06.30.09
Posted in Litigation, Probate administration, Wills at 1:41 pm by gbroiles
If you’d like to see the documents filed so far in the Michael Jackson probate matter, here they are: http://www.scribd.com/doc/16974369/Michael-Jackson-Probate-Filings.
In brief, Michael Jackson’s parents are asking the court to appoint Katherine Jackson (Michael’s mother) as guardian of his three children, as administrator of his estate, and as a special administrator to immediately assume control of his assets.
The probate petition is drafted as if Michael Jackson didn’t have a will; supposedly, an attorney has an original will signed by Michael Jackson which will be filed for probate. In California, a person in possession of a decedent’s will has 30 days from the death to deposit the will with the superior court in the county where the decedent lived.
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06.12.09
Posted in Litigation, Living trusts at 4:04 pm by gbroiles
Clients frequently ask “Can I change my living trust by crossing things out and writing in new parts? The California Court of Appeals answered that question last week: not if you want your changes to stick.
In Cory v. Toscano, the person who created the trust gave “(a) To Elaine [last name omitted here for privacy] the balance remaining from the sale of my real property in Los Banos . . .”
At some later point, the creator of the trust apparently changed his mind, adding in his own handwriting the notation “^ 25% of” to the paragraph, so that the changed version said “(a) To Elaine, 25% of the balance . . .” The handwritten changes were dated and had the initials of the trust’s creator.
It’s no surprise that after the trust creator died, Elaine, whose inheritance was cut by 75%, wanted to challenge the modification to the trust. Elaine’s attorney filed a special petition requesting a court ruling on the question of whether or not the handwritten changes to the trust were protected by the trust’s “no contest” clause. The Court of Appeals ruled that the handwritten changes were not protected by the no contest clause – meaning that Elaine can challenge whether or not they were an effective modification to the trust. If Elaine wins her challenge, she gets the full value of the Los Banos property. If Elaine loses her challenge, she gets the same 25% she would have received if she hadn’t brought her challenge. She’ll have to pay attorney’s fees for her challenge – but it looks from public records like the property is worth at least $800,000, so she’s balancing spending a few tens of thousands of dollars against potentially recovering $600,000.
What can we learn from this case? The first lesson is that handwritten, informal changes are likely to cause problems. The second lesson is that piecemeal amendments to trusts are invitations for problems – even if the trust creator had asked his attorney to formalize this change, it would have been obvious to Elaine that her $800,000 inheritance just turned into a $200,000 inheritance; and the change to the trust that reduced her inheritance wasn’t protected by the no contest clause.
In California, heirs and beneficiaries are entitled to a complete copy of the “Terms of the Trust” – this includes the original document, and any amendments. It does not include previous versions of the trust if they have been entirely replaced by a restated trust. If your trust document (and amendments) show a series of changes, where some beneficiaries’ shares grow or shrink, you should know that the beneficiaries will eventually see all of the different versions. Making the changes in small discrete steps makes it tempting for a family member or friend to challenge “just the last change” and ask a judge to go back to an earlier version of the trust that’s more favorable to them.
My office practice is to avoid partial amendments whenever possible – the small amount of money saved by not restating the document is tiny compared to the potential financial and emotional burden on beneficiaries and successor trustees when all of the piecemeal amendments are eventually revealed after death. If the trust had been “amended and restated in full” to match the creator’s wishes, it might be that Elaine would never know about the $600,000 she didn’t get, she would have been happy with her $200,000 gift, there would have been no lawsuit, and the property would already be sold.
By saving a few hundred dollars in legal fees or a trip to the attorney’s office, the trust creator has now caused what must be approaching a hundred thousand dollars in legal fees for this fight, and years of delay in estate administration.
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05.27.09
Posted in Nonprobate transfers at 4:02 pm by gbroiles
I ran across an interesting question today – is a California probate necessary when someone dies as a resident of another state, but they have an account in a California bank?
If the decedent used a revocable (”living”) trust, and changed the title on the bank account to reflect trust ownership – no problem, no probate is required.
If the decedent used a revocable trust but didn’t change the title on the bank account to reflect trust ownership, then it may be possible to use a petition under California Probate Code Section 850 (a “Heggstad petition”) to get control of the account without the delay and expense of a full probate.
If the decedent didn’t have a revocable trust and the balance in the account is less than $100,000, then the other-state executor or beneficiaries can wait until 40 days after the death, then use a small estate affidavit to collect the funds.
If the decedent didn’t have a revocable trust and the balance in the account is $100,000 or more, then an ancillary California probate will be necessary, including all of the traditional probate procedures and formalities. This is the worst-case scenario; I usually tell people that a probate in Santa Clara County will take approximately a year to complete, and 18 months isn’t surprising. A probate for a single asset like a bank account will be able to move quickly through the inventory & appraisal stage, since there isn’t much work to do, but there’s still a mandatory waiting period for creditor claims, and the delays inherent in scheduling multiple mandatory court hearings.
As a California resident and a California attorney, I’m embarassed that our state does this to people from other states; I don’t think it’s fair or reasonable, but that doesn’t mean it’s not the law. What’s even worse is that this feature of California law isn’t well known, and isn’t likely to be known by residents of other states, or even by attorneys in other states who haven’t run into the issue before. So it’s a problem that will surprise people over and over again.
It’s also a reminder to keep on top of little details with respect to bank accounts and estate planning. In this case, the failure to (a) use a trust, (b) designate beneficiaries on the account, or (c) move the account out of California is likely to cost the beneficiaries a few thousand dollars and months of delay while the probate proceeding occurs. I’m sure that’s not what the decedents intended, but it’s what they got.
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03.28.07
Posted in Uncategorized at 1:15 pm by gbroiles
A recent post discussed the problem created by estate plans that aren’t updated to take advantange of recent changes in tax laws – or were never drafted with actual human beings in mind, just the tax code.
Specifically, it’s pretty common for a living trust for a married couple to mandate that the trust property be split into two different trusts upon the death of the first spouse. This is done partly to protect the estate from estate tax, and partly to make sure that some of the property will be distributed according to the wishes of the spouse who passed away.
This sort of planning is important if there’s enough property to worry seriously about estate tax; or if there’s a significant chance that the surviving spouse will frustrate the original estate plan.
On the other hand, there are a lot of families where there’s no serious risk of estate tax, and where the second spouse either wants or needs the flexibility to use/control all of the property .. or where the second spouse reasonably wants or needs to change the original distribution plan. (For example, if there are two or three children, and one of them quits their job or moves cross-country to care for the ailing surviving spouse, it’s not uncommon to see a disproportionate distribution of property to that child who made a big sacrifice to provide care and support for the parent.)
A well-drafted estate plan can include flexibility to allow the surviving spouse to allocate property between the A and B trusts after the first death. This isn’t necessarily what you’ll get from a trust mill, or from an attorney who isn’t interested enough to spend a few hours talking to you to understand your situation – but it is certainly possible. Two common approaches are called a “disclaimer trust” and a “Clayton election”.
I think this sort of planning is very important where, as now, it’s tough to know what the estate tax exemption amounts are going to be, and what the family is going to look like, upon the first (and second) deaths.
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03.16.07
Posted in Incapacity planning, Litigation at 8:56 am by gbroiles
A recent California court decision illustrates the importance of reading carefully and paying attention, even when signing apparently harmless documents.
In Hogan v. Country Villa Health Services, a California appellate court enforced an arbitration clause in admission documents for a skilled nursing facility, signed by an elderly woman’s daughter upon admission. When the elderly woman later died while a patient of the skilled nursing facility, her family wanted to sue for wrongful death, eder abuse, and violation of patient rights.
The skilled nursing facility asked the court to rule that the family was forced to bring their elder abuse claim before an arbitrator instead of to a jury, because of the documents signed at the time of admission. The family argued that, even though the daughter had a statutory Heathcare Power of Attorney form signed by her mother, the mother had not authorized the daughter to waive her right to a jury trial in a real courtroom.
The Appeals Court held that the California statutory Advance Health Care Directive form (see Probate Code section 4701), as it was signed by the mother, was sufficient to give the daughter the power to agree to the arbitration agreement.
The unfortunate result is that the elder abuse claim will not be heard in a public forum – even though it’s likely that neither the mother nor the daughter had any idea that was a potential outcome when they signed the documents.
This is an important reminder to always read what you sign – and that it’s helpful to get assistance from someone who can advise you about unexpected consequences, such as the waiver of the right to a trial – because sometimes simple forms have complicated, unintended consequences.
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03.14.07
Posted in Administration, Trust administration at 8:35 am by gbroiles
A common questionI encounter concerns the administration of a joint trust after the first spouse has died. In California, a typical living trust estate plan will take the form of a joint trust, which splits into two (or three) subtrusts when one of the spouses passes away.
The typical model is that the property that belonged to the person who passed away should be transferred into the “B” or Bypass trust. In some circumstances, another trust – referred to as the Q-TIP or “C” trust – will also be funding with some of the property from the person who passed away.
The other trust – the “A” trust, also known as the Survivor’s trust, holds the property of the spouse who is still living.
It’s not unusual for the surviving spouse – especially if they didn’t pay attention during the estate planning process, or if they used a trust mill or an attorney who couldn’t be bothered to explain the estate plan which was developed – to be surprised to learn that they’re obligated to take half of the property they’re accustomed to thinking of as “theirs”, and to move it into a new bank account or brokerage account.
(The exact details of the split between the A, B, and maybe C trusts depends on the property you own, how title was held (separate property versus community property), and the terms of your trust, so it’s not possible for me to describe exactly what to expect without actually reading your trust and understanding your property situation.)
In any event, unless the joint trust has been specially drafted to preserve flexibility at the first death, the trustee of the trust – typically the surviving spouse – is required to move assets into the bypass trust.
Why is this required? Because the different trusts – A, B, and C – are treated differently from a legal and from a tax point of view. For example, the B and C trusts are typically distributed according to the rules created by both spouses together; while the surviving spouse typically has the power to give the property in the A trust to anyone they choose.
In practical terms, this is most often an issue where the surviving spouse and the spouse who passed away had different ideas about who should receive their property – often because the surviving spouse remarries, or because this was a second marriage for one or both of the partners, and some of the children weren’t the biological offspring of both partners.
What happens if the bypass trust isn’t funded? The trustee – either the surviving spouse, during their lifetime, or the successor trustee – may face a lawsuit from frustrated beneficiaries, who are angry that their inheritance has been taken away from them or mismanaged.
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03.12.07
Posted in Litigation, Trust administration at 8:21 am by gbroiles
A California appellate court issued an opinion on February 22, 2007 in Young v. McCoy 2007 Cal App Lexis 224 which will provide encouragement and comfort to trust creators who seek to preserve assets for their beneficiaries.
The court ruled that a creditor cannot force the trustee of a discretionary trust to make a distribution to the beneficiary, if the trustee has reasonably determined that the beneficiary does not need a distribution to provide for their health, education, maintenance, or support. The practical effect is that – since there is no distribution – the creditor cannot get their hands on the funds which have been preserved for the beneficiary.
This opinion concerns a case where the beneficiary was convicted of attempted murder – but it is likely to be helpful to people in much more mundane circumstances faced by many families, such as divorce, business disputes, and even bankruptcy created by overwhelming medical bills following catastrophic injury or illness.
If your estate plan does not provide asset protection for your family – or if you are using the state’s default estate plan, which does not provide asset protection for beneficiaries – you should think seriously about sitting down with competent estate planning counsel to make sure you’re doing everything you can to provide for the people who depend on you, and the people you care about most.
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11.30.06
Posted in Planning, Tax planning at 3:59 pm by gbroiles
(This guest post was written by James Hall, CLU, with assistance from John Upton and Dunham Sherer, Esq.)
Are State (Prop 13) and Federal Estate Tax Laws limiting home inventories for sale, resulting in a permanent commitment to higher prices and unfair capital gains treatment between surviving spouses and senior couples selling their homes? The solution may be federal legislation to eliminate capital gains for seniors by eliminating the current 250,000 per person exemption Capital Gains Tax.
The positive side effects of allowing seniors (age 65) to sell their homes and personally owned commercial property capital gains tax-free are as follows:
- It is fair to all seniors age 65 and older by giving all equal financial options.
- It should increase the inventory of real estate, making the market more competitive.
- It will increase local tax revenues, because under Proposition 13, the property tax base increases by only 2% per year, unless real property is sold, at which point it increases to current market value. Seniors selling tax free will bring in a current market price taxpayer, and raise the property taxation base to current market value.
- It frees up dead equity capital and moves some of it into the free market.
- Help relieve the Proposition 13 constraint upon real estate sales, and as a result develop more property tax revenue without changing the Proposition 13 legislation.
- Schools should be the #1 beneficiary of increased property tax revenue.
Why do some seniors pay huge capital gains when selling their homes while others pay nothing? The reason is a little known part of the 1981 Federal Estate tax legislation referred to as the “Step-Up-In-Basis-At-First-Death.” This provision means that a current surviving spouse can sell their home for any price with no tax obligation at all. Contrast that to a senior couple across the street that will have to pay a 24% capital gains tax on all gain above the $250,000 per person exemption. In many neighborhoods, that can now amount to a tax of $300,000 and much more on the couple, while the current surviving spouse can make the same sale and move on with no tax obligation at all.
A further point is that this step up provision doesn’t only apply to homes. It applies to both halves of the entire estate. This includes commercial property, cash, stocks, bonds – everything. This is clearly special interest legislation for the very rich to eliminate Capital Gains.
The vast majority of Californians owning homes don’t think Estate Tax legislation applies to them. They are wrong. It applies to millions of homeowners in California and in other parts of the country, who may need to sell and realize gains in excess of the $250,000 per person exemption. They aren’t rich and many can’t afford a huge tax at sale. There are an increasing number of neighborhoods where properties have appreciated more than the current $250,000 per person exemption, yet the tax only impacts the couple who must sell, not the current surviving spouse at any age.
A partial equity solution to property tax inequality would be to give equal treatment to senior couples and surviving spouses, at least with respect to real estate sales. The long-term effect of the existing Federal Estate tax legislation is to create an increasing financial incentive for seniors to stay where they are and hold property until a death occurs. It leads to limited inventories, lower potential property tax revenues in older neighborhoods and ultimately higher prices for residential and commercial real estate.
The current legislation has increasingly become special interest legislation that transfers the property and capital gains taxes to middle class homeowners and senior couples who must sell. The effects of this legislation have been over 20 years in the making. The inequities created are obvious. What will the next 20 years bring, with continuing inflation and no change in the current laws, other than increasing inequities among surviving spouses and senior couples?
Is it any wonder why California real estate values continue to rise with special interest legislation that penalizes home and commercial real estate sales by senior couples? Its unfair that some seniors get a capital gains break on the sale of their property and others do not. Eliminate the capital gains tax on property and many seniors will sell at a convenient time, which will increase housing supply and lower prices. The time for legislation to correct these effects on the real estate market is long past due.
James U. Hall, CLU, Monte Sereno
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11.29.06
Posted in Living trusts, Planning at 4:30 pm by gbroiles
I guess my Amazon review – reproduced substantially as this morning’s post – struck a nerve, as today I received a four page letter from Janet Dobrovolny, the attorney who created Suze Orman’s Will & Trust Kit. The letter disagrees with several of my conclusions, and requests “a full detailed response” which I have offered to provide, if Ms. Dobrovolny agrees that I may republish her letter along with my response.
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Posted in Living trusts, Planning, Tax planning, Wills at 8:32 am by gbroiles
Last month, I wrote briefly about Suze Orman’s Will & Trust Kit. After writing that post, I decided perhaps I was unfair by commenting about the program without using it myself, so I ponied up $14 to get a first-hand opinion.
As I mentioned before, the trust(s) created by the program use California law, no matter what state you live in. A joint trust created with this program says that all property transferred to the trust will be community property. A joint trust created by this program also waives each spouse’s rights under California Family Code section 2640. Don’t know what community property is, or what section 2640 says? Too bad.
Briefly, Family Code section 2640 says that spouses have the right to be repaid for separate property they bring to the marriage, or contribute to community property during the marriage – e.g., if you own a house as a single person, then get married, and later get divorced, you don’t need to split the equity you already had in the home at the time you were married.
I think it’s amazing that the program expects people to waive their rights under 2640 without explaining what that means – that’s potentially a decision with consequences in the tens or hundreds of thousands of dollars, in the event of divorce.
Also, many people want to put separate property into a joint trust for ease of management – a well-drafted trust will preserve the separate property character of separate property assets which are titled in the name of the trust. The Suze Orman trust does the opposite.
Before printing any documents, the program makes you agree to a disclaimer that says you should consult an attorney. Unfortunately, if you’re not in CA, it may be difficult to find an attorney who wants to give you a legal opinion about CA law.
The trust included does absolutely no estate tax planning. It’s good that the authors are up-front about this, but it would be helpful if the materials on the outside of the box explained that if you’ve got more than $1 million in property, the authors think you should avoid using their program and see an attorney instead.
Ultimately, to generate an estate plan using this software, you’re going to have to click over and over again to “AGREE” to a disclaimer that tells you these documents should be reviewed by an attorney before they’re actually used; that the authors are not providing legal advice; that the authors accept no responsibility for your actions. Would you hire an attorney who gave you documents while asking you to sign a document agreeing not to sue them if the document turned out to be useless, or worse?
The trust created by the program can be modified entirely after the death of the first spouse – so there is no protection in place to preserve assets for the joint children if the surviving spouse remarries or needs Medicaid-funded nursing home care.
The documents provided to change beneficiaries for IRA and 401(k) plans have no discussion of – and make no provision for – planning for “stretch” IRA distributions, and in fact make “stretch” planning impossible, which might potentially mean losing out on tens or hundreds of thousands of dollars due to the missed stretch opportunity.
Even though the attorney who co-wrote the software is licensed in California – and California is the forum state mentioned in the choice of law clause – the estate plan makes no provisions for California property tax planning for beneficiaries who may inherit real property. If you’ve lived in California, you’ll appreciate the importance of preserving your Proposition 13 property tax assessed value for your children, and their children .. if your estate plan was drafted with that end in mind. There may be similar issues for people who live in other states – I’ve got no idea if there are or not, and you probably don’t either, unless you find someone who knows your local law.
The program doesn’t cost much money and has some educational value. So it’s not a total waste. The plan and the documents it produces are a long way away from what a good estate planning attorney can produce – but what’s really missing here is an overall understanding of the family’s assets, values, risks, and opportunities .. together with a comprehensive plan to address those circumstances.
I’m an estate planning attorney in CA – but I don’t really think of a software package that costs less than a large pizza as a meaningful competitor, especially after trying it out to see what it produces. I wouldn’t mind at all if potential clients of mine used the software to play around at home to get comfortable with some of the terminology and issues that are part of putting together a real estate plan – but there’s no way I’d recommend this to someone I cared about as a good way to create an estate plan that they actually planned to sign and use.
I’m still shocked by the decision to make trusts for all states subject to California law – that’s the kind of advice that can only be given responsibly by someone who understands California law, the law of your state, and your personal circumstances. There are cases where I might choose to have a client’s trust be governed by the law of another state – but those cases are relatively rare, and I can articulate clear, concrete reasons to do so. A blanket choice that everyone, everywhere, should use California law strikes me as inappropriate.
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11.22.06
Posted in Planning at 9:05 am by gbroiles
The UC Davis School of Veterinary Medicine has announced a new program called “TLC for Pets“. The program provides a structured way to provide a loving home and continuing veterinary care for pets after the death of the pet’s owner.
Some pet owners choose to put together a comprehensive care plan for their pets in the event that the pets outlive their owners. Those plans typically include directions about the feeding, medical care, and other needs of the pet .. along with funds necessary to provide for the pet’s support and to compensate human caregivers.
Other pet owners have close family or friends with pet-friendly homes and can provide a long-term home for the pet if the need arises.
However, some pet owners find themselves in a situation where they do not have the resources to fully fund their own pet mainentance trust, and they do not have family or friends who are able to welcome the pets into their homes. In this relatively common circumstance, programs such as TLC for Pets or the San Francisco SPCA’s SIDO Program provide a valuable public service.
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10.31.06
Posted in Planning, Tax planning at 9:44 am by gbroiles
Let’s continue to consider the example described in the previous post – Mom and Dad buy their home for $100,000 in 1970. Given California’s property tax scheme, as modified by Proposition 13, Mom and Dad will pay state and local property taxes of approximately 1.1% of the assessed value of their home every year – and the assessed value of the home is artificially limited to a growth rate of 2% per year, unless and until the home is sold, at which time it’ll reset to the real fair market value.
In practical terms, this means that Mom & Dad, in 2006, will probably be paying property taxes of between $1,000 and $1,500 per year on their home that’s worth $1,000,000. Let’s imagine another couple purchases the home next door to Mom & Dad, which turns out to be identical to Mom & Dad’s house – and the fair market value (FMV) is also $1,000,000. The new couple will pay approximately $10,000 per year in property tax, where Mom & Dad will pay closer to $1,000.
This ability to retain the old assessed value represents a considerable opportunity to avoid paying property taxes.
An important part of estate planning – often overlooked by attorneys who don’t spend a lot of time working on estate plans, and virtually always overlooked by do-it-yourself software kits and books – is working to preserve the opportunity for heirs to keep the favorable low property tax valuation, in the event that the heirs choose to continue to own the property instead of selling it.
As discussed in the previous message, let’s say that Mom stays in the home after Dad’s passing, and that when Mom passes away the home is now worth $1,500,000. Mom’s estate plan provides that the home will go to her son and her daughter, each taking a 50% interest.
Son and Daughter will get to keep Mom’s favorable property tax valuation; California law provides that property tax will not be reassessed on a transfer between parents and children. The transfer of 1/2 of the property from Mom to Son and 1/2 of the property from Mom to Daughter qualifies as a transfer that’s exempt from reassessment.
Let’s say that Daughter’s already got a house she wants to stay in – but Son wants to live in the family home, so he arranges to get a mortgage so he can purchase Sister’s half from her, and Son can own the home as his own.
The wrong way to set this up is the obvious way – Son buys the other half of the house from Daughter. Now, Son will get to use the favorable valuation for the half of the property he inherited from Mom, since that was an exempt transfer .. but the half of the house that Son purchased from Daughter will be reassessed, because sibling-to-sibling transfers aren’t exempt. Now, instead of paying a property tax bill of $1000 to $1500 per year, Son’s property tax bill will be more like $8000 per year (1/2 of $1,000 + 1/2 of $15,000).
If Son keeps the family home for 20 more years, the failure to plan for favorable property tax treatment will cost Son $140,000 in extra property taxes. If Son then passes the property on to his children at his death, then his kids will be paying property tax bills of $8000 instead of $1000, and the waste continues.
Unfortunately, this approach is what you’re likely to end up with if you (or your attorney, or your do-it-yourself software) aren’t paying attention to property tax planning – it’s easy to conclude “well, there are no estate tax issues here” and stop thinking. That decision to stop thinking can cost heirs an awful lot of money pretty quickly.
This isn’t a hypothetical example – I have worked on several cases where the estate plan was drafted by an attorney (or worse, an annuity salesperson) who didn’t know or care about property tax, and the consequence is tens or hundreds of thousands of dollars in unnecessary property taxes for the heirs.
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10.30.06
Posted in Planning, Tax planning at 9:52 am by gbroiles
It’s tempting to compare one’s assets to the exemption amounts for federal estate tax ($2 million in 2006, 2007, 2008) and conclude that there are no tax issues in planning one’s estate (or failing to plan).
Unfortunately, that’s only part of the story.
One often underappreciated aspect of estate planning is planning for income tax implications for heirs – ideally, one would like to give heirs assets that are subject to as little tax as possible. Most property that appreciates – for example, real estate, collectibles, and securities (stocks & mutual funds) get what’s called a “step up” in basis when it’s transferred at death.
For example, let’s say that Dad has a share of stock he bought long ago for $10 – the stock is now worth $100. If Dad sells that share of stock, he’ll owe income tax on the $90 of profit he made while holding the stock. The $10 purchase price (which may have been adjusted due to stock splits, reinvested dividends, and so forth) is what tax people call Dad’s “basis” in the stock.
Let’s also assume that Dad wants to give that share of stock to his daughter. If Dad gives that share of stock during Dad’s lifetime to Daughter, Daughter will get what’s called “carryover basis” – that means that Daughter’s basis in the stock will be the same as Dad’s basis, which was $10. If Daughter immediately sells the stock, she’ll also have to pay tax on the $90 of built-in profit.
However, if Dad keeps the stock and gives it to Daughter upon his death – either through a trust, or through a will – then the stock gets the “step-up” in basis, and Daughter’s new basis in the stock is the fair market value on the date that Dad died. This means that if Daughter immediately sells the stock, she’ll have (virtually) no tax to pay, since her basis (fair market value) will be very close to the sale price. Daughter may have a small gain or a small loss on the stock, but it won’t be very big if she sells the stock relatively quickly.
The same treatment applies to other property that appreciates – like real estate or collectibles.
Some property – like cash – is valued at its face value, so it doesn’t make sense to talk about getting a “step up basis” in, say, a bank account.
This sounds great, right? Well, there’s a catch. The only property that gets a step-up in basis is property that’s included in Dad’s “taxable estate” at his death. The good news is that the vast majority of people may have a “taxable estate” but pay no tax, because they get an exemption equal to the tax on the first $2 million of property (for people who die in 2006, 2007, 2008). So .. this means that Dad can pass along up to $2 million in property, all of which gets a step-up in basis for income tax purporses, without owing any estate tax.
If Dad passes more than $2 million in property to others at his death, then his estate will owe tax on the amounts above $2 million – unless the amounts beyond $2 million are given to recipients who have special exemptions. (Specifically, charities and Dad’s spouse, if she’s a US citizen. Charities and spouses who are US citizens can receive an unlimited amount of property at death without any estate tax obligations.)
In my practice, I find that most people notice (and appreciate) the step-up in basis when it is applied to real property. Specifically, the step-up in basis is very helpful to surviving spouses, especially if the shared home was titled as community property. When property is titled as community property, the entire property gets a step-up in basis upon the death of the first spouse.
Let’s say that Mom and Dad bought their house in 1970 for $100,000. Today, the house is worth $1,000,000. (These numbers will look crazy to non-California readers; but they’re not unusual for middle-class people here in Silicon Valley.)
If Mom and Dad sell the house, they’re going to have to pay tax on approximately $400,000 of capital gain – they can exclude the first $500,000 in capital gain when they sell their principal residence, but they’ve got $900,000 in profit – so they’ve still got another $400,000 that they’ll have to pay tax on.
Men tend to have shorter lifespans, so let’s suppose that Dad passes away first. Now – because of the step-up in basis and holding title as community property – Mom’s new basis in the home is $1,000,000. Mom can sell the house and her profit will be zero – so no tax will be due. Let’s say that Mom stays in the house 5 more years – and during those 5 years, the house appreciates another $200,000 in value, to $1,200,000. Mom can still sell the house without having a tax bill to worry about, since she’s got her $250,000 exclusion – applied to the $200,000 profit above Mom’s basis of $1,000,000, there’s still no taxable gain.
But let’s imagine that Mom doesn’t sell the house – Mom lives 10 more years, and the house appreciates in value to $1,500,000. Mom dies, leaving the house to her two kids. If the house is included in Mom’s taxable estate, the kids will get the step-up in basis again – so their basis in the house will be $1,500,000 (or, each kid will have a basis of $750,000 in their half of the house). This means that the kids, if they choose to sell the house, can keep the $750,000 each – with no estate tax, and no income tax due. That’s a pretty nice result, given that Mom & Dad’s original investment in the house was $100,000. $1.4 million in appreciation has passed to the children, tax-free, perfectly legally.
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10.27.06
Posted in Living trusts, Planning, Wills at 1:27 am by gbroiles
Professor Gerry Beyer mentions that QVC is offering a $60 Suze Orman estate planning organizer – where “organizer” apparently means “plastic briefcase with LED flashlight built into the handle”. Sounds perfect for Maxwell Smart or Inspector Gadget.
If you can live without the plastic briefcase, you can get Suze Orman’s estate planning software from Amazon.com
for approximately $14.
The downside is that you get what you pay for – specifically, you’ll get a document you can’t edit that specifies that it should be interpreted using California law. This is not especially remarkable if you are a California resident, as that’s probably what you intended.
On the other hand, if you happen to live in one of the other 49 states, it’s setting you up for an ugly surprise if administration of the trust or estate turns out to be anything other than perfectly smooth – because it’s going to be difficult and/or expensive to find someone in your state who’s also licensed in California and stays current regarding California trust law. If it turns out that there’s litigation regarding the trust, you’ll get to pay that expensive attorney even more than you otherwise would, because they’re going to have to spend extra time writing a detailed brief for the judge explaining California law .. since it’s pretty unlikely that you’ll randomly get assigned a local judge who’s got any knowledge about California law.
California law strikes me as an especially poor choice of law if someone was going to try to draft a “universal trust” since California law is essentially homegrown. California has not adopted the Uniform Trust Code and I don’t believe it will, though 19 other states have.
The marketing material says the resulting documents are “good in all 50 states” – which is literally true, but totally misleading. When I speak with someone who wants to bring an out-of-state trust into California, my advice is to amend and restate it to use California law for ease of understanding and administration. In a similar vein, when I talk to potential clients who live (or expect to live) in another state, my advice to them is that they not pay me to draft an estate plan, but that they seek a good estate planning attorney in their (intended) home state, who will know the local tricks and pitfalls.
“Good in all 50 states” is the legal equivalent of “one size fits all” – it’s a giant warning that what you’re getting wasn’t intended specifically for you, and if it happens to work out well it’s a happy accident.
I think it’d probably be better if the Suze Orman trust didn’t specify a state’s law at all – or if it chose the law of the state where the user lived, even if it means that the person who wrote the software doesn’t know how the language will be interpreted. Frankly, I don’t see how the person who wrote the software can have any faith that, say, a New York judge will reach a reasonable result under California law trying to interpret a do-it-yourself trust for a New York resident. (Nothing against New York, I wouldn’t want to try to litigate a trust that specified New York law in a California courtroom, either.) I gather that choosing California law allows the attorney involved in publishing the software to avoid the charge that she’s trying to practice law in states where she’s not admitted to practice .. but while that trick may save her bacon, it puts people who buy the software in a terrible posture.
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02.12.06
Posted in Planning at 11:00 pm by gbroiles
A LawGuru poster asks: “If I set up a trust for my grown children after I got re-married, does the spouse have any claim to that trust or any assets in that trust upon my death? Specifically, can I set up a separate trust without my spouse having access to it?”
The answer depends on what sort of property you own.
California is a community property state – this means that it’s important to understand the difference between community property and separate property.
Community property is property you acquire during your marriage, typically by working – or property you buy with community property money. (For example, if you work, your paycheck is considered community property – so things that you buy with that money will also be community property.) Community property also includes any interest, dividends, or capital gains earned by community property money or investments. (So, if you put your paycheck in the bank and earn some interest on the money, the interest will also be community property.)
Separate property is property you held before marriage, or property that you gain during the marriage by gift or inheritance. Separate property also includes the interest, dividends, or capital gains earned by separate property during your marriage. (If a family member wills you $1000, that will be your separate property; if you put that money in the bank and it earns interest, the interest will also be your separate property.)
That doesn’t sound so tough – but the hard part is figuring out where money went (lawyers and accountants call this “tracing”) when community property money and separate property money are mixed (”commingled”). If you’ve got a bank account where you deposit your paychecks, and then you get an inheritance, and you deposit the money from the inheritance into the same account .. and then you write some checks out of that account, perhaps to fix up your (community property) house and your (separate property) collectible automobile, it can be tough to determine whether the money that was spent was community money or separate money, and whether you made a gift by spending your separate property money on a community asset (the house) or if your spouse made a gift by allowing you to spend community money on a separate property asset (the car).
(Actually, there are a number of further complicating factors that I’m ignoring in the interest of clarity – if this is an important topic to you, you should sit down with an estate planning attorney or a divorce attorney – depending on your needs – to really pin down the specifics of your situation.)
Upon your death, you have the right to decide who will get all of your separate property, and one half of your community property. (The other half of your community property belongs to your spouse.)
So, if you have property that everyone agrees is separate property, you can give that to anyone you please, and your spouse has no right to object or to interfere. (Similarly, of course, your spouse can dispose of their separate property as they please ..)
You can also dispose of one half of your community property as you please, without your spouse’s consent.
The tricky part here is figuring out or agreeing about the characterization of some property as community property, and some property as separate property – you may think that certain money or certain property is obviously yours .. and your spouse may think it’s obviously community, or obviously theirs. The process is a little bit like negotiating a divorce settlement, without the divorce, because (ideally) the parties will continue to be married, but with a clearer idea of who owns what.
So, to come back to the question – yes, a married person can create an estate plan that disposes of their property to people other than their spouse, and the spouse can’t change it – but this is a delicate situation that requires both careful attention to detail (legal & factual) and a measure of diplomacy, because the process isn’t an easy or a comfortable one. You can ignore the issue (or find an attorney who will ignore the issue) but this simply defers the unpleasantness until after your death. This means you won’t have to deal with it, but it also makes it less likely your wishes will be carried out.
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