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 can also spare your loved ones the expense, delay and frustration associated with managing your affairs when you pass away or become disabled. 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.
Planning for Incapacity
If you become incapacitated, you won’t be able to manage your own financial affairs. Many are under the mistaken impression that their spouse or adult children can automatically take over for them if 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. 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 show 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 form statutory 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 health care, called an Advance Health Care Directive in California, where you designate the person to make such decisions. Your Advance Health Care Directive should also indicate your preferred medical treatments such as the use of extraordinary measures should you become permanently unconscious or terminally ill.
If you leave your estate to your loved ones using a Will, everything you own will pass through probate. The probate process in California 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. You can imagine how stressful this process can be.
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. 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 Minor Children
It is important that your estate plan address issues regarding the upbringing of your children in the event you or your spouse dies unexpectedly. 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.
Your estate plan should also cover the possibility of both you and your spouse dying simultaneously, or within a short duration of time. A contingency plan should provide for persons you would like to manage your assets as well as the guardian you would choose 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.
If you do not have proper planning and documentation in place, the decision as to who will manage your finances and raise your children will be left to a court of law. 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 would like your beneficiaries to receive your assets directly, or whether you would prefer to have the assets placed in trust to be 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.
Planning for Death Taxes
The IRS will want to review your estate at death to ensure you do not owe them that one final tax: the federal estate tax. The current exemption for federal estate tax is $5.25 million per person (2013).
Whether there will be any estate tax to pay depends on the size of your estate, the exemption amount, and how your estate plan works. There are many effective strategies that can be implemented to reduce or eliminate death taxes, but you must start the 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. Some planned giving strategies 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 avoiding conservatorship during your lifetime, probate at death, estate taxes and unnecessary delays. The best way to explore estate planning issues related to your family and financial situation, your goals, and options available to you, is to schedule a free 30-minute consultation with our office.
Advanced Estate Planning
You’ve worked hard your whole life to provide for your family and make your loved ones more secure. Without advanced estate planning strategies, much of the significant assets you have accumulated may end up with the IRS and state taxing authorities. Our firm can also assist families with such sophisticated planning strategies as Family Limited Partnerships or Limited Liability Companies, Personal Residence Trusts, Irrevocable Life Insurance Trusts and a wide range of charitable gifting techniques to reduce Federal Estate Taxes, Gift Taxes and Generation Skipping Transfer Taxes.
Family Limited Partnership
A Family Limited Partnership (FLP) is a form of a limited partnership among members of a family. The main advantages of forming and funding an FLP involve estate and gift tax savings and asset protection. An FLP also allows you to retain control over the transferred assets while enjoying these advantages. Once the FLP is established and your assets are transferred to it, you can make gifts of limited partnership interests to your children or other beneficiaries. This accomplishes several different estate planning objectives simultaneously:
1. The value of each limited partnership interest which you give away decreases the value of your taxable estate and, consequently, any tax which your heirs would have to pay upon your death. The gifts are made using the annual gift tax exclusion, so depending on its value, you may not have to pay any gift tax on the transfer.
2. The value of the partnership interests transferred to your beneficiaries is far less than the corresponding value of the assets in the partnership. Since limited partners do not have the ability to direct or control the day-to-day operation of the partnership, a minority discount can be applied to reduce the value of the limited partnership interests which you are gifting. Furthermore, because the partnership is a closely-held entity and not publicly-traded, a discount can be applied based upon the lack of marketability of the limited partnership interest. This allows you to leverage the FLP as a vehicle to transfer more wealth to your beneficiaries, while retaining control of the underlying assets.
3. A properly-structured FLP can have creditor protection characteristics since the general partners are not obligated to distribute earnings of the partnership.
Qualified Personal Residence Trust
Our homes are often our most valuable assets and hence one of the largest components of our taxable estate. A Qualified Personal Residence Trust or a QPRT (pronounced “cue-pert”) allows you to give away your house or vacation home at a great discount, freeze its value for estate tax purposes, and still continue to live in it. Here is how it works:
- You transfer the title to your house to the QPRT (usually for the benefit of your family members), reserving the right to live in the house for a specified number of years.
- If you live to the end of the specified period, the house (as well as any appreciation in its value since the transfer) passes to your children or other beneficiaries free of any additional estate or gift taxes.
- After the end of the specified period, you may continue to live in the home but you must pay rent to your family or designated beneficiary in order to avoid inclusion of the residence in your estate. This is may be an added benefit as it serves to further reduce the value of your taxable estate, though the rent income does have income tax consequences for your family.
- If you die before the end of the period, the full value of the house will be included in your estate for estate tax purposes, though in most cases you are no worse off than you would have been had you not established a QPRT.
An added benefit of the QPRT is that it also serves as an excellent asset/creditor protection vehicle since you no longer technically own the property once the trust is established and your residence is transferred to the QPRT.
Irrevocable Life Insurance Trust
There is a common misconception that life insurance proceeds are not subject to Federal Estate Taxes. While the proceeds are received by your loved ones free of any income taxes, they are countable as part of your taxable estate and therefore your loved ones can lose about half of its value to estate taxes.
An Irrevocable Life Insurance Trust or ILIT (pronounced “eye-lit”) is created specifically for the purpose of owning your life insurance policy. A properly established and administered trust holds the policy outside of your estate and keeps the proceeds from being taxable to your estate. The proceeds from the insurance policy can then be used to provide your estate with the liquidity to pay estate taxes, pay off debts, pay final expenses and provide income to a surviving spouse or children.
There are many options available when setting up an ILIT. For example, ILITs can be structured to provide income to a surviving spouse with the remainder going to your children from a previous marriage. You can also provide for distribution of a limited amount of the insurance proceeds over a period of time to a financially irresponsible child.
The Law Office of Gretchen J. Kenney is dedicated to helping clients make educated, informed decisions about their assets and will work with you and your team of financial advisors and CPAs to implement an effective estate plan that allows for the maximum transfer of assets to your loved ones.
Contact the Law Office of Gretchen J. Kenney by calling 650-931-2505 or by completing our online contact form.
The Law Office of Gretchen J. Kenney assists clients with Elder Law, including Long-Term Care Planning for Medi-Cal and Veterans’ Pension (Aid & Attendance) Benefits, Estate Planning, Probate, Trust Administration, and Conservatorships in the San Francisco Bay Area.