Why should I have an estate plan?
Most people don’t realize that there are more ways to control who inherits their property than the typical will. Or, people assume that it will be relatively simple for their family members to figure out what to do with their assets in the event of their death. In reality, inheritance without a robust estate plan quickly gets complicated, time-consuming, and even costly for your heirs, which is why everyone should make a personalized estate plan.
What generally happens to my property after I die?
Regardless of what kind of estate plan you have—including if you do not have an estate plan in place in the first place—your property typically goes through a process called probate. A probate court typically needs to assess the validity of your will, take stock of your assets, identify your heirs, satisfy any debts or creditors, then oversee the distribution of any remaining inheritance. The process will also require a statute-mandated fee from your estate for doing so—in some cases, up to 4%! This quickly amounts to tens of thousands of dollars for the average estate in the Bay Area.
Probate proceedings also take a minimum of 4 months but usually more than 1 year to fully resolve, which means your heirs cannot receive anything from you in that time. And if you own property in multiple states or countries, your estate will need to go through probate in each of those jurisdictions as well. As you can see, the cost and time adds up quickly, which is why most Californians prefer to avoid probate.
Why does probate exist? Is there any way to avoid it?
Probate was originally designed to help avoid fraud, both for the heirs and any creditors. Back when wills were mostly handwritten, probate courts were necessary to confirm there was no foul play in the will that was presented, either through a forgery or unethical influence when the estate owner was in a delicate mental or emotional state. Probate courts are still necessary today to settle disputes over inheritance claims or unpaid debts. However, most clients don’t anticipate such issues, which is why they would rather the money that would typically go to a probate court to go to their heirs instead.
Now, there are a few exceptions to the rule that all estates must pass through probate. First, if your physical and liquid assets (with some exceptions) total less than $184,500, California law does not require your estate to go through probate court. This amount is set by state statute and does not include retirement accounts, life insurance, annuities, joint tenancy property, and payable-on-death accounts. Second, if you place most of your assets in a living trust such that your property outside of the trust totals less than $184,500, your estate does not need to go through probate. It is for this second reason that many clients prefer to use a living trust as the main vehicle of their estate plan.
If I don’t want to avoid probate, do I still need an estate plan?
Whether you choose to avoid probate or not, there are still significant financial and emotional benefits to planning your estate in advance. Compared to prior times where individuals held all their assets at a single bank or in a family property, people today typically have diversified assets: cash, valuables, multiple bank accounts, investment portfolios, insurance, retirement accounts, real estate, vehicles, and more. Those without an estate plan run the significant risk that assets will be overlooked or simply lost in the difficult time after one’s passing.
There is also the peace of mind you can give your family members when you clearly delineate your wishes in advance. Though most executors of an estate will do their best to divide your assets in the way they think you would have wanted, it is best for all parties when you communicate your desires—from who should take custody of a minor child or pet to how gifts of property should be distributed.
For these reasons and more, we highly recommend all individuals to craft a personalized estate plan today.