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San Fernando Valley Probate & Estate Administration Law Blog

Avoiding estate depletion

Many of the Los Angeles County residents who come to see us here at the law offices of Alice A. Salvo have worked hard their entire lives to be able to offer some bit of an estate to their children. What many don’t understand is that even if one has a prepared a will and named beneficiaries, it is possible that the expenses of both life and death can end up depleting the assets to one’s estate before they’re ever able to be distributed. In this post, we’ll examine exactly how estate depletion occurs, and what, if anything, can be done to avoid it.

Few may realize this, but it actually can cost quite a bit to die. Medical bills, caretaker expenses, and funeral costs, not to mention any outstanding debts accrued by the deceased can end up leaving family and friends owing a small fortune. Most may assume that life insurance will cover these expenses. Yet there are two problems with that assumption: first, a 2013 Harris Interactive Study conducted for showed that nearly 40 percent of American adults don’t have life insurance. Second, there’s likely a significant number beyond that who have it, but not enough to cover the aforementioned expenses. In such an event, funds are pulled directly from the estate to cover these expenses before any thought is given to dispersing them to heirs.

Is your living trust insured by the FDIC?

If you're like most in Woodland Hills, then you've probably been told at least once in your adult life that you need to start thinking about estate planning. In the world of estate planning, the buzzword that everyone is told to avoid is probate. In order to avoid probate, advisors will often recommend putting your assets into a living trust. Yet this raises the question of whether or not you're insured against the potential failure of the bank holding your trust.

The Federal Deposit Insurance Corporation offers insurance to at least $250,000 per bank for each the checking, savings, or money market accounts, or certificates of deposit that you hold there. Many of the other financial products offered by banks, however, are not covered. These include stocks, bonds, mutual funds, and annuities. FDIC protection for living trusts is available, yet to qualify for special coverage considerations, the trust account must meet all three of the following criteria:

  •          The language of the account title must include terms indicating its purpose, such as "living trust," "payable on death," or "in trust for."  
  •          The beneficiary must be in a position to collect interest on the trust's assets at the time of the bank's failure
  •          The beneficiary must be either a living person, a nonprofit organization, or an IRS-recognized charity

A look at wealthy Americans' views on inheritance

California residents who are concerned about issues with estate beneficiaries may wish to know the results of an estate planning survey of wealthy Americans. Their views on whom to leave their assets to and how much to give may be instructive.

It is estimated that from 2007 to 2061, a total of $59 trillion will be passed down to beneficiaries. For those who have a high net worth, generally seen as over $5 million, family is the main concern. A survey of 206 wealthy individuals revealed that passing their assets on to their children and other family members is their most important estate planning goal, with philanthropy first in the minds of only 4 percent. Another major concern is minimizing taxes in order to preserve assets for their beneficiaries. Many of those surveyed plan to give to family members during their lifetimes in order to limit estate taxes.

Planning for possible incapacity in California

People who are planning their estates often fail to plan for the possibility that they may become incapacitated due to an accident or illness. If a person does not include incapacity planning as a part of the overall estate plan, other family members may have difficulty with being able to take care of the person's financial needs.

There are several available options people may want to consider. A durable power of attorney will allow a designated agent to make financial decisions while the person is incapacitated. This can include the ability to make financial transactions, pay bills and conduct business on the incapacitated person's behalf. People may choose to establish a springing power of attorney, which only takes effect if two doctors agree that the person is incapacitated.

Preparing a will as part of estate planning

California residents who are over the age of 18 may want to consider writing a will. A will is a part of most estate plans, and without one, the state often decides how an individual's assets are distributed after their death. A will appoints beneficiaries who will receive those assets, and those beneficiaries might be friends, family or organizations, such as charities.

A will also needs an executor. This can be a friend, relative, attorney, financial planner or some other professional. The executor inventories the estate, distributes assets, and pays debts and taxes. This may be a complex job depending on the estate, so an individual appointing an executor may want to ask the person if they are willing to complete the task.

The importance of estate planning

California members of the Baby Boomer generation have traditionally been more concerned with maximizing income and planning for retirement than they have been with estate planning. However, as the boomers enter their sixth decade, it becomes more important to have a plan. This may help to protect their worldly possessions for the next generation and save them from certain difficulties as the details of the estate are worked out.

It is important to leave some kind of document specifying the distribution of property and goods and making the wishes of the benefactor clear. Even after these documents are in place, it may be necessary to revisit and revise them as situations warrant. Updating the beneficiaries may be necessary with older wills and estate plans because situations may have changed in the time since the relevant documents were originally drafted.

Cash-value life insurance as part of an estate plan

Some California residents may benefit by choosing to purchase cash-value life insurance insurance policies as a part of their overall estate plan. Those most likely to do so are people who already have enough assets for their own retirements, are older and who are risk-averse.

Many investors, wary of the vagaries of the marketplace, place money into low-yielding investment tools such as certificates of deposit or money market funds, with the idea that the money will be earmarked for a designated beneficiary. These investors may do better by instead liquidating the low-yielding asset, then using the money to purchase cash-value life insurance for the named beneficiary instead.

Options for estate plans vary widely

As part of their estate planning, California residents may want to leave portions of their assets to family and charity, but they may also want to go beyond those two categories. Estate tax exemptions are higher than they used to be, so individuals concerned about taxes have more flexibility as to where they might direct their money.

For example, while the legal system primarily recognizes family as heirs, individuals have the option to leave less of their estate to family or even to disregard family altogether. Instead, an individual might opt to leave some or all of their assets to a partner they are not married to, friends or domestic employees. With this in mind, individuals who are estate planning might want to consider whether to expand their circle of beneficiaries beyond family.

Making estate planning easier for the family

Some California residents may know that one facet of estate planning involves explaining to family members what the estate plan entails and what to do if that individual should die. Because an estate plan may be complex, there might be an easier way to take care of those details without unduly stressing family members.

One estate planning suggestion is to place the details of the plan with an attorney so that beneficiaries may make a phone call to that attorney to find out what the estate entails and where the documents for the estate are located. This may include a will and information on retirement accounts, insurance policies, banking and business accounts, and other assets. Instructions about paying bills or other ongoing financial matters may also be included in the estate plan.

Duties of a trust administrator

Residents of California may wonder what is involved in trust administration. A trust has two parts, income and principal, and the administrator, also known as the fiduciary, is in charge of managing both of those parts. The principal consists of all the assets that are in the trust, while the income is paid out to beneficiaries. The beneficiary may also eventually inherit the principal or receive income until death. At that time, the principal may pass to another beneficiary.

A fiduciary is responsible for making sound decisions in managing the assets and investments and avoiding taxes as much as possible. As a result, a financially inexperienced fiduciary is often advised to seek expert advice. Beneficiaries will want to know that fiduciaries are investing wisely, and a written investment plan can help reassure heirs about the fiduciary's intentions.