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Newark Family And Estate Law Blog

The estate tax is a tax imposed on a person’s assets after death. California does not have an estate tax, but there is still a federal estate tax that might need to get paid.

In preparing your estate plan, you should determine if your estate will owe tax and how to deal with it.

Exemption amounts and planning

The federal estate tax is only due on an estate when the total value exceeds $12.06 million in 2022. This is an exemption amount for each individual. Married couples can pass an unlimited number of assets to their spouse on death and can set up certain trusts that will allow each spouse a full individual exemption to effectively double the exemption amount.

Tax rates

Tax rates on an estate increase as the total value over the exemption amount rises. The rates start at 18% and go up to 40% for estates that have a value of more than $1 million over the exemption amount.

Paying the tax

If you know that your estate will owe federal tax, you may want to plan how that tax will get paid. You can prepare a certain amount of cash assets available to the estate for its obligations. If sufficient cash is unavailable, your beneficiaries may have to liquidate other assets, such as a business or real estate, to pay the tax.

You probably want as much of your hard-earned wealth to go to your beneficiaries as possible. It is essential to plan for estate taxes to avoid paying more tax than necessary.

If the time is right for you to create your estate plan, there are certain elements to consider.

Here are four common mistakes you can avoid and retain estate planning control.

1. Forgetting about long-term care

The cost for home health care aides averages $50,000 per year. A private room in a nursing facility runs more than $100,000 per year. You must remember that 70% of people over the age of 65 will need long-term care. In view of this, you should investigate long-term health insurance early on since the cost increases every year.

2. Not planning for minors

You need to ensure proper care for minor children in the event of your unexpected death. You can designate a guardian in your will—but first, ask the person you name if they will agree to take on this responsibility.

3. Avoiding the impact of taxes

In California, the Franchise Tax Board does not levy estate taxes as such on an inheritance. However, your beneficiaries will have to pay income tax on certain assets. Inherited accounts such as a 401(k) are subject to required minimum distributions or RMDs, which are taxed as ordinary income. You can avoid this on behalf of your heirs with a Roth IRA conversion during your lifetime. Your attorney or accountant can help you understand how this works.

4. Failing to update your plan

Life is full of major happenings, and some are significant enough to affect your estate plan. For example, if you have a new grandchild, if you divorce or if a beneficiary dies, you should make the appropriate changes. A good rule of thumb is to consider an update every three to five years. Avoid mistakes, keep the information current and you will remain in control of your estate planning responsibilities.

An estate plan can help you plan for the future. With a well-written strategy, you can maintain control of your assets despite incapacitation or other serious changes in your life.

Keeping your plan updated will guarantee it continues to operate the way you intend. Significant changes in your life might require prompt and thorough modifications to your plan.

Life changes

There are numerous reasons why you might need to change your strategy. According to Bank of America, some reasons to modify your estate plan include the following:

  • You receive an inheritance
  • You give birth to or adopt another child
  • Changes to tax law
  • You divorce or remarry
  • You change your health care proxy or POA
  • You retire or develop a serious illness

Neglecting your plan after major events in your life may cause it to slowly fall apart. Without evidence of the changes you intend to make, the courts will follow the outline of your original plan. This can lead to disappointing outcomes that jeopardize the value of your assets and could result in them going to people you no longer associate with.

Periodic reviews

Even if you have not experienced any major changes, a periodic update will help you fine-tune your plan. Experts recommend this type of review every three to five years. You might consider involving your legal team in this review to provide insight into ways you can optimize your plan and improve its function.

Making changes in a timely manner can reduce the stress and confusion of trying to sort things out when it is too late. An updated estate plan can protect your money and provide comfort and clarification for your surviving family members.

No one expects to suffer debilitating injuries from a vehicle accident or to fall into a coma that could last indefinitely.

However, if the unexpected happens, your powers of attorney (POA) for healthcare and finances will provide the assistance you need. When is the best time to draft a POA?

About POAs

A power of attorney allows the person you choose to act as your agent and make healthcare or financial decisions on your behalf if you are unable to do so. A durable POA becomes active as soon as you sign it in your capacity as the principal. The POA for healthcare enables your agent to make medical decisions for you. The POA for finances gives your agent the authority to balance your checkbook, pay your bills, file your taxes and make financial decisions on your behalf.

Creating your documents

The earlier the better is the idea to keep in mind with regard to creating your healthcare and financial POAs. First, an accident or severe illness can strike regardless of age causing incapacitation. Second, the possibility of some level of dementia becomes a consideration as the years pass. You must be mentally competent to establish and sign a power of attorney document.

The proactive approach

Owing to circumstances beyond your control, you may not know your POAs have gone into effect and that your agent has stepped up to manage your healthcare and financial decisions. But your mind will be at ease once you create these documents, and should your care ever become an issue, your family will avoid the expense and complexities of obtaining guardianship.

When you and your spouse decide to split up, you may not have much insight into the process. A commonly divisive issue that comes along with it is how you and your spouse will divide finances.

The court prefers spouses to compromise, but that cannot always happen. As such, the state’s laws dictate how a judge will do things should it come down to it. Gain a basic understanding of how a judge may rule when it comes to who gets what.

What does equitable mean?

Under New York law, divorcing couples should equitably divide their property. While this sounds like it means equal, that is not the case. An equitable split is one that the court deems fair after weighing your and your spouse’s many contributions to the marriage. This may mean that one spouse gets more in a divorce than the other for many reasons.

What does the court consider a contribution?

So, what does the court look at when deciding who contributed what? While judges will want to look at income and the financial aspects of what each spouse brought, it does not end there. In an equitable split, the judge also examines situations including:

  • Who bears more responsibility for the end of the relationship?
  • Who stayed home to raise children?
  • Who has more separate property?
  • Who may need time to get income up after divorce?

It is worth noting that debt divides along the same lines as property and assets do.

If at all possible, you may want to try and work things out before a judge steps in. This keeps you and your spouse in control rather than allowing a third party to dictate your future.

Understanding the importance of choosing a respectful and thoughtful executor is key for you and any beneficiaries in your life. After you die, you want to have a person who knows your wishes and what to do next.

Taking time to understand the weight of this choice can help you as you think seriously about who to pick.

Better handling of financial issues

According to Kiplinger, your executor should take time to review basic ideas about finances before beginning to pay any expenses or deal with bank accounts. Although this person needs to stay aware of how to spend money, they do not need to have a lot of knowledge about financial topics or formal training to do these tasks.

Asset distribution is a large part of the process, so this person must approach being an executor like a job. Picking someone who takes finances seriously is a good idea if you worry about all the tasks an executor needs to complete.

Less fighting among family

One other aspect of an executor’s personality is whether or not they will get along with family members and beneficiaries. While they may know a lot about handling money, if they are prone to fighting or tend to disagree over important matters in stressful situations, it could be a bad match.

This person is also typically significantly younger than you. Keeping your records organized and talking to your beneficiaries while you plan your will can help them understand what will happen in the future. Choosing the best executor that is willing to complete this job and fulfill your wishes can help you relax.

When you begin the estate planning process in California, you will appoint a personal representative to act as the administrator of your affairs upon your death or incapacitation.

Choosing the right person for the job is essential for making sure your end-of-life care meets your standards and your assets go to your beneficiaries according to your wishes after your passing.

Responsibilities of an estate administrator

As administrator of the estate, your personal representative takes on several duties. He or she must actively work to inventory and protect your assets, settle your debts with creditors, file your taxes, distribute your property to beneficiaries and finalize your case in probate court. Therefore, you must choose a qualified, capable and responsible individual.

Traits to look for in your personal representative

Integrity: Your representative will have access to your assets and accounts. It is important that he or she is trustworthy.

Resiliency: Settling an estate is hard work, especially for someone dealing with the emotional pain of loss. Your representative should be confident, comfortable and able to keep the probate process moving along on schedule.

Availability: Handling your affairs may take considerable time and effort, depending on the complexity of your estate. Your chosen administrator should understand and agree to the time commitment ahead of the appointment.

Your last will serves as your final commitment to your loved ones. The last thing you want is tension and conflict in your family. Therefore, you should do your due diligence and carefully consider your options when choosing your personal representative.

When sibling rivalries grow wildly out of control, it can result in major problems for everyone involved. This is especially true when it comes to matters involving the assets or estate of parents, as is the case with probate.

Some sibling rivalries can even escalate to the point of litigation. But how, and why?

Sibling disputes of the past

Metrowest Daily News discusses potential sibling disputes that might arise over probate. In general, past wounds and negative ties tend to get aggravated in the wake of a parent’s death due to the emotional disturbance it brings. Add in the fact that it involves assets, and it creates a powder keg.

There are two main reasons for sibling disputes to rise to the point of litigation. The first has to do with old bad blood and the poor handling of a parent’s estate. In some cases, a parent may leave unequal or inequitable assets divided up among their children. This can stoke old resentment about perceived favoritism and cause children who got less to lash out and litigate in an attempt to even the divisions out.

How can you avoid them?

The easiest way to avoid this is by the parent making sure to divide the assets equally from the start. If that is impossible for some reason, then it is important for the parent to make a clear statement to their child about why this has happened.

The other issue is undue influence. This involves one sibling accusing another of manipulating an elderly parent, especially if they have mental health or memory problems. The accused sibling likely did this to gain a more favorable mention in the estate plan. There is not much to do in this case but go through litigation, unfortunately, which is why having legal aid may be of service.

As you assemble your estate plan, you may encounter terms and estate planning documents you know little about. For instance, are you familiar with advance directives?

The American Cancer Society breaks down advance directives as estate planning documents. Learn how to ensure your loved ones know your end-of-life desires even if you cannot communicate them verbally.

The basics

For an advance directive, you draft a legal document that conveys your medical choices if you become medically incapacitated. The document notes your end-of-life medical desires and the individuals you want to make decisions for you when you cannot. For instance, if you fall into a coma or develop Alzheimer’s, you may not have the ability to communicate whether you want to donate your organs or receive specific medical treatments. Rather than use their most favorable guess, your friends and family instead refer to your advance directive to understand what you want and do not want.

Types of advance directives

You have a few different options if you want to create an advance directive. Living wills are advance directives that activate at the end of life when a person falls permanently unconscious or terminally ill. With a durable power of attorney for health care, you name a person as your proxy to make medical decisions for you if you cannot. While a Physician Orders for Life-Sustaining Treatment form lets you communicate your health care wishes, it is not an advance directive.

Put your advance directive in place sooner rather than later. While you may not like thinking about the end of your life, pushing past your anxiety and planning for the inevitable helps your loved ones take care of you.

If you have elderly parents, you may want to encourage them to put their financial affairs in order. After all, creating a comprehensive estate plan is one of the more effective ways for them to maintain control over end-of-life matters.

You can probably trust your parents’ estate plan to reflect their genuine intentions. Still, senior citizens are often susceptible to undue influence. This type of manipulation happens when someone supplants his or her interests over your parents’ wishes.

Isolation

It is not uncommon for seniors to experience both loneliness and isolation. If your mother and father have lost contact with close family members and friends, they may be looking for a caregiver or another person to fill the void. If this person has unscrupulous intentions, he or she may be able to cajole your parents into drastically changing their estate plan.

Incapacity

When you think about mental incapacity, you may envision an all-or-nothing change. That often is not the case, though, as older individuals tend to lose mental capacity over time. Put simply, if your parents are not capable of making financial and legal decisions, someone may be waiting to take advantage of their cognitive decline.

Ageism

According to a recent study in the Journal of Psychiatry Research, older individuals often experience extreme ageism. This type of discrimination includes differential treatment because of actual or perceived age.

If your parents are sensitive to ageism, they may be reluctant to ask relatives and friends for help with complex estate planning matters. This, of course, may leave them vulnerable to undue influence from someone they know less well.

If you can stop undue influence while your parents are alive, you can protect both their interests and your inheritance. After they die, though, it may be necessary to contest the estate plan to ensure you receive your fair share of your parents’ wealth.