Securing Your Future with a Comprehensive Estate Plan: Understanding the Key Components

Estate planning allows you to ensure that your property and assets are distributed to your loved ones, according to your wishes and in a way that minimizes your tax obligations and legal costs. As you can imagine, it’s a very important tool for real estate investors. While estate planning can seem daunting, it can be made much easier by focusing on the 5 key elements. 

As professional property managers here at Coastline Equity, we often work closely with estate planners and investors who are looking to pass down their real estate investments to the next generation. And so, in this article, we want to go over these 5 key elements and explain why they are essential components of a well-planned estate.

Wills 

A will is a legal and written document that outlines how a person's property and assets will be distributed after their death. It is important for individuals to have a will to ensure that their property is distributed according to their wishes, rather than defaulting to state laws, as well as to avoid confusion or conflict amongst the will’s beneficiaries. 

A will becomes effective upon the death of the person who wrote it and must be probated in court to be legally binding. The probate process involves the court reviewing the will and determining its validity, as well as supervising the distribution of assets according to the instructions in the will. A probate court may take 12-16 months to chart out a distribution plan, and can cost up to 10 percent of your estate’s value. 

It is important to have a valid will in place to ensure that your assets are distributed according to your wishes and to avoid disputes among family members. It is also a good idea to periodically review and update your will to reflect changes in your life and circumstances. 

Trusts 

Trusts are legal structures that can be used to manage and distribute assets. It allows a third party (in many cases, a legal representative or a person’s decedents) to hold and direct your assets within the trust fund. 

The person or entity that is appointed to manage and distribute assets held in your trust is called the trustee. The trustee has a fiduciary duty to act in the best interest of the trust beneficiaries and to administer the trust according to its terms. The trustee is responsible for investing and protecting the trust assets, making distributions to the beneficiaries, and carrying out the specific instructions outlined in the trust agreement.   

The trustee has a fiduciary duty to act in the best interest of the beneficiaries and to follow the terms outlined in the trust document. Trusts can be revocable or irrevocable. 

A revocable trust, also known as a living trust, can be amended or revoked by the grantor during their lifetime. This type of trust allows the grantor to retain control over the trust assets and change their mind about the trust's terms and beneficiaries. 

On the other hand, an irrevocable trust cannot be amended or revoked once it has been established. The grantor gives up control over the assets placed in the trust and cannot make changes to the trust agreement. What would be the benefits of forfeiting that control once the trust is created? 

An irrevocable trust can offer certain benefits that a revocable trust does not, including: 

1. Estate Tax Reduction: An irrevocable trust can remove assets from the grantor's taxable estate, reducing the overall estate tax liability. 
2. Asset Protection: Assets placed in an irrevocable trust are typically protected from creditors and bankruptcy, making them a useful tool for protecting wealth. 
3. Certainty and Control: The grantor can specify the terms and conditions for the distribution of assets to beneficiaries in an irrevocable trust, ensuring that their wishes are followed after their death. 
4. Avoidance of Probate: Assets in an irrevocable trust are not subject to probate, saving time and reducing the cost and public nature of the probate process. 
5. Special Needs Planning: An irrevocable trust can be used to provide for a beneficiary with special needs without jeopardizing their eligibility for government benefits. 

In summary, while a revocable trust offers flexibility and control to the grantor, an irrevocable trust provides greater benefits for estate planning and asset protection. The best choice depends on the specific goals and circumstances of the grantor. It is always best to consult with an estate planning attorney to determine the best option for your individual needs. 

Power of Attorney 

A power of attorney is a legal document that allows an individual to appoint someone else (known as the “agent”) to handle their affairs in the event that they become incapacitated. It is important to have power of attorney in place to ensure that someone trusted is able to make decisions on your behalf if necessary. 

There are several types of power of attorney, including: 

1. Durable power of attorney: This type of POA remains in effect even if the principal becomes incapacitated or unable to make decisions for themselves. 
2. Springing power of attorney: This type of POA only takes effect when a specified event occurs, such as the incapacity of the principal. 
3. Limited power of attorney: This type of POA gives the agent limited authority to act on behalf of the principal, such as the ability to sell a specific piece of property. 

The authority granted by a power of attorney can be as broad or as limited as the principal wishes. The POA should specify what actions the agent is authorized to take and any restrictions on their authority.

Advance Health Care Directive 

An advance health care directive is a legal document that outlines an individual's wishes for their medical treatment in the event that they become unable to make decisions for themselves. It is important to have an advance health care directive in place to ensure that medical providers are aware of your wishes and can act accordingly. 

Examples of directives that can be included in an Advance Health Care Directive include: 

1. Life-sustaining treatment: A directive regarding whether the person wishes to receive life-sustaining treatment, such as artificial feeding and hydration, if they have a terminal illness or are in a persistent vegetative state. 
2. Pain management: A directive specifying the person's preferences for pain management, such as the use of pain medication or the use of palliative care. 
3. Organ and tissue donation: A directive indicating whether the person wishes to donate their organs or tissues after death. 
4. Mental health treatment: A directive regarding the person's preferences for mental health treatment, such as the use of psychotherapy or medications. 
5. End-of-life care: A directive specifying the person's wishes for end-of-life care, such as hospice care or the use of a do-not-resuscitate (DNR) order. 

An Advance Health Care Directive can be a valuable tool for ensuring that a person's medical treatment is consistent with their wishes, even if they are unable to communicate those wishes themselves. It is important to have an Advance Health Care Directive in place and to periodically review and update it to reflect changes in your health and preferences. 

Estate Taxes 

Estate taxes are taxes that are levied on a person's estate after their death. Laws vary throughout the country but, generally, only estates valued at or above certain amounts are subject to estate taxes. As of 2022, California does not have an estate tax; however, residents are still subject to federal tax. 

What Is the Federal Estate Tax Threshold? For 2022, the threshold for the federal estate tax is presently $12.06 million for individuals, $24.12 million for married couples. This means that, if your estate is valued at or above these levels, it will be subect to the federal estate tax. This tax rate can be as high as 40%. 

It is important to be aware of the potential estate tax implications when planning your estate and to consult with a financial advisor or estate planning attorney to determine the best course of action. 

Conclusion 

By considering these 5 elements of estate planning in California, individuals can ensure that their wishes for the distribution of their assets are fulfilled, minimize taxes and legal costs, and provide for their dependents. It is important to work with a qualified estate planning attorney to create a comprehensive plan that meets your individual needs and goals. If you would like help in finding a trusted estate planner, feel free to reach out to us through our website, www.CoastlineEquity.net