Estate Planning Basics Information Workshop presented for

Sacramento County Employee’s Retirement System

Workshop Purpose  Estate Planning Basics •

What Everyone Needs To Do

• Common Planning Mistakes • Wills • Revocable Living Trusts • Financial Power of Attorney • Advance Health Care Directive • Estate Taxes

We All Know that Estate Planning is Important, but...  We are so busy with…

work, school, taking care of the children, financial obligations, all the stuff that needs to be done at home, and sometimes, a vacation

 We are always meaning to

“get around to it….”

We All Know that Estate Planning is Important, but... Most of us end up leaving our loved ones without any plan or guidance…

What Happens When You Haven’t Done Estate Planning?  Unnecessary Court Proceedings & Legal Costs  Delays and Distress for Loved Ones  The wrong people get the wrong property  Children’s inheritances wasted  Major intra-family problems are created  Families can lose much of what it took a

lifetime to build

The Commonly Asked Question:

Do I Need a Will? Do I Need a Trust?

Do you want to leave your family with Stress and a Big Mess?

Then you need A PLAN… Your estate plan may be written in a Will or in a Trust, but more than that is required…

Definition of Estate Planning  Good Estate Planning will:  Give what you have,  To whom you want,  When you want,  In the way you want,  At the least possible cost.

What Everyone Needs To Do: Will or Living Trust Your Distribution Plan; Avoid Probate Court

Power of Attorney Financial Affairs Designate someone to manage your financial and legal affairs; Avoid Conservatorship Court Proceeding

Advance Health Care Directive Designate someone to make medical decisions upon incapacity; Provide Instructions for Life Support; Avoid Conservatorship Court Proceeding

Special Planning Young Child

Special Needs Child

Domestic Partner

Life Partner

What Is an Estate?

 Everything you ow n, including . . .    

House; personal property, cars…. Bank Accounts ,Investments, Mutual Funds Life insurance death benefits Qualified Retirement Plans: IRAs, 457, 401K

 All assets are counted as your “estate”

The Goals of your Estate Plan  Organize your Estate assets and benefits  Anticipate and eliminate potential problems  Direct the distribution of assets and benefits : 

To whom you want, in the way you want, when you want

 Choose the people who will take care of your

children, and their inheritance  Choose the people who will take care of you if your are disabled  Leave a Good Impression organized thoughtful caring

Obstacles to Achieving Your Goals The 3 Most Common Planning Mistakes:  Intestacy  Joint Ownership  Beneficiary designations

Common Mistake #1: Intestacy the Automatic Estate Plan  Without a Will or Trust, State Law will determine

who gets your property.  Guarantees probate, substantial fees and costs (if your “probate estate” exceeds $100,000)

 Always Creates STRESS for Loved Ones  Alm ost Alw ays Creates CONFLICT for Loved Ones  Your Legacy:

Everyone BLAMES YOU for the BIG MESS

Common Mistake #1: Intestacy the Automatic Estate Plan I ntestacy is the w orst plan

$$$$$ $$$$$

$$$$$ $$$$$

Brother vs. Sister Step-Children vs. Step-Mother Children vs. Step-Brother/Sister

Common Planning Mistake #2: Joint Tenancy  You own all of asset

with someone else as “Joint Tenants”  At your death, surviving Joint Tenant takes all  You CANNOT leave your interest to anyone else Your W ill or Trust does not control Joint Tenancy P roperty

Brothers John and James buy Vacation Home Vesting Deed, 2002: “John Sample & James Sample Joint Tenants”

John Sample, R.I.P. 2006 John’s Distribution Plan: “ I Leave my Estate to my Children”

John’s ½ interest in Vacation Hom e does not pass to children After John’s Death, James is 100% Owner

Problems with Joint Tenancy  Passes property to unintended heirs  Excellent for creditors of joint owner  Can cause unnecessary taxes

CONCLUSION: Don’t use joint tenancy without professional advice.

Common Planning Mistake #3: Beneficiary Designations  Life Insurance Policy  Annuity  IRA  401k Plan & other Qualified Retirement Plans

These assets have a “pay on death” beneficiary.

Problems with Beneficiary Designations  The wrong people can get the money  Outdated beneficiary selections  No Control over the money

Who are Your Beneficiaries?  IRA

457 401k Life Insurance  When was the last time you updated your beneficiaries?  Who will get the money: Your parents? Your ex-spouse? Your brother or sister? Your young children? No-one? (your “estate”) WHERE WILL THE MONEY GO?

Naming Children as Beneficiaries

BOB & MARIE SAMPLE $500,000 Life Insurance on Each Beneficiary = Spouse Contingent Beneficiary = Julie (8) and Jim (4) TRAGEDY STRIKES: BOB & MARIE ARE GONE What happens now?

What Happens to the Insurance Money when Bob and Marie are Gone? The Sample Family Estate Plan: (sorry kids, we didn’t get around to it , but we intended to….)

What Happens to the Insurance Money when Bob and Marie are Gone? The Automatic Plan:  Guardianship Proceeding  Court Jurisdiction  Distribute all money when

Child is an Adult

What Happens to the Insurance Money when Bob and Marie are Gone? The Automatic Plan: When does your child become an adult?

What Happens to the Money AT AGE 18! I f you don’t have a plan

Naming Your Child as Beneficiary Seems like the Right Thing To Do

But, Remember, Children Grow Up

Beneficiary Designations Alone are Not Enough  You need a plan for the Insurance

Proceeds

 Your Children are counting on you  When will your children be old enough to

handle the money?

Review: Common Planning Mistakes  Intestacy – the worst plan  Joint Tenancy – it’s not yours when you die  Beneficiary Designations – no control

What Everyone Needs To Do  Will  Living Trust  Power of Attorney Financial Affairs  Advance Health Care Directive

Wills One Problem:  The majority of us don’t leave a Will

Wills

 Written instructions for distribution

of your estate  Are effective on death  May not control all property

The Result of a Will  Wills Guarantee Probate for estates in excess of $100,000

Estates valued less than $100,000 can pass through California’s “Small Estate” rules without formal probate;

& “pay on death” accounts do not require probate (life insurance, IRA, etc.)

Probate  The Court-Supervised transfer of assets from the

deceased to the living

 “Dead P eople Don’t Sign Deeds”  The Process: File Petition for Probate Appoint personal representatives Locate and value the property

 The Purpose and Goal: Obtain Court authority to handle and distribute the deceased’s property

How A Will Works To Distribute Your Property After Your Death House Deed: Harry Baxter

$ Bank Accounts $ owner: Harry Baxter

$ Mutual Funds $ owner: Harry Baxter

$ Other Assets $ owner: Harry Baxter

Court Jurisdiction Court authorizes sale of assets and payment of debts. At end of probate, property distributed by court order: 1/3 = Julie 1/3 = Tom 1/3 = Jane

Will Filed in Probate Court

Probate  In order to conclude Probate:

Pay the personal representative Pay the Attorney Pay all other creditors Resolve all controversies Distribute property to beneficiaries

The Cost Of Probate  Generate executor and attorney fees  Taken

off the top

 Average probate fees from 4-8%  Probate can take 1-2 years to complete

A Will is a Basic Estate Planning Tool  Everyone should have a Will - at a minimum  Leave instructions - a matter of respect  Some people want to do more than the basics

Revocable Living Trust  A Revocable and Changeable Contract  Created during you Life  A Single or Joint Trust  The Trust owns Property and Assets  All Trusts have 3 Parties: Trustmaker Trustee Beneficiary

3 Parties To A Revocable Living Trust  Trustmaker: The person who creates the Trust (You).

 Trustee: The person managing the Trust property (You).

 Beneficiary: The person who uses and receives the benefit of the trust property (You). While you are alive, and not incapacitated, you retain complete control in the role of all three parties.

Revocable Living Trusts  Place your assets in your Trust  

Real Property (residence, rental) Financial Accounts

 Coordinate beneficiary designations  All property held for your benefit  

During you life, with complete control or during you disability, by your Trustee

How A Living Trust Works During Your Life House Deed: Baxter Trust

$ Bank Accounts $ Owner: Baxter Trust

$ Mutual Funds $ Owner: Baxter Trust

$ Other Assets $ Owner: Baxter Trust

Complete Control by Harry & Catherine As Co-Trustees.

The Baxter Living Trust Trustees: Harry & Catherine Beneficiaries: Harry & Catherine

How A Living Trust Works House Deed: Baxter Trust

$ Bank Accounts $ Owner: Baxter Trust

After Your Death Complete Control. Jane Baxter acts as Successor Trustee.

$ Mutual Funds $ Owner: Baxter Trust

$ Other Assets $ Owner: Baxter Trust

No court proceeding required.

The Baxter Living Trust Trustees: #1: Successor Trustee Jane Baxter (daughter) or

#2: Successor Trustee Ryan Smith (friend)

Beneficiaries: 3 Baxter Children in equal shares.

How A Living Trust Works $ Bank Accounts $ To $ Mutual Funds $ $ Insurance $ All assets sold by Trustee. Insurance paid to Trustee. Proceeds held in Trust.

Distribute Your Property After Your Death The Trustee has complete control of all assets.

Trustees: #1: Jane Baxter (daughter)

Trustee distributes proceeds to children:

1/3 = Julie 1/3 = Tom 1/3 = Jane

The Baxter Living Trust

No court proceeding required.

Beneficiaries: 3 Baxter Children in equal shares.

How A Living Trust Works If You Are Incapacitated House Deed: Baxter Trust

$ Bank Accounts $ Owner: Baxter Trust

$ Mutual Funds $ Owner: Baxter Trust

$ Other Assets $ Owner: Baxter Trust

Complete Control by Trustees. Catherine acts as Trustee for Harry while he is incapacitated. No court proceeding required.

The Baxter Living Trust Trustees: #1: Catherine #2: Catherine as Trustee for Harry Beneficiaries: Harry & Catherine

How A Living Trust Works $ Bank Accounts $ To Take Care of Your Children $ Mutual Funds $ After Your Death $ Insurance $ All assets sold by Trustee. Insurance paid to Trustee. Proceeds held in Trust.

Complete Control by Trustee.

Trustees: Ryan Smith

Each child’s share held in Trust. Money used for child’s school, support, house. Children’s Trust Distributions: 1/4 at age 25; 1/2 at age 30; all at age 35.

The Baxter Living Trust (friend)

No court proceeding required.

Beneficiaries: 3 Baxter Children in equal shares.

Revocable Living Trusts  Trusts are easy for you to create

No lifetime income tax consequences  No other persons involved  Trusts are easy to maintain  Changes are easy to make, and not often needed  No extra record keeping  No recurring fees or costs 

Additional Estate Planning Tools  There are Additional Decisions to make and

Documents we all need, sooner or later

 “Later” may be too late  If you don’t execute Power of Attorney and

Advance Health Care Directive, then if you are incapacitated, it is likely that you will require a Con$ervator$hip Proceeding.

Power of Attorney for Financial Affairs  Who will handle your financial affairs if

you are not able to do so? 

Incapacity or Unavailability

 A Power of Attorney can designate your Agent to handle your

financial affairs on your behalf 

banking, real property, tax matters, etc.

 Everyone over age 18 should have a Power of Attorney for

Financial Affairs

Advance Health Care Directive

Advance Health Care Directive  Who will make medical decision for you if you cannot

communicate with your physician?

 An Advance Health Care Directive is a single legal document

that serves two purposes:

1. Designate your Health Care Agent to make general medical decisions on your behalf 2. You can also make your desires known regarding end-of-life decisions and life support. You make the decision; your Agent follows your instructions.

Everyone over 18 needs a Health Care Directive

Special Planning  For Child under age 18, designate a “Guardian of the Person” who will raise and care for the child.

 For a Special Needs Child, establish Special Needs Trust to provide lifetime financial security and allow continuance of government support

 For Domestic Partners, establish basic estate plans, plus provisions dealing with co-owned property and separate property; decide whether to “opt out” of Domestic Partner laws and rules.

 For Life Partners, establish basic estate plans, plus provisions dealing with co-owned property and separate property

And What About Estate Taxes?

Good News!

The Federal Estate Tax 2009 Estate Size

Estate Tax

$ 3,500,000

$ none

Estate Tax Planning for Married Couple with more than $7,000,000 in 2009 Harry & Catherine Baxter Living Trust $7,000,000 Estate At Harry’s death, the Baxter Trust

Harry Baxter Family Trust = $3,500,000

turns into Two Trusts:

Catherine’s Survivor’s Trust= $3,500,000

At Catherine’s death,

Catherine controls both

Both Trusts distributed to Baxter Children

Trusts during her lifetime

Estate Tax = $0

Baxter Children Inherit $7,000,000

W ithout Trust Planning, Estate Tax Bill = $1,500,000

Estate Taxes No one ever has an estate tax “problem” If you have estate tax issues , there are plenty of planning tools to save estate taxes. You have the power and resources to implement those tools.

Conclusion & Review: Estate Planning Basics  Will or Living Trust Trust for Children; Guardianship Special Needs Trust for Special Child

 Advance Health Care Directive You need to appoint someone to make medical decisions when you can’t; If desired, state your decision regarding life support.

Review: Estate Planning Basics  General Financial Power of Attorney: Authorize someone to act on your behalf in financial matters.

 Memorial Instructions: You should let people know what you want done.

 Estate Planning Support Team: Key family member or friend. Financial Planning Advisor. Estate Planning Attorney.

Estate Planning Basics  How To Do Estate Planning:   

Consult with Estate Planning Attorney Hire Estate Planning Attorney Self Help Power of Attorney Forms - www.

 What will it Cost? The Range of Fees: “DIY” Costco Software Attorney

WHEN IS THE RIGHT TIME TO DO ESTATE PLANNING?  W hat are your P riorities?

Planning your Next Vacation?

Doing the Yardwork?

Taking Care of Sparky?

W hat About Taking Care of Your Fam ily and Loved Ones?

Good Estate Planning Will Give what you have to whom you want, when you want, in the way you want. And do it all at the lowest possible cost.

Good Estate Planning

Good Estate Planning will protect your loved ones and keep all of your assets with your family.

Thank You!