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Estate Planning in California - Goals of Estate Planning


1. Establish Guardianships for Minor Children: If you are a parent and your children are under the age of eighteen, you should always appoint at least two Guardians, a Guardian and a Successor Guardian, whom you trust, to ensure that your children will be cared for and protected. The appointment of Guardians is traditionally written into the Last Will and Testament.

Furthermore, in California, there are two types of Guardianships to consider. First is the Guardianship of the Person: which determines who will be appointed guardian(s) of your children's person. In other words, who will care for your children on a daily basis, who the children will live with, and who will be responsible for your children's education and health care until they turn eighteen. Second is the Guardianship of the Estate: which determines who will be appointed guardian(s) of your children's estate. In other words, who will care for all of your assets that you have left to your children on your children's behalf, whether it be buying or selling properties, investment strategies, etc., Guardians of the Estate will care for your children's wealth, on their behalf until they turn eighteen. People generally appoint the same person or people as both the Guardians of the Person and Estate, but if you have relatives or friends who excel in child care but not necessarily in finances, or vice-versa, the flexibility to appoint whom you are most comfortable with, for each task, is inherently availble in our estate plans.

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Avoid Probate

2. Avoid Probate and the Probate Process: The Probate Courts, in and of themselves, are necessary. For people who pass away without a living trust, or other similar estate plan, the Probate Courts determine who your property goes to, by applying the California Intestate Laws (California Probate Code Sections 6400-6402.5), and overseeing the transfer of the property. It is also important to note that if you choose to have only a Last Will and Testament drafted, the Will must also be submitted to the Probate Courts. The downsides of the Probate Courts and the Probate System is that it is an extremely long process, taking as long as two years to ultimately determine what happens to your children, your property, and to finalize the transfers of property. For access to the Probate Courts, probate attorneys and the courts will charge you a fee determined by law, currently at four percent (4%) of the total value of your estate, not to mention your time and incidental costs of the proceedings. Complicating matters even more, the courts attempt to give away your property, as the court believes you would have wanted it given away. Any court proceeding has the potential to become a nightmare and bringing your family members into court, may be an invitation to start disagreeing about how each family member believes you would have wanted your property distributed.

By creating an Estate Plan with our offices, we provide you with a plan specifically devised to avoid the Probate Courts and Probate Process. Through a living trust, you exercise full control over your assets, without giving up any of that control to the slow-moving Probate Courts. Basically, you are taking the functions of the Probate Courts into your own hands, by you yourself determining what happens to your property, when it actually happens, upon what conditions, and in what amounts. Through a pour over will, you yourself determine who will be the guardians of your children, and you yourself make sure all of the property you own not specifically accounted for in the living trust is "poured over" into your living trust. And finally, instead of the Probate Courts overseeing this process of appointing guardians and transferring property, you yourself appoint a Trustee, to complete the process on your behalf. Additionally, by the pre-planning inherent in creating an Estate Plan, you also open up the possibility of creative tax planning that would not be available in the Probate Courts.

Saving money: By essentially pre-paying in creating an Estate Plan, you automatically save at least 4% of the entire value of everything you own. To put this in appropriate context: if you own a home and nothing else, valued at $500,000, probate costs will amount to at least $20,000. Aside from the value savings, it is perhaps more important that you can determine exactly what will happen, when it will happen, what degree it will happen by, etc. You maintain control over your property. You can make sure that your children and other beneficiaries receive as much of the value of your estate as possible.

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Transfer Assets

3. The Seamless Transfer of Property: As mentioned above, by creating an Estate Plan, you maintain control over your property. Instead of relinquishing this control to the Probate Courts while it oversees the transfer of your property, put this function in the hands of someone you trust to complete this task on your behalf, your Trustee. Your Estate Plan accomplishes this seamless transfer of property through a Revocable Living Trust. When setting up your Living Trust, our offices will transfer your property into the trust, thereby technically making your Living Trust the "owner" of your property. However, don't let this scare you, becuase although your Living Trust "owns" your property, you "own" the trust, so there is no loss of power or control over your property.

Upon your passing, your Trustee will fulfill your wishes as written out in your Estate Plan. Your Trustee will be responsible for managing the property in your Living Trust and ultimately transferring the property to your beneficiaries. Your Trustee will also be responsible for drafting and completing all of the transfer documents associated with the transferred property. As this can get quite complicated, our offices additionally offer Trustee Support Services for any assistance your Trustee may need in fulfilling your wishes.

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Avoid Probate

4. Understand Asset Protection Truths and Myths: As mentioned above, upon creating your Living Trust, our offices will transfer your assets (or property) into your Living Trust.

Myth Number One: it is widely believed that by transferring assets into your Living Trust, the assets transfer without their liabilities attached. This is NOT true. For example, if you transfer your house into your Living Trust, it will transfer WITH the mortgage attached.

This Truth is a little difficult to swallow, especially for people who come with the expectation of being able to shield their assets from their attached liabilities. The Truth is more in the details, in terms of asset protection, because a living trust will offer such devices as creative tax planning to avoid or reduce the death and/or capital gains taxes, thereby creating the ultimate advantage of not disadvantaging your beneficiaries by transferring as much of the VALUE of the asset as legally possible.

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Transfer Assets

5. Understand Tax Implications & Contemplate Disclaimer Trusts: The news of any death gets even worse when one begins to understand that the government collects what is commonly known as the "Death Tax" in the year that you pass away. Upon your passing, the government collects approximately one half of the value of everything you own (all of your assets). The good news, in this good news/bad news scenario, is that the government also created an "Exclusion" to this "Death Tax." In 2009, the "Death Tax Exclusion" was $3.5 Million Dollars. This meant that for everyone whose total worth was NOT OVER $3.5 Million Dollars (i.e. total worth under $3.5 Million) who died in 2009, there were no "Death Taxes" due. And for everyone whose total net worth was over $3.5 Million Dollars, then they owed approximately 45% of the value of everything they owned over $3.5 Million in "Death Taxes."

So for example, if John Doe died in 2009 with $3 Million, then he would owe no death taxes because he is under the exclusion amount. If John Doe died with $4.5 Million, then he would owe 45% of the $4.5 Million he owns minus the $3.5 Million exclusion. He would owe: $4.5 - $3.5 Million = $1 Million x 45% = $450,000. Please understand that the "Death Tax" can grow significantly for people whose net worth exceeds the exclusion amount. Additionally, as of 2011, a $5 Million Dollar exclusion to the Death Tax was in place, and was set to expire in 2013. However, the $5 Million Dollar exclusion (35% rate on amounts above this exclusion) was extended through 2013, and as of early 2013, the Death Tax remains a key issue in congressional budget negotiations. Although no one can know for certain, many believe the exclusion amount will eventually drop to $1 Million Dollars and the death tax rate will rise to 55%.

The Death Tax is actually a tax on your beneficiaries. When you think about it, you yourself are not responsible for paying the Death Tax because you have already passed away, so it will be your beneficiaries who are paying this tax, hopefully out of the value of the property (or assets) you pass on to them. However, the payment of this tax becomes complicated when the value of your property is in real estate, company ownership or other non-liquid assets (or property). This is when it becomes important to plan ahead specifically for the Death Tax, especially considering that the exclusion could fall to $1 Million Dollars.

Disclaimer Trusts: These are Trusts within your Living Trust which act as "holders" of the property. In the most basic sense, because these Disclaimer Trusts "hold" the property, its value technically does not get added to the value of your estate upon your death. Practically speaking, Disclaimer Trusts become more of a tax planning or tax delay device, rather than the commonly held misconception that they are tax avoidance devices.

Please feel free to contact us if you have any questions about any of the above. Although it can sound a bit complicated, once you begin to understand the reasons for creating an Estate Plan, it also tends to make sense very quickly. We're here to answer any questions.

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