Aretha Franklin’s death on Aug. 16 and the passing of Prince in April 2016 turned up one thing the entertainers shared in common.
Both died without a will.
According to experts, dying without a will creates mystery.
“In my experience, the most common thing that happens when someone dies without a will (or trust) is nothing. No one really knows what to do,” said Anthony Celaya, a Napa-based estate-planning attorney.
As a result, your children, partner and relatives have to spend time, money and energy working to convince a court-appointed probate administrator what you wanted done with your property and other assets.
The most common way to avoid confusion is to create a living trust and a “pour-over” will. A pour-over will states that assets that have not been placed in the living trust should go there when you pass. Creating a trust that contains all of the assets allows you to avoid the costs and time of probate.
A living trust is a written legal document that places your assets into a trust for your benefit during your life. When you pass, the assets are distributed by your chosen representative, or successor trustee, to your beneficiaries.
What happens first?
California state law allows the court to initiate a probate case when there is no will and there are assets requiring the opening of a probate, such as real estate in the decedent’s name. The court typically appoints a close relative, the decedent’s spouse, child, or grandchild, in that order, as an administrator.
That person settles the decedent’s outstanding debts, including their final federal and state income taxes. All debts are deducted from the assets of the estate. Then the administrator distributes the remaining assets to the decedent’s heirs. The distribution occurs pursuant to California’s intestacy statutes. The term “intestacy” refers to dying without a will.
If a decedent is survived by children but no spouse, the children inherit everything in equal shares. If a decedent is survived by a spouse, their assets are handled differently depending on whether the assets are community or separate property. Community property is property acquired during the marriage, such as income earned during the marriage.
Separate property is property a spouse owned before marriage or after separation. It is also property that a spouse inherits or receives as a gift before, during, or after marriage.
An asset can change status from community to separate property and vice versa. There are many ways an asset can change status, such as if two or more assets are commingled, the spouses form a written agreement, or the spouses improve separate property, like a house, with community property, such as income earned during the marriage.
After a decedent passes, the spouse gets all of the community property. When a decedent is survived by a spouse but the decedent leaves no children, grandchildren, parents, siblings, nieces, or nephews, then the spouse inherits all the separate property as well.
When a decedent is survived by a spouse and one child, the spouse receives one half of the separate property. The decedent’s child receives the other half of the separate property.
When a decedent survived by a spouse and two or more children, the spouse receives one third of the separate property. The children receive the remaining two thirds of the separate property, divided up into equal shares.
What to know about tax exemption
The Tax Cut and Jobs Act of 2017 doubled the federal tax exemption amount for estates from $5.49 million in 2017 to $11.2 million in 2018.
The change means that whether you have or lack a will, you can now leave more untaxed funds to your beneficiaries. The change has drastically altered how estate planning attorneys are working with clients.
The federal estate tax on the taxable portion of a decedent’s estate is 40 percent. California does not require an additional state inheritance tax.
“Before, we tried to bring the value of assets down to reduce the amount of the estate. We wanted the value of the estate to be low to fit within that $5.49 million exemption. We created limited liability companies and did gifting, creating fractional share interests. (We) used other estate planning tools to make that happen. Now we’re trying to maximize the value of the estate to get as close to full value, but within the applicable estate tax exemption. (This) increase(s) the ‘step-up’ in capital gains basis for the estate assets,” said Mark Gladden, a Healdsburg-based estate planning attorney with Passalacqua, Mazzoni, Gladden, Lopez & Maraviglia, LLP.
Beneficiaries also receive an advantage because of the step-up basis loophole.
When a person dies, the value of certain assets, including qualified stocks, real estate, and other capital assets, changes to the asset’s fair-market value on the day that the decedent passed.
For example, say a decedent bought a house for $50,000. The house is now worth $650,000. The person inheriting the house can value the house at $650,000. This practice minimizes the beneficiary’s capital gains tax on the asset. Capital gains tax is a tax on the profits from specific types of assets.
A beneficiary would be taxed on the profit they received from the sale of the $650,000 house.