Estate Planning has been defined from
many perspectives. A good friend has answered the question of "what
is it" and "why do it" as follows:
"I want control of my
life and assets while I am alive and well. If I should become
sick or disabled, I want to make sure that I am protected and
cared for, as are my loved ones, in the manner I have chosen
and by the people I have chosen.
When I die, I want to
give what I have to whom I want, when I want, and in the way
I want. And, if I can, I want to save every last dollar of taxes,
professional fees and court costs."
As the above indicates,
it is important that we use our assets to their fullest
potential during our lifetimes, for our personal, family,
business and charitable interests. It is also important
that we arrange for the transfer of our assets after
There are many tools
available to accomplish these goals. We want to share
with you a brief outline of some of those options.
This is, unfortunately for you and your
family, the most popular method of estate planning. The government
has recognized this and in response has established a one-size-fits-all
default estate plan. If you do nothing, the plans established by
the Internal Revenue Service and the California State Legislature
will automatically "kick-in". That's the good news.
The bad news is, under such plan there
is a good chance you will be paying substantially more income tax,
estate tax, court costs and attorneys' fees than necessary, thereby
depleting your estate. You will also have no say as to who will
receive your assets or when.
JOINT OWNERSHIP OF PROPERTY APPROACH
This is probably the next most popular
method of estate planning. Most married couples who purchase a home
take title as "husband and wife as joint tenants." For smaller estates,
joint ownership of property may be an acceptable estate planning
tool. It defers probate and provides an orderly transfer of property
between two individuals. It is automatic upon death.
However, care must be taken in its use.
Its use could have many disadvantages, such as the loss of income
and estate tax-saving opportunities, loss of control of the asset,
and unintended personal liability.
Except for very small estates, the use
of a living trust is usually much more desirable than joint ownership,
as will be shown below.
BENEFICIARY DESIGNATION APPROACH
The next most widely used planning tool
is the beneficiary designation. Certain types of assets (such as
life insurance, IRA's, pensions, bank accounts, etc.) are set up
in such a way that you can name a beneficiary to receive the asset
upon your death. For tax and non-tax reasons, care should be used
in properly naming beneficiaries.
WILL AND TESTAMENT APPROACH
A will is an estate planning document
drafted during your lifetime, which sets forth what you want to
happen after you die:
It can set forth who
you want to receive your assets and when.
It authorizes the payment
of creditors and all applicable taxes.
It names a personal representative
who is responsible for entering the will into probate and making
distributions according to your desires.
It can nominate the person
you wish to serve as the guardian of your minor children.
It empowers the personal
representative to carry out the terms of your will, especially
relating to the ability to sell, dispose of and liquidate property
and continue the operation of a business.
It can establish trusts
for the benefit of minor children or other individuals.
The primary disadvantage of using a will
is in its implementation. In order to carry out the terms of a will,
your personal representative is obligated to file a probate proceeding
with the court. This can be time-consuming (approximately two years)
and expensive (approximately 5% of the gross estate). In addition,
all probates are public and therefore there is a loss of privacy
regarding your affairs. For small estates, a will may be sufficient
to carry out your desires. As your estate grows, the use of a living
trust becomes much more desirable.
LIVING TRUST APPROACH
A trust is a vehicle to hold title to
your assets. There are many tax and non-tax advantages in using
a trust. There are many types of trusts as well. A trust must be
tailored to your needs and your estate. Some of the benefits of
a trust are as follows:
It allows you to name
the person who will manage your estate (the trustee) both now
and after your death. It also empowers such trustee to carry
out the terms of the trust that you have defined. While you
are alive, you can be the trustee of the trust.
It enables you to determine
both who will receive your assets and when they will receive
It can eliminate
substantial estate taxes.
It provides for management
of your assets in case of your disability.
It avoids the extended
time, expense and inconvenience of probate.
There are many other
benefits of a trust, including income tax planning.
A Trust should, in most cases, be the
key instrument of your estate plan. It is confidential and provides
coordination of your entire estate. It is easy to establish and
easy to change. You can maintain total control over all of your
In summary, a trust can be used to accomplish
many goals, and should be seriously considered in most estate plans.
DURABLE POWER OF ATTORNEY FOR ASSETS
The realities of life dictate that we
must give consideration as to who we wish to manage our property
in the case of a mental or physical disability, prior to death.
Relying on family members or friends to act under a court-appointed
conservatorship is usually unwise, because of the unnecessary costs,
delays and restrictions often imposed.
The alternative to a conservatorship is
to grant (while you are able and competent) the power to manage
your property to an individual or a bank trust department. In California,
this can be arranged through a power of attorney designed to become
effective during any such incapacity.
The need for this type of power of attorney
is minimized if all of your assets are held in the name of a living
trust. With the use of a trust, the successor trustee of the trust
will manage your assets during any such disability. Very frequently,
(by inadvertence or design), some assets are kept out of the trust.
This durable power of attorney will assure that those assets are
also properly handled.
HEALTH CARE DIRECTIVE
California also recognizes a separate
Advance Health Care Directive granted by you to another individual
to authorize that individual to make health care decisions for you
during any period of disability.
This power should be granted to an individual
or individuals who you trust to hold your personal care and well
being as the top priority. An Advance Health Care Directive grants
specific authority to that individual to consent to or refuse treatment
for you in the event you are unable to make such decisions. Without
this power, your family will be required to spend the time and substantial
money necessary to establish a conservator to obtain the authority
to make such decisions.
LIFE INSURANCE APPROACH
The life insurance contract has many
uses in the estate planning process, including providing:
Liquidity. Even when
the best estate planning tools are used, there are liquidity
needs to pay final expenses, death taxes, or to provide an inheritance
for one family member so a business interest or real property
can be distributed to another family member. Life insurance
may be the only way to guarantee that this money will be available,
in the right amount, and at the time needed. Life insurance
should be considered in addition to a trust or other estate
Protection for Dependents.
Life insurance is also effectively used for the protection of
dependents when an individual has not accumulated significant
assets. A life insurance policy designed to provide cash when
needed most, may be the only way a young family can guarantee
sufficient assets for the surviving spouse and children.
In many instances, the use of life insurance
is the best approach to achieve your estate and financial goals
and desires. In addition, insurance can be used to effectively protect
your assets, such as in the case of long-term disability insurance.
USE OF CHARITABLE GIFTS
Charitable gifts are often motivated
by your desire to provide for your favorite charities. When you
have made this decision, the tax advantages of a charitable transfer
and the integration of these transfers into your total estate plan
can provide substantial tax advantages both during your life and
at your death. In many instances charitable trusts and private foundations
We have attempted to familiarize you
with some basic estate planning tools. For those with larger estates,
there are many additional, more sophisticated planning techniques
to provide even more protection and tax savings. Included on such
list of tools are: Family Limited Partnerships, Personal Residence
Trusts, Life Insurance Trusts, Special Needs Trusts, Dynasty Trusts,
Property Agreements, Children Trusts and various types of Charitable
Trusts. If you are interested in seeing which of the estate planning
tools is best suited for your particular circumstances, please do
not hesitate to contact us.