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Estate Planning Basics

This post is a short introduction to standard estate planning for persons with total net worth below $5m - the point at which we start discussing more advanced tax planning strategies.

Goals of an Estate Plan

There are three main goals for standard estate plans aside from advance tax planning:

First, to make sure that the beneficiaries you identify are those that actually receive from your estate.

Without at least some type of plan inheritance is governed by the California Probate Code (“CPC”) under what are called the rules of intestate succession. The beneficiary identified in such rules is generally not the intended beneficiary. For example, an extremely common issue is where no will or other estate plan has been put into effect and a long-term romantic partner receives nothing with the estate being transferred instead to a family member.

Second, if you have children, to identify the temporary and permanent guardians who will be responsible for your children in the event that you and the other parent are no longer able to do so.

Third, to save material amounts of money, time, and effort.

Who Doesn’t Need An Estate Plan

Everyone should have some type of estate plan even if it is just a will to identify beneficiaries. For most people, to avoid the expense and time associated with attorneys and probate court more than just a will is required.

The only people who may not need a full estate plan are those with “small estates” where the total value is less than $166,250 and any real estate has a value less than $55,245 (as of 1/1/2021), even in such cases if the assets grow in value over time it is easy to end up with significant costs.

Avoiding the Money and Time of Probate Court

Probate court can be very expensive with most of that expense being the executor fees, the professional fees, and the filing fees. It is also a complex and time-consuming process, where even a simple probate transfer to a spouse or child can take more than a year and it comes at the worst time – just after your family has suffered from a tragedy.

In probate court the executor, usually a family member, and the attorney for the executor are compensated positions. The fees for these positions arises under California’s statutory fee schedule (Probate Code 10800 & 10810). These statutory fees apply to both the attorney and the executor. Filing and publishing fees and accountants add more cost which is paid for out of the estate.

Perhaps most importantly the “estate value” on which the statutory fees are based is the Gross Value – for example, a $1.5m house with a $1m mortgage will be treated as $1.5m in estate value for purposes of determining the fees.

A conservative cost estimate for a simple estate follows:

An estate plan that avoids probate court for a person (or couple) with children and one house with total assets of $1m usually costs around $2,000 – this is an estimated savings of $52,000 - 26 times the cost.

What is an Estate Plan?

What is commonly referred to as an “estate plan” is a set of documents that ensure that your estate is transferred to those you identify as beneficiaries in the most efficient manner possible.

It can be as simple as a Last Will & Testament or a change to the deed on your house or be incredibly complex and made up of many documents to deal with taxes, manage cross-border ownership, and to create and fund long term specialized trusts.

For those who do not need tax planning or other complex services, however, an estate plan generally consists of:

  1. A trust.

  2. A last will and testament.

  3. A springing power of attorney.

  4. An advance health care directive.

A Short Intro to Trusts

There are many types of trusts - for a longer but not exhaustive list see Types of Trusts.

Generally, what most people refer to when it comes to estate planning is a revocable trust sometimes called a “living trust” and there are a number of types that depend on marital status, total assets, and desired outcomes.

For most estate plans the revocable trust is the best tool as it allows the transfer of the estate without court proceedings, provides the most management and beneficiary flexibility, and is easy to update and amend as necessary.

Essentially, what a revocable trust does is allow for the automatic transfer of your assets to the beneficiaries you identify in the event of your death. You can put assets into the trust or take them out whenever you want and outside of processing and filing costs there is no tax consequence for doing so.

The Last Will & Testament

One of the simplest estate planning documents is a Last Will & Testament. This can be handwritten - though probably shouldn’t be - and among other things identifies the beneficiaries of the estate. A Will, which is coupled with a trust is often referred to as a “pour-over-will”. The pour-over-will is a catch all will. Many people are quite busy and updating their estate plans whenever they open a new account or buy a new property is not at the top of their minds. The pour-over-will covers any assets that were not included in the trust or that were obtained afterward and directs them back into the trust.

The use of only a Will for estate planning is not recommended as it lacks flexibility and, except for small estates, will require processing through the expensive and time-consuming probate court proceeding described above. Additionally, Wills tend to be easier to dispute and can increase the cost of litigation expenses as compared to a trust.

A Power of Attorney

A power of attorney is a notarized document that allows another person to act as your agent. It can be used for a variety of things, such as controlling and managing accounts and businesses, buying and selling assets, settling claims.

In the estate context it is use for when a person becomes incapacitated and is most useful for older individuals who are at risk of being taken advantage of. Without it, an incapacitated adult would have to be conserved which is another expensive and time consuming process with ongoing costs.

A springing power of attorney allows another person you identify to be responsible for your financial decisions if you are rendered incompetent or unable to do so. The standard required to determine your competency is something that is discussed as part of the estate planning process. A springing power of attorney is highly recommended for older individuals who are at risk of dementia or cognitive decline and having one can save huge amounts of time and money.

Advance Health Care Directives

An advance health care directive identifies your health wishes and is used in the event you are unable to make decisions, again for example if you are in a coma or otherwise not competent. This includes provisions about whether you would like to be maintained on life support, organ and body donations, and similar issues that may be confronted by your loved ones in the event of a medical emergency.

Depending on the outcome sought, the size of the estate, the desires for family members, the tax planning complexity, and cross-border issues there may be additional documents.

What Will My Estate Plan Cost?

The cost of an estate plan varies with the complexity of the estate. The main drivers of cost are the total assets, whether there are tax planning issues, the state or country in which assets are held, you and your spouse or partners citizenship and residency status, foreign tax issues, and the type and number of assets such as large or complex real estate holdings, private securities, private stock options, and finally any specialized trust terms such as asset protection trusts, irrevocable trusts, special needs trusts, or other non-standard plans.

Most people do not require advanced tax planning or specialized trusts and only need a standard estate plan that will put their wishes into effect, identify the beneficiaries, identify guardians for any children, and avoid probate court and associated expenses. For such clients, the cost usually ranges from $1,500 to $4,000.

Next Steps

If you are interested in creating an estate plan please see our post Estate Planning Process or schedule your free consultation by clicking here.


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