When it comes to securing your future and your loved ones, the importance of estate planning cannot be overstated. It is a thoughtful approach to provide for your loved ones, even after you pass away. Not just that, an estate plan stands strong for you, when you are incapacitated.
In this blog, you will learn why having an estate plan in California is important. We will also explore its core components, so you dive into estate planning well-informed.
By the end of this blog, you will be able to create an estate plan for yourself, and at the right time. Let’s get started.
Understanding Californian Terms Related to Estate Planning
Before you learn why estate planning is important, there are some related terms you must know.
An asset refers to something of value that is owned or controlled by an individual, organization, or business. It can take various forms, including cash, property, investments, equipment, inventory, and intellectual property.
Assets are categorized into two main types: tangible assets and intangible assets.
- Tangible assets are physical items that can be touched or seen. For example, real estate properties, vehicles, jewelry, artwork, and personal belongings.
- Intangible assets, on the other hand, lack physical substance. It includes things like intellectual property rights, royalties, and digital assets such as online accounts and cryptocurrencies.
An executor is appointed to follow the instructions in a person’s will after they pass away. They have a legal duty to act in the best interests of the deceased person and the beneficiaries mentioned in the will.
The tasks of an executor include:
- Starting the probate process by filing the required paperwork with the correct court to validate the will and gain legal authority.
- Managing the estate’s assets during probate, such as protecting property, handling investments, and maintaining accurate financial records.
- Identifying and resolving any outstanding debts, taxes, or claims against the estate. This includes notifying creditors, reviewing and approving valid claims, and ensuring compliance with tax laws.
- Supervising the distribution of assets to beneficiaries according to the instructions in the will. This may involve selling or transferring property and closing accounts.
A trust is a legal arrangement where a person, known as the grantor or settlor, transfers assets to a trustee. The trustee holds and manages the assets for the benefit of designated beneficiaries.
The trust is established by signing a trust document that outlines the terms, conditions, and instructions for managing and distributing the trust assets.
Types of trusts commonly used in estate planning include:
- Revocable Living Trust: The grantor retains control over the assets during their lifetime and allows for the seamless transfer of assets to beneficiaries after the grantor’s death, bypassing the probate process.
- Irrevocable Trust: Once set up, this trust cannot be changed or canceled by the grantor without the agreement of the beneficiaries. It offers potential tax advantages and safeguards the assets.
- Testamentary Trust: Created within a will and becomes effective upon the grantor’s death. It provides for the management and distribution of assets to beneficiaries, particularly if they are minors or have specific needs.
- Special Needs Trust: Designed to provide for individuals with disabilities without disqualifying them from government benefits. It ensures that the trust assets are used to supplement, not replace, the individual’s benefits.
Power of Attorney
A power of attorney grants authority to a designated individual, known as the agent or attorney-in-fact. The agent makes decisions and takes actions on behalf of the grantor in financial, legal, and other matters.
Here are key points to know about a power of attorney:
- It allows the grantor to choose a trusted person to handle their affairs if they become incapacitated or unable to make decisions.
- The agent can manage bank accounts, pay bills, make healthcare decisions, and engage in legal transactions on the grantor’s behalf.
A beneficiary is an individual or entity designated to receive assets or benefits from various estate planning instruments. This includes trusts, wills, life insurance policies, and retirement accounts.
Primary beneficiaries receive assets first. Contingent beneficiaries inherit assets if the primary beneficiaries are unable to do so.
For example, naming a spouse as the primary beneficiary of a life insurance policy and children as contingent beneficiaries.
Probate is the legal process that occurs after a person’s death to validate their will, settle their debts, and distribute their assets to beneficiaries.
It is a court-supervised process that ensures the deceased person’s wishes, as expressed in their will or state intestacy laws, are followed.
Probate expenses, including court fees, attorney fees, and executor compensation, are usually paid from the estate’s assets.
An estate tax is a federal tax imposed on the transfer of a deceased person’s assets to their beneficiaries.
Key points about estate tax include:
- It is based on the total value of the estate above a certain threshold.
- The tax rate varies according to the value of the estate.
- Estate planning strategies can help minimize tax liability.
- Exemptions and deductions are available to reduce the taxable estate.
- Estate tax returns must be filed with the IRS if the estate meets certain criteria.
A will is a legal document that outlines a person’s wishes regarding the distribution of their assets and the care of their minor children after their death. It is a fundamental component of estate planning and is also referred to as a “last will and testament.”
Key points about a will include:
- It allows individuals to designate beneficiaries and specify the distribution of their property.
- It can appoint an executor to manage the estate and carry out the instructions.
- A will can address guardianship of minor children and establish trust for their benefit.
- It must meet specific legal requirements and be signed in the presence of witnesses.
- A will can be updated or revoked as circumstances change.
Without a will, the state’s laws of intestacy will dictate how your assets are distributed. Many times, it may not align with your desires.
What you must know about estate planning in California?
Estate planning simplifies the lives of your loved ones after your passing. It ensures that your assets are distributed among them according to your wishes. You can make specific bequests, designating certain items or amounts of money to particular individuals or organizations. This may include sentimental possessions, family heirlooms, or charitable donations.
It also covers any outstanding debts you may have. When a person passes away, their debts do not simply disappear. Instead, the debts become part of their estate, which includes their assets and liabilities.
In times of incapacity
When you’re sick or unable to make decisions, an estate plan covers who will handle your finances, pay bills, and manage your affairs according to your wishes. As a Californian, you have the following rights in situations of incapacity:
- Conservatorship Designation: Choose a trusted person to handle your affairs through a legal conservatorship if you can’t manage them yourself or lack a durable power of attorney.
- Nomination of a Guardian for Yourself: Nominate someone to make personal care decisions on your behalf if you become incapacitated.
- HIPAA Authorization for Agents: Grant designated agents access to your medical information for informed decision-making.
- Instructions for End-of-Life Care: Express your preferences for end-of-life care, including life-sustaining treatments, in advance healthcare directives or a separate document.
- Communication with Healthcare Providers: Share important legal documents with healthcare providers to ensure they understand your wishes and can collaborate with your agents.
- Advance Healthcare Directive: Appoint a healthcare agent and outline medical treatment preferences for future incapacitation.
- Durable Power of Attorney for Finances: Designate a trusted individual to handle financial and legal matters on your behalf.
- Living Will: Specify end-of-life care preferences and extraordinary medical interventions.
Is Having an Estate Plan Necessary in California?
If you don’t have a well-thought-out estate plan in place, it can create potential challenges and uncertainties for your loved ones after you pass away. Without a plan, your assets may be subject to probate, a lengthy and costly legal process that can tie up your estate for months or even years. This can impose unnecessary financial burdens and emotional strain on your family during an already difficult time.
As they say, money can bring out the worst in people, and without a documented plan, family members may engage in disputes over their entitlement to your assets. This can lead to potential conflicts and irreparable damage to relationships.
But, with clear instructions in your will or trust, the distribution of your assets can be aligned with your wishes. Your intended beneficiaries may receive the inheritances you intended for them, and the process can become easier and less costly for your loved ones to navigate.
Also, with an estate plan, decisions about your healthcare and end-of-life preferences won’t be left to others. Your desires regarding medical treatments, life support, and funeral arrangements will be heard and fulfilled.
When you die without a will in place, that’s called dying intestate, and the laws of your state will determine how your assets are distributed. This can result in outcomes that may not align with your wishes or the best interests of your loved ones.
Although it may not be the easiest subject to broach, estate planning is a meaningful and responsible step to take.
Top 3 Myths about Estate Planning in California
Myth #1: “I don’t need estate planning because I don’t have a large estate.”
Fact: Estate planning is not only about the size of your estate. It involves preparing for the distribution of assets, appointing guardians for minor children, healthcare decisions, and more. Without a plan, state laws dictate how your estate is distributed, which may not align with your wishes.
Myth #2: “I’m too young to start estate planning.”
Fact: Estate planning is essential regardless of age. Accidents and unexpected events can happen at any time. According to a 2023 survey by caring.com, 24 percent of individuals aged 18 to 34 in the United States have a will. It’s never too early to start planning for the future.
Myth: “Creating a will is enough; I don’t need any other documents.”
Fact: While a will is important, it may not cover all aspects of estate planning. Other documents like a durable power of attorney, healthcare directive, and trust can provide additional protection and control over your assets and healthcare decisions.
When Is the Right Time to Have an Estate Plan in California?
Let’s look at some practical scenarios to understand when creating an estate plan is crucial.
Starting a Family
When starting a family or expecting a child, create an estate plan to choose guardians for your children. This ensures their care by trusted individuals if something happens to you and the other parent.
Purchasing Property or Valuable Assets
If you’ve acquired property or valuable assets, establish an estate plan to determine their distribution and protect their value for future generations.
As retirement nears, review and update your estate plan to ensure your assets are distributed according to your wishes, minimize taxes, and maximize the estate’s value.
Experiencing Health Issues
For serious illnesses or health conditions, create or update your estate plan to align medical decisions with your values. Address healthcare directives and powers of attorney to empower trusted individuals to make decisions for you.
Blended Families or Divorce
In blended families or after a divorce, revisit your estate plan to reflect current family dynamics and intentions. Update beneficiary designations, revise guardianship appointments, and make necessary adjustments to protect the interests of all family members.
Starting a Business
When starting or owning a business, incorporate business succession planning into your estate plan to ensure a smooth transition, protect your legacy, and provide for your loved ones financially.
Major Life Events
Marriages, divorces, births, or deaths in the family often necessitate a review of your estate plan. Adjust your plan to accommodate new family members, remove former spouses, or include individuals who have become important to you.
Value-Based Estate Planning: Trusting the Experts to Design Your Ideal Plan
While it may not be easy to discuss, estate planning is a meaningful and responsible step. Value-based estate planning is a valuable tool for individuals of all financial backgrounds, aligning personal values, goals, and priorities with the estate plan.
To ensure a legally sound and tailored plan, seek the expertise of estate planning professionals. Consult with an experienced estate planning attorney to guide you through the complex laws and create a comprehensive estate plan that reflects your unique needs and objectives.