Estate Planning for the Married Couple

Goralka Law Firm
4470 Duckhorn Drive
Sacramento, CA 95834

Telephone: 916.440.8036
Facsimile: 916.440.8038

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ESTATE PLANNING FOR THE MARRIED COUPLE

Summary Probate proceedings are available for married partners in the form of a Spousal Property Petition. As a result, a full probate is not required upon the death of the first spouse. A court proceeding is required along with the publication notice. The petition will also include a detailed listing of marital assets which is public record and is filed with the court.

Upon the death of the surviving spouse, a full probate is required. The following is a schedule of the amount of the statutory attorney's fees. Note that the same amount is also applicable as compensation to the executor or administrator of the estate. Finally, note that the statutory fee is fee for ordinary services and does not include extraordinary items such as services related to the sale of property or the preparation of an estate tax return.

Note that the probate of a $200,000 estate is subject to combined attorney's and executor's fees in the amount of $14,000. This amount is in addition to the filing fees, publication costs and probate referee's fees.

Note also that the Counties have, for the first time, begun charging a variable filing fee in probate matters. This is certainly the result of the budget crisis faced by the state of California and the counties. Under the new filing fee schedule, larger estates will pay a larger fee. That fee will range between $261.50 to $3,908.00. If the estate is valued at $3,500,000.00 or more, the filing fee will be $3,908.00 plus 2% of the amount over $3.5 million. The new filing fee schedule for Sacramento County, effective as of August 17, 2003, is as follows:

Note that the filing fees are in addition to the statutory fees for executors and attorney's which are also based on the value of the estate. Other costs will include the cost of the probate referee for valuing the assets included in the estate, accounting costs if necessary for the court and for the filing of any income tax returns that may be required for the estate.

Since 1976, transfers by gift in a death have been subject to a unified system of taxation. A single unified rate schedule applies to both gift and estate tax purposes and the rates are progressive on the basis of cumulative of lifetime and death transfers. The prescribed tax rate ranges from 18% (for transfers under $10,000) to 50% (for transfers over $2.5 million). However, due to the unified credit, the lowest marginal rate at which taxes are actually paid amounts to forty-one percent (41%).

Under current law, each marital partner will be entitled to a credit plan of one million dollars ($1,000,000) in 2011.)The credit amount is higher in earlier years but falls to $1,000,000 in 2011.) As a result, a married couple should be able to plan to transfer an estate with a value of two million dollars ($2,000,000) to their children without incurring any estate tax. However, due to the interplay between the applicable credit amount and the marital deduction, planning is critical to ensure that each individual actually utilizes the full credit to which he or she is entitled.

For example, a husband and wife with a taxable estate of two million dollars ($2,000,000) leave all the property to the surviving spouse upon the first spouse's death. All the property is then to be transferred to their children upon the surviving spouse's death. Such an estate plan results in the failure to utilize one of the applicable credit amounts. This is because the marital deduction is used prior to the applicable credit amount. The amount claimed for the marital deduction upon the first spouse's death is included in the deceased spouse's estate.

Many married couples utilize a credit shelter trust which is created for the purpose of preserving or using the decedent spouse's unified credit. In order for the credit shelter trust to accomplish this tax objective, the shelter trust must apply to assets that are subject to tax on the decedent spouse's estate and transfer those assets in such a way that the assets will not be subject to tax unless the surviving spouse estate upon his or her death. One way of accomplishing this is to give the credit shelter portion of the bequest to someone other than the surviving spouse. Typically, such a transfer would be made to the children.

A credit shelter trust may also be utilized without forcing the married couple to choose between saving taxes and providing sufficient support for the surviving spouse. The credit shelter trust can be establish to give the surviving spouse access to the assets in the credit trust if necessary for his or her health, education, welfare and support. The surviving spouse can also receive the income from the shelter trust.

The need to provide for the care of minor children is generally the primary factor motivating parents to establish an estate plan. Planning for their minor children is often the most important aspect of the estate plan because the plan will effect not only the disposition of the property but also the personal care of the children until they become adults. All parents, regardless of the size of their estates, need to establish a plan that provides for the best possible homes for their minor children in the event of the parent's premature death. In addition, parents need to consider the children's ages when establishing a plan for the disposition of their property during both life and at death. Note that in the absence of an estate plan, any assets otherwise distributable to the children will be distributed in full when the child attains the age of eighteen (18). Most parents are concerned that children of this age, when adults, should not be provided substantial amounts of money or assets.

1. Planning for the Minor's Custody. All minor children must have a guardian who is the person responsible for their personal care. This is either a natural guardian or a court appointed guardian. If a minor child is left without a custodial parent, the court will appoint a guardian to be responsible for the personal care and custody of that child. The guardian will have the responsibility for the daily care of the child and will have the duty to make all directions and decisions involving the child's residence, education, religious affiliation and medical care. The guardian should act in this respect as a substitute parent. The guardian is generally not obligated to provide financial support for the child and is entitled to be reimbursed for the cost of support from any assets held for the benefit of the child. Guardians derive their authority from the court and must be court appointed. Guardians remain under the supervision of the court until the child reaches the age of majority (18 in California). A parent can nominate a guardian in his or her will and should always take the opportunity to do so. The failure to designate a guardian can provoke a major family disruption, especially if relatives of both parents compete for custody of the child. A family dispute over custody can cause a permanent rift in the extended family as well as delaying the settlement of the child in a new home. The nomination of a guardian by will is the best way to minimize the risk of these disruptions.

Choosing a guardian for a minor child is a difficult process and the parent should consider a variety of factors in making that decision. The primary concern, especially for younger children, is that the guardian and the child must have or be able to develop a close and loving relationship. This factor often causes parents to consider grandparents as guardians for the children. However, grandparents are rarely the best choice since raising young children is a long and difficult job. In addition, naming a guardian of a generation older than the parents increased the likelihood that the guardian will in fact die before the child attains the age of majority, thus leaving the child without a caretaker for the second time.

2. Planning for Distribution of Property. The minor child should generally not directly own property. There are two important reasons exist for avoiding direct ownership of property by a minor child. First, state law generally provides that a minor child is not competent to administer his or her own property. While a child can hold title to property in his or her name, state law provides that a minor does not have the capacity to enter into a binding contract. As a result, the minor cannot sell, rent or otherwise administer the property that he or she owns. The second issue is that California law vests full control of that property when the child attains the age of eighteen. Most children do not yet have the fiscal maturity to manage substantial assets.

1. Definition of a Trust. A trust is simply a device for holding property in which ownership is divided between a trustee and a beneficiary. The trustee holds legal title to the property on behalf of the trust and has both the right and duty to manage the property for the benefit of the beneficiary. The beneficiary holds an equitable interest in the property which means that, although the beneficiary has no right to manage the property, the beneficiary has the right to the economic benefit related to that property. The trust instrument generally includes directions to the trustee regarding how he or she should manage and distribute trust property. To ensure these instructions are followed, California law imposes fiduciary obligations upon the trustee. In simplest terms, the Trustee must follow the Trust instrument and act fairly toward the beneficiary. California law provides remedies for the beneficiary against the trustee for failing to carry out these responsibilities, as well as rights against the trust property itself.

2. Creating a Trust. A trust is created when a property owner transfers property to a person with the intent that the recipient hold the property for the benefit of someone else. Thus there are generally three parties to a trust: (1) the owner who transfers the property (referred to as the settlor, donor or grantor); (2) the person receiving the property (referred to as the trustee); (3) the person for whom or whose benefit the property is being held (the "beneficiary"). Although the trust involves three parties, it does not require three separate persons as one person can, and often does, act in more than one capacity. For example, typical revocable intervivos trusts established to avoid probate commonly provide the person establishing the trust acts as the initial trustee and to be the initial beneficiary of the trust. In that special circumstance, that one person is the settlor, trustee and beneficiary.

3. Trust Instrument. The trust instrument is a document that sets forth the terms of the trust. Theoretically, there is no requirement for the trust to be in writing unless the law otherwise requires it in writing. The writing is required in two circumstances: (1) that the trust holds an interest in real estate, the statute of clause requires it be in writing and (2) if the trust involves a transfer of property upon death, the will requires that to be in writing. More importantly, a written instrument is critical to evidence the creation of the trust and the terms for administration and distribution. Therefore, a written trust instrument should be used.

4. Revocable Living Trust. The revocable living trust is one of the most widely used estate planning devices. A revocable trust funded during life avoids probate and the revocable trust funded at the settlor's death can provide a unified plan disposition for the settlor's probate and non-probate assets. The revocable living trust is most widely used for probate avoidance and should be fully funded before the settlor's death.