FAQs – Estate Planning

FAQs – Estate Planning

FAQs – Estate Planning

Do I have enough money to need an estate plan?

An estate plan is about much more than saving taxes.  An estate plan is a plan to put your affairs in order and provide a coherent set of instructions to be carried out in the event of your incapacity or upon your death, and should address the following issues:  (1) how your assets are to be managed and distributed during your lifetime and upon your death, (2) how your minor children are to be cared for if you should die or become incapacitated, (3) how you are to be cared for and who should act on your behalf if you ever become incapacitated, and (4) how to address end-of-life decisions, such as whether to be kept alive on life support, disposition of your remains (burial vs. cremation), and organ donation.  Even if you don’t have a substantial estate, there are steps you can take today to make life easier for you and your family in the future.

As for estate taxes, under current law (applicable through 2025), for 2024, the “exemption amount” is $13,610,000 ($27,220,000 for a married couple). This is the amount that you can give, at life or at death, not including gifts to a spouse or charity, without paying estate tax.  You can give unlimited amounts to your spouse (with some restrictions for a non-citizen spouse, and some restrictions where the gift to the spouse is through a trust) without the imposition of the estate tax. The exemption amount is scheduled to increase annually for inflation through 2025, and revert back to $5,600,000 in 2026 (increased for inflation from 2017) under current law.

What is a “Living Trust”?

A revocable living trust is a document that you create now, which sets forth how you would like your assets managed and distributed in the event of your incapacity or death. A married couple can create a joint living trust to hold their community property, as well as the separate property of each spouse.  During the life of the creator (commonly called the “grantor”, “trustor,” or “settlor”) very little will change as to how the creator manages his or her assets or lives his or her life.  It is upon death or incapacity that a trustee (a spouse, a trusted friend or professional associate, an adult child, or a bank or trust company) will assume management and follow the rules set out by the grantor as to how assets should be managed (i.e. will assets be held in continuing trust for children, or distributed to them at specified ages). A living trust is a very flexible document that can be amended and modified during your lifetime as your circumstances change.

Even with a living trust, a Will (called a “pour over will”) is also necessary to transfer assets to the living trust if you did not transfer your assets to the living trust during your life.

Does a living trust provide creditor protection?

A revocable living trust does not protect your assets from creditors, because you retain full rights to the assets and may amend or revoke the living trust as you wish. However, trusts created for your beneficiaries under the revocable living trust document may be drafted in a manner to protect your beneficiaries from their creditors, by, for example, holding assets in trust for a beneficiary’s use, rather than distributing the assets to the beneficiary outright.

Why not just have a Will?

A Will goes into effect at your death and has no bearing on how your assets would be managed during your life, for example, in the case of incapacity.  A petition must be filed with the Court to probate a Will.  It may take approximately two to three months (in the Los Angeles Superior Court) to obtain a hearing date to have the Will admitted to probate and to have a personal representative appointed to administer the estate, and these time periods are getting longer as the budget for the California court system is continually and drastically cut. In a probate court proceeding, the information contained in the Will and the information about the deceased person’s assets become a matter of public record. The administration of the probate estate is overseen by a Judge. The probate court proceeding can last from eight months to two years, sometimes even longer, before all of the decedent’s assets are ultimately distributed to the beneficiaries named in the Will.  If there are minor beneficiaries, the Will may have to provide for trusts to be established in any event.  On balance, a stand-alone Will is an inefficient way to provide for loved ones, even if you don’t have a large estate.

What about my retirement plans?

Retirement plans, such as a 401K plan or an IRA, pass by beneficiary designation.  A retirement plan would not be owned by your living trust; you remain the owner, as the participant.  However, a living trust can be named as the beneficiary of a retirement plan.  There are many considerations to take into account in naming the beneficiary(ies) of your retirement plan so that your entire estate plan is coordinated and taxes are minimized.

How do I choose a Trustee?

Choosing a trustee to administer your living trust upon your incapacity or after your death requires a good deal of thought.  A spouse may be the natural choice at the first death, but thereafter the choice gets more complicated.  A trustee requires a good skill set of financial savvy, management skills, people skills, and adequate time to devote to the job and most importantly, must be trustworthy.  Choosing a family member may provide a person who is familiar with the personalities of the beneficiaries, but that person may not have the time or skills to undertake what can be a very long job.  A professional trustee, such as a bank or trust company, may be a better long run choice in instances where there are substantial assets and trusts that will last for many years, where there this a risk that family issues may get amplified, and/or where the options regarding individual trustees are not palatable.  Sometimes a co-trustee arrangement, with a trusted family friend and a trust company, can be the solution.

Do I need a power of attorney?

A power of attorney allows you to name someone, referred to as your “Agent’, to manage your finances, file your tax returns, manage your retirement assets, deal with government agencies (such as the Social Security Administration or Medi-Cal), and perform a great many other tasks, to the extent of the authority you choose to grant, in the event of your incapacity and without the need for an expensive conservatorship proceeding. A power of attorney is useful for matters that arise with respect to assets that are not held in a living trust – your successor trustee will manage those assets.

What gifts can I make tax-free?

There are certain gifts that you can make that do not use any of your exemption amount.  The tax law allows all individuals to make gifts to other persons on an annual basis, free of gift tax, and without the requirement to file a gift tax return. These gifts are known as “annual exclusion” gifts.  In 2024, the annual exclusion gift limit is $18,000 for each gift made to a person, but this amount is periodically adjusted for inflation.  This means that this year (2024), if an individual decides to make 10 annual exclusion gifts to his or her family and friends, with a collective value of $180,000, no gift taxes will be due and the individual will not have to file a gift tax return.  In addition to outright gifts, annual exclusion gifts can be used to fund Section 529 Education plans, pay premiums for life insurance, or for other gifts in trust for children and grandchildren.

Another form of “free” gifts are those which are for medical or educational purposes for another person.  For example, a grandparent can pay the private school tuition of a grandchild, in addition to making an annual exclusion gift to the grandchild.  Similarly, a person could pay his sibling’s medical bills.  To qualify for this favorable gift tax treatment, the payment must be made directly to the provider of the service (e.g., the school or the doctor), and not to the recipient (the grandchild or brother).

Do I need an Advance Health Care Directive?

A Florida woman named Terri Schiavo and the legal battle fought by her parents and husband demonstrated how important it is for every person to have an Advance Health Care Directive, sometimes referred to as a “living will”, to set forth their end of life decisions, including whether or not to be kept alive through artificial medical measures, such as feeding tubes and breathing machines.

Terri Schiavo fell in her home and went into full cardiac arrest. At the hospital, the doctors determined that she had suffered massive brain damage due to a lack of oxygen, causing her to be in a persistent vegetative state. Terri required a feeding tube to keep her alive.

Terri did not have an Advance Health Care Directive, so there was no document that clearly expressed her wishes regarding life-prolonging medical procedures. Terri’s husband, Michael Schiavo, wanted to have her feeding tube removed.  He felt that she would never recover from her vegetative state and that it would not be her wish to be kept alive artificially. However, Terri’s parents, Robert and Mary Schindler, opposed the removal of Terri’s feeding tube and argued that as a Roman Catholic Terri would oppose ending her life. Since Terri did not have an Advance Health Care Directive, and the family could not agree, the matter had to be resolved in court.

Michael petitioned the Court in Florida to have Terri’s feeding tube removed.  Robert and Mary Schindler opposed the petition. The legal battle over this issue persisted for seven years, which included 14 appeals. In March 2005, the court agreed with Michael that Terri would not have wanted to be kept alive in a vegetative state with the assistance of a feeding tube. 15 years after her accident, Terri’s feeding tube was removed. Terri died a week later.

Terri’s case illustrates the importance of having an Advance Health Care Directive. If Terri had an Advance Health Care Directive that expressed her wishes regarding the feeding tube, those wishes could have been carried out 15 years earlier, saving her family members from the terrible emotional toll and the financial expense of the lengthy court matter.

An AHCD allows you to do the following:

1.  Name persons to act as your agents to make health care decisions for you when you are not able to do so for yourself.

2.  Express your end-of-life decisions about whether or not you want to be kept alive through artificial medical life support measures.

3.  Give directions regarding the disposition of your remains following your death (e.g., burial vs. cremation).

4.  Express your wishes regarding organ donation (yes or no, and if yes, any limits on the use – transplant, therapy, education).

We recommend that you provide a copy of your Advance Health Care Directive to your doctor so that he or she is aware of your wishes. Also, bring a copy of your Advance Health Care Directive with you whenever you have to go to the hospital for a treatment or a procedure.