I am often asked, “Why is estate planning so important anyway?” Below, I discuss why it is crucial to put together an estate plan, with some of the most important reasons including the following: giving your successor trustee the power to manage and control your trust assets during incapacity and after your passing, probate avoidance, estate tax avoidance, enables you to set a plan of inheritance and avoid family conflicts.

 

PLAN FOR YOUR INCAPACITY

 

Executing a durable power of attorney for management of property, finances, and personal affairs enables you, while you have capacity, to nominate individuals you trust to act on your behalf in the event of future incapacity (e.g., car accident, dementia, etc.) During your incapacity, which may be temporary or permanent, your attorney in fact will have several powers, including but not limited to, the power to file your federal and state income taxes, file a lawsuit on your behalf (which may be the cause of your incapacity), inherit on your behalf, ensure your health care premiums are paid (to ensure you do not lose your existing health care coverage), fund your trust by titling non-trust assets into the name of your trust to avoid probate. This ensures that your estate is handled appropriately during a difficult time.

 

Executing an advance health care directive, also known as a living will, enables you, while you have capacity, to nominate individuals you trust to act on your behalf to make your health care decisions. This document enables you to specify certain health care wishes in advance (e.g., anatomical gift preference (donate organs and tissues for transplant purposes or donate your body as a cadaver or only donate organs and tissues to family members or no anatomical donations) and life sustaining treatment preference (do you want to be on life support if you are in a permanent vegetative state, have no brain activity or are terminally ill and life sustaining treatment is only prolonging your death).  Any and all decisions you do not specify in this document, your health care agent will have the discretion to make.

 

PROTECTING YOUR ASSETS FROM PROBATE

 

An estate is automatically subject to probate if the assets comprising the estate are valued more than $150,000. Probate is the judicially supervised process of changing title of your assets from your name to your beneficiary’s name upon your death. Probate is typically a slow process as there are only two probate courtrooms currently open in San Diego County, with both courtrooms hearing additional matters on conservatorships and guardianships. The entire probate process typically takes between nine (9) months to two (2) years to complete. Hence, your heirs will have to wait a considerable amount of time before receiving their inheritance. Alternatively, if you execute a trust before your passing, your beneficiaries may inherit in as little as four months after your passing.

 

Court fees and filing fees amount to hundreds of dollars. In addition, statutory attorney fees are based on the gross value of your assets. An attorney is paid between 1% to 5% of the gross value of the asset, depending upon the size of your estate. For example, if pass away owning a home that is not titled in the name of a trust, it will go through probate. The probate court is not concerned whether you have equity in the home or not, if the fair market value of the property is more than $150,000, it will be subject to probate. If at the time of your passing, your home is valued at $500,000 and you had no equitable interest in the home, an attorney may be paid up to $20,000 in fees in probate to change title of the home. Alternatively, if your home were titled in the name of a trust, your successor trustee would pay between $7.00 to $25.00 to change title. Probate should always be avoided whenever you own real property due to these unnecessary expenses.

 

Aside from being a lengthy and expensive, probate is a public process. Anyone may pull your file and obtain private information about your loved ones, including their names, addresses, telephone and social security numbers, and your financial situation, including your assets and debts.

 

ESTATE TAX AVOIDANCE

 

If the value of your estate is greater than $5,250,000 (for an individual, $10,500,000 for a married couple), the federal government imposes a 40% tax on any sum above this magic number. A married couple is allotted anything above this magic number is taxed by the federal government at 40%. A well-drafted trust will help minimize the tax burden to your beneficiaries.

 

PLAN OF INHERITANCE

 

For estates passing through probate, where a beneficiary is under the age of eighteen, the court will designate that their monies be held in an account and be distributed to the minor outright on the minor’s 18^th birthday. (Would an average child go to college if they received one million dollars on their 18^th birthday?) Titling your assets in a trust avoids probate and enables you to choose the dates of distribution for minors (e.g., a distribution of 5% upon attainment of a bachelor degree from an accredited four year university or college or when the beneficiary reaches the age of 25, whichever occurs first, a distribution of ½ at age 30 and final distribution of the trust principal and interest outright at age 35).

 

Further, you get to decide who inherits from you. For estates passing through probate, the court will follow a California-devised distribution scheme in dictating the distribution of your assets. Priority of distribution typically is as follows: (1) surviving spouse; (2) children; (3) grandchildren; (4) grandparents; (5) siblings; (6) nieces and nephews. The search continues through your ancestral tree for a living heir and if no living relative is located, the State of California inherits 100% of your estate. These laws may result in relatives who you no longer have any relationship with inheriting a large portion of your estate, rather than those monies going to a close friend or a cause you are passionate about.