In a sentence, estate planning is planning to conserve one’s wealth while alive, and to maximize the transfer of wealth at one’s at death. Estate planning is not just for the wealthy, and whether it is realized or not, everyone already has an estate plan: there is the government’s plan or your own private plan, which your attorney may advise you on.
A proper estate plan seeks to accomplish three chief goals. First, maximize wealth transfers from one generation to the next, and to minimize estate taxes upon one’s death. Second, a proper estate plan is usually designed to avoid a probate proceeding, which is costly, slow, and becomes public record. Finally, a proper estate plan puts one’s final wishes in writing, usually in the form of a will or trust.
Proper estate planning seeks to minimize the taxes that occur on death. The Internal Revenue Code (IRC) provides that any amounts that are includable in one’s “gross estate” are subject to taxation when one dies. Currently, the applicable estate tax rate is a maximum of 35%.
Here is an example. Suppose you own the following assets: a house worth $1,000,000, stock investments worth $150,000, two cars each worth $40,000, and a bank account with $200,000 in cash. Under the government’s plan, all of this is included in your gross estate, and 35% of the amount in excess of the “exclusion amount” will go to the government. This result may be good for Uncle Sam, but not necessarily good for your surviving loved ones. A proper estate plan can help avoid or minimize this result.
A good estate plan also provides for the best utilization of assets during one’s life, including consideration into retirement planning, replacement of income in the event of disability, management of the estate in case you become incapacitated, and providing for loved one’s after your death. An estate planning attorney can help you with these planning needs by making a judicious use of certain tax-beneficial tools and planning techniques. These techniques include living trusts, irrevocable life insurance trusts, making gifts to loved ones while alive, arranging business interests, and making charitable gifts.
Certain estate planning tools are extremely effective for transferring assets to your loved one’s while minimizing the estate, gift, and income tax consequences. For example, provided certain provisions of the IRC are met, a grantor-retained annuity trust (“GRAT”) is a powerful way to pass appreciated property (i.e. property with a built-in gain) to one’s beneficiaries free of gift and estate tax, while at the same time giving you an income stream. Each person’s estate and situation is unique, so different estate planning tools will apply, and your attorney can best advise you on which best achieves your goals.
When a person dies without a valid will or trust, a probate proceeding determines who gets what. There are several drawbacks to probate. Not only is it inefficient, it is costly, and the whole thing becomes public record. People who have gone through probate have described it as a nightmare. When the court gets involved to manage a decedent’s assets, it creates an uncertainty as to who will ultimately benefit, which often causes psychological trauma to your loved ones. Instead of letting a judge and the State decide who gets your possessions when you are gone, you can determine that now by having your attorney draft a will, a trust, or, for certain assets, a deed to hold property as joint tenants. An estate planning attorney can help ensure that none of your assets are included in your “probate estate,” thus avoiding the nightmare of a probate proceeding. That said, if you already find yourself involved in a probate proceeding, we can help.
A proper estate plan will also put in writing your final wishes, so that you decide who will receive what, and also ensure that your loved ones are well taken care of when you are gone. To accomplish this, attorneys often use revocable or irrevocable trusts, wills, and durable powers of attorney. Moreover, attorneys use advanced medical directives to put into writing a client’s medical desires for his/her end-of-life treatment; it is your decision today what will happen if you become incapacitated.
Because estate planning requires a mastery of tax law, few attorneys are competent to work in this niche area of law. Choosing the right attorney is important since a poorly drafted will, trust, or business succession plan, might not be discovered until years later, likely after you have assed. Our firm specializes in tax law; we can educate you on your options, and help to accomplish the three goals of estate planning. Fora reduced rate initial consultation about your estate planning issue, you may contact me online, at my Irvine and Los Angeles (Westwood) estate planning offices, or call 800.681.1295.