End-of-Year Check-In: Are Your Investments Aligned with Your Estate Plan?

As the year winds down, it’s the perfect time to reflect on your financial goals and ensure your investments and estate plan are working together seamlessly. If you’ve experienced significant financial or personal changes this year — or even if you haven’t — an end-of-year check-in can help you maximize tax benefits, avoid costly mistakes, and keep your legacy on track.

Here are a few key areas to review before the clock strikes midnight on December 31.

1. Review Your Beneficiary Designations

Beneficiary designations on accounts like 401(k)s, IRAs, and life insurance policies override what’s written in your will or trust. This means outdated designations can cause unintended consequences.

Example: Imagine you remarried but forgot to update the beneficiary on your IRA. If your ex-spouse is still listed, they’ll inherit the account — even if your estate plan says otherwise. Double-check that all beneficiary designations reflect your current wishes.

2. Maximize Tax-Advantaged Gifting

The end of the year is your last chance to take advantage of the annual gift tax exclusion for 2024, which allows you to gift up to $18,000 per recipient without incurring gift taxes.

Example: If you want to reduce the size of your taxable estate, you could gift $18,000 to each of your three children and their spouses. If you’re married, you and your spouse can combine your exclusions to gift $36,000 per person, transferring up to $216,000 out of your estate in one year.

3. Consider Charitable Giving

Donating appreciated assets or setting up a Donor-Advised Fund (DAF) can reduce your taxable income while supporting causes you care about.

Example: If you donate stock valued at $50,000 (originally purchased for $20,000) to a DAF, you avoid paying capital gains tax on the $30,000 appreciation and get a charitable deduction for the full $50,000, all while leaving a charitable legacy.

4. Align Your Investments with Your Estate Plan

Your estate plan and investment strategy should work hand-in-hand to protect and transfer your wealth efficiently. Consider whether your assets are properly titled and whether trusts could help reduce taxes or simplify transfers.

Example: If you’ve invested in rental properties, placing them in a revocable living trust can keep them out of probate, ensuring your heirs receive them quickly and efficiently.

Finish the Year Strong

A little year-end planning can go a long way toward securing your financial future and protecting your legacy. Whether you need to update beneficiary designations, make tax-savvy gifts, or ensure your investments align with your estate plan, taking action now can save you time, stress, and money later.

Contact us today to schedule your end-of-year estate planning review. Let’s make sure 2025 starts off right!

Gifting with Purpose: How to Make Tax-Efficient Gifts to Loved Ones This Holiday Season

The holiday season is a time of giving, and for many families, it’s also a great opportunity to think about how their gifts can do more than bring joy — they can create meaningful financial benefits for both the giver and the recipient. With thoughtful planning, you can make tax-efficient gifts that help your loved ones today while potentially reducing the size of your taxable estate. Here’s how.

Take Advantage of the Annual Gift Tax Exclusion

Every year, the IRS allows you to give a certain amount to as many people as you’d like without triggering gift taxes. For 2024, this annual gift tax exclusion amount is $18,000 per recipient. That means you could give $18,000 to each of your children, grandchildren, or friends — and if you’re married, your spouse can do the same, effectively doubling the exclusion to $36,000 per recipient.

Example: If you have two children and one grandchild, you and your spouse could gift a total of $108,000 this year without impacting your lifetime gift and estate tax exemption. It’s a win-win: your loved ones benefit from the funds now, and you reduce the size of your taxable estate.

Cover Educational or Medical Expenses Directly

Did you know that some gifts don’t count toward your annual exclusion at all? Payments made directly to an educational institution for tuition or to a healthcare provider for medical expenses are entirely tax-free and unlimited.

Example: If your grandchild is attending college, you could pay their tuition directly to the school without it counting against your $18,000 annual exclusion. Similarly, if a loved one has high medical bills, you could cover those costs directly to the provider.

Fund a 529 Plan for Future Education

If you’re thinking about the long-term future of a child or grandchild, contributing to a 529 college savings plan is an excellent option. These accounts grow tax-free as long as the funds are used for qualified education expenses. Better yet, you can front-load up to five years of annual gift exclusions at once.

Example: Let’s say you want to help a newborn grandchild get a head start on their education. In 2024, you could contribute $90,000 ($18,000 x 5 years) into their 529 plan, effectively making a large gift now while still staying within IRS guidelines. Your spouse could do the same, doubling the contribution to $180,000.

Plan Thoughtfully

Gifting can be a powerful way to share your wealth while reducing your tax burden, but it’s essential to do it strategically. If you’re considering making significant gifts this holiday season, consult with an estate planning attorney to ensure you’re maximizing the benefits.

This holiday season, let your gifts be more than thoughtful — let them be purposeful. 🎁

International Families: Estate Planning Essentials for Cross-Border and Multinational Households

For families with international connections, estate planning can present unique challenges. Cross-border assets, differing inheritance laws, and tax implications all require special attention. Here’s a quick guide on how to address the complexities of multinational estate planning.

1. Account for Cross-Border Assets
If you or your spouse hold assets in another country, you’ll need to address these in your estate plan. International assets may be subject to that country’s laws, which may affect inheritance and tax requirements. Work with a legal advisor experienced in cross-border planning to develop an effective strategy.

2. Understand Differing Inheritance Laws
Inheritance laws vary widely, and some countries enforce “forced heirship,” where a portion of the estate must go to specific family members. Knowing how foreign laws interact with U.S. estate planning can help avoid surprises and ensure your intentions are honored.

3. Address Tax Implications
Multinational families may face complex tax obligations, including estate and gift taxes in multiple jurisdictions. Consider consulting a tax advisor to understand how your international status could impact your tax liabilities, ensuring that your estate is optimized.

4. Choose Guardians and Executors Carefully
For families with minors, selecting a guardian who resides in the same country as the child is often essential for practical and legal reasons. Executors also need to understand cross-border complexities, making it important to choose someone equipped to handle these responsibilities.

Working with experts in cross-border estate planning ensures your multinational family’s assets and wishes are protected, wherever in the world they may be.

The SECURE Act's Impact on Inherited Retirement Accounts

Navigating inherited retirement accounts has become more complex due to significant regulatory shifts brought by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and subsequent updates in the SECURE 2.0 Act of 2023. Here’s an overview of how these changes impact beneficiaries and what it means for estate planning.

SECURE Act of 2019: Key Changes

The original SECURE Act, enacted in 2019, overhauled the distribution rules for inherited retirement accounts. Previously, designated beneficiaries could often “stretch” required minimum distributions (RMDs) based on their life expectancy, allowing tax-deferred growth over a longer period. However, the SECURE Act replaced this with a 10-year rule for most non-spouse beneficiaries:

1. 10-Year Distribution Rule: Non-spouse beneficiaries now generally must withdraw all assets from an inherited IRA or retirement plan within ten years of the account holder’s death, rather than over their lifetimes. This change speeds up the timeline and may accelerate taxable income for beneficiaries​​.

2. Exceptions to the 10-Year Rule: Certain "eligible designated beneficiaries" (EDBs), such as surviving spouses, minor children, disabled or chronically ill individuals, and beneficiaries not more than 10 years younger than the deceased, are exempt from the 10-year rule. These beneficiaries can still stretch distributions over their life expectancies until other conditions trigger the 10-year rule.

3. Increased RMD Age: The age for required minimum distributions (RMDs) was extended from 70½ to 72, giving account holders a bit more flexibility before they must start taking distributions​.

SECURE 2.0 Act of 2023: Further Adjustments

In 2023, the SECURE 2.0 Act introduced additional refinements, giving more flexibility but also adding complexity for inherited accounts:

1. RMD Age Increased to 73 (and Future Increase to 75): Starting in 2023, the RMD age was raised to 73, with a scheduled increase to 75 by 2033. This shift allows more time for retirement accounts to grow before mandatory distributions begin, benefiting account holders and potentially increasing what beneficiaries might inherit.

2. Clarification on the 10-Year Rule for Successive Beneficiaries: The 10-year rule remains but was clarified for EDBs who initially qualified for life expectancy payouts. Upon the death of an EDB, any remaining assets generally need to be distributed within ten years​​.

3. Elimination of Certain RMD Penalties: SECURE 2.0 temporarily suspended penalties for missed RMDs for specific beneficiaries, acknowledging that the rule changes might create confusion. Beneficiaries in certain circumstances now have a grace period to adjust their distributions without incurring penalties​.

4. New Opportunities for Roth Conversions: SECURE 2.0’s encouragement of Roth conversions aligns well with tax planning for beneficiaries. Roth accounts are not subject to RMDs during the original account holder’s life, potentially simplifying inheritance and enhancing the value for beneficiaries due to tax-free withdrawals​.

Practical Impact for Beneficiaries

The rapid changes brought by both SECURE Acts underscore the need for strategic planning:

• Beneficiary Designations Matter: Properly designating eligible beneficiaries can provide valuable flexibility under the new rules.

• Tax Planning for Heirs: Since distributions must often be taken within a shorter time, beneficiaries may face higher tax obligations. Strategies like Roth conversions can help mitigate this.

• Estate Plan Revisions: Account owners should review and possibly revise their estate plans to align with SECURE 2.0's distribution requirements and tax implications.

By staying informed and planning accordingly, beneficiaries can better manage inherited accounts under these complex rules. Consulting with an estate planning attorney or tax professional is highly advisable to navigate these changes effectively.

Assembling a Team of Life Advisors: Estate Planning Attorney, Financial Advisor, CPA, and Insurance Advisor

As you navigate significant life milestones—whether it’s buying a home, starting a family, launching a business, or planning for retirement—you’ll face a variety of financial, legal, and personal challenges. These milestones represent exciting opportunities, but they also come with complex decisions that require expert guidance. To ensure that you’re making informed choices and protecting your future, it’s crucial to assemble a team of trusted advisors, including an estate planning attorney, financial advisor, CPA, and insurance advisor. Here’s why each professional is vital in helping you achieve your goals.

1. Comprehensive Guidance for Every Aspect of Your Plan

No significant life event happens in isolation. Whether you’re making financial decisions, addressing tax concerns, or protecting your assets, each aspect of your plan influences the other. A collaborative team of advisors can provide holistic advice, ensuring that all areas—legal, financial, tax, and risk management—are covered.

Key Advisors:

• Estate Planning Attorney: Ensures that your assets are protected and that your estate plan (wills, trusts, etc.) reflects your current wishes, especially after life events like marriage, divorce, or having children.

• Financial Advisor: Helps you create a personalized financial strategy for reaching your goals, from saving for retirement to growing wealth through investments.

• CPA (Certified Public Accountant): Guides you on tax planning, ensuring you’re maximizing tax savings and staying compliant with changing tax laws.

• Insurance Advisor: Helps you protect your assets and loved ones by ensuring you have the right insurance coverage (life, health, disability, long-term care, etc.) to mitigate financial risk.

This team approach ensures that you’re making decisions that align with your overall life plan, avoiding costly mistakes or overlooked details.

2. Tailored Planning for Life Events and Milestones

Each major life milestone—whether it’s buying a home, growing your family, or preparing for retirement—presents unique challenges. By working with a team of advisors, you can ensure that each event is handled with a strategy tailored to your specific needs and goals.

Example Milestones:

• Buying a Home: A financial advisor helps you plan for the down payment and manage the mortgage process. Your CPA advises on tax implications, while an estate planning attorney ensures the property is titled correctly for your estate plan. An insurance advisor ensures your home is adequately insured to protect against risk.

• Starting a Family: Your financial advisor helps with budgeting for future expenses, such as education. Your estate planning attorney updates your will or trust, while your CPA advises on tax benefits for dependents. Your insurance advisor reviews your life insurance coverage to ensure your family is protected in case of the unexpected.

• Planning for Retirement: A financial advisor designs an investment strategy, your CPA ensures tax efficiency, and your estate planning attorney aligns your retirement goals with your estate plan. Your insurance advisor may recommend long-term care insurance or adjustments to health coverage to safeguard your retirement years.

This level of coordination allows you to manage each milestone effectively, knowing that no important aspect is overlooked.

3. Tax Efficiency, Legal Protection, and Risk Management

Major life decisions often come with tax consequences, legal considerations, and potential risks. Without a team of advisors, it can be challenging to keep up with changes in laws and regulations. Your advisors work together to keep your financial and legal plans in alignment, while also protecting you from unexpected risks.

How Each Advisor Helps:

• CPA: Ensures your financial strategies are tax-efficient, helping you reduce taxes on income, investments, and estates.

• Estate Planning Attorney: Keeps your legal documents, like wills, trusts, and powers of attorney, compliant with current laws, and makes sure your estate is protected.

• Insurance Advisor: Helps you manage risk by making sure you have the right coverage to protect against health issues, property loss, disability, or death. They can also recommend long-term care insurance and liability coverage for added protection.

• Financial Advisor: Guides your investment strategy, keeping risk tolerance and tax efficiency in mind while ensuring your long-term financial goals are met.

Together, these professionals safeguard your wealth, optimize your tax situation, and provide legal protections, allowing you to focus on your life goals with peace of mind.

4. Risk Management: Protecting Your Future and Family

Life is unpredictable, and having a plan for the unexpected is crucial. Whether you’re dealing with health challenges, sudden financial setbacks, or changes in family dynamics, your team of advisors can help you minimize risk and ensure you’re prepared for any curveballs life throws your way.

Risk Management Considerations:

• Insurance Advisor: Ensures you have the right types of insurance to protect against life’s uncertainties, such as life insurance, disability insurance, and long-term care coverage.

• Financial Advisor: Recommends diversification strategies and insurance-backed investment products to help manage financial risk.

• Estate Planning Attorney: Prepares your estate to minimize risks, such as legal challenges or probate delays, ensuring your assets are distributed according to your wishes.

• CPA: Advises on how to handle the tax implications of unexpected events, like sudden inheritance, medical expenses, or asset sales, ensuring that you’re protected from tax-related pitfalls.

Having a robust risk management plan in place means you can rest assured that your financial legacy is secure, no matter what challenges you may face.

5. Long-Term Success and Peace of Mind

By assembling a team of expert advisors, you ensure that your financial, legal, and insurance needs are proactively managed over the long term. This proactive approach means that as your life changes—whether through new financial goals, tax laws, or evolving family circumstances—your team will be there to adjust your strategy, keeping everything on track.

Long-Term Benefits:

• Regular reviews and updates to your estate plan, financial strategy, and insurance coverage

• Continuous monitoring of tax laws and legal developments that could impact your plans

• A well-coordinated strategy that protects your wealth, reduces risk, and secures your family’s future

A team of advisors provides not just advice, but peace of mind, knowing that your interests are protected and your goals are being actively pursued.

Major life milestones often involve more than just financial decisions—they require careful coordination across legal, financial, and insurance strategies. By assembling a team of advisors, including an estate planning attorney, financial advisor, CPA, and insurance advisor, you can ensure that every aspect of your plan is optimized to protect your future. Don’t wait until after a major event to put your team in place—start building your advisory team today to ensure you’re fully prepared for the journey ahead.

If you’re considering assembling a team of advisors or need help getting started, reach out to us to begin safeguarding your future and achieving your goals. Our professional network is your professional network.

How to Navigate Proposition 19 When Inheriting Real Estate

If you’re anticipating inheriting real estate from an older family member, understanding how Proposition 19 impacts property taxes is essential to making informed decisions. While inheriting property can be a valuable asset, California’s property tax laws present challenges that could result in significant financial obligations.

Let’s explore the potential pitfalls of Proposition 19 and consider strategies to minimize property taxes, ensuring you can retain the family home and maximize its value for future generations.

What is Proposition 19?

Passed by California voters in November 2020, Proposition 19 made significant changes to the rules governing property tax reassessment upon inheritance. Under prior law, real estate passed from parents to children could maintain its existing low property tax assessment, thanks to Proposition 13, which capped property taxes at 1% of a home’s assessed value and limited yearly increases to 2%.

With Proposition 19, however, several key changes took effect:

1. Limited Parent-to-Child Exclusion: This exclusion from property tax reassessment only applies if the property is the parent’s primary residence AND the child uses the inherited property as their primary residence. If the property is used as a rental or vacation home, it will be reassessed to its current market value, often resulting in a sharp increase in property taxes.

2. Cap on Exclusion Amount: Even if the child makes the inherited property their primary residence, the exclusion is limited to the home’s existing assessed value plus $1 million. Any portion of the property’s market value that exceeds this threshold will be reassessed at the current market rate.

Pitfalls of Inheriting Real Estate under Proposition 19

1. Higher Property Taxes on Non-Primary Residences

If you inherit a property and choose to rent it out or use it as a second home, it will be reassessed at its current market value. This can lead to much higher property taxes, sometimes making the property unaffordable to keep.

2. Substantial Tax Increases for High-Value Properties

Even if you plan to live in the inherited home, real estate in areas with high market values can still trigger higher property taxes. With the exclusion capped at $1 million over the home’s assessed value, properties in the San Francisco Bay Area, Los Angeles, and San Diego can easily exceed this threshold.

For example, if a home is currently assessed at $500,000 for property tax purposes but is now worth $2.5 million, the exclusion only applies to $1.5 million ($500,000 assessed value plus $1 million). This leaves $1 million subject to reassessment at market rates, potentially leading to a significant tax increase.

3. Pressure to Sell Inherited Property

Increased property taxes may force some heirs to sell family homes they would prefer to keep. This can disrupt long-term wealth-building opportunities and erode generational property ownership, particularly for families who have owned real estate for decades.

Solutions to Minimize Property Taxes

While Proposition 19 presents challenges, several strategies can help reduce the financial burden and allow you to retain inherited property.

1. Move into the Inherited Property

One way to avoid a full property tax reassessment is by making the inherited property your primary residence. By doing so, you can take advantage of the $1 million exclusion from reassessment. Though this might not eliminate all tax increases, it can prevent a more drastic rise in property taxes.

For example, if the home’s current assessed value is $500,000 and its market value is $2 million, the new assessed value would be $1 million (market value minus the exclusion), rather than the full $2 million, significantly reducing the tax increase.

2. Consider Gifting the Property Before Death

For some families, it may be advantageous to transfer ownership of the property before the original owners pass away. Gifting the property while the older generation is still alive can prevent Proposition 19 from coming into play. However, this strategy must be carefully planned, as it can have capital gains tax and gift tax implications.

Before proceeding with any gift or transfer of real estate, it’s crucial to consult with an estate planning attorney and a tax advisor to understand the full financial impact and determine the best course of action for your family.

3. Use a Family PARTNERSHIP or LLC

Placing real estate into a family partnership or a limited liability company (LLC) can offer flexibility and long-term planning benefits. While it may not entirely avoid property tax reassessment, it can help structure the transfer of the property in a way that aligns with your broader estate planning goals. An LLC can also offer protection from creditors and help manage the property among multiple heirs.

4. Rent or Sell Strategically

If keeping the property as a primary residence is not an option, renting it out could generate income to cover the increased property taxes. Alternatively, if the property’s value has risen significantly, selling it might make sense. A well-timed sale could provide substantial financial benefits and help avoid the long-term tax burden.

Inheriting real estate in California under Proposition 19 presents a unique set of challenges, especially regarding property tax reassessment. Understanding these rules and being proactive about tax planning can help you navigate the complexities and preserve your family’s assets.

Consulting with an experienced estate planning attorney, CPA, and financial advisor is essential for finding solutions that fit your specific situation. By taking thoughtful steps now, you can protect the value of your inheritance and ensure it remains a valuable resource for your family’s future.

Understanding the Tax Landscape in Comprehensive California Estate Planning

When crafting a comprehensive estate plan in California, understanding the different types of taxes at play is crucial. Each tax—federal estate and gift tax, income taxes on capital gains, and county property taxes—has unique implications, and strategies to minimize one may inadvertently increase exposure to another.

Federal Estate and Gift Tax:
The federal estate tax applies to the transfer of an individual’s assets at death, while the gift tax applies to transfers made during life. As of 2024, the federal estate and gift tax exemption is $13.61 million per individual, meaning estates valued below this threshold are not subject to federal estate tax. However, for some individuals and families, this tax can be significant, and strategies like gifting or creating trusts are often employed to minimize exposure.

Federal and State Income Taxes on Capital Gains:
Capital gains taxes are incurred when assets are sold for more than their purchase price. In California, both federal and state income taxes apply to these gains. When designing an estate plan, it’s essential to consider the potential capital gains tax implications, especially when transferring appreciated assets, as strategies that minimize estate tax might trigger substantial capital gains taxes.

County Property Tax:
California’s Proposition 13 generally caps property tax increases at 2% per year, based on the property’s assessed value at the time of purchase. However, transferring real estate, either during life or at death, can trigger a reassessment of the property’s value, potentially leading to a significant increase in property taxes. Certain exemptions exist, such as transfers between parents and children, but many of these exemptions have been limited by Proposition 19.

Navigating the Interplay of Taxes:
The key challenge in estate planning is that strategies to mitigate one type of tax can increase exposure to another. For example, gifting appreciated assets during life can reduce the taxable estate, but it also transfers the donor’s tax basis to the recipient, potentially increasing capital gains taxes when the asset is sold. Similarly, transferring real estate can avoid estate tax but might lead to a reassessment and higher property taxes.

Effective estate planning requires balancing these competing tax considerations while keeping the client’s overall goals in focus. A holistic approach, often involving careful timing of transfers and the use of specialized trusts, is essential to minimize the total tax burden and preserve wealth across generations.

By understanding and addressing the interaction between these taxes, estate planning can be tailored to meet clients’ needs and objectives, ensuring that their legacy is preserved with minimal tax exposure.

Navigating Potential Estate Tax Changes: Comprehensive Strategies for Families with Net Worth Between $7 Million and $14 Million

The potential expiration of the Tax Cuts and Jobs Act (TCJA) of 2017 has brought estate tax planning to the forefront for many families. The TCJA significantly increased the federal estate tax exemption to $13.61 million per individual ($27.22 million for married couples) in 2024. However, if Congress does not act to extend these provisions by the end of 2025, the exemption could revert to approximately $6 million per individual, potentially subjecting more estates to federal estate tax.

For families with net worths between $7 million and $14 million, these changes could have a substantial impact. In response, it is crucial to explore and implement estate planning strategies that can minimize estate tax exposure before its too late. Here, we examine a range of sophisticated techniques, from trusts and gifting strategies to specialized partnerships and insurance solutions.

1. Grantor Retained Trusts (GRTs)

Grantor Retained Trusts, such as Grantor Retained Annuity Trusts (GRATs) and Grantor Retained Unitrusts (GRUTs), allow the grantor to transfer assets to beneficiaries while retaining an interest in the trust. This approach can significantly reduce the taxable value of the gift, thereby lowering estate tax exposure.

2. Charitable Remainder Trusts (CRTs)

A Charitable Remainder Trust (CRT) provides a dual benefit: income for the grantor or other beneficiaries for a specified period and a charitable donation at the end of the trust term. The CRT allows the grantor to avoid immediate capital gains taxes on the sale of appreciated assets, while also reducing the size of the taxable estate.

3. Intentionally Defective Grantor Trusts (IDGTs)

An Intentionally Defective Grantor Trust (IDGT) is a powerful tool for freezing the value of appreciating assets within the estate while allowing them to grow outside the estate. By selling assets to an IDGT in exchange for a promissory note, the grantor can remove substantial value from the taxable estate while continuing to pay income taxes on the trust’s earnings, further reducing the estate’s value over time.

4. Qualified Personal Residence Trusts (QPRTs)

A Qualified Personal Residence Trust (QPRT) is an effective way to transfer a primary or secondary residence out of the estate at a reduced gift tax value. In a QPRT, the grantor transfers ownership of the residence to a trust but retains the right to live in the home for a specified period. If the grantor survives the trust term, the residence passes to the beneficiaries at a discounted value, reducing the estate tax burden. If the grantor does not survive the term, the residence is included in the estate, but any appreciation during the trust term is excluded.

5. Family Limited Partnerships (FLPs) and Family LLCs

Family Limited Partnerships (FLPs) and Family Limited Liability Companies (LLCs) offer a way to transfer wealth to the next generation while retaining control over the assets. By placing assets into an FLP or Family LLC, the grantor can gift partnership or membership interests to family members at a discounted value due to lack of marketability and minority interest discounts. This not only reduces the taxable estate but also provides a structured way to manage and protect family assets.

6. Irrevocable Life Insurance Trusts (ILITs)

An Irrevocable Life Insurance Trust (ILIT) is a valuable tool for providing liquidity to pay estate taxes without forcing the sale of other assets. By setting up an ILIT and transferring ownership of a life insurance policy to the trust, the proceeds from the policy are kept out of the taxable estate. The trust can then use these proceeds to pay estate taxes or provide for beneficiaries, ensuring that other valuable assets can remain intact.

7. Gifting Strategies

With the potential reduction in the estate tax exemption, now is an opportune time to consider gifting strategies. The annual gift tax exclusion allows individuals to gift up to $18,000 per recipient in 2024 without incurring gift tax. Larger lifetime gifts, made under the current exemption limits, can further reduce the taxable estate. Vehicles such as Family Limited Partnerships (FLPs) or Family LLCs can be used to structure discounted gifts, providing additional estate tax benefits.

8. Generation-Skipping Transfer (GST) Trusts

A Generation-Skipping Transfer (GST) Trust allows families to transfer wealth to grandchildren or even great-grandchildren, skipping the children’s generation to minimize estate taxes over multiple generations. The GST tax exemption, which is tied to the federal estate tax exemption, can be used to fund such trusts, reducing the overall estate tax burden.

9. Spousal Lifetime Access Trusts (SLATs)

A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust where one spouse makes a gift to the trust for the benefit of the other spouse and potentially other beneficiaries. This technique allows the gifting spouse to remove assets from their taxable estate while still allowing indirect access to the trust’s assets through the other spouse. SLATs are particularly useful in planning for potential future reductions in the estate tax exemption.

10. Intra-Family Loans

Intra-family loans allow wealth to be transferred to younger generations at favorable interest rates, as set by the IRS’s Applicable Federal Rate (AFR). These loans can be used to finance the purchase of appreciating assets by younger family members, effectively freezing the value of those assets in the estate of the older generation. If structured properly, intra-family loans can provide significant estate tax savings.

The potential reduction in estate tax exemptions in 2026 highlights the importance of proactive estate planning for families with net worths between $7 million and $14 million. By employing a combination of strategies—including GRTs, CRTs, IDGTs, QPRTs, FLPs, ILITs, gifting plans, GST trusts, SLATs, and intra-family loans—families can effectively manage their estate tax exposure and preserve wealth for future generations. Not all techniques work in all cases. Complex and sophisticated plans take into account many factors, including family goals, legacy, tax circumstances, and interest rate environment.

Estate planning is a complex and highly personalized process that requires the guidance of an experienced estate planning attorney, financial advisors, and accountants. By acting now, families can take advantage of current exemptions and implement strategies that will protect their wealth from potential tax law changes. Early planning and strategic action are key to securing your family’s financial future.

Upstream Gifting: Benefits and Pitfalls

Transferring appreciated assets to an older generation, such as parents, can be a strategic move to take advantage of the "step up" in basis at death, potentially saving significant capital gains taxes. However, while this strategy offers tax advantages, it also comes with risks and complexities that must be carefully considered.

Understanding the Step Up in Basis

When an individual inherits property, the tax basis of that property is "stepped up" to its fair market value at the decedent's date of death. This means that if the asset has appreciated over the years, the capital gains tax liability on the inherited asset is based on the value at the time of death, rather than the original purchase price. For example, if a parent purchased a property for $100,000, and it was worth $500,000 at their death, the new basis for the inheritor becomes $500,000. This can result in substantial tax savings for the heir when they eventually sell the asset.

The Strategy: Gifting Appreciated Assets to an Older Parent

The strategy involves transferring ownership of appreciated assets (such as real estate or stocks) to an older parent. Upon the parent's death, the asset would then be inherited back by the original owner or another heir, with the benefit of a stepped-up basis.

Potential Benefits

1. Tax Savings: The primary benefit is the potential elimination or significant reduction of capital gains taxes due to the stepped-up basis.

2. Estate Planning: This can be a useful tool in estate planning, especially when dealing with highly appreciated assets.

Potential Pitfalls

1. Loss of Control: Once the asset is transferred, the original owner no longer has control over it. The parent now legally owns the asset, and there is a risk they might sell it or bequeath it to someone else.

2. Health and Longevity Risks: If the parent lives much longer than anticipated, the strategy's benefits might be delayed, and the original owner could face unforeseen financial complications.

3. Medicaid Eligibility: Transferring assets to an older parent could affect their eligibility for Medicaid and other needs-based government benefits.

4. Gift Tax Implications: The transfer could trigger gift tax consequences if the value of the asset exceeds the annual gift tax exclusion or the lifetime gift tax exemption.

5. Potential Family Conflicts: Relying on the good faith of the parent to return the asset after their death can lead to family disputes, especially if the parent’s estate plan is not clear or if there are other heirs involved.

Ensuring a Smooth Process

To mitigate these risks, consider the following steps:

1. Legal Agreements: Draft legal documents that outline the intent of the transfer and the expected return of the asset upon the parent's death. While not foolproof, this can provide some level of assurance.

2. Trusts: Setting up a trust can help retain some control over the asset and provide clear instructions for its handling upon the parent’s death.

3. Clear Communication: Ensure all family members are aware of the plan to avoid misunderstandings and potential conflicts.

4. Professional Advice: Consult with an estate planning attorney and a tax advisor to navigate the legal and tax implications properly.

Transferring appreciated assets to an older generation to take advantage of a step up in basis can be an effective tax-saving strategy. However, the inherent risks and potential pitfalls necessitate careful planning, clear legal agreements, and trust in the older generation. By working closely with legal and financial professionals, you can ensure that this strategy aligns with your overall estate planning goals and minimizes potential complications.

A Brief Explanation of the Federal Estate and Gift Tax

Planning your estate involves understanding the federal estate and gift tax system. The federal estate tax is a tax on the transfer of your estate after you pass away. The gift tax, on the other hand, applies to the transfer of money or property while you are alive. These taxes are interconnected, sharing a unified exemption amount.

Exemptions and Tax Rates

Unified Exemption: For 2024, the federal estate and gift tax exemption is $13.61 million ($12.92 million for 2023) per individual. This means you can transfer up to $13.61 million in gifts and estate value without incurring any federal tax. For married couples, this amount effectively doubles to $27.22 million.

Tax Rate: If your estate exceeds the exemption amount, it will be taxed at rates ranging from 18% to 40%, depending on the value over the exemption threshold.

Annual Gift Tax Exclusion: You can give up to $18,000 per recipient per year without it counting against your lifetime exemption. Married couples can jointly give $36,000 per recipient annually.

Methods to Limit Estate Tax Exposure

1. Lifetime Gifting: Utilize the annual gift tax exclusion to reduce the size of your taxable estate.

2. Charitable Donations: Donations to qualified charities can reduce your estate's value.

3. Irrevocable Trusts: Placing assets in an irrevocable trust can remove them from your taxable estate. (Placing assets in a revocable (living) trust does not shield your assets from the estate tax.)

4. Portability/Unlimited Marital Deduction: If you are married, ensure your spouse uses any unused portion of your exemption.

5. Liquidity to Pay Taxes: Using tools like life insurance to provide liquidity to your estate to pay any taxes owed.

State-Level Estate and Inheritance Taxes

In addition to the federal taxes, some states impose their own estate or inheritance taxes with different exemption amounts and rates. California does not impose either tax.

Understanding the federal estate and gift tax system is crucial for effective estate planning. Knowing the exemptions, tax rates, and methods to limit exposure can help ensure your assets are distributed according to your wishes with minimal tax impact. Consulting with an estate planning attorney can provide personalized strategies to protect your legacy and meet your estate planning goals.

The Strategic Role of Life Insurance in Estate Planning

Estate planning is an essential financial strategy that ensures your assets are managed and transferred according to your wishes after your passing. While estate planning often involves wills, trusts, and tax planning, life insurance is a pivotal component that can enhance the effectiveness of these efforts.

Liquidity When It's Most Needed

One of the primary benefits of incorporating life insurance into estate planning is the provision of liquidity. Upon the death of an estate holder, there are immediate expenses to be met, including funeral costs, outstanding debts, and perhaps taxes. Life insurance policies can be designed to pay out quickly upon the insured’s death, providing the necessary funds to cover these expenses without the need to hastily liquidate other assets, which might otherwise be sold at an inopportune time or at a loss, or may have other sentimental value (e.g., a house that has been in the bloodline for generations).

Providing for Heirs

Life insurance can ensure that heirs receive a significant cash inheritance without any delay. This is particularly beneficial for those who wish to provide for their loved ones immediately after their passing. Moreover, life insurance payouts are generally tax-free, which means beneficiaries receive the full amount of the intended gift without the deductions associated with other types of inheritances.

Equalizing Inheritances

In situations where the assets are difficult to divide equally, such as in businesses or real estate, life insurance can be used to equalize inheritances among multiple beneficiaries. For instance, if one child inherits a family business, a life insurance policy can provide comparable value to other children, ensuring fair and equitable distribution of the estate.

Estate Taxes and Other Costs

For larger estates, federal estate taxes can pose a significant burden. Life insurance can be a strategic tool to pay these taxes without the need to liquidate other estate assets. By setting up an irrevocable life insurance trust (ILIT), the proceeds from the life insurance policy can be excluded from the taxable estate, potentially saving a significant amount in taxes and preserving more of the estate for the beneficiaries.

Business Succession Planning

For business owners, life insurance is a key element in succession planning. It can provide the funds necessary for a partner or group of employees to buy out the deceased owner’s interest in the company, facilitating a smooth transition and ensuring the business’s continuity.

Life insurance offers a versatile and powerful tool for estate planning. Its ability to provide immediate liquidity, equalize inheritances, cover estate taxes, and facilitate business succession planning makes it indispensable in a well-rounded estate strategy. As with any financial planning, it's important to consult with legal and financial advisors to tailor life insurance coverage to your specific needs and goals, ensuring that your legacy is preserved and protected according to your wishes. Through careful planning and strategic use of life insurance, you can secure peace of mind for yourself and your heirs.

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.

Explainer: Property Tax in California

In California, property taxes are assessed by the county assessor's office in the county where a property is located. This is an ownership tax set by the voters of the state of California, and has nothing to do with the federal government, the president, or Congress.

Property taxes are imposed based on the “assessed value” of a property, which is usually determined by the purchase price of the property. Property owners receive a property tax bill each year that reflects the assessed value of their property and the applicable tax rate. Property owners can choose to pay their property taxes in two installments, due on December 10th and April 10th of each year.

Proposition 13, passed by voter initiative in 1978, is a landmark California law that limits the amount of property tax that can be imposed on a property to 1% of the property's market value at the time of purchase, with annual increases of no more than 2%. This means that even if the market value of a property increases over time, the assessed value (the purchase price) essentially freezes in time until the property is sold again. This is why each property owner on a given city block pays a different property tax rate, since each parcel was purchased at a different time at a different price. When a property is sold again, the assessed value is reassessed, and the property taxes are recalculated for the new owner.

Let’s use an example. If a home is purchased for $500,000, that becomes its assessed value. Under Prop 13, the property taxes would be calculated by imposing a 1% tax on the assessed value of $500,000, or $5,000. The property owner owes $5,000 per year in property taxes, and that amount can only be increased by 2% per year (~$100). So even if the property increases in market value to $2,000,000, the property owner still only owes $5,000 per year (plus increases) so long as they continue owning the property.

Property taxes are vital to a community. Most school districts in California are funded by property tax revenue. That’s a huge reason why you see well funded school districts where homes have a high property value. And conversely, you may see struggling school districts in neighborhoods with stagnant or depressed property values. Those “good” schools then further increase the desire to live in that school district, and consequently increase the surrounding property values in that neighborhood, to create an echo chamber of increasing property values and tax revenue. Property values, and by extension property tax revenue, go hand in hand with well funded school districts.

Up until recently, Proposition 58, effective since 1986, allowed parents to pass to their children their property tax rate. This was called the “parent-child exclusion”. The parent-child exclusion allowed children to inherit property that often had a market value in the millions but only pay property taxes based upon the price their parents (and sometimes grandparents) paid for the property. So, in our example above, a child could inherit that property worth $2,000,000, and still only pay $5,000 in property taxes for their entire life. And then they could pass that property to their children with the same property tax rate! If the property was reassessed upon the inheritance, the property taxes would have shot up to $20,000 (1% of $2,000,000).

This all changed with Proposition 19.

Prop 19, passed in 2020 and in effect since 2021, limits the ability of children to inherit property from their parents without reassessment of the property's value. Under the new law, the property must be the primary residence of the giving parent, must be used as the primary residence of the inheriting child, and the difference in assessed value and the market value is capped at $1 million over the parents’ assessed value. Put another way, the parent-child exclusion is essentially eliminated unless multiple conditions are met. Prop 19 also allows homeowners who are over 55 years old, disabled, or victims of natural disasters to transfer their property tax rate from their existing home to a new home of equal or lesser value anywhere in California. This means that these homeowners can move without facing a significant increase in property taxes.

Prop 13 and 19 are the law of the land for California property taxes. While homeowners over 55 years of age will experience new flexibility in moving to a new home while paying the same property taxes, more inherited properties will be reassessed, thus increasing tax revenue to help defray the costs of allowing those over 55 to keep their tax rate. Proper planning on both fronts ahead of time is recommended to avoid any unnecessary increases in the costs of living for you and for 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.

Explainer: the Estate and Gift Tax

The Estate and Gift Tax is a tax scheme that imposes a tax on the transfer of an asset. The Estate Tax (otherwise known as the Death Tax; they’re the same thing) requires the transfer to be made after the giver’s death. So, think of an inheritance when you think of the Estate Tax. And the Gift Tax requires the transfer to be completed during the giver’s life. So, think of a birthday or anniversary gift. But in both scenarios, something is being transferred. Also keep in mind that the transfer is being made gratuitously, meaning there is no sale taking place. It must be a gift.

The Estate and Gift Tax is a tax on the grantor of the transfer. That’s the person or estate of a person that is making the gift (the giver). The tax is imposed by the Internal Revenue Service (IRS), our federal taxing authority. Note that we do not have a federal inheritance tax–a tax on the recipient of a transfer. There are a few states that do have an inheritance tax, but California is not one of them. An inheritance tax may apply if the recipient of a gift resides in a state or country that imposes an inheritance tax.

The Estate and Gift Tax is really easy to calculate. It’s a flat tax, meaning that it applies equally to every grantor of a transfer. The federal government imposes a flat 40% tax of the fair market value of the asset being transferred. That is not a typo. As an example, if I gave my friend $1,000 for her birthday, I would have to pay $400 to the IRS for making this gift. It’s an identical result if I left my friend a $1,000 inheritance from my estate. My estate would be on the hook for a $400 tax.

Hold up. Why have we not heard of anyone paying this tax?? And why is no one upset with this??

Enter: the estate and gift tax exemption.

The Estate and Gift tax are linked by an exemption amount. An exemption is a magic number that Congress selects, and it applies to every US citizen and green card holder. Congress has decided that so long as you do not make gifts in excess of your exemption amount, then no tax is owed. The exemption amount is set periodically by Congress, and it gets adjusted for inflation annually. When someone dies, all of the gifts they made during their life are added to the value of stuff they own upon their death, and that total is measured against the exemption amount.

Ok, simple enough. How do we know our applicable exemption amount?

The current exemption amount is set at $10,000,000 per person. That’s not a typo, either.  It’s indexed for inflation annually. So for 2023, the exemption amount is $12,920,000. Additionally, if you’re married, you essentially get to combine your exemption amount with your spouse’s exemption amount. In short, if you are an unmarried person, you can transfer up to $12,920,000 in assets and pay no estate taxes. If you’re married, you can jointly transfer up to $25,840,000 in assets and pay no estate taxes. Only the amount that exceeds the exemption is subject to the 40% tax. For example, if an unmarried person dies owning $14,000,000 in assets, only $1,080,000 ($14,000,000 - $12,920,000) is subject to the 40% flat tax, or $432,000 in taxes owed on a $14,000,000 estate.

How does the IRS know whether lifetime gifts were made, and how much they amounted to?

Just like we are required to report our income every year on a Form 1040, we are also required to report any gifts made in a given year on a Form 709. When you report the gift, the IRS walks over to your file and deducts the amount of that gift from your $12,920,000 exemption amount. No taxes are owed until you run out of exemption! But here’s the thing: you only have to report gifts that are in excess of what is called the annual exclusion. 

The annual exclusion is another number set by Congress that allows each person to make a certain value of gifts every year, to every recipient, and not tell a soul, including the IRS. The current annual exclusion is set to $17,000. So, for example, I can give each one of my friends up to $17,000, per year, and not have to report that on a Form 709. I can combine my exclusion with my spouse’s exclusion, and make up to $34,000 in gifts per recipient, per year, and not report it on a Form 709. This is why you never hear of anyone filing gift tax returns after birthday parties. If only we were all so generous!

So what happens if, for example, parents assist a child with a downpayment of a home, in excess of $34,000 in a given year?

If a gift is made in excess of the annual exclusion, then you deduct the amount excluded and then file a gift tax return for the amount in excess. Let’s say parents give a $200,000 gift to a child to purchase a home. They would deduct the $34,000 ($17,000 x 2 parents = $34,000) they can jointly give to the child in a year and not report it, then report the remaining $166,000 ($200,000 - $34,000). Each parent would file a Form 709 declaring a gift of $83,000 each. The IRS walks over to each parent’s file, and deducts $83,000 from each of their $12,920,000 exemption. If they haven’t gone over the exemption amount, no taxes owed on that transfer.

Whew! That’s a lot of information to digest.

To sum it up, we all get an Estate and Gift Tax Exemption. It’s set by Congress, and annually it gets adjusted for inflation. This year’s amount is set at $12,920,000. Spouses can effectively combine that amount. The tax is a flat 40% tax of the fair market value of the transferred asset, and only the giver of the gift/inheritance is on the hook. But the giver only pays it when they exhaust the exemption amount, and only the amount in excess of the exemption is taxed. Additionally, only lifetime gifts in excess of the annual exclusion (currently $17,000 per year, per recipient) count against the exemption amount. If you never exceed the exemption amount, you don’t pay any tax.

That all being said, the exemption amount is set to reduce in roughly half (to ~$6,000,000 per person) on January 1, 2026, unless Congress acts. Keep your eyes peeled for the coming months and elections to see where the exemption amount lands.

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.

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.

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.