1. Dying Without a Will:
Interstate Succession

INTRODUCTION

Basic estate planning is the process of planning for the transfer of your property in a cost-efficient manner. After your death, the only way your heirs will be able to transfer your home will be through probate, unless you have a living trust. A living trust will be much more cost efficient than a will and probate.

Understanding how that property transfer occurs and how to minimize the headaches is just the first step to basic estate planning. Familiarizing yourself with the fundamental concepts of estate planning with the glossary below is the next step. Finally, because this is a complex field of law, please consult your attorney or our offices for a consultation on your personal estate planning.

1. DYING WITHOUT A WILL: INTESTATE SUCCESSION

You already have an estate plan. The state of California has a system in place to determine who gets your property when you die. Unless you change this plan, the state will decide for you and charge your estate a probate fee. With no will and no trust, your property will be divided among your spouse and your children.

2. WILLS

A will is a legal document which determines who will inherit your property when you die. Many people execute wills simply because they do not know how expensive they are in the long run.

Even with a will, the state will still charge a probate fee to your estate. Basically three types of wills exist in California:

1. Holographic Will: you must write out in your own hand, sign and date.

2. Attested Formal Will : you must sign and date, and must be witnessed by two disinterested parties both in your presence at the same time.

3. Statutory Will : a preprinted form published by the State Bar of California, in which your signature must be witnessed by two disinterested parties; this form is relatively narrow and inflexible in scope.

3. PROBATE

If you die without a trust, your property will pass through probate—the court-supervised process of transferring title to your property following your death.  

Probate fees are determined by law. Statutory probate fees on the first $100,000 in property value run $8,000 (8%). On the next $100,000, the fees decrease to 6% and then to 4% on the next $800,000. Fees on property over $1,000,000 go to 2%.

Just to give you an idea, here are the fees on a few home values:

The absolute minimum duration for a probate proceeding is five months, but two years or more is not uncommon. The size and complexity of the estate determines how long the probate lasts.

4. AVOIDING PROBATE THROUGH JOINT TENANCY

Because of probate's exorbitant fees, basic estate planning usually involves avoiding it whenever possible. One of the most common probate alternatives is joint tenancy — when two or more people own property together.  

If one of the owners dies, the other owners "inherit" that share. However, joint tenancy only avoids probate at the first death. At the second death, or the death of the last joint tenant, the property will go into probate.

We strongly recommend that you do not own property in joint tenancy with your children or someone other than your spouse. If your children or the other owners are sued, you could lose your home.

5. AVOIDING PROBATE THROUGH LIVING TRUSTS

The best way to avoid probate in California today is with a living trust — essentially a contract with yourself while you're alive. You're both the trustor and the trustee of your own estate; think of it as a corporation owning your property with you as the president. 

To avoid probate upon your death, you would have a backup trustee. Simply speaking, we use the signature of your backup trustee to avoid the judge's signature. 

6. ESTATE AND GIFT TAXES

Estate and gift taxes are federally imposed on your taxable estate when you die. The same tax also takes effect when you give a substantial amount of property to someone during your lifetime.

Subject to the rules and exceptions below, any amount in excess of the current limit of $2,000,000 would result in a tax of 45% on the excess . Therefore, a taxable estate of $2,100,000 would result in a tax of $45,000.

A Tax Shelter: The Unified Credit

Everyone is eligible for a unified credit equal to a shelter of $2,000,000 for estate tax purposes.  You can bequeath this amount, tax-free, to your heirs upon your death.

Yearly Gifting

The law allows for $11,000 annually to be given away, per person, free from taxes. A married couple with two children could give them $44,000 in one year without paying any gift tax or filing any gift-tax return.

Marriage Shelter: $4,000,000

If a married couple has a complex trust, they can shelter up to $4,000,000 in assets from federal estate tax; each spouse has a $2.0 million estate tax shelter.  

However, if the married couple does not set up a complex trust while they're both alive, they lose one of their $2.0 million estate tax shelters. This is a "use it or lose it" tax shelter. If a couple sets up the complex trust and "uses" the first estate tax shelter, they can't lose it. But, if they don't use the shelter, they lose it.

The only way to take advantage of both $2.0 million tax shelters is to set up a complex trust.   Because of the 45% minimum tax rate, the loss of just one shelter means a potential loss of more than $700,000. With a complex trust a married couple can avoid this sizable loss!

7. UNLIMITED MARITAL DEDUCTION

Simply put, there is no federal estate tax on the transfer from husband to wife (except if one spouse is not a US citizen). The government has chosen not to tax widows and widowers, but they tax the children to death. 

8. DISABILITY PLANNING

If you become incapacitated in California, a court may select a conservator to manage your property and make your personal decisions for you. With a living trust, you could avoid a conservatorship and select, in advance, someone you trust to manage your affairs  

9. DURABLE POWERS AND LIVING WILL

In addition, you should have a durable power of attorney for property, a durable power of attorney for health care, and a living will in the event you become disabled.

A durable power of attorney for property allows you to select the person to write your checks and access your retirement plans. A health care power of attorney determines who would make your health care decisions. Lastly, a California living will is the "pull the plug" document. 

10. CLOSING

Now that you're familiar with the fundamentals of estate planning, you'll want to formulate your own estate plan to meet your personal goals. In a consultation at our office, you could get your specific questions answered and begin the process.