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Estate Planning Questions and Answers
What is an estate plan?
What should you consider before acquiring an estate plan?
Should you have an estate plan?
What is included in your estate?
What is a last will and testament?
What is a revocable living trust?
What is probate?
Does an estate plan permit you to name alternative beneficiaries and alternate executors/trustees?
Who should you choose as your executor or trustee?
How can you provide for your minor children in your estate plan?
When does estate planning involve tax planning?
How does the way you hold title to property affect its distribution?
Does the characterization of property as community or separate property have an effect on its distribution?
What is tenancy in common and what effect does it have?
What is joint tenancy and what effect does it have?
What other types of estate plans are there besides a will and a trust?
What is a power of attorney and should it be a part of my estate plan?
What is an estate plan?
An estate plan may be one of the most important things you acquire in your life. You can be a single person or married couple to acquire an estate plan. In sum, an estate plan is your written instructions to your loved ones of how you want your assets distributed, how you want your minor children to be cared for, or how you want your future needs addressed in case you are unable to care for yourself at some time in the future. An estate plan is an important process which involves your loved ones and your assets. With a carefully drafted estate plan, you can determine how your assets will be managed and whom will manage your assets during your lifetime if you are unable to, and after your death. In your estate plan, you will also determine how and to whom your assets will be distributed after your death. An estate plan is more than just having a will drafted. It can be much, much more. An estate plan, however, can also involve financial, tax, medical and business planning. A will may be a part of the planning process, but you will need other documents as well to fully address your estate planning needs. Just as people and assets and laws change, it may well be necessary to adjust your estate plan every so often to reflect those changes. Some examples of estate plans include wills, trusts, powers of attorneys, joint tenancy, tenancy in common, life insurance, retirement plans, etc.
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What should you consider before acquiring an estate plan?
There are many important things to consider and think about before you acquire an estate plan from an estate planning attorney. First, you should know and understand your important assets and the approximate value of each of those assets. Second, you should have an ideal of whom you want to be as beneficiaries of those assets and when you want those assets distributed. Third, you should also have an ideal as to who you want to manage those assets if you cannot either during your lifetime or after your death. Fourth, you should carefully decide who would be the person to care for any of your minor children after your incapacitation or death. Fifth, you should consider who will be the person to make decisions on your behalf concerning your care and welfare if you should become unable to care for yourself? Sixth, you should have an ideal of what you want done with your remains after you die and where would you want them buried, scattered or otherwise laid to rest.
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Should you have an estate plan?
Everyone should have some sort of an estate plan. The answer to what estate plan that is appropriate for each person’s individual situation cannot be easily answered within this paragraph. Whether you have a large or small estate, each adult individual person should have a power of attorney where you can designate someone to manage your assets and make health care and personal care decisions for you if you ever become unable to do so for yourself. If your estate is small, you may simply focus on who will receive your assets after your death, and who should manage your estate, pay your last debts and handle the distribution of your assets. This may be accomplished through a simple estate plan like a last will and testament. If your estate is large, you may need a more complex estate plan to preserve your assets for your beneficiaries and reducing or postponing the amount of estate tax which otherwise might be payable after your death. If you have children, you should have at least a will, but trusts may be more appropriate if you have a large estate. Your attorney will be able to advise you on whether your assets constitute a large or small estate. If you fail to plan ahead, a judge will simply appoint someone to handle your assets and personal care. And your assets will be distributed to your heirs according to a set of rules known as intestate succession. Contrary to popular myth, everything does not automatically go to the state if you die without a will. Your relatives, no matter how remote, and, in some cases, the relatives of your spouse will have priority in inheritance ahead of the state. Still, they may not be your choice of heirs; an estate plan gives you much greater control over who will inherit your assets after your death.
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What is included in your estate?
Your estate includes all of your assets. This could include assets held in your name alone or jointly with others, assets such as bank accounts, real estate, stocks and bonds, and furniture, cars and jewelry. Your assets may also include life insurance proceeds, retirement accounts and payments that are due to you (such as a tax refund, outstanding loan or inheritance). The value of your estate is equal to the “fair market value” of all of your various types of property after you have deducted your debts (your car loan, for example, and any mortgage on your home). The value of your estate is important in determining whether your estate will be subject to estate taxes after your death and whether your beneficiaries could later be subject to capital gains taxes. Ensuring that there will be sufficient resources to pay such taxes is another important part of the estate planning process.
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What is a last will and testament?
A will is a traditional legal document which names individuals (or charitable organizations) who will receive your assets after your death, either by outright gift or in a trust. It nominates an executor who will be appointed and supervised by the probate court to manage your estate; pay your debts, expenses and taxes; and distribute your estate according to the instructions in your will. It also nominates guardians for your minor children. Most assets in your name alone at your death will be subject to your will. Some exceptions include securities accounts and bank accounts that have designated beneficiaries, life insurance policies, IRAs and other tax-deferred retirement plans, and some annuities. Such assets would pass directly to the beneficiaries and would not be included in your will. In addition, certain co-owned assets would pass directly to the surviving co-owner regardless of any instructions in your will. And assets that have been transferred to a revocable living trust would be distributed through the trust not your will. For a more detailed explanation of wills, please refer to the Trust and Wills page of this site.
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What is a revocable living trust?
A revocable living trust is a legal document that can, in some cases, partially substitute for a will. With a revocable living trust (also known as a revocable inter vivos trust or grantor trust), your assets are put into the trust, administered for your benefit during your lifetime and transferred to your beneficiaries when you die, all without the need for court involvement. Most people name themselves as the trustee in charge of managing their living trust’s assets. By naming yourself as trustee, you can remain in control of the assets during your lifetime. In addition, you can revoke or change any terms of the trust at any time as long as you are still competent. The terms of the trust become irrevocable when you die. In your trust agreement, you will also name a successor trustee (a person or institution) who will take over as the trustee and manage the trust’s assets if you should ever become unable to do so. Your successor trustee would also take over the management and distribution of your assets when you die. A living trust does not, however, remove all need for a will. Generally, you would still need a will known as a pour over will to cover any assets that have not been transferred to the trust. You should consult with a qualified estate planning lawyer to assist you in the preparation of a living trust, your will and other estate planning documents. Also, keep in mind that your choice of trustees is extremely important. That trustee’s management of your living trust assets will not be automatically subject to direct court supervision.
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What is probate?
Probate is a court-supervised process for transferring a deceased person’s assets to the beneficiaries listed in his or her will. Typically, the executor named in your will would start the process after your death by filing a petition in court and seeking appointment. Your executor would then take charge of your assets, pay your debts and, after receiving court approval, distribute the rest of your estate to your beneficiaries. If you were to die intestate (that is, without a will), a relative or other interested person could start the process. In such an instance, the court would appoint an administrator to handle your estate. Personal representative is another term used to describe the administrator or executor appointed to handle an estate. Simpler procedures are available for transferring property to a spouse or for handling estates in which the total assets amount to less than $100,000. The probate process has advantages and disadvantages. The probate court is accustomed to resolving disputes about the distribution of assets fairly quickly through a process with defined rules. In addition, the probate court reviews the personal representative’s handling of each estate, which can help protect the beneficiaries’ interests. One disadvantage, however, is that probates are public. Your estate plan and the value of your assets will become a public record. Also, because lawyer’s fees and executor’s commissions are based on a statutory fee schedule, a probate may cost more than the management and distribution of a comparable estate under a living trust. Time can be a factor as well. A probate proceeding generally takes longer than the administration of a living trust. Discuss such advantages and disadvantages with an estate planning lawyer before making any decisions.
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Does an estate plan permit you to name alternative beneficiaries and alternate executors/trustees?
Yes. In either a will or a trust, you are permitted to list alternate beneficiaries and you can also list alternate (or successor) trustees (for a trust) and executors (for a will). Although not mandatory, it is highly recommended that you do. The alternative beneficiary is listed in the event that your primary beneficiary does not survive you. And if a beneficiary is too young or too disabled to handle an inheritance, you might consider setting up a trust for his or her benefit under your will or living trust. Once you have decided who should receive your assets, it is very important that you correctly identify those chosen individuals and charitable organizations in your will or trust. Many organizations have similar names and, in some families, individuals have similar or even identical names.
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Who should you choose as your executor or trustee?
The choice of an executor or trustee is a very personal one. You could name your spouse or domestic partner as your executor or trustee. Or you might choose an adult child, another relative, a family friend, a business associate or a professional fiduciary such as a bank. Your executor or trustee does not need any special training. What is most important is that your chosen executor or trustee is organized, prudent, responsible and honest. While the executor of a will is subject to direct court supervision and the trustee of a living trust is not, they serve almost identical functions. Both are responsible for ensuring that your written instructions are followed. One difference is that the trustee of your living trust may assume responsibilities under the trust agreement while you are still living (if you ever become unable or unwilling to continue serving as trustee yourself). You should always discuss your choice of an executor or trustee with your estate planning lawyer. There are many issues to consider. For example, will the appointment of one of your adult children hurt his or her relationship with any other siblings? What conflicts of interest would be created if you name a business associate or partner as your executor or trustee? And will the person named as executor or successor trustee have the time, organizational ability and experience to do the job effectively?
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How can you provide for your minor children in your estate plan?
First of all, in your will, you should nominate a guardian to supervise and care for your child (and to manage the child’s assets) until he or she is 18 years old. Under California law, a minor child (a child under age 18) would not be legally qualified to care for himself or herself if both parents were to die. Nor is a minor legally qualified to manage his or her own property. Your nomination of a guardian could avoid a ‘tug of war’ between well-meaning family members and others. You also might consider transferring assets to a custodian account under the California Uniform Transfers to Minors Act to be held for the child until he or she reaches age 18, 21 or 25. Or you might consider setting up a trust to be held, administered and distributed for the child’s benefit until the child is even older.
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When does estate planning involve tax planning?
Estate taxes are imposed upon estates that have a net value of $2 million or more. That amount will increase to $3.5 million in 2009. In 2010, the estate tax will disappear completely. Then, unless Congress passes an extension, the exemption will revert back to $1 million in 2011. For estates that approach or exceed these amounts, significant estate taxes can be saved by proper estate planning, usually before your death or, for couples, before one of you dies. Keep in mind that tax laws often change. And estate planning for tax purposes must take into account not only estate taxes, but also income, capital gains, gift, property and generation-skipping taxes as well. Qualified legal advice about taxes and current tax law should be obtained from a competent lawyer during the estate planning process.
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How does the way you hold title to property affect its distribution?
The way you hold title to your property has a major effect in how that property is distributed, and is a critical factor in the estate planning process. Any changes in title to the property you own may have a consequential effect on the taxes you may have to pay on those assets.
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Does the characterization of property as community or separate property have an effect on its distribution?
Yes. With respect to community property and separate property, any property you acquire during marriage is deemed community property, whether you are married or a registered domestic partner. As a married individual or registered domestic partner, you may continue to own certain separate property as well property which you owned prior to the marriage or domestic partnership. Any property that is community is then owned by both spouses jointly and would normally be distributed equally between both spouses or partners in the dissolution of the marriage. A gift or inheritance received during the marriage or partnership would be considered separate property as well. Separate property can be converted to community property (and vice versa) by a written agreement (it must conform with California law) signed by both spouses. However, taking such a step can have significant tax and other consequences. You cannot will away all of the community property of the marriage, although you can will away your share of the community property. Alternatively, you can will away 100% of all of your separate property.
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What is tenancy in common and what effect does it have?
If you own property as tenants in common and one co-tenant (co-owner) dies, that co-tenant’s interest in the property would pass to the beneficiary named in his or her will. This would apply to co-tenants who are married or in a domestic partnership as well as to those who are single. Tenancy in common has no survivorship rights characteristics. In other words, the survivor tenant in common does not inherit the deceased tenant’s interest in the residence. Also, the ownership is not joint, and not always equal. A tenant in common can have any percentage ownership in the property, and the distribution of that deceased tenant’s share will be according to the deceased tenant’s interest ownership.
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What is joint tenancy and what effect does it have?
Joint tenancy is an undivided form of property ownership with a right of survivorship characteristic. Co-owners (married or not) of a property can also hold title as joint tenants with right of survivorship. If one tenant were to die in such a situation, the property would simply pass to the surviving joint tenant without being affected by the deceased person’s will. However, joint tenancy is not always the best form of an estate plan and may have some very big disadvantages. You should always consult with an attorney prior to placing property in a joint tenancy.
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What other types of estate plans are there besides a will and a trust?
There are multiple estate plans available besides a will or a trust. Some of these estate plans allow you to transfer the assets directly to the named beneficiaries. Such assets include (1) life insurance proceeds; (2) qualified or non-qualified retirement plans, including 401(k) plans and IRAs; (3) certain ‘trustee’ bank accounts; (4) transfer on death (or TOD) securities accounts; and (5) pay on death (or POD) assets, a common title on U.S. savings bonds. Keep in mind that these beneficiary designations can have significant tax benefits and consequences for your beneficiaries and must be carefully coordinated with your overall estate plan.
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What is a power of attorney and should it be a part of my estate plan?
A power of attorney is a written documents that instructs what will happen to your finances and health care in advance before you become incapacitated. Through estate planning, you can choose those who will care for you and your estate if you ever become unable to do so for yourself. Just make sure that your choices are documented in writing. If you set up a living trust, for example, the trustee will provide the necessary management of those assets held in trust. You should also consider setting up a durable power of attorney for property management to handle limited financial transactions and to deal with assets that may not have been transferred to your living trust. By doing this, you designate an agent or attorney-in-fact to make financial decisions and manage your assets on your behalf if you become unable to do so. And by setting up an advance health care directive/durable power of attorney for health care, you can also designate an attorney-in-fact to make health care decisions for you if you ever become unable to make such decisions. In addition, this legal document can contain your wishes concerning such matters as life-sustaining treatment and other health care issues and instructions concerning organ donation, disposition of remains and your funeral. Both of these attorneys-in-fact lose the authority to make decisions on your behalf when you die. If you have not made any such arrangements in advance and you become unable to make sound decisions or care for yourself, a court could appoint a court-supervised conservator to manage your affairs and be responsible for your care. The court’s supervision of the conservator may provide you with some added safeguards. However, conservatorships can also be more cumbersome, expensive and time-consuming than the appointment of attorneys-in-fact under powers of attorney. In any event, even if you appoint attorneys-in-fact who could manage your assets and make future health care decisions for you, you should still document your choice of conservators in case a conservatorship is ever necessary.
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