NorCal: 510-901-5375 | SoCal: 818-658-2174

A Common Sense Approach to Estate Planning

Add Martin Luther King, Jr. to the list of famous people who died without a will in place. His family is currently in litigation with his 86-year-old former secretary who possesses documents, including a note from Rosa Parks, which she says Martin Luther King, Jr. gave her. The family contests that the notes are the property of the estate so it is a matter of “he said, she said.” A will stating Dr. King’s wishes for his secretary to have them would have cleared up the whole thing and saved a great deal of money and heartache for the parties involved. The King family is not alone. Today, 55% of Americans do not have a will. A basic will seems so simple to set up. You have to wonder why that step in estate planning is not taken by so many.

People usually fall into one of two camps: the folks that just don’t get around to estate planning, and the ones that have the best intentions but get caught in a trap. They make it so complicated that it becomes impossible to make decisions because they are so bogged down by the minutia and become paralyzed and unable to move forward. For example, a former client of mine and her husband had not set up a will even though they had two children in elementary school. They were startled into action when her best friend—who she had considered asking to be her children’s guardian—suddenly passed away in her early forties. They knew they had to act, but what had stopped them in the past was that no one seemed to be the right guardian. Her brother was very loving, but not good with money. Her sister lived too far away, and her friend was too strict with her children. Every potential guardian they considered had a drawback because they were over-analyzing things.

Estate planning isn’t easy, but it doesn’t have to be complicated. Here are some common sense guidelines to get you started no matter which camp you are in.

Ask yourself these questions to determine what vehicles you need:

1. Do you have minor children? If you do, you need a will to name a guardian in case you pass away while they still need parental care. Here is the reality check – chances are you won’t pass away until you are in your eighties. If you are married, chances are one of you will live to age 94 so the guardian for your children will probably be you, but name a guardian nonetheless. A rule of thumb in choosing a guardian is to trust your gut. When you think of a guardian for your kids, who is the first person that pops in your head? Usually the first one that comes to mind is the right one – don’t over think it. You can also make changes later as your children get older and lives, people, and relationships change.

2. Is your estate fairly simple and small enough such that you can name a beneficiary on all of your assets? If you don’t own a home, have less than five million dollars in assets, and all of your assets are in bank accounts, credit union shares, brokerage accounts, and retirement accounts, you can name a beneficiary on each one of these accounts and they will bypass probate. You don’t need a trust, and you may not need a will either, although you may want one to make specific bequests such as your automobile or special personal items such as jewelry or antiques. When a beneficiary is named, the assets pass to them at your death without having to go through any probate proceedings.

Double check to make sure you have the correct beneficiaries. This is the most common mistake I have seen in my professional life and have even made myself. When my children were very young and I was a single parent, I named my father as the beneficiary of my 401(k) rollover from a former employer so he could use it for my son’s care if I passed away. I recently consolidated my retirement accounts and my 82-year-old father (who has since remarried) was still listed as the beneficiary! When I made the fund transfer, I updated the beneficiary to my wonderful husband of 19 years and needless to say, I double checked every other account.

3. Do you own a home or other real property? You may want a trust.Your home, your vacation property, and your investment property will go through probate at your death if you are single or at the second death if it is owned jointly with your spouse or partner. If you’d like to bypass probate, a trust may be the right estate planning vehicle for you. A common mistake I have seen is parents “simply” adding an adult son or daughter as a joint owner of the property thinking they will save the money and complications of setting up a trust in order to avoid probate.

Instead of simplifying things, a whole host of complications were created by these actions. Since the adult child is now a joint owner, the house can be attached to a judgment in a lawsuit. If there are other children, a can of worms is opened in terms of dividing up the estate. The IRS may also get involved because there may be possible gift taxes, and there is no longer a “stepped-up basis” at the parent’s death so the daughter or son may have a taxable event when it comes time to sell the property. None of this was ever considered when “simply” adding their daughter or son to their deed of trust. A living trust will do the job here.

4. Do you have a large estate or a high net worth? Work with an estate planning attorney since the rules and exemptions amounts are constantly changing, however, a trust may preserve your federal estate tax exemption. If your assets are over five million dollars, or you think they will be in the near future, a trust may be able to save estate taxes upon your death. The federal exemption amount for each U.S. citizen in 2012 is $5,120,000. Estates over this amount will be taxed at 35% (this year). But remember Congress may lower that amount – if they don’t act in 2012, it reverts to a one million dollar exemption for 2013. For now, the Deceased Spousal Unused Exclusion (DSUE) allows the sharing of the unused exemption from the first spouse to pass away to the surviving spouse. However, in the future the rules may revert back to where if you are married and pass away without a trust, your assets pass to your spouse without preserving your estate tax exemption. Your federal exemption may be lost, so if you and your spouse each would like to leave $5,120,000 worth of assets to your beneficiaries without creating an estate tax liability, a trust can help.

For example, let’s say your estate is worth $10,240,000. You pass away and leave the assets to your wife. At her death, assuming the $5,120,000 exemption is the same, she could pass that $5,120,000 free of estate taxes to beneficiaries, but the other $5,120,000 might be subject to an estate tax rate of 35% resulting in a $1.792 million payment to the IRS. (The current estate tax code allows spouses to share this exemption, but this is only a temporary clause, so this example assumes this clause is not in effect.) If you had set up a living trust, you could have preserved your exemption and your family would owe zero in estate taxes to the IRS instead of $1.792 million. Do the numbers seem large? When you include the value of your home, your retirement accounts, and life insurance, five million dollars is not out of reach for a lot of people.

5. Do you want to do something special with your money? A trust is a vehicle that serves special situations the best. If you have a special needs child that you’d like to provide care for after you are gone, or leave a legacy to a special charity or special people in your life, a trust has more power to keep on giving when you aren’t there. If there is someone you specifically don’t want to leave a legacy to for whatever reason, a trust is a better vehicle than a will since it bypasses probate and thus is private instead of a public event. A special needs or charitable trust is more complex to set up, but certainly worth the effort to get it right. Find an attorney with a specialty that matches your interests to streamline the process.

6. You don’t have to answer this one – just put powers of attorney on your list. Just about everyone needs financial and medical powers of attorney. During your lifetime, a durable power of attorney for financial matters allows your representative to manage your funds without becoming a joint owner on the accounts. The medical powers of attorney and living will do the same for your medical issues – your representative can speak for you when you aren’t able to. When you set up your will or trust, your attorney will generally have a package that includes these documents. You may also find that you have an employee benefit at work that provides free or discounted legal documents and services.

Also remember one of the best things about estate planning is your plans aren’t etched in stone tablets for all of eternity. They can be changed (during your lifetime, anyways) so do your best, pick the right vehicle, and trust your gut when making decisions. Then move forward.

Oh, and don’t forget to check your beneficiaries—anyone can make that mistake.


Let Us Answer Your Questions
Schedule a Free Consultation

Get customized and devoted help at every stage of your financial journey. We have helped thousands of clients. As a top estate planning attorney in the Los Altos, California area, we can help you, too.


43480 Mission Boulevard, Suite 270
Fremont, CA 94539