Martindale-Hubbell Peer Review Ratings recently came out with it's rating of me. The Ratings are an objective indicator of a lawyer's high ethical standards and professional ability. Attorneys receive a Peer Review Ratings based on evaluations by other members of the bar and the judiciary in the United States. I have been honored with an "AV Preeminent" rating which is a significant rating accomplishment- a testament to the fact that a lawyer's peers rank him or her at the highest level of professional excellence. My piers gave me a rating of 5 out of 5 in all possible areas analyzed: Legal Knowledge, Analytical Capabilities, Judgment, Communication Ability, Legal Experience. I'm pleased and honored.
On November 9, 2012 the Joint Committee on Taxation released a report which, among other issues, examines the potential impact to the Treasury from potential changes to the estate tax, including the Obama administration’s proposals. Importantly, if the 2012 estate tax regime is extended into 2013, the Joint Committee estimates that there will be 3,600 taxable estates. Under the Obama administration’s proposed 45-percent estate tax and $3.5-million exemption, the number of taxable estates in 2013 is estimated to be 7,200. If the estate tax regime in 2013 reverts back to the 2002 regime (as it is currently scheduled to do), the number of taxable estates is estimated to be 55,200.
2012 provides a unique opportunity for making gifts using the federal estate, gift and generation skipping transfer (“GST”) tax exemption of $5,120,000 (reduced by any prior use of such exemption).
Unless Congress takes action, the exemption decreases to $1 Million on January 1, 2013 and there is a possibility that those who miss the opportunity will have lost the ability to make significant tax free gifts.
· Based upon the existing estate and gift tax rate of 35%, the additional taxes from not taking advantage of the gift exemption of $5.12 Million that could expire on January 1, 2013 as compared to the $1 Million gift tax exemption that is scheduled to be effective on January 1, 2013 could be over $1.4 Million.
· If estate, gift and GST tax rates are increased to 45%, additional taxes from not taking advantage of the $5.12 million tax exemption could be over $1.8 Million.
· For couples who each retain their $5.12 million of remaining gift tax exemption (total of $10.24 million), the potential gift tax savings by making use of the 2012 exemption could be as much as $3.7 million (assuming the gift tax exemption is reduced to $1 million and gift tax rates increased to 45%).
These computations disregard the additional tax benefits of removing future appreciation on assets gifted from future estate, gift and GST taxes.
If you believe you can afford to make gifts in 2012, you must carefully select assets to gift and understand the consequences if such gifts are determined to be undervalued in the event of an IRS audit.
For legal assistance, call a qualified tax attorney. Call Mitchell A. Port at (310) 559-5259.
Are you married?
Estates of married individuals dying after 2010 must file an estate tax return to pass along their unused estate & gift tax exclusion amount to their surviving spouse.
Available for the first time this year, the new portability election allows estates of married taxpayers to pass along the unused part of their exclusion amount, normally $5 million in 2011, to their surviving spouse. Enacted in December, 2010, this provision eliminates the need for spouses to retitle property and create trusts solely to take full advantage of each spouse’s exclusion amount.
A married couple might want to take into consideration a very important aspect of the 2010 estate tax law. Under the law, each partner's individual estate tax exemption of $5.12 million becomes "portable," or it allows the first partner who passes away to transfer his or her individual estate tax exemption to his or her surviving spouse.
The IRS expects that most estates of people who are married will want to make the portability election, including people who are not required to file an estate tax return for some other reason. The only way to make the election is by properly and timely filing an estate tax return on Form 706. There are no special boxes to check or statements needed to make the election.
The purpose of this provision is to ensure that the surviving spouse does not incur an estate tax on property that would normally be covered by the estate tax exemption. This provision operates with the martial estate tax exemption, which allows the first spouse to pass away to transfer his or her assets to the surviving spouse without incurring an estate tax. Because of this provision, the first spouse to pass away does not need to use the $5.12 million exemption.
However, if a couple wants to take advantage of the portability provision, the executor of the estate must file an estate tax return on the first spouse to pass away to preserve the exemption. Even if the estate is worth less than $5.12 million exemption, the executor might still want to file an estate tax return preserving the exemption just to be cautious. The surviving spouse might gain a windfall and, notwithstanding other facts, use the preserved exemption to pass that windfall to the heirs of the surviving spouse.
Speak with an estate planning attorney for help. Call Mitchell A. Port at (310) 559-5259.
In November, 2010, a court action was filed in the U.S. District Court, Southern District of New York, seeking a refund of the estate tax levied on a married same-sex couple, which would not have applied to a married straight couple and which arguably violated the United States Constitution. The plaintiff in that action, Edith Schlain Windsor (“Edie”) challenged the constitutionality of section 3 of the Defense of Marriage Act (“DOMA”) which required Edie to pay federal estate tax on her same-sex spouse’s estate.
Edie met her late spouse, Thea Clara Spyer ("Thea"), nearly a half-century ago at a restaurant in New York City. Edie and Thea went on to spend the rest of Thea's life living together in a loving and committed relationship in New York.
After more than forty years, Thea and Edie were finally legally married in Toronto, Canada in 2007. Having spent virtually their entire lives caring for each other in sickness—including Thea's long battle with multiple sclerosis—and in health, Thea and Edie were able to spend the last two years of Thea's life together as married.
New York State legally recognizes Edie and Thea's marriage and provided them with the same status, responsibilities, and protections as other married people. However, Edie and Thea were not considered "married" under federal law because of the operation of the statute known as DOMA, and, as a result, Edie was forced to pay more than $350,000 in federal estate tax that she would otherwise not have had to pay if Edie and Thea's marriage were recognized under federal law.
This month, the District Court upheld Windsor’s constitutional challenge to section 3 holding that it violates the Equal Protection Clause of the United States Constitution thereby allowing for the marital deduction.
This is a rapidly evolving area of the law. If you are an executor in a similar situation, you should move quickly to file protective claims.
For tax help from an experienced attorney, call Mitchell A. Port at (310) 559-5259.
Currently, on account of the enactment of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “2010 Tax Act”), the Federal estate tax exemption is $5.12 million, or twice that for a married couple.
It was and is common practice for a married person to provide if his or her surviving spouse survives to have his or her estate to be divided into two broad portions. One part is made equal to the estate tax exemption. That part is exempted from estate tax when that spouse dies on account of the so-called unified or applicable estate tax credit (which may be translated into a dollar exemption of $5.12 million). That part may be placed into a trust of which the surviving spouse is a beneficiary but need not be included in the gross estate of the survivor. Typically, that trust is called the “credit shelter trust” (because it is protected from type by reason of the unified credit), “estate tax exemption trust” or a “bypass trust” (because it “passes by” the estate of the surviving spouse for estate tax purposes).
The second part of the estate of the surviving spouse usually passes to or in a marital deduction trust for the surviving spouse and avoids estate tax when the first spouse dies by reason of the estate tax marital deduction. The property that passes to or in trust for the surviving spouse under the protection of the estate tax marital deduction is included in the gross estate of the survivor (unless consumed, given away or dissipated before the survivor dies). (In some cases, this second part of the estate is also divided by directing an amount equal to the otherwise unused generation skipping transfer tax (GST) exemption of the first spouse to die to pass into a separate qualified terminable interest property (QTIP) trust described in Section 2056(b)(7) of the Internal Revenue Code (Code). A QTIP trust qualifies for the estate tax marital deduction only by affirmative election.
As mentioned, the 2010 Tax Act increased the Federal estate tax exemption to $5.12 million for this year. That Tax Act also made other changes to the Code including adopting a “portability” system under which the surviving spouse may “inherit” any unused estate tax exemption of the first spouse to die, by an affirmative election on the United States estate tax return of the spouse dying first, and use it to protect the survivor’s later gifts from gift tax or his or her estate at death from Federal estate tax.
But under the 2010 Tax Act, the Federal estate tax exemption is scheduled to decline to and remain at $1 million at the end of this year. Moreover, under that act, portability will disappear. However, many think that Federal legislation will be enacted that will increase the Federal exemption to at least $3.5 million and make portability permanent.
Under Revenue Procedure 2001-38, 2001-1 CB 1335, the IRS ruled that the estate of the surviving spouse is permitted to “undue” or “reverse” any QTIP election made in the estate of the first spouse to die which was unnecessary to reduce the Federal estate tax marital deduction. In other words, if the spouse dying first directed the amount by which his or her Federal estate tax exemption exceeded the amount needed to eliminate Federal estate taxes back into the marital deduction trust, then over-funding the QTIP trust can be undone so that no part of the over-funded amount will be included in the survivor’s gross estate.
If both portability and Rev. Proc. 2001-38 are available, two additional considerations need to be taken into account. The first is that all appreciation with respect to the assets excluded from the estate of the surviving spouse, by reason of enacting the revenue procedure, occurring after the death of the first spouse to die up to the death of the survivor on those assets, would be excluded from the gross estate of the survivor. In contrast, in the case of portability, all appreciation on the assets passing to the surviving spouse with respect to the ported amount of Federal estate tax exemption would be included in the survivor’s gross estate. The second is that, in the case of portability, the property inherited by the surviving spouse will receive automatic change in income tax basis pursuant to Section 1014 of the Code. On the other hand, if revenue procedure is invoked, the basis of that property will not be adjusted at the survivor’s death.
Ethical Wills are documents designed to pass ethical values from one generation to the next. It is not a legal document and typically it is in the form of a letter written by parents to children or grandchildren. It is drafted by you, not me or any other attorney. Today it does not need to be in the form of a letter but could be an audio or video recording.
Ethical wills often contain meaningful family stories, personal values and beliefs, statements of faith, blessings, advice, and expressions of love. They may even share regrets, apologies, and final requests. There are no rules or laws about the length or content of an ethical will. It can be a few lines, or paragraphs or many pages in length.
Every ethical will is unique. And, while there is no standard format for writing one, samples of ethical wills can be found at this link.
The process of writing the ethical will can be rewarding. The centerpiece of the letters I have seen are a few short sentences about what values are important to the individual. However, what most distinguishes an ethical will from a will dealing with one’s assets, is that there is a explanation of how these values came to be important, whether they were passed down from previous generations or, learned through real life lessons.
Wikipedia has a terrific article on ethical wills covering these topics:
Medieval – 18th Century
Content of an Ethical Will
Rights of publicity pass to the heirs of celebrities who are residents of California when they die. A hologram performance by Tupac Shakur (who died in 1996) at this year’s Coachella Valley Music and Arts Festival is a right which passed to his mother when he was shot.
Proper estate planning in California can help direct where revenue from those rights will go long after the person died.
California Civil Code section 3344 is for the publicity rights of living persons, while Civil Code section 3344.1, known as the "Astaire Celebrity Image Protection Act," grants statutory post-mortem rights which prohibit the unsanctioned use of the "name, voice, signature, photograph or likeness on or in products, merchandise or goods" of any person.
Civil Code Section 3344.1 requires any person claiming to be successor-in-interest to the rights of a deceased personality under Section 3344.1 register the claim with the Secretary of State's Office. This is not a mandatory filing, however.
There is some question as to how those rights should be value and taxed at the time of death. If holograms become profitable, the IRS might start looking into taxing them. This may not be too different from commercials, endorsements and other publicity which can be very valuable assets worth taxing at death.
For tax planning by an experienced California lawyer, call Mitchell A. Port at (310) 559-5259.
Tax specialists are paying attention to how half a dozen of Facebook’s top names, including founder Mark Zuckerberg, appear to be using a perfectly legal maneuver called a grantor-retained annuity trust, or GRAT, to avoid at least $200 million of estate and gift taxes on their own Facebook shares.
A grantor retained annuity trust may be an effective means for a wealthy client who wants or needs to retain all or most of the income from a high-yielding and rapidly-appreciating property to transfer the property to a child or other person with minimal gift or estate tax. GRATs are particularly indicated where the client has one or more significant income-producing assets that he or she is willing to part with at some specified date in the future to save federal and state death taxes and probate costs, to obtain privacy on the transfer, and to protect the asset against the claims of creditors.
A GRAT is created by transferring one or more high-yield assets into an irrevocable trust and retaining the right to an annuity interest for a fixed term of years or for the shorter of fixed term or life. When the retention period ends, assets in the trust (including all appreciation) go to the named "remainder" beneficiary (ies). In some cases other interests, such as the right to have assets revert back to the transferor's estate in the event of the transferor's premature death, may be included.
Facebook's prospectus cites eight separate "annuity trusts" set up by insiders Dustin Moskovitz, Parker, Sheryl, Reid Hoffman, Michelle Yee (Hoffman's wife) and Zuckerberg over the past four years. All told, these trusts hold about 22 million shares that will be worth more than $690 million if Facebook goes public at $31.50 a share, the middle of its projected range.
GRATs provide a fixed annuity payment, usually expressed as a fixed percentage of the original value of the assets transferred in trust. For example, if $100,000 is placed in trust and the initial annuity payout rate is 6 percent, the trust would pay $6,000 each year, regardless of the value of the trust assets in subsequent years. If income earned on the trust assets is insufficient to cover the annuity amount, the payments will be made from principal. Therefore, the client-transferor is assured steady and consistent payments (at least until principal is exhausted).
All income and appreciation in excess of that required to pay the annuity accumulate for the benefit of the remainder beneficiary (ies). Consequently, it may be possible to transfer assets to the beneficiary (ies) when the trust terminates with values that far exceed their original values when transferred into the trust and, more importantly, that far exceed the gift tax value of the transferred assets.
Facebook offers a good vehicle for describing the inner working of GRATs to sidestep estate and gift taxes.
In essence, these trusts transfer asset appreciation from one taxpayer to others, virtually tax-free.
The benefit can be huge. If the Facebook insiders didn't use GRATs for those shares, but held them until they died or gave them away to friends or relatives after the offering, then the gift or estate tax owed on the shares would be more than $200 million. (This calculation assumes a $31.50 share price and the current top gift- and estate-tax rate of 35%; rates are scheduled to rise to 55% next year.)
The gift tax value of the transferred assets is determined at the time the trust is created and funded using the "subtraction method." The gift tax value is determined by subtracting the value of the annuity interest (and, in some cases, other retained interests, such as the right to have the assets revert back to the transferor's estate if he or she does not live the entire term of the trust) from the fair market value of the assets transferred in trust. How the annuity interest and any other retained interests are valued depends on who the remainder beneficiary (ies) is (are) and who retains the annuity and other interests relative to the transferor. There is a more restrictive and less appealing set of valuation rules when family members are beneficiaries and certain family members retain interests in the property both before and after the trust is created than when unrelated parties are involved.
Here is an example, using figures from the Facebook offering document: Zuckerberg and Moskovitz each disclosed "annuity trusts" holding 3.4 million and 14.4 million Facebook shares, respectively. The value of each share when the trusts were set up was less than $1.85, according to the prospectus.
After contributing their stock to the GRATs, the two founders would, over time, take payments equal to the original value of the gift plus a small return. Without knowing information that's unavailable—such has how long the trusts will run or exactly how they are structured—it's impossible to say what payments have already been or will be made.
But it is possible make an educated guess as to the appreciation that's being shifted from the two founders' estates. Given a $31.50 share price, a conservative estimate of it is $29 per share, or about $100 million for Zuckerberg and more than $415 million for Moskovitz.
At current top rates of 35%, that means estate-and gift-tax savings of about $35 million for Zuckerberg and $150 million for Moskovitz. Other Facebook insiders and investors appear to be saving $20 million or more with their GRATs.
What if Facebook stock declines? The stock would then be returned to the original owner.
The person who sets up the GRAT is not really worse off, because he paid little or no tax in the first place. Either he wins or it's a tie—except for the lawyer's fees. The principal risk with a GRAT is that the owner will die before the term is up.
If family members are involved, the gift tax valuation rules of the Internal Revenue Code may apply. Under these rules, certain types of retained interests, such as the right to have trust assets revert to the transferor's estate in the event of the transferor's premature death, may be valued at zero when computing the gift tax value of the transfer. As a general rule, every retained interest but a "qualified interest" is assigned a value of zero for gift tax valuation purposes.
Since the GRAT permits payment of both income and trust principal to satisfy the annuity payments you have retained, the GRAT should be treated as a grantor trust for income tax purposes. This means you (the transferor-annuitant) are taxed on income and realized gains on trust assets even if these amounts are greater than the trust's annuity payments. This further enhances this tool's effectiveness as a family wealth-shifting and estate-tax-saving device. In essence you are effectively allowed to make gift tax-free gifts of the income taxes that are really attributable to assets backing the remainder beneficiary's interest in the trust.
By making assumptions about income to be earned by the trust in the future, and future capital growth, it is also possible to project the future value of the principal remainder that will be payable to the beneficiaries at the end of the term of the trust. If limited partnership interests, minority stock interests, or other fractional or non-controlling interests have been contributed to the GRAT and appropriate discounts claimed for lack of voting power or lack of marketability, it may also be useful to illustrate the future economic growth of the pre-discounted value of the principal, and to compare the present value of the remainder for gift tax purposes (including appropriate discounts) with the projected future value of the principal remainder (without discounts).
A successful GRAT requires several ingredients: a person worth millions—or potential millions—who wants to avoid gift or estate tax and is willing to part with assets to do so; an asset that will rise in value while in the trust; and, if possible, low interest rates.
With these elements in place, the taxpayer sets up a GRAT with a set term of two years or longer and gives the asset to it before its value surges. Set-up costs include appraisal and legal fees.
Over the life of the trust, the person who set it up gets annual payments adding up to the asset's original value plus a return based on a fixed interest rate determined by the Internal Revenue Service. That is currently 1.6%, near a record low.
Meanwhile, ideally, the asset soars in value, and that growth is outside of the grantor's estate. When the GRAT's term ends, the asset goes to the beneficiaries—usually into another trust set up for their benefit.
The result: no gift or estate tax on the appreciation, even though it has been transferred.
One question remains: neither Zuckerberg nor Moskovitz have children. So who are these trusts' beneficiaries? It is possible to name unborn children—as well as future spouses and current friends or relatives—as beneficiaries of a GRAT.
Although this blog is focused primarily on matters of interest involving California probate, there are related topics worthy of discussion.
For example, while probate is the California court's supervision over the transfer of property from the deceased person's estate to the rightful heirs or beneficiaries, when that person is still alive he or she may not have the ability to make decisions about the property belonging to him or her. When we are alive but incapacitated (by a stroke, heart attack, auto accident, debilitating disease or some other reason), someone ought to be given the power to make decisions regarding our property when we are not able to make those decisions ourselves.
In those instances, a durable power of attorney for property management and financial affairs is useful. That type of California document "endures" our incapacity and continues to remain in effect. The person named in the durable power of attorney - the attorney in fact - steps into our shoes and is empowered to make decisions regarding our property.
There are basically two types of California durable powers of attorney. One becomes effective immediately upon being signed. In that case, the attorney in fact may exercise his or her powers even when we may still be competent. So, when using this type of power of attorney, be sure to give the power to someone who will not misuse it.
The second type of durable power of attorney becomes effective upon our becoming incapacitated. The power "springs" up when and as needed. The primary draw-back to a "springing durable power of attorney" is the common requirement that the attorney in fact must also present notes from two physicians declaring our incompetency. Getting those type of notes may be a challenge which could render the durable power of attorney ineffective.
For more information, call a California attorney. Call Mitchell A. Port at (310) 559-5259.
Approximately 70% of Americans don’t have a will. A will is a fairly simple document to create so why do so many people avoid it? Some might say: I don’t have anything to leave to my heirs; I’ll let them sort it out when I’m dead; I’m dead so it’s not my problem; I’ve got plenty of time to write my will; I can’t afford it, etc. Read about how to write your own will here.
Families today tend to be blended, containing spouses, ex-spouses, children, step-children, and adopted children. Parents of blended families—or any family, really—should take the time to draft a will to ensure their wishes are followed after they die. You certainly are capable of writing your own will, but most attorneys and financial advisors recommend getting the help of an attorney to draft a will to ensure all required details are covered. Individuals should also consider preparing a durable power of attorney for health and financial reasons.
Naming a guardian for your minor children and naming an executor are two important components of your will. What happens if neither parent is able to take care of the children? Without a will, the court appoints a guardian for your children.
Be sure to update your will if there’s a change in your marital status, you give birth to a child, move to a new state or any significant change in your life situation. It’s particularly important to write a new will if you’re in a second marriage and you have children from a former relationship. In some cases, your current spouse may automatically inherit your assets and your children may unintentionally be left out.
Forbes online has an interesting article on this topic here. It is worth reading.
Call the right probate and estate planning attorney for help. Call Mitchell A. Port at (310) 559-5259.
Among a California notary public’s various roles, one is to serve as an officer that authenticates the signing of important legal documents. A notary is simply an impartial witness to the taking of acknowledgements and/or affidavits, the signing of documents and administering oaths.
To become an officer of the state, a notary public must complete and pass a curriculum as well as a state standardized test. The would-be notary must also go through an FBI and California Department of Justice background check. The California Secretary of State publishes online the Notary Public Handbook which contains California laws relating to notaries public and is designed to assist an applicant in preparing for the notary public examination.
As an impartial witness to the execution of legal documents, all California notary publics are prohibited by law from giving or providing any information that can be construed as practicing law. A notary cannot provide legal advice; a notary is not an attorney (though some attorneys – like me - are notaries).
A notary public's power and authority comes from the State of California and is appointed and commissioned by California's Secretary of State. A California notary public must act in an impartial, unbiased and disinterested manner since the position is a privilege that results from being given a public office.
Some typical documents a notary public will notarize include real property deeds, living trusts, healthcare directives, Powers of Attorney for property management, property titles, grants and estate plans. For certain notarizations such as documents transferring title to real estate, notaries will also fingerprint the parties involved in the transaction.
As an estate planning attorney, I notarize the documents I have prepared for my clients since I am also a notary. In most cases, I won't notarize a document for someone who is not my client or for a document I have not prepared.
For steps to obtain a notary public commission, here's a brief checklist:
Complete Approved Education
Register for the Exam
Take the Exam
Submit Fingerprints via Live Scan
Await Commission Packet
Purchase Notary Public Materials
File Notary Public Oath & Bond
For more information about this, see the Secretary of State's website at this link.
The California Probate Code contains a lot of rules applicable to the one who serves as the trustee of a trust. Starting with Code section 16000, California's laws delineate the conduct of trustees ranging from activities the exercise of discretionary power to the content of reports prepared for the benefit of beneficiaries.
Selecting a trustee to run your estate in your place at the time you die ought to be done carefully and with a clear understanding of what the job requires. Once you've made up your mind about who to name as trustee in your trust, it is prudent to get that person's consent to serve as your trustee. It is also important that the trustee understand the principles and duties governing his or her conduct vis-a-vis the trust. Here are a few things to know:
For a free telephone consultation about your probate, call Los Angeles attorney Mitchell A. Port at (310) 559-5259.
On November 21, 2011, the IRS released its most recent publication on the topic of federal estate and gift taxes. The pub can be accessed at this link by clicking here. This updates the version released on December 14, 2009.
Most gifts are not subject to tax. Likewise, most estates are not subject to estate tax.
If you die during 2011, you can pass estate tax free up to $5,000,000. For those dying in 2012, add another $120,000. Gifts in amounts up to those figures may also be made tax free.
An extra tax free gift is permitted during any given year of up to $13,000.
Related articles on this topic include:
In another blog post, the topic addressing who is your IRA's beneficiary can be important. Leaving an IRA directly to heirs has many pitfalls: any withdrawn money will lose the inherent protections of the IRA, the heirs may exhaust the funds quickly to the detriment of any long-term tax deferral benefits and the money may be vulnerable to divorce settlements or creditors.
Trusts offer a safer option for passing on your IRA to heirs. Just like any assets held in trust, an inherited IRA left to a trust will limit exposure to both creditors and unchecked spending, thus providing greater assurance that long term tax deferral will be achieved. Furthermore, leaving an IRA to a trust with a responsible trustee can increase the likelihood that, along as there’s no imperative need for cash, your heirs’ tax deferral benefits will be maximized.
There is a difference between naming a “living trust” as the beneficiary of an IRA and transferring the funds to the trust’s name. The former action is permissible, often desirable and does not trigger the immediate recognition of the taxable income inherent in the IRA. The latter is a distribution triggering immediate taxable income.
It is common for the spouse who is the IRA account holder to designate the other spouse as the primary beneficiary. The complication arises when it comes to the contingent beneficiary. What if there are funds left in the IRA after both spouses have passed away? Should they name the children as the beneficiaries? At that point, many couples consider naming the “living trust” as the beneficiary.
As nothing in life is perfect, you should be aware that leaving an IRA to a trust has its disadvantages. The IRS interprets the minimum required distribution (MRD) rules strictly for trust beneficiaries, which can result in reduced tax deferral. Consequently, the children will not be able to use their own life expectancies to calculate the required minimum distributions, and may be forced to withdraw the funds over a period of as little as five years.
Take for example that you leave your IRA to a trust, naming your sister Stacey as the trustee. Stacey will have the discretion as to how much she distributes to your son Cary, who is the primary trust beneficiary.
This arrangement serves to protect the assets. Stacey can take minimum distributions from the IRA and hold the funds in trust, if she wants to keep Cary from depleting the money too quickly or losing the money to creditors or divorce.
The IRS considers this example an “accumulation trust” and as a result, the shortest life expectancy of all the possible trust beneficiaries will be used to determine MRDs.
Suppose that the IRA passes to the trust when Cary when he is 58, with a 26-year life expectancy on the IRS table. If his Aunt Glendene, 68 years old with an 18-year life expectancy, is the oldest of the secondary beneficiaries, money must be withdrawn from the IRA on an 18-year schedule. The result is that taking money from the IRA over 18 rather than 26 years will curtail tax deferral and reduce potential wealth building.
The best option is to name a standalone IRA beneficiary trust as the beneficiary as allowed by the 2005 Private Letter Ruling 200537044 approving an “IRA Trust” or a conduit trust. An IRA Trust has a single individual as a primary beneficiary. A standalone trust is designed to meet the requirements of a designated beneficiary trust; give each beneficiary the ability to use that beneficiary’s life expectancy for purposes of “stretching-out” distributions; and make it less likely that the beneficiaries will immediately cash out the IRA or take other actions that may have adverse tax consequences.
Using this new strategy, a benefactor begins by creating either an accumulation trust or conduit trust that will inherit his or her IRA. This trust should be a one-purpose trust. Following death, an independent party can “toggle” from one of these types of trust to the other, depending on the beneficiary’s needs. At the death of the owner of the IRA, this IRA Trust will divide into smaller “subtrusts,” one for each intended beneficiary.
For instance, you intend to divide your IRA among your four children. At your death, the IRA Trust (which becomes irrevocable at your death) will divide into one trust for each child.
Assuming your children can manage their inherited IRAs, each of the subtrusts can be structured as conduit trusts for maximum tax deferral and potential protection of principal. At any time during your life, you can amend the plan if you decide that one or more of your children needs the protection of an accumulation trust.
Letter Ruling 200537044 clarifies what happens after you die. It approves an arrangement in which each subtrust can have a “trust protector.” The person who serves as trust protector must be unrelated by blood to the trust beneficiary, but may have a personal relationship to him or her, such as a CPA, attorney, personal financial adviser or friend.
If adverse conditions come up, such as a beneficiary has creditor or marital problems, the trust protector can change a conduit trust to an accumulation trust by voiding the provision that requires the immediate payout of IRA distributions to the primary trust beneficiary. As a result, the trustee will gain the discretion to accumulate funds, and more significant asset protection is given to the beneficiary.
The Internal Revenue Service’s ruling can be helpful in another way too. If an accumulation trust had been setup for a beneficiary with current financial problems that have since been resolved, the trust protector may switch it to a conduit trust by requiring the full payout of MRDs.
This post-death switch can be done only once, regardless of the direction the switch is made. The decision can be made on a beneficiary-by-beneficiary basis so that some beneficiaries have conduit trusts and some beneficiaries have accumulation trusts.
The IRA Trust has been approved in a Private Letter Ruling which technically applies only to the taxpayer from whom the ruling was requested.
For more information about incorporating IRA Trusts into your estate plan, please call Mitchell A. Port at (310) 559-5259.
You may want to consider making use of your gift tax exemptions in the next few weeks. Why? The “Super Committee” is scheduled to announce its proposals on November 23rd which might remove current benefits. The proposals may include changes in the current death tax regime, that is, the estate, gift and generation-skipping transfer tax laws. For example, by as soon as December 31st, the Federal gift tax exemption could be reduced from the current $5 million to $1 million or, though unlikely, as early as the November 23 announcement date. Other estate planning techniques may also be of interest, some of which may be affected by changing tax laws. These techniques are summarized elsewhere in this blog as well as below.
Use of $5 million Federal gift tax exemption. The current Federal gift tax exemption of $5 million (or $10 million for married couples who elect to split gifts) is scheduled to revert to $1 million (or $2 million for married couples who elect to split gifts) on January 1, 2013. A proposal was submitted to the Super Committee to revert to a $1 million Federal gift tax exemption one year earlier, on January 1, 2012, or possibly as early as November 23rd – just 3 weeks away. Consequently, you may wish to consider making immediate gifts to use part or all of the $5 million (or $10 million) Federal gift tax exemption.
Qualified personal residence trusts (“QPRTs”). In a depressed real estate market, a gift to a QPRT may result in shifting appreciation to your trust beneficiaries. Although this benefit is somewhat offset by the current low interest rates (which reduce the discount associated with the donor’s retained interest and result in a corresponding increase in the value of the gift), if you own depressed residential real estate you may still wish to consider establishing a QPRT.
Valuation discounts. There have been a number of proposals considered by the Super Committee that would reduce the availability of discounts associated with gifts of interests in some limited partnerships or other entities. You might therefore want to establish and transfer interests in such entities to take advantage of potential valuation discounts.
Low-interest loans. The lowest rates for intra-family loans for November 2011 are .19% (for loans up to 3 years), 1.20% (for loans greater than 3 years and up to 9 years) and 2.67% (for loans greater than 9 years). With low interest rates like these, you might make low-interest loans to family members or to trusts for their benefit or refinancing any loans that are currently outstanding.
Charitable lead annuity trusts (“CLATs”). For those of you who have been making substantial annual gifts to charity, consider creating a CLAT to fund those gifts since, like a GRAT, a CLAT is particularly effective in transferring wealth to family members in a low-interest-rate environment. Another benefit of acting now is that a current CLAT may take advantage of charitable deductions that Congress may limit in the future.
Grantor retained annuity trusts (“GRATs”). The Super Committee is considering a proposal to require that GRATs have a 10 year minimum term. Often, there are certain benefits associated with GRATs lasting less than 10 years. For those of you who would like to establish shorter-term GRATs, you should do that soon. In addition, a GRAT created now, regardless of the length of the term, would take advantage of the historically low “benchmark” rate (i.e., the minimal investment return necessary to pass wealth to the trust beneficiaries) of 1.4% for November 2011.
If you would like to discuss any of these tax techniques, contact Mitchell A. Port, an estate planning attorney, at (310) 559-5259.
“I don’t have an estate in California big enough or worth doing any planning for.” This often stated comment is many times the wrong reason for not having a living trust, a will, a power of attorney for property management or an advance health care directive.
The word "estate" simply refers to the things you own, your assets. For example, money in a checking account is an asset you own. If you have a checking account, you have an asset and you have the beginnings of an estate. Equity in your house or ownership of a life insurance policy or anything else you own are additional assets making up your estate.
Depending on what property makes up your estate, when you die California may require that ownership over it can change only with the court’s oversight. To avoid probate in California, a living trust which owns your property should be prepared; the living trust doesn’t change very much the power you still have over your property so you often have nothing to lose by getting a living trust.
Call an experienced estate planning attorney in Los Angeles who is able to help you no matter where in California you may live. Call Mitchell A. Port at (310) 559-5259 for estate planning help.
For 2011 and 2012, a spouse will inherit their deceased spouse's unused estate and gift tax exemptions. The previous law stated that the exemption amount in 2011 was to be $1 million with a taxation rate of 55%. This law was changed at the end of 2010 making the federal estate tax exemption $5 million with a taxation rate of 35% over that amount for 2011 and 2012.
Because of changes to the tax law, you may now be able to pass estate tax-free a total of $10 million to your children and other heirs. Technically speaking, a surviving spouse, assuming an election is made by the executor of the deceased spouse’s estate, will be able to increase his or her applicable exclusion amount by the amount of the unused exclusion amount of the deceased spouse (dying after 2010). This new ability to increase the surviving spouse’s applicable exclusion amount by the unused exclusion amount of the deceased spouse has been described by estate planners as the “portability of unused exclusion between spouses.”
For more on this, the American Institute of CPAs has a pretty good article by clicking at this link. For estate tax planning help from a California tax attorney, call Mitchell A. Port at (310) 559-5259.
Estate Planning Kits In California's Major Cities: Los Angeles, San Diego, San Francisco, Sacramento
Many of my California estate planning clients at first ask about using an off-the-shelf trusts and wills kit and whether it may be detrimental to their heirs. Don’t get estate planning advice from a box. Purchasing a kit, filling in the information it asks for and then believing that your estate and tax planning needs are satisfied may create more legal issues than it solves. Estate planning software purchased online or from one of the stationary superstores doesn’t address all kinds of issues which may be important to you such as:
Accounting. Whether or not the trustee must provide the beneficiaries with an accounting at least once a year and whether the beneficiaries have the right to challenge the accounting.
Prior Marriages. Whether to distribute property from the trust estate when the first spouse who dies has kids from a prior marriage or leave the whole estate to the surviving spouse. Later, when the surviving spouse dies, how does the property go to the kids of the other spouse when the surviving spouse wants to leave the entire estate to his or her own kids.
Trustee’s Compensation. Do you want to pay your trustee? If so, how much? A fixed dollar amount, a percentage of the value of the estate or some other calculation? Would you not pay a family member serving as trustee but pay a non-family member?
Trustee’s Powers. You have options about how much power to give your trustee to handle your affairs after your death. Kits won’t provide you with flexibility but give boilerplate language.
Have your wills, living trusts and other California estate planning documents prepared by a qualified attorney. Call Mitchell A. Port, a Los Angeles tax lawyer, for help. Call (310) 559-5259.
The Wall Street Journal online ran an article on March 14, 2011 which in part said the following about preparing our children for when they become an adult while away at college:
5. THE ADVICE: Help children protect their health and finances from uncertainty and risk.
Once a child turns 18, parents no longer have the legal authority to access the child's medical records or make health or financial decisions for the child, says Laura Mattia, a Fair Lawn, N.J., certified financial planner.
That loss of control over a child's care "is a hard thing for a parent to hear," she says, but families need to create a "game plan" to address the unexpected.
It should include three documents—a health-care directive, a HIPAA release and power of attorney—which together allow parents to access a child's medical records and make decisions on the child's health care and finances if necessary.
Ms. Mattia gave this advice to a client whose child was going to study in London for a semester. The client initially was shaken by the realization that she could no longer make crucial decisions on her daughter's behalf without taking legal action, Ms. Mattia says.
But it prompted a conversation between mother and daughter that brought into the open the anxiety they were both feeling about being so far apart and introduced the daughter to the importance of financial and estate planning. It also prompted the mother to take another look at her own estate plan.
"It was an empowering discussion for both the mother and daughter," Ms. Mattia says.
It is a common myth related to California living trusts that nothing needs to be done when the person for whom the trust was made dies. While a revocable living trust can help avoid probate, it does not mean that there is nothing to do upon the death of a settlor/trustor.
Among some of the things that usually have to be done by a successor trustee are:
Obtain a taxpayer identification number from the Internal Revenue Service
Order timely appraisals of all trust assets
Provide notice to Medi-Cal
Marshall the estate’s assets so as to get a complete picture of the property in the estate
Fund subtrusts according to the terms of the living trust
Prepare statutory notices to beneficiaries
Prepare and file a final income tax return for the person who passed away
This list is not exhaustive; there are many more things that a trustee may be legally required to do. There are still procedures of legal significance that need to be done upon the death of a settlor. Failure to do some of these things leaves a successor trustee open to liability for breach of fiduciary duties.
So its not that the use of a properly funded revocable living trust avoids any and all costs associated with the handling of one’s affairs. However, in the ordinary situation the fees charged by an attorney should be far less than the statutory fees for probate.
Consult for free over the phone with a California trust adminstration attorney. Call Mitchell A. Port at (310) 559-5259.
Here are 10 things NOT to do in terms of estate planning in Los Angeles, Santa Barbara, Ventura, San Diego and all other California counties:
1. Use non-experts for advice.
2. Forget to fund your living trust.
3. Own large bank or brokerage accounts as joint tenants.
4. Forget to have your will and living trust reviewed every few years.
5. Lose your original documents.
6. Name your estate as the beneficiary of your IRA or other retirement account.
7. Forget to coordinate your beneficiary designations with your plan.
8. Leave property directly to a minor child or incapacitated person.
9. Use the ostrich approach to estate planning.
10. Underestimate the value of using an estate planning specialist.
The best thing you can do to learn more is to consult with an estate planning attorney. Call Mitchell A. Port for a free estate planning telephone conference at (310) 559-5259.
"Per stirpes" and "per capita" are two terms that often appear in estate planning documents like California wills and living trusts. They are confusing and sometimes mistakenly used interchangeably. Here’s what they mean:
Both terms usually apply to a situation where you leave property to a group of people, like your children, some of whom die before you die. As an example, let's say that you have 5 kids. Four of your kids survive you but one of your kids (Stacy, who has five children of his own) dies before you.
If your California will and living trust leave your property "in equal shares per stirpes to my descendants who survive me", then your property will be divided into five equal shares. Each surviving child receives a share, and Stacy's five children each receive one-fifth of his share.
If Stacy died before you but didn't have children of his own who are alive when you die, then only four shares are created.
Alternatively, you could leave your property "in equal shares per capita to my descendants who survive me." In this situation, 9 equal shares will be created giving one share for each living descendant. In other words, there is a share for each child of yours and one for each of Stacy’s children. Per capita allocations can give Stacy's children more than 50% of your property.
Another option would be to leave your property "in equal shares per capita to my children who survive me." In that case, only four shares are created and no share is created for either Stacy since he didn't survive you or for his children because they aren't your children. This language cuts out Stacy and his family entirely and may not be the preferred approach.
Discuss your options with a California estate planning attorney. Call Mitchell A. Port at (310) 559-5259.
This article is reprinted from my friend and asset protection attorney Jacob Stein of Kleuger & Stein, LLP.
On December 16, 2010, Congress passed and sent to the President the "Middle Class Tax Relief Act of 2010." The law contains the most sweeping change in the taxation of estates in 29 years. It also contains a ticking time bomb that might explode in the faces of the beneficiaries of many trusts. As a result of the new law, many existing estate plans no longer work, and many others will cause actual harm. As a result, every married couple's existing estate plan should at least be reviewed, if not scrapped.
Here are the major estate tax changes:
The exclusion from estate tax for citizens and residents is increased to $5 million. If a person dies with an estate under valued at under $5 million, his or her estate pays no estate tax. The $5 million exclusion will increase based on cost-of-living adjustments. The exclusion was $3.5 million in 2009.
If a decedent's estate exceeds $5 million, the rate of tax on the excess is reduced to 35%. The highest rate was 45% in 2009.
A married couple can shield $10 million from estate taxes. If the first to die of a married couple (the "deceased spouse") does not use his or her $5 million exclusion, the administrator of the deceased spouse may elect to give the unused exclusion to the surviving spouse.
It is this last change, the "portability" of unused estate tax exclusions, that will cause many estate planners – and their clients – to question the viability of their existing estate plans.
In order to understand the problem, we must focus on a basic estate tax concept, the "unlimited marital deduction" ("UMD"). With a couple of minor exceptions beyond the scope of this article, if a person dies and leaves his or her estate to his or her surviving spouse, the UMD says that there are no estate taxes on the first death, regardless of the size of the estate. No fancy estate planning is required in order to qualify for the UMD. For example, were Bill Gates to write a one-sentence will on the back of an envelope saying "I give everything to my wife when I die," the UMD would kick in, resulting in his widow receiving the entire estate free of estate taxes. The theory behind the UMD is that married couples should be treated as a unit, with estate tax coming due only on the death of the surviving spouse.
The interplay of the exclusion and the UMD resulted in married couples losing one estate tax exclusion. Let's assume Mr. and Mrs. Jones, a married couple with a $7 million estate. If Mr. Jones had died in 2009, when the exclusion was $3.5 million, leaving everything to Mrs. Jones, the UMD results in no estate taxes on Mr. Jones' death. If Mrs. Jones had also died in 2009, the IRS would have allowed a $3.5 million exclusion to Mrs. Jones' estate, and would have taxed everything above $3.5 million, resulting in a estate tax of $1,455,800. If Mr. and Mrs. Jones had never met and never married, and each had died in 2009 with a $3.5 million estate, the combined estate tax would have been zero!
For many years, the IRS has allowed married couples to avoid this result by means of a trust that, unlike Bill Gates' hypothetical one-sentence will, does require some fairly sophisticated estate planning. The planning device is an "A-B" trust, and it operates as follows: Let's assume that Mr. and Mrs. Jones' estate is valued at $7.1 million, and that Mr. Jones died in 2009, when the exclusion was $3.5 million. Upon his death, the estate divides into two sub-trusts, a "Marital Deduction Trust," [the "A" trust] and a "Credit Shelter Trust" [the "B" Trust.] The "B" Trust is allocated an amount equal to the exemption in effect in the year of the deceased spouse's death ($3.5 million). The "A" Trust is allocated the balance, i.e. $3,600,000. On Mr. Jones' death, the Marital Deduction Trust is not subject to estate tax because it qualifies for the UMD. The "B" Trust is subject to estate tax, but the assets allocated to it equal Mr. Jones' exemption, resulting in no tax. So far, we have not done anything to avoid estate taxes for Mr. Jones or Mrs. Jones; a one-sentence will leaving everything to Mrs. Jones would have sufficed to completely avoid estate taxes on Mr. Jones' death.
The magic that is the A-B trust becomes apparent on the second death. Let's assume Mrs. Jones also died in 2009. The $3.6 million in the "A" trust is subject to tax, Mrs. Jones gets her $3.5 million exemption, and only $100,000 is subject to tax. None of the assets in the "B" trust are subject to tax.
In order for the A-B technique to work, the "B" Trust must restrict Mrs. Jones' use of the property. She may not have a "general power of appointment" over the property, i.e. the unfettered right to dispose of the property. Usually, her power to invade the trust is limited to Mrs. Jones' "health, education, support and maintenance" needs, which shouldn't cramp her style, but is less than the complete discretion she has over the "A" Trust. Not having a general power of appointment over the assets means that she is deemed not to own the assets, and if she is deemed not to own them, her estate is not taxed on them.
All this will be unnecessary on January 1, 2011. Starting then, Mr. Jones' executor will be able to give Mr. Jones' unused $5 million exemption to Mrs. Jones, even with a one-sentence will written on the back of an envelope. The potential problem lies in those "A-B" trusts that pre-date the new law, and the problem is not an estate tax issue; it's an income tax issue.
One of the biggest benefits of the Internal Revenue Code is the "step-up" in basis when a person dies. For example, had Mr. Jones bought Ford Motor Company stock for $10 per share, and sold it during his lifetime for $100 per share, he would have realized a $90 capital gain. But if Mrs. Jones had inherited the stock from Mr. Jones, she would have obtained a $100 date-of-death basis in the stock, and all of the gain inherent in the stock would have been forgiven. Had she later sold the stock for $101, her capital gain would have been $1, not $91. But in order to obtain a step-up, the asset must be included in a decedent's estate, and none of the assets in the "B" trust are included in the decedent's estate. In our example, if the Ford stock had increased in value from $100 to $300 following Mr. Jones' death, their children would receive a $100 basis in the stock, not $300.
In prior years, we weren't much troubled by this result. We were willing to forego the step-up in basis in order to avoid the estate tax, because estate tax rates were always higher (45%) than capital gains rates (15%). But with a married couple now able to shield a $10 million estate from estate taxes without an A-B trust, any married couple with an estate small enough so as to likely not incur an estate tax will now find that their "B" trust is an income tax albatross. These married couples will lose the basis step-up, with all of the resulting capital gains taxes, without any corresponding estate tax savings.
In addition to the tax detriment that is inherent in the A-B trust, there is a non-tax reason that many existing A-B trusts may now no longer meet their creators' needs. In order to qualify for the estate tax benefits of the A-B trust, the tax code instructed us how to write those trusts. Specifically, following the first spouse's death, the surviving spouse may freely alter or amend the "A" trust, the "B" trust becomes irrevocable following the first spouse's death. Many people were willing to suffer this consequence if it meant a substantial reduction – or elimination – of estate taxes. But for married couples with an estate that is not likely to reach $10 million, this consequence may no longer be acceptable.
There are some circumstances when a "B" trust may be desirable for non-tax reasons, and those still remain intact. For example, the first-to-die spouse may want some assets to be placed in an irrevocable trust to make certain that the children receive those assets, and not the survivor's new love interest.
Bottom line: Any married couple with an "A-B" trust should, at the very least, have it reviewed. Depending on the size of the estate and the nature of the assets, many married couples will wish to amend or revoke their existing estate plans.
Under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, the estate tax exempt amount is $5 million in 2011 and 2012, and reverts to $1 million beginning in 2013. For 2011 and 2012 only, a deceased spouse’s unused exempt amount can be transferred to the surviving spouse. This provision is known as “portability”. As an owner of a large IRA, you ought to know how you may take advantage of portability by naming your spouse as beneficiary of your IRA benefits.
Before portability, if the decedent did not have enough nonretirement assets to fully fund the credit shelter trust, there was a tradeoff between the income tax benefits of leaving the IRA to the spouse and the potential estate tax benefits of leaving some or all of the IRA to the credit shelter trust or to or in trust for the children or grandchildren.
Portability largely solves the problem. The IRA owner can name the spouse as the beneficiary of the IRA. The spouse can take the IRA, roll it over, name new beneficiaries to get a longer stretch-out, and convert to a Roth IRA, either all at once or over a number of years. Except with respect to the income and growth on the exempt amount during the spouse’s lifetime, the estate tax benefit of the credit shelter is preserved. Portability allows the IRA owner’s unused estate tax exempt amount to be transferred to the spouse.
In order to transfer the unused estate tax exempt amount to the spouse, the IRA owner’s estate must file an estate tax return and elect to transfer the unused estate tax exempt amount to the spouse. The opportunity to shelter the income and growth on the unused estate tax exempt amount during the spouse’s lifetime is lost.
Nevertheless, the ability to leave the IRA to the spouse while preserving the unused estate tax exempt amount provides a major benefit, and simplifies the planning for IRA owners with large IRAs who do not have sufficient other assets to fully fund the credit shelter trust. This situation will be more common with a $5 million estate tax exempt amount.
For much of 2010, lawyers advised wealthy clients to take advantage of a unique “opportunity” to make taxable gifts. With both the gift tax and the estate tax automatically scheduled to increase to 55% in 2011, the 35% gift-tax rate on gifts of more than $1 million last year looked like a bargain. Now, estate planners are in the awkward position of trying to figure out what clients who followed their advice can do to reverse those transfers.
Their collective chagrin stems from the sweeping tax overhaul President Obama signed Dec. 17. Under this law the amount that anyone can transfer tax-free during life went up this year from $1 million to $5 million ($10 million for married couples). So by simply waiting until 2011 to make gifts, it might have been possible to avoid gift tax altogether. What’s more, under the new law the tax on transfers that exceed the limit stayed at 35%, instead of going up to 55%, so paying tax in 2010 wasn’t a good deal for this reason either.
What’s the remedy for donors’ remorse?
There’s a dearth of viable options for clients who would like to undo taxable gifts made in 2010. They can disclaim the gift (if it’s not too late for that); make the case for rescission (in this context the legal theory rests on a frail reed), or seek a private letter ruling from the Internal Revenue Service asking for mercy (a costly process). Without clarification or leniency from the Service, clients may instead opt for legal self-help. What does that mean in this context? It might well be a euphemism for tax fraud.
Source: Steve Leimberg's Estate Planning Email Newsletter. For more information about this, also look at a Forbes.com article.
The new federal estate and gift tax laws (briefly summarized in this posting) do not impact many of the laws on the books in California about probate. It may be easy to think that because Congress will allow each one of us to pass up to $5 million estate tax free that we don't need a living trust since there might not be any tax benefits to having a trust. It is IMPORTANT TO KNOW that passing ownership of property to an heir or beneficiary may still require going through probate since the law passed by Congress does not avoid probate. Estate taxes and probate are unrelated since one involves federal rules while the other involves state rules. To avoid probate, Californians should use a living trust even if the estate is under $5 million in value and the trust provides no tax benefits.
Maximum Estate Tax Rate
The estate tax rate is lowered to 35% for deaths in 2011 and 2012, and for 2010 deaths where the estate tax regime is elected.
Unused Estate Tax Exemption "Portable" to Surviving Spouse
For 2011 and 2012 deaths, unused estate tax exemption of the first spouse to die can be transferred to the surviving spouse and added to his or her own exemption. There are limitations on receiving exemption from more than one predeceased spouse, however.
Sunset in 2013
Beginning in 2013, everything goes back to the 2001 rules, so the estate tax exemption will be $1 million, with a 55% rate; the gift tax exemption will be $1 million with a maximum 55% rate for gifts above $1 million; and the GST exemption will be $1 million (adjusted for inflation from 1997).
Estate Tax Exclusion Increased for 2011 and 2012 Deaths
The estate tax exemption amount will be $5 million for deaths in 2011, and $5 million indexed for inflation in 2012. For deaths in 2013 and later, however, the sunset causes the 2001 estate tax exemption ($1 million) to come back.
Estate and Generation-Skipping Transfer Tax Reinstated for 2010 Deaths, With Election
For 2010 deaths, an election may be made between either (a) paying estate tax with a $5 million exemption and 35% maximum rate and receiving a stepped-up income tax basis or (b) paying no estate tax but receiving carryover basis, subject to certain modifications. The estate is deemed to choose option (a) unless affirmatively electing option (b). Method and deadline for electing have yet to be determined.
Gift Tax Rate and Exclusion Remain As-Is for 2010 Gifts, but Increase for Later Years
For 2010 gifts, the lifetime gift tax exemption will remain $1 million and the rate for gifts above $1 million will remain 35%. For gifts in 2011 and 2012, however, the lifetime gift tax exemption will increase to $5 million (indexed for inflation in 2012); the rate for gifts above $5 million will remain 35%. The sunset causes gifts in 2013 and later, however, to be subject to a lifetime gift tax exemption of $1 million and a maximum rate of 55% for gifts above $1 million.
GST Exemption Increased and Rate Decreased
For gifts and deaths in 2010 through 2012, the GST Exemption is $5 million (indexed for inflation in 2012). GST Exemption may be allocated for 2010 deaths even if the "no estate tax" option is elected. The GST Tax rate is 35% for 2011 and 2012.
No GST Tax Payable in 2010
For gifts and deaths in 2010 only, the Generation-Skipping Transfer (GST) Tax rate is 0%, so no GST tax will be payable with respect to such transfers. This could present significant 2010 year-end planning opportunities for a small number of individuals.
Certain Filing Deadlines Extended
For deaths from January 1, 2010, through December 16, 2010, deadlines for filing estate and GST tax returns, paying estate tax, and making disclaimers are extended until the later of September 17, 2011 (9 months from the date of enactment), and the regular due date.
Most think that the "death tax" is simply a tax on what you own at the time of your death even though you already paid tax on the income used to acquire those things which are subject to the "death tax". The legal definition of the estate tax is that it is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death.
Frequently Asked Questions on Gift Taxes
Find some of the more common questions dealing with gift tax issues as well as some examples of how different types of gifts are treated.
Frequently Asked Questions on Estate Taxes
Find some of the more common questions dealing with basic estate tax issues.
If you give someone money or property during your life, you may be subject to federal gift tax.
Filing Estate and Gift Tax Returns
Learn when to file estate and gift taxes, where to send your returns, and get contact information if you need help.
2010 Brings Big Changes to the Estate and Gift Tax
Learn about the legislative changes that affect Estate and Gift taxes.
What do we mean when we say someone has enough decision-making capacity to be “competent”? The law, psychology and finance are all waking up to issue of decision-making capacity. California estate planning attorneys are having to decide from time to time whether a client can make major decisions about finances or future plans.
The American Bar Association and the American Psychological Association have published a handbook for lawyers entitled “Assessment of Older Adults with Diminished Capacity” that is worth reading.
The lesson: get your California Will, revocable living trust, durable power of attorney for property management and advance health care directive done sooner than later.
Call an experienced estate planning attorney for help. Call Mitchell A. Port at (310) 559-5259.
Deborah L. Jacobs of the New York Times wrote the following article entitled: "Do the estate tax limbo: Financial strategies while we wait to see what happens"
The federal estate tax is scheduled to rise from the ashes next Jan. 1, and a lot more families may feel its bite unless Congress changes current law.
The resulting uncertainty about what Congress might do, and if and when Congress might do it, is complicating financial planning. It’s a particular burden to the retired, who must find a balance between what they need to live on and how much they might give away to avoid estate taxes.
Fortunately, a number of strategies are available, and not all of them involve depleting your resources.
The amount of each estate that is exempt from estate tax is scheduled to become $1 million in 2011. That’s down from $3.5 million in 2009, when the tax was last in effect. The tax on the balance is to rise to 55 percent in most cases. And that’s up from the 2009 rate of 45 percent.
Here are some tax strategies to consider.
Give it away
The easiest way to reduce the tax bill is to give as much as $13,000 a year each to as many people as you like — which you can do without paying gift tax.
Spouses can combine this annual exclusion to give $26,000 jointly to each of as many people as they would like, or they can give the money to a trust for someone’s benefit.
To give away more than that, you can count your gift against the $1 million lifetime exemption — the total of taxable gifts each person can make without incurring a gift tax.
During this period of uncertainty, buy a one- or two-year term policy to cover the tax bill if the exemption amount is only $1 million, said Ann B. Burns, a lawyer with Gray Plant Mooty. The policy can be canceled if Congress eases your estate tax concerns.
Be sure that your beneficiaries, not you, own the policy, or the proceeds will count as part of your estate and could be subject to tax. As owners, your beneficiaries must pay the premiums, but you can give them the money to do that using annual gifts. If you already own a policy, sell it to the trust or to family members for its fair market value.
A widow or widower who remarries gains the estate tax advantage available to all married couples: you can leave an unlimited amount to your spouse — provided she or he is an American citizen — with no estate tax applied. The assets must be left outright or in a certain type of trust.
In the process, though, the remarrying widow or widower would lose the late spouse’s Social Security benefits, said Joshua S. Rubenstein, a lawyer with Katten Muchin Rosenman.
This strategy affects only the assets your deceased spouse left to you; assets left to other beneficiaries are unaffected.
Make a loan
If you lend money to family members — say, to buy a house or a car or to start a business — you create a win-win situation.
You must charge a minimum rate of interest set each month by the Treasury, called the applicable federal rate, to avoid potential gift tax and income tax consequences.
For September, the rate for loans lasting more than nine years and requiring monthly payments is an attractive 3.6 percent.
Go to college
Section 529 education savings plans are primarily a tool for financing education — your own or a family member’s. Earnings in the account are exempt from federal tax, provided the money is withdrawn to pay for tuition or certain expenses for college or graduate school.
Another attraction of these accounts is that you can tap the money yourself if you need it, making 529 accounts a good way to hedge your bets. To have this option, you must name yourself as the owner, said Susan T. Bart, a lawyer with Sidley Austin.
The law permits lump-sum deposits, using the annual exclusion, of as much as $65,000 a person at once or $130,000 for married couples, provided you file a gift tax return that treats the gift as if it had been spread over five years. If you die before the five years is up, the part of the gift that reflects the number of years still to go will be considered part of your estate.
Make a trust
With a grantor retained annuity trust, known as a GRAT, you put appreciating assets into an irrevocable trust and retain the right to receive an annual income stream for the term of the trust.
This annuity is based on the Section 7520 rate set each month by the Internal Revenue Service. If you survive the trust term — a condition for this technique to work — any appreciation above the set rate can go to family members or to trusts for their benefit. Under current law, it is possible to create a GRAT that will result in no taxable gift, or a nominal one.
These trusts are not appropriate for people who cannot stomach complexity, and they cost at least $5,000 to $10,000 to set up, Burns said. They work best for assets where rapid appreciation is expected, she said, for instance, when a company is sold or goes public.
If the IRS fails to assert a tax deficiency against a transferor before the running of the statute of limitations against a transferor, the transferee may nevertheless be liable for estate, gift or generation-skipping transfer tax under the concept known as “transferee liability.” Section 6901(c) allows one year after the expiration of the limitation period against the transferors for the IRS to determine a liability against the transferees under §6324(b).
Fiduciaries may be personally liable for payment of transfer taxes under the transferee liability doctrine and beneficiaries may be liable as well.
Read the actual Memorandum Opinion in the Upchurch case.
Estate and Gift Taxes
The estate tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death.
Find some of the more common questions dealing with basic estate tax issues.
If you give someone money or property during your life, you may be subject to federal gift tax.
Learn about the legislative changes that affect Estate and Gift taxes.
Find some of the more common questions dealing with gift tax issues as well as some examples of how different types of gifts are treated.
Learn when to file estate and gift taxes, where to send your returns, and get contact information if you need help.
Stay up to date with the tax law changes related to estate and gift taxes.
Estate and Gift Tax Treaties (International)
Forms and Publications - Estate and Gift Tax
Publication 950, Introduction to Estate and Gift Taxes
Another terrific newsletter has been published by my friend and asset protection attorney Jacob Stein of Klueger & Stein, LLP. In it Jacob discusses the limitations of single member LLCs as an asset protection device. Read more here.
When does hiring a California estate planning attorney make sense? Here are a few reasons:
You have a taxable estate
You have minor children and want to provide for distributions to them at intervals or for specific purposes
You have a beneficiary who is disabled
Your children have drug or alcohol problems and need a trust that will take that into consideration
You want to benefit a charity
You own a business and want to provide for someone to take over the business after your death
You own real estate in more than one state
You are in a second marriage with children of other relationships
You have substantial assets in 401(k)s or IRAs
You want to have someone you can call when you have questions or want to make changes in your documents
Contact an experienced California lawyer to get advice on your estate planning needs. Call Mitchell A. Port at 310.559.5259 to minimize the impact of death and taxes.
Since California estate planning documents provide for your wishes in the event you become incapacitated and later distribute the wealth you have accumulated over your life at the time you die, your will, living trust and durable powers of attorney are some of the most important documents you will sign. Where to keep these documents is an important decision.
While a safe deposit box or a home safe is probably the most secure place to keep any documents where you can be assured that they are protected from theft, fire, damage, tampering or loss, I recommend leaving them in a more accessible place.
A power of attorney is used during your incapacity and if the person who has been given power by you cannot get into your safe deposit box or home safe because they either don’t have a bank key or combination to a lock, those documents won’t be too helpful in your time of need.
Don’t be too concerned about your will, living trust or power of attorney being stolen: who wants those documents anyway? They cannot be used if you are alive and well. At the moment you die, just pre-arrange with your executor or trustee of your living trust to be sure he or she knows where your originals are so they can get to them before anyone else. As for the possibility of losing them in a fire, simply get another original set from the lawyer who wrote the documents if they are burned or destroyed.
Masters in Accounting was created as a nonprofit resource to serve students considering enrolling in a masters in accounting program. Actively maintained, Masters in Accounting is a nonprofit website which lists and links to every accredited masters in accounting program as well as answers some basic questions about the degree so that students have a single unbiased resource from which they can begin their research.
This blog was listed in the "101 Top Tax Policy Blogs" featured in Masters in Accounting.
The deadline for the completion of qualifying First-Time Homebuyer Credit purchases has been extended. Taxpayers who entered into a binding contract before the end of April now have until September 30, 2010 to close on the home.
The Homebuyer Assistance and Improvement Act of 2010, enacted on July 2, 2010, extended the closing deadline from June 30 to Sept. 30 for eligible homebuyers who entered into a binding purchase contract on or before April 30 to close on the purchase of the home on or before June 30, 2010.
Here are five facts from the IRS about the First-Time Homebuyer Credit and how to claim it.
If you entered into a binding contract on or before April 30, 2010 to buy a principal residence located in the United States you must close on the home on or before September 30, 2010.
To be considered a first-time homebuyer, you and your spouse – if you are married – must not have jointly or separately owned another principal residence during the three years prior to the date of purchase.
To be considered a long-time resident homebuyer, your settlement date must be after November 6, 2009 and you and your spouse – if you are married – must have lived in the same principal residence for any consecutive five-year period during the eight-year period that ended on the date the new home is purchased.
The maximum credit for a first-time homebuyer is $8,000. The maximum credit for a long-time resident homebuyer is $6,500.
To claim the credit you must file a paper return and attach Form 5405, First Time Homebuyer Credit, along with all required documentation, including a copy of the binding contract. New homebuyers must attach a copy of the properly executed settlement statement used to complete the purchase. Long-time residents are encouraged to attach documentation covering the five-consecutive-year period such as Form 1098, Mortgage Interest Statements, property tax records or homeowner’s insurance records.
For more information about the First-Time Homebuyer Tax Credit and the documentation requirements, visit IRS.gov/recovery.
The following article is reprinted from a newsletter written by my friend, Jacob Stein, an asset protection attorney at Klueger & Stein, LLP:
Spouses' Liabilities to Third Parties: California Creates a Problem and Provides a Solution
Assume that a spouse in California becomes liable to a third party, either as a result of a tort claim, a business debt or any other source. To what extent may the other spouse (the "non-debtor spouse") be held liable for the debts of the "debtor spouse"? Unfortunately, California statutory law is mostly good news for creditors and bad news for married debtors. But the Family Code provides spouses who engage in some early planning with an escape hatch, permitting the non-debtor spouse to avoid the debts of the debtor spouse.
The problem has two sources. The first is that most of the assets of married spouses in California are community property. A spouse's earnings are community property, and assets acquired during the marriage with the earnings of one or both spouses are also community property. Even if an asset started out as a spouse's separate property, either having been received by one spouse as a gift or an inheritance or having been owned by one spouse prior to marriage, it is likely that the asset will, over time, be commingled with community property and thus became community property.
It is the second source that really creates the problem. Section 910 of the Family Code provides that, with limited exception, "the community estate is liable for a debt incurred by either spouse before or during marriage, regardless of which spouse has the management and control of the property and regardless of whether one or both spouses are parties to the debt or to a judgment for the debt." As a result of §910 -- and contrary to widespread belief – there is no such thing in California as a "community debt" or a "separate debt." The issue is not the nature of the debt but the nature of the asset. If the asset is part of the "community estate," the asset will be subject to seizure by a creditor of either spouse. The confusion probably results from the experience of family law practitioners. In the context of a divorce proceeding, the court is required to determine which of the debts that arose during the marriage were "separate or community and confirm or assign them to the parties..." Family Code §2551. But outside of the context of a divorce (and, to a lesser extent, in probate) there are no "community" or "separate" debts. Community property will stand to answer for the debts of the debtor spouse even if the debt was incurred for the debtor spouse's exclusive personal benefit. See In re Soderling, 998 F.2d 730 (9th Cir. 1993).
The rule for spouse's separate property is very different. Except for "necessaries of life," the separate property of a non-debtor spouse is not liable for the debts of the debtor spouse, whether the debt arose prior to or during the marriage. Family Code §913-914.
The harshness of the rule embodied in §910 is slightly mitigated by Family Code §911, which provides that the marital earnings of the non-debtor spouse will not be held to answer for the premarital debts of the debtor spouse. In effect, this means that a creditor cannot garnish the wages of a nondebtor spouse for the premarital debts of the debtor spouse. Once the nondebtor spouse has received the wages, the wages are liable for the premarital debts of the debtor spouse unless the nondebtor spouse deposits the wages in an account to which the debtor spouse has no access.
It is interesting to note how radical a departure Family Code §910 is from the forty "common law" states that do not have a community property regime. In these states, the general rule is that assets -- including earnings -- titled in the name of a non-debtor spouse are not liable for the other spouse's debts. See, e.g. Ill. Compiled Statutes ch. 750 §65/5 ("...neither the wages, earnings or property of either [spouse] nor the rent or income of such property, [shall] be liable for the separate debts of the other.")
Moreover, many common law states have retained "tenancy by the entirety," a form of ownership for real property. If property is titled as such, and only one spouse is a debtor, that spouse's creditors cannot seize or encumber the property as long as the marriage persists. See, e.g. Mich. Code §600.6023a ("Property...held jointly by a husband and wife as a tenancy by the entirety is exempt from execution under a judgment against only 1 spouse.") The essence of tenancy by the entirety is that it cannot be severed without the consent of both spouses, and the nondebtor spouse will never consent to a severance of the tenancy.
The Family Code, having created the problem in §910, provides a solution in §850, which permits spouses to "transmute" their assets from community to separate. By means of simple "transmutation agreement," spouses may effectively remove themselves from the entire California community property regime, as fully as of they had never set foot in California. The result is, of course, that only the separate assets of a debtor spouse can be seized by that spouse's creditors to satisfy that spouse's debts. Presumably, even after a transmutation agreement, the separate assets of one spouse could be reached by a creditor who provided "necessaries of life" to the other spouse.
There are only two requirements for a valid transmutation agreement, one that is easy to comply with and the other which is fraught with difficulties. In order for the transmutation of real property to be effective against third parties, the transmutation must be recorded. Family Code §852(b). Presumably, a deed transferring title from both spouses to one spouse, as that spouse's "sole and separate property," should be sufficient to satisfy this requirement, but the better practice is to record a "Memorandum of Transmutation Agreement," making explicit just what has occurred.
The second requirement poses the challenge for practitioners. Family Code §851 provides that "A transmutation is subject to the laws governing fraudulent conveyances." Fraudulent conveyances in California are governed by the Uniform Fraudulent Transfer Act, Civil Code §3439 et. seq. What is and what is not a fraudulent conveyance is way beyond the scope of this article. However, it is safe to assume that a transmutation agreement that transmuted all of a married couple's assets into the separate property of the low-risk spouse, leaving the high-risk spouse with nothing, would be a fraudulent transfer, since no one gives away assets and receives nothing in return unless the avoidance of creditors is the motivation. However, it is equally safe to assume that if each spouse were to cede a community property interest in half of the assets to the other, with the result that each spouse were to emerge from the transmutation agreement with a separate property interest in half of the marital assets, such a division could not be considered a fraudulent conveyance. This places a premium on fairly valuing and carefully dividing the assets. It is recommended that each spouse emerge from the transmutation agreement with a sufficient amount of liquid assets. If one spouse receives nothing but cash, and the other spouse receives a separate property in interest in unproductive raw land, the spouse with the raw land cannot pay his or her debts as they come due, resulting in that spouse's insolvency, a hallmark of a fraudulent conveyance.
One might assume that, at best, a transmutation agreement solves only half of the problem, leaving a high-risk spouse's separate assets vulnerable to creditors. But not all assets are equally desirable to creditors. Assume that a married couple owns only two assets, a parcel of commercial real estate fairly valued at $1,000,000, and a business fairly valued at $1,000,000. As we have seen, if both assets are community property, both may be seized by the creditors of each spouse. A creditor may effectively seize the real estate simply by recording a judgment. The creditor may – but need not – foreclose upon the property. Eventually the debtor will have to deal with the creditor, because the real estate cannot be sold or refinanced without the creditor's judgment being removed. But the business is another matter entirely. It might be sold to a willing buyer at arm's length for $1,000,000, but it might be worth far less in the hands of a creditor, especially if the debtor is willing and able to compete with the business following the seizure. In order to satisfy a judgment, a creditor will have to install a receiver in the business, an expensive and not always effective remedy. Creditors generally are not interested in operating businesses. They want assets that are either cash or are readily reduced to cash. These are the assets that should be transmuted into the separate property of the low-risk spouse.
Finally, transmutation agreements share one thing in common with almost every other asset protection device: The "earlier" you do it, the more likely it will hold up.
Preservation and growth through multiple generations is one of the biggest challenges that California's wealthy families must confront regarding their wealth. One solution for many wealthy families is a tradeoff involving ownership versus control. That is, structuring wealth in a way in which family members can have the desired degree of control over that wealth without having ownership for transfer tax purposes. Sometimes the private trust company might be the best way to thread that needle.
Wealthy families place a high premium on giving each generation the opportunity to participate in decisions regarding the preservation and growth of their wealth. However, preservation and growth are threatened by the federal transfer tax system, divorce and litigation.
One response to these threats by wealthy families is to use irrevocable trusts which often involve transferring family wealth to them. When an individual or a financial institution is serving as trustee of irrevocable trusts, the ability of family members to have a voice in the management of their wealth inside of those trusts is difficult if not impossible.
To retain some voice in the management of their wealth, wealthy families look for structures that permit and encourage the participation of each generation in the investment management of family wealth held in irrevocable trusts. One such structure that is the private trust company.
A private trust company is also referred to as an exempt trust company or a family trust company. Except in a few states, it is a entity chartered by a state that is formed for the express purpose of providing trust and fiduciary services to a single family; it is not allowed to transact business with the general public. More importantly for wealthy families desiring involvement in the management of family wealth in irrevocable trusts, it creates a forum for current and future generations to discuss and influence the preservation and growth of that wealth.
In addition to the ability to be involved in the management of family wealth in irrevocable trusts, the following are some of the key reasons wealthy families form private trust companies:
Limited personal liability. As a general rule, the members of the board of directors of a private trust company have limited liability, and they are operating within a business standard as opposed to the higher fiduciary standard for trustees. Family members and trusted advisors who serve as individual trustees have unlimited personal liability.
Greater willingness to consider retention of heavily concentrated family assets. Private trust companies are less risk adverse and better attuned to family assets and the special place they hold within the context of the family compared to corporate trustees.
Elimination of trustee succession issues. Trustee succession issues which often occur when individuals or financial institutions are named as trustee are resolved.
Ability to select a favorable forum. Nevada, Texas, Wyoming, South Dakota and Texas are some of the more popular states where wealthy families are chartering private trust companies because they promote such trusts by enacting favorable tax laws.
Potential Disadvantages of a Private Trust Company
Required information disclosure. As part of the charter application process, certain information will have to be disclosed to regulatory authorities about family members and non-family members who will be board members, principal shareholders or executive officers of the proposed trust company.
Capital requirements. A private trust company must meet minimum capital requirements to exercise the fiduciary powers granted to it by the chartering state. These capital requirements vary from state to state.
Threat of additional regulation. Since a private trust company must apply for and obtain a charter from the state where it is to be located, the private trust company is subject to the laws and regulations of that state which can change from time to time by that state’s legislature. The lone exception is an unregulated trust company which can be formed in Massachusetts, Nevada, Pennsylvania, Virginia, and Wyoming.
The IRS issued Notice 2008-63 which contained a proposed revenue ruling addressing the transfer tax and income tax consequences of a private trust company serving as trustee of family trusts. The stated goal of the IRS was to show that the tax consequences of using a private trust company as trustee were no more restrictive than if the taxpayer acted directly in that role.
For more information about this, call your tax attorney. Mitchell A. Port is a tax lawyer in Los Angeles.
When preparing your California Will, nominating guardians to raise your minor children can be difficult. Guardians are the individual or couple who will physically and emotionally take care of your children by clothing them, feeding them, educating them and raising them to be decent human beings.
1. If you’ve named a couple to take care of your children, what should happen if one of persons in the couple dies or if they divorce? Do you nominate one of them to serve alone as guardian or do you nominate someone else entirely new; how disruptive to your child would that be?
2. Is the person you’ve chosen young enough to take on the responsibility? While choosing your parents may make sense, they may be too old for the job or may die before your children are still minors. If you do choose individuals who are older than you, always name back up guardians.
3. Does the individual have values similar to your own and the traits necessary to raise your children? Some of those values include religious beliefs, education (private vs. public schools, religious vs. secular schools, out-of-state or California schools), patience and a sense of humor?
4. Is the proposed guardian financially secure, emotionally stable and physically well? Does he or she have a healthy lifestyle? Will he or she stay in California?
The California Probate Code addresses the topic of guardians in Code Sections 1400 et seq., 1500 et seq., and 2100 et seq.
The topic is much more nuanced than presented here. Call your estate planning attorney for help.
Joint tenancy is a type of ownership in California where two or more people share an interest in real or personal property often with a right of survivorship. Homebuyers in Los Angeles, Orange, Santa Barbara and Ventura Counties are often advised to hold the property in joint tenancy with a right of survivorship so that when one of them dies, the other receives the property. Married couples often take title to their home as joint tenants and when one of them dies, the surviving spouse gets full title to the property.
There are occasions where joint tenancy may be the correct way to hold title; when doing that, just make an informed decision.
One benefit to joint tenancy is the avoidance of probate. Since title “automatically” transfers to the surviving joint tenant, probate is unnecessary.
However, joint tenancy in California has problems associated with it. For instance:
Problems with Creditors - Creditors of a joint owner can come after the property to satisfy the debts of one of the joint owners which means the other joint owner can lose his interest in the property even when he is not responsible for the credit problem. If a joint owner has a judgment rendered against him, the creditor can seek to satisfy the judgment by forcing a sale of the property.
Capital Gains Tax Issues - By using joint tenancy instead of a living trust, a husband and wife may be forfeiting certain tax benefits that would be available such as what is called a “double step-up in basis”.
Gift Tax Issues – Also, by putting someone on title with you as a joint tenant, you may be making a taxable gift and a gift tax return may have to be filed.
Loss of Flexibility – The surviving joint owner who receives an asset will get the asset outright. The joint owner cannot spread out distribution of the asset over time. Let’s say a 20 year old receives an inheritance from a joint checking account upon the death of the co-owner, he will receive the entire account all at once rather than over a period of years as he matures.
Loss of Control - When you own property with other joint tenants, you give up unilateral control over the property. You no longer have the right to act alone with regard to selling, making improvements or refinancing the property.
To discuss how to take title to property, speak with a qualified tax attorney. Call Mitchell A. Port at (310) 559-5259.
The following discusses how title to your California assets should be transferred into your living trust and any differences in the way title should be taken for specific types of assets. The purpose of transferring property into your living trust is to avoid probate in California, the probate fees, the delays in transferring property to your rightful heirs because of probate and the public nature of the California probate proceeding.
TITLE TRANSFERS (FUNDING THE TRUST).
For my own estate, the Mitchell A. Port Family Living Trust is intended eventually to hold title to substantially all of my assets.
Generally, I should transfer title to my assets from my individual name to:
"Mitchell A. Port, Trustee, Mitchell A. Port Family Living Trust dated May ____, 2010"
Here is a list of the property to consider putting into a living trust:
2. Bank, Savings and Other Cash Accounts
3. Bonds, T-Bills, Commodities
4. Club Memberships
5. Life Insurance; Pension, Profit Sharing, Retirement
a. Secured by Real Property
b. Secured by Personal Property
7. Partnerships and LLCs: Limited (or General) Partnerships and LLCs
8. Real Property
b. Loan Acceleration
c. Title Insurance
d. Homeowner's Exemption
e. Homeowner's Insurance
f. Purchases of Real Property
g. Sales of Real Property
a. Marketable Securities
b. Mutual Funds; Margin and Ready Asset Accounts
c. Closely Held Corporations
10. Prepare a list of information that would be useful in case of death or a health emergency and add it to this book or some place easily locatable:
a. Bank Accounts and Safe-Deposit Boxes
All bank names - account numbers - personal contact, if available - location of safe-deposit box - contents of box - location of box key;
b. Credit Cards
Issuers - account numbers - expiration dates - special information (airline mileage points, balances owed);
Home, car, life, health, long-term care: issuers - account numbers - agents - premium due dates;
d. Health Care
Contact information for physicians - current medications and dosages - Medicare claim number - Medigap policy number;
Accountant information - location of past filings;
f. Investment And Retirement Accounts
Names of brokerage or plan administrators - account numbers - PIN numbers - Names of bankers or brokers;
Amount of mortgage payment or rent - due date - location of deeds and property titles - contact information for service people;
(i) Driver’s license number and expiration date; (ii) vehicle registration information; (iii) any items in storage and storage company phone number; (iv) contact information for neighbors and friends; (v) e-mail accounts, websites, and passwords; (vi) the combination to any safe in your home; and (vii) a list of the automatic payments from and deposits to bank accounts.
A Jewish couple, acting as trustors/settlors of their living trust, were "free to distribute their bounty as they saw fit and to favor those grandchildren whose life choices they approved of". So held the Illinois Supreme Court.
A Jewish couple's decision to disinherit any of their grandchildren that married outside their faith was decided by the court to be lawful. The couple’s will provided that upon the death of the surviving trustor, if any grandchild had married outside the Jewish faith, their non-Jewish spouse had a year to convert to Judaism. If they did not, the gift would lapse.
The state Supreme Court decided that the clause was valid as long as divorce was not encouraged by the method of disinheritance.
Restraints on marriage are generally held by the Courts to be void as against public policy when such provisions are contained in wills or trusts. California Civil Code section 710 provides that conditions imposing restraints upon marriage, except upon the marriage of a minor, are void; but this does not affect limitations where the intent was not to forbid marriage.
Consult an experienced estate planning lawyer if you want to create provisions to disinherit a particular beneficiary on grounds of substance abuse or because of religion. Call Mitchell A. Port at (310) 559-5259 to discuss your will, living trust and other estate planning options.
A recent poll described in Forbes.com found that many of those who had done no estate planning (in California and elsewhere) were deterred by the legal cost and mistakenly believed that those without large assets didn't need to plan. Half of Americans don't have any of the most basic estate planning documents, including a will, a living trust and financial and medical powers of attorney, needed to protect them (and their assets) if they're incapacitated.
Why do so many people lack estate planning documents? One reason might be because of the recession: 44% of those without any documents said the reason was because they were more focused on "essentials" like paying bills and buying groceries. Contributing to this oversight, however, were misconceptions about the primary purpose of estate documents or what might happen if someone hasn't planned.
For example, 19% of those with no documents said they didn't have sufficient assets to warrant estate planning. Yet wealth and the estate tax have little to do with the need for basic legal documents should you become disabled.
Speak with a qualified estate planning attorney soon about how a California living trust, pour over will, durable power of attorney for property management and advance health care directive might help you. Call Mitchell A. Port at 310.559.5259.
TABLE OF CONTENTS
Part One - First Steps
Ch 1. Why You Should Plan Your Estate How You Can Save Money and Be Sure You've Done It Right
Ch 2. Getting Started Don't Procrastinate (This Means You)
Part Two - Transferring Property Without a Will
You Have Many Ways of Getting Money to People Without Fuss or Delay
Ch 3. Lots of Little "Wills" Your Guide to Will Substitutes
Ch 4. Life Insurance An Old Standby Has Lots of Uses
Ch 5. Joint Tenancy They're Easy and Cheap—But Watch Out for Pitfalls
Part Three - Wills
What Should be in Yours?
Ch 6. Wills 101 The Basics
Ch 7. What Goes in the Will What to Put in and What to Leave Out
Ch 8. After the Will Is Written Follow These Steps to Be Sure Your Will Does the Job
Part Four - Trusts and Living Trusts
They Can Do a Lot--but They're Not for Everyone
Ch 9. How Trusts Work A Quick Look at a Misunderstood Tool
Ch 10. Do You Need a Trust? As Usual in the Law, It Depends
Ch 11. Living Trusts 101 The Basics
Ch 12. Setting up a Living Trust Your Guide to Doing it Right
Part Five - Putting the Tools to Work
Some Tips for People with Particular Needs
Ch 13. Providing for the Kids Tips for Every Age of Offspring
Ch 14. Married...with or Without Children Most of Us Want to See That Our Spouse Is Taken Care of, but How?
Ch 15. Splitting Up Divorce and Remarriage
Ch 16. Beyond Ozzie & Harriett Straight Talk and Otherwise
Ch 17. Estate Planning for Business Owners The Law Gives You Lots of Options--but You Have to Use Them Well
Ch 18. Providing Income for Your Final Years Estate Planning and Retirement
Ch 19. Controlling Costs in Your Final Years Paying for Long-Term Care
Part Six - Death and Taxes
Strategies for Holding On to as Much as You Can
Ch 20. Death and Taxes Trying to Make Sense Out of Rules That Keep Changing
Ch 21. Tax Planning 101 Trusts
Ch 22. Tax Planning 102 The Benefits of Living Gifts and Life Insurance
Part Seven - When You Can't Make the Decision
Confronting Your Biggest Fear Now Can Make a Big Difference Later
Ch 23. Changing Your Mind Changing, Adding to, or Revoking Your Will or Trust
Ch 24. Delegating Decisions Advance Directives
Ch 25. Planning for End of Life Decisions Living Wills and Organ Donation
Part Eight - Putting the Plan into Action After Your Death
Steps You Can Take Now to Help Your Survivors
Ch 26. Easing the Burden on Your Family There's a Lot You Can Do to Help--Now
Ch 27. Choosing the Executor Some Tips on Getting the Right Person
Ch 28. Trustees You Can Choose a Person or a Company to Get the Job Done
Ch 29. Probate A Quick Primer on How it's Done
Appendix A. Estate-Planning Checklist
Appendix B. Sample Basic Will (Annotated)
Appendix C. Health-Care Advance Directive
When thinking about your California living trust, your Will, a durable power of attorney for property management and the advance health care directive, you may be considering who will be the guardian of your minor children, who will be the trustee of your living trust, how you want your assets distributed and on what terms will their beneficiaries receive certain assets. Have you overlooked your family dynamics? Here is a partial list of some of the issues which can cause family feuds:
One area that can be a big issue after death is the family home.
Another is the choice of a successor trustee (the individual who will administer your trust after your death, pay the bills, and distribute the assets).
Another potential problem area is in situations where you have loaned one of your children money during your lifetime.
Finally, what about the distribution of personal property among family members?
So when you create your estate plan, consider how your family is going to react when the terms of your trust, will, power of attorney and advance health care directive are implemented. This may require an experienced estate planning lawyer to carry out your wishes in drafting the plan.
Californians often need an estate plan consisting of a living trust, a pour over will, a durable power of attorney for property management and an advance health care directive when any one or more of the factors below are present. Whether you need an estate plan depends in part on the information you get from your estate planning lawyer. Here are some reasons to have an estate plan:
1. You have a blended family with children from previous relationships.
2. You want to disinherit an heir.
3. You have no heirs and you want to avoid having your property “escheat” or go to the State of California.
4. You have minor children.
5. You have a disabled child or a disabled adult beneficiary.
If you don’t have property that would have to go through probate, then a will is probably enough. No matter what your situation, you would always benefit from a durable power of attorney for property management and an advance health care directive since those documents work when you become incapacitated.
Call a California based estate planning attorney and get more information. Call Mitchell A. Port at 310.559.5259.
The Los Angeles Times ran an article on March 7, 2010 by Kathy M. Kristof in the personal finance section discussing the need to either amend your existing living trust or have one prepared along with a will, durable power of attorney for property management and an advance health care directive. Here is what the Times said:
If you're rich, the best estate planning advice would be to die quickly. If you're not, the best advice is to either review or rewrite your estate planning documents to make sure your heirs aren't left high and dry if you die.
That's because estate taxes that could allow Uncle Sam to nab up to 45% of your bequeathed assets are currently -- and very temporarily -- kaput.
A decadelong phase-out of the estate tax eliminated the tax completely as of January. The catch: If nothing's done, estate taxes will boomerang back to historic levels in 2011. That means any bequest of more than $1 million would be hit with a heavy levy on any amount above that limit after December.
But estate planning isn't just about taxes, and it's not just for the rich.
The legal vacuum that was created by the temporary elimination of the estate tax has created potential pitfalls even for people with modest estates.
For example, if you were to die this year and had an old "by-pass" trust, the elimination of the estate tax could cause you to accidentally disinherit your spouse, said Clay Stevens, director of strategic planning for Aspiriant, a wealth management firm in Los Angeles.
These trusts, aimed at reducing estate taxes, often have boilerplate provisions for bequeathing children an amount equivalent to the estate tax "exclusion." This year, that exclusion is unlimited, so everything goes to your kids and unintentionally there would be nothing left for a spouse, he said.
Then, too, as long as the estate tax is phased out, so is something called the "step-up" that reduced capital gains taxes on your appreciated assets after you died.
You can still get that break if you make a few strategic fixes to your estate plan this year, Stevens said. But, if you do nothing, your heirs could face capital gains taxes on all but a pittance of your appreciated property.
"This is the one year when you can't procrastinate," said Herbert E. Nass, a New York lawyer and author of "101 Biggest Estate Planning Mistakes." "Absolutely everyone should review their documents."
What if you have no documents? Then get cracking.
Studies indicate that the vast majority of Americans don't have wills, trusts or powers of attorney. That can leave heirs in a rough spot, said Danielle Mayoras, coauthor with her husband, Andy, of "Trial & Errors: Famous Fortune Fights."
Act now, avoid trouble later
Ignoring your estate plan can land your children with ill-suited guardians or give them a pile of cash that they're too young to handle, she said.
If you become incapacitated before you die, it can mean that your care could be dictated by a stranger -- or even an enemy. And, doing nothing can cause your heirs to bicker and battle in court -- sometimes for decades.
"People never think their family is going to end up fighting," Andy Mayoras said. "But, especially in this economy, families are fighting over money more and more."
Nass contends that neglect of an estate plan may have cost one wealthy New Yorker his life. Wall Street titan Ted Ammon, in the throes of an acrimonious 2001 divorce, was killed by his estranged wife's boyfriend, Nass said. The boyfriend went to prison, but the estranged wife got the estate because Ammon hadn't yet changed his will.
"That was big news out here for a long time," he said.
What do you need? First and foremost you need a will, which distributes your assets at death. Wills can be simple -- a matter of a few paragraphs -- or very complex. It depends on your wishes and whether you expect to draw up additional documents, such as a trust.
If you don't want a trust, your will should name personal guardians for any minor children, economic guardians who can distribute assets to your children and other heirs, and an executor who will make sure the terms of the will are carried out. Finally, it should include a simple statement about what you own and who should get it.
If you're leaving assets through a will, it's wise to also execute powers of attorney for both financial and healthcare matters, Stevens adds. That will give somebody you trust the ability to pay your bills and make medical decisions for you if you become incapacitated before you die.
But if you want your heirs to be able to avoid probate -- a time-consuming and costly legal process that involves a court reviewing the distribution of assets bequeathed through a will -- you'd be better off to also create a trust. If you have a trust, your will essentially can be a one-liner: "I want all my nonretirement assets to go into my trust."
(Retirement accounts such as IRAs should be left directly to people, not trusts. That gives your heirs the ability to withdraw those assets, and pay taxes on them, over a longer period of time.)
A trust would then distribute the assets based on the formula you'd drawn up. Trusts can accommodate difficult issues, such as whether you want to attach a few strings to your bequests as you might if you're leaving assets to heirs who are not financially or personally responsible.
Divide and conquer . . . the IRS
Trusts also typically contain clauses that dictate who would handle your financial affairs should you become unable to handle them yourself. And many include a "by-pass" or a "two-step" provision that essentially splits the trust in two.
Splitting the trust is aimed at saving estate taxes. That's because husbands and wives can leave each other all their assets without tax consequences, but if they want to leave money to anyone else, any amount over a set threshold is subject to tax.
The amount that's "excluded" from estate taxes has been a moving target for the last 10 years, but is unlimited today and likely to amount to $1 million in 2011.
As a result, savvy couples with estates in excess of $1 million (in any year but 2010) would each execute a by-pass trust, leaving the amount of the estate tax exclusion to their kids or other heirs and the rest to their spouse.
That would preserve the estate tax exemption for the spouse who is the first to die. In the case of someone with $2 million in assets, that could save heirs a tidy $550,000 -- or 55% of the second $1 million.
But the most important thing may be to simply make your wishes known so your heirs know that you've thought about them and how you'd like to provide for them when you're gone. That alone could eliminate a lot of family bickering.
Both Nass and the Mayorases wrote books about what celebrities have done wrong with estate planning. They say they did so to give parents and their children a way of bringing up the topic to explore how they could do it better.
"It's a way to get the dialogue started," Andy Mayoras said.
Danielle Mayoras adds that entertainer Ray Charles' estate plan provides a blueprint of how to do it right. He got his 12 children and their nine respective mothers in a room to talk about what he was planning, which was to give most of his money to charity. But everyone was provided for in some way, she said.
"The beauty of doing that is that everything is out in the open," she said. "It gives the family some comfort and the ability to talk about it."
Call Mitchell A. Port, an experienced estate planning attorney, for a consultation now. Call (310) 559-5259.
Ever thought of providing in your California will or living trust for unequal distributions to your children, disinheriting a child or leaving gifts to charity or to friends, then this posting is important. Some parents believe that unequal distributions may be necessary because they have already helped to support or educate one of their children or feel that one of their children has a spendthrift issue. There may also be times when a parent has remarried and wants to leave assets to his or her current spouse and is concerned that the children of the first marriage will not understand.
A recent article in the New York Times discusses having a conversation with your children about your plans before you die in order to decrease the chance that they will challenge your estate plan after you die. The article quotes a wealth mediator who says that the children and grandchildren may not like what you have chosen to do, but at least they can feel like they were informed and hopefully will respect your wishes. The kids may get angry at the situation but their anger will be directed at you, not at the favored beneficiaries after your death. Communication can also help relieve the tension between the adult children of a first marriage and the children and/or spouse of the second marriage. The article is worth reading.
If you want to discuss how to distribute your property to your beneficiaries with a qualified California tax lawyer, call Mitchell A. Port at (310) 559-5259.
An irrevocable trust is one that usually cannot be amended, changed or revoked. Trusts can become irrevocable in several ways.
Some trusts for married couples become irrevocable at the first spouse’s death. A common example is an A/B trust, sometimes called an Exemption Trust or a Bypass Trust. With this type of trust, the deceased spouse's trust becomes irrevocable after the first death and cannot be amended, changed or revoked.
Irrevocable life insurance trusts and qualified personal residence trusts are made to be irrevocable at the time they are created. The life insurance trust is a type of trust that is created to hold life insurance and pass the insurance death benefit to the beneficiaries of the trust without any income or estate taxes on the placement of the policy in the trust or upon the insured’s death. Such a trust cannot be revoked, changed, or amended after it is created except by court order.
There are some times, however, where an irrevocable trust can be modified by court order. California Civil Code Section 3399 permits a contract like a trust to be reformed when the writing, through mistake or fraud, fails to express the intent of the parties. For instance, reforming a trust might be appropriate when due to a drafting error or scrivener's error.
California Probate Code Section 15409 also permits a trust to be changed if “owing to circumstances not known to the settlor (person creating the trust) and not anticipated by the settlor, the continuation of the trust under its terms would defeat or substantially limit the accomplishment of the purposes of the trust.” In this situation, what the court can do is extensive. The Probate Court can authorize acts that are forbidden by the terms of the trust or not authorized.
Under California Probate Code Section 15403, when all beneficiaries of an irrevocable trust consent to modification or termination of a trust the court can permit that to occur unless the court finds that a material purpose remains for continuance of the trust and that purpose outweighs the arguments for termination or modification.
Speak to a tax attorney about amending, changing or revoking an “irrevocable” trust. Call Mitchell A. Port at (310) 559-5259.
The New York Times ran an article last month describing the effect of suspending the estate tax so that no death tax is owed for those dying in 2010. Concepts like losing the step-up in basis and the application of capital gains taxes are explained. The article advises readers to update their wills, living trusts and other estate planning documents to take into account the changes in the laws applying to death taxes.
Call your California estate planning attorney now.
A post on January 23, 2010 in Wills, Trusts & Estates Prof Blog provides a chart listing the best states for trusts. The ranking factors considered are (1) state income tax in the state, (2) directed trust statute, (3) asset protection trust availability, (4) dynasty trust ability, and (5) the number of trust companies in the state.
The top four states include Alaska, Delaware, Nevada and South Dakota.
The next best include three states: Florida, New Hampshire and Wyoming.
Finally, the last group of states include: Colorado, Idaho, Ohio, Utah and Wisconsin.
If you give someone money or property during your life, you may be subject to federal gift tax. However, the IRS recently announced that the gift tax annual exclusion will remain unchanged in 2010 at $13,000. As long as your gifts to an individual are $13,000 or less, there is no gift tax return that is required to be filed and no gift taxes are due.
Most gifts are not subject to the gift tax and most estates are not subject to the estate tax. For example, there is usually no tax if you make a gift to your spouse or to a charity while you are alive or if your estate goes to your spouse or to a charity at your death. If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion of $13,000.
Even if tax applies to your gifts or your estate, it may be eliminated by the unified credit. Talk to your tax attorney about how to eliminate the gift and estate tax.
Gift tax returns are filed with the Internal Revenue Service when the value of your gift exceeds $13,000, unless you are making a gift to your spouse. Gifts to spouses are usually non-taxable.
A married couple can actually gift $26,000 to each individual without creating a gift tax liability; there is no need to report it to the Internal Revenue Service either.
With proper gift planning a family can transfer a significant amount of money to their children and grandchildren. For example, you and your spouse have 3 kids who are married and each kid has 2 of their own children. The number of people who can each receive a non-taxable gift is 12: 3 kids + 3 spouses + 6 grandchildren. A gift of $13,000 to each person by both you and your spouse can remove $312,000 a year from your estate. Do this for 10 years and you could remove over $3.1 million. Given that the current tax rate is 45%, this could save $1.4 million in estate taxes.
Generally, the person who receives your gift or your bequest will not have to pay any federal gift tax or estate tax because of it. Also, that person will not have to pay income tax on the value of the gift or inheritance received. Taxes on gifts or bequests are paid by the one making the gift or by the one who dies and leaves behind an estate.
Making a gift or leaving your estate to your heirs does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions).
For other estate planning ideas, talk to Mitchell A. Port at 310.559.5259 – a tax attorney in Los Angeles, California.
The Wall Street Journal online reports that: "Senate Democratic leaders Wednesday failed in a last-ditch effort to pass a short-term extension to override the tax's expiration, a process put into motion during the Bush administration. That virtually ensures that the tax will disappear Jan. 1."
Nonetheless, California still requires in many situations the probate of an estate if you want to inherit property.
Since there are no California estate taxes due when a person dies, this post is about federal estate and gift taxes. Estate and gift tax law may be one of the most complex subjects in the Internal Revenue Code. For tax help, I strongly recommend that you consult with an estate tax practitioner (attorney or CPA) who has a lot of experience in these areas of law. You may also find additional information in Publication 950 or some of the other forms and publications offered on the IRS Forms Page as well as on the Forms Page dedicated to estate and gift taxes.
Below are some of the more common questions and answers about Estate Tax issues:
When can I expect the Estate Tax Closing Letter?
What is included in the Estate?
I own a 1/2 interest in a farm (or building or business) with my brother (sister, friend, other). What is included?
What is excluded from the Estate?
What deductions are available to reduce the Estate Tax?
What other information do I need to include with the return?
What is "Fair Market Value?"
What about the value of my family business/farm?
What if I do not have everything ready for filing by the due date?
Who should I hire to represent me and prepare and file the return?
Do I have to talk to the IRS during an examination?
What if I disagree with the examination proposals?
What happens if I sell property that I have inherited?
Below are some of the more common questions and answers about Gift Tax issues:
Who pays the gift tax?
What is considered a gift?
What can be excluded from gifts?
May I deduct gifts on my income tax return?
How many annual exclusions are available?
What if my spouse and I want to give away property that we own together?
What other information do I need to include with the return?
What is "Fair Market Value?"
Who should I hire to represent me and prepare and file the return?
Do I have to talk to the IRS during an examination?
What if I disagree with the examination proposals?
What if I sell property that has been given to me?
Finally, you may need to know about filing estate and gift tax returns which you can read about by clicking here.
"The Intelligent Investor" published in the October 3, 2009 Wall Street Journal says that "... with yields near lows, now is the time to stop moaning about the lack of income and to start turning rock-bottom interest rates to your advantage."
These techniques, when used properly, move assets out of your estate at discounted prices so that less of your estate is subject to estate tax when you die.
Speak to your estate planning attorney before interest rates rebound. Or, call a tax lawyer; call Mitchell A. Port at (310) 559-5259.
Internal Revenue Code section 2518 allows a California beneficiary to sign a qualified disclaimer, resulting in treatment of the disclaimed property as if the California disclaimant had predeceased the decedent. Utilizing disclaimers as part of the estate plan builds in flexibility.
Treasury Regulation section 25.2518-2 lists the following “Requirements for a Qualified Disclaimer”.
(a) In general. For the purposes of section 2518(a), a disclaimer shall be a qualified disclaimer only if it satisfies the requirements of this section. In general, to be a qualified disclaimer—
(1) The disclaimer must be irrevocable and unqualified:
(2) The disclaimer must be in writing;
(3) The writing must be delivered to the person specified in paragraph (b) (2) of this section within the time limitations specified in paragraph (c)(1) of this section;
(4) The disclaimant must not have accepted the interest disclaimed or any of its benefits; and
(5) The interest disclaimed must pass either to the spouse of the decedent or to a person other than the disclaimant without any direction on the part of the person making the disclaimer.
More of the Regulation is below.
If you would like information about how a qualified disclaimer can keep the IRS at bay, call your tax attorney or call Mitchell A. Port at (310) 559-5259.
Whether your concerns are immediate or long-term, a qualified California estate planning attorney will be able to counsel you on the best options available to you to meet your individual needs.
Pursuant to Internal Revenue Code section 2053(a), “the value of the taxable estate shall be determined by deducting from the value of the gross estate such amounts: (1) For funeral expenses, (2) for administration expenses, (3) for claims against the estate, and (4) for unpaid mortgages on, or any indebtedness in respect of, property where the value of the decedent's interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate, as are allowable by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered.”
The amount an estate may deduct for claims against the estate has been a highly litigious issue. The lack of consistency in the case law has resulted in different estate tax treatment of estates that are similarly situated, depending only upon the jurisdiction in which the executor resides. The Treasury Department and the IRS believe that similarly-situated estates should be treated consistently by having Code section 2053(a)(3) construed and applied in the same way in all jurisdictions.
The Internal Revenue Service issued final regulations relating to the amount deductible from a decedent's gross estate for claims against the estate under Code section 2053(a)(3). In addition, the regulations update the provisions relating to the deduction for certain state death taxes to reflect the statutory amendments made in 2001 to Code sections 2053(d) and 2058. The regulations primarily will affect estates of decedents against which there are claims outstanding at the time of the decedent's death.
Who should get a copy of your California living trust? In a previous blog, the California Probate Code was quoted as follows:
"When a revocable trust or any portion of a revocable trust becomes irrevocable because of the death of one or more of the settlors of the trust, or because, by the express terms of the trust, the trust becomes irrevocable within one year of the death of a settlor because of a contingency related to the death of one or more of the settlors of the trust, the trustee shall provide a true and complete copy of the terms of the irrevocable trust, or irrevocable portion of the trust, to any beneficiary of the trust who requests it and to any heir of a deceased settlor who requests it."
Other than those mentioned in the Probate Code, no one else has the right to a copy of your trust upon your death. The terms of your trust remain private.
For your own peace of mind, you may want to give a copy of your trust to your successor trustee. You are not obligated to do that. Some people choose to give copies to their children who are the successor trustees and the only beneficiaries. Other clients of mine keep their trust private.
One of the advantages of having a revocable living trust is that it is private and not a public record. No one has the right to see the provisions of your trust unless you want them to.
When you transfer your investment and other accounts into the name of your trust, often you will take your trust into the financial institution and show them that you have one. Simply give the bank officer the first page and last page of your trust. You can also give the institution a copy of your Certification of Trust; the Certification is a document showing the name of your trust, listing the trust’s powers, and the current trustees. You do not have to provide any financial institution with a copy of your trust.
In my Los Angeles, California neighborhood, I often see flyers and ads for cheap living trust seminars. As an estate planning attorney who drafts living trusts and charges considerably more for those services, I am suspicious of what these seminars really offer.
I attended a seminar once. The speaker was not an attorney and I got the impression you never get to meet with one even after signing up for the service. I assume non-lawyers draft the documents contrary to state law prohibiting the practice of law without a license. I’m told that an attorney will “review” the documents before you sign them. I wonder if that happens.
Often, those seminars seem to be designed to lure seniors in with a promise of bargain-rate estate planning. You may be offered a low-cost trust, but it's just a pretext for getting you to reveal confidential financial information about your assets. These document "mills" then send other “professionals” like insurance sales agents to your home to follow up with offers of annuities and other financial products that may mean disaster for those who buy them.
Common sense is often enough to avoid these scams:
Don't work with estate planners who aren't licensed to practice law.
Be suspicious of any living trust that's marketed at an extremely low-price.
Don't work with anyone who uses high pressure sales tactics.
Don't buy a financial product that you don't understand.
Use a trusted source for information geared toward legal services like estate planning designed for the everyday consumer.
To speak with an experienced estate planning attorney about these topics, call Mitchell A. Port at (310) 559-5259.
Read Michael Jackson's Will he prepared and signed in Los Angeles, California.
With the coverage of Michael Jackson's death, estate and guardianship questions involving his children, Michael Jackson's Will was made available through the internet shortly within it being filed with a Los Angeles Probate Court.
Don't be shocked that such an important and personal document is available to the public. That's the nature of wills -- they are public documents (once you die) when a probate proceeding is started. Any will admitted to probate court is a public record that anyone can read.
So what do you do if you don't want your estate planning wishes to be read by everyone? Do what Michael Jackson did and create a revocable living trust. He created his estate plan.
Estate planning is a term that may confuse people. Many people really don't know what documents make up an estate plan. The term estate planning somehow confers a meaning that someone must have an estate. And people think of estates as those lovely homes in Beverly Hills and the surrounding area. You don't have to be Michael Jackson or own an expensive home to benefit by having an estate plan.
Generally whenever someone dies, whatever they leave behind is called their estate whether it is assets or debts. So, estate planning is really planning for handling your affairs after you die.
In some instances, estate planning is also planning for incapacity.
The basic estate plan for most people generally consists of the following documents:
2. Living Trust
3. Durable Power of Attorney
4. Advance Health Care Directive
Talk to a California estate planning attorney. Reduce the impact of death and taxes. Call Mitchell A. Port at (310) 559-5259.
The State Bar of California has an excellent brochure answering many many questions commonly asked by my clients in Los Angeles and others throughout California.
As an estate planning attorney in Los Angeles, I highly recommend reading the pamphlet before you visit with your own estate planning lawyer so that you can be as well prepared as possible.
Don't have an estate planning attorney? Speak with Mitchell A. Port at (310) 559-5259 whose area of legal practice involves preparing wills, living trusts, powers of attorney, health care directives and other estate planning documents.
Internal Revenue Code
Federal tax law begins with the Internal Revenue Code (IRC), enacted by Congress in Title 26 of the United States Code (26 U.S.C.). This version may not be current so check to be sure you are reading the most recent Code.
Treasury (Tax) Regulations
Treasury regulations (26 C.F.R.)--commonly referred to as Federal tax regulations-- pick up where the Internal Revenue Code (IRC) leaves off by providing the official interpretation of the IRC by the U.S. Department of the Treasury.
Other Official Tax Guidance
In addition to participating in the promulgation of Treasury (Tax) Regulations, the IRS publishes a regular series of other forms of official tax guidance, including revenue rulings, revenue procedures, notices, and announcements. See Understanding IRS Guidance - A Brief Primer for more information about official IRS guidance versus non-precedential rulings or advice.
The authoritative instrument for the distribution of all forms of official IRS tax guidance is the Internal Revenue Bulletin (IRB), a weekly collection of these and other items of general interest to the tax professional community.
The Los Angeles Times ran an article on June 21, 2009, which discussed in general terms the ways Californians can hold title to property. The Los Angeles Times described the following types of vesting:
Tenancy by the entirety
Tenancy in common
Joint tenancy with right of survivorship
The Los Angeles Times could have added information about community property as well as "community property with a right of survivorship".
The LA Times ran an article on July 14 which in part discussed the risks and benefits of preparing a do-it-yourself Will in California or using cheap online sources for estate planning documents. It also discussed when using an estate planning attorney and paying a higher fee makes sense. Here's the full article.
With a play on words, the Wall Street Journal recently published an article entitled "Deciding if Your Kid is Trust-Worthy". Estate planners in California often ask clients the same question since having a living trust may make sense depending on, for instance, whether their children are worthy of getting property when they are young or at an older age.
California Wills, living trusts, durable powers of attorney for property management and the advance health care directive are usually prepared by lawyers. There are many forms available for free online but it is often inadvisable to use them.
Speak with an estate planning attorney about your own situation. Call Mitchell A. Port at 310.559.5259.
Estate planning for those of us in Los Angeles and throughout California where property values have been significantly impacted as a result of the recent economic slump can use this link to a great article from Money magazine on rethinking your estate planning options, given the uncertainty of future tax rates and exemptions.
Discuss your will, living trust and other estate planning needs with a qualified tax attorney. Call Mitchell A. Port at (310) 559-5259.
Internal Revenue Code Section 7520 requires that the Secretary of the Treasury revise the mortality assumptions underlying the IRS tables at least once every ten years to incorporate the most recently available mortality data. These tables were last updated on May 1, 1999, and new tables have now been issued effective for transactions occurring on or after May 1, 2009.
What is the effect on life expectancy under the new tables? It is interesting to look at the life expectancies and compare them under the old and the new tables.
At age 70, under the 1990 census table, the life expectancy of a 70 year old was 13.95 years and under the new table is rises to 14.27 years. Again, the increase in number of years is less dramatic than under the old tables as age come closer to biological limits.
At age 80, in comparing the 1980 and 1990 tables, the increase in life expectancy went from 7.98 years to 8.4 years. It only climbs to 8.42 years under the new table.
The tables will now impact charitable remainder trusts, qualified personal residence trusts and private annuities.
The actuarial tables and some of their uses are explained in more detail in the following IRS publications:
Publication 1457 provides examples for valuing annuities, life estates, and remainders generally.
Publication 1458 provides examples for valuing interests in unitrusts.
Publication 1459 provides examples for valuing remainder interests in depreciable property for income tax purposes.
For estate planning under the new tables, call Mitchell A. Port at (310) 559-5259.
California Probate Code Section 4402 provides that a power of attorney is legally sufficient if the wording in the document complies closely with California Probate Code Section 4401, the form is properly completed and the principal's signature is acknowledged.
California Probate Code Section 4401 provides a free form power of attorney that meets the requirements of California Probate Code Section 4402. The powers granted by a power of attorney are broad and sweeping. Those powers are explained in Probate Code Sections 4400-4409 and Sections 4450-4465.
The power of attorney is just one piece of an entire basic estate plan. The other parts of a California estate plan consist of a living trust, a will and an advance health care directive. To discuss estate planning in more detail, call California attorney Mitchell A. Port.
Two of the benefits of a California revocable living trust are continuity of management and avoidance of probate. These benefits are generally available only as to assets that are held in the name of the California living trust. Often, when property is left out of your living trust, it may have to be probated before heirs can obtain legal title and ownership. This blog post deals with title transfers.
Generally, you should transfer title to your assets from your individual name to:
"[Your name], Trustee, [your surname] Family Living Trust dated [the date the Trust is signed]"
So, title may look like this example: “Mitchell A. Port, Trustee, Port Family Living Trust dated February 2, 2009”
Title to your assets should be transferred to your California living trust – in most cases – for the types of property listed below. Various issues related to the type of property transferred into your California living trust are mentioned as well. You ought to address transferring the following assets:
2. Bank, Savings and Other Cash Accounts
3. Bonds, T-Bills, Commodities
4. Life Insurance; Pension, Profit Sharing, Retirement Plans
a. Life Insurance
b. Retirement [IRA] Accounts
c. Keogh, Pension, Profit Sharing Benefits
d. Current Retirement Benefits
a. Secured by Real Property
b. Secured by Personal Property
6. Partnerships and LLCs
a. Limited Partnerships and LLCs
7. Real Property
b. Loan Acceleration
c. Title Insurance
d. Homeowner's Exemption
e. Homeowner's Insurance
f. Purchases of Real Property
g. Sales of Real Property
a. Marketable Securities
b. Mutual Funds; Margin and Ready Asset Accounts
c. Closely Held Corporations
9. Prepare this list of information addressing the items below that would be useful in case of death or a health emergency and add it to your California estate planning book or some place easily locatable:
a. Bank Accounts and Safe-Deposit Boxes
All bank names - account numbers - personal contact, if available - location of safe-deposit box - contents of box - location of box key;
b. Credit Cards
Issuers - account numbers - expiration dates - special information (airline mileage points, balances owed);
Home, car, life, health, long-term care: issuers - account numbers - agents - premium due dates;
d. Health Care
Contact information for physicians - current medications and dosages - Medicare claim number - Medigap policy number;
Accountant information - location of past filings;
f. Investment And Retirement Accounts
Names of brokerage or plan administrators - account numbers - PIN numbers - Names of bankers or brokers;
Amount of mortgage payment or rent - due date - location of deeds and property titles - contact information for service people;
(i) Driver’s license number and expiration date; (ii) vehicle registration information; (iii) any items in storage and storage company phone number; (iv) contact information for neighbors and friends; (v) e-mail accounts, websites, and passwords; (vi) the combination to any safe in your home; and (vii) a list of the automatic payments from and deposits to bank accounts.
Consult with a California estate planning attorney. Call Mitchell A. Port at (310) 559-5259.
After working with your attorney in Los Angeles to avoid probate in California by preparing your will, living trust, durable power of attorney for property management and the advance health care directive, you now decide you want to revoke the directive. How?
California law provides that a patient having capacity may revoke the designation of an agent only by a signed writing or by personally informing the supervising health care provider. California law goes on to say that a patient having capacity may revoke all or part of an advance health care directive, other than the designation of an agent, at any time and in any manner that communicates an intent to revoke.
In other words, you may revoke the designation or authority only if, at the time of revocation, you have sufficient capacity to make a power of attorney for health care. The burden of proof is on the person who seeks to establish that you did not have capacity to revoke the designation or authority.
Discuss your estate plan with an experienced attorney. Call Mitchell A. Port in Los Angeles at 310.559.5259.
An advance draft copy of a California tax form for same-sex married couples is now available. It is subject to change and Franchise Tax Board (FTB) approval before it is officially released. This form includes the 2008 legislative changes. It will likely be released by the FTB as Publication 776.
This publication is primarily to assist same-sex married couples (SSMC) in filing their California income tax returns, if they have SSMC adjustments. The FTB has also included information about the legal history of SSMC and community property that may be useful in completing the return.
On June 20, 2008, the FTB issued NOTICE 2008-5 on the subject of California Income Tax Treatment and Tax Return Filing Obligations of Same-Sex Married Couples. The purpose of the Notice is to advise same-sex married couples of their California income tax treatment and tax return filing obligations resulting from the California Supreme Court's recent decision in In re Marriage Cases (2008) 43 Cal.4th 757.
California's FTB has more information on same-sex married couples' tax obligations at its website.
Questions and answers about California’s Statutory Will are presented here and in California Probate Code Section 6240.
The following information, in question and answer form, is not a part of the California Statutory Will. It is designed to help you understand about Wills and to decide if this Will meets your needs. This Will is in a simple form.
1. Does a Will avoid probate? No. With or without a Will, assets in your name alone usually go through the court probate process. The court's first job is to determine if your Will is valid.
2. Are there different kinds of Wills? Yes. There are handwritten Wills, typewritten Wills, attorney-prepared Wills, and statutory Wills. All are valid if done precisely as the law requires. You should see a lawyer if you do not want to use this Statutory Will or if you do not understand this form.
3. What can a Will do for me? In a Will you may designate who will receive your assets at your death. You may designate someone (called an "executor") to appear before the court, collect your assets, pay your debts and taxes, and distribute your assets as you specify. You may nominate someone (called a "guardian") to raise your children who are under age 18. You may designate someone (called a "custodian") to manage assets for your children until they reach any age from 18 to 25.
4. Does my Will give away all of my assets? Do all assets go through probate? No. Money in a joint tenancy bank account automatically belongs to the other named owner without probate. If your spouse, domestic partner, or child is on the deed to your house as a joint tenant, the house automatically passes to him or her. Life insurance and retirement plan benefits may pass directly to the named beneficiary. A Will does not necessarily control how these types of "nonprobate" assets pass at your death.
5. What happens if I die without a Will? If you die without a Will, what you own (your "assets") in your name alone will be divided among your spouse, domestic partner, children, or other relatives according to state law. The court will appoint a relative to collect and distribute your assets.
6. May I change my Will? Yes. A Will is not effective until you die. You may make and sign a new Will. You may change your Will at any time, but only by an amendment (called a codicil). You can give away or sell your assets before your death. Your Will only acts on what you own at death.
7. When should I change my Will? You should make and sign a new Will if you marry, divorce, or terminate your domestic partnership after you sign this Will. Divorce, annulment, or termination of a domestic partnership automatically cancels all property stated to pass to a former husband, wife, or domestic partner under this Will, and revokes the designation of a former spouse or domestic partner as executor, custodian, or guardian. You should sign a new Will when you have more children, or if your spouse or a child dies, or a domestic partner dies or marries. You may want to change your Will if there is a large change in the value of your assets. You may also want to change your Will if you enter a domestic partnership or your domestic partnership has been terminated after you sign this Will.
8. May I add or cross out any words on this Will? No. If you do, the Will may be invalid or the court may ignore the crossed out or added words. You may only fill in the blanks. You may amend this Will by a separate document (called a codicil). Talk to a lawyer if you want to do something with your assets which is not allowed in this form.
9. Who may use this Will? This Will is based on California law. It is designed only for California residents. You may use this form if you are single, married, a member of a domestic partnership, or divorced. You must be age 18 or older and of sound mind.
10. Are there any reasons why I should NOT use this Statutory Will? Yes. This is a simple Will. It is not designed to reduce death taxes or other taxes. Talk to a lawyer to do tax planning, especially if (i) your assets will be worth more than $600,000 or the current amount excluded from estate tax under federal law at your death, (ii) you own business-related assets, (iii) you want to create a trust fund for your children's education or other purposes, (iv) you own assets in some other state, (v) you want to disinherit your spouse, domestic partner, or descendants, or (vi) you have valuable interests in pension or profit-sharing plans. You should talk to a lawyer who knows about estate planning if this Will does not meet your needs. This Will treats most adopted children like natural children. You should talk to a lawyer if you have stepchildren or foster children whom you have not adopted.
11. What can I do if I do not understand something in this Will? If there is anything in this Will you do not understand, ask a lawyer to explain it to you.
12. Where should I keep my Will? After you and the witnesses sign the Will, keep your Will in your safe deposit box or other safe place. You should tell trusted family members where your Will is kept.
13. What is an executor? An "executor" is the person you name to collect your assets, pay your debts and taxes, and distribute your assets as the court directs. It may be a person or it may be a qualified bank or trust company.
14. What is a custodian? Do I need to designate one? A "custodian" is a person you may designate to manage assets for someone (including a child) who is under the age of 25 and who receives assets under your Will. The custodian manages the assets and pays as much as the custodian determines is proper for health, support, maintenance, and education. The custodian delivers what is left to the person when the person reaches the age you choose (from 18 to 25). No bond is required of a custodian.
15. What is a guardian? Do I need to designate one? If you have children under age 18, you should designate a guardian of their "persons" to raise them.
16. Should I ask people if they are willing to serve before I designate them as executor, guardian, or custodian? Probably yes. Some people and banks and trust companies may not consent to serve or may not be qualified to act.
17. Should I require a bond? You may require that an executor post a "bond." A bond is a form of insurance to replace assets that may be mismanaged or stolen by the executor. The cost of the bond is paid from the estate's assets.
18. What happens if I make a gift in this Will to someone and that person dies before I do? A person must survive you by 120 hours to take a gift under this Will. If that person does not, then the gift fails and goes with the rest of your assets. If the person who does not survive you is a relative of yours or your spouse, then certain assets may go to the relative's descendants.
19. What is a trust? There are many kinds of trusts, including trusts created by Wills (called "testamentary trusts") and trusts created during your lifetime (called "revocable living trusts"). Both kinds of trusts are long-term arrangements in which a manager (called a "trustee") invests and manages assets for someone (called a "beneficiary") on the terms you specify. Trusts are too complicated to be used in this Statutory Will. You should see a lawyer if you want to create a trust.
20. What is a domestic partner? You have a domestic partner if you have met certain legal requirements and filed a form entitled "Declaration of Domestic Partnership" with the Secretary of State. Notwithstanding Section 299.6 of the Family Code, if you have not filed a Declaration of Domestic Partnership with the Secretary of State, you do not meet the required definition and should not use the section of the Statutory Will form that refers to domestic partners even if you have registered your domestic partnership with another governmental entity. If you are unsure if you have a domestic partner or if your domestic partnership meets the required definition, please contact the Secretary of State's office.
21. What is community property? Can I give away my share in my Will? If you are married and you or your spouse earned money during your marriage from work and wages, that money (and the assets bought with it) is community property. Your Will can only give away your one-half of community property. Your Will cannot give away your spouse's one-half of community property.
Where should you keep estate planning documents prepared by your attorney licensed in California? Where should people expect to find your living trust, will, durable power of attorney and advance health care directive? You want to be sure that those documents stay safe and can be easily found when your family needs to find them.
Do not keep them in a safe deposit box at the bank.
The best place is in your home where they can easily be found when they are needed. Don’t lock them into a box for safekeeping inside your home since that would be as difficult to penetrate as a safe deposit box. Simply leave them in the open inside a desk, on a shelf or somewhere else that is obvious to anyone looking for them.
Your safe deposit box won’t be easy for your friends or family to open it if you’re not there. This is true even if they are co-owners of the box. Having the key isn’t enough to get the bank to open it up for them — the bank wants you to prove that you have the legal authority to require them to open it up. So here’s the conundrum: the document granting your friends or family the right to act on your behalf as an executor or as the power of attorney/agent is inside the box, and until the box is opened, they can’t prove that they have the authority to get the bank to open it…etc.
Safe deposit boxes are often inside a bank which may be closed over the weekend. If a durable power of attorney or advance health care directive is needed over the weekend, no one will be able to get to it until Monday. In a medical emergency, the advance health care directive should be easily accessible.
To speak with a tax attorney about your estate plan, call Mitchell A. Port at (310) 559-5259.
The online Wall Street Journal said in an article posted on October 15th that estates, including those in California that may or may not go through probate, may benefit by a "portable" estate tax shelter regardless of which presidential candidate is elected.
The article says: "This issue is known as portability because the exemption per person -- $2 million this year and $3.5 million next year -- would become transferable from one spouse to the other, in effect doubling the surviving spouse's exemption. In essence, that means that spouses would be able to use each other's estate-tax exemption without first having to set up complex and costly trusts and take other steps that many people now feel obliged to do."
For us in California, the article goes on to say: "...such a change could greatly simplify estate planning and lead to fewer hassles for many married couples and their heirs." Living trusts in California may no longer be necessary to capture both spouses federal tax shelter. Nonetheless, a living trust will continue to be useful as a technique to avoid probate.
Probate in California continues to be a good reason to create a living trust. If someone you know died and did not have a living trust, call Mitchell A. Port to discuss probate.
The financial bailout plan recently signed into law benefits Californians because bank accounts owned by living trusts can get more FDIC insurance than accounts owned by individuals. Trust accounts get the maximum FDIC insurance for every qualified beneficiary.
Until December 31, 2009, when the financial bail-out package expires, the FDIC now insures “qualifying beneficiaries” in California for $250,000 each. A qualifying beneficiary is a spouse, child, grandchild, parent, or sibling of the account owner. The account must be owned by the living trust.
This is how it works:
A single mom in Los Angeles County, Ventura County, Santa Barbara County or Orange County California sets up a living trust naming her two children as the beneficiaries after she dies, the bank account owned by the trust is insured up to $500,000: 2 beneficiaries at $250,000 each.
If my wife and I set up a living trust and all three of our children are the beneficiaries after we both die, the trust account is ensured for up to $1,500,000: $250,000 for each beneficiary and for each owner, or 6 x $250,000.
These FDIC limits are per bank not per account. If a California living trust owner has more than one account at the same bank, these limits apply to all their accounts there.
Be sure and confirm this with your banker in writing and avoid relying on any other informal sources.
To discuss your living trust, Will, durable power of attorney and advance health care, please call Mitchell A. Port at (310) 559-5259.
The Difference Between Legal Tax Avoidance and Illegal Tax Evasion
“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands: Taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.”
The IRS has a very interesting and detailed description of the types of tax problems people often either intentionally or negligently get involved with. You can read the entire article here but you can see the topics that are discussed below.
General Tax Fraud
Employment Tax Enforcement
Abusive Tax Schemes
Abusive Return Preparer
Tax Scams - How to Recognize and Avoid Them
All About Criminal Investigation (CI)
Program and Emphasis Areas for Criminal Investigation
Report Suspected Tax Fraud Activity
Civil tax problems? Speak with Mitchell A. Port at (310) 559-5259.
Northern Trust has a brochure entitled: "Estate Planning: Strategic Wealth Transfers During Life and at Death". It contains an estate planning overview worth looking at. The topics include:
Who Should Receive Your Assets?
Which Assets Should They Receive?
When and How Should You Transfer Wealth?
Basic Estate Planning Documents
Recruiting the Right Team
Who Should Draft Your Estate Plan?
Who Should be Your Executors and Trustees?
Who Should be the Guardian for Your Children?
Transferring Property After Death
Receiving Benefits After Death
The Probate Process
Determining Potential Estate Taxes
How Much is Your Estate Worth?
How the Federal Estate Tax System Works
State Estate Tax
Step-up or Step-down in Basis At Death
SELECTED TRANSFER TAX SAVINGS STRATEGIES
Strategy #1: Using The Marital Deduction Wisely
Plan to Use Both The Marital Deduction and Your Estate Tax Exemption
Control Wealth With a QTIP Trust
Give Your Spouse Control with General Power of Appointment Trust
Create a Qualified Domestic Trusts
Strategy #2: Lifetime Wealth Transfers
Gift Tax Exclusion
Uniform Transfers to Minors Act (UTMA) Accounts
Qualified Trusts for Minors
Irrevocable Life Insurance Trusts
Strategy #3: Using the Gift Tax Exemption Wisely
Grantor Retained Annuity Trust (GRAT)
Family Limited Partnerships (FLP)
Strategy #4: Consider Carryover Basis
General Rule: “Carryover Basis” for Gifts
Don’t Transfer Assets With a Built-In Loss
What about Step-Up At Death?
Strategy #5: Trusts That Benefit Both Individuals and Charity During .
Life or At Death
Charitable Remainder Trust: Cash Flow and Flexibility
Charitable Lead Trusts: Passing Wealth to Future Generations
Strategy #6: Private Foundations and Donor Advised Funds
Grant Making: Private Foundations
Donor Advised Funds
Strategy #7: Focusing on the Family-Owned Business
Who Will Manage the Business?
Who Should Own Your Business?
How Will the IRS Value Your Company?
Strategy #8: Planning to Avoid Generation Skipping Transfer Tax
Allocating GST Exemption
Strategy #9: Evaluating Your Need For Life Insurance
Is Lost Earning Power an Issue?
Is Liquidity an Issue?
Choose the Best Owner
Consider an ILIT
Strategy #10: Understanding Community Property Issues
Remember, Marital Rights Are Expanded
Plan Carefully When Using a Living Trust
Community Property and Tax Cost
IMPLEMENTING AND UPDATING YOUR PLAN
Where Do You Go From Here? No endorsement of Northern Trust or its agents is intended. So, call a qualified California estate planning attorney for help with your tax planning. Call Mitchell A. Port at (310) 559-5259.
Complaints Against Enrolled Professionals
California's taxpayers who have a complaint against their attorney, accountant, enrolled agent or other practitioners who are specifically permitted to practice before the IRS can submit their complaints in writing in a letter format. The letter should include the tax practitioner's name, address, telephone number, designation (i.e., attorney, certified public accountant, enrolled agent, enrolled actuary, etc.), a detailed description of the allegations, and any documents that support those allegations.
Direct all referrals to:
Internal Revenue Service
Office of Professional Responsibility
SE:OPR, Room 7238/IR
1111 Constitution Avenue NW
Washington, DC 20224
You can send it by facsimile at 202-622-2207
Complaints Against Unenrolled Tax Return Preparers
Complaints against unenrolled tax return preparers can be reported by completing Form 3949-A and mailing it or a letter with similar information to Internal Revenue Service, Fresno, CA 93888.
For additional information, you may refer to Complaints Against Tax Professionals Frequently Asked Questions.
If you have questions concerning an allegation, you may email the IRS at OPR@irs.gov.
Your California estate planning documents (the living trust, will, durable power of attorney for property management and advance health care directive) are usually on paper and you want to be sure that they stay safe and can be easily found when your family needs to find them. So, where should you store them?
There are people who store them in very odd places like their freezers. It’s a better idea to keep your originals in a fire-resistant safe in your house and to notify friends and family where they are and how to get it open. Better yet, you can simply keep them in an accessible place where they can easily be found; if they are lost or destroyed before you need them, your estate planning attorney can provide you with another copy.
It is probably not a good idea to store your estate plan in a safe deposit box at the bank. Unless your friends or family are co-owners of the box (and sometimes even if they are), it won’t be easy for them to open it if you’re not there. Having the key isn’t enough to get the bank to open it up for them — the bank wants you to prove that you have the legal authority to require them to open it up. Think about it: the document granting your friends or family the right to act on your behalf as an executor is INSIDE the box, and until the box is opened, they can’t prove that they have the authority to get the bank to open it… (and so on).
Another concern about using a safe deposit box is those small keys to safeguard. Lost keys are create an expensive problem. When you rent a box from the bank, they give you two keys. The only way the box can be opened is when one of your keys and one from the bank are used at the same time. If you lose both of your keys, you have to pay the bank to drill out and replace the lock on the box.
For other information about California estate planning, call an estate tax attorney – call Mitchell A. Port at 310.559.5259.
I am often asked about restraining orders that become effective when a divorce action is filed in California and how those orders impact estate planning by my clients who live in Los Angeles County, Santa Barbara County, Ventura County or Orange County. I am also asked about the ability of my clients to do estate planning when they terminate their marital status before the final disposition of property.
When a dissolution action is filed, pursuant to California Family Code section 2040(4)(b), parties are prevented from creating a nonprobate transfer or modifying a nonprobate transfer that could affect the disposition of the property being transferred without having first obtained the written consent of the other party or a court order. Nonprobate transfers include revocable trusts, joint tenancies and beneficiary designations such as payable on death accounts, IRAs, profit sharing pension plans and life insurance.
As a result, a trust can be created but cannot be funded. While this will allow my client to immediately fund the trust at the conclusion of the dissolution action, this does not solve the problem of dieing during the dissolution action without an estate plan in place.
Therefore, if my client has the luxury of time, creating or modifying a revocable trust should be done before a dissolution action is pending. If this is not possible, then revoking any and all family trusts should be considered and an interim Will should be created. This will insure a disposition of my client’s separate property and one-half of the community property to persons whom my client would want to receive the property should their death occur during the pending dissolution action.
Because people often choose to terminate their marriage before the final disposition of property, what about estate planning of such property once the parties divorced? The issue was that while restraining orders became effective upon the filing of the dissolution action, Probate Code section 5600 provides that spousal beneficiary designations are automatically revoked at the termination of marital status if an asset is a “non probate transfer asset,” as defined in Probate Code section 5000 unless there is either (1) clear and convincing evidence that the transferor intended to preserve the nonprobate transfer in favor of his or her former spouse, or (2) an order from the Court. Effective January 1, 2008, the California legislature resolved this question in California Family Code section 2337(c)(7A).
California Family Code section 2337 addresses the situation where a party seeks to terminate their marital status before the disposition of property and protections that may be put in place to protect the spouse that did not seek the early termination of their marital status. Section (c)(7A) now provides that the Court may specifically order a party, as a condition of their seeking to be divorced, to maintain the other party as a beneficiary of a nonprobate transfer of one-half, or upon good cause, all of a nonprobate transfer asset until a judgment is entered with regards to the property and the property is in fact distributed.
As a result of this new development, it is important that when my clients tell me they are divorced, I must inquire further. I need to know if they were divorced after January 1, 2008; and if so, if they have a final judgment on their property issues. If not, I need to see their Status Only Judgment of Dissolution to know if the Court imposed a California Family Code section 2337(c)(7A) condition on the termination of their marital status so I know how to proceed with their estate planning.
If you are contemplating a divorce and you are concerned about your spouse getting your estate upon your death because that is what your Will or living trust provides, then speak with me about resolving this issue. I am an estate planning attorney and can help.
California tax lawyers and many of their clients are familiar with the advantages of accelerating charitable bequests into charitable remainder trusts: income for life for beneficiaries of the client’s choosing, capital gains tax savings, generous income tax charitable deductions and eventual support for important charitable causes. CRTs typically involve six-figure funding amounts, however, and come burdened with a variety of complexities and reporting requirements.
On the other hand, it is possible for clients age 60 and older to blend support for their charitable cause with a simple plan that will provide significant payments for life from gifts as small as $3,000 as well as large income tax deductions, potential capital gains tax savings and payments that are partly tax free. The technique that makes these benefits possible is a charitable gift annuity.
A gift annuity is a contract between a donor and a not-for-profit organization in which the donor exchanges cash or securities for an annuity for one or two recipients.
Immediate payment gift annuities have greatest appeal to older clients who are charitably motivated and wish to add a fixed income component to their portfolios. Both payout rates and deductions are high for this age group (the average gift annuity donor is age 77).
Gift annuities seem to have appeal for women. Women continue to live longer than men by roughly 5 years and so may have a greater interest in “an income that a person cannot outlive.”
Gift annuities also can be arranged to make payments for the lifetimes of two people, such as a husband and wife, brothers and sisters, parents and children or close friends.
Investors can use gift annuities to get investment profits and receive annual payments form the charitable organization that range from 5.5% to 10.5% depending on the age or ages of the persons receiving the payments. In general, 30 to 50% of a donor’s capital gain escapes capital gains tax completely. The remaining gain will be reported in small annual installments as part of the donor’s annuity payments and taxed at only 15% or possibly less.
Retirees who are unhappy with low CD returns can increase their spendable income with gift annuities and also enjoy payments that are partly tax-free. Capital gains savings are advantageous to investors who wish to move from equities into a fixed income arrangement.
Deferred payment gift annuities provide higher payout rates and larger charitable deductions, however, tax-free payments are smaller as a percentage of the annuity payment.
For other tax planning opportunities, call your tax lawyer. Call Mitchell A. Port at (310) 559-5259 for a tax consultation.
The American Institute for Cancer Research has developed programs to assist California's tax lawyers and financial planners in providing their clients with accurate and current information related to charitable gifts. The Institute appreciates the role that California tax attorneys and financial planning professionals play in the consideration of charitable gifts by AICR supporters.
In the AICR's Estate Planners Corner: Services for Attorneys, Financial Professionals and Investment Advisors, it provides free publications and updates on a variety of tax and gift planning issues related to charitable gifts. Some of the publications include tax topics such as:
For more detailed information on these estate planning topics, you are invited to call Mitchell A. Port, a tax attorney in Los Angeles, California, at (310) 559-5259.
Hot news: Schwarzenegger signed a bill recently issued from the California legislature to protect pet trusts. Other blog posts on this topic include: "Estate Planning For Pets" from June 20, 2008, "California Estate Planning And Your Pets" from April 16, 2008, "No Kidding – A California Trust For Your Pet" from December 17, 2007
Under such trusts, a trustee pays a caretaker to ensure that the pets are housed, fed and otherwise maintained. Pet owners have to account for their pets during estate planning or the animal may not be cared for.
California Senate Bill 685 removes the discretion of trustees in fulfilling the trust. It also allows courts to appoint a caregiver if the trustee does not wish to arrange for the pet care.
You may see the full Los Angeles Times article on this subject.
Sometimes the most difficult part of the estate planning meeting I have with my California clients concerns their choice of guardians for their minor children. Sometimes they are troubled about having too few people to choose from and at other times they are concerned about who they choose when their children are young may be different from those they would choose if their minor children were a bit older. Keep in mind that California law provides that the nomination of guardians is made in your Will (rather than in your living trust or durable powers of attorney).
A terrific blog post that may be helpful in choosing the appropriate guardian can be viewed by clicking here.
If you would like to discuss this and other California estate planning topics with a tax attorney located in Los Angeles, call Mitchell A. Port at (310) 559-5259.
California's Durable Power Of Attorney for property management and personal affairs is used when you become incapacitated for any reason (e.g., Alzheimer’s, stroke, heart attack, auto accident causing a coma, etc.). It should be part of your basic California estate plan. The contents of the power of attorney ought to cover most, if not all, of the following items
1.1. Real Property Transactions.
(g) Change in Form of Title.
(h) Public Use.
1.2. Tangible Personal Property Transactions.
(c) Security Interests.
1.3. Stock and Bond Transactions.
(a) Acquisition and Transfer.
(b) Evidence of Ownership.
1.4. Commodity and Option Transactions.
(a) Acquisition and Transfer.
1.5. Banking and Other Financial Institution Transactions.
(a) Existing Accounts.
(b) Opening of Accounts.
(c) Establishing and Closing Safe Deposit Boxes.
(d) Contracting Services.
(e) Making Withdrawals.
(f) Receiving Financial Statements.
(g) Entering Safe Deposit Boxes.
(h) Borrowing Money.
(i) Checks, Drafts, and Negotiable or Nonnegotiable Paper.
(j) Receiving Negotiable or Nonnegotiable Instruments.
(k) Letters of Credit, Credit Cards, and Travelers Checks.
(l) Extensions to Pay.
1.6. Business Operating Transactions.
(a) Operation and Transfer.
(c) Bonds, Shares, and Other Instruments.
(d) Sole Proprietorship.
(g) Sale or Liquidation.
(h) Buy Out Agreements.
1.7. Insurance and Annuity Transactions.
(a) Existing Personal Coverage.
(b) Procuring New Coverage.
(c) Paying Premiums for New Coverage.
(d) Beneficiary Designation.
(h) Manner of Paying Premiums.
(j) Beneficiary Change.
(k) Governmental Aid.
1.8. Retirement Plan Transactions.
(a) Select Payment Options.
(b) Beneficiary Designations.
(c) Voluntary Contributions.
(d) Investment Powers.
(f) Borrow, Buy, and Sell.
(g) Waiver of Spousal Rights.
1.9. Estate, Trust, or Other Beneficiary Transactions.
(c) Participation in Proceedings.
(d) Removal of Fiduciary.
(e) Investments and Disbursements.
(f) Transfer to Revocable Trust.
(g) Contingent Interests.
(h) Probate Code Section 13502 or 13503 Election.
1.10. Power to Create, Modify, or Revoke Trusts for My Benefit and Benefit of My Dependents.
1.11. Resignation From Fiduciary Positions.
1.12. Claims and Litigation.
(b) Intervention and Interpleader.
(c) Provisional Remedies, Enforcement of Judgments, and Participation in Proceedings.
1.13. Tax Matters.
(a) Preparation and Filing of Documents.
(b) Paying and Contesting Amounts.
(c) Exercising Elections.
(d) Acting in Tax Matters.
1.14. Personal and Family Maintenance.
(b) Domestic Help, Travel, and Necessities.
(c) Medical Care.
(e) Charge Accounts.
(f) Church and Organization Affiliations.
(g) Religious or Spiritual Needs.
(i) Funeral and Burial.
(a) Attorney in Fact's Discretion.
(b) Gifts to Attorney in Fact Limited to "5 or 5" Amount.
(c) Payment of Gift Tax.
(d) Gift Splitting.
1.16. Government Benefits.
(a) Execution of Vouchers.
(b) Possession of Property.
(e) Receipt of Proceeds.
1.17. Nomination of Conservator.
1.18. Incidental Powers.
(c) Execution, Acknowledgment, and Delivery.
(e) Court Assistance.
(h) Preparation and Filing of Documents.
(i) Other Lawful Acts.
1.19. Restrictions on Property Management Powers.
(b) Obligations of Attorney in Fact.
(c) Insurance on Life of Attorney in Fact.
2.1. Determination of Incapacity.
2.2. Capacity Regained.
2.3. Reimbursement for Costs and Expenses.
2.5. Notice to Third Party as to Amount of Compensation.
2.6. Reliance by Third Parties.
2.8. Exculpation of My Attorney in Fact.
2.9. Revocation and Amendment.
To find out more about estate planning, call California tax attorney Mitchell A. Port at (310) 559-5259.
Tax planning for family wealth transfers and California-based family owned businesses is complex and requires input from qualified advisors. Self-study may also be important: A resource for family business executives includes Fambiz.com.
That site covers topics in depth such as:
Family Business Trends
Transfer of Ownership
Women in Family Business
Use the Family Business Search engine to find a multitude of articles that can be searched by subject. A great resource for owners and executives of California's family businesses.
To talk to a California attorney about these and other business succession topics, call Mitchell A. Port at 310.559.5259.
Californians making gifts often believe the federal gift tax is paid by the recipient/beneficiary. Unfortunately, it is the one making the gift who pays the tax. Tax free gifts are possible, however.
An estate planning attorney in Florida, David M. Goldman, has a good article on the taxation of gifts and how to make tax free gifts. Those of us living in Los Angeles County, Orange County, Santa Barbara County, Ventura County and throughout California come within the rules explained in Mr. Goldman's article.
To discuss tax free gifts, taxable but tax efficient gifts or other estate planning topics, please call Mitchell A. Port, an estate planning attorney, at (310) 559-5259.
Grantor Retained Annuity Trusts can "leverage" your Applicable Credit and allow you to gift more at less tax cost.
How a Qualified Personal Residence Trust can save gift and estate taxes.
Using Family Limited Partnerships and Limited Liability Companies to facilitate estate planning.
Intentionally Defective Grantor Trusts
IDGTs used as an estate freezing device. You create a trust which is defective for income tax purposes (but not for estate and gift tax purposes) for the benefit of children and/or grandchildren. You sell assets (stock in a closely held or family business, real estate, marketable securities, limited partnership interests) to the trust in exchange for an installment note with interest. IDGT works best if the sold assets are subject to discounts in determining their fair market value and if it is expected that the sold assets will appreciate in value at a rate greater than the interest rate payable on the note.
A charitable remainder unitrust or annuity trust can provide income and estate tax benefits, avoid capital gains tax and provide funds for research, helping the needy or other philanthropic goals.
Private foundations can be a philanthropic legacy for wealthy donors.
To discuss these and other estate planning techniques, call Mitchell A. Port, a California tax attorney in Los Angeles, at (310) 559-5259.
The "Property & Probate" online magazine of the American Bar Association published an article by attorney Stephanie B. Casteel of Atlanta, Georgia, entitled "Estate Planning for Pets".
Estate planning topics include:
Traditional Estate Planning Options
Identification of Animal
Charitable Remainder Trust
Statutory Pet Trusts
Federal Law and Tax Consequences
Here's an interesting excerpt from the article:
"Pets are valuable members of a client’s family, as illustrated by Leona Helmsley’s $12 million bequest to a trust for her dog, and it is important for the practitioner to address the care of the client’s pets in the event of his or her earlier death. Regardless of whether the client’s jurisdiction has enacted legislation allowing the creation of statutory pet trusts, clients may make outright bequests of their pets to a trusted caregiver or establish a traditional trust for their pets’ care. Many states are enacting statutes recognizing and enforcing trusts the beneficiaries of which are pets. Accordingly, it is important for practitioners to consider the available estate planning techniques and the factors that contribute to a plan that ensures the care and protection of a client’s pets."
If you would like to set up a trust like this, please call attorney Mitchell A. Port at (310) 559-5259 to discuss it.
I read an ad and it went something like this:
"There's really no difference between law firms."
Many people believe that Los Angeles law firms are pretty much the same. I don't. I believe that what separates me from the pack is not what I do, but how I do it - aggressive not conservative, team player and not a one-man-band, problem solver not just a legal practitioner. My clients clearly understand and value this difference. How can I help you? Contact Mitchell A. Port at (310) 559-5259.
I liked this because it describes me and my practice. If you need help with probate, Wills, living trusts, powers of attorney, tax problems or business transactions, please call me for your consultation.
The State Bar of California has a publication free for downloading called: "When You Become 18: A Survival Guide For Teenagers."
Once our children become adults, they may need to have their own set of legal documents to address their incapacity and where their property will go should they die too young. An earlier blog post discusses the benefit of having a California advance health care directive for young adults.
Speak with a California estate planning attorney about this and other tax topics. Call Mitchell A. Port at 310.559.5259.
Estate tax audits continue to be scattered across the country. With the drop in the number of federal estate tax returns expected to be filed because of the increased filing threshold resulting from the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, the IRS offered voluntary early retirement to many Estate and Gift tax employees across the nation.
A great deal of employees accepted the buy-out and thereby created a coverage problem for local audits. The workload nevertheless has to be handled.
Here is a list of estate tax managers and their contact numbers located throughout the U.S.:
ESTATE TAX MANAGERS
Van Nuys, California
(Covers Los Angeles)
818 756 4522
(Covers Oakland, Los Angeles, San Jose)
510 637 4557
212 436 1114
(Covers Albany, Syracuse, NYC)
212 436 1145
212 436 1094
New York City
212 436 1146
New York City
212 436 1082
(Covers MA, ME, NH, VT)
617 316 2326
(Covers MA, CT)
617 316 2328
(Covers PA, DE)
215 861 1585
(Covers NJ, MD, DC, VA)
973 993 7401
(Covers NC, VA)
336 378 2873
(Covers AR, GA, TN)
615 250 5573
George Dewey Jacksonville
(Covers SC, N&C. FL)
904 665 1300
Martin Basson Plantation
(Covers S. FL)
954 423 7232
(Covers MI, Cleveland OH)
216 520 7170
(Covers IN, KY, Roanoke, VA, OH)
513 263 4071
(Covers LA, OK, MS)
504 558 3245
James McMullen (Acting)Chicago
(Covers Chicago & Milwaukee)
312 566 2207
(Covers MN, CO, SD, MT, ID)
651 312 7757
MO, IA, S. IL
(Covers KS, MO, NE, New Orleans)
402 221 3779
Ft. Worth, TX
(Covers Dallas, Ft. Worth, Lubbock)
817 759 2900 x 620
AZ, San Diego, Laguna Niguel
(Covers WA, OR, HI)
425 468 6009
(Covers UT, Denver, San Jose, Bakersfield)
510 637 4549
(Covers NM, Houston, Austin)
713 209 4415
If you have an estate tax problem, call Los Angeles estate tax attorney Mitchell A. Port at 310.559.5259.
The Washington Post online ran an interesting story about estate planning with the use of a post-nuptial agreement. The article featured a couple as they were inching toward the edge of the divorce cliff.
Here is an excerpt:
Now they are starting over. They've settled their arguments over money. They've divided up some of their assets. They are maintaining two households but agree to try to spend no more than 10 days apart in a month. They are about to celebrate their 40th wedding anniversary. "Deep down we really do love each other," she says. "If you once loved in a passionate way, you can reclaim that."
The news is the tool this 60-something couple used to reclaim their marriage: the post-nuptial agreement.
The post-nup is a contract signed during marriage to manage financial affairs and divide income and assets in the event of death or divorce.
One purpose of the post-nup is estate planning. "That is a perfectly good reason to do it," says Jeff Atkinson, principal author of "The American Bar Association Guide to Marriage, Divorce & Families" (Random House, 2006). It is a way to direct retirement benefits to children of a previous marriage, or to an adult child with special needs.
For a further discussion of this technique, call a California estate planning attorney, call Mitchell A. Port at (310) 559-5259.
With the recent California Supreme Court decision overturning the ban on gay marriage, California Secretary of State Debra Bowen contacted the Legislative Counsel of California and was told that dissolving a domestic partnership would not be necessary before a same-sex couple can wed. A written opinion is expected to follow next week.
The San Francisco Chronicle ran an interesting news story about this.
On Thursday, the California Supreme Court issued its opinion legalizing gay marriage in California. The 4-3 California Supreme Court ruling found the state's ban on same-sex marriage unconstitutional, and declared that gay couples have the same legal right to marry as heterosexual couples.
Here are some excepts from that court opinion:
Although the understanding of marriage as limited to a union of a man and a woman is undeniably the predominant one, if we have learned anything from the significant evolution in the prevailing societal views and official policies toward members of minority races and toward women over the past half-century, it is that even the most familiar and generally accepted of social practices and traditions often mask an unfairness and inequality that frequently is not recognized or appreciated by those not directly harmed by those practices or traditions. It is instructive to recall in this regard that the traditional, well-established legal rules and practices of our not-so-distant past (1) barred interracial marriage, (2) upheld the routine exclusion of women from many occupations and official duties, and (3) considered the relegation of racial minorities to separate and assertedly equivalent public facilities and institutions as constitutionally equal treatment. As the United States Supreme Court observed in its decision in Lawrence v. Texas, supra, 539 U.S. 558, 579, the expansive and protective provisions of our constitutions, such as the due process clause, were drafted with the knowledge that “times can blind us to certain truths and later generations can see that laws once thought necessary and proper in fact serve only to oppress.”
For this reason, the interest in retaining a tradition that excludes an historically disfavored minority group from a status that is extended to all others — even when the tradition is long-standing and widely shared — does not necessarily represent a compelling state interest for purposes of equal protection analysis.
After carefully evaluating the pertinent considerations in the present case, we conclude that the state interest in limiting the designation of marriage exclusively to opposite-sex couples, and in excluding same-sex couples from access to that designation, cannot properly be considered a compelling state interest for equal protection purposes. To begin with, the limitation clearly is not necessary to preserve the rights and benefits of marriage currently enjoyed by opposite-sex couples. Extending access to the designation of marriage to same sex couples will not deprive any opposite-sex couple or their children of any of the rights and benefits conferred by the marriage statutes, but simply will make the benefit of the marriage designation available to same-sex couples and their children. As Chief Judge Kaye of the New York Court of Appeals succinctly observed in her dissenting opinion in Hernandez v. Robles, supra, 855 N.E.2d 1, 30 (dis. opn. of Kaye, C.J.): “There are enough marriage licenses to go around for everyone.”
Further, permitting same-sex couples access to the designation of marriage will not alter the substantive nature of the legal institution of marriage; same-sex couples who choose to enter into the relationship with that designation will be subject to the same duties and obligations to each other, to their children, and to third parties that the law currently imposes upon opposite-sex couples who marry. Finally, affording same-sex couples the opportunity to obtain the designation of marriage will not impinge upon the religious freedom of any religious organization, official, or any other person; no religion will be required to change its religious policies or practices with regard to same-sex couples, and no religious officiant will be required to solemnize a marriage in contravention of his or her religious beliefs. (Cal. Const., art. I, § 4.)
While retention of the limitation of marriage to opposite-sex couples is not needed to preserve the rights and benefits of opposite-sex couples, the exclusion of same-sex couples from the designation of marriage works a real and appreciable harm upon same-sex couples and their children. As discussed above, because of the long and celebrated history of the term “marriage” and the widespread understanding that this word describes a family relationship unreservedly sanctioned by the community, the statutory provisions that continue to limit access to this designation exclusively to opposite-sex couples — while providing only a novel, alternative institution for same-sex couples — likely will be viewed as an official statement that the family relationship of same-sex couples is not of comparable stature or equal dignity to the family relationship of opposite-sex couples. Furthermore, because of the historic disparagement of gay persons, the retention of a distinction in nomenclature by which the term “marriage” is withheld only from the family relationship of same-sex couples is all the more likely to cause the new parallel institution that has been established for same-sex couples to be considered a mark of second-class citizenship. Finally, in addition to the potential harm flowing from the lesser stature that is likely to be afforded to the family relationships of same-sex couples by designating them domestic partnerships, there exists a substantial risk that a judicial decision upholding the differential treatment of opposite-sex and same-sex couples would be understood as validating a more general proposition that our state by now has repudiated: that it is permissible, under the law, for society to treat gay individuals and same-sex couples differently from, and less favorably than, heterosexual individuals and opposite-sex couples.
In light of all of these circumstances, we conclude that retention of the traditional definition of marriage does not constitute a state interest sufficiently compelling, under the strict scrutiny equal protection standard, to justify withholding that status from same-sex couples. Accordingly, insofar as the provisions of sections 300 and 308.5 draw a distinction between opposite-sex couples and same-sex couples and exclude the latter from access to the designation of marriage, we conclude these statutes are unconstitutional.
Having concluded that sections 300 and 308.5 are unconstitutional to the extent each statute reserves the designation of marriage exclusively to opposite sex couples and denies same-sex couples access to that designation, we must determine the proper remedy.
When a statute’s differential treatment of separate categories of individuals is found to violate equal protection principles, a court must determine whether the constitutional violation should be eliminated or cured by extending to the previously excluded class the treatment or benefit that the statute affords to the included class, or alternatively should be remedied by withholding the benefit equally from both the previously included class and the excluded class. A court generally makes that determination by considering whether extending the benefit equally to both classes, or instead withholding it equally, would be most consistent with the likely intent of the Legislature, had that body recognized that unequal treatment was constitutionally impermissible.
In the present case, it is readily apparent that extending the designation of marriage to same-sex couples clearly is more consistent with the probable legislative intent than withholding that designation from both opposite-sex couples and same-sex couples in favor of some other, uniform designation. In view of the lengthy history of the use of the term “marriage” to describe the family relationship here at issue, and the importance that both the supporters of the 1977 amendment to the marriage statutes and the electors who voted in favor of Proposition 22 unquestionably attached to the designation of marriage, there can be no doubt that extending the designation of marriage to same-sex couples, rather than denying it to all couples, is the equal protection remedy that is most consistent with our state’s general legislative policy and preference.
Accordingly, in light of the conclusions we reach concerning the constitutional questions brought to us for resolution, we determine that the language of section 300 limiting the designation of marriage to a union “between a man and a woman” is unconstitutional and must be stricken from the statute, and that the remaining statutory language must be understood as making the designation of marriage available both to opposite-sex and same-sex couples. In addition, because the limitation of marriage to opposite-sex couples imposed by section 308.5 can have no constitutionally permissible effect in light of the constitutional conclusions set forth in this opinion, that provision cannot stand.
David M. Goldman, an estate planning attorney in Florida, has an interesting article worth reading at his blog. Simply substitute "California estate planning" or "California estate planning lawyer" for the reference to "Florida" and you should be able to obtain some valuable information. Or, simply call Mitchell A. Port, a California estate planning attorney, at (310) 559-5259 to discuss your concerns.
Jonathan G. Blattmachr and Georgiana J. Slade at Milbank, Tweed, Hadley & McCloy LLP, and Bridget J. Crawford at Pace University - School of Law, have written an article in the March, 2007 edition of "Estate Planning" magazine, addressing estate planning for those of us with estates under five million dollars. I have posted the full article at the same time as this posting.
Here is an abstract for the article:
"Financial concerns may preclude people of modest wealth (defined for purposes of this article as those having a net worth between $1 million and $5 million) from making significant lifetime transfers to achieve estate planning goals. Yet lifetime transfers are among the most effective ways to reduce estate taxes. Individuals of modest wealth may experience a tension between the desire to take advantage of opportunities to reduce taxes and protect assets from other claims which may arise, on the one hand, and the need to preserve an adequate base of wealth to ensure the maintenance of a current standard of living, on the other.
"The advisor to these individuals carefully should consider what estate planning steps are most appropriate and what level of transfers, if any, the individual reasonably can afford to make.
"This article details and evaluates eleven strategies that may apply to clients in the modest wealth category:
"(1) inter vivos transfers of life insurance and other non-income producing assets;
"(2) estate building and income tax sheltering with life insurance;
"(3) qualified personal residence trusts;
"(4) effective use of annual exclusions;
"(5) self-settled trusts;
"(6) potential use of the gift tax exemption and the GST exemption;
"(7) assessing income tax-free states;
"(8) using a charitable remainder trust to build wealth and generate income;
"(9) medical care and tuition payments;
"(10) limited liability entities for asset protection and tax planning; and
"(11) special care in handling interests in qualified plans, IRAs and other IRD."
To speak with an estate planning attorney in Los Angeles, California, call Mitchell A. Port at 310.559.5259.
Most would rather not think about it but if your child is 18 or older then it is appropriate for him or her to have an advance health care directive. All the same reasons that apply for older adults to have the directive also apply to a younger adult. While you're at it, perhaps a will, living trust and durable power of attorney for property management may also be a good thing.
Speak with a Los Angeles attorney to help decide what makes sense. Call Mitchell A. Port at 310.559.5259.
In this past Sunday's edition of the Los Angeles Times, David Colker wrote an interesting article about setting up a trust for your pet as provided under California law. This article is along the lines of my earlier blog entry entitled "No Kidding - A California Trust For Your Pet" written on December 17, 2007. Here is what David Colker wrote:
Leona Helmsley was a nice mom -- to her dog.
Just look at her will. The multimillionaire hotel owner, whose nickname was the Queen of Mean, left nothing to her late son's children when she died last year.
But her beloved Maltese named Trouble got $12 million to keep him in the manner to which he was accustomed.
It became a national joke, but it also put a spotlight on a serious concern.
"It raised awareness about what happens to pets if they outlive us," said Michael Markarian, executive vice president of the Humane Society of the United States.
"We think of pets as having a short life span so we assume it won't happen. But just in case, we should ensure they go to a loving home."
Without a trust fund or some other way to provide for care, a long-adored pet could end up in a shelter.
"It's not uncommon," said Ryan Drabek, spokesman for Orange County Animal Care Services. "We get calls from the coroner to come pick up a pet if there are no family members who will do it."
Pet trusts have the force of law in 39 states, including California. In general, the money is turned over to a designated caregiver -- often a family member or friend -- who takes the pet in.
But the California law, which went into effect in 1991, is considered weak compared with most of the others. It states that the wishes expressed "may be performed by the trustee for the life of the animal."
The problem is the word "may."
"It makes the law unenforceable," said Adam Keigwin, spokesman for state Sen. Leland Yee (D-San Francisco), who has introduced legislation to make pet trusts more bulletproof.
The revised law says instructions in a pet trust should not be considered a "mere request." The bill was approved by unanimous vote in the Senate in January and is awaiting action in the Assembly.
In case of a challenge, the proposal directs that courts "carry out the general intent of the trust."
Great care should be taken in planning a pet trust, Markarian said. It's important to have a detailed discussion with the designated caregiver.
"It's not something to spring on someone by surprise after you die," he said. "Suddenly, they find out they are taking care of Fido or Fluffy."
Markarian also suggested naming at least one backup in case the primary designee can't take the pet when you die.
The people you name can't be forced to take care of the animal. If you don't plan well, the pet could still end up in a shelter until a new home for it is found, if ever.
To determine the amount of money that should be set aside, a pet owner should figure out how much will be spent for food and regular medical care for the estimated life of the animal and then add a substantial amount in case of major medical problems.
Still, the funds could get depleted. At that point, all you can hope is that affection will take over.
"If you pick the right person," Markarian said, "that pet is not going to be abandoned when the money runs out."
For more extensive estate planning that includes, in part, a living trust, a pour-over will and a durable power of attorney for property management, consult with Mitchell A. Port by calling him at 310.559.5259.
The question I sometimes hear as part of my California probate law practice from clients after the death of a loved one is: “What do I need to do now?” Not all of the points below will apply to all Decedents, but many of them will. What follows should be considered when a close friend or relative dies who owns property in Los Angeles County, Santa Barbara County, Ventura County or Orange County, California:
1. If the death occurs at home, you may need to contact a local police officer or coroner.
2. Notify family and friends. You may want to consider having family members contact others to save yourself some time on the phone during a stressful period.
3. If the Decedent wished, a donation of body parts and tissues should be considered.
4. If a doctor is not present, notify a doctor or coroner in order to obtain a death certificate.
5. Contact a funeral home concerning burial or cremation arrangements.
6. Look for instructions which the Decedent may have left regarding preferences for funeral and burial arrangements.
7. Complete funeral and burial arrangements.
8. Determine if the Decedent belonged to a burial or memorial society that may make special arrangements for the funeral, such as military honor guards.
9. Contact the Social Security Administration and any other government agencies or benefit program that may be making payments to the Decedent. (Note that the payment for the month of death will not be made by the Social Security Administration and others.)
10. Review the Decedent’s financial affairs and look for any estate planning documents, such as Wills and Trusts, along with any other relevant documents, including:
The Federal estate tax is a tax on the right to transfer property at death. The tax, reported on Form 706, United States Estate (and Generation Skipping Transfer) Tax Return, is applied to estates for which at-death gross assets, the "gross estate," exceed the filing threshold. Included in gross estate are real estate, cash, stocks, bonds, businesses, and decedent-owned life insurance policies. Deductions are allowed for administrative expenses, indebtedness, taxes, casualty loss, and charitable and marital transfers. The taxable estate is calculated as gross estate less allowable deductions.
The IRS Estate Tax page provides further information concerning the estate tax. Covered are topics including:
Frequently Asked Questions on Estate Taxes Gift Tax
Frequently Asked Questions on Gift Taxes
Filing Estate and Gift Tax Returns
Forms and Publications - Estate and Gift Tax
Publication 950, Introduction to Estate and Gift Taxes
What's New - Estate and Gift Tax
Once you have accounted for the Gross Estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your "Taxable Estate." These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify.
After the net amount is computed, the value of lifetime taxable gifts (beginning with gifts made in 1977) is added to this number and the tax is computed. The tax is then reduced by the available unified credit. Presently, the amount of this credit reduces the computed tax so that only total taxable estates and lifetime gifts that exceed $1,000,000 will actually have to pay tax. In its current form, the estate tax only affects the wealthiest 2% of all Americans.
Most relatively simple estates (cash, publicly-traded securities, small amounts of other easily-valued assets, and no special deductions or elections, or jointly-held property) with a total value under $1,000,000 do not require the filing of an estate tax return. The amount was $1,500,000 in 2004 and 2005. For 2006 through 2008, the amount is raised to $2,000,000.
To maximize your estate tax planning opportunities, call Mitchell A. Port at 310.559.5259.
This information is not intended to be a substitute for proper estate planning. Writing your own will may result in unintended consequences, misinterpretation and perhaps litigation. Probate will not be avoided. I have listed many of the steps necessary to write your own will even though I advise against it.
To write a holographic will as a California resident, the following steps should be taken:
1. Use a completely blank sheet of paper (no letterhead, no logo, nothing on it)
2. Write the entire will in your own handwriting
3. State your name and that you are of sound mind and not under any duress to write a will
4. State the county in which you reside
5. State that it is your last will and that it supersedes all prior wills
6. State who you are married to, if you are married, and if not, so state
7. State the names of your children, if any, and if none, so state. If you have children and they are minors, list those people in an order of priority who will be guardians
8. List those people in an order of priority who will be executors
9. State that bond is waived for any executor (and guardian – if you have children) who serves
10. State who is going to inherit what property, for example, “I leave my spouse all of my interest in any property whether real or personal, including but not limited to our home on _________, Drive, my nut company on __________, Drive, my real estate on ____________ Drive, all of my cash and investments, and all the rest of my property wherever located. If my spouse does not survive me, I leave all of my interest in said property in equal shares to my children.”
11. State who else gets something by mentioning their name(s) and what they get. Add that if either the person named is not living at the time of your death or if the property is no longer a part of your estate, then the gift to that person lapses.
12. If applicable, state your intent to disinherit anyone who contests the will. For instance: “Except as otherwise provided in this Will, I have with full knowledge omitted to provide for my children and heirs, or any others who might feel entitled to some portion of my estate. I have carefully considered the needs and abilities of my family and after such consideration have disposed of my estate in the manner provided in this Will. Should any beneficiary named in this Will, or the parent of any beneficiary named in this Will, or any person claiming through a beneficiary named in this Will, or any person claiming to be an heir, directly, indirectly, singly or in conjunction with other persons, attack this Will, or contest any of its provisions, or contest any trust established by me, or seek to impair or invalidate any part or provision of my estate plan, or conspire or cooperate with anyone attempting to do any of the aforesaid, such person's interest (or if such person has no interest, but his or her child has an interest in my estate or any trust established by me, then such child's interest) in my estate is revoked and shall be forfeit and distributed as if such person (or the child of such person) had predeceased me and any generation-skipping transfer taxes caused by reason of such forfeiture shall be charged to and paid from such property without the benefit of the use of any of generation-skipping transfer tax exemption.”
13. Sign and date the document without any witnesses or a notary. Do not let anyone else sign as a witness and do not have the will notarized
This does not avoid probate and should not be used as a substitute for a complete estate plan. Consultation with an estate planning attorney like Mitchell A. Port at 310.559.5259 is strongly advised.
The Internal Revenue Service has many forms and free publications on a wide variety of topics to help you understand and meet tax obligations, reporting and filing requirements. If you need IRS materials try one of these ways:
Walk-in: During the tax-filing season, many libraries and post offices offer free tax forms. Some libraries also have copies of commonly-requested publications. Braille materials may also be available. Many large grocery stores, copy centers, and office supply stores have forms you can photocopy or print from a CD.
Internet: You can access forms and publications on the IRS website 24 hours a day, 7 days a week, at IRS.gov.
Mail: Send your order for tax forms and publications to National Distribution Center, P.O. Box 8903, Bloomington, IL 61702-8903. You should receive your products within 10 days after we receive your order.
Phone: Call 800-TAX-FORM (800-829-3676) to order current year forms, instructions and publications and prior year forms and instructions. You should receive your order within 10 days.
Try these links:
Publication 2053A, Quick and Easy Access to IRS Tax Help and Forms (PDF 40K)
Publication 910, Guide to Free Tax Services (PDF 636K)
Need other tax help? Have other tax problems you wish to discuss with a California tax attorney? Call Mitchell A. Port at 310.559.5259.
It is a common belief that the recipient of a taxable gift has to pay the tax.
Federal tax law is different than that: the person who receives your gift does not have to report the gift to the IRS or pay gift or income tax on its value. Instead, if you recently gave any one person gifts that are valued at more than $12,000, you - the maker of the gift - must report the total gifts to the Internal Revenue Service and you may have to pay tax on the gifts.
If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift. Gifts also include money and property, including the use of property without expecting to receive something of equal value in return.
There are some exceptions to the tax rules on gifts. The following gifts generally are not taxable and do not count against the $12,000 annual limit:
Tuition or Medical Expenses that you pay directly to an educational or medical institution for someone's benefit
Gifts to your Spouse
Gifts to a Political Organization for its use
Gifts to Charities
If you are married, both you and your spouse can give separate gifts of up to the annual limit of $12,000 to the same person without making a taxable gift. In other words, you and your spouse can give one of your children (or anyone else for that matter) a $24,000 gift of cash or other property during any one year without paying any gift tax. This is commonly known as splitting gifts between spouses. Essentially, it means a gift by you or your spouse to a third person can be considered as made one-half by each of you provided there is consent by both spouses.
For more information, get the IRS Publication 950, Introduction to Estate and Gift Taxes, IRS Form 709, United States Gift Tax Return, and Instructions for Form 709. They are available at the IRS Web site at IRS.gov in the Forms and Publications section or by calling 800-TAX-FORM (800-829-3676).
Gift tax planning often requires the help of a qualified tax lawyer. Please call attorney Mitchell A. Port at 310.559.5259.
While most tax return preparers are professional and honest, you can use the following tips to choose a preparer who will offer the best service for your tax preparation needs.
If you choose to use a paid tax preparer, it is important that you find a qualified tax professional. Taxpayers are ultimately responsible for everything on their return even when it’s prepared by someone else.
The most reputable preparers will request to see your records and receipts and will ask you multiple questions to determine your total income and your qualifications for expenses, deductions, and other items. By doing so, they have your best interest in mind and are trying to help you avoid penalties, interest, or additional taxes that could result from later IRS contacts.
Get References. Ask questions and get references from clients who have used the tax professional before. Were they satisfied with the service received?
Plan Ahead. Choose a preparer you will be able to contact after the return is filed and one who will be responsive to your needs.
Ask about service fees. Avoid preparers who claim they can obtain larger refunds than other preparers, or those who guarantee a refund or base fees on a percentage of the amount of the refund.
Research. Check to see if the preparer has any questionable history with the Better Business Bureau, the state’s board of accountancy for CPAs or the state’s bar association for attorneys. Find out if the preparer belongs to a professional organization that requires its members to pursue continuing education and also holds them accountable to a code of ethics.
Determine if the preparer’s credentials meet your needs. Does your state have licensing or registration requirements for paid preparers? Is he or she an Enrolled Agent, Certified Public Accountant, or Attorney? If so, the preparer can represent taxpayers before the IRS on all matters – including audits, collections, and appeals. Other return preparers can represent taxpayers only in audits regarding a return signed as a preparer.
Want a referral to a qualified tax return preparer from a California tax attorney? Call Mitchell A. Port at 310.559.5259.
The California State Bar has a very interesting pamphlet offering advice on finding the right lawyer for you in California.
The pamphlet asks about 16 different questions to help you find and hire the right attorney.
To speak with an attorney in Los Angeles, please call Mitchell A. Port at 310.559.5259.
Pets are no longer treated like any other piece of property. California has a law on the books under California Probate Code Section 15212 passed in 1991 which provides as follows:
A trust for the care of a designated domestic or pet animal may be performed by the trustee for the life of the animal, whether or not there is a beneficiary who can seek enforcement or termination of the trust and whether or not the terms of the trust contemplate a longer duration.
This California statute provides that you can create a trust for the care of a designated domestic or pet animal for the life of the animal. The duration will only be for the life of the pet, even if the trust instrument contemplates a longer duration.
California Probate Code Section 15212 is intended to clarify the law which may have been voidable under the rule against perpetuities provided in the California Civil Code. On the death of the designated animal, the trust permitted by Section 15212 terminates.
Before this the law treated pets like any other piece of property upon the death of their owners.
As evidence of the increasing interest in estate planning for pet owners, see Roberta C. Yafie, Trust-Fund Pets, NY Post, June 24, 2007 (stating that "[m]ore and more middle-class pet owners are opting for Pet Trusts to ensure their dependant's are cared for").
With the adoption of this code, setting up a trust to care for pets became a recognized estate planning technique. This law enables pets to become the beneficiaries of your will or trust.
Those of us with federal tax problems in California are governed by the court decisions made the Ninth Circuit Court of Appeals; decisions by other Circuit Courts do not necessarily apply to California’s taxpayers directly. But in a recent decision Estate of Tamulis v. Comm'r of Internal Revenue by the Seventh Circuit Court of Appeals involving the tax treatment of a charitable remainder trust—a trust in which the income goes to individuals during their lifetime (or some other period) but what remains after their rights expire goes to charity – the Court held against carrying out the charitable intent of the donor.
Here's the story. Father Tamulis, a Catholic priest, died in 2000, leaving an estate of $3.4 million. His will left the bulk of his estate to a living trust that he had created. The trust was to continue for the longer of 10 years or the joint lives of Tamulis’s brother and the brother’s wife. During that period they would have a life estate in a house owned by the trust and the trust would pay the real estate taxes on the house.
The net income of the trust, as “determined in accordance with normal accounting principles,” would go to two of the brother’s and sister-in-law’s grandchildren (that is, Tamulis’s grandnieces), minus $10,000 a year, which would go to their third child until she graduated from medical school. Upon the termination of the trust the assets would pass to a Catholic diocese.
The estate tax return, filed in 2001, claimed a charitable deduction of $1.5 million, represented to be the present value of the charitable remainder, which was described on the return as the “residue following 10 year term certain charitable remainder unitrust at 5% quarterly payments to two grand nieces.” In each of the years 2001 through 2004, the trust distributed no more than 5 percent of the fair market value of the trust’s assets, as valued at the beginning of each year, to the grandnieces and for the payment of the real estate taxes on their parents’ home.
The Internal Revenue Service refused to allow the charitable deduction. The charitable remainder, as defined in the trust instrument, was not a charitable remainder unitrust as defined in the Internal Revenue Code. In particular, the trust instrument did not specify either a fixed dollar amount, or the percentage of the trust’s fair market value, that would go to the income beneficiaries— to the grandnieces in cash and to their parents in the form of a life estate in the house and payment of the real estate taxes on it, which would be paid out of the trust’s income.
This was a fundamental defect, fixable only by a judicial proceeding to reform the trust, filed within 90 days after the estate tax return was due. The trustee (who was also the executor of Father Tamulis’s will) and the diocese realized that there was a problem. But more than eight months elapsed before the executor prepared a complaint to file in an Illinois state court (the trust is governed by Illinois law) to reform the trust. And for unexplained reasons the complaint was never filed. Instead, in 2003 the executor circulated to the income beneficiaries a proposed reformation of the trust to bring it into compliance with the Code. But the third grandniece did not sign it, and so the trust has never been reformed, with or without a judicial proceeding, although the trustee continues to administer it in accordance with the requirements of the Code, as her predecessor (the original trustee, who has died) had said in the estate tax return that he was doing.
Her argument, rejected by the Tax Court and renewed before the Seventh Circuit, is that the statement in the return, coupled with the trustee’s continued administration of the trust as if it were a qualified unitrust, should be deemed substantial compliance with the Code, although she concedes that it is not literal compliance.
There is a doctrine of substantial compliance with the often intricate and obscure provisions of the Internal Revenue Code. The Seventh Circuit has criticized the Tax Court’s articulation of the doctrine for formlessness, and, noting that the courts of appeals do not defer to the legal rulings of that court any more than they do to the rulings of a district court, has ruled that the “doctrine of substantial compliance should not be allowed to spread beyond cases in which the taxpayer had a good excuse (though not a legal justification) for failing to comply with either an unimportant requirement or one unclearly or confusingly stated in the regulations or the statute.”
Tamulis’s charitable remainder trust flunks this test. The executor-trustee, represented by counsel, as he was, and well aware that a substantial tax deduction was at stake, had no excuse for failing to bring the required judicial proceeding to reform the trust. The requirement is not unimportant; it protects against efforts to bend trust law to get a tax benefit. Nor is the requirement stated unclearly or confusingly in the Code or in any regulation—it is perfectly clear. Until the trust was reformed, compliance with the spirit of the Code’s provisions dealing with charitable remainder trusts had depended largely on the good faith of the trustee.
When the conditions for applying the doctrine are not satisfied, it makes good sense to hold a taxpayer to the requirements of the tax code. The doctrine of substantial compliance “seeks to preserve the need to comply strictly with regulatory requirements that are important to the tax collection scheme and to forgive noncompliance for either unimportant and tangential requirements or requirements that are so confusingly written that a good faith effort at compliance should be accepted.” The doctrine is therefore inapplicable to this case.
Do you think you qualify to have the doctrine of substantial compliance apply to you? Speak with a California tax attorney and call Mitchell A. Port at 310.559.5259.
The California State Board of Equalization has promulgated a rule that grants to registered domestic partners certain property tax relief afforded to spouses. County assessors (including the assessors of Los Angeles County, Ventura County, Santa Barbara County and Orange County) unsuccessfully challenged the rule in the trial court and appealed, arguing that it was unconstitutional. The California State Court of Appeal disagreed (you may read the opinion here).
In 1978, California voters adopted Proposition 13, a constitutional amendment, which limits the amount of ad valorem tax assessed on real property unless there has been a “change in ownership.” After the California Legislature defined such a change of ownership to exclude, among other things, real property transfers between spouses, the voters adopted Proposition 58, placing the spousal transfer exclusion in the state Constitution. The California State Board of Equalization then promulgated a rule excluding from the definition of change of ownership a transfer of real property to a registered domestic partner via intestate succession upon the death of the person’s registered domestic partner. Thereafter, the California Legislature amended the statutory scheme to limit change of ownership by excluding any real property transfers between registered domestic partners from the reassessment of full cash value for property tax purposes.
Plaintiffs, who are California county assessors, filed an action for declaratory relief, asserting that neither the Legislature nor the California State Board Equalization had the authority to create the registered domestic partner exclusion from classification as a change in ownership.
As California State Court of Appeal explained, the trial court correctly held (1) the Legislature can create an exclusion from “change in ownership” for registered domestic partners, without violating the California Constitution, (2) when the Legislature amended provisions of the Family Code and Revenue and Taxation Code, it ratified the Board’s rule excluding certain real property transfers between registered domestic partners from the property tax reassessment provisions of Proposition 13, and (3) accordingly, the Board’s rule is not unconstitutional.
On March 30, 2005, the Tax Court ruled that a decedent’s transfer of real property to a family limited partnership (“FLP”) and later FLP gifts were includable in the decedent’s estate under Internal Revenue Code Section 2036(a)(1) which recaptures in a decedent’s gross estate certain assets transferred while alive. The Estate appealed. On September 14, 2007, the Ninth Circuit upheld the Tax Court’s decision. Read the Ninth Circuit opinion here.
Virginia Bigelow, the decedent, transferred her 98.3% interest in a single family residence to a trust (“Trust”). (The decedent’s children held the other undivided interests.) The trustees of the Trust were Virginia and her son. The following year, the parties exchanged the property held by the Trust for another rental residence (“Property”) and bought out the children’s undivided interests. Two years later, the Trust and the decedent’s children formed the FLP. The Trust contributed the Property to the FLP and the children each contributed $100. The Trust was the sole general partner. Over the next three years, numerous gifts of FLP interests occurred. At decedent’s death, the decedent owned a 44% limited partner interest in the FLP and her Trust held the sole one percent general partner interest. The 44% limited interest was valued at a 37% discount from the underlying appraised value and the one percent general partner interest was valued at a 35% premium.
In addition, the loans on the Property were retained as liabilities by the decedent. However, the Property served as the ultimate collateral for the loans. Because the decedent was left with insufficient funds to pay off the loans, the Partnership distributed funds necessary to service one of the two loans. No other distributions were made. After Ms. Bigelow’s death, a reduction in her Partnership capital account was made to reflect the loan payment distribution.
The Estate appealed the Tax Court’s decision arguing there was no “implied agreement” for the decedent to use, enjoy or have the right to the income of the Property and that the transfers were completed under the “bona fide sale” exemption of Internal Revenue Code Section 2036.
The Ninth Circuit affirmed the Tax Court’s deficiency determination, finding that Ms. Bigelow and the Bigelow children had an implied agreement that Ms. Bigelow would retain income and economic enjoyment from the transferred asset, and that the inter vivos transfer was not a bona fide sale for adequate and full consideration under Internal Revenue Code Section 2036(a).
To discuss putting an effective family limited partnership in place, please call Mitchell A. Port at 310.559.5259.
The California State Bar maintains a very interesting website which provides information about the following California estate planning topics:
DO I NEED ESTATE PLANNING?
1. What Is Estate Planning?
2. What Is Involved in Estate Planning?
3. Who Needs Estate Planning ?
4. What Is Included in my Estate?
5. What Is a Will?
6. What Is a Revocable Living Trust?
7. What Is Probate?
8. To Whom Should I Leave My Assets?
9. Whom Should I Name as My Executor or Trustee?
10. How Should I Provide for My Minor Children?
11. When Does Estate Planning Involve Tax Planning?
12. How Does the Way in Which I Hold Title Make a Difference?
13. What Are Other Methods of Leaving Property?
14. What If I Become Unable to Care for Myself ?
15. Who Should Help Me With My Estate Planning Documents?
16. How Do I Find a Qualified Lawyer?
17. Should I Beware of Someone Who Is a "Promoter" of Financial and Estate Planning Services?
18. What Are the Costs Involved In Estate Planning?
You may also want to look at my website: www.AskMyAttorney.net for more information.
In California, you can make a will in one of three ways:
A will prepared by a California lawyer. A qualified estate planning lawyer can make sure that your will conforms with California law. The California attorney can also offer suggestions and help you understand the many ways that property can be transferred to or for the benefit of your beneficiaries. I, as a California lawyer, can also help you develop a complete estate plan and offer alternative plans which may save taxes. This kind of planning can be extremely helpful and economical in the long run for you and your beneficiaries. No matter what kind of will you use, the will should be solely your will and not a joint will with your spouse or any other person.
Also, keep in mind that your will is not a living will. The term living will is used in many states to describe a legal document stating that you do not want life-sustaining treatment if you become terminally ill or permanently unconscious.
A statutory will. California law provides for a “fill-in-the-blanks” will form. The will form is designed for people with relatively small estates. If there is anything you do not understand or if you are making any provisions which are complicated or unusual, you should ask a qualified lawyer to advise you.
A handwritten or holographic will. This will must be completely in your own handwriting. You must date and sign the will. Your handwriting has to be legible, and the will must clearly state what you are leaving and to whom. A handwritten will does not have to be notarized or witnessed. However, any typed material in a handwritten will may invalidate the will. A typed will must be signed by two witnesses. It is a good idea to consult with a qualified lawyer to make sure your will conforms with California law and does not have any unintended consequences.
Last weekend, the Los Angeles Times Business section ran a front page article on estate planning entitled "Estate Planning Can Help You Rest Easier; Protect Your Heirs and Property By Making Sure Your Wishes Are Clear". It is reprinted here so you can easily read why in California an estate plan can avoid probate problems, family fighting and save taxes. Here's the article:
A durable power of attorney (DPA) for property management is the best protection against the financial consequences of becoming disabled. A DPA is a document often drafted by an estate attorney in which one person (the principal) gives legal authority to another person (the attorney-in-fact) to act on the principal's behalf. In California, probate law allows for the DPA to provide that it is "durable"; that is, that it will continue in effect after you become incapacitated. It terminates at your death or cancellation (you can cancel it at any time), or at a time you specify.
A DPA's flexibility is one of its main advantages. You can limit the authority of the attorney-in-fact in the document, giving him or her as many or as few powers over your property as you wish, attaching conditions and so on. You should check with an attorney before executing a DPA.
The DPA lets you appoint an attorney-in-fact (usually your spouse or child) to manage all or part of your business or personal affairs. The law imposes the responsibility on the attorney-in-fact to act as your fiduciary, but it might be difficult for you or you family to take him or her to court. Since this person can in effect do anything with your money, you should be sure to appoint someone you trust and in whose judgment and ability you have confidence.
The State Bar of California has a very informative website containing information specifically addressing the question of whether you should have a California estate attorney prepare a revocable trust, that is, a family trust to stay out of probate court.
The State Bar of California article asks these probate law related questions:
What Is a Living Trust?
What Can a Living Trust Do for Me?
Should Everyone Have a Living Trust?
How Does a Living Trust Help if I Am Incapacitated?
How Does a Living Trust Help at my Death?
Who Should Be the Trustee of My Living Trust?
What Are the Disadvantages of a Living Trust?
If I Have a Living Trust, Do I Still Need a Will?
Does a Living Trust Save Estate Taxes?
Does a Living Trust Pay Income Taxes?
What Other Estate Planning Documents Should I Have?
What Other Kinds of Trusts Are There?
How Do I Transfer Assets to My Living Trust?
Who Should Draft a Living Trust for Me?
How Do I Find a Qualified Lawyer?
Should I Beware of Someone Who Is a "Promoter" of Financial and Estate Planning Services?
How Much Does a Living Trust Cost?
To discuss how answers to some of these questions may effect you and your family, please call Mitchell A. Port at (310) 559-5259.
The website for the State Bar of California has a terrific series of articles addressing various topics. One of those topics of interest to California residents discusses Wills. Below are the topic headings the article discusses - some of which deal with probate law. The California State Bar also has a link to a free California statutory will.
What does a will do?
A guardian for your minor children.
Does a will cover everything I own?
Assets owned as a joint tenant.
“Transfer on death” or “pay on death.”
“Community property with right of survivorship.”
Your spouse’s or domestic partner’s half of community property.
Are there various kinds of wills?
A handwritten or holographic will.
A statutory will.
A will prepared by a lawyer.
What if my assets pass to a trust after my death?
Can I change my will?
How are the provisions of my will carried out?
Who should know about my will?
What other planning should I do?
List of assets and debts.
Durable power of attorney for property management. In this document, you appoint another individual (the attorney-in-fact) to make property management decisions on your behalf if you are incapacitated.
Advance health care directive / durable power of attorney for health care.
How can I find a lawyer to write a will for me?
If you would like to discuss these and other California probate questions, please call Mitchell A. Port at (310) 559-5259.
No need for a California estate attorney to prepare the power of attorney - if that is all you want done - since the one for free is simple to use.
The California Attorney General's website recommends that you:
Designate Person To Carry Out Wishes. Select who should handle your health care choices and discuss the matter with them. You could name a spouse, relative or other agent.
Inform Key People Of Your Preferences. Notify your doctor, family and close friends about your end-of-life preferences. Keep a copy of your signed and completed advance health care directive safe and accessible. This will help ensure that your wishes will be known at the critical time and carried out.
Give a copy of your form to:
The person you appoint as your agent and any alternate designated agents
Your health care providers
The health care institution that is providing your care
Other responsible person who is likely to be called if there is a medical emergency
For answers to questions about the California advance health care directive and other estate planning matters, call a Los Angeles tax attorney: call Mitchell A. Port at (310) 559-5259.
In California, a durable power of attorney for property management, also called a financial power of attorney, is a way for you to arrange for someone to manage your personal financial affairs if you become unable to do that on your own. Depending on the extent of the powers provided, a durable power of attorney may also be used to avoid a California probate, probate court and help minimize estate tax. An estate attorney should be consulted to be sure the document provides the terms you desire.
If you become incapacitated and unable to make decisions for yourself, the durable power of attorney avoids the messy alternative of a court proceeding. Your spouse, closest relatives, or someone else who cares for you will have to ask a court for authority over some or all of your financial affairs. Without the durable power of attorney, a California probate attorney may be required to obtain a conservatorship.
A durable power of attorney can be written so that it goes into effect immediately as soon as you sign it. Many of my estate planning clients have a durable power of attorney for each other in case something happens to one of them or for when one spouse is away. As an estate attorney, I often draft a “durable” power of attorney because if I don't, it will automatically end if you later become incapacitated; my document "endures" my client's incapacity.
My clients, some of whom live in Los Angeles County, Santa Barbara County, Orange County or Ventura County, specify that they do not want the power of attorney to go into effect unless a doctor certifies that they have become incapacitated. This is called a "springing" durable power of attorney. Its purpose is to enable you to keep control over your affairs unless and until you become incapacitated, when it springs into effect. I don’t like them as much as those which become immediately effective because it may be difficult to obtain a written medical opinion concerning your incapacity.
When you create and sign a durable power of attorney, you give another person legal authority to act on your behalf. In California, this person is called your attorney-in-fact.
Commonly, people want their attorney-in-fact to “step into their shoes” and give their attorney-in-fact broad power to handle all of their finances and property. But you can give your attorney-in-fact as much or as little power as you wish. You may want to give your attorney-in-fact authority to do some or all of the following:
The IRS published a Q&A about basic trust law and trust taxation which is quite good. Any qualified California tax attorney worth his salt knows this material. Here are the "Qs" and for the "As" click here.
Basic Trust Law
Q: What is a trust?
Q: Who is a grantor of a trust?
Q: What is a trustee/fiduciary?
Q: What is a beneficiary?
Q: What is a simple trust?
Q: What is a complex trust?
Q: What is a grantor trust?
Q: What are irrevocable/revocable trusts?
Q: What are testamentary and Inter Vivos trusts?
Trust Taxation Questions
Q: IRS instructions for Form 1041 and Schedules A, B, D, G, I, J and K-1 provide general tax information and guidance for completing Form 1041. What law controls trust taxation?
Q: Do trusts have a requirement to file federal income tax returns?
Q: How does a trust compute its income tax liability?
Q: I have been told that I can assign income to a trust and I will not be taxed on that income. Is this true?
Q: May a trust deduct contributions to a charity?
Q: Will I owe Federal Gift Taxes on property contributed to a trust?
Q. The information presented by the promoter sounded legitimate. Now I have concerns regarding this promotion. Who do I contact to report information on the promotion and promoter?
Q. Can I get more information on the Internet?
Speak with a California tax lawyer about these and other questions you may have. Call Mitchell A. Port at (310) 559-5259.
Domestic trusts are trusts created in California and the rest of the country. Here are some common abusive domestic trust schemes:
Family residence trust
My wife and I transfer family residences and furnishings to a trust, which sometimes rents the residence back to us. The trust deducts depreciation and the expenses of maintaining and operating the residence including gardening, pool service and utilities. The courts have consistently collapsed these types of trusts, taxing income to us and disallowing personal expenses.
My wife and I transfer assets or income to a trust claiming to be a charitable organization. The trust or organization pays for personal, education or recreation expenses on behalf of me and my wife or family members. The trust then claims the payments as charitable deductions on its tax returns. These alleged charitable organizations often are not qualified and have no IRS exemption letter; hence, contributions are not deductible. Charitable deductions are not allowed when the donor receives personal benefit from the alleged gift.
This involves the transfer of an ongoing business to a trust. Also called an unincorporated business organization, a pure trust or a constitutional trust, it gives the appearance that I have given up control of my business. In reality, through trustees or other entities controlled by me, I still runs the day-to-day activities and control the business's income stream. Such arrangements provide no tax relief. The courts have held that the business income is taxable to me under a variety of legal concepts, including lack of economic substance (sham theory), assignment of income, or that the arrangement is a grantor trust. In some circumstances, the trust could be taxed as a corporation.
Asset protection trust
These trusts are promoted as a means of avoiding liability for judgments against an individual or business. However, beware of any asset protection trust marketed as part of a package to reduce federal income or employment taxes. The courts can ignore such trusts and order my property sold to satisfy the outstanding liabilities.
Equipment or service trust
This trust is formed to hold equipment that is rented or leased to the business trust, often at inflated rates. The business trust reduces its income by claiming deductions for payments to the equipment trust. This type of arrangement has the same pitfalls as the business trust, and it will result in no tax reduction.
Do you think you are involved in one of these and would like to extricate yourself? Call Mitchell A. Port, a California tax attorney, at (310) 559-5259.
What are the economic consequences, including the impact on government tax collections, of same-sex marriages? The tax laws in California are complex and too involved for publication in this blog. However, in an interesting article written a few years ago, several scholars at various universities collaborated in an article which begins an analysis of this topic by stating that:
It is well-known that a couple's joint income tax burden can change with marriage. Many couples, especially two-earner couples with similar incomes, pay a marriage tax because their taxes when married are more than their combined tax liabilities as single filers.
This feature of the income tax suggests that legalizing same-sex marriages would increase income tax revenues, because gay and lesbian households are thought to consist primarily of two-earner couples.
In this paper we estimate the income tax effects of allowing same-sex couples to marry. We use estimates on the size of homosexual relationships, the percent who would marry if same-sex marriage becomes legal, and the average incomes of these couples, in order to generate estimates of the revenue impact.
Our calculations indicate that legalizing these marriages would lead to an annual increase in federal government income taxes of between $0.3 billion and $1.3 billion, with the likely impact toward the higher range of the estimates.
If you or someone you know owes income tax as a result of being in a same-sex marriage, a referral to a qualified tax attorney for help is important. Call Mitchell A. Port at (310) 559-5259.
The California State Bar has a lengthy article concerning estate tax and California probate. A few of the topics covered in that site are described here.
What Is Estate Planning?
What Is Involved in Estate Planning?
Who Needs Estate Planning?
What Is Included in my Estate?
What Is a Revocable Living Trust?
What Is a Will?
What Is Probate?
How Should I Provide for My Minor Children?
To Whom Should I Leave My Assets?
Whom Should I Name as My Executor or Trustee?
How Does the Way in Which I Hold Title Make a Difference?
What Are Other Methods of Leaving Property?
When Does Estate Planning Involve Tax Planning?
What If I Become Unable to Care for Myself?
Who Should Help Me With My Estate Planning Documents?
Should I Beware of Someone Who Is a "Promoter" of Financial and Estate Planning Services?
What Are the Costs Involved In Estate Planning?
How Do I Find a Qualified Lawyer?
The Californian State Bar urges you to seek advice only from professionals who are qualified to give estate planning advice. Many professionals must be licensed by the State of California. Mitchell A. Port is a licensed attorney with a master's degree in taxation who has been practicing law since 1982. You may reach him to discuss your estate tax and estate planning concerns at (310) 559-5259.
PUT IT IN WRITING
As a probate attorney in Los Angeles, all of my California clients have me prepare a California Health Care Directive. As the Terri Schiavo case illustrated, in any given case, people may have divergent views on what measures should be taken to keep someone alive. The choice of which person speaks for you is your choice alone. My clients avoid or lessen the kind of strife that has torn the Schiavo family by identifying in advance who will speak for them.
TALK ABOUT IT
Each of us in Los Angeles County, Ventura County, Santa Barbara County and Orange County where most of my clients live chooses a person to whom we express our wishes who shouldn't be left guessing. If anything good has come of the Schiavo tragedy, it is that families are now talking about end of life decisions, and are taking steps to make sure that their wishes are known and are carried out.
I still believe that the designation of a health care agent is far more effective than trying to provide instructions for every conceivable scenario. But your grant of authority to your agent – and your discussions with him or her – should cover a key issue raised in the Schiavo case by specifying whether or not the agent's power extends to the withholding or withdrawal of fluids and nutrition.
YOU CAN'T COVER ALL THE BASES:
Any attempt to make medical decisions far in advance, I began to realize, will almost always be futile. As one widely-read booklet on advance health care directive (Shape Your Health Care Future with Health Care Advance Directives, co-produced by the American Association of Retired Persons, the American Bar Association Commission on Legal Problems of the Elderly, and the American Medical Association, 1995) states:
California property values are through the roof. For those of us who live in Los Angeles County, Ventura County, Santa Barbara County or Orange County and are considering making a gift of property, obtaining an appraiser to help determine the value of an asset to be gifted or that is in an estate is an important decision. This is true whether the California property is held in your own name or in the name of a limited liability company (LLC).
You don't want to pay for an appraisal, and then lose the case, have a large deficiency or penalties imposed, or suffer the embarrassment of the court telling the appraiser that his testimony is "full of holes".
California and other courts continue to ignore, criticize and occasionally use the testimony of appraisers to determine a disputed value.
Reputation and price of appraisal firms necessarily seem to assure success.
Appraisers must state their qualifications and show their understanding that a substantial or gross valuation misstatement may subject the appraiser to a civil penalty under Internal Revenue Code section 6695A in the appraisal.
Here are some suggestions in working with – and selecting – appraisers:
1. Confirm that the appraiser is full time and independent.
2. Check to be sure the appraiser is credentialed - in the subject matter to be appraised!
3. Confirm that key information, dates, and facts are correct.
4. Insist that the appraisal considers the various valuation methods, and if some are rejected or given less weight than others, a reason is given and supported for that action.
5. Involve the appraiser early.
6. Make sure your appraiser has statistical expertise and the numbers add up - and are current!
7. Confirm that the appraiser is not too "creative".
8. Check to be sure the appraiser has the ability and willingness to listen - as well as to engage the client and others in order to obtain important information that others may not have asked.
Structuring your gift or creating an estate tax strategy to minimize or avoid tax requires the input of a qualified California tax attorney. Call Mitchell A. Port at (310) 559-5259 to discuss the tax strategy you have in mind or that may be available to you.
Want to give your input to the IRS on a matter involving gift taxes? Read on....
The Internal Revenue Service announced the other day that it is reconsidering a series of private letter rulings (PLRs) previously issued. A PLR is an interpretation of statute or administrative rules and their application to a particular set of facts or circumstances. The private letter ruling addresses unusual or complex questions pertaining to a particular taxpayer and his or her tax situation. The purpose of the letter ruling is to advise the taxpayer regarding the tax treatment he or she can expect from the IRS in the circumstances specified by the ruling.
The PLRs under reconsideration address, in part, the gift tax consequences under sections 2511 and 2514 of the Internal Revenue Code of trusts that utilize a distribution committee consisting of trust beneficiaries who direct distributions of trust income and corpus. The Office of Chief Counsel believes that the conclusions in the PLRs regarding the application of section 2514 may not be consistent with Rev. Rul. 76-503, 1976-2 C.B. 275, and Rev. Rul. 77-158, 1977-1 C.B. 285. As a result, the Office of Chief Counsel is requesting comments from us in the general public as to whether the conclusions in these PLRs regarding section 2514 can be reconciled with the revenue rulings.
These PLRs involve a situation where trust distributions are made at the unanimous consent of a distribution committee that consists of trust beneficiaries, or at the discretion of an individual committee member with the consent of the grantor. If a distribution committee member resigns or dies, the committee member is replaced with another person. The PLRs conclude that the distribution committee members have substantial adverse interests to each other for purposes of section 2514. Therefore, they do not possess general powers of appointment over the trust and as a result, distributions from the trust will not be subject to gift tax with respect to the distribution committee members.
The problem is, however, that the holdings in Rev. Rul. 76-503 and Rev. Rul. 77-158 indicate that because the committee members are replaced if they resign or die, they would be treated as possessing general powers of appointment over the trust corpus. Some suggest that the facts presented in the PLRs are distinguishable from the revenue rulings because in the PLRs, the grantor’s gift to the trust is incomplete since the grantor retains a testamentary special power of appointment. See, however, section 25.2514-1(e), Example (1) of the Gift Tax Regulations, and Rev. Rul. 67-370, 1967-2 C.B. 324.
Before the Office of Chief Counsel takes any action with respect to the PLRs, the Office of the Associate Chief Counsel, Passthroughs & Special Industries is requesting comments regarding the question of whether the distribution committee members possess general powers of appointment under section 2514. The comments could also include suggestions for a substantially similar trust structures that would achieve the intended income, gift, and estate tax objectives of the transactions described in the PLRs.
Comments should be provided within ninety (90) days of the date of this news release. Send written comments to: Internal Revenue Service, Attn: CC:PA:LPD:PR (CC:PSI:4), room 5203, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (CC:PSI:4), Courier’s Desk, Internal Revenue Service, 1111 Constitution Ave, N.W., Washington, DC, or sent electronically, via email to: Notice.email@example.com (indicate CC:PSI:4)
Existing California law (California Probate Code Section 5600) invalidates nonprobate transfers of assets made to a former spouse by a decedent before termination of the marriage, unless
There is clear and convincing evidence that the decedent intended for the benefits to pass even after termination of the marriage,
The nonprobate transfer is not subject to revocation, or
A court orders otherwise.
A bill pending before the California State Legislature (AB 873) would permit a court instead to impose any or all of the following conditions upon a party to a bifurcated, status-only dissolution:
A new condition authorizing the court to make an order, if appropriate and except as specified, requiring that a party maintain a beneficiary designation for a nonprobate transfer asset until judgment has been entered with respect to the community ownership of that asset and until the other party's interest therein has been distributed to him or her.
A new condition authorizing the court to require that the community interest in an Individual Retirement Account (IRA) by or for the benefit of the party be assigned or transferred, as specified, to the other party to preserve the ability of the party to defer the distribution of the IRA upon the death of the other party. In addition, the bill would include a new condition authorizing the court to order a specific security interest under specified circumstances that may arise upon the death of one party.
Except as specified, the bill would require a party to maintain a beneficiary designation for a spouse for up to half, or upon a showing of good cause all, of a nonprobate transfer asset until a final judgment on the community interest has been entered.
Consult with an estate planning attorney about your alternatives. Call Mitchell A. Port at (310) 559-5259.
The California Probate Referees' Association published its latest edition of the Probate Referees' Procedures Guide. The Guide is designed to assist those with California probate experience as well as those without experience.
The Guide covers all basic procedures with a focus on the preparation of the Inventory and Appraisal. The Guide provides practical suggestions for preparing attachments, describing assets, obtaining appraisals and presenting necessary supporting data.
The Los Angeles Daily Journal published the California Probate Guide under the title: Using Probate Referees in Trusts, Probate, Conservatorships and Guardianships, Small Estates, and Non-probate Matters
The Guide's Table of Contents are here:
WHY USE A PROBATE REFEREE?
THE ROLE OF THE PROBATE REFEREE
BENEFITS OF USING REFEREIS IN TRUST AND NON-PROBATE MATTERS
TRANSFER OF SMALL ESTATES AND SPOUSAL PROPERTY PETITIONS
NEW REQUIREMENT OF VALUATIONS WHENEVER ACCOUNTS ARE REQUIRED TO BE FILED
WHAT IS THE INVENTORY AND APPRAISAL
-Checklist for preparing the Inventory and Appraisal
-What does not go in the Inventory and Appraisal
-What goes on Attachment 1
-What goes on Attachment 2
LISTING PARTICULAR ASSETS
-The importance of complete information
-Vacant, agricultural, condominium, and single family residential
-Residential income producing
-Remainder and reversionary interests
-Closely held corporations
TANGIBLE PERSONAL PROPERTY
-Miscellaneous/furniture and furnishings
-Motor vehicles/mobile homes/boats
-Livestock and breeding animals
-Portfolio accounts at brokerage firms
-Common and preferred stocks
-Corporate, state and municipal bonds
-US treasury notes and bonds
-GNMA, FNMA, and FHLMC securities
-United States savings bonds
-Inheritances and distributions from trusts
-Patents, copyrights, and royalty interests
-Judgments and ongoing litigation
-Personal injury actions
-Gas and mineral rights
ADMINISTRATIVE ISSUES AND QUESTIONS COMMONLY ASKED
-How long does the appraisal take?
-How do I correct a mistake?
-When do I need a reappraisal for sale?
-What about inheritance taxes?
Speak with an experienced California probate lawyer who can represent you in any court in California, most readily in Los Angeles County, Santa Barbara County, Ventura County and Orange County. Call Mitchell A. Port at (310) 559-5259 to discuss your probate matter.
My estate planning and probate clients who come from Los Angeles County, Santa Barbara County, Ventura County and Orange County, (and occasionally from Northern California) will often speak with me about what they have heard regarding estate planning and avoiding probate. Retained by clients as their California estate planning attorney and California probate lawyer, they freely share their concerns about estate tax, gift tax planning and the other items listed here:
1. Failure to Make Gifts to Reduce Estate Taxes. Easy gifting options include the $12,000 annual exclusion, $1,000,000 lifetime gift exemption, and unlimited tuition/medical gifts. In a 45% estate tax bracket, each $12,000 gift saves $5,400 in estate tax.
2. Failing to Protect a Child's Inheritance. A child's inheritance that passes outright to the child is not protected from creditors, divorce, or estate tax at the child's death. To protect the inheritance, it may be better to leave assets in trust for such child's benefit. If desired, the child can be named as the co-trustee of the trust along with a third party.
3. Failure to Pursue Sophisticated Estate Planning Tools. Explore techniques to reduce estate taxes and/or protect assets. Consider the family limited partnership, charitable trusts, qualified personal residence trust, and sale of assets to children.
4. Wasting $2,000,000 Exemption When First Spouse Dies. The $2,000,000 exemption is wasted when assets are left outright to the surviving spouse. Instead, the Will should create a bypass trust to be funded with $2,000,000 of the decedent's assets, saving up to $900,000 of estate taxes (assuming a 45% estate tax rate). WARNING: Naming the spouse as beneficiary of life insurance/retirement plans prevents such assets from going into the bypass trust. Also, if the house goes outright to the survivor, the decedent's portion cannot be used if needed to fully fund the bypass trust. The impact on the overall plan should be considered before making such a bequest.
5. Wasting $2,000,000 GST Exemption. This results in needless estate taxes at the deaths of children. Instead, consider segregating $2,000,000 ($4,000,000 for husband and wife) of assets in trust for the benefit of children for life and then to grandchildren, free of estate tax at each child's death.
6. Life Insurance Policies Owned by the Insured. The proceeds of life insurance are subject to estate tax when the insured owns the policy. For example, $1 million of coverage taxed at 45% leaves only $550,000 coverage after tax. Transferring ownership of life insurance to an irrevocable life insurance trust (or having the trust buy new coverage) removes the proceeds from the estate, provided the insured lives for three years after the transfer.
7. Poor Timing of Retirement Plan/IRA Distributions. Penalty taxes arise if retirement plan/IRA distributions are too small, too early, or too late. Devise a distribution strategy and beneficiary designations to maximize income tax deferral, but with due consideration of these penalty taxes. Consider designating a charity as beneficiary to avoid estate tax and income tax.
8. Failure to Plan for Lifetime Contingencies/Disability. This may result in a court-supervised guardianship. Plan ahead by executing a power of attorney for management of property and personal affairs, advance health care directive and living trust. Be wary of "standard form" documents.
9. Lack of Liquidity to Pay Estate Taxes. Illiquidity can result in forced "fire sale" of real estate or a family business within nine months of death in order to pay taxes. In this situation, it is advisable to explore life insurance and plan for the orderly sale of assets.
10. JTWROS ("Joint Tenants with Right of Survivorship") Ownership Designation on Brokerage or Bank Accounts. This designation prevents such accounts from being funded into the bypass trust when the first spouse dies, potentially wasting the decedent's $2,000,000 exemption (and costing up to $900.000 in extra estate taxes). This also applies to "P.O.D." (pay on death) accounts and "Trust" accounts payable to a named beneficiary (example: "A, Trustee for B"). While these designations avoid probate, other problems arise instead. Multiple party accounts should be set up as tenants in common.
If you would like to speak with a licensed California attorney about these matters or estate planning in particular, call Mitchell A. Port at (310) 559-5259.
Have a tax problem? Want to try and solve it yourself without hiring tax attorneys? Don't really need tax help at the moment? Think spending money on tax lawyers when you already owe money is something to avoid for the time being?
Below is a convenient (unendorsed) list of tax help sites - none necessarily based in California - for your review.
When you want to consult with a tax attorney in Los Angeles who services clients throughout California for Franchise Tax Board matters and throughout the country for IRS tax problems, call Mitchell A. Port at 310.559.5259.
The California legislature recently held a hearing on the question of whether the attorney-client privilege should continue indefinitely after a client's death. The hearing further asked whether a means for waiving the privilege should be created when subsequent administration of the estate is necessary.
In judicial and other proceedings when an attorney is called as a witness or otherwise required to produce evidence related to a client, the attorney-client privilege applies to shield the attorney from providing the evidence.
The privilege enables a client to prevent a witness from disclosing confidential communications between the client and his or her attorney. It encourages the client to fully disclose information to assist the attorney in the lawyer’s representation of the client. Under current law, the privilege remains effective until the end of the probate of the deceased client's estate and the personal representative was discharged by the court.
The bill provides that the attorney-client privilege continues indefinitely after the client's death and creates a mechanism for waiving the privilege when a lawyer is instructed by the holder of the privilege to do so.
This bill also authorizes the court to appoint a personal representative for purposes of holding the attorney-client privilege where the court has discharged a personal representative and disclosure is sought as to a privileged communication. Under this bill a lawyer will be obligated to claim the attorney-client privilege, even if the client is dead, whenever the lawyer is present when the communication is sought to be disclosed.
This bill will also allow waiver of the privilege if the attorney is instructed to do that by the holder of the privilege.
Litigation in the Bing Crosby estate has weakened the assumption that the privilege could be abandoned after a deceased client's personal representative has been discharged without harming the societal goals embodied by the attorney-client privilege.
Upon Bing Crosby's death, there was a probate of his assets, including his recording contracts. During the probate case, HLC Properties, Ltd. was created which received Crosby's assets, including the recording contracts, on his estate's distribution. His widow was the personal representative and the court then discharged her. HLC later sued MCA, a record company, for unpaid royalties. MCA requested and the trial court ordered HLC to turn over documents containing Crosby's past communications with his attorneys.
In HLC Properties, Ltd. v. Superior Court, the California Supreme Court upheld the trial court. Since the attorney-client privilege is governed exclusively by statute, the court did not consider whether the assumptions behind the statutory rule ending the attorney-client privilege on the discharge of a client's personal representative remain valid. (HLC Properties Ltd. v. Superior Court, 105 P.3d 560 (Cal. 2005).)
If Bing Crosby had created a revocable trust to avoid probate and to pass his royalties at his death, his successor trustee would have been able to claim the privilege. If he incorporated his business during life, his corporation would have been able to claim the privilege.
The bill before the California legislature concludes that the continuance of the attorney-client privilege after a client's death should not be decided on minute and picky distinctions that are unrelated to the purposes from which the privilege originates, such as whether the decedent passed property at death by either a revocable trust or a will.
The IRS issued new guidelines for family limited partnerships (FLPs) applicable to many of my clients in Los Angeles County, Ventura County, Santa Barbara County and Orange County.
Those FLP guidelines focus on 4 issue of concern to California real estate investors and those considering using the FLP as an estate planning tool. Those issues are:
Whether the fair market value of transfers of family limited partnership or corporation interests, by death or gift, is properly discounted from the pro rata value of the underlying assets.
Whether the fair market value at date of death of I.R.C. §§ 2036 or 2038 transfers should be included in the gross estate.
Whether there is an indirect gift of the underlying assets, rather than the family limited partnership interests, where the transfers of assets to the family limited partnership (funding) occurred either before, at the same time, or after the gifts of the limited partnership interests were made to family members.
Whether an accuracy-related penalty under I.R.C. § 6662 is applicable to any portion of the deficiency.
The Appeals Settlement Guidelines can be read in more detail at the IRS website.
These issues should be familiar to your tax advisor. Schedule a discussion about these new guidelines as soon as possible - get tax help which benefits you. If you would like to discuss this or other estate planning matters with Mitchell A. Port, call him at 310.559.5259.
Probate in California requires these assets to be probated:
The deceased person's share of an asset when the asset is registered as tenants in common with other people.
One-half of each asset registered as community property in the decedent's name with his or her spouse.
Assets in the deceased person's name alone.
California law provides that a probate is not necessary if the total value at the time of death of the assets does not exceed the sum of $100,000. If the deceased person has 3 accounts at 3 different banks each having $35,000 on deposit, then the sum of the 3 accounts exceeds the $100,000 limit and each account must be probated even though each account is less than $100,000. There is a simplified procedure for the transfer of assets with a value under $100,000. The $100,000 figure does not include vehicles and certain other assets.
The following assets are NOT subject to the California probate process:
Assets in a bank or savings and loan account in the deceased person's name as "trustee" for someone else.
Assets which can be registered in a person's name and which are "payable on death" (P.O.D.) or "transfer on death" (T.O.D.) to someone.
Assets held in joint tenancy with another person or persons.
Assets held in a living trust.
Assets such as life insurance and IRA benefits, where a beneficiary is named and is alive at the time he or she is to receive the property from the deceased person.
Assets registered by husband and wife as "community property with right of survivorship."
Assets passing to the surviving spouse. If the deceased person owned assets in his or her name alone but these assets are left by will or pass by intestate succession to the surviving spouse, no probate is necessary.
In some cases, part of an estate in California can avoid probate while another part of the same California estate may have to go through probate.
If you would like to know whether a probate is necessary, Mitchell A. Port welcomes calls for a consultation at (310) 559-5259.
For those of you who have read my earlier blog postings on California estate planning and want to know about some of the topics that may come up during an estate planning meeting with a Los Angeles tax attorney like me, I’ve attached a long questionnaire and a short questionnaire.
I almost never ask anyone to complete the long form before we meet. Many find it too cumbersome and I want to avoid providing people with a reason not to see me as their tax attorney. Instead, I provide the long form as a guideline for the kind of assets that may need to be put into your California living trust.
It is also a good way to inventory what you have so that your executor or trustee will have an easier time administering your estate.
Finally, it helps me to know roughly how large an estate and what types of property I am working with so I can bring all the tax planning resources I have to address effectively the federal estate tax issues raised by your estate.
Click on this link for the estate planning long form sample questionnaire: Download file
I have also provided a short form estate planning questionnaire which simply asks some of the questions most important to my clients. Those questions include who will serve as guardians of minor children and who will be the executors. Click on this link for the estate planning short form questionnaire: Download file
Belief 1: "I Don't Have an Estate Big Enough to Require Planning"
This is the most frequently heard objection to having an estate plan. What is important is not the value of your estate but the mix of the assets of your estate. For example, a $125,000 condominium, or any other real property located in Los Angeles County, Santa Barbara County, Orange County, Ventura County or anywhere else throughout California, is the right kind of asset that would necessitate an estate plan since the avoidance of probate fees is important when the estate consists in part of real property. Probate fees on this condominium would be about $4,750. A living trust would eliminate this needless fee.
Belief 2: Leaving Everything to Your Spouse
Leaving everything to your spouse "wastes" the $2,000,000 unified credit exemption of the first spouse to die which could cause a considerable increase in the estate taxes of the surviving spouse. Further, some spouses have neither the interest nor ability to manage estate assets after the death of their spouse. Utilizing appropriate estate planning techniques and trusts, the estates of both you and your spouse gain the benefit of the largest possible tax savings, and also get proper estate management.
Belief 3: Believing That Living Trusts Avoid All Estate Taxes
Living trusts do not avoid all estate taxes. Instead, you are able to take advantage of the law permitting each person to pass this year or next $2,000,000 of their estate to heirs without paying any estate tax. This is a tax savings of between $900,000 and $1,100,000. During this year and next, an estate over $2,000,000 for a single person, or $4,000,000 for a married couple, would be hit by an estate tax even if all of the property is in a living trust.
Taking Care Of Obligations To This Spouse, Your Prior Spouse, Kids From Current Marriage And Kids From Your Prior Marriage
Your premarital agreement written in California may require that you purchase life insurance for your spouse's benefit. You may also have children, whether they live in California or not, from a prior marriage for whom you are concerned. If so, you may fulfill your requirement to your spouse while at the same time taking comfort in also providing for your children all under the same insurance policy. Options can and ought to be discussed with a qualified estate tax attorney.
Perhaps you do not want your spouse to have complete control over the policy's cash value or death benefit so that all of the beneficiaries for whom you are concerned get all the cash which you want them to receive.
Children from your current marriage should not be excluded from receiving a part of your estate upon your death even if the prenuptial agreement is silent on the matter or requires you to provide primarily for your spouse.
A technique should be devised to be sure a distribution upon your death to your children of your current marriage does not give rise to either an estate tax or an individual income tax.
These goals and concerns may be met by using a trust to own the policy and to serve as the primary beneficiary. An irrevocable insurance trust will accomplish these things, and more.
An irrevocable insurance trust is a separate legal entity your attorney creates with your help to own the life insurance and to be the primary beneficiary. The trust can provide that upon your death, your spouse is to receive all of the income generated by the principle and may receive distributions of principle for reasons such as health, education, maintenance, and support.
If someone other that your spouse is the trustee in charge of managing the funds, you may feel better about whether any of these criteria for principle distributions are met. To the extent principle remains in the trust after your spouse's death because the trustee did not distribute any for nonconforming reasons, your children from a prior marriage can be the beneficiaries of it.
For children of your current marriage, an irrevocable insurance trust may also be handy. You may either use your separate property funds created (or preserved) under your prenuptial agreement or community assets to pay the premiums. The trust is the beneficiary of the death benefit and your children are the beneficiaries of the trust.
In this fashion, you can rest comfortably knowing that no matter what happens with your current marriage, your children will be provided for so long as the insurance is kept in force.
Sophisticated California investors and their local financial advisors in Los Angeles, Orange County, Santa Barbara or Ventura know that the charitable remainder trust (CRT) is one of the most effective and flexible tools in philanthropic financial planning. But this tool is not limited only to sophisticated investors or those who are philanthropically minded.
Many individuals who are retired or planning to retire own low-yield, highly appreciated assets, such as stock or real estate, and don’t want to sell them because of the capital gains tax. A CRT allows you to unlock the income-producing potential from such an asset without paying a substantial amount of capital gains tax.
In most cases, when you create a CRT, you fund it with low-yield, highly appreciated assets. In many instances, you may serve as the trustee and retain power over managing trust property. As the CRT’s trustee, you sell the assets and because the CRT is a tax-exempt entity, no capital gains tax is due on the sale. The trustee then may reinvest the total value of the assets instead of the assets’ after-tax value. When 100% of the property’s value is invested, a wonderful outcome results.
A CRT delivers a stream of income earned on 100% of the asset’s value to you and, in some cases, your beneficiaries for life (or a specified term of years). If the CRT invests in tax-exempt bonds, your and your beneficiaries’ payout can be tax-exempt. When the trust terminates, the remaining trust assets will pass to a charity of your choice. Depending on how the trust is designed, the trust will terminate at your death, the death of your surviving beneficiary, or at the end of a term of years.
From a tax standpoint, a CRT provides you with an immediate income tax deduction for the portion of the assets that will eventually pass to your charity, which increases your spendable income now. This deduction may then be used over a period of years to offset future income.
Also, you save estate taxes in the future because the assets transferred to the CRT will not be subject to estate tax.
Your investment specialist or estate planning attorney will be able to discuss these and other estate planning vehicles in depth and to determine which are best suited to meet your specific financial goals. If you would like to speak with Mitchell A. Port, Esq. about your estate planning, please call for a free consultation at (310) 559-5259.
It's a good idea to update your California estate plan every few years or after the occurrence of significant life events such as marriage, divorce, the birth of a child and grandchild, or adoption.
Meet with your tax attorney while you’re still thinking about the changes you want to make to your plan.
Even if you haven't experienced any of these events since you last updated your estate plan, there have been changes in California state and federal tax laws or changes in your financial situation that necessitate a reevaluation of your estate plan.
Your desires as far as how your property will be distributed are likely to change over the years, especially as certain events occur in your life. For example, if you get a divorce, you probably don't want to make the same bequest to your former spouse as you did when you were married. In Los Angeles County, Ventura County, Santa Barbara County and Orange County, California, provisions regarding an ex-spouse in your will are not disregarded.
The birth or adoption of a child is another life event that will require you to update your estate plan. Even if your will or trust already provides for children, it is a good idea to update it each and every time you have a child.
Other significant events that will require you to update your estate plan are marriage, re-marriage, the death of a beneficiary, and the death of an executor or trustee.
California provides that a statutory share of the estate will go to a surviving spouse. If this statutory requirement is not in keeping with your estate planning desires, you will need to revise your estate plan or have a valid pre-nuptial or post-nuptial agreement to avoid it.
This becomes particularly important for individuals in a second marriage who have grown children from a first marriage. In this situation, you may want to provide for the support of your current spouse during his or her lifetime, but you will want to make sure that your children ultimately inherit your assets.
Without proper planning, your current spouse's children could end up inheriting your assets, instead of your own children.
Another thing that tends to change over the years is your financial situation. If your current estate plan was made even a few years ago, your net worth may have changed enough that you will need to incorporate more estate tax planning into your estate plan.
Finally, you should reevaluate your desires from time to time. You may find that you've changed your mind about a variety of issues addressed by your estate plan. Do you want a different person to be the trustee of your estate, rather than the one who is currently named in your will or trust? Did you grant a health care power of attorney to one of your children and now that child has moved to a different state? Is there something about the way one of your beneficiaries is leading his or her life that would make you want to put their bequest into a trust rather than granting an outright distribution?
You may have become aware that one of your children has trouble managing money and you fear their creditors might end up with the inheritance.
If you already have an estate plan in place, you deserve congratulations for planning ahead and being prepared. But you also need to remember to update it from time to time as your situation or needs change.
To discuss this in more detail, please call Mitchell A. Port at (310) 559-5259.
During a recent evening event with other professionals in Los Angeles, California, I was asked whether a probate of a living trust created and signed in Los Angeles is necessary. My knee-jerk reaction was to say “of course not”. But after hearing more about the situation, I had to reconsider.
The circumstances were that the California based trustee in charge of the estate after the settlors of the trust died wanted to transfer the trust’s investments from one investment firm to another firm. Both securities firms were located in Ventura County with offices in Santa Barbara County and Orange County, California. The firm currently holding the investments asked the trustee whether he knew with certainty that the trust he had in his possession was the most recent version and that it had not been amended.
Until the trustee could somehow prove that he had the most recently drafted trust which had not been amended, the investment firm would not release the property. To make matters worse, the investment firm would not accept a mere written statement (not even a notarized one) from the trustee that he had the latest trust and that there were no amendments to it.
I suppose that the California investment firm had the experience of releasing funds to a trustee without asking whether the living trust the trustee presented was the latest version and whether it had been amended. My guess is that after releasing the investments to the trustee, another person connected to the estate approached the investment firm with a later version of the trust which may have named that person as the trustee in place of the trustee who previously obtained access to the investments. The investment firm probably had no choice but to require proof that the living trust presented by the second trustee was the most recent version and once it received that proof it handed-over the property upon demand. As a result, the firm was out-of-pocket the value of the investment account one time too many.
How does a trustee prove that the living trust he or she possesses is the latest version and has not been amended? The trustee will have to petition a California probate court having jurisdiction over trust administration seeking an order confirming the status of the living trust as the last living trust or amendment signed by the settlors. The trustee can then present that order to the investment firm so as to obtain control over the investments and transfer them to the other firm as he or she originally tried to do once becoming the trustee.
If you would like help by consulting with an attorney experienced in trust administration, you are welcome to call Mitchell A. Port at (310) 559-5259.
One of the decisions that you will be asked to make as you are completing the purchase of real property in California, is how you are going to hold title to the property (the vesting). The vesting will appear on the Deed of Trust and the Grant Deed, which are recorded documents in the county where the property is located such as Los Angeles County, Ventura County, Orange County or Santa Barbara County. Usually, your escrow officer or lender, or possibly both, will ask you how you want to hold title. The manner in which you hold title may have significant legal and tax consequences. Some of the issues that you should consider will be explored in this blog.
Real property in California can be owned in either Sole Ownership or in Co-Ownership. There are three options for holding property as a Sole Owner:
A Single Man or Woman, defined as a man or woman who has never been married.
An Unmarried Man or Woman, defined as a man or woman who has been married in the past, but is now legally divorced or is widowed.
A Married Man/Woman, as His/Her Sole and Separate Property, defined as a married man or woman who wishes to acquire title in his or her name alone.
In California, any assets that are acquired during marriage become community property, (i.e., belonging to both spouses), unless they are specifically acquired as separate property. Real property that is conveyed to a married man or woman is considered community property, unless it is stated otherwise. In order for a married individual to acquire title in his or her name only, the spouse must relinquish all right, title and interest to the property. Usually, this is done by executing a Quitclaim Deed to the property, which is recorded concurrently with the deed to the property.
For residential property, the primary methods for holding title are Community Property, Joint Tenancy, and Tenancy in Common. Tenancy in Partnership will not be addressed in this article.
My estate in California isn’t big enough to justify the expense, effort and time to have an estate plan prepared.
As an estate planning and tax attorney working with clients in Los Angeles County, Ventura County, Orange County, and Santa Barbara County, I hear this refrain a lot. The simplest way to decide whether you would benefit by having an estate plan prepared is to ask whether you have any property that would pass to your heirs through the court supervised process called probate. If you own such property in California, then you would benefit by having an estate plan prepared.
An easy rule of thumb to keep in mind is that your California real estate vested in your own name must go through probate after death unless a living trust is established beforehand and the property was held in the name of the trust. Another easy rule of thumb is that cash, investments and savings accounts held in your own name must also go through probate if the total value is over $100,000 unless the accounts were held in the name of a living trust.
Probate is usually a process worth avoiding when possible. It is slow, expensive, and a hassle. In comparison, a living trust which holds your property at the time of death allows your property to be distributed quickly to your proper heirs usually without any expense or trouble.
Your living trust comes into play at the time of death. But while you are alive and incapacitated or incompetent, there are other important parts of an estate plan that may come into play. Those other parts are a durable power of attorney for property management and a California advance health care directive. Both of those documents allow someone you trust to manage your personal affairs (pay your mortgage, your bills, etc.) and to make important health care decisions on your behalf if you can’t do that for yourself.
Call an estate planning and tax attorney now to discuss these and other benefits related to your estate plan.