While nobody wants to think about death or disability, establishing an estate plan is one of the most important steps you can take to protect yourself and your loved ones. Proper estate planning not only puts you in charge of your finances, it may also spare your loved ones the expense, delay and frustration associated with managing your affairs when you pass away or become incapacitated.
If you leave your estate to your loved ones using a will, everything you own will pass through probate. The same is true if you pass away without leaving a will or living trust to direct the disposition of your estate. The process is expensive, time-consuming and open to the public. The probate court is in control of the process until the estate has been settled and distributed. If you are married and have children, you want to make certain that your surviving family has immediate access to cash to pay for living expenses while your estate is being settled. It is not unusual for the probate courts to freeze assets for weeks or even months while trying to determine the proper disposition of the estate. Your surviving spouse may be forced to apply to the probate court for needed cash to pay current living expenses. You can imagine how stressful this process can be. With proper planning, your assets can pass on to your loved ones without undergoing probate, in a manner that is quick, inexpensive and private.
Providing for Incapacity
The Federal Center for Disease Control and Prevention (CDC) reports that 26% of adults in the United States have some type of disability. 10.8% of disabled adults suffer from illnesses that cause serious difficulty concentrating, remembering or making decisions. 6.8% are unable to live independently, and 3.7 % need assistance with self-care. If you becomeincapacitated,youwon’tbeabletomanageyourownfinancialaffairs. Manyare under the mistaken impression that their spouse or adult children can automatically take over for them in case they become incapacitated. The truth is that in order for others to be able to manage your finances, they must petition a court to declare you legally incompetent. In California, this process is called conservatorship (for incapacitated adults) and guardianship (for incapacitated children). Conservatorships and guardianships are managed by the probate court. This process can be lengthy, costly and stressful. Even if the court appoints the person you would have chosen, they may have to come back to the court every year and report how they are spending and investing each and every penny. If you want your family to be able to immediately take over for you, you must designate a person or persons that you trust in proper legal documents so that they will have the authority to withdraw money from your accounts, pay bills, take distributions from your IRAs, sell stocks, and refinance your home. A will does not take effect until you die and a power of attorney may be insufficient.
In addition to planning for the financial aspect of your affairs during incapacity, you should establish a plan for your medical care. The law allows you to appoint someone you trust – for example, a family member or close friend – to make decisions on your behalf about medical treatment options if you lose the ability to decide for yourself. You can do this by using a durable power of attorney for healthcare where you designate the person to make such decisions. The power of attorney for healthcare may also inform others of your preferred medical treatment, such as the circumstances in which extraordinary measures such as ventilation, feeding and nutrition intervention, cardiopulmonary resuscitation, and other interventions should be authorized (and if so for how long) or declined if you become permanently unconscious or terminally ill.
Providing for Minor Children
It is important that your estate plan address issues regarding the upbringing of your children. If your children are young, you may want to consider implementing a plan that will allow your surviving spouse to devote more attention to your children, without the burden of work obligations. You may also want to provide for special counseling and resources for your spouse if you believe he or she lack the experience or ability to handle financial and legal matters. You should also discuss with your attorney the possibility of both you and your spouse dying simultaneously, or within a short duration of time. A contingency plan should designate persons you want to manage your assets as well as the guardian you’d like to nominate for the upbringing of your children. The person, or trustee in charge of the finances need not be the same person as the guardian. In fact, in many situations, you may want to purposely designate different persons to maintain a system of checks and balances. Otherwise, the decision as to who will manage your finances and raise your children will be left to the probate court in a Guardianship proceeding. Even if you are lucky enough to have the person or persons you would have wanted selected by the court, they may have undue burdens and restrictions placed on them by the court, such as having to provide annual accountings.
Other issues to consider in this respect is whether you want your beneficiaries to receive your assets directly, or whether you would prefer to have the assets placed in trust and distributed based a number of factors which you designate, such as age, need and even incentives based on behavior and education. All too often, children receive substantial assets before they are mature enough to handle them properly, with devastating results.
You should give careful thought to your choice of guardian, ensuring that he or she shares the values you want instilled in your children. You will also want to give consideration to the age and financial condition of a potential guardian. Some guardians may lack child- rearing skills you feel are necessary. Make sure that your plan does not create an additional financial burden for the guardian.
Planning for Death Taxes
The IRS will want to review your estate at death to ensure you don’t owe the government that one final tax: the federal estate tax. Whether there will be any tax to pay depends on the size of your estate and how your estate plan works. In recent years, the estate tax exemption amount has been maintained at an exceptionally high level under the federal tax law, resulting in only a small percentage of taxpayers owing estate tax at the time of death. For example, this year the estate tax exemption amount is over $11 million per individual, and over $23 million for married couples. Thus, individuals or couples who pass away this year with an estate less than $11 million or $23 million will not incur any federal estate tax and, in California, there is no state death tax. However, in 2025, the death tax exemption is scheduled to be lowered to about $5 million, and many observers are of the opinion that Congress may amend the law and lower the estate tax exemption in 2022 to $5 million or less per individual. In one fell swope, millions of more citizens may soon have a potential estate tax problem to address. There are many effective strategies that can be implemented to reduce or eliminate death taxes, but you must start planning process early in order to implement many of these plans.
Charitable Bequests – Planned Giving
Do you want to benefit a charitable organization or cause? Your estate plan can provide for such organizations in a variety of ways, either during your lifetime or at your death. Depending on how your planned giving plan is set up, it may also let you receive a stream of income for life, earn higher investment yield, or reduce your capital gains or estate taxes.
A well-crafted estate plan should provide for your loved ones in an effective and efficient manner by providing for the protection of you and your loved ones during your lifetime in the event of incapacity or disability, and avoiding probate, estate taxes and unnecessary delays in the administration of your estate upon your death. You should consult a qualified estate planning attorney to review your family and financial situation, your goals and to explain the various options available to you. Once your estate plan is in place, you will have peace of mind knowing that you have provided for yourself and your family in case the worst happens.