Estate Planning - Not Just For The Wealthy

There is a common misconception that estate planning is reserved for the wealthy 1%, as a tool to help them shield their assets from Uncle Sam. I hear people joke all the time “well, as soon as I have an estate, I’ll need that.” But in fact, estate planning is critical for anyone age 18 or older, and is particularly important for parents of minors as well as homeowners. For people with larger estates, of course, estate planning may mean a collection of complex trusts and other instruments to minimize taxes and maximize control of wealth. But for the majority of people, estate planning can be pretty simple; there are several levels of estate planning, and what you need to best protect you and your family is probably not as complex as you think:

Every Legal Adult Should Have a Plan for Incapacity.

Every person who has reached the age of 18 years needs two documents: an Advance Health Care Directive and a Financial Durable Power of Attorney. The Advance Health Care Directive lays out your wishes re: health care and medical decisions and empowers the person (or persons) of your choice to make those decisions if you cannot. A Financial Durable Power of Attorney is where you nominate and empower an individual (or individuals, or in some cases, an institution like a bank or professional trustee) to manage your finances if you are unable to do so yourself. Some of the tasks encompassed under “manage your finances” include paying your bills, taking out insurance policies for you, suing on your behalf, collecting monies owed to you, etc. A failure to have one or both of these documents will mean a lengthy and costly court process for your family or friend(s) if you ever lack the capacity to make decisions for yourself.

Every Parent with Minor Children Needs a Will.

A will is the tool used to nominate guardians for your minor children. In the absence of this document, a court will be tasked with the choice of choosing for you, and ANYONE can petition the court to take on the role of guardian.

A Trust is a Good Idea if Any of the Following Statements Describe You…

  1. Your estate is larger than $150,000.
    • Even if you have a will, if your estate is worth more than $150,000, your estate will go through probate unless you have a trust. The probate process is very expensive, time-consuming, public (anyone can access probate court records), and stressful for whomever you leave behind. And while your estate is in probate, all of your assets will be frozen and unavailable to the people who depend on you financially. Probate, and all of the costs, delays and hassles associated with it, can be avoided completely by setting up a revocable living trust.
  1. You own real estate in California.
    • This point goes back to probate and the fees charged to go through probate. In California, fees for probate attorneys are set by law and are based on the GROSS value of your assets, not on the value of what you actually own. So, if your real estate is worth $600,000 but you still owe $500,000 on the loan, your estate will have to pay $15,000 to transfer your $100,000 of equity to your heirs. You could spend a fraction of that on a well thought-out and tailored estate plan, prepared by an attorney, to avoid the bite that probate would take out of your equity.
  1. Your children are minors or young adults.
    • If your children are minors, and you have a will, most likely, your will is set up so that your children inherit their full share at the age of 18. If you don’t have a will, of course, your children will certainly inherit their full share of your estate at the age of 18. This is probably not the best course of planning for your children, as more than likely, their inheritance (that you worked so hard to build) would be gone more quickly than they can imagine. The recommended course of action is to have money available for their needs (tuition, housing, food, etc.) but to have someone else in charge of the money, doling it out over time. Giving them lump sum payments at specific ages, for example, will likely help them learn how to manage money – probably by making mistakes with the first lump sum, and then resolving to make wiser decisions with the next distribution. Many people choose to distribute their children’s shares in the following way: 1/3 of their inheritance at age 25 or upon completion of a bachelor’s degree (whichever happens first), ½ of the balance at age 30, and the remaining balance at age 35. By distributing an inheritance over time, you are able to protect your children from blowing through the entire inheritance as a young adult.
    • Another benefit of having a trust is that you can provide guidance to the trustee (the person in charge of how money is spent on your children’s behalf) regarding the types of things you want the trustee to spend money on and how much money you would have allocated. For example, you can stipulate the size of gift you would have given for a vehicle, high school graduation, a wedding, a down payment for a first home, etc.

Estate planning is a useful tool for all California residents, not just for the wealthy. Talk to an estate planning attorney today to discuss how to best meet your goals and address your needs.