Ask yourself the following questions:
1. Intestacy
The most obvious result of dying without an estate plan is that your assets will go to your heirs as defined by California law. You may not want that. If you are married with children, you should know that up to half of your separate property will pass to your children, not to your surviving spouse. If you have no spouse, children or grandchildren, your estate will go to your parents, then to your siblings if your parents are dead. Maybe that's the result you would have chosen, maybe not. You might rather give a helping hand to a friend or to a charity.
2. Estate Tax
Married people are often able to save on estate taxes by having an estate plan. This is so because a married couple can take advantage of both the unlimited marital deduction and the personal exclusion amount for each spouse.
The marital deduction means paying no estate tax when the first spouse dies. The personal exclusion amount, $4 million for a married couple, minimizes estate taxes when the second spouse dies. This can only be accomplished with a trust.
If your estate is substantially above the personal exclusion amount ($2 million) estate planning is crucial. There are many different ways to reduce the size of your taxable estate while you are alive.
3. Conservatorship
If you have not created a living trust and a durable power of attorney you may be creating heartache for your family. If your assets are in a trust, the person you named as your successor trustee will manage them if you are unable to. The successor trustee could transfer funds from one account to another or liquidate assets to pay for your care. Similarly, your agent under a durable power of attorney can make nonmedical decisions, incur legal contracts and manage other aspects of your finances for you.
If there is nobody with legal authority to manage your assets and your affairs, someone will have to petition the probate court to be appointed your conservator. This is an expensive and public. The conservator has to make periodic accountings to the court and often has to get a bond to be able to serve. Without an estate plan, you have no say in whom the courts appoint as your conservator.
If you have an estate plan in place, you will have named an agent to make health care decisions for you. Also you will have left written instructions about the types of medical treatments you do or do not wish to receive.
4. Probate
The best reason to have an estate plan is to avoid probate. In limited circumstances probate is desirable, but most people, given the choice, avoid probate. It is expensive—up to 8% of the gross estate, meaning without accounting for claims, can go to executor and probate attorney fees, and that figure does not include CPA fees, filing fees, and bonds. Probate can take a longtime, and it is public.
5. Hazards of Joint Tenancy
Holding your property in joint tenancy is not an "estate plan" technique. Often parents who may have a few assets use joint tenancy. By adding a child to the title to their home and to their accounts, they create joint tenancies in those assets. This means that each joint tenant, the parent and the child, has an equal undivided interest in the asset and each has a right of survivorship. It does sound like a quick and easy way to avoid probate and attorneys, doesn't it? It's not.
There are several problems with this "plan," however. First problem: basis. When you give your child half of your house his half gets your basis, too. If you bought the house twenty or thirty years ago, the basis is low. However, when your child receives a house because of a death, rather than as a gift, he gets a "stepped-up" basis. This means the basis is the fair market value of the house on the date of the death. He can turn around and sell the house without incurring capital gains tax. But, if he received half of the property as a gift and only half on a death, only half of the property gets a stepped-up basis on your death. In this case, when he sells the property, he will like have to pay capital gains tax.
The other big problem with joint tenancy is that once you put someone else on your title the property is legally theirs. They can withdraw money from the bank account. You cannot sell or refinance your home, and you cannot take them off your title without their consent. An undivided interest means you each own 100% of the house.
Of course, everyone who uses this "estate plan" method swears that their children are honest and would never cause trouble. There is a sizable body of case law suggesting that not every child is honest when it comes to their parents' money. Besides, even if your child is trustworthy, nobody is immune from financial distress. Creditors can go after all of your child's assets, which include your 100%, not just half, of any accounts and your home that you hold as joint tenants.
