Integrating Charitable Giving into Your Estate Planning

Charitable giving is a noble way to ensure your legacy lives on, impacting future generations and supporting causes close to your heart. When structuring your estate plan, there are several philanthropic vehicles to consider, each offering unique benefits and considerations. From bequests to sophisticated trusts and donor-advised funds, understanding these options can help tailor your charitable contributions to align with both your financial and altruistic goals. Here's how you can effectively incorporate charitable giving into your estate planning.

Key Charitable Vehicles in Estate Planning

1. Bequests: One of the simplest ways to make a charitable gift is through a bequest contained within your living trust. This method allows you to specify an amount of money, a percentage of your estate, or specific assets to be given to charity. Bequests are highly flexible, easy to arrange, and can significantly reduce the estate tax burden on your heirs.

2. Charitable Trusts: These are more complex instruments that provide valuable tax breaks and can be tailored to suit different goals:

• Charitable Remainder Trusts (CRTs) allow you to receive an income stream or allow your designated beneficiaries to receive an income stream for a period, after which the remaining assets go to your chosen charity.

• Charitable Lead Trusts (CLTs) provide an income stream to the charity for a set term, and thereafter, the remaining assets revert to you or pass to your heirs, potentially reducing or eliminating gift and estate taxes.

3. Donor-Advised Funds (DAFs): DAFs act as a charitable investment account. You contribute assets which immediately qualify for a tax deduction, and then recommend grants to charities over time. This vehicle is particularly useful for those who wish to remain actively involved in philanthropy without managing a private foundation.

4. Private Foundations: For those with substantial assets, starting a private foundation can be an effective but complex way to control charitable giving. Foundations can fund various charities, offer family members roles in its administration, and create a lasting institutional legacy. However, they require significant management and adhere to strict regulations.

5. Endowments: Setting up an endowment can provide a charity with a permanent source of income, as the principal is kept intact while investment income is used for charitable purposes. This option is appealing if you want to ensure long-term financial support for a charity.

Strategic Considerations for Charitable Giving

Tax Implications: Each vehicle has specific tax benefits and implications. For example, bequests can reduce the size of your taxable estate, while contributions to CRTs and CLTs may reduce both income and gift taxes. Understanding these nuances is crucial in maximizing the tax efficiency of your charitable efforts.

Timing of Impact: Some options, like direct bequests or contributions to DAFs, can provide immediate benefits to charities. Others, such as endowments or CLTs, are structured to give over a long period. Consider when you want your chosen charity to benefit from your gift.

Control and Legacy: Decide how much ongoing control or involvement you wish to have. DAFs and private foundations allow for continued involvement in donation decisions, whereas bequests and endowments are generally one-time arrangements.

Family Involvement: If involving family in philanthropy is important, consider vehicles that support this goal. DAFs and private foundations can engage multiple generations in charitable activities.

Charitable giving within estate planning is not just a way to reduce taxes—it's a strategy to make a meaningful difference in the world while honoring your values. Whether it’s supporting a local community, contributing to global causes, or advancing scientific research, the right charitable vehicles can integrate your philanthropic objectives seamlessly into your overall estate plan. As always, consulting with legal and financial professionals can provide guidance tailored to your personal circumstances, ensuring your charitable contributions are both impactful and aligned with your estate planning goals.

Estate Planning for the "Sandwich Generation"

If you're part of the Sandwich Generation, caught between supporting your aging parents and your young adult children, you're navigating a uniquely challenging path. Balancing these responsibilities requires not just emotional resilience and financial acumen but also a solid estate plan. An estate plan is crucial in ensuring that your efforts to care for both generations are sustainable and aligned with your long-term goals.

Protecting Your Legacy and Their Future

Ensure Financial Security: With multiple generations depending on your support, an estate plan can safeguard their financial future. It allows you to allocate resources effectively, ensuring that your children's education and your parents' care needs are addressed, even in your absence.

Health Care Directives: Estate planning goes beyond financial aspects, including health care directives for yourself. This ensures that your wishes are respected, preventing your adult children or aging parents from making difficult decisions during stressful times.

Durable Powers of Attorney: By establishing durable powers of attorney, you appoint trusted individuals to manage your affairs if you're incapacitated. This step is vital to maintain the continuity of care and support for both your parents and children.

Guardianship Designations: For those with younger children or dependents with special needs, your estate plan can designate guardians, providing peace of mind about their well-being and care.

Avoid Probate: A comprehensive estate plan can help your assets bypass the probate process, ensuring that your heirs have quicker access to the resources they need for their care and support.

Tailoring Your Estate Plan

Start with Open Conversations: Begin by discussing your intentions and the importance of estate planning with your family. These conversations can help clarify your wishes and prepare everyone for the future.

Consult Professionals: Given the complexities of balancing needs across generations, seeking advice from estate planning attorneys and financial advisors is crucial. They can offer tailored strategies that reflect your family's unique circumstances.

Review and Update Regularly: Your estate plan should evolve with your family's needs. Regular reviews—at least every few years or after major life changes—ensure that your plan remains relevant and effective.

For those in the Sandwich Generation, an estate plan isn't just a financial tool; it's a cornerstone of your family's well-being and security. It ensures that you can provide for your aging parents and young adult children, come what may. With the right planning, you can protect your legacy and offer them a foundation of stability and support, now and in the future.

Debunking the Myth: Why Even Modest Estates Need an Estate Plan

There's a common misconception floating around that if you're married, own a modest amount of assets, and want your belongings to go to your children, estate planning isn't necessary. Many believe that the simplicity of their wishes means the legal system will automatically fulfill them without any formal documentation. However, this assumption couldn't be further from the truth. Let's break down why even those with modest assets and seemingly straightforward wishes absolutely need an estate plan.

Understanding the Basics

At its core, estate planning is about making decisions in advance: Who will inherit your assets, who will take care of your children if you can't, and who will make decisions on your behalf if you're incapacitated. It encompasses more than just who gets what; it's about ensuring your family's future is as secure and conflict-free as possible.

Misconceptions vs. Reality

The myth that modest estates don't require estate planning stems from misunderstandings about how estate distribution works. Without an estate plan, your estate goes through probate, a court-supervised process that can be lengthy, costly, and public. Probate can be especially complicated for even modest estates due to the intricate laws of California, which may differ greatly from other states’ laws.

Why Estate Planning is Crucial

1. Protecting Your Children’s Future: An estate plan allows you to appoint a guardian for your minor children, something that's decided by the courts if you haven't made your wishes legally known. This decision alone makes estate planning invaluable.

2. Avoiding Probate: With the proper estate planning tools, such as a living trust, you can help your estate avoid the probate process entirely, ensuring your assets are distributed efficiently and privately according to your wishes.

3. Reducing Family Conflict: Clearly stated wishes in an estate plan can greatly reduce the potential for misunderstandings and conflicts among your loved ones. It's about making your intentions clear and legally binding.

4. Financial Management and Health Care Decisions: Estate planning also includes creating durable powers of attorney for both finances and health care, which allow someone you trust to manage your affairs if you're unable to do so. This is crucial in ensuring that your and your family’s needs are met, according to your wishes, under any circumstances.

The Reality for Married Individuals with Modest Assets

Even if your assets are modest, without an estate plan, there's no guarantee your spouse will automatically inherit everything. Without an estate plan, assets can be divided among your spouse, children, and sometimes even parents or siblings. An estate plan ensures your assets go exactly where you want them to.

Also, consider assets that you might not think of as needing to be included in an estate plan, such as digital assets, online accounts, or family heirlooms. These items often carry emotional value that far exceeds their monetary worth, and deciding who they go to can prevent disputes and ensure they're treasured by the intended recipient.

Taking the First Step

The thought of estate planning can be overwhelming, but it doesn't have to be. Start by considering your wishes for your family's future. Consulting with an estate planning attorney can demystify the process and tailor an estate plan that fits your unique situation, ensuring your modest assets—and more importantly, your family—are protected according to your wishes.

The myth that estate planning is unnecessary for those with modest assets and straightforward wishes is just that—a myth. Estate planning is a vital tool for everyone, ensuring that your wishes are honored, your family is protected, and your legacy is secured. By taking the steps to create an estate plan, you're not just planning for the distribution of your assets; you're ensuring peace of mind for yourself and your loved ones.

Estate Planning Essentials for Blended Families

Blended families bring unique dynamics and joys, but they also present distinct challenges when it comes to estate planning. Crafting a comprehensive estate plan for blended families requires thoughtful consideration and strategic decisions to ensure that the financial and emotional well-being of all family members is safeguarded.

Understanding Blended Family Dynamics: Blended families, often formed after remarriage, may include children from previous relationships, stepchildren, and biological children of the new union. Navigating the intricate relationships within a blended family adds layers of complexity to estate planning, requiring careful thought and open communication.

Key Issues in Estate Planning for Blended Families:

1. Asset Distribution and Fairness:

   Balancing the financial interests of both the biological and stepchildren is crucial. Clearly defining how assets will be distributed ensures fairness and minimizes potential conflicts.

2. Protecting the Interests of Spouses:

   Providing for the surviving spouse while ensuring that the children from previous marriages receive their intended share requires strategic planning. Trusts can be instrumental in achieving these dual objectives.

3. Guardianship for Minor Children:

   Determining guardianship arrangements for minor children in blended families is a sensitive yet crucial decision. Open communication between spouses and clear documentation in your estate plan can provide reassurance and stability for the children.

4. Life Insurance and Long Term Care:

   Reviewing and updating life insurance policies and providing for long term care in the event of a disability is vital. Ensuring that you have the right coverages that correspond to your estate planning wishes is critical to avoid unintended conflict between family members.

5. Establishing Trusts for Children:

   Creating trusts for children from previous marriages can protect their inheritance, ensuring that it remains separate from marital assets and is ultimately distributed according to your wishes.

6. Communication and Transparency:

   Open communication within the blended family is paramount. Discussing financial matters, estate planning decisions, and the rationale behind them fosters understanding and helps prevent potential disputes.

7. Prenuptial and Postnuptial Agreements:

   Consideration of legal agreements, such as prenuptial or postnuptial agreements, can provide additional clarity on financial expectations and help protect the interests of both spouses and their respective children.

Working with an Experienced Estate Planning Attorney: Navigating the complexities of estate planning for blended families necessitates the expertise of an experienced attorney, and their professional network. A legal professional can provide tailored advice, ensuring that your estate plan reflects the unique dynamics and goals of your blended family.

Crafting an estate plan for a blended family is not a one-size-fits-all endeavor; it's a nuanced and personal journey. By addressing the key issues outlined in this guide and collaborating with an experienced estate planning attorney, you can create a plan that preserves harmony, protects the interests of all family members, and leaves a legacy of thoughtful consideration for generations to come.

Estate Planning Basics

Welcome to the world of estate planning! Whether you're just starting out or realizing it's time to get your affairs in order, understanding the basics is the first step toward securing your legacy. In this beginner's guide, we'll break down the fundamental concepts of estate planning to help you navigate this essential process with confidence.

Understanding the Basics: Estate planning involves selecting decision makers to handle your affairs when you’re unable and creating a roadmap for the distribution of your assets and the fulfillment of your wishes after you're gone. The key components include:

1. Living Trust:

   A living trust is a tool that allows you to manage assets during your lifetime, even if you become disabled, ensuring a smoother distribution process after your passing while avoiding probate.

2. Last Will and Testament:

   Your will is a legal document used as a “safety net” to catch assets you forgot to title in the name of your trust.

3. Power of Attorney:

   This legal document designates someone to make financial decisions on your behalf if you become unable to do so. It's a crucial aspect of planning for unforeseen circumstances.

4. Healthcare Directive (Living Will):

   Specify your healthcare preferences in advance with a living will, ensuring that your medical treatment aligns with your wishes, even if you can't communicate them yourself.

The Importance of Beneficiary Designations: In addition to your estate planning documents, above, many assets, such as life insurance policies and retirement accounts, allow you to designate beneficiaries directly. Keeping these designations up-to-date is crucial to ensuring your assets go to the intended recipients.

Considerations for Parents: If you have minor children, your estate plan should include provisions for their care. This involves appointing a guardian in your will and potentially setting up a trust to manage their inheritance until they reach a specified age.

Starting Your Estate Planning Journey: Now that you have a basic understanding, the next step is to consult with an experienced estate planning attorney. They can help tailor a plan to your unique situation, they can provide expert advice as it relates to taxes, and they can ensure that your wishes are legally sound and well-protected.

Estate planning might seem daunting, but with the right guidance, it becomes a proactive and empowering process. By taking the time to understand the basics and seeking professional assistance, you're not only securing your legacy but also providing peace of mind for yourself and your loved ones.

Explainer: Capital Gains Tax

The capital gains tax is a subset of our income tax system. It is imposed by both the federal government (IRS) and the state of California (Franchise Tax Board). The recipient of the income is the one on the hook for paying it.

You’re probably most familiar with paying income tax on your earnings through work. Since our wages are fairly predictable year over year, most wage earners have their employers take out (or “withhold”) their income taxes from each paycheck ahead of time. Then, every April, with a timely filed tax return, each wage earner claims a refund for any excess due back to the wage earner. But our wages are only one form of income we may receive in any given year.

Other forms of income may come in the way of rents from an income property we own and lease to a tenant. Or maybe we receive dividends paid to us because we hold shares in a company that generated profits for the year. Or maybe we own an interest in an oil well and are entitled to royalties from that interest.

Or, more commonly, we sold something for more money than we purchased it for. Profit from a sale is considered income, and it is called a “gain”. (Similarly, if we lost money on a sale, we would call it a “loss”). If something is valued more than what it was purchased for, but hasn’t been sold, it’s considered a “potential” or “built in” gain. It becomes an “actual” or “recognized” gain once you actually sell the asset. A capital gain is a gain on the sale of a capital asset. A capital asset can be a house, vehicle, office equipment, art, construction equipment, stocks, bonds, a trademark, etc. Capital assets are essentially anything you own that is not cash or a retirement account.

Let’s use an example. (The following example is going to be significantly simplified not to include tax deductions or financing instruments like mortgages. We’re also not discussing short-term capital gains in this example).

You purchase a home for $500,000 in cash. That purchase price is considered your “cost basis”, or the starting point for calculating gains and losses. Five years later, your home is worth $750,000. Your cost basis remains the purchase price at $500,000, but you now have a potential gain of $250,000 built into your property. At this point no taxes are due or owed. You don’t actually have the $250,000 sitting in your bank account. You have the fleeting possibility of making that $250,000 if you sell the house today. If your home value dips to $450,000 tomorrow, you would then have a potential loss of $50,000. Your home value is a fluctuating number from year to year, and your potential losses and gains flow accordingly.

Let’s say you decide to sell it to a willing buyer at that $750,000 price. At this point you took an asset that you purchased for $500,000, and you converted it into $750,000. That means you resulted in a recognized capital gain of $250,000. You now have income that actually went into your bank account. You will be taxed by both the federal government and the state of California on that income as a capital gains tax.

Now’s a great time to remind you that this is not a CPA’s post. This is about estate planning, right? Why are capital gains significant in an estate planning context?

Capital gains, as explained above, are taxed when someone makes a profit selling an asset. If you don’t ever sell the asset, there is no taxable event. So what happens if you have an asset with a built in capital gain, and give it away or gift it during your life?

When you make a lifetime gift of an asset, and it has potential gains built into it, you are also giving the recipient a future capital gains tax problem. Let’s use the same example from above, with the house that is worth $750,000, and was purchased for $500,000. If you gave that house to your children instead of selling it, your children also receive the built in capital gains. So if/when your children sell the home, and it’s sold for more than $500,000, then they owe any capital gains tax. Since you never sold the house, someone has to pay the tax, and it’s going to be the owner that sells it.

What if you give the house after you die?

There is a federal tax law that says any gift of a capital asset after death receives what is called a step up in basis to fair market value upon date of death. In plainspeak that means that an asset gifted at death gets all of the built in capital gains eliminated. That’s not a typo. If instead of giving the $750,000 house to your children during life you gave it to them as an inheritance, then they receive the home as if they purchased the home for $750,000! If/when they sell the home, their capital gains exposure is measured from the $750,000 amount and not the original purchase price of $500,000. This significantly reduces or eliminates anyone ever paying capital gains tax on the sale of this home. It’s quite the benefit! You do not need to do anything to receive this benefit. It’s a tax feature available whenever someone dies owning capital assets.

To apply this knowledge to a real world situation, think of a time when a parent added a child to title of their home. The parent’s idea might be to shortcut the transfer of the home by adding the child to title during life, and upon the parent’s death the child receives the home… which is partially correct. They will receive the home. But they will also receive a portion of the parent’s built in capital gains. You see, when the parent dies, only the portion of the capital gains associated with the home that the parent owns gets eliminated. The portion that the child owns stays in place until the child dies or sells the property. In situations with joint title, part of the interest gets the step up at death, but the portion in the hands of the person still living remains untouched. So in most cases, we prefer to transfer appreciated assets after death and not during life.

You can see how knowing the nuances of “everyday” taxes can help when planning ahead. And you can also probably see how once you’ve made certain transfers, you cannot “unring the bell”. We strongly recommend speaking to a professional prior to making large or substantial transfers, even when it involves something mundane like adding a child onto title. Even non wealthy, “straightforward” estate plans can benefit from speaking to an estate planning professional to create a robust and comprehensive plan.

Full Video of the January Living Trust Seminar

The seminar below was presented live on January 21, 2023, by Matt Shafae, at the reSolve Group offices in Palo Alto. We covered basic estate planning, how to review an existing estate plan, how to care for minor children, and a basic survey of the taxes involved in an estate plan.

The screen may be hard to view on the video. Click here for a copy of the slides to follow along.

Marriage: You Either Are Or You Aren't

You’re either married or you aren't. There’s no in between. California does not recognize what some may call “common law” marriage. There’s no magic number of months or years before a romantic relationship transforms miraculously into a marriage.

For the “it’s just a piece of paper, our love is what’s important” crowd, we’re here to tell you that marriage is much more than that. Among other things, marriage confers rights upon someone you are not blood related to. Rights that are often unique to a spouse. In other words, if you’re unmarried–meaning you do not have a marriage license from a government agency–then the law views your partner as a friend that you really, really like.

From an estate planning perspective, a spouse is a family member. They get default rights against a deceased spouse’s estate. They receive major tax benefits from local, state, and federal taxing authorities. The law is very protective over surviving spouses. Not so much over long term unmarried partners, or even “we’re pretty much married” people. Those are all roommates under the law, and they get no special benefits.

What about domestic partners? Surely, that’s a special designation, right? Domestic partnerships are only recognized by some state and local governments. The federal government has no recognition for domestic partnerships. To the federal government, you’re either married or unmarried.

But some people have children together and never get married. That’s an exception, right? Nope. You certainly share very important responsibilities with one another, but you’re still not married spouses under the law. End of story.

Marriage is much more than some mere formality. It’s a very important legal union between two people.

That all being said, marriage is not for everyone. And that’s totally fine! However, if you do decide to not marry–for WHATEVER reason–then it is extremely critical that you create an estate plan, and specifically provide for any unmarried loved ones that you want to care for. And also to name your unmarried partner as someone who may have legal authority to assist you, and vice versa. Without reducing your wishes to writing, your unmarried partner will receive no special treatment by default, nor will they have legal authority to assist you if that scenario arises.

Whether you are married, but especially if you are not, it is critical to have your wishes reduced to writing so that the appropriate people (and pets) are cared for and that the right people have the appropriate legal authority to act when necessary.

How Cryptocurrency and NFTs Fit into Your Estate Plan

Five years ago, cryptocurrency was probably not on your radar. Today, it may be an important investment in your portfolio. You could even own some nonfungible tokens (NFTs), which are powered by the same blockchain-based technology. Despite the dizzying fluctuations in the value of these assets, you should ensure that they are included in your estate plan so you can preserve them for your heirs.

Preserving Cryptocurrency: Now and Later

Cryptocurrency, which is digital money, is exhibiting stability as part of the global financial landscape, even though the value of individual coins (units of cryptocurrency) has been notoriously volatile. The overall market hit $3 trillion in value in 2021, only to lose $2 trillion in value so far in 2022. Emerging from the ashes of the 2008 financial disaster, cryptocurrency is likely to retain its status as an investment option because its holders enjoy freedom from government and bank control.

This advantage can become a drawback when it comes to preserving cryptocurrency. Before you consider including cryptocurrency in an estate plan, it is imperative that you hang on to your digital cash on a day-to-day basis. This involves preserving the passwords and digital wallets (storage units) connected to your cryptocurrency. This will avoid a disastrous situation like the one that befell a Welsh man who accidentally threw away half a billion dollars’ worth of Bitcoin. Consider the following options to preserve your cryptocurrency:

• Hot wallet: An online app that provides convenience but is vulnerable to being hacked or stolen

• Cold wallet: An offline storage device that avoids hacking but is a small item and easily misplaced

• Custodial wallet: A third-party crypto exchange that holds your coins, avoiding the risk of losing the device, although the company could freeze your funds or be the target of a cyber attack

• Paper wallet: A printed list of keys and QR codes that is safe from hackers but easily misplaced
  

Tax Consequences to Consider

Another important consideration is that the Internal Revenue Service (IRS) considers cryptocurrency to be property rather than currency. That means it is subject to capital gains tax. Whether the owner holds it for longer than twelve months determines whether the IRS will assess short-term or long-term capital gains tax. Exchanging cryptocurrency for fiat currency (a country’s official money) is a taxable event, as is exchanging one kind of cryptocurrency for another (e.g., exchanging Bitcoin for Ether). If you are in the business of selling or creating cryptocurrency (called “mining”), ordinary income tax rates will apply.

What about NFTs?

NFTs are unique digital collectible items. They are based on the concept “I own this.” It does not matter what “this” is, just that it is valuable or may gain value someday. That is why various digital collectible assets, such as the following, can be characterized as NFTs:

• Digital artwork

• Video clips

• Social media posts

• Memes

• Gaming tokens

• Digital real estate

While being the owner of the virtual Pyramid of Giza may seem silly today, who knows how much it will be worth tomorrow? This makes a little more sense when we think about emerging technologies like virtual reality, augmented reality, and metaverses. While the NFT market seems to have collapsed recently, you never know when it will bounce back or if something similar will take its place.

How Crypto and NFTs Fit into Your Estate Plan

Talk to an estate planning attorney about cryptocurrency and NFTs, even if you have not yet purchased your first Dogecoin or CryptoKitty. They can help you keep taxable events to a minimum and preserve your digital assets as part of your overall estate plan while maintaining your privacy.

An Estate Plan Can Help You Reach Your #GOALS

Many of us put off estate planning because it deals with a lot of challenging topics–our mortality, potential taxes, our finances, our health, our loved ones. It can feel easier to put it on the back burner, especially if we don’t feel “wealthy” or “old”–two common descriptors we all think about when we hear the words “estate planning.”

We’ve said it over and over: EVERYONE needs an estate plan (not just the wealthy or aging). Imagine if a relative left you $500 or $5,000 or $50,000 as an inheritance. It’s probably not going to make you rich, but all of us welcome any sort of unexpected assistance. Now imagine if you had a lengthy legal process to wade through to receive the gift. You probably would have wished that your relative had created an estate plan to simplify the process, regardless of the size of that gift. This is particularly true if anyone is financially dependent upon you.

Estate planning doesn’t have to be overwhelming or induce anxiety. Instead of looking at estate planning as “just another thing you have to figure out,” start with your goals. You probably have a lot of it figured out already.

Who do you want to provide for?

If something happened to you yesterday, who would be the people, pets, organizations, or causes that you would want to provide for? Your spouse or partner? Your children? Your parents or siblings? Your dog or other pets? A charity addressing a cause that you are passionate about? All of the above? Identifying who you would want to help is the very first step.

Once you have figured out the who, next comes the what. We all have differing levels of assets. Our finances, our obligations, all look different from person to person. Like we highlighted above, even the smallest amount can significantly help someone else. Would you want to itemize specific gifts to specific beneficiaries? Would you want to divide up whatever you own into fractions or percentages? Or perhaps a combination of the two. You can define what you provide to others however you see fit.

Next, you will want to figure out the how and when you are providing for the who above. Are you providing for young children or a family pet? Or maybe both at the same time! Those two gifts will look dramatically different. It probably will not be helpful to either group to dump a large sum of money onto their laps. These gifts will need to be managed, and the managers of the gifts will want guidance and means to execute the gift.

We all have goals. Most of the time those goals include caring for our people and pets. An estate plan will help you reach those goals, even when you are not around. If you can describe who you want to provide for, then you’re most of the way there to creating an estate plan. Contact an estate planning professional to reduce it down to writing so that you can take one important step toward peace of mind.

Estate Planning for the Self Employed

It takes a lot of courage and hard work to start your own business. Small business owners develop adept skills at being adaptable, flexible, and resourceful. That being said, small business owners are vulnerable to catastrophic risk everyday. Small businesses focus a lot on economic and financial risk. Often overlooked is the impact of personal crises. If an untimely personal crisis–death, injury, incapacity–were to occur, it’s important to ensure that there is a plan in place so that the business can continue to operate, especially if your loved ones are counting on the business to continue.

Succession Plan

A succession plan for your small business is like an estate plan for the business. It defines who takes over the business when you are unable to. It also may include options for certain parties to purchase the business. It helps avoid ambiguities, in-fighting, and allows the business to seamlessly transition without disruption. The succession plan should work in concert with the estate plan. A succession plan can help bridge any gaps between your estate plan and the operation of the business when there are more than one party involved in owning or managing the business. For example, your estate plan can only address your ownership stake in the business. It cannot dictate what co-owners or partners do. A succession plan allows you to create a binding plan on all parties involved.

Special Licensure or Expertise

Perhaps the business at issue is a professional or medical service. If the business relies on special licenses to operate–CPAs, architects, lawyers, dentists, therapists, etc.--then the estate plan and succession plan needs to nominate and appoint appropriate decision makers to step in when you are unavailable. Even without needing special licensure, if the business is primarily fueled by your expertise, a comprehensive plan will account for this. Otherwise, there ought to be a plan for winding down the business if continuing is not possible.

Vendors and Clients/Customers

A comprehensive estate plan addresses all of the authority necessary to conduct your affairs when you are unavailable. This includes dealing with third parties like vendors to the business and the clients and customers of the business. Without the proper authority, those interacting with the business may become frustrated and take their business elsewhere.

There is no blueprint for a proper estate plan dealing with a small business. Part of the reason you started your own business was for autonomy and to be able to conduct business your way. That also means you will need to tailor your estate planning to address every aspect of operating your business.

Estate Planning for Multigenerational Caregivers

More than 12% of American parents who are caring for children under the age of 18 also provide unpaid care to aging adults. All told, these multigenerational caregivers provide more than two and a half hours of unpaid care a day, on average, according to a Pew Research Center analysis of Bureau of Labor Statistics data.

This number will only increase as life expectancy continues to crawl upward over time, and as professional care becomes more costly. This means that estate planning that addresses the needs of all three generations–the minor children, the caregiving generation, and the aging generation–is all that more critical.

The caregiver generation is often spread thin, stressed out, and expends a lot of emotional and financial resources to care for two generations of needs. If something were to befall that person, it would impact the minor children and the aging adults significantly and simultaneously. Having a comprehensive estate plan that addresses the needs of both generations is imperative. Our default procedures are not designed to address the responsibilities of a multigenerational caregiver.

Similarly, the aging generation ought to address that someone provided unpaid care for their needs. Oftentimes, the aging generation’s estate plan–if they even have one–simply leaves any remaining assets at death to their children, in equal shares. It typically is not amended to provide for an offset for any expenses used on their behalf, or to create an unequal distribution to account for the caregiving provided by one adult child but not from another. Frequently, the caregiving adult child assumes that their caregiving will be recognized by their siblings. Sadly, that isn’t always the case. These arrangements need to be documented to avoid any unnecessary resent, or worse, any unnecessary litigation.

There is a lot riding on the shoulders of multigenerational caregivers in a family. Any crisis will upend all of the responsibilities they must meet, and dramatically disrupt the care being provided to the other two generations. A comprehensive estate plan is imperative for the caregiving generation, as to avoid any disruption in care to the aging generation and the minor children, as well as an estate plan for the aging generation to document the care being provided to them.

Using A Professional Fiduciary

Estate planning is about choosing the right people to fill certain roles in your estate plan. It’s selecting decision makers and defining who they care for when you are unable to. For some, the estate plan and beneficiaries may be clear, but maybe it’s slim pickens trying to select someone to carry out the plan–the decision makers. Well, like anything else in life, you can usually find a professional to do the job. Enter: professional fiduciaries.

A fiduciary is a person who acts on behalf of another, like managing money or property. A fiduciary assumes a duty to act in good faith with care, candor, and loyalty in fulfilling their obligations. The trustee of a trust is an example of a fiduciary. The trustee is administering the terms of the trust, on behalf of the person who created the trust, for the benefit of the beneficiaries.

There are institutional fiduciaries, like a bank. And there are individual fiduciaries, who are bonded professionals in private practice. For flexibility and a personal touch, some may hire a private professional fiduciary. For long standing stability and managing large portfolios of assets, some may hire an institutional fiduciary. It depends on the circumstances and your priorities. Either way, you can meet and speak with a professional of your choice, and then nominate them in your estate planning documents.

Here are some circumstances when professional fiduciaries may be helpful.

Transplant

If you relocate to another part of the country, or to another country altogether, it may take some time to build a network of trusted friends and contacts. A professional fiduciary can help fill the role of financial decision maker when a personal contact or family member is not a practical possibility. If you end up finding someone you are more comfortable with, you can always amend your documents to update your list of decision makers. You do not need to delay creating an estate plan simply because you do not know enough people in town.

Specific Needs

If your loved ones require special attention–whether that be due to a medical condition, an addiction issue, issues related to means tested government benefits, or something entirely different–a professional fiduciary can assist navigate those delicate waters so that you do not have to place an ill equipped family member into the situation. A professional fiduciary will not be emotionally attached to your situation. They will have no problems setting boundaries with the beneficiary, or sticking to firm guidelines. It’s their job and they take it seriously. They will also ideally have familiarity and experience dealing with discrete issues with trust beneficiaries.

Multi generational

If an estate plan calls for long term care of beneficiaries–for example, a “dynasty” trust, or a trust set up for a very young beneficiary that will persist into that person’s adult life–then choosing a decision maker that can carry on their duties for decades may make a lot of sense. Institutional fiduciaries typically have the ability to outlive an individual serving that role, and can provide that continuity and consistency that may be required under the circumstances. Similarly, nominating a private professional fiduciary firm, that employs several fiduciaries, may allow for that same type of continuity over the course of years.

Your estate plan should not be dependent upon your personal network of contacts to provide you with an adequate decision maker. A professional fiduciary can fill a gap until a personal decision maker is available to you, and it can also provide you with options that a family member or close friend cannot provide.

Estate Planning for Divorced Spouses

Divorces happen. That much is obvious. Why they occur, and how frequently, is a bit more nuanced. And we can leave that for another law firm’s blog. If you’re divorced, or considering a divorce, remember to update or create your estate plan accordingly. For a quick refresher on marriage in California, read our prior post.

Untangling a marriage can be emotionally draining, legally complicated, and sometimes overwhelming. That being said, having a plan in place in case something happens to you either before, during, or after a divorce should not be moved to the back burner.

In California, divorces can take months to years to complete. A lot can happen during that time, even if the divorce is an amicable or “straightforward” divorce. Additionally, all divorces in California trigger what are called “automatic temporary restraining orders” (ATROs). When either spouse files a petition for dissolution (that’s legal speak for divorce) and serves the papers on the other spouse, the ATROs are triggered requiring both spouses to maintain financial status quo. The ATROs help prevent one or both spouses from emptying out bank accounts, or transferring assets to third parties without the other spouse’s knowledge and consent.

The following issues should be considered in light of the ATROs described above. You should always consult your family lawyer before taking any action during a divorce.

Guardianship of Minor Children

You can divorce a spouse, but you cannot terminate your ex-spouse’s parental rights over your children. If something happens to either of you, the surviving parent typically becomes the sole legal guardian of the children. Keep that in mind when making guardianship decisions in your estate planning documents during and after your divorce. Your guardianship designations do not supersede your ex-spouse’s parental rights. It doesn’t matter how much or how little visitation the surviving parent has or had.

Nominating Your Ex Spouse

If your ex-spouse is listed as an agent or beneficiary in any of your existing estate planning documents, you should review the designations carefully and immediately. Your documents likely do not have any provisions addressing a divorce. Similarly, if your retirement assets, life insurance policies, or any other assets with beneficiary designations list your ex-spouse as the beneficiary or successor owner, consider updating those designations as well. Updating beneficiary designations could violate the ATROs. Please consult with your attorney before taking any action.

Revoke Joint Documents and Address Joint Assets

If you created a joint living trust with your ex-spouse prior to the divorce, you should consider revoking the trust. If you both agreed to hold assets jointly, either during or after divorce, consider drawing up a written agreement documenting the terms of your joint ownership.

Create An Interim Estate Plan

If you’re in the middle of divorce proceedings, you still need an estate plan. It needs to reflect that you are currently legally married (you will not be legally divorced until the court enters judgment), but that you are working towards not being married. You can create a will that distributes whatever you do own to the individuals or organizations that you care about. For example, that last thing you probably want is for assets you intended on going to your children to end up in the hands of your ex-spouse instead. You should also create a durable power of attorney that specifically allows your agent to work with you family law attorney to complete the divorce on your behalf in the event you are unable. You can create a separate living trust while you’re still married, but you’ll need to obtain a judgment dividing your assets before you can fund your living trust. This also means that if you’re funding a separate living trust during a divorce, it could violate those ATROs as well. For many divorcing couples, a will, power of attorney, and healthcare directive is a solid interim estate plan until the asset issues are resolved.

Everyone needs an estate plan. If you’re divorced or divorcing, it’s imperative that you document your wishes, and act with care and nuance when it comes to your transitioning family dynamics. Schedule an estate planning consultation with a competent attorney, and consult with your family law attorney throughout the process.

Avoid the Estate Planning Banana Peel – Don’t Add Your Kids on Title to your Home

Many aspects of estate planning in California center around avoiding the need for probate court. Adding a death beneficiary to an asset or adding a co-owner on title to an asset are two ways to avoid the need for probate court when you die. Well, that sounds pretty easy. Why don’t we all just do that and call it a day?

Put simply, adding co-owners and death beneficiaries to assets only addresses one situation: that 1) you have died; 2) that the beneficiary/co-owner is alive upon your death; 3) the beneficiary/co-owner has capacity and is over 18 years old upon your death; and 4) the beneficiary/co-owner does not have creditors nipping at their heels.

There are so many other scenarios that can occur. All it takes is for any one of the four factors above to be false for your simple plan to become complicated and problematic. Besides that, there are tax implications for adding people onto title of your assets.

Let’s illustrate with a common example. A widowed parent owns their own home, and has two children. The parent figures that it would simplify everything if they add their two children onto the title of the home. That way, upon the parent’s death, the children receive the home, in equal shares, without having to go through the probate process.

What gets overlooked in the above hypothetical are the following considerations.

Death v. Incapacity

The only way to avoid probate in the above example is if the parent dies. If the parent is alive but incapacitated (think: dimentia), the children have no authority to act on the parent’s behalf by simply being co-owner of the home. They now co-own a property with someone who cannot handle their own affairs. They would have needed the parent to sign other legal documents, such as a durable power of attorney.

Similarly, if either or both children are incapacitated upon the parent’s death, probate may be necessary to receive ownership of the home unless the incapacitated child signed a durable power of attorney themself. Or, if the children are not yet adults, they cannot own the property outright without legal guardians involved.

Creditors

When the parent adds the children as co-owners to any asset, including their home, the parent is entangled with that child’s financial life, including that child’s creditors. If the child is going through a divorce, or someone is suing them for money, or the child owes taxes or other debts, or if the child files for bankruptcy, then the parent’s home is now subject to the claims of the child’s creditors. The parent may have to figure out how to get their own house back!

Additionally, if the child faces those same creditors after the parent’s death, there is no barrier between receiving full ownership of the house and satisfying those creditors’ claims. Ultimately, the child may end up losing the home to their creditors, which is certainly not what the parent intended.

Creating Capital Gains and Property Tax Problems (Click here for a brief discussion of taxes)

When the parent adds their children to title, the parent is making a lifetime gift of that portion of the home. This in itself could trigger a gift tax issue. Gift tax issues aside, typically when the parent dies, all of the capital gains built into the home are eliminated upon the parent’s death. But only the capital gains associated with the portion of the home that the parent owned at death. The portion of the home that the children now own do not receive what is called a “step up in basis”, and the capital gains for the children’s portion are not eliminated. If the parent kept all 100% interest in the home, then all of the capital gains would have been eliminated. After putting their children on title during their life, the parent is now creating a capital gains problem for the children when they sell the home.

Adding multiple children to title can also create adverse property tax implications. Even though Prop 19 has severely limited the application of the parent-child exclusion, there is still an opportunity for the parent to transfer the home to one or more children with some relief from increased property taxes. However, when more than one child is added as co-owner, the home could get reassessed when one child decides to buy another out in the future since that is not a parent-child transaction.

Co-ownership and death beneficiary designations lack any nuance. It only asks whether an owner is dead, and if the answer is yes, ownership of the asset automatically transfers to the other co-owners or to the beneficiaries in whatever condition or circumstance they find themselves. No discretion is involved to determine whether it’s a “good” situation to transfer ownership of the home to the co-owner or beneficiary. Additionally, It makes you vulnerable to your co-owners’ creditors, and could create unforeseen tax issues for your loved ones. The only surefire way to transfer ownership of your assets, with nuance and full discretion, is to create a comprehensive estate plan.

The Myth of the “Straightforward” Estate Plan

“We have a pretty straightforward situation, so it shouldn’t be too complicated or cost too much, right?”

We often get asked this question by prospective clients. It’s not really a question to us, though. Rather, it projects how the prospective client views both their situation and the estate planning process in general. They view their situation as uncomplicated, which is a veiled way to suggest that there’s little actual work involved. That as long as a client wants assets to pass, for example, to their spouse and children upon their death, then they just have to say some magic words to us and the legal fees magically vanish and we admit that estate planning is really just copying and pasting names into a word processor and then hitting “print.”

All snark aside, we take these expectations and assumptions seriously. It is an estate planner’s daily battle to combat these assumptions and to demonstrate that an effective comprehensive estate plan should include large doses of nuance.

There is no such thing as a straightforward estate planning situation. It just doesn’t work that way. Sure, wanting to care for your loved ones is a straightforward desire. How you intend on doing that is much less straightforward. And each person holds different values and priorities when it comes to caring for their loved ones.

Will you be incapacitated at any point before your death? Will your spouse be incapacitated when you die, or will they be perfectly healthy? Will they remarry? What if they remarry and have additional children? What if you are a part of a blended family? How old will your children be when you die? Will your death be a traumatic experience for them? What if one or more of your children are incapacitated when you die? What if you are old and gray when you die, but right when you die one of your children is amidst a messy divorce, bankruptcy, or are facing addiction issues?

I can keep going. We haven’t even discussed the size and extent of your estate, or whether there are assets that need special treatment. We haven’t discussed how exposure to taxes may impact your decisions. Or maybe you’re self-employed and we need to figure out how to continue the business, or wind it down, after your death. It gets less straightforward with each additional consideration.

It’s not about inserting names into templates. It’s about adding nuance, being advised of your options, carefully walking through hypothetical situations, and weighing the possibilities. It’s thinking through all of the contingencies so that your loved ones don’t have to.

You can contact us to schedule a free initial consultation to get the conversation started.

3 Reasons Why Estate Planning is Improved When You Work With a Lawyer

Talking about death can be difficult. It’s also a bit of a downer, to put it mildly. So many of us put estate planning off as long as possible. For most people, hiring a lawyer can elicit a similar reaction. When you put the two together, it’s easy to understand why some people may want to avoid discussing their own death or incapacity altogether. Some try to address their own mortality with as little conversation as possible by creating their estate plan on their own, or by using online resources.

The following are 3 reasons why working with a lawyer can improve the estate planning experience.

Expertise

A certified expert estate planning lawyer has years of training in both estate planning and tax matters. You can rely on that expertise when you ask detailed questions. They can walk you through hypothetical scenarios, tell you why some of your ideas are fantastic approaches, and maybe how some of your ideas aren’t the best way to proceed. An estate planning lawyer can provide detailed advice and counsel suited to your specific situation, knowing they are required to have your best interest in mind. You never have to wonder if their information is inaccurate or outdated, or whether they have others’ interests in mind.

Working with a lawyer creates a dynamic feedback loop. They can ask follow up questions of you when they hear an issue that you may not have even identified yourself. An estate planning professional can help identify blind spots in your thinking and help you resolve them.

Experience

Estate planning lawyers have years of experience working with other clients—both in planning, as well as administering trusts and estates of those who have died. In that experience, they can offer you a wealth of examples that worked out well, and experiences that may not have worked out as the client had intended. They bring this experience into your situation. You receive the opportunity and benefit of years of planning experience on demand. Additionally, when a crisis or issue does arise, the lawyer will be there to advise and support you or your loved ones to help you get through the crisis.

Peace of Mind

Estate planning lawyers are there to support you through this often challenging process. They can provide some levity to what may seem like a heavy topic. They can be a sounding board to inter-family dynamics. Lawyers can provide perspective and context to what can seem like a complicated or overwhelming dilemma. All the while, an estate planning professional will ensure that your documents are drafted accurately, meticulously, and effectively. You can rest assured that your estate planning documents are valid, enforceable, and can withstand any potential challenge. This peace of mind is invaluable.

How Do You Select The Decision Makers in Your Estate Plan?

Determining what happens to your stuff after you die is only one aspect of an estate plan. And it’s not even the most critical part. The most critical component of any estate plan is the people involved. Who will act as your financial agent in a time of crisis? Who will make medical decisions for you? If you have minor children, who would you select to be their legal guardian? And then there’s your stuff. Where do your assets and possessions go after you die? And if you’re leaving any of it to young, immature, or unprepared individuals, who will you select to manage that inheritance for them?

Financial agents. “Financial agent” is a short hand to mean the successor trustee of your living trust, the executor of your will, and the attorney-in-fact under your power of attorney. The reason we have one umbrella term for these roles is because they all serve in making financial decisions for you when you are unable, and the three roles overlap so much that we recommend using a consistent list for all three.

So how do you choose your financial agents? It comes down to judgment. This is a decision making role. Choose someone who shares similar priorities, values, and decision making principles with you. Don’t worry about knowledge or expertise. With good judgment, one can always seek out the appropriate expert advice.

Guardians. Guardians are nominated to raise minor children–children under the age of 18 years. A good guardian is someone who shares your values. Are you religious? Do you like early bedtimes for your children? Is diet and nutrition important for your child? A good candidate for a guardian nomination would hold dear the same values that you do. Additionally, if your child is school-aged, it will be critical that the nominated guardian live local enough as to not uproot your now-orphaned child. Orphaned children have already gone through the trauma of losing their parents. They do not need the additional unease of living in unfamiliar surroundings, away from their friends and community.

Healthcare agents. The same goes for healthcare agents as was described previously about financial agents. You do not need to befriend a bunch of medical professionals to use as healthcare agents. You want someone who shares your judgment and values. They can speak to the medical professionals to get expert opinions and advice.

You can select the same person or persons for each or all of the roles above. But that is not required. It really comes down to your life situation and peace of mind. Would you want the person in charge of your child’s inheritance to also be the one who puts them to bed each night? Do you know someone who can make medical decisions for you and also handle your financial affairs? An experienced estate planning professional can help walk you through your life situation, priorities, and selections. And they can add their own experiences as additional guidance.

Estate Planning is Not for You

It’s for them—your loved ones, for those you care about.

When you are either deceased or incapacitated you obviously won’t be available to participate in the execution of your estate plan. Your estate plan is all that remains to assist in caring or providing for your loved ones or causes that you care about.

To that end, the most important aspect of an estate plan is the personal information and guidance that you provide to those who step in to execute your plan. Without that information and guidance, it could be a wild goose chase trying to piece together all the loose ends surrounding your life. The more loose ends, the more time and effort will be required to carry out your wishes.

Do your trusted agents have access to your passwords and credentials?

Our lives no longer consist solely of tangible assets. Sure, for most of us our homes are our most valuable assets. But more and more, our lives are becoming more digital and intangible–online financial accounts, cloud storage, digital photographs, social media accounts, cryptocurrency, etc. To access these digital assets, your trusted agents will need your passwords. Without them, federal privacy laws require a court order to access them. Your trusted agents require adequate time and evidence to obtain a court order. If it takes your agents too long to obtain the order, or if they lack the requisite evidence to persuade a judge to issue an order, the digital accounts may be terminated, blocked, and in some cases deleted. Even providing the PIN to your mobile device could save your agents time, expense, and a lot of expended energy.

Do your trusted agents have clear guidance on your wishes?

An estate plan allows you to document your wishes–how to handle your financial affairs, how to provide for your loved ones. But it’s only as good and thorough as the information you provide. Be sure to keep current documentation of your assets, your debts, and any specific instructions. A great place to keep this information is in your estate planning binder containing your legal documents.

Is your list of trusted agents current?

Our lives are ever changing. And so are the relationships we have with our loved ones. It’s critical that you revisit your estate planning documents to confirm that you have the most current list of trusted agents to step in when a crisis arises.

A current, detailed estate plan will allow your loved ones to step in and execute your wishes in that time of crisis. Chances are that you will be unavailable to provide any guidance or assistance when that time comes. Be sure the appropriate information is readily available for your trusted agents to minimize delays and confusion.

Taxes and Estate Planning

One of the most consistent questions that we come across involves taxes. For estate planning purposes, there are three (3) distinct types of taxes that may impact your estate plan. 

1. Estate & gift tax

The estate and gift taxes are transfer taxes. They are federal only. California does not impose an estate or gift tax.

• Transfer taxes tax the transfer of an asset. The estate tax is imposed when someone transfers something upon death (think: inheritance) and the gift tax is imposed when it’s a lifetime gift (think: birthday present).

• Who pays it? Always the person making the transfer (aka the estate of the person who died, or the person giving the gift). 

Not all transfers are taxed. There is an exemption amount that must be exceeded before the tax kicks in. The current exemption amount for an individual is $11.7 million*, and for a married couple it’s $23.4 million*. In other words, you need to have more than $11.7 million or $23.4 million in net assets to have to pay any estate tax. 

The gift tax is related to the estate tax. This is how: every year, every single person can give any other person $15,000* without reporting it to the IRS. A married couple can double that amount. If you exceed the amount, then you have to report it to the IRS. But instead of paying tax on it, your estate tax exemption amount is reduced by the fair market value of the item gifted. 

Example: If you love this blog, and you’re married, you can give Natasha $30,000 this year without reporting it to the IRS. If you love it SO much, you could give Natasha $31,000, but then you have to report that extra $1,000 to the IRS. The IRS then takes your $1,000 and reduces your estate tax exemption amount by $1,000. So instead of being $23.4 million exemption, it would be $23.4 million MINUS $1,000. 

*This is the amount for 2021. Each year this amount is adjusted for inflation. 

2. Income tax (capital gains taxes)

Income tax, as you know, is both state and federal. For purposes of this section, we’re focusing on capital gains taxes (profit made when selling something) and not your wage income (income made going to work).

If you buy something for an amount and it increases in value, and then you sell it, you have to pay taxes on that increase in value, which is called a gain. A capital gain is a profit from selling a capital asset, which is basically anything that is substantial in nature, excluding cash or retirement accounts (think: real estate, stocks, heavy machinery, artwork, collectibles, etc.). 

Example: You buy your house for $1 million. It increases in value to $4 million and you sell it. You’ve “earned” $3 million on the house. You have to pay capital gains taxes on the increase in value of $3 million. Your capital gains taxes are part of your income tax. 

Importantly, built-in capital gains get zeroed out when someone dies. 

Example: You buy your house for $1 million. It increases in value to $4 million, and you die. Whoever gets your house (spouse, child, etc.) retains it at the value of $4 million. If they sell it the minute that you died, then they do not pay any capital gains. If they hold on to it until it’s worth $10 million and sell it, then they would pay capital gains taxes based on $6 million in gains ($10 million - $4 million, date of death value), rather than $9 million ($10 million - $1 million, purchase price). 

3. Property tax 

Property tax is imposed by the county in which the property sits. We are bolding this because it’s important and has come up numerous times with Prop 19. To repeat: property tax is a COUNTY tax. It’s not state. It’s not federal. It’s local. 

Property tax is paid in two installments, annually. It is calculated based upon an “assessed value” and is only adjusted when a property is reassessed in value, which happens most often when it changes ownership on title. 

For the most part, property taxes are adjusted anytime the property changes hands, with certain exceptions. If you plan on transferring property to your children, or to your parents, then there are certain benefits afforded to these discrete transactions. Proper planning is critical to avoid unnecessary increases in property tax.

Why does this matter? 

It is crucial not to conflate or confuse the three taxes described above. Proper tax planning within the context of estate planning requires keeping each analysis separate. Tweaking a transaction to gain a benefit through one tax analysis may increase your tax exposure with one of the other taxes. Ultimately, you are best off planning ahead and trying to anticipate pitfalls before they happen, especially when it comes to intergenerational transfers. Contact us to discuss your specific situation and to work through your goals for your family.