Too often, we get caught up in the busy rush to earn or obtain more, and we forget the importance of planning for the future to keep, preserve, and eventually pass on all our hard earned property to those we love. Everyone who owns property and has children or family knows or has been informed by their CPA's, financial planners, and attorneys, that Estate Planning is something they will ALL need to do sooner or later. Still, some of us put off making a plan, either because we think we are too busy at the moment and will "get to it later" or because we think we can put it off and wait until we are much older and "really need it". In many cases, waiting until the last minute to make these decisions will result in the loss of hundreds of thousands, or even millions, of dollars that could have been used by your family.
WHY?
Plan to Avoid Probate
First of all, there is the probate court. Probate is basically like a court trial in which a judge decides who will inherit your property. Your family must go through probate after you pass away because you own property in your name. For example, the deed to your house shows that you are the owner. When you pass away, that house has no legal owner, even if you have children who should inherit that house. In order to transfer legal ownership of your property to your children, the law requires that your children go to the probate court to ask the judge to have the property title changed and passed to them.
In theory this is supposed to work well for a family without any Estate Plan because the court can make sure that your children, and not some strangers, will end up with the house. However, probate is a court proceeding and takes a lot of time and will cost your children money to hire an attorney to guide them through the probate process. An average probate proceeding in the State of California can take about a year or more. The probate attorney’s fee commonly charged is set by California law, as a percentage of the GROSS value of the estate (i.e. whether or not you have equity in your home, the fee is the same), and can financially set back an unprepared family without large cash savings.
By using current Estate Planning methods available to all families in California, Probate can be avoided altogether. Your children could receive all of your Trust assets at your death without going through Probate, and WITHOUT paying probate fees.
Plan to Pay Less Estate Tax
Second, in addition to probate costs, there is an additional expense the family must consider; Federal Estate Taxes. The estate tax is a basically a death tax the I.R.S. will levy on property that your children receive by inheritance. For people dying in the years 2011-2013, the I.R.S. allows each person to leave $5,000,000 in property without estate tax. (UNDER THE CURRENT LAW, THIS AMOUNT WILL BE REDUCED TO $1,000,000 PER PERSON AFTER 2013). This amount is based on the NET value of the property. This means that unless you can time your death appropriately, most people should expect that the $1,000,000 per person limit will be in effect when they die. With a $1,000,000 exemption, a wife can leave $1,000,000 and a husband can leave $1,000,000 for a total of $2,000,000 tax free to their children. However, if you do not make a proper Estate Plan, you may have to pay estate taxes even with less than $2,000,000 worth of property.
This often happens because in California, most property owned by a married couple is considered community property, and will pass to the surviving spouse on the death of one spouse. For example, after a husband passes away, the wife, as the surviving spouse, will receive all the property. But when she passes away, she can only transfer up to $1,000,000 tax free. Everything else is taxed. Simply put, the husband's $1,000,000 exemption was not used when the wife inherited all the property. However, with a careful Estate Plan, BOTH the husband's AND wife's exemption amount can be used, and the children could receive more tax free from their parents.
IN OTHER WORDS, A FAMILY WITH AN ESTATE PLAN COULD LEAVE THEIR CHILDREN TWICE AS MUCH MONEY TAX FREE AS THE FAMILY WITHOUT ANY PLAN.
For the next several years, the estate tax laws will continue to change. The exemption amounts are scheduled to go up, then down. By year 2010, the exemption amount will be down to $1,000,000 per person. As you navigate through the current political and economic changes, it is more important than ever to have an estate planning professional to guide you through the maze, use the best methods availabe, and make sure your family comes through a death with as much property and security, and as little tax loss, as possible.
WHAT IS ESTATE PLANNING?
Basically, estate planning is finding the best way to protect your property from the costs of death and give more property to your family. Prepared families have taken advantage of the estate planning laws for many decades to transfer wealth from one generation to another.
One popular estate planning technique is the "LIVING TRUST". The Living Trust can greatly reduce the costs and hardships of death. And because the Living Trust requires very little maintenance while both spouses are living, the Living Trust is a favorite instrument among estate planners and families.
