July 29, 2009
Estate Planning 101
A 54-year-old father of four is playing basketball with his sons, collapses and dies of a heart attack. A mother and father of six are broadsided in an intersection; both die instantly. A mother of five dies of cancer four months after being diagnosed. Situations similar to these unfortunate tragedies can be compounded by a lack of estate planning.
Most people need some sort of estate planning. If parents have young children, it is absolutely imperative.
Estate planning is a process of planning for the future, both at the time of incapacity or death. Such a plan ensures that a person’s property and health care wishes are honored, and that loved ones will be provided for in their absence. It covers the transfer of property at death as well as other personal matters, including tax planning. It also determines how and by whom your personal health care will be managed and how decisions will be made during your lifetime if you become unable to care for yourself.
What HappensIf You Do Nothing?
If you die without a will, your estate will be required to go through probate — a court-supervised public process in which your assets are distributed according to California laws. There are problems with probate. First, an attorney will need to file the necessary documents. All documents, including the value of the deceased’s assets, will become public record. Probate can also take a significant amount of time, as it is administered by the court. Further, probate can be expensive. Probate fees are generally about 5 percent of the total amount of the gross estate. Note: this is not the net estate (estate minus debt), but the entire gross estate. Finally, the State of California will be the sole decider as to whom your assets will be distributed. This distribution could be contrary to halachah (Jewish law).
Without estate planning, a judge would appoint guardians for young children if both parents were to die. This raises several concerns. First, practical money issues: Children cannot inherit money, so the court would require a “guardianship of the estate” be established. With a guardianship of the estate, the court requires the guardian to post a bond (which the estate would pay for); the guardian needs to obtain court approval for sales, investments and distributions (added delay and expense); the guardian must file periodic accounting with the court (accounting and legal fees are paid for by the estate); and the guardianship terminates and funds are distributed at age 18. That’s right — whatever money the children are entitled to from the estate would be given to the children at 18 years old. (How long would that last?)
Second, if you do not nominate a guardian to supervise and care for your children, a judge would determine who should care for your children. Anybody who wishes (e.g., family/friends) to care for your children could petition the court to become appointed. This could create a “tug of war” between well-meaning family members and friends.
Further, this issue is of particular importance to the baal teshuvah community. Jewish law requires that parents train their children in the performance of mitzvot, and a father has the obligation to teach his sons Torah. Unfortunately, in most cases the extended family of a baal teshuvah would not be able to fulfill the parents’ obligations of teaching Torah. Baal teshuvah parents need nominate an appropriate guardian in order to ensure that their children are taught mitzvot and Torah.
If there is a medical emergency it is important to inform health care providers of your wishes. Without taking action through estate planning, there could be unintended consequences and actions taken against halachah. Halachah governs many medical and end-of-life issues. An advanced health care directive (living will) allows you to express your preferences concerning medical treatment when you are incapacitated or at the end of your life. By expressing your preferences in a written legal document, you are ensuring that doctors know your preferences. The document allows you to designate an agent to make your health care decisions. The Agudath Israel of America has drafted an advanced health care directive in which there is a designation of a rabbi who you would like to consult in such a situation. This document ensures that all medical and end-of-life decisions are pursuant to halachah.
If no will is drafted, the laws of California will govern how assets are distributed. Generally, assets would go to your spouse, then children, then parents, and so on until all assets are distributed.
Halachah requires that assets be distributed differently. The Torah laws of succession state that when a man dies and leaves sons as well as daughters, the sons inherit his estate, whereas the daughters receive nothing. If he only leaves daughters, then the daughters inherit the estate. The wife does not receive an inheritance, but rather lifetime support. Additionally, a firstborn son inherits from his father twice as much as any other son.
A time-honored approach to adapting the Torah laws of inheritance is the use of the Shtar Chatzi Zachar. A man writes a document that becomes effective one minute before death that obliges him to pay a large sum of money (more than the value of the entire estate) to his daughters, with the condition that in the event that his sons pay the daughters a share of the estate, she releases the sons from the obligation to pay the debt. Basically, when a man dies, his sons will have a choice: either to give their sisters an equal share in the estate or to pay off the debt effectively resulting in being left with nothing. By drafting a Shtar Chatzi Zachar, both halachah and your wishes can be fulfilled.
Many people who own a house in Los Angeles or have a substantial amount of assets could potentially have a large estate tax bill. In 2009 you may pass $3.5 million without any estate tax. Next year, 2010, there is no estate tax. However, starting in 2011, you may only pass $1 million free of tax. In 2011, the tax rate for estate tax is scheduled to be approximately 55 percent. This is the plan if Congress does not legislate differently. It is unclear what exactly will happen with estate taxes, but it is a fair guess that estate tax will not be abolished. There are different estate-planning techniques that include Living Trusts that can help reduce or even eliminate estate taxes. If you have about $1 million of assets (this includes life insurance) it would be a good idea to discuss this with a professional.
Estate planning does not need to be hard or even expensive (often the cost of estate planning will be minimal compared with the cost of probate or estate taxes). The most important aspect about estate planning is that it is actually done.
“No one gets out of this life alive, so we must plan for the future,” a friend told me.
Many people try to put off doing it, but that is foolish and shortsighted. When a family member dies suddenly without an estate plan, the ensuing mess is terrible. Without an estate plan, the family will need to spend extra money, the process takes time, and the most difficult part will be the heavy emotional toll. Having to deal with probate issues is a consistent reminder of the deep loss.