On the heels of "Make a Will" month in August, we interviewed Parks Foundation board member Chad Dorr about the importance of estate planning and some current trends. Chad Dorr is an estate planning attorney at Perry, Johnson, Anderson, Miller & Moskowitz in Santa Rosa. The views expressed in this article are his own.
Q: For people who don’t have many assets, do they really need an estate plan?
Absolutely. Most people think of “estate planning” as identifying who gets what property when you die. That is part of it, but a comprehensive estate plan is much more than that. It includes making plans for your financial affairs and healthcare decision-making if you become incapacitated. If you don’t lay your plans out, in writing, in advance, not only will your loved ones have to deal with grieving in what may be the hardest moments of their lives, they will be left rudderless in carrying out your wishes – which is a recipe for disputes – and could put important decisions in the hands of the courts.
Q: What’s better, a will or a trust?
That depends on the circumstances. A lot of folks think that a will is sufficient in terms of planning for their estates, but in California, if a person dies with as little as $166,250 (gross value) in their estates, their heirs will have to go through the time and expense of a court-supervised probate. With the estate tax threshold currently so high -- $11.7 million for individuals/$23.4 million for married couples – most people don’t need an estate plan for tax purposes. Estate plans are incredibly important, though, to ensure that the things you’ve worked so hard for during your life get to your loved ones efficiently.
A trust is a more detailed instrument that allows your property to be distributed without court supervision, which usually means the estate can be handled quicker and for less expense, meaning more of your estate will go to your heirs.
Here’s a good example: Donna has no savings, but owns a modest house worth $500,000 and nothing else. With a will (or if she dies without a will), probate will cost $13,000 for attorneys’ fees and at least $2,000 in court-related fees. A trust will also have some expenses of administration, but they are usually a fraction of what a probate would cost.
Don’t think that trusts are only for wealthy people. Trusts are for everyone. Basically, anyone who owns real property in Sonoma County would likely be subjected to probate when they die with a will. For most people, to create the easiest transition to your heirs or other beneficiaries, a trust (or some other non-probate transfer) is most helpful.
Q: What are some current trends that you're seeing?
We are keeping an eye on a number of legislative proposals related to the estate tax. Given the amount of debt the U.S. has taken on because of COVID recovery, Congress may reduce the estate tax threshold or eliminate some other tax planning tools that benefit heirs, like the step-up in basis for determining capital gains on inherited property.
Also, lately, it seems like more individuals are working on their estate plans. That might be because people have had more time during COVID to catch up on things they postponed, or it might be because people are more aware of their mortality during a pandemic.
Q: What advice do you give people about making legacy gifts to nonprofit organizations?
I talk to my clients about being able to provide for things that they care deeply about during their lives, even when their life situation may not enable them to be particularly generous. When someone passes away, she or he no longer needs to worry about paying rent or the particulars of daily living. And you don’t have to worry about potential future expenses, such as skyrocketing costs for healthcare. Because you no longer have uncertainty about what funds you’ll need in the future, that freedom from worry can open the door to greater generosity after you’ve died.
Leaving a bequest to a nonprofit is a great way to support things you were passionate about during your life and pass that legacy on to future generations.
Is a gift through a will or trust the only way to leave a bequest to a nonprofit?
A gift through a will or trust is probably the most common way to benefit a nonprofit organization. Some people also like the simplicity of naming a nonprofit as the beneficiary of a retirement account, life insurance policy, or bank account. Naming a nonprofit as a beneficiary offers the advantage that if the person has already created estate plans and doesn’t want to go back to an attorney, she or he can change the beneficiary with a simple form from the financial institution.
Retirement accounts present a unique situation. An IRA, for example, is an excellent tool for building capital tax-free during your lifetime. But part of the bargain that Congress made when it created the IRA is that upon a person’s death, the assets in the IRA do not benefit from a step-up in basis and all withdrawals are taxed at ordinary income rates, which are generally higher than the preferential capital gains rate.
If you donate your IRA to a charity, though, the charity can cash out the IRA essentially tax free.
Consequently, for those who want to give an inheritance to their heirs and to a charity, I often advise people to give appreciated stock or property that is outside the IRA, such as the family home, to children or other loved ones, since those assets benefit from a step-up in basis; and to direct their IRA to a nonprofit. In this arrangement, your estate ends up with a greater value to distribute to the people and organizations you care most about. Both your heirs and the nonprofit come out ahead.
Q: Are there any other estate planning topics you want to cover?
Some people might be interested in more advanced types of trust documents, such as charitable remainder trusts.
In a charitable remainder trust, you place property into an irrevocable trust where you receive the benefit of the income during your lifetime and at the end of the trust, the principal goes to the nonprofit. You will typically get an immediate charitable tax deduction and can sell appreciated assets held in the CRT without paying capital gains tax, meaning more income for you and more principal for the nonprofit.
Here’s an example of when a person might consider a charitable trust: Mark owns a rental property and relies on the rent to support himself. He frequently hikes in Sonoma County Regional Parks, but he doesn’t feel like he can donate much at this time. Mark meets with his estate planning attorney and sets up a charitable remainder trust with the Sonoma County Regional Parks Foundation as the beneficiary. This trust pays him a guaranteed monthly income during his lifetime. When he passes away, the remainder of the value of his rental property is donated to the nonprofit Sonoma County Regional Parks Foundation.
The takeaway: Estate plans cover much more than just wills and trusts, and almost anyone would benefit from creating an estate plan to ensure that their wishes are followed after they pass. If you have a passion for Regional Parks but haven’t been able to support parks as generously as you would like during your lifetime, consider a gift through your will, trust, or IRA/401(k).
The staff at the nonprofit Parks Foundation are happy to speak with you if we can be of assistance. Contact Executive Director Melissa Kelley at email@example.com or (707) 565-1830.
The views expressed in this interview are provided as general information only and are not intended to be relied on as legal advice. As always, you should consult with your own legal counsel and tax professionals to determine the appropriate estate planning documents for your particular circumstances.