you (to continue or not to continue life support, for example). A living will is a statement of your personal wishes as to what life sustaining medical treatment you want or don’t want, should you become terminally ill. These three tools can be vital in the administration and preservation of your estate, and most adults, regardless of age, should have all three.
Do I need a trust?
There are dozens of types of trusts, and each has advantages and disadvantages. A bypass or charitable remainder trust can provide income during a lifetime and save estate taxes upon death. A Q-Tip (qualified terminable interest property) trust can be useful for providing income to a second spouse but bequeathing the assets themselves to children from a previous marriage. Trusts can provide control of the assets that you don’t have with outright gifting, such as specifying that your child can’t use the money until a particular age. Professional management of trust assets can relieve trust beneficiaries of that burden. You can use certain types of trusts to avoid probate costs and escape the reach of creditors. Despite their advantages, trusts aren’t needed in many estates. Living trusts, for example, are widely hyped and oversold, and, in many instances, provide little or no value for the average estate. For example, although they can avoid probate, living trusts don’t avoid estate taxes. Trusts can be expensive to establish and manage. Trustees have to be chosen carefully, especially if they are relatives or close friends who may not be financial experts. Trust assets can be mismanaged or intentionally abused. In many cases, you’re giving up permanent control of assets. We, together with your attorney can advise you if a particular type of trust would benefit your estate.
I have a small Estate. Do I need to worry about estate taxes?
Currently (for tax year 2009 - this number changes regularly and you should always consult a qualified professional. Do NOT assume this number is correct after 2009 as Congress is discussing everything from the repeal of estate taxes, to the imposition of higher, and lower exemption amounts) the first $3,500,000.00 in estate assets is free of federal estate and gift taxes (though not necessarily free of state inheritance taxes). However, beyond $3,500,000.00, assets are taxed at a minimum of 37%, rising to a whopping 45%. These figures will adjust until the estate tax disappears in 2010. HOWEVER, under current law the estate tax reappears in 2011 unless Congress acts, and the personal exemption will drop again to $1 million, so plan sensibly!! It is my personal belief that there will be action taken to cement the estate tax into he tax code by 2010, with some modification in the exemption amount. You may not have a $1 million estate right now, but the accumulation over a lifetime of a home, insurance, investments, and retirement plans could push the value of your estate beyond the threshold without proper planning.
How can I reduce my estate taxes?
Before you start worrying about saving estate taxes, we need to determine how much money you’ll need to live on during retirement. Even if your estate already exceeds the exemption threshold, you probably will spend down some or much of its assets to see you through your retirement years. People need a comfortable financial cushion in light of increasing longevity, higher medical costs, and long term inflation. (Legislation recently enacted now forces individuals to spend down most of their assets before receiving assistance for long term care. The earlier you consider Long Term Care Insurance, the cheaper it is and it may make the difference in whether you will leave an estate, or just debt) If estate taxes remain an issue after you’ve determined the minimum amount of resources you need for retirement, then you might consider
- Gifting up to the maximum allowed before the imposition of gift taxes annually (doubled if you and your spouse gift jointly)
- Removing the value of insurance from your estate.
- Donating assets to charity.
- Setting up a bypass trust (also called a credit shelter trust) if you’re married.
What about the use of insurance in an estate plan?
Insurance can play an important role in estate planning.
- Auto, home, and liability insurance protect against losses of property in your estate.
- Life insurance can provide surviving family members with cash for living expenses and for expenses associated with the death.
- Long Term Care insurance can protect an estate from depletion if medical care is needed on a long-term basis
- Life insurance proceeds can be used to pay estate taxes if the estate doesn’t have sufficient liquid assets available, though this mainly is needed for joint estates valued at over $ 4 million currently (using a bypass trust, gifting etc. can usually cover the first $ 4 million.)
- Estates whose principal asset is a small business often need life insurance for co-owners to buy out the deceased’s estate or for the deceased to provide an equitable share to heirs who won’t be involved in running the business.
Issues of ownership, the type of policy (such as the popular "survivorship life" policy), and the use of insurance trusts make this complicated area. Life insurance can cause unwanted estate tax consequences if it is not carefully structured and you could lose up to half the "income tax-free" insurance proceeds to Uncle Sam.
Do I need to update my plan once it is in place?
Yes. Estates change over time. Typically, the value of your estate grows, perhaps pushing you into a higher estate tax bracket. You may have become divorced, or one of your heirs has died, a power of attorney you appointed has moved and is no longer willing or able to serve, or, a host of other changes may have occurred since the plan was first put into place.
How do I know Taylor & Associates is qualified to assist me?
Our principal, Mr. Taylor, is a Certified Financial Planner Certificant with over 23 years experience, is nationally published on the topic of both domestic and international estate and asset protection planning and works together with some of the most prominent lawyers in Southern California to provide the best fiduciary financial and investment advisory services possible to all his clients.
To obtain CFP® Certification, an individual must study and demonstrate competency in six areas vital to comprehensive financial planning, including cash flow and budgeting, insurance, retirement, investments, tax, and estate planning and successfully completing a 10 hour proctored comprehensive examination given over two days. In addition, CFP® Certificants voluntarily submit to a written code of ethics and standards of practice, as well as completing 30 hours of mandatory continuing education each two years. The emphasis of the CFP® educational program is on the interrelatedness of the financial areas and the need for an objective analysis of a client’s circumstances and goals. The CFP® Certificant must also meet educational, work experience, and ethical standards to maintain the right to use the CFP® marks in public practice. The others?.........
Please call us at 310. 260. 1126 or E-mail us, we’ll be happy to assist you.
* Please note, We are based in Los Angeles County, CA. Because of the sheer size of this county, things take much longer than in other parts of the country, Also, in some States, lawyers charge by the hour for their probate services which may be cheaper, whereas in California there are statutory amounts lawyers earn based on percentages of the gross estate. Depending on the complexity of your situation you may or may not need to implement more advanced planning strategies. You are encouraged to inform yourself locally before taking any action. Nothing herein shall be construed as legal advice. We are not lawyers. You should always speak to an attorney before implementing any estate plan.