ESTATE PLANNING 101. Estate planning involves management and distribution of your ASSETS and planning for your INCAPACITY.

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1 ESTATE PLANNING 101 WHAT IS ESTATE PLANNING? Estate planning involves management and distribution of your ASSETS and planning for your INCAPACITY. WHERE DO I START? Two important steps in planning your estate are: 1) DECIDING WHAT YOU WANT TO HAPPEN TO YOUR LOVED ONES AND YOUR ASSETS AFTER YOU HAVE PASSED AWAY 2) DETERMINING WHO SHOULD MAKE DECISIONS FOR YOU IN THE EVENT OF YOUR INCAPACITY WHICH PLAN DO YOU HAVE? Everyone has a plan: Your Own Plan or California s Plan? CALIFORNIA S CHOICE: Without a proper estate plan, California has a process to dispose of your assets called PROBATE Probate is the legal process through which the court makes sure that, when you die, your debts are paid and your property is distributed according to your WILL. If there is no valid will, or if a will contest has resulted in the will getting thrown out, the court will look to California's INTESTATE SUCCESSION laws to determine who the heirs will be and how the property will be distributed among them: 1. Surviving spouse, if no surviving spouse then; 2. Children 3. Grandchildren 4. Parents 5. Siblings 6. Grandparents 7. Eventually if no heirs are found the property escheats to the State and thereby becomes the property of the Government.

2 MYTH: I DO NOT GO THROUGH PROBATE IF THERE IS A WILL If your gross (not net) estate is over $150,000, it is subject to PROBATE. Probate is: 1. COSTLY 2. LENGTHY 3. PUBLIC In California, Probate Legal Fees are a percentage of the Gross Probate Estate. (Excluded from Probate are assets held in a Living Trust, or by Joint Tenancy, Life Insurance payable to a beneficiary other than the estate, Retirement Plans, and any other "POD or pay on death assets). FEES PAID TO THE COURT There is a $435 fee payable to the Court for each petition you have to file. In simple probate cases you only have to file two petitions: the initial Petition to Probate the estate and a Petition for Final Distribution. For more complex cases, you may have to file additional petitions. You ll also have to file a Notice of Probate in a newspaper. You are required to use only certain newspapers, and their charges will vary. Expect the notice to cost anywhere from $100 to $450. FEES PAID TO THE ATTORNEY An attorney s fee -- called a statutory fee -- is based on the fair market value of the assets in the estate. The fee doesn t take liabilities into account. The probate code establishes a sliding scale: 4% of the first $100,000 3% of the next $100,000 2% of the next $800,000 1% on the next $9,000, % on the next $15,000,000 A reasonable fee thereafter

3 The Gross Probate Estate is the total value of the estate BEFORE reduction for debts. For example, a $1,000,000 gross value estate is worth $23,000 in fees, even if the net value of the estate is worth a lot less after reduction for mortgages and other debts. If there are complications, extra fees are allowed with Court approval, which is routinely granted. Probate may take years to complete (average time is 1-2 years) and your family will experience loss of privacy and control and pay expensive administration costs (4-10% of gross estate). Everything is public and requires court approval. What Kinds of Instructions Can You Leave for Your Loved Ones? 1. WHO should inherit your assets? You may want to consider special questions when transferring certain types of assets. For example, if you own rental properties Should all of your beneficiaries inherit those properties? Tricky question, isn t it? First you need to decide which of your heirs have the ability to manage the properties. Then you need to consider the cash needs of each beneficiary. 2. WHEN and HOW they should inherit the assets? Promote responsibility with your gifts Constructive not enabling behavior Only you can dictate the terms appropriate to address your concerns Maybe not in one lump sum Maybe for specific items (education or first house) EXAMPLE: You can choose to pass assets through a LIVING TRUST A LIVING TRUST is a legal document that holds property.

4 THREE POSITIONS OF A LIVING TRUST: a. TRUSTORS: People who own assets and put ( fund ) them into a living trust. b. TRUSTEES: People who manage assets in a living trust c. BENEFICIARIES: People who spend the money and use the assets in a living trust. ADVANTAGES of a living trust: a. YOU are 100% in CONTROL b. Avoids PROBATE (no court fees) c. ASSET MANAGEMENT upon INCAPACITY d. PRIVACY (no public record or court involvement) ANY COMPLETE ESTATE PLAN SHOULD CONTAIN: A LIVING TRUST POUR-OVER WILL: A will that "pours over" property into a trust when the will maker dies. A pour-over will is intended to guarantee that any assets which somehow were not included in the trust become assets of the trust upon the party's death. A DURABLE FINANCIAL POWER OF ATTORNEY (POA) naming an agent (and alternate) responsible for financial management if you aren t able to do so yourself. AN ADVANCE HEALTH CARE DIRECTIVE that gives instructions concerning the type of care you wish to receive (or avoid) in the event of a terminal illness.

5 UPDATING YOUR PLAN: Your Estate Plan should be updated any time your FINANCIAL or your FAMILY CIRCUMSTANCES change or there have been changes in the LAW. Generally every 2-3 years is recommended. DON T DO IT YOURSELF! This area of the law is constantly changing and books or materials on the internet are not always up to date. While there are pre-printed forms available for wills, powers of attorney, living trusts and advance health care directives, such forms may not be valid in your state or may not meet your specific needs. Completing such forms properly can be difficult and you cannot correct your mistakes when you are dead or disabled! SUMMARY OF THE ESTATE & GIFT TAX AND REVERSION IN Top Estate Tax Rate 35% 55% Estate Tax Exemption $5.12M $1M Gift Tax Exemption $5.12M $1M The current federal tax exemption on estates and gifts is set to roll back on Jan. 1 from $5.12 million to $1 million -- the same level it was at in 2002, before tax cuts passed during the George W. Bush era went into effect. If no further actions are taken by Congress, the exemption will decrease to $1 million in 2013 which means that an estate over $ 1 million will pay federal estate tax! Estate planning involves many interlocking parts -- and each demands a degree of time and attention. For example, for gifts that include assets other than cash, such as real estate, appraisals are required. But because of the end-of-year planning rush, an appraisal could take up to two months. That alone makes putting off a decision until the end of the year in hopes of getting some clarity from Washington a risky bet! THE REAL DEADLINE TO BEGIN PLANNING IS NOW!

6 Disclaimers: The information in this document is for general informational purposes only and is not intended to be legal advice. The information may not apply to any specific factual and/or legal set of circumstances. This information is not intended to substitute for obtaining legal advice from an attorney. No person should act or rely on any information in this document without seeking the advice of a licensed attorney. To ensure compliance with the requirements imposed on by IRS Circular 230 (31 C.F.R , et. seq.), any tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding tax-related penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein. Joanna L. de Vos, Esq. Estate Planning Attorney As Heard On: Law Office of Joanna de Vos, APC 4203 Genesee Avenue, Suite 103 San Diego, CA joanna@estateplanningsd.com