An estate plan is a combination of legal documents in which you direct how you want your money and other assets to be distributed after you die. Another important aspect of an estate plan is the nomination of a guardian for your minor children. Young parents often believe that they don’t have enough assets to justify creating a trust or even drafting a will. However, perhaps the most important reason to create an estate plan is to nominate a guardian for your children. Your children’s guardian will help to bring comfort and stability to your children at a very stressful time of their lives.
Most people are familiar with a will - a document which is administered under Court supervision through a process called “probate.” In some cases, a will is sufficient to direct the distribution of your money and other assets to your intended beneficiaries. But many people and families benefit from other documents including:
Trust - a legal entity (like a corporation) designed to avoid some of the costs of “probating a will” as well as offering greater control over the method of distributing your assets to your beneficiaries and usually allowing for a much faster distribution as opposed to the probate process. There are many different types of Trusts (just like there are different types of corporations) that can help you and your family achieve your goals.
Power of Attorney - a document which allows someone else you designate to manage your finances if you become unable to do so (due to illness, injury, or any other reason you specify).
Advance Health Care Directive - a document in which you describe what medical treatment you want to receive in the event that you can’t express yourself otherwise (for example, if you are in a coma). In this document you can also designate who you want to make medical decisions on your behalf to the extent not already expressed in the document.
These are the basic components of an integrated estate plan. Each person and every family has its own goals and unique circumstances. I work with you and your family by explaining your options, making recommendations, and putting together the estate plan that will best help you to achieve your estate planning goals.
Why Do You Need an Estate Plan?
Here is the good and bad news: You already have an estate plan! The state of California has a series of laws that will determine how your assets are distributed upon your death absent a will or trust. For some families, the default rules might accomplish their goals. But most families want a plan that is different from the default, if for no other reason than to avoid the cost and time associated with the probate process.
An estate plan allows you to control not only to whom your assets are distributed, but how they are distributed as well. For example, under California law your child will receive her or his inheritance at age 18. Many parents don’t think that their children will be mature enough at age 18 to inherit their money. By keeping a child’s inheritance in trust, parents can direct that their children not receive their inheritance until they are older, but give the trustee of their trust the flexibility to use trust assets to pay for their children’s education, health care, and general well-being as needed.
Another example concerns a “special needs child” who receives public assistance. If a special needs child receives an inheritance they might lose their eligibility to receive those benefits. A “special needs trust” can help to avoid this problem. Why Are There Different Types of Trusts?
Different trusts help to accomplish different goals. Some trusts are “revocable,” meaning that they can be amended or even terminated whenever and however you desire. Others are “irrevocable,” meaning that once you settle the trust, it cannot be terminated.
Because different people and families have different needs, estate planners have developed lots of different types of trusts to help accomplish our clients’ goals. Some of the more common types of trust include:
Marital A-B Trust: This is one of the most common and powerful types of trusts and is often the cornerstone trust for a young, growing family. This trust gives the settlors maximum flexibility in structuring how their beneficiaries will inherit their assets while at the same time ensuring that trust assets will first be used for the care and comfort of the settlors. It is also designed to help minimize (or at least delay) estate tax liability when the first settlor passes away.
Special Needs Trust: When a loved one (usually a child) has a disability, they are often eligible to receive certain benefits (entitlements). Some of those benefits are “means tested,” meaning that a person only qualifies for help if they have less than a certain amount of assets. Therefore, if a special needs person inherits a sum of money outright, they may lose their government benefits. A special needs trust allows you to arrange for assets to be used for the care and benefit of your loved-one, but without jeopardizing his or her eligibility to receive government benefits. While the establishment of a special needs trust is relatively easy, it is critically important that the trust be administered properly so that the special needs aspects of the trust are preserved. I often recommend to my clients that a special needs trusts be administered by a professional fiduciary to avoid mistakes that might jeopardize your loved-one’s government benefits.
Irrevocable Life Insurance Trust (ILIT): Life insurance is an important source of money for a family when someone passes away. Life insurance proceeds are often intended to pay estate liability, pay off the debts of the insured, and as a source of cash to survivors. That’s the great news about life insurance. The bad news is that under present law, life insurance proceeds are considered a part of your gross estate for determining estate tax liability. In other words, when computing whether you owe estate taxes (and how much you owe in estate taxes), the IRS includes your life insurance as a part of your assets, even if insurance proceeds are paid directly to your plan’s beneficiaries. A properly structured and managed ILIT can solve this problem so that your life insurance plans are not included in your posthumous gross estate.
Qualified Domestic Trust (QDOT): When one (or both) spouses are not U. S. Citizens, the marital exemption does not apply. The marital exemption is an extraordinarily important part of the Internal Revenue Code that enables a trust to avoid or delay the imposition of estate taxes. (This is what makes the Marital A-B Trust described above so powerful.) A QDOT allows a non-citizen spouse to take advantage of the marital deduction, with certain restrictions. The most important restriction is that the surviving non-citizen spouse cannot be a trustee. The trustee must be a U. S. citizen. If trust assets are $2 million or above, the trustee (or a co- trustee) must be a U. S. bank. Because Silicon Valley attracts lots of foreign workers, QDOTs are an important part of many estate plans in our part of the country.