Your Home = Your Wealth

For most of us, our primary source of wealth is our family home, our primary residence. Especially for Bay Area folks. We have watched our property values soar, and accordingly enjoy built up equity in our homes. The problem—if you want to call it that—is that the equity is not sitting in our bank accounts. It’s “stuck” in our homes. And we cannot access it without selling the ground on which we stand.

This means that for many of us, our largest asset is the thing we sleep in. It’s what is going to make up the bulk of our estate. So when it comes time to create an estate plan, several issues need to be addressed to have a comprehensive estate plan that will be effective when the time comes.

Is your home sentimental?

Let’s face it, unless you leave your home to someone who loves it as much as you do, they’re likely going to sell it and enjoy the cash. If your home is sentimental, or if your family legacy is tied to it, your estate plan should clearly define what your beneficiaries can–and cannot–do with the home. Can they live in it? Can they rent it out? Can they sell it? If they cannot sell it, where does the house end up when your beneficiaries die?

Do you have more than one beneficiary?

Many families leave a bulk of their estate to their children. And many families have more than one child. If you have one home, and multiple children, you don’t want to “leave it up to the kids” when it comes to the family home. What if one child wants to live in it but the other wants to cash out? Is it important to plan ahead for any increases in property taxes? Do you want to allow for either child to have the option to purchase the other’s share?

Are there competing interests for the home?

Many of us are the “‘tween” generation these days. They have little ones at home while caring for one or more aging parents. You may find yourself in a position where you want to provide a place for your parents to live, but also leave an inheritance to your adult children. If you want to keep the house for your parents to live in, have you made adequate plans for the trust to pay the expenses for the home while your parents live there? What if your children need the equity in the home to pay for college while your parents need a place to live? Which dependents get priority?

Many of us do not have adequate cash and other investments to offset distributing our entire home to one child and hope that our other children miraculously receive some equalizing gift. There are lending and other financing strategies to offset such a gift, but they need to be carefully planned for ahead of time. It’s imperative to consider your own thoughts with respect to your home, and then plan accordingly.

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.

What Needs to Happen When Someone Dies?

After a client has designed their estate plan, the most common question we get, by an overwhelming margin, is some form of “What needs to happen when someone dies? How does someone execute this estate plan we have created?”

Notice

When someone dies, there usually isn’t an alert that goes out to your loved ones, your banks, your employer, your utility companies, your credit card companies, etc. Well, unless you’re a celebrity. But for us non-celebrities, the news of one’s death trickles out organically. Loved ones handle the deceased’s remains and any rituals–funeral, memorial, wake, spiritual ceremony, etc. Sometime from a week up to a month and a half after the death, the county produces a death certificate. With the death certificate, the decedent’s loved ones begin to notify all interested parties and organizations of the decedent’s passing.

Knowledge

When the decedent’s loved ones are emotionally and psychologically ready, they begin to piece together what they can about the decedent’s life. This will include discovering the assets and debts of the decedent, obtaining control over any digital accounts and assets (like social media and cloud accounts), as well as determining whether the decedent had an estate plan. Hopefully, the decedent alerted the people involved in their estate plan as to the location of the estate planning documents. That’s not always the case, so sometimes this step may involve a bit of a “wild goose chase” for the documents.

Administration

Once it is determined whether there is an estate plan, steps are taken to administer the estate. There are two main routes of estate administration:

Only a Will, or no estate plan

If no estate plan is discovered, or the decedent only had a will, then the decedent’s estate must go through the probate process. Read our prior post about what probate entails. Our office can be retained to assist the loved ones guide the decedent’s estate through probate if there is only a will, or no estate plan at all.

Estate plan with a living trust

If the decedent died having created an estate plan built upon a living trust, then the administration of their assets is handled privately by way of trust administration. Trust administration is often quicker and less expensive than probate administration. The person named as the successor trustee of the living trust is tasked with carrying out the terms of the trust, along with providing notices required by law, marshaling and valuing assets, paying any debts and expenses, and distributing the remaining assets following the terms of the distribution provisions of the trust.

To assist them, the successor trustee can hire an attorney (like our office, for example!) to represent them in carrying out their duties. Trust administration can differ greatly from one trust to another. Also, trust administration varies greatly whether the decedent was married and survived by a spouse versus being unmarried or the second spouse to die. Trust administration can be handled by attorneys whether or not the attorneys drafted the estate plan.

If you lost a loved one, contact us to schedule a complimentary initial consultation to figure out next steps.

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.

Distribution Options for Your Beneficiaries

One of the main reasons cited for creating an estate plan is to care for loved ones. An estate plan allows you to expressly name beneficiaries to your estate, the methods by which the gifts will be distributed, how the distribution is administered, whether there are any conditions on the gifts, and so forth. Most people want to provide for family members, relatives, or close friends. This post will survey some common options for how you can make the gift.

Outright and free of trust

The most straightforward way to provide for someone is outright and free of trust. Upon your death (or your spouse’s death, or after the second of you to die, etc.), the gift is distributed to the intended beneficiary, and assuming they are above the age of 18, the gift is now owned by them. That’s it. For example, if you leave $40,000 to Person X, then upon your death, Person X receives $40,000 to do whatever they want. It works similarly for percentage or fractional gifts, like 25% of your estate, or 1/3 of your estate. The value is calculated, and when the distribution stage takes place, the beneficiary receives that gift as their own. The limitation to this method of giving is that you relinquish all control over the gift. If the beneficiary was going through some life challenges, like a divorce or a bankruptcy, your gift may end up never reaching the beneficiary at all. Or if they face significant debt, your life’s work may have ended up going straight into the hands of the beneficiary’s creditors.

Sometimes a little nuance is needed. Maybe dropping a large sum of money on someone isn’t the best idea under the circumstances.

In Trust

Leaving a gift in trust for someone can provide a lot of flexibility and oversight. This option creates a trust (a separate trust other than your living trust) naming your beneficiary as the beneficiary of this newly created trust. You also name the Trustee managing the assets held in trust. 

These trusts are created after your death. They are sometimes called “beneficiary trusts”,  “inheritance trusts”, “FBO trusts” (“for the benefit of”), “GST trusts” (generation skipping transfer), “dynasty trusts”, or “asset protection trusts”. For the most part, all of those terms can be interchangeable. They all describe an irrevocable trust set up for the benefit of someone other than yourself. “Irrevocable trust” means that the beneficiary is not able to change the terms of the trust (unlike your living trust, which is amendable during your life). The two main reasons someone may want to create irrevocable inheritance trusts is to 1) retain some control over the gift; and 2) protect the gift from the beneficiary’s creditors (think: the beneficiary’s ex-spouse in a divorce, a plaintiff in a judgment against the beneficiary, or from a bankruptcy). By keeping an inheritance in trust, the assets in trust will not “count” toward the assets of the individual beneficiary, and remain somewhat shielded from those creditors.

If you want to provide for a minor (a child under the age of 18), then a beneficiary trust is the way to go. You can name someone as Trustee of the trust to manage the gift for the benefit of the minor child, and that person does not need to be the child’s parent or guardian. You can specify when, if at all, the minor beneficiary is able to take over as Trustee of their inheritance.

Similarly, you can provide for someone who is financially immature or has addiction issues. A trust allows you to provide for someone even when they are not fully capable of providing for themselves.

Supplemental Needs Trust

Sometimes a beneficiary is receiving government assistance that is means-tested. For example, many MediCal and SSI/SSA benefits have eligibility requirements pertaining to a recipient’s income or net worth. If your beneficiary receives a lump sum inheritance, it could disrupt those benefits. The beneficiary would then need to use their inheritance for their care in place of the government benefits, and they would likely end up destitute, back on the government benefits. By leaving the inheritance in a supplemental needs trust, the trust can provide for the beneficiary without disrupting their means-tested assistance.

With trusts, you can place conditions on your gifts. For example, a common condition for parents is that their children be educated before receiving their inheritance. However, what may be clear in your head, may be ambiguous to someone carrying out your instructions. What does educated mean? Does the child need to earn a degree? Two year degree or four year degree? Does the institution need to be accredited? Does the institution need to be located in the United States? Can it be an online institution? You get the idea. You can place any condition on your gift that you like. However, an estate plan is only as effective as it is executable. There needs to be as little ambiguity in the trust terms as possible.

When you work with an estate planning professional, they will field all of the available options, discuss your goals, and assist you with matching your options and your goals. And after all that, an estate planning professional will make sure the documents are drafted correctly, with as little ambiguity as possible.

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.

Funding Your Trust

Once you have created a trust, it’s important that you “fund” it. Funding the trust essentially means that you transfer ownership of your assets into the name of the trust. Instead of your name being on the account, it’s your name as trustee of the trust on the account. 

For example: the checking account of Joan Johnson becomes the checking account of Joan Johnson, trustee of the Johnson Living Trust, dated March 3, 2020. 

It is critical to fund your trust to avoid the time, expense, and public nature of probate. And to have a plan in place if an unexpected crisis arises. Having a trust unto itself doesn’t help you achieve that end; you have to get your assets into the name of the trust for the trust to be effective. Ideally, everything you own, besides your retirement accounts, is typically transferred into a living trust. If you don’t put your assets (like your house) into your trust, then your estate may still go through probate!

When we set up a trust for you, we provide you with complete funding instruction to address each type of asset and how to move it into the name of the trust. And if any questions arise, we welcome our clients to call us with any questions.

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.

Are You Married?

There is a common misconception that California honors “common law marriage” after seven years of living together.* 

*(The misconception sometimes has a different number of years associated with it.) 

In California, there is NO common law marriage. There is NO seven year rule (or any other year rule) to establish a marriage. The only way to be married in California is to marry with a state license and certificate from the county clerk. 

And if you’re not married, then under the law, you and your significant other have no more rights than roommates. 

There’s no legal in-between. 

If you live with your significant other for 50 years, you’re still not married. If you have children together, you’re still not married. If you share ownership of a home, you’re still not married. The only way to be considered married is to actually get married. 

So why is this significant? Well, in sum: married couples enjoy benefits that unmarried couples do not. Married couples are considered family (e.g. for visitation in a hospital, healthcare benefits, or even inheritance); they can own community property (which has its own benefits); and they have different tax treatments. 

A registered domestic partnership is also not marriage. Although California recognizes domestic partnerships, the federal government does not. The federal government only recognizes marriages. 

So that marriage certificate is not just a piece of paper. It has major consequences and impacts on your rights, benefits, and obligations. If you would like to discuss how your situation would be affected by getting married (or not), please contact us for a free consultation.

What is... a Trustee?

This is part of an on-going series of blog posts titled the "What Is..." series, where we attempt to explain, in simple terms, common estate planning terms and concepts. To read other posts in this series, click here.

A trustee is a person (or sometimes an institution, like a bank) who has the power to act on behalf of a trust. If you establish a living trust (as a trustor), then most of the time you will be the initial trustee. You act on behalf of the trust. 

As the trustor (also known as the person who established the trust), you also name successor trustees -- people who will act on behalf of the trust after you, either because you no longer want to, or you are not able to do so, or because you have passed away. 

As the trustee of your own living trust, nothing changes on a day-to-day basis. You even file taxes the same way. The living trust is more like a legal alias for you.

But what do your successor trustees do for your trust? Or, what do YOU do if you’re named as a successor trustee for someone else? 

In sum: the trustee’s job is to carry out the directions set forth in the trust document. 

There are some initial steps that a successor trustee must take after the death of the trustor. Please note that this is not an exhaustive list -- and this is exactly what we help with as attorneys. This is for informational purposes, to give you some idea of the responsibilities involved. 

First, the trustee must accept the position so that they can act on behalf of the trust. Then:

1. In general, the trustee must notify the beneficiaries and heirs that they are beneficiaries of the trust.

2. Certain government offices must be notified as well, depending on the trustor’s assets and benefits. For example, if the trustor owned real estate, then the assessor’s office must be notified. If the trustor was receiving social security benefits or Medi-Cal benefits, those agencies would need to be notified.

3. The trustee must then inventory and determine the value of assets as of the date of the trustor’s death (e.g. appraisals of property, etc.). This is required to determine the value of the assets for tax purposes, and to provide an accounting of the trust property to the beneficiaries.

4. In addition to handling an estate tax return, the trustee may be required to file the trustor’s final income tax return for the year that they died. The trustee may also have to file an income tax return if the trust estate earns money before it is all distributed to the beneficiaries. 

The trustee must then follow the instructions in the trust, within the boundaries of the law. This may include paying funeral expenses, outstanding credit card debts, etc. Some trusts have certain time periods during which the beneficiaries should receive a distribution, or they may have conditions that must be met before a beneficiary receives a distribution. Some trusts require waiting a certain period of time before the beneficiary receives a distribution, or the trust may contain outright restrictions on distribution. The trustee is tasked with interpreting and executing all of these instructions.

The trustee has a fiduciary duty to the trust. This means that just because they have the right to do something doesn’t mean that they should do it. For example, they may have the ability to sell trust assets like a home, but if they sell it for below the market value, or in a down market, they could have breached their fiduciary duty.

It’s important to know what the trust says to be able to execute its provisions and comply with the legal requirements. 

If you are a successor trustee for a loved one, please contact us for a free initial consultation. If you have a trust, and would like to ensure that it says what you want it to say for your trustee, please also contact us for an initial consultation.

Trustees and Fees

If I ask someone to be a trustee for me, I want to make sure that they get paid. Do I need to give them a specific amount in the trust? 

Most trusts (like most of the ones we draft) include a provision that permits the trustee to receive “reasonable” compensation. In most cases, this is determined based on the amount of time and complexity of an estate. And, in most cases, there is no dispute about the trustee receiving reasonable compensation. 

However, if you anticipate that someone might challenge the compensation, then you absolutely can specify how a trustee will be compensated. For example, you might select a percentage of your assets as payment or you might select an hourly rate that increases with inflation. 

(Note: If you have a professional fiduciary serve as a successor trustee, then they will provide their own rate of pay.)

How does someone determine what is a reasonable fee?  

The trustee must keep track of all the time that he or she spends in the role of trustee. The trustee should keep a log of the date, amount of time*, and each task that was performed. More complicated tasks are entitled to increased compensation. Keeping clear records is important. 

At the end of the year, the trustee can obtain the fee. By keeping clear records, the beneficiaries understand why the trustee is requesting the amounts and what they did during that time. Additionally, if administering the trust takes multiple years, the beneficiaries are less likely to raise issues or questions if the fees are spread over several years. 

*How does a trustee track time? 

We recommend tracking time by 15 minute increments or less. In other words, if something takes you 10 minutes, then it’s okay to put in .25 as your time; it is not okay to round up to an hour. 

Is the trustee’s fee considered a gift? 

No. The trustee’s fee is taxable income. It is earned. However, if the trustee spends money that is reimbursed (e.g. mileage for trips on behalf of the trust or tolls) than this is not income and therefore not subject to income tax. 

How does the trustee pay for things? 

The trust pays for trust expenses. Depending on the terms of the trust and the point at which a trustee begins managing the trust, the trustee should create a trust administration bank account, opened using a taxpayer ID that is specifically for the trust. 

What if my trustee doesn’t want to accept a fee? 

Even if the trustee chooses to waive a fee, he or she is still entitled to receive one and should take the approach we recommend above. A trustee may begin by saying that they don’t want a fee, but if the time and complexity becomes too much, they may decide otherwise. Having clear records is the key. 

Why wouldn’t a trustee accept a fee payment? 

Trustee fees are income, and therefore subject to income tax. If the trustee is also a beneficiary of the trust, they may decide to waive the fee as they would receive funds as a trust distribution anyway. 

If I become a trustee, what’s the first thing I should do? 

We strongly recommend speaking to an attorney (like us) as early as possible. We know that grieving can take a toll, but we also are here to help guide you through the trust administration process.

How to Disinherit a Family Member

Sometimes there may be a family member who you want to make sure does not receive anything from your trust or estate. Perhaps they have enough financial support that they do not need more or perhaps there is a personal rift. 

It’s important to know that there are certain people who you cannot disinherit by omitting them from your estate planning documents: a spouse and a minor child. There is a presumption in California that you intend to provide for a spouse and for minor children; therefore, leaving them out of your documents is not sufficient. For spouses, minor children, and (really) everyone else, there are steps you can take to make sure that your wishes to exclude someone are legally binding and not subject to litigation. 

What does it mean to disinherit? 

Disinheriting means affirmatively excluding relatives from becoming heirs or beneficiaries of your trust or estate. For example, if someone has an estranged parent or child, they may want to disinherit that person. 

No one is entitled to receive something from you after you die. However, in certain circumstances, spouses and children are presumed to have been intended beneficiaries. If you die without any estate planning documents OR all your named beneficiaries have predeceased you, then your assets could go to your closest living relatives. (Your closest living relatives are determined by state law and the list starts with your children, then your parents, then your siblings, then your nieces and nephews, then aunts and uncles, then cousins, etc.) 

How do I disinherit? 

If there is a close family member who is potentially entitled to receive something (a parent, child, sibling), then it is important that the person is explicitly named and acknowledged, and that the person was intentionally excluded as a beneficiary. 

What about a token gift? 

If you provide a token gift (e.g. $1) then that person becomes a beneficiary. Beneficiaries are afforded rights of notice and due process, regardless of the size of their gift. By learning that they received merely a token gift, they may feel emboldened to file a law suit. Even if their claim ultimately lacks merit, your trustees may feel compelled to settle the suit, since it is often cheaper to settle than to prove the claim lacks merit. If your intention is to EXCLUDE someone, then you probably don’t want them on that list of beneficiaries. 

What about a bigger gift? 

Sometimes, the best way to “get rid” of potential litigation is to give someone enough that it’s not worth their time to file a lawsuit to try to get more. If you give someone $1, it’s easy to say that they have nothing to lose in filing a suit. If you give someone $1000, it may not be worth it to them. 

What about “no contest” clauses? 

A no contest clause is a part of a will or trust that says that anyone who contests the document, and fails, won’t receive anything. In California, courts are reticent to lock potential viable claims out of court. So no contest clauses only practically come into play for claims with zero merit on its face. The economics of litigation often result in out of court settlements, even when a claim lacks merit. Although no contest clauses are considered best practices, you do not want to rely on such a clause to prevent future will or trust contests.  

So what should you do if you want to leave someone out? 

If you decide to disinherit a family member, call us to discuss options for how best to proceed.

Are Holiday Gifts Taxable?

The short answer: Yup! But, spoiler: you probably won’t end up paying any gift taxes on holiday gifts.

A holiday gift is a donative transfer of an asset from one person (donor) to another (donee). A “donative transfer” simply means that the donee didn’t have to do or pay anything for it. It’s a true gift! It’s also a gift that you’re giving during life (intervivos) - as opposed to a gift that you make after you die (i.e. through a will or trust).

There is a tax that could be imposed, but that requires a little more explanation. Just like the government taxes things from your income (income taxes), to certain goods sold (sales tax), to real estate that you own (property taxes), it also taxes the transfer of items. So the gift tax is a transfer tax.

The gift tax is only imposed by the federal government (think: IRS); California doesn’t tax gifts. And it’s only imposed on the donor (the person giving the gift). If you receive a gift, and you live in California, you’re not on the hook for transfer taxes. If you give a gift, and you live in California, you still won’t owe any gift tax to the State of California and probably won’t owe any gift taxes to the federal government.

Here’s why: The federal government has this nifty rule called the “annual exclusion.” What that means is that each resident of the USA can make a gift up to $15,000, per year, to any other person, and not owe any taxes on that gift. In fact, the IRS doesn’t even want to know about it! You don’t have to report it. Married couples can combine that exclusion amount to $30,000 to one person, per year, and still fall within the same rule. So put another way, you’d have to be awfully generous this holiday season to have to deal with gift taxes.

Well, what if you are that generous?

If you make a gift in excess of $15,000 but less than what is called the exemption amount (currently $11.58 million per taxpayer for 2020; $11.7 million for 2021), you won’t owe any gift taxes. However, you do need to report it to the IRS. Once reported, the IRS will deduct the amount of the gift over $15,000 from your total exemption amount that you’re entitled to when you die. For example, if you give a $75,000 gift to your favorite niece this year, you would report a $60,000 gift ($75,000 - $15,000 exclusion amount) and the IRS would walk over to your file and deduct $60,000 from your $11.58 million unified credit. Only $11.52 million left to give before you pay transfer taxes! (The exemption amount involves estate taxes, which we can explain and discuss with you as part of your estate planning process.) 

Until then, may you have a safe, healthy, and generous holiday season!

Proposition 19

Californians have passed Proposition 19 with a little over 51% of the vote. It will significantly change the California property tax scheme as it applies to parent-child transactions.

There are two main components to Prop 19:

1. Over-55 Rule. The first component allows homeowners who are either over 55, have severe disabilities, or are victims of natural disasters or hazardous waste contamination to purchase a new residence and retain their property tax assessment from thier current home. In other words, you can “take” your current property tax rate with you to your next home, even if the new home is worth more than your current home. And you can do this up to 3 times in your lifetime. This provision takes effect on April 1, 2021.

1. Limited Parent-Child Exclusion. The second component dramatically limits what is called the “parent-child exclusion” from reassessment. Parents may no longer transfer unlimited amounts of property to children and escape reassessment. This one takes a bit more explanation. This provision takes effect on February 16, 2021.

A Brief Explanation of the Parent-Child Exclusion

In very broad terms, the California property tax scheme--or “Prop 13”--taxes owners of real property (the legal term for “real estate”) based on the property’s “assessed value.” To keep things simple, think of the “assessed value” as the purchase price of the property. Based on that purchase price, the tax collector imposes a ~1% tax. The property tax is not adjusted until or unless there is a “change in ownership.” When there is a change in ownership, the value of the property is reassessed. Reassessment can increase the property taxes dramatically for the new owner. 

In 1986, California voters allowed for an exception to the general “change in ownership” rule that triggers reassessment. The exception is that if parents transferred their property to their children (either by gift, inheritance, or sale), then the assessed value (i.e. property tax rate) would carry to the children. In other words, if you received property from your parents, you would continue to pay the property tax rate your parents were paying. This exception was unlimited when parents transferred their primary residence, and was limited in value when parents transferred property that was not their primary residence (e.g., vacation home, rental property, etc.).

Now let’s fast forward to February 16, 2021. When Prop 19 takes effect, the parent-child exclusion described above will be abolished. In its place will be a far more limited exception. The new exception only allows escaping reassessment if parents transfer property to their children AND the children use the transferred property as their primary residence. In other words, if the children do not live in the house and want to use it as a rental property (or keep it vacant) then the property will be reassessed. 

For example, if a parent bought a house in 1972 for $200,000, then their property tax might be $2,000 a year, regardless of the house’s increasing market value. If the parents transfer the home to a child (either gift, inheritance, or sale) after February 16, 2021, and the child does not live in the house, the property will be reassessed to its current fair market value (say $2,000,000) and the tax will jump to $20,000 a year.

Your Options Going Forward

There is no straight answer here. There are MANY unknowns at play here: the pandemic, a potential recession, other changes in the law in the near future, and particulars about your life and family. All that we know is that Prop 19 will dramatically change parent to child transfers going forward. If you were planning to leave your children property with the presumption that they would enjoy property tax savings, then you may want to consider transferring to them prior to February 2021. However, please understand that a lifetime transfer now may carry capital gains implications forward to your children. It’s a balancing act. We cannot emphasize this enough: there is no one-size-fits-all solution here. Contact us immediately to discuss your situation, things you can consider, and available options.

A side note on timing: The California election is not certified until December 11. After that, there will be regulations that are issued about how Prop 19 will be implemented and how it will work. While we can provide guidance at this point, there are still some questions outstanding that we won’t know the answers to until after that date.