Why do you need estate planning no matter where you live, but especially in California? What is estate planning? Isn’t estate planning just for people with a lot of money, property and wealth? Why should someone just starting a family or in their mid-40’s give any thought to estate planning?
Do you own your own home? Do you own or have a financial interest in a business? Do you have children? Do you pay taxes to the federal government and your state? Do you have or are you paying into a retirement plan, pension or 401(k)?
The fact of the matter is whatever your perception of “wealth” is, if you own a home or a business, you need an estate plan. If you have a child or children, you need estate planning. If you don’t want other people (often people you don’t even know) to make decisions about your life, your health, or your money, you need an estate plan. The truth of the matter is this: you don’t need an estate plan some time in the future when you get around to it. If you answered “yes” to any of the questions above, you need an estate plan right now.
The small investment in an estate plan can come back to you quickly, often in tax savings alone. The first time your dog bites someone, a person is injured on your property, a creditor wants immediate payment, you are injured or cause injuries in a car accident or face an unexpected illness the cost will return to you.
Estate planning will put things in order, establish protections for all you have worked so hard to build and are in the process of building. It protects your loved ones. It protects you, personally, if something should happen to you or if you suffer an unexpected injury or illness.
What is Probate, and Why Should You Care?
Here in San Diego, California the question is quite simple: do you own or are you in the process of paying off the mortgage on your house? If so, no matter where you are in the repayment of the mortgage or if you own the property outright, you need estate planning.
The facts here are true for most states, it’s just a question of the volume of savings based upon where you live. When anyone passes away, their property, assets and debts must, in the vast majority of cases, pass through probate court. The process of probate is to organize the assets and debts of the party, pay their debts and expenses, and distribute (transfer title to) any remaining money and assets to “beneficiaries” or “heirs.”
Why should you care if you pass away, and your assets and debts go through probate? Simple answer: it is quite expensive and will tie up any and all of your assets for several months and in many cases involving real estate, more than a year. The costs of probate and the administration of your estate come out of your assets. The cost of probate is almost always based upon a percentage of the value of the estate. Not the net equity of the estate, the value of the estate.
Let’s consider a simple example: taking a single family home through probate:
Here in San Diego the median price of a home presently stands at $939,100.00 and many homes are well above $1 million. It doesn’t matter if there is a mortgage against the home, or if the equity in the home is $100,000 or $700,000. The cost of probate is based on the value of the home: $939,100 dollars.
Here in California, the statutory executor and attorney fees are enshrined in law:
4% on the first $100,000
3% on the next $100,000
2% on the next $800,000
In our example above, the $939,100 median priced home would require the executor and the attorney to be paid $21,782.00, each. ($4,000 + $3,000 + 2% of the remaining $739,100 or $14,782 = $21,782). That means $43,564 of the estate in this simple example would not be passed on to the beneficiaries and heirs. This doesn’t include the cost of the probate court itself (referee fees, administrative fees), as well as filing fees of $435 and the “final distribution fee” of $435.
An effective estate plan would transfer the ownership of that $939,100 home directly to the beneficiaries and/or heirs. In this example, the loved ones of the homeowner would have saved more than a year of time, a lot of hassle, legal fees of their own, and more than $45,000 in probate costs.
Simply Put: Why Do You Need Estate Planning?
Why do you need estate planning? Here are the essential reasons:
Your estate plan provides important protections to your property and assets (for example, through the protections of a trust or entity such as an LLC) that protects the assets against creditors and other risks for as long as you possess the assets.
An estate plan memorializes your wishes and instructions. What do you want to happen to your accounts and assets and who will make important decisions if you become incapacitated? How do you want to be cared for if you become ill? Who will have the authority to make decisions about your money and paying your debts? Who will have the authority to make decisions about your healthcare and/or lifesaving efforts? Your estate plan should include advance health care directives and other important documentation of decision-making powers.
Estate planning reduces expenses at every step of the process. How you hold an asset or dispose of it can have a substantial impact on associated taxation. The goal of estate planning is to preserve and protect assets and reduce taxation and other “costs” now. Effective estate plans avoid probate altogether and ensure your assets pass to the people and causes you care most about quickly, and cost-efficiently.
Your estate plan should provide for those you love including your spouse and/or children. If you have a child and you lose your life in a fatal accident, who do you wish to care for them going forward. Of course, a parent wouldn’t want to leave this important decision to child protective services. Are you concerned about issues like drug or alcohol challenges for an heir or even spendthrift behavior? There are strategies to provide for these challenges while safeguarding and ultimately providing for your loved ones.
If you own a business, several companies, or interests in a business as a member of an LLC or shareholder there are important considerations to protect your interests throughout your life and beyond. What happens to these holdings in the event of a debilitating illness, accident, or death? Your estate plan should provide important protections to make sure your interests are protected and preserved or managed in a manner you define in your instructions.
Estate planning isn’t just about what happens when you are seriously injured or pass away. It’s about living a full life with prudent planning and protection. What will your needs look like in retirement? What strategies need to be planned for and how will you protect the assets you develop?
Why do you need estate planning? It protects all you’ve built through your hard work and life efforts to this point. It protects your own interests, as well as those you love and cherish. An effective estate plan provides additional protections for your assets through appropriate insurance, entities and legal structures such as revocable and irrevocable trusts.
Protect your assets. Reduce taxation. Memorialize your objectives, wishes and instructions. It’s time.
We invite you to learn more about the integrated tax, legal, accounting and business consulting services of Allen Barron and contact us or call today to schedule a free consultation at 866-631-3470.
