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Less Taxing Matters

Upcoming estate tax changes could affect you

Now is the time to review your family’s current estate plan

On Jan. 1, 2013, estate-planning attorneys will be greeting not just a new year, but the fact that the estate tax may apply to any estate of more than $1 million.

Whether you find yourself under or over the new limit, the change is an excellent reminder to review your current estate plan. If you already have one, is it vulnerable to this lower exemption amount? Conversely, if you’ve never even considered estate planning, now is a great time to take action.

First-time planning is simple. A basic will can be created using a reliable, inexpensive resource like the Quick & Legal Will Book (published by Berkeley’s NOLO Press). Why act now? The simplest answer is that California’s default inheritance rules rarely mirror our own wishes. Creating a will ensures that your desires for the division and distribution of your property are known and followed.

If you already have a basic will, congratulations – but is that enough? Those who own any kind of real estate or have a net worth of greater than $150,000 should consider creating what is known as a living trust.

Unlike the more advanced techniques used by those with estates over $1 million, a living trust is a cost-reduction tool, not a tax reduction tool. A living trust reduces costs by minimizing the decedent’s assets subject to probate, which is an expensive and time-consuming process in which your will is filed with a court and then reviewed by a judge, your property inventoried and appraised, legal debts are paid, and the remaining assets distributed. You will want to avoid this process for two reasons:

Time delay of probate: Probate administration often drags on for a year or more.

Expense of probate: In California, probate fees are set by law and they are significant. If the probate estate value is between $100,000 and $1 million, probate attorney and executor fees each total 2 percent of the estate value plus $3,000.

Worse yet, the probate estate value used to calculate probate fees typically exceeds your actual net worth. To illustrate this unpleasant fact, consider a typical Marina or Cow Hollow condo with a market value of $750,000. The single, unmarried owner holds direct title and owes $700,000 on the mortgage when she dies unexpectedly. This condo, because it was not titled with a living trust, would be included in the probate estate, adding $750,000 to the probate estate value despite the fact that the owner only had $50,000 of actual equity. The result, if the decedent had no other assets: fees of approximately $36,000 to probate a net estate of just $50,000!

Living Trust is About Choice

Property held by a living trust is not subject to the cost and delay of probate administration. Instead, upon your death, the trustworthy individual you named as trustee carries out a series of simple administrative steps, ultimately making either a one-time or on-going distribution from your estate to your chosen beneficiaries. The power of the living trust lies in customization. Some individuals choose to provide broad powers to their trustee to act for the beneficiaries’ best interest, while others spell out their wishes in great detail, including provisions for long-term financial support for minors or adults, specific property distribution, or contingent, conditioned or shared gifts. Ultimately, a living trust is about choice: choice to name your beneficiaries and how and what they will receive, all while avoiding the cost and delay of probate.

The living trust is typically paired with directives covering medical and financial decisions in case of incapacity. The complexity of these documents is greater than a basic will and, for this reason, they are best created by an attorney with experience in the area.

Next month, I’ll address estate planning for married couples with a combined net worth of over $2 million using a bypass trust. The following month, I’ll address estate planning for individuals with a net worth of greater than $1 million. If you fall into either of these categories and want to learn more immediately, consult with a local estate-planning attorney.

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Attorney Andrew L. Jones concentrates his Pacific Heights practice in tax law, business law and estate planning. This article is intended to provide general information and should not be considered legal, tax or financial advice. E-mail: AJ@AndrewLJones.com

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