Estate planning is the process by which people prepare their assets to be transferred to another person or institution during their lifetime or upon their death. An estate plan also determines who makes financial and healthcare decisions on behalf of an individual who may become incapacitated. It can also determine guardianship for any minor children. A typical estate plan may involve a trust, will, power of attorney for financial matters, advanced healthcare directive (commonly known as a living will) and asset transfer documents.
Simply put, a trust is a legal entity which can hold title to property. The person who creates a trust is commonly known as a grantor, trustor or settlor. All trusts are managed by a single “trustee” or multiple “co-trustees” and exist for the benefit of certain individuals (or charities) known as “beneficiaries.” Many different types of trusts exist ranging from “revocable” which may be changed and/or amended, to irrevocable, which cannot. Trusts may also exist for specific family and charitable purposes.
There are many positive reasons why people create trusts, but the most common reasons are:
- To avoid the probate process;
- To allow for the management of their assets should they become incapacitated; and
- To specify who should benefit from their assets upon their death.
A will is a legal document that contains specific instructions as to how a court is to distribute assets following the death of the creator of the will, also called the “testator.” Upon death of the testator, a will must go through a series of legal steps, or “probate” in order for assets to be passed on.
Probate is determined based on a percentage of the estate. The current probate fees in California are:
|Estate Value||Statutory Fee|
A person who passes away without a will is said to have died “intestate.” When a person dies intestate, their assets are distributed according to the following order as found in the California Probate Code as follows:
• If not married, the estate is distributed:
- To children equally.
- If there are no children or surviving grandchildren, to parents.
- If there are no parents living, then to siblings.
- If there are no siblings, then to grandparents.
- If there are no grandparents, then to aunts and uncles, or cousins.
- If there are no cousins, then to “next of kin.”
• If married, the estate is distributed:
- All community property goes to the surviving spouse.
- Separate property is distributed as follows:
- All to spouse if no parent, child, grandchild, niece or nephew survives.
- ½ to spouse if only one child, or grandchild survives.
- ½ to spouse if there is no child or grandchild, but a parent, sibling, niece or nephew survives.
- 1/3 to spouse if more than one child survives.
- 1/3 to spouse if one child and one grandchild survives.
- 1/3 to spouse if issue of two or more deceased children survive.
Also referred to as a “living will,” an advanced healthcare directive is a document that allows for a “principal” to appoint an “agent” for healthcare related decisions only. The principal can also include instructions relating to their healthcare, including decisions relating to any variety of scenarios including end-of-life treatment.
In addition to the annual exclusion amounts, you also can give the following without triggering the gift tax:
- Charitable gifts.
- Gifts to a spouse.
- Gifts to a political organization for its use.
- Gifts of educational expenses. These are unlimited as long as you make a direct payment to the educational institution for tuition only. Books, supplies and living expenses do not qualify.
- Gifts of medical expenses. These, too, are unlimited as long as they are paid directly to the medical facility.
Yes. The maximum amount an individual can give during their lifetime is known as the “unified credit.” Effective January 1, 2014, the unified credit is $5,340,000 per individual.