An estate plan is not something that should be prepared once and then locked away, not to be seen again until a person passes away. As we discussed in a recent post, everyone with an existing estate plan should review it every few years to make sure it still addresses their needs. It should also be reviewed and updated after certain major life events - including divorce and remarriage.
Probate in California is unfortunately an expensive and time-consuming process. Probate refers to the court proceedings to administer the estate of a deceased person and distribute their assets to heirs and beneficiaries. Court costs and legal fees can be prohibitive. For this reason, many people who are beginning the estate planning process are interested in avoiding probate.
The inter vivos or living trust is the most popular strategy for avoiding probate in California. By using a carefully drafted revocable trust instead of a will as the primary estate planning document, the creator of the trust - called the trustor - can keep assets out of probate. This is because the trust, not the trustor, owns the assets. The assets are therefore not part of the trustor's estate when they die. The assets are managed and distributed by a trustee chosen by the trustor.
As the 2016 presidential election enters its final weeks, those voters who have not already made up their minds will be studying the candidates' positions on various issues. Some voters in the Sacramento area may wonder if the federal estate tax should be an issue of concern. The answer, for all but the wealthiest California residents, is no.
The Republican candidate has proposed abolishing the federal estate tax. Even if this were to happen, it would have no effect on the vast majority of people. Currently the federal estate and gift tax does not apply to the first $5.45 million of a decedent's estate plus prior taxable gifts, due to the lifetime exclusion. Married couples can combine their exclusions and effectively shield $10.9 million from estate and gift tax.
Unfortunately, estate planning is not always taken as seriously as it should be or may not be considered at all. Failing to conduct any estate planning is the worst mistake that can be made and studies show that many Americans who have reached the age where they should have come up with an estate plan have not done so. There are several errors that can be made when estate planning, or failing to estate plan, so it can be useful to know what those mistakes are to avoid them.
The number one mistake in estate planning is failing to have a will. An effective estate plan includes a properly executed will. One survey revealed that 64 percent of American adults do not have a will. A will is important to document the wishes of the estate planner. Without a will, assets are divided according to the laws in the estate planner's state and those laws may not be consistent with the estate planner's wishes. The next important estate planning failure to be aware of is failing to update your will. Just as life is not set in stone, and changes, a will should be updated to reflect important life changes that may impact the wishes of the estate planner. Marriage, divorce and other circumstances may all impact an estate plan.
Trusts are a popular estate planning vehicle in California. But trusts can be used for many purposes besides managing financial assets for the benefit of loved ones. In fact, California's Probate Code specifically says a trust can be established for any purpose that is not illegal or contrary to public policy. A good example of a specialized trust is the pet trust.
The purpose of a pet trust is to ensure that one or more pets are cared for when their owner is incapacitated or deceased. The person who creates the trust, known as the settlor, transfers funds to the trustee, to be used to care for the animals. The trustee can be instructed to care for the animal, or the trust can designate a separate caregiver to whom the trustee will make periodic payments for the animal's care.
In California most wills go through probate proceedings without a significant dispute. Similarly, most trusts are administered without any controversy. But occasionally a conflict arises among family members, between family members and an executor or between family members and trustees. When this happens it is critical for a party to the dispute to knowledgeably assert their rights under the law.
Hurt feelings can arise when family members believe they were not treated fairly in their loved one's will or trust. If there is evidence the unfairness resulted not from the testator's or settlor's wishes, but from the undue influence of another person, it may be necessary to pursue probate or trust litigation. Family members may be able to prove that an outsider cultivated a confidential relationship with the decedent and took advantage of that relationship to influence the decedent to make a bequest to them.
In this blog we have on several occasions discussed the advantages of a revocable trust for estate planning purposes in California. A revocable trust is what the name implies: it can be modified or terminated at any time during the settlor's lifetime. But what about an irrevocable trust? Can it ever be modified or terminated?
Irrevocable trusts have more limited and specialized purposes than revocable trusts. They often have advantages in terms of protecting assets from creditors or avoiding unnecessary estate taxes.
The IRS has proposed new regulations that, if enacted, could drastically affect estate planning for small business owners and farmers in California's Central Valley. Under the new regulations, the long-established practice of discounting shares of a family-owned business, including an agricultural business, would be curtailed.
Currently, individuals have a $5.45 million lifetime exclusion from federal estate and gift taxes. The exclusion is portable between married couples, meaning that each couple has a combined exclusion of $10.9 million. Estates that are smaller than the exclusion amount are not subject to federal estate and gift tax. But for a substantial estate, any assets over the exclusion amount will be taxed at the rate of 40 percent.
In this California estate planning blog, we've written many posts about the importance of having an estate plan and of not postponing the estate planning process. But the process isn't necessarily over when the will or trust has been drafted, signed and witnessed. Every estate plan should be reviewed periodically to make sure it is up to date, and still reflects the testator's wishes.
There is no set rule as to how often an estate plan should be reviewed. Some financial advisors suggest a thorough review at least every five years. Those with large estates may want to do an annual review. More importantly, an estate plan should be reviewed whenever there has been a major change in the law or the testator's life.
We all want what is best for our family; however, in order to accomplish such a task, we need to think about the future and the what-ifs. For some California residents, this process is not always easy, but the reality is that estate planning can accomplish essential and major decisions that individuals of all ages and families of all sizes need to make.
At Michael A Sawamura Attorney at Law, our legal team is dedicated to aiding and guiding our Sacramento clients through the estate planning process. For some, this is an emotional and often difficult process, but with a strong and positive bond, we draft durable documents that accomplish the many goals of our clients.