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Probate
is a court supervised process that includes collecting and valuing
your assets, paying your debts and taxes and distributing your assets
to your heirs. As part of this process, a notice of your death is
published in a newspaper in order to allow your creditors to make
claims against your estate. Probate proceedings are open to the public
and anyone can review the court file and examine the details of your
financial life. Probate is expensive, with most of the work being
done by a personal representative (named in your Will or otherwise
appointed by the court) who is assisted by an attorney and, usually,
an accountant. The fees and costs of probate can range from perhaps
2-10% of the gross value of your estate. Although using a Revocable
Living Trust does not make all costs associated with a death go away,
it can significantly minimize them.
How long does it take to go through Probate?
Probate
is a lengthy process that normally takes a minimum of six months to
complete, with the average time being from nine to twelve months.
It is not unusual for the administration of a complicated estate to
continue for years.
What is a Conservatorship?
A conservatorship
is a court supervised procedure by which an agent is appointed to
manage your assets and/or personal affairs, including medical care,
when you are not able to do so yourself. Your court appointed agent
usually must post a bond, paid out of your estate, must file annual
accountings with the court and, usually, must also seek court permission
before making major decisions about your property. This procedure
is expensive and time consuming, often requiring court hearings and
the assistance of an attorney. In addition, the individual appointed
as Conservator is entitled to reimbursement for necessary expenses
and to reasonable compensation for his or her services, all paid from
your estate. Because the court is involved, a conservatorship is a
matter of public record (including the nature of your estate and your
physical and mental condition). A better approach is to have a Revocable
Living Trust since your successor Trustee can manage your assets and
often entire avoid the need for a conservatorship of your estate.
What
are Death Taxes?
Separate from the expense and delay of probate, your estate may also be liable for death taxes. These taxes (also called estate or inheritance taxes) are paid on transfers of property at death.
There are two types of death taxes: the federal estate tax and the state death tax. California's estate tax, known as a "pick-up" tax, is equal to a credit given by the federal government for payment of state death taxes attributable to assets located in California. In other words, the overall amount of estate tax due is the same; California merely takes a share of the federal tax. However, if you own certain assets (i.e., real property) in another state, that state will take a percentage of the "pick-up" tax and California will take the balance. In addition, other states may assess a separate inheritance tax, over and above the "pick-up" tax.
Beginning
January 1, 2002, the state death tax credit was reduced by 25% for
decedents dying in 2002. That credit will be reduced by 50% for decedents
dying during 2003 and by 75% for decedents dying during 2004. For
decedents dying after 2005, no credit can be taken for payment of
state death taxes, effectively terminating the “pick-up”
tax. Instead, a deduction will be allowed against the federal death
tax for any death taxes that may be separately imposed by a state.
Treating the state death tax as a deduction, rather than a credit,
could result in higher overall death taxes. As of 2003, California
does not have a separate state death tax.
Why Do I Need Estate Planning?
Estate
Planning involves the creation of a definite plan for managing your
wealth while you are alive and distributing it after your death. A
properly prepared estate plan can do all the following: 1) provide
for the care of you and your family during times of disability or
incapacity; 2) determine who will care for your children after you
are gone; 3) determine who will inherit your assets (and when they
will inherit those assets and in what amounts); 4) avoid probate;
and 5) reduce death taxes.
Isn’t a Will Sufficient?
A Will
is a vital part of your estate plan. Through a Will, you can appoint
a guardian for your children and can name an executor to see that
your assets are distributed to your heirs and that death taxes are
paid. However, a Will alone does not avoid the time and expense of
probate, nor does it allow you to take advantage of certain steps
that can reduce the burden of death taxation. In addition, upon your
death, the provisions of your Will and the resultant distribution
of your assets through probate are open to public scrutiny.
What are the Benefits of a Family Limited Partnership?
A Family
Limited Partnership (FLP) is frequently used as a foundation for a
well-organized estate plan. An FLP can consolidate asset ownership,
thereby decreasing the overall investment and management costs of
multiple investments. It can provide asset protection, and continuous
ownership of property within the family unit, by limiting or preventing
access to the assets by creditors or former spouses. It simplifies
annual gifting of assets to future generations, while allowing you,
as the general partner, to maintain control over the assets. It can
also reduce the size of one’s estate that would be subject to
death taxes by allowing accelerated transfers to future generations
at reduced values. An FLP is also flexible in that, unlike an irrevocable
trust, the provisions of the FLP can be amended to meet changing circumstances
without court intervention, if all partners agree. Because of the
restrictions on transfers, an FLP is typically valued at a discount,
compared to the value of its individual assets, thus potentially providing
a savings in transfer taxes at death.
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