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Estate Planning 101

You’ve heard an estate plan is important but you have no idea why or what that means. Below is an overview that is meant to answer your questions.

What is an Estate Plan?

An Estate Plan is your rulebook for what you want to do with your assets, not only upon your death but also upon your incapacity. Your rulebook consists of a Living Trust, Pour-Over Will(s), and Advance Healthcare Directive(s).

Why do I need one?

1. Without an Estate Plan, the state of CA decides who gets your assets, according to the rules of intestacy which are set forth in the Probate Code. Simply put, you no longer get to decide what happens to your assets.

2. Without an Estate Plan, if you have a “large estate”, you won’t be able to plan for estate taxes. Large estates (over 11.180 million per person) are subject to federal estate tax at a rate of 40%.

3. Without an Estate Plan, the distribution of your assets, in accordance with the rules of intestacy, will have to go through PROBATE.

4. With an Estate Plan, at your death or incapacity, your rulebook goes into effect immediately.

What is PROBATE? Why do I want to avoid it?

1. It's a court-supervised process, meaning nothing can be done with your assets until the Court issues an order. Paperwork needs to be filed to appoint someone as the personal representative of the estate (see #3 below), and a hearing regarding the appointment isn't scheduled until at least two months later. Once the personal representative is appointed and the estate is admitted to probate, there are tons of hurdles and legal requirements to meet before the estate can be distributed, with court oversight and approval, to the your heirs.

2. The rules of intestacy apply, which means your assets are distributed according to CA Probate Code Section 6400 et seq.

3. A personal representative of the estate is appointed according to the order of priority set forth in CA Probate Code 8461. The law says who gets priority of appointment and it may be someone you don't want to be left in charge.

4. Everything done in probate becomes public record. Court records are public, which means your assets and who gets what becomes public knowledge, thereby eliminating any privacy.

5. Probate is an extremely lengthy process, taking one year at a minimum. This means your assets are tied up until the process is done or almost done. What this ultimately means is that there's no immediate closure for your loved ones until probate is over with, which means it can be emotionally draining.

6. Probate is an unnecessarily costly process, which ultimately depletes your assets and reduces the amount of inheritance your lawful heirs ultimately receive.

Attorney's and the personal representative are entitled to compensation for "ordinary services" which compensation is statutorily set based on the size of your estate. (CA Probate Code Section 10810). Simply put, the law sets the amount of fees payable to the attorney and your personal representative and it's based on how big of an estate you have.

The formula for "ordinary services" is as follows:

4% on the first $100,000

3% on the next $100,000

2% on the next $800,000

1% on the next $9,000,000

½% on the next $15,000,000

Amounts above $25,000,000 = determined by court.

By way of example, if you own a $650,000 house, the fee is $16,000, even if you have a $500,000 mortgage.

Fees for "extraordinary services" are also payable on an hourly basis per CA Probate Code Section 10811.

Filing fees associated with the probate process are approximately $2,000, roughly around the same amount as the cost of an estate plan.

Why can’t I just create a Will instead of a Living Trust?

1. Having a Will is better than NOT having a Will because at least you have expressed your wishes and get to bypass the rules of intestacy. In other words, it allows you to designate who gets what at your death.

2. A Will still has to go through PROBATE which means exorbitant fees (filing fees, attorney's fees, and personal representative fees), time consuming and lengthy process, and delaying closure for loved ones. There are certain exceptions in the event your estate is collectively under $150,000.

3. A Will is only applicable at death, not at incapacity.

What can I do in my Estate Plan?

You get to establish the rules for what you want to happen at your death or incapacity.

1. You get to decide who to appoint to manage your assets,

2. You get to designate who gets what and under what conditions.

3. You get to nominate a guardian/trustee for your minor children.

4. You get to indicate your wishes regarding burial, funeral, etc.

5. You get to indicate your wishes regarding care during your incapacity.

6. You get to plan for the payment or bypass of federal estate taxes, if applicable.

What happens after I establish a Living Trust?

The Trust must be “funded”, i.e., assets need to be transferred into the Trust. This is a very important step because if you don’t fund it, the Trust terms won’t govern those assets.

What do I get when I decide I want an Estate Plan?

1. Living Trust

2. Pour-Over Will(s)

3. Advance Healthcare Directive(s)

4. Trust Transfer Deeds for real property, with accompanying Preliminary Change of Ownership Forms regarding real property transfers.

5. Certification of Trust

6. Blanket Assignment of Assets to Trust

7. Instructions on transferring assets to your trust.