Estate planning is not just about reducing taxes. Estate Planning is also about making sure your assets are distributed as you want both during your lifetime and after you’re gone. The fact is that when most people think about their assets they include not only the obvious tangible wealth they have accumulated (house, cars, bank accounts, stock, retirement accounts, etc.), but also their intangible wealth (their hopes, dreams and personal values), which they want to pass on to the next generation. In order to ensure these goals are met you need to consider a number of questions.
It would be nice to start with the first questions in everyone’s mind – “Who should inherit my assets and how much should they get?” But, before you can even think about that issue, you need to consider your marital status and where you live. Here in California we are a community property state. Regarding your material assets the term community property means that everything you or your spouse earn during your marriage is shared between the two of you 50/50. For example you earn $100,000 a year and purchase a $500,000 house. (Granted, I know that these numbers are impossible in California because you could never buy a house for $500,000 even with the decline in real estate prices.) Your spouse is entitled not only to half the money you have earned, but also half the value of the house. Regardless of whether or not your spouse has ever earned a penny during your marriage.
Most people think community property applies only to divorces. Not true, we also have to look at it in regard to estate planning. What can you give away with your estate plan? Simple answer: only half of the community property. Also, should you die without a will your surviving spouse is not only entitled to half of the community property, but also one third of your separate property, e.g., property you had before you got married or which you received by gift or bequest. Even with a will or living trust, if you provide less for your spouse than state law deems appropriate, the law will allow the survivor to elect to receive the greater amount.
Once you’ve settled on a method of distribution for your spouse you should then ask yourself a few more questions.
Do you want your children/beneficiaries to share equally in your estate?
Do you wish to include grandchildren or others as beneficiaries?
Would you like to leave any assets to charity?
Do you have a method for passing on your intangible wealth? Here at Chhokar Law Group, P.C. we offer “Priceless Conversations” which allow you to pass on your values, hopes and dreams to your family and friends. You can learn more about our methods of passing on your intangible wealth at www.socalclg.com.
Which assets should the beneficiaries in the questions above inherit?
You may also want to consider special questions when transferring certain types of assets. For example: If you own a business, should the business pass only to your children who are active in the business? Should you compensate the other children not involved in the business with assets of equal value? How do we solve this problem?
If you own rental property, should all beneficiaries inherit? If so, should they all inherit in equal shares? How should they inherit the rental property, as joint tenants or tenants in common? Do they all have the ability to manage the property?
How much do the particular financial needs of each beneficiary play a part in what they inherit?
When and how should they inherit the assets? In determining the answer as to how your beneficiaries should inherit your assets, at a minimum you should focus on the following factors: (1) The potential age and maturity of the beneficiaries; (2) The financial needs of you and your spouse during your lifetimes; and (3) The tax implications at every level considering Income Tax, Gift Tax, Estate Tax and Generation Skipping Tax.
Outright bequests offer simplicity, flexibility and potentially some tax advantages, but you have no control over what the recipient does with the assets once they are transferred. Trusts are advantageous when the beneficiaries are young or immature, when your estate is large, and especially for tax planning reasons. Also, trusts can provide for professional asset management capabilities an individual beneficiary may lack while allowing for the trust maker to set up his or her own terms for how and when the beneficiaries are to receive inheritances.
Trusts can even keep all of your assets held in trust private and away from the court system and potential predators; unlike a will which requires you to go through the public process of probate in which fees and court costs can be as high 5% of the total value of your estate.
In the end remember that one of the simplest and best ways to define probate is as follows. “Probate” is the filing of a lawsuit, against yourself, with your own money, in order to notify your creditors of their potential claims against you.
Let’s just avoid all of these issues and use a properly drafted and maintained trust designed for you and only you!