Estate Planning

Provide Creditor and Divorce Protection to Your Children

An Irrevocable Life Insurance Trust (ILIT) can insure that your beneficiaries are protected from their inabilites, disabilities, predators, creditors, in-laws, and out-laws, including potential ex-spouses. An outright transfer of an insurance policy to beneficiaries does not provide the same level of protection as an insurance trust. Maximum flexibility and creditor protection can be achieved through the use of an independent trustee, spendthrift provision, and the grantor's surviving spouse having a testamentary limited power of appointment over the family trust (after death of the insured).     

Do not buy life insurance for your spouse without talking first to an attorney about the difference between buying life insurance outright and buying life insurance through an ILIT. 

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How Do You Know if You Need an Estate Plan?

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.

Choosing the Trustee for Your Living Trust

Who should be named the "trustee" of your trust?

The trustee is the person who will manage and control the trust's home and other assets while you are alive. Generally if you, or you and your spouse, are healthy, the trust documents should list you, or you and your spouse as co-trustees. In the case of a married couple, this allows the surviving spouse to automatically take control when the other dies or becomes incapacitated.

You also will need to designate a successor trustee. This is the person (or perhaps a bank or other organization) that you want to control the trust after both of you have passed away. The successor trustee's primary job is to ensure that your assets are distributed to your heirs according to the wishes spelled out in your trust or will.

Two Good Suggestions for Estate Planning

Excerpts from the new book by Nancy Keates, The Wall Street Journal Guide to the Business of Life.

Two good suggestions for estate planning:

Don't surprise or confuse your heirs:

A contested will can make legal fees skyrocket. Making clear decisions, telling your heirs exactly what to expect, and being explicit in your will, will help reduce the risk of a legal fight. One common problem is a poorly drafted will that can lead to ambiguities about the deceased's wishes and, ultimately, increase the risk of legal fights. Another thing to watch out for are conflicting directives between the will and, say, a life insurance policy or a retirement account.

Consider a living trust:

Assets in a living trust go directly to heirs designated by the trust and avoid probate, saving you legal expenses. If you own homes in two states and want to avoid probate in one of the states, you can put that home in a living trust. Be sure the cost of setting up trusts, and revising them as situations change, doesn't exceed the legal fees and taxes you are trying to avoid.

What is the Difference Between a Limited Liability Company and a Limited Partnership?

A limited partnership requires at least one general partner and one limited partner. The general partner is potentially liable for all the obligations of the partnership. One way to protect your partnership from liability is to have another entity, a corporation without assets, act as the general partner. The limited partner has limited liability. Limited partners may jeopardize their limited liability status if they actively participate in the business of the partnership.

A limited liability company requires one or more members which may be individuals, partnerships, limited partnerships, trusts, estates, associations, corporations, other limited liability companies or other business entities. Properly arranged, the membership interest in a limited liability company by one member is potentially protected against the creditors of the other members. Members are afforded limited liability similar to shareholders of a corporation and have pass-through taxes comparable to a partnership.

What Does Probate Cost?

SAMPLE Cost of Propate:

CALCULATION OF PROBATE FEES

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The costs of probate can be substantial and represent significant wealth loss to your heirs.  The following is the California Probate Code section specifying probate fees and an example of the amount of probate fees due on a $1,500,000 - sized estate. 

CALIFORNIA PROBATE CODE §10810: Statutory Fees for Services (a) Subject to the provisions of this part, for ordinary services the attorney for the personal representative shall receive compensation based on the value of the estate accounted for by the personal representative, as follows: (1) Four percent on the first one hundred thousand dollars ($100,000). (2) Three percent on the next one hundred thousand dollars ($100,000). (3) Two percent on the next eight hundred thousand dollars ($800,000). (4) One percent on the next nine million dollars ($9,000,000). (5) One-half of 1 percent on the next fifteen million dollars ($15,000,000). (6) For all amounts above twenty-five million dollars ($25,000,000), a reasonable amount to be determined by the court. (b) For the purposes of this section, the value of the estate accounted for by the personal representative is the total amount of the appraisal of property in the inventory, plus gains over the appraisal value on sales, plus receipts, less losses from the appraisal value on sales, without reference to encumbrances or other obligations on estate property.

EXAMPLE:   GROSS ESTATE OF $1,500,000 - CALCULATION OF PROBATE FEES

(NOTE:  Fees are calculated on the gross estate - i.e., without offset for debts.  Gross estate includes any retirement accounts and life insurance payable to the estate.)

4% of the first $100,000             $  4,000

3% of the next $100,000            $  3,000

2% of the next $800,000            $16,000

1% of the next $500,000            $  5,000                                                                              

Attorney’s Probate Fees                              $28,000

Executor’s Probate Fees                              $28,000

               

TOTAL PROBATE FEES               =            $56,000

                                                                                                

These fees do not include court costs and other probate administration costs.  The total probate expenses (i.e., fees and costs) could represent a significant loss of wealth to your heirs.   

What is Probate?

Probate is the court-supervised process developed under California law which goal is to transfer your assets at your death to the beneficiaries set forth in your will, and in the manner prescribed by your will. It also provides for a fairly quick determination of valid claims of any creditors who have claims against your assets at your death. At the beginning of a probate administration, a petition is filed with the court, usually by the person or institution named in your will as executor. After notice is given, and a hearing is held, your will is admitted to probate and an executor is appointed. If you die "intestate" (that is, without a will), your estate is still subject to probate court administration and an administrator is appointed by the court to handle your estate.

What Is a Living Trust?

A revocable living trust is also commonly referred to as a revocable inter vivos trust, a grantor trust or, simply, a living trust. A living trust may be amended or revoked by the person creating it (commonly known as a "trustor," "grantor," or "settlor") during the trustor's lifetime, as long as the trustor is competent.

A trust is a written agreement between the individual creating the trust and the person or institution named to manage the assets held in the trust (the "trustee.") It is proper for you to be the initial trustee of your living trust. 

Eventually since management support is expected, your trust should designate an individual or bank or trust company to act in your place. The terms of the trust become irrevocable on the trustor's death. Because the trust contains terms which provide for distribution of your assets on and after your death, the trust acts as a substitute for your will.  The trust removes the need to probate your will with respect to those assets which are held in your living trust at your death.

Naming Charities in Your Estate Plan

The easiest way to implement charitable giving as part of your estate plan is a charitable bequest.

Charitable bequests are testamentary gifts made through a will or other estate planning device like a trust. This planning may provide significant estate and gift tax benefits. Charitable bequests take on many forms depending on the intent of the donor.

The most common form is an outright bequest of virtually all kinds of property (stocks, bonds, real property, and royalties) listed in an estate plan to be given upon the death to the charitable organizations of your choosing.

Other strategies for charitable bequests can take many forms including these described below.

Should I Make Gifts to my Children

Lately I have been asked, "Should I make gifts to my children?" - Especially as year end approaches. What appears to be a simple question may have a very complex answer. In analyzing tax aspects, it is easy to miss other very important factors which should be considered before the you make decisions on gifting. Tax issues are extremely important – however, they are not the only consideration.

If you are deciding whether to make a gift to your children before the year ends, here are some pros and cons to weigh with your attorney and accountant in regard to the gifting question include:

Pros:

Satisfaction of seeing donees enjoy gifted assets during the donor's lifetime