Jan
Welcome to AB cast integrating legal tax accounting and business solutions. I’m Jonathan Allen. This podcast will be about estate planning.
Neil
Well, Jan, as we start our conversation about estate planning, I guess the first question right out of the gate would be what’s the reason for estate planning and why does an individual or married couple need to consider an estate plan?
Jan
Well, there are a couple of reasons to create an estate plan. The first is so that you have a roadmap as to what’s going to occur in the event of an unforeseen or unusual death of let’s say a spouse. If you don’t have a plan, there is so much confuse and so much to do, and so much to learn and so much to transfer that it becomes overwhelming, particularly when the surviving spouse is in a state of grief. So the first is just to create a plan, know what’s going to happen, know what you’re going to do, know what you need to do. The second is that in terms of creating estate plans, the first and foremost reason for creating one is to avoid the cost of probate. People often ask me what the cost of probate is. And the cost of probate is really the cost of transferring an asset in the, a decedent name to the beneficiaries.
Jan
And that’s really the, what the probate process is. It’s a transfer of title of assets from the decedent to the beneficiaries, but there’s a fee that’s associated with that and that’s called a probate fee. So in order to go back and obtain the change or the transfer of, of title, you have to go through probate court, which means you have to go into court in order to be able to obtain the transfer of the title to those assets. For example, if you were to go back and if a couple had a home and both of them were to pass and the home was to pass to the children as beneficiaries under, um, under probate, let’s say under will, then there’s a way to calculate what the fees of the probate are. And the fees of probate are predicated based on the overall value of the estate itself.
Jan
The estate is comprised of the assets of the decedent and the assets that need to be transferred to beneficiaries. So let’s take a simple example. If you have a, a home let’s say in San Diego and the median price of that home is say $640,000, which I believe is the current medium value of homes in the San Diego area. Then probate would be calculated as follows. There would be a 4%, uh, probate fee on the first a hundred thousand dollars or $4,000. Then there’s a 3% fee on the next a hundred thousand dollars again of the $640,000 asset, which would equal $3,000. And then there’s 2% on the remaining assets from $200,001 up to a million. So just by having a median priced home in San Diego county and attempting to transfer assets to the beneficiaries could cost you in probate fees alone, $32,000. And that’s not including additional fees such as in order to sell a home, you have to have an appraisal. You have to have perhaps fix up costs. There are tax turns to be completed. There are a number of fees that would be associated that would be concurrent with finalizing probate that would have to be paid the cost of going back and creating a trust is far less costly. And in terms of actual dollars than just a simple transfer of a home in San Diego county, we, most of the trust that we do in our office are far below that $32,000 figure and generally run from between $2,500 to $4,500.
Neil
And it’s important to note Jan that the fees are not based upon the equity in the house. So that in that example, if the $640,000 house had a $500,000 mortgage, there would only be $140,000 in equity, but the fees are based on the value of the house, the full value, regardless of the equity, correct?
Jan
Correct. It’s based on the fair market value of the asset. So if you have a home that was purchased, let’s say back in the eighties or early, and the purchase price was $200,000 and it’s appreciated to the $640,000 value. The probate fees are predicated on the fair market value as of the date of death,
Neil
Right? So Jan, what is an estate plan? What’s the process of estate planning like and what are the basic tools that you use when you develop in estate plan?
Jan
State planning is a fairly simple, straightforward procedure. And we generally start with a questionnaire and that questionnaire is submitted to our clients and they go through a series of questions and those questions are designed to give us an indication of the types of assets that they have, the value of the assets, where the assets are located and who it is upon their death that they want the assets to be distributed to. So it’s a about a 12 page questionnaire, uh, that simply outlines the assets. We call it, marshaling the assets that goes back and lets us know what types of assets the client has and where those assets are to be distributed upon their deaths.
Neil
And what are the tools that you use to do that?
Jan
The basic estate plan consists of what’s known as a pour over will. Oftentimes people confuse a will with a pour over will. And there’s a distinction between the two, a pour over will is a document that we create when we go through and we create our trust documents in the event. That for some reason, if there’s a statutory in probate or in a state law that would make a trust invalid, then the pour over will goes back and essentially restates what it is that the trust already says so that the trust will not fail. It will continue in terms of the pour over will. There are several other are forms that we go back and we, we execute in terms of the, of the trust or the estate creation. One of those documents would be a healthcare directive and that healthcare directive is designed to be given to an individual’s physician in the event that there’s a medical emergency in the event, that there should be some sort of medical, uh, intervention, perhaps prolonging life, depending on, on what it is that’s occurring at the time.
Jan
And it’s really a directive to the physician as to what it is the individual who is unable to speak for themselves, wants the physician to do. And that’s called the advanced healthcare directive. It will go back and it will advise the whether or not extraordinary measures should be taken to prolong life in the event of a catastrophic, a accident or in the event of, in the event of terminal illness. It, it, it allows the individual to speak without, without having to physically or mentally be present when the attending physician is assessing the, um, the other thing that we go back and we use as well is we use several powers of attorney and we, we devise two powers of attorney. One is for who’s going to make healthcare decisions in the event that the individual is unable because of competency because of medical, uh, intervention is unable to make medical decisions for themselves.
Jan
And that’s a medical, durable power of attorney. And in that power of attorney that allows someone else to step into the shoes of the individual and speak on their behalf. So that individual will have the ability to tell physicians what they will or will not, um, accept what it is that they will allow them to do to the individual, and essentially make the decisions as though the individual were making them for themselves. The other power of attorney that we utilize is a financial one because in the event of the incapacity through accident or death of an individual, someone’s going to have to make the financial decisions as to how it is that the individual’s estate and or finances will be handled. And sometimes the holders of those powers of attorney may be different. So for example, if a decedent is making a medical power of attorney, the person that they designate to make medical decisions over their life and death decisions may not be the same person that will go back and make decisions for their financial wellbeing in the event of capacity or, or death.
Neil
Jan, you earlier mentioned a trust. What is a trust?
Jan
A Trust is a document that sets out in great detail, the plan over the distribution of the assets of a decedent, and it outlines what beneficiaries are to receive what assets and in what percentage, and in accordance to, or with in our particular instance with California law,
Neil
There are obviously different types of trust. Jan, you often hear the terms revocable and irrevocable. Can you tell us a little bit about those
Jan
Delineation of differences between the types of trusts come down to whether or not they’re granted trusts and a granted trust is where an individual has an asset such as you may have a home and you want to go back and create a trust, and you wanna put that, put your home into that trust. You are the grantor of that trust. In other words, you have the asset that’s going to be contributed to that trust that grantor trust is generally a revocable trust. In other words, you are allowed to change it by law. Anytime you want up until the date of your death. So when we go back and we think of estates and we think of living trusts, those types of trusts are called grant, our trusts, and they are revocable because they can be changed in the event that someone wants to create an irrevocable trust. The asset has contributed to a trust over which the grantor, the person putting the asset into the trust is not in control of the asset. Once the trust is formed and the asset is transferred, generally there is a professional executor for that trust or professional trustee for the irrevocable trust. And once the transfer has been made the grantor no longer controls that asset, those are used primarily when we are looking at long term estate planning, wealth building and tax deductions,
Neil
Special needs planning,
Jan
Special needs trust would, could be another one. Pet trusts have become, uh, a fairly large type of irrevocable trust as well.
Neil
So Jan, there’s presently a lot of discussion about changing the limits on federal estate tax exemptions. Can you tell us a little about what a typical trust looks like and how some of these changes might change, how estate plans and trusts might need to be structured long term as well as the need to keep them updated and reviewed?
Jan
Yes. Currently trusts have sort of been out of favor for a while because the unified tax credit, which is the amount of assets that can be held and transferred tax free, uh, has been so high. It currently runs at 11 million, $250,000 per individual. So a husband and wife can have up to over 22 million in assets and not pay any estate taxes. However, given the current climate and the potential for Congress decreasing that unified credit amount to perhaps three to 5 million per decedent suddenly now any estate in excess of say six to 8 million could have a taxable event in the event that there are assets that exceed that amount in terms of a traditional trust that we’re, we’ve been seeing a lot of in the last 10 years, we’ve been utilizing, what’s known as living trust, and those are grant our trusts. They are revocable trusts and a husband and wife go back and put their assets into the trust and then call out who the beneficiaries are to be in the event of their death.
Jan
Generally, in the event of the death of the first spouse, the surviving spouse has the right to utilize all of the assets within the trust for the remainder of their life. And then the balance of whatever remains after the death of the second spouse is distributed to the beneficiaries, but there are other ways to go back and distribute assets. For example, if a husband and wife have come into a marriage and they have their separate assets, they can go back and create a trust in which the assets from each of the spouse remains their sole on separate property to be distributed to the beneficiaries into permanently of the death of the first decedent. So for example, a husband and wife may contribute separate property. And in the event that the husband passes first, his trust could go back and liquidate, whatever assets are in his trust that he has deemed to go to his beneficiaries and distribute those assets to those particular beneficiaries. But that’s not the usual trust that we see it is normally husband and wife combine their assets will contribute all of those assets to a trust. Each spouse will have the ability to utilize those assets for the remainder of their lives. And then in the event of the death of the second spouse, us, the assets are distributed per the beneficiary clauses. Within those trusts.
Neil
Another common situation we see more and more often is blended families. So if a husband and wife come in and each has children from a previous marriage, one of their concerns might be providing for their unique and separate children and to protect their inheritances. How would you accomplish that?
Jan
That’s often the case because of the increase in blended families. We often see the distinction between, for example, children of the current union, as opposed to stepchildren from either the husband or the wife and accommodation can be made in the trust for certain assets to be specifically designated to certain children. So you may want children from the current union to be, to have the distribution of the assets that are occurred within that marriage, and then special carve outs for children from a previous marriage based on whatever percentage that the parents deem appropriate.
Neil
Another form of trust we’re using more often, especially after recent tax law changes is a Q-tip trust. Can you tell us a little more about Q-tip
Jan
QTIP is a qualified terminable interest, and we have seen it, although again, because of the increase of the unified credit, unless the estate is fairly large, we haven’t seen a large utilization of QTIP lately that could come back into favor. However, if the unified credit is lowered in the near term.
Neil
So in general, what should an estate plan accomplish for each individual person?
Jan
An estate plan should accomplish a roadmap in the event of death of the decedent, but more importantly, the protection of the assets so that the assets are not decimated or decreased in value and our past to the beneficiaries per the desire of the decedent.
Neil
And how often should you review and update existing estate plans and trusts
Jan
Generally, if there’s been no major change in one’s life, I would say three to five, five years is probably an appropriate amount of time to go back and review the trust. Things, change people change. It may be the desire of the trustees to go back and change the beneficiaries or change percentages or, or the assets perhaps that they started with may no longer be in existence. It may also be important to go back and review the trust when there are new assets that are required that need to be put into the trust. So the funding of the trust is of critical importance, particularly when there are new assets that have been obtained after the initial creation of that first trust. And that can be achieved either by a restatement of the trust, or it can be done by the addition of the assets to the trust. So there are several different ways that a trust can be updated without having to recreate an entirely new trust, simply because of the acquisition of new assets.
Neil
So if people hear about changes in major bills in Congress, here in California or wherever their home state may be, it’s an important time to check in with Alan Barron.
Jan
The key here is to watch what it is that may occur coming out of Congress in the next couple of years, if the unified credit down, if there is a trust currently in place, it would be a good time to go back and see your, uh, trust attorney to modify and make changes that would be appropriate based on that decreased unified credit.
Neil
So, Jan, what’s the greatest mistake our listener should avoid when estate planning.
Jan
I think the greatest mistake that most people ache is assuming that they don’t have assets of enough value to have, for example, an estate plan or a trust. Many times I talk to individuals who will come into the office and advise me that they have a home. And that’s the only thing that they have. And therefore they don’t need a trust or an estate plan. And generally that’s not the case. If you have assets and you want the assets to be distributed to certain beneficiaries, then it’s in your best interest to go back and create an estate plan and or trust.
Neil
And Jan, if our listeners don’t have an estate plan in place, or if they haven’t updated it in a while, what should they do?
Jan
That’s easy. You can call our office and schedule in a appointment. The first consultation, the first hour of consultation is free and we’ll be happy to go back and review your trust and advise you of any additions or changes that may or may not be needed to your document. And if there is no state plan at all, then we would be more than happy to go back and assist them in the creation of a trust for their beneficiaries. Learn more about our integrated legal tax accounting and business solutions and visit Allen barren.com or call (866) 631-3470 to schedule a free consultation.
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