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Estate Planning 101

Are your assets protected for your heirs?

By Martha Daetwyler

Taking the time to prepare an estate plan is one of the greatest gifts you can give to your family.  A well drafted estate plan will make sure that your assets go where you want them to and will minimize the time and expense involved in the transfer of your assets after your death.  Also, you can make sure that your financial affairs and medical decisions are handled as you would wish during any periods of incapacity.

This month, we've brought in estate and trust expert Martha Daetwyler, an experienced and highly respected San Francisco attorney, to provide advice on basic estate planning issues.

Since you can't take it with you…

The basic estate plan involves a will or a living trust.  These documents provide instructions for the distribution of your property when you die.  If you die without having left directions, the probate court will distribute your assets according to the state's laws of intestate succession to your nearest relatives.


Living Trust versus a Will

Wills:  With most wills, your heirs will be required to go through the probate process when you die.  Probate is a court process of validating your will and authorizing the executor to distribute your assets.   There are significant disadvantages to probate including cost, delays and the lack of privacy.  Also, if you own real estate in more than one state, there will need to be a probate proceeding in each state where you own real estate.

Living Trusts:  A living trust is also referred to as an inter vivos trust (meaning you established it during your lifetime), or a revocable trust (because you can revoke or amend it at any time).  In most cases a living trust is preferable to a will, because with a living trust your heirs do not have to go through the probate process.  

With a living trust, the person you name as successor trustee can collect your assets, pay your bills, and distribute your assets according to your directions without court involvement, thus avoiding the delays and costs of probate.  It is important to note, however, that setting up a revocable trust does not offer any creditor protection.  Part of the job of your successor trustee will be to see that your bills are paid out of your assets.

Related Documents

The other documents which are an essential part of your estate plan include:

•  Pour-over Will—Catches any assets which have not been transferred to your living trust.

•  Durable Power of Attorney—Gives the agent you name (usually the same person as the successor trustee) the authority to handle your financial affairs if you are incapacitated for a period of time.

•  Advance Health Care Directive—Gives your agent the power to make health care decisions on your behalf if you are unable to do so and also gives guidelines of your wishes regarding medical treatment and end of life issues.  Having a written statement of your wishes can prevent inter-family disputes about your care and avoid your being kept alive by artificial means if that is your wish.

Tax Planning

Currently the first $2 million of an individual's estate can pass free of taxes.  For a married couple, the amount is doubled ($4 million).  If you are married and have combined assets over that amount, it is important to have an adequate estate plan in place to insure that the exemption amount of the first spouse to die is not lost. 

Note that the estate tax exemption amount increases to $3.5 million for individual's dying in 2009.  For the year 2010, the estate tax goes away entirely.  The estate tax is scheduled to be reinstated in 2011 with an exemption amount of $1 million.  There is currently much speculation as to whether Congress will pass legislation to preserve the estate tax and settle on a fixed exemption amount going forward.  Although no one has an accurate crystal ball for these matters, most tax practitioners predict that there will an estate tax in our future and that the exemption amount will be greater than $1 million.  In the meantime, estate planning attorneys are drafting documents with lots of flexibility in reference to the exemption amount and planning in that regard.

Retirement Accounts

Estate planning for retirement plan accounts is a significant issue for many people, as IRAs and 401(k) accounts today make up a large part of their savings for many individuals in the baby boom generation.  The distribution of these assets generally is not governed by your trust, but rather by the beneficiary designation form which you will have submitted to the plan administrator for your particular plan. 

There can be significant issues to address in designating your beneficiaries which can have a big impact on the timing of distributions to your heirs, how long they can stretch out the tax-free growth in the account, and the deferral of income taxes.  Your estate planning attorney can provide valuable assistance in making sure that your beneficiaries are properly designated for your retirement plans.

It is especially useful to note that retirement accounts are a particularly appropriate source of assets for making charitable gifts since a charitable beneficiary will not have to pay income tax on the distributions they receive directly from a retirement account.  Thus the same distribution amount will be worth more to a charity than the after-tax distribution received by an individual beneficiary.


Further considerations…

•  Estate planning is especially important for parents with young children in order to name guardians and provide that the assets are held in trust for the children's benefit until they reach the ages you designate.

•  Same sex couples in California, if they are registered domestic partners, are covered by virtually all of the laws applicable to heterosexual married couples.  Since the federal tax laws do not recognize these unions, however, estate planning is critical.

•  Transferring interests in real estate can be very complicated in California in light of the rules relating to reassessments for property tax purposes.  A knowledgeable estate planning attorney can be very helpful in advising about contemplated transfers of real estate interests among family members, as well as among non-related parties.

Martha Daetwyler is a San Francisco attorney specializing in estate planning, probate and trust administration, charitable giving, real estate matters, tenants-in-common agreements, corporate and LLC entities, and tax exempt entities.  She can be reached at mdaetwyler@lpslaw.com or at 415.957.1800.