Estate Planning for New Parents

I get asked the following question quite often: Why should new parents have an estate plan?
The simple answer is that if you don't provide an estate plan for your family, then the state of California provides one for you, and it's probably one that you don't want.

GUARDIANS

To begin with, you want to make sure that you have appointed a guardian or guardians if something should happen to you. If you do not specify who the guardian(s) of your children will be, then a local judge will make that decision for you. Obviously, you are in a better position to determine the guardians of your children than a judge who doesn't know your children or the potential guardians, and it is your responsibility to appoint the best people available to take care of your children (only you know who those people are).

GUARDIANSHIP OF THE ESTATE

In addition, California law (with minor exceptions) does not allow children to inherit property in excess of $5,000. Therefore, if all or part of your estate (in excess of $5,000) goes to your children, a guardianship of the estate will be set up. This process entails the court appointing a person to look after your children's property. Throughout the duration of the guardianship, which lasts until each child reaches 18, every significant decision concerning the property must be approved by the court, and accountings must be filed. This process is very time consuming, very costly, and usually requires the assistance of an attorney. This eats away at the children's assets.

DISTRIBUTION OF ASSETS AT 18

Moreover, by law, a guardianship ends automatically when each child reaches 18. At that point, each child receives what is left of his or her assets. Unfortunately, many eighteen year old children might be inclined to squander their assets without much thought to their education or future.

Nevertheless, proper planning can avert a guardianship, as well as the distribution of assets to the children upon reaching 18.

DISTRIBUTION IF NO WILL OR TRUST

Under California law, if you die without a will or trust, the state determines who will receive your property. California law specifies that your children will receive two thirds of your separate property (if you have two or more children), or one half of your separate property (if you have only one child). Your community property (which may comprise a large share of your estate) and the balance of your separate property will all be left to your spouse or domestic partner. This may leave your children with much less or much more than you wish for them to receive. Conversely, it may leave your spouse or domestic partner with less or more than you wish for them to receive. It is obviously better if you decide what goes to your children and spouse, not the state.

SAVING COSTS AND ESTATE TAXES

Another problem with not planning your estate properly is that you may end up paying exorbitant costs, either to attorneys, executors, probate referees, or the government. Probate fees alone, which can easily be avoided, would amount to $36,000 for an estate which consists of $750,000 (including outstanding loans). That means that if you own a home worth $750,000, even if it has an outstanding mortgage of $500,000, you will be required to pay at least $36,000 if the home is probated.

WHAT SHOULD YOU DO?

At the very least, all new parents should have a will. This will alleviate some of the problems noted above. Often, a trust might be more appropriate (and will avoid probate), but this will depend on your specific circumstances. Other estate planning documents you should look into include durable powers of attorney for health care and for finances. These documents will provide for easier planning and management of health and financial issues in case you become incapacitated.

In any event, you should take control of your situation and find out what your options are and how to provide for your new family.

How to Avoid Probate?

Probate is a complex procedure which requires lots of time, effort, and worst of all, is very expensive. Because of the expense, time, and hassle involved, it should be avoided if possible.

One simple way to avoid probate is to set up a living trust. Assets in a living trust do not have to be probated. This makes living trusts the perfect vehicle for avoiding the cost and hassle of probate.

Another way to avoid probate is to title assets in joint tenancy. Assets titled as joint tenancy avoid probate because when one owner of joint tenancy property dies, his or her interest in the property automatically vests in the surviving owner(s). So, if two people own property as joint tenants, if one of them dies, the other automatically becomes the sole owner (without having to go through probate). There are some drawbacks to owning property in joint tenancy, so please contact us if you are considering titling an asset in joint tenancy. (For example, the property will not avoid probate on the death of the surviving joint tenant; in addition, there are tax basis consequences to owning property in joint tenancy, which can have a negative tax impact on the surviving joint tenant.)

The same holds true for California property titled as community property with right of survivorship. The surviving spouse will automatically become the sole owner of the property upon the death of the first spouse.

One easy way to avoid probate for bank accounts is to hold them as "payable on death" (P.O.D.) accounts. These accounts have the benefit of being paid automatically on death to a named beneficiary. These accounts can be set up through your local bank. One common question we get regarding P.O.D accounts is whether the named beneficiary has any right to funds in the account prior to the death of the primary account holder. The answer to this is no. The beneficiary has no right to the funds prior to the death of the primary account holder, and the beneficiary can be changed or eliminated by the primary account holder prior to death.

Another way to avoid probate through beneficiary designation involves retirement accounts and pension plans. Retirement accounts such as IRAs or 401(k) accounts go directly to a named beneficiary or beneficiaries at death. This will avoid the necessity of going through probate, as the beneficiary can simply claim the plan benefits from the account custodian.

Two other ways to avoid probate in California are: 1) for estates which have less than $100,000 in probate assets, and 2) for estates where a spousal property petition can be utilized. Smaller estates, which have less than $100,000 in probate assets (the estate can be much larger than $100,000, but the probate assets must not exceed $100,000) can go through a summary procedure where affidavits are utilized to transfer assets.

For estates where a spouse, or registered domestic partner, is to receive assets outright, a spousal property petition can be used to transfer assets. When using this procedure, there is no limit as to the amount of assets which can be transferred. The assets to be transferred must pass by either will or intestate succession (where there is no will, but California laws mandate that the assets are to be transferred to the spouse or domestic partner). Additionally, part of an estate can be transferred utilizing a spousal property petition even if other assets must still be probated.

In sum, there are numerous ways to avoid probate under California law. Please contact us if you have any questions regarding California probate law or ways to avoid probate in California.