Basic estate planning
WHAT IS ESTATE PLANNING?
- Estate planning is a process by which you determine:
- how to provide for your spouse and children upon your death
- how and to whom your assets will be distributed after your death, including trusts for the benefit of a spouse, children or grandchildren
- the payment of debts, taxes, burial arrangements, etc.
- charitable & legacy gifting
- business succession planning
- how and by whom your finances will be managed during your lifetime if you become incapacitated
- how and by whom your medical care will be managed during your lifetime if you become incapacitated
- who will be responsible for taking care of your minor children in the event of your death or incapacity
HOW LONG DOES THE PROCESS TAKE?
- Although it sounds complicated, most estate plans can be drafted and executed with only a few visits to Palmer Kucera LLP. Or if necessary we can come to you!
WHO NEEDS ESTATE PLANNING?
- You do! Whether your estate is large or small.
- If your estate is small, you may only be deciding who will receive your assets after death, who will pay your last debts, and so forth.
- But it is still important!
- Sibling rivalries and bad blood can easily develop when arguing over mother’s favorite painting or father’s stamp collection, let alone a house and other substantial assets.
- If your estate is large, you may develop a plan that calls for estate tax planning, revocable and irrevocable trust instruments, business succession planning, and so on.
WHAT IF YOU DIE WITHOUT AN ESTATE PLAN?
- Dying without a will or trust is called “dying intestate.”
- In this case, the judge appoints an agent of the court to handle your assets and personal care, which means:
- your assets will be distributed according to a set of rules called intestate succession
- your minor children will be placed in the custody of someone approved by the court
- In the event of your incapacity, medical care decisions—including end of life decisions—may be made by the court (remember the sad case of Terri Schiavo?)
- The lesson: don’t die without an estate plan!
WHAT IS INCLUDED IN YOUR ESTATE?
- All of your assets, such as:
- Tangible personal property: cars, furniture, clothing, artwork, jewelry, etc.
- real property: home, investment property, land, vacation home, etc.
- financial interests: cash, bank accounts, stocks and bonds, life insurance proceeds, retirement accounts, IRAs, 401Ks, annuities, etc.
- The value of your estate is calculated by adding up all of the above assets and deducting any debts you owe.
A will is the legal cornerstone to any estate plan, and is the minimum requirement for traditional legal document that:
- names individuals (or charities, etc.) who will receive your assets after your death, either by outright gift or in a trust
- nominates an executor who will (under the guidance of the probate court):
- manage your estate
- pay your debts, expenses and taxes
- distribute your estate according to the instructions in the will
- nominates guardians for your minor children
Palmer Kucera LLP has Basic Will packages that are an affordable way for any client to ensure that his/her heirs are protected in the event of death or incapacity.
Revocable Living Trusts
A revocable living trust is a written legal document that manages your assets in a more comprehensive way than a will. Your major assets are put into the trust, administered for your (and your spouse’s) benefit during your lifetime, and then transferred to your beneficiaries after your death in a manner that you choose.
The components of a trust:
- Trustor (you and/or your spouse)
- Trustee (usually you and/or your spouse while alive)
- Successor Trustee (after your death)
- Beneficiaries (you, your spouse, children, grandchildren, et al.)
- Trust Property
What assets typically go into a trust?
- Larger assets such as: real property, securities accounts, business interests, etc.
- Items of tangible personal property usually don’t go into a trust directly, as they are bought, sold and moved around with more frequency (a notable exception: a classic collector’s car)
- As with Wills, certain assets usually pass outside a trust, including:
- securities and bank accounts with designated beneficiaries
- life insurance policies
- IRAs, 401Ks, tax-deferred retirement plans, and annuities with named beneficiaries
- jointly-owned assets with right of survivorship
While you are alive, you retain complete control to:
- modify the trust as to beneficiaries, trustees, gifts, etc.
- modify parts or all of the trust
- revoke the trust in its entirety
- buy and sell trust property as you would any other property
At your death, the trust becomes irrevocable.
Main advantages of a trust:
- Avoids probate, which can involve:
- delay in distribution of assets
- delayed access to money for beneficiaries
- court supervision
- cost of probate
- Ensures the desired management of assets in the event of incapacity
- It’s not a matter of public record (unlike wills)
BASIC TRUST PLANS: Most clients will only require a basic (though certainly comprehensive) revocable living trust, by virtue of the fact that their overall estates fall well short of the federal estate tax exemption amount ($5.45 million in 2016). Although less complicated in structure, these trusts are nonetheless effective in every aspect of their design. For example, even a basic trust drafted by Palmer Kucera LLP may include supplemental needs planning; in that case, if any beneficiary qualifies for supplemental/special needs benefits from the government at the time the trust becomes operative as to them, it automatically defaults to a supplemental needs trust structure, thus protecting both the benefits received and the assets inherited.
COMPLICATED TRUST PLANS: For some clients, a revocable living trust that includes tax planning may be necessary. In that case, Palmer Kucera LLP has the experience to draft various plans that will allow clients to maximize tax planning to their advantage, including: Disclaimer Trusts; Credit Shelter Trusts; Marital Exemption Trusts; Qualified Terminal Interest Property Trusts (QTIPS); “ABC” Trusts; and even “Portability,” which allows the surviving spouse to utilize the unused exemption amount of the deceased spouse.
MARRIED CLIENTS WITH BLENDED FAMILIES: Many families today are comprised of second or third marriages and children who come from the current marriage, the prior marriages, or both. Those clients are naturally concerned with the manner in which their assets are managed and transferred at death. That concern is only heightened by the prospects of a future marriage of their surviving spouse. In these special circumstances, the attorneys at Palmer Kucera LLP work closely with clients to draft plans that allow the assets of each spouse to pass to those they intend. For example, the husband may wish to use his assets to provide for his wife after his death, while at the same time guaranteeing that those assets eventually pass to his children from a prior marriage at her death, rather than to her children from a prior marriage, to a subsequent husband, to creditors, or even to her own imprudent investments. Palmer Kucera LLP can create trust plans that accomplish this, plans that are fair and equitable in these delicate family situations while being bulletproof at the same time. What this ultimately provides clients is peace of mind that their loved ones will be cared for long after they are gone.
Financial and Health Care Powers of Attorney
DURABLE POWER OF ATTORNEY
- A written legal document that gives another person, of your choosing, the right and authority to act on your behalf regarding financial matters.
- This legal authority may include:
- paying your bills, mortgage, and other financial obligations
- managing income and benefits from social security, Medi-Cal, pensions, IRAs, etc.
- buying and selling real estate on your behalf
- many other powers
- This power may be set up to take effect immediately or only upon your incapacity.
ADVANCE HEALTH CARE DIRECTIVE (INCL. LIVING WILL)
- A written legal document that gives another person, of your choosing, the right and authority to act on your behalf regarding health care matters.
- The legal authority may include decisions regarding:
- medical treatment (or withholding of treatment)
- organ donation, disposition of remains, and your funeral
- end-of-life decisions, including whether or not to use life support
- What if I don’t have this plan in place when I become incapacitated?
- The court will appoint a court-supervised conservator to manage your affairs and be responsible for your care.
- Terri Schiavo did not have a living will, and the results were tragic and painful for all parties. Her case was litigated for fifteen years while she lay in a vegetative state in a hospital bed, before her feeding tube was finally removed.
Retitling of assets and updating beneficiary designations incl. new transfer of death deeds
RETITILING OF ASSETS: Much of estate planning involves the retitling of assets, or even the determination of proper title to assets. For example, often clients inherit property from estates that have never been probated, perhaps from a parent who died many years ago, thus there exists a break in the chain of title. Palmer Kucera LLP are experts in determining proper title to real property. We will obtain court orders determining the proper ownership interests in real property, and file those with the county recorder, thus creating clear title for clients and their estates. Clients can therefore be assured that their estate plans are without defects in title that will burden their heirs.
UPDATING BENEFICIARY DESIGNATIONS: Many assets in a client’s estate are not normally transferred into the trust, for example: 401Ks; IRAs; Keoghs; and other retirement accounts and pension plans. The reason is that these assets pass by operation of contract between the decedent and his/her named beneficiary. When filling out those forms, an employee is required to name a beneficiary, such as a spouse or child. As a default, many of those forms include a choice of “my estate.” Although these instruments and assets exist outside the trust, they are nonetheless important parts of estate planning, and it is therefore critical to ensure that the beneficiary designations are current and accurate. For example, a client would not want a former spouse to be the named beneficiary, or even “my estate.” Palmer Kucera LLP can help sort out those designations so that they work with a client’s overall estate plan.
TRANSFER ON DEATH DEED: Effective January 1, 2016, California law permits residents to use transfer on death deeds to avoid probate on their real property. These deeds allow homeowners to pass their property, usually a house, to a chosen beneficiary upon death, bypassing the costly and time-consuming process of probate. In the right circumstances, these deeds can be used as a substitute for a revocable living trust. For those clients, Palmer Kucera LLP can draft transfer on death deeds and properly record them at the county recorder’s office.
Advanced Estate and Transfer of Wealth and Planning
GIFT TRUSTS: A gift trust is an irrevocable trust which is specifically structured so that gifts to the trust will qualify as a gift of a present interest and, therefore, will not be treated as taxable gifts. A gift trust is an effective means of guaranteeing that the trust assets pass outside of probate and are not calculated in the taxable estate, which will reduce estate taxes. The value of the gift, and any appreciation in value, will not be calculated in the total amount of the taxable estate of the grantor.
FAMILY LIMITED PARTNERSHIPS: Family limited partnerships are used to transfer wealth from one generation to another. When properly set up by Palmer Kucera LLP, family limited partnerships can be very profitable and save families thousands of dollars in gift and estate tax. They are partnerships that, by definition, are limited to family members, and are formed as long-term family investment vehicles. They allow one family member, typically the general partner/parent, to move assets to other members, children/limited partners, while still retaining control over the assets. Family limited partnerships allow for favorable tax treatment relating to those transfers, as valuation discounts are applied to the assets.
IRREVOCABLE LIFE INSURANCE TRUSTS: Many clients are surprised to learn that the proceeds from their life insurance policies are subject to estate taxation. That is, the proceeds are included in the valuation of a client’s taxable estate, as long as the client owned the policy (as most do). An obvious solution is to transfer ownership of the policy to another person, for example a child or other heir. But that solution has serious drawbacks, such as a permanent loss of control. A better solution is often an irrevocable life insurance trust, which is created to own one or more policies insuring the client’s life. Because the trust is irrevocable, the client no longer “owns” those policies, and the death proceeds are not includable in his/her taxable estate.
QUALIFIED PERSONAL RESIDENCE TRUSTS (QPRT): A QPRT is an irrevocable trust that holds a client’s personal residence for a term of years, and at the end of the term the residence is distributed to the beneficiaries named in the trust, typically the children. It is an effective tool that allows a client to minimize estate taxes by leveraging his/her estate and gift tax credit and freezing an appreciating asset (the house) at its current value. In other words, all of the future appreciation of the residence will be transferred to the children estate and gift tax free. And because the QPRT is an irrevocable trust, the house no longer belongs to the donor and thus creditors are not be able to execute a judgment lien on that asset.
GRANTOR RETAINED ANNUITY TRUSTS (GRAT), GRANTOR RETAINED INCOME TRUSTS (GRIT) AND GRANTOR RETAINED UNITRUSTS (GRUT): A grantor retained annuity trust (GRAT) is a useful strategy to shift wealth from one generation to the next by minimizing or eliminating gift tax. A GRAT allows the grantor to retain some income interest for a period of time and then ultimately transfer assets, at a reduced transfer tax cost, to the beneficiaries, usually the children. A grantor creates a GRAT by transferring assets into an irrevocable trust while retaining the right to receive an annual payment, or annuity. The retained annuity interest allows for a reduction in the value of the property transferred for gift tax purposes while providing the grantor with a cash flow stream for the applicable term.
- A grantor retained income trust (GRIT) is an irrevocable trust established by the grantor who transfers assets to the GRIT while retaining the right to receive all of the net income from the trust assets for a fixed term of years. The net income is distributed by the trustee to the grantor annually or on a more frequent basis as determined pursuant to the terms of the trust agreement during the term. At the expiration of the term, the remaining trust principal is either distributed to beneficiaries or held in further trust for the benefit of such beneficiaries. If the Grantor survives the term of the GRIT, the principal of the GRIT is excluded from the Grantor’s estate for federal estate tax purposes. However, because GRITs cannot be used to pass wealth to members of the grantor’s family, they are not an appropriate instrument for every client contemplating wealth transfer.
- A grantor retained unitrust (GRUT) is an irrevocable trust that provides an annual payment of a fixed percentage of the net fair market value of the trust assets, determined annually. The trust is for a specified term of years. The income from the trust is paid to the grantor with the remainder beneficiaries receiving the principal at the end of the term. A GRUT is used when the grantor wishes to participate in the growth of the assets inside the trust. A grantor may add assets to the GRUT after its creation.
INTENTIONALLY DEFECTIVE GRANTOR TRUSTS (IDGT): An intentionally defective grantor trusts (IDGT) is used to freeze the value of an asset for estate tax purposes while transferring assets out of the estate free of gift tax. If structured properly, an IDGT is a complete transfer to a trust for transfer tax purposes but an incomplete, or “defective,” transfer for income tax purposes. Because the trust is irrevocable for estate and gift purposes and the grantor has not retained any powers that would cause estate tax inclusion, the future value of the assets transferred is removed from the grantor’s gross estate on the date of the trust’s funding. However, because the grantor retains certain other powers, the trust is treated as a grantor trust for income tax purposes. As a result, the grantor, though not a beneficiary, is taxed on all the trust’s income, even though he or she is not entitled to any trust distributions. The IDGT will thus receive the gross income generated from the trust’s income-producing assets, which will accrue to the benefit of the trust’s beneficiaries.
Business Succession Planning
Difficult as it may be for entrepreneurs to envision a time when they will no longer be running their businesses, timely business succession planning can help ease the transition, protect the future of the business and maximize value for the entrepreneur and the family. At Palmer Kucera LLP, we recognize that this process requires experienced legal advisors who can provide special skills and focused attention. We consider business succession planning to be an integral part of estate planning.
A good business succession plan involves careful attention to the transfer of ownership and control to the next leaders of the business in a way consistent with the client’s other plans. Special skill and experience are required if the attorney is to help the client pass through the complex maze of state, federal and international laws that may apply. Such a plan can involve varied strategies, including:
- Shareholders' Agreements governing buy-outs at death, disability or retirement.
- Trusts to put control of the business into the right hands while permitting the sharing of the income of the business.
- Compensation packages for retiring and incoming management employees.
- Creation of an employee stock ownership plan (ESOP) to give employees an equity interest in the company while providing current shareholders with an opportunity to diversify their holdings.
- Income, gift and estate tax saving strategies for a sale of the business.
Palmer Kucera LLP has significant experience and expertise in all of these techniques. We listen to our clients and help identify goals and objectives, avoid potential pitfalls and develop an innovative and tailor-made succession plan.
Business Succession Planning
WHAT IS PROBATE?
Probate is a court-managed process through which a person’s estate is administered after his or her death. Through the probate process, the decedent’s debts are paid and distributions are made to his or her heirs and beneficiaries. If the decedent left a carefully drafted will that provides for the distribution of his or her assets, the probate process is often administered rather efficiently and quickly. If the decedent did not leave a will or there is a dispute about the validity of the decedent's will, however, the probate process can be lengthy, tedious, time-consuming and costly.
The use of a living trust in conjunction with a will can be used to avoid the probate process altogether. In California, the executor under a will or a trustee under a trust must see that the decedent’s debts are paid and that the assets of the estate or trust are properly distributed according to the applicable document. Oftentimes, an estate’s executor is a loved one of the decedent who is likely dealing with the emotional aftermath of the decedent’s death, which can make it difficult to manage the legal and financial issues associated with probate and trust administration. The attorneys at Palmer Kucera LLP understand the complexity of probate administration and we work with the probate court to administer the will according to the decedent's wishes so that the executor and decedent's beneficiaries do not bear the burden alone.
WHAT ESTATE AND TRUST ADMINISTRATION SERVICES ARE PROVIDED?
The attorneys at Palmer Kucera LLP help trusted advisors and family members through the probate and trust administration process after the death of a loved one. During this difficult time, we focus on providing compassionate legal advice, helping clients through the probate and trust administration process so that they can focus on spending time with their family and loved ones. For instance, we provide the following types of services during the probate and trust administration process:
- Educating executors, trustees, and beneficiaries about the probate and trust administration processes
- If probate is necessary, ensuring that the decedent's will moves through the probate process quickly and efficiently
- Ensuring efficient trust administration, including the management and distribution of assets
- Consulting with trust and estate accountants in the preparation of state and federal estate and inheritance tax returns
- Consulting with the trust and estate accountants to ensure that distributions are made in a tax-effective way
- Advising heirs and beneficiaries, when asked and appropriate, regarding post-mortem estate planning techniques in order to minimize future tax implications
SMALL ESTATE PROBATE
For many clients, the size of the decedent’s estate does not warrant a “formal” probate. This frequently happens when the decedent owned only a modest home or other minimal assets. In these cases, California allows a “small estate” probate process, which is usually less expensive and time consuming than a formal probate. In most instances, the attorneys at Palmer Kucera LLP can determine if a decedent’s estate qualifies for this abbreviated process within the initial consultation, and advise a client as to the cost and expected timeline of the process.