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.

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.

What is... a conservatorship?

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.    

When we started contemplating this blog post, the world was a vastly different place. Now, in the time of COVID-19, we have unfortunately seen this issue come up many times. This is how it happens: George is 42 years old. He had a high fever and difficulty breathing, and was rushed to the hospital. He was intubated and suddenly isn’t conscious anymore. He didn’t create an estate plan in advance, and did not execute any powers of attorney. 

Who can pay his bills? Who can make medical decisions for him? 

In the absence of powers of attorney, a loved one would need to petition the probate court to become George’s conservator. A conservatorship proceeding protects a person who cannot care for himself or his property. The person making the request is asking the court to appoint him or her as the conservator to make those decisions on behalf of George. The conservator may only make decisions on George’s behalf that are in George’s best interest. 

What does the conservator actually do? 

There are three types of conservatorships: 

1) of the person - in which the conservator manages one’s personal needs (physical, medical, food, clothing, shelter)

2) of the estate - in which the conservator manages one’s financial affairs 

3) of both the person and the estate - in which the conservator does both #1 and #2.

Can conservatorships end? 

Yes. If George gets better, and can manage his own finances and healthcare decisions, the conservatorship is no longer necessary and it terminates. If George passes away, then the obligations of the conservator terminate as well. 

Why do you want to avoid a conservatorship? 

1. It is a court proceeding. This means it takes place in a public forum and it can take a long time to complete. 

2. It is time that your loved one is away from you. You and your loved one want to be together, not in court. 

3. The person who is appointed the conservator may not be the person you want to be making those decisions. 

4. It can be expensive. A court maintains oversight over a conservatorship to ensure that the person is being cared for and that the conservator is meeting fiduciary obligations. Court oversight means paying an attorney an hourly rate, and paying an accountant every year to prepare “accountings” to demonstrate to the court that the conservator is appropriately using George’s funds on George.

Typically, conservatorships occur when someone loses capacity suddenly and is unable to make decisions for him or herself unexpectedly. (See our previous post on incapacity). For example, George was 42 years old and didn’t anticipate being hospitalized. He was generally healthy, and hadn’t yet executed powers of attorney. 

What can I do to avoid a conservatorship? 

It’s actually fairly straightforward. We strongly recommend creating financial and healthcare powers of attorney so that your loved ones can avoid a court proceeding and you can name who YOU want to make these decisions for you. And if it’s appropriate, a living trust can also help in times of incapacity. Contact us today for a free consultation.

What to Consider When Nominating a Guardian

As we told you in our previous post on guardianship,  your elected guardian is a recommendation to a judge stating who you want to care for your child when/if you are unable to do so. 

Sometimes we meet with clients who do not have anyone who lives nearby, or they do not feel they have anyone in their network who is qualified (emotionally, financially, physically) to care for their child/children. If you fall into one of those categories, who else should you think about? 

We suggest that you think about your relatives, friends, and colleagues who share your values. We have found that this is the most important part of selecting a guardian. 

Values can include: 

• Judgment and discretion that generally aligns with your parenting

• Religion/Culture 

• Education 

• Activities that you want your child to participate in/not participate in (e.g. sports, music) 

• Comfort/ability to visit relatives and/or accept visiting relatives 

• Ability or desire to travel for vacation

You can nominate a guardian for your minor child, and your nomination holds a lot of weight. Ultimately, though, a judge needs to sign off on the nomination. And that judge will be concerned with one thing: the best interest of the child who needs a guardian. 

Judges don’t want to uproot a child who is otherwise thriving. Or send a child into a circumstance that will make the child more unstable than maintaining the status quo. However, judges are also typically reticent to send children overseas, especially if the child is a US citizen. By sending someone overseas, the court may lose jurisdiction (i.e. say over the matter). 

Having a judge oversee guardianship provides a level of protection and care for your child. If you nominated someone whose circumstances have changed drastically, you have peace of mind that your child will be placed in the best place for him or her. 

It can feel overwhelming to try to come up with a list of people who you would trust to care for your child. We can help talk this through with you so you can make the best decision for you and your family.

Revising Your Estate Plan

Many times when people create an estate plan, it is one thing on the proverbial “to do” list that might get put off longer than we want. But it feels great when we finally get it  checked off as DONE! And while that should definitely be the case, you should also review -- and revise -- your estate plan periodically. 

We’re in an extraordinary time with COVID19 dictating how we are living our lives in a way that we did not expect. In a world not too long ago, we imagined relying on people making financial or medical decisions for us who did not live near us. We have adequate virtual and digital resources to do things online; and if not, travel was available and relatively easy. This is a different world. 

There are several circumstances that arise that may require revision of your plan: 

The People

• Are the people who you designated to manage your money still the right fit for you? Are they healthy enough to take on that burden? (Remember: financial management comes up during incapacitation as well as at the time of death.) 

• Are you still happy with the list of people who you selected to make healthcare decisions on your behalf? Are they nearby enough to talk to your doctor on short notice? 

• If you have children, are the guardians that you nominated still appropriate? 

• Are the beneficiaries “right”? If you didn’t create an estate plan or a trust with us, does your plan account for your children who have been born/adopted since the plan was created? Or, perhaps your children are married with their own children now. Do you have any issues with the partner that your child chose for them self? Do you want to provide for your grandchildren directly?

The Structure

There are several ways to design an estate plan and big decisions that are made as part of the planning process.

• Did you select a survivor’s trust, but now believe an AB trust might be more appropriate?

• Did you want everything to go to your children outright but now want it to stay in trust for them?

• Did you decide that your children are (more or less) responsible and should be able to receive any potential inheritance sooner or later? 

Your Assets

Right now, the estate tax exemption amount is $11.58 million per person, or $23.16 million per married couple. In 2026, that law is set to sunset if Congress doesn’t act, and the exemption amount will drop to somewhere between $10-12 million. If your assets are starting to approach those exemption amounts, you may want to consider different estate planning tactics. 

Changes in the Law

The laws change and how it can impact your estate plan can change too. For example, have you heard of the Secure Act? It went into effect on January 1, 2020. You can read more about it here. 

Take Action

Just as critical, perhaps you are the potential beneficiary in this scenario. Did your parents create an estate plan a long time ago when you were a child, but it can now be revised to reflect better your current living situation?  There is no better time than now to have this conversation with your parents.

If you already have an estate plan, we recommend that you review it every 2-3 years to make sure that it’s still what you want—and to account for any of the above changes. If you’d like us to conduct a review of your estate plan, whether you created it with us or with someone else, please contact us for a complimentary review. 

An Ambiguous Disposition: Right of Survivorship on Bank Accounts

Late in 2019, the California Court of Appeal issued a decision (Placencia v Strazicich) which impacts people with beneficiaries on bank accounts. 

In the case, Ralph Placencia had a joint bank account that had an express right of survivorship in favor of one of his daughters. However, before he died, Ralph left a will stating that he wanted the proceeds of the bank account to go to all three of his daughters (not just the one whose name was jointly on his account). 

The conflict between the beneficiary designation and Ralph’s will lead to litigation. After analyzing the law, the court determined that a will, in and of itself, cannot render a beneficiary designation ineffective. However, the court did allow for a very limited circumstance where a decedent’s intent, shown by “clear and convincing” evidence, may invalidate a beneficiary designation. Even if that evidence is contained in statements made in a will. 

In other words: if you have a joint account with another person (e.g. a parent), the right of survivorship on the joint account is not absolute. Even though this court decision is very limited in scope, it does reinforce the principle that the right of survivorship will be determined by the decedent’s intent—which can be supported by statements made in a will, among other forms of evidence. 

Make your intentions clear. Almost every case dealing with an ambiguous gift will come down to the decedent’s intent.

March 2020 Webinar on Estate Planning

At the end of March, Matt was featured in a webinar hosted and sponsored by the reSolve Group. He talked about the different estate planning tools that are available to us all and that are especially critical to employ amidst this battle to contain the COVID-19 pandemic.

You Should Really Have a Power of Attorney Right Now

We have written blog posts about powers of attorney in the past, but we want to reiterate the importance of having a power of attorney right NOW, during our shelter-in-place measures to mitigate the spread of COVID-19. 

Powers of attorney give someone else authority to make financial and/or medical decisions on your behalf without your loved one having to go to court to get that authority. 

Here are a few of the most frequent conversations we have had in the past few weeks: 

1. I’m married, so my spouse can just do it. No, just because you’re married, your spouse does NOT have authority to make financial or medical decisions on your behalf.

2. I’ll just deal with it when the time comes. When the time comes, you or your loved one may be in the hospital and already incapacitated. This means that someone would have to go to court to obtain the legal authority to act on your behalf. And, unfortunately, right now, courts are not operating at full capacity due to COVID-19. Remember that the court is also limiting in-person contact, and is only hearing emergency matters. (Not to mention that going to court involves time, expense, and a public proceeding that could be humiliating for the person who is incapacitated.)

3. I’ve been quarantined for 14 days, so I’m not sick. We hope not. We really hope not. But if you leave the house to get groceries or someone drops something on your doorstep, your 14-day clock resets. Why count days? Have a plan in place NOW, when you can and when you don’t have to rely on courts to take action. 

A power of attorney is most effective when utilized in conjunction with a comprehensive estate plan. But, if you do nothing else right now, please execute Powers of Attorney.

Shafae Law COVID-19 Protocol

Our thoughts are with those affected by the virus, particularly those who are sick. We wish them a speedy recovery, and we remain inspired by our healthcare workers, supply chain workers, retail workers, and others who are tirelessly caring for people around the world.

The following is an update on our role in preventing the spread of the virus, and our protocol until the worst passes.

• Both of our offices are remaining open to assist clients with their estate planning documents, but closed to in-person visits.

• We are limiting our interactions to phone/video conference/email only. 

• We are implementing an unusual, temporary protocol to deliver and execute your documents. Our chief focus is to get legal instruments in place and in effect, and we will revisit/amend/revise them once things have returned back to normal, if need be, free of charge.

• Both courts and recorders' offices are limiting their own exposure and implementing their own COVID-19 protocols. Therefore, we may be limited and/or delayed when it comes to probate and real property transfers. Your patience is appreciated.

If you know someone who is in need of estate planning documents (wills, trusts, powers of attorney, etc.), or needs to make a change to existing documents, ask them to contact us for a free video conference/phone consultation. It is precisely in these times of uncertainty where a detailed, comprehensive estate plan—especially medical and financial powers of attorney—is critical. Follow us on Facebook, Twitter, and Instagram for further updates.

What is... an ILIT?

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.

An ILIT (eye-lit) is an irrevocable life insurance trust. It’s a trust that cannot be changed (irrevocable) that is created to be both the owner and the beneficiary of a life insurance policy. Why would you do this? It’s a way of having life insurance proceeds excluded from a taxable estate. 

Remember that estate taxes are calculated by adding up the value of everything you own at your death, and if it’s over the estate tax exemption, your estate owes 40% of the excess over the exemption amount. Well, “everything you own at death” includes the proceeds of any life insurance policies you owned during life. Essentially, an ILIT allows you to gift the money “out” of your estate during your life, but still have control over the proceeds after you die.

If you’re thinking “what about gift taxes?” you’re on track: The trustee of the ILIT sends a letter to the ILIT’s beneficiaries (called a “Crummey” letter) every time you transfer money into the ILIT to pay for the insurance premiums. It advises the ILIT’s beneficiaries that they can ask for their share of the money within a specified period of time. 

Typically, no one actually asks for their share because the benefits of leaving it in the trust to pay life insurance premiums would result in more money, later. If there’s no money to pay the premium, then the policy will lapse and there won’t be anything for the beneficiary later. By issuing this letter, the money you transfer to the trustee of the ILIT becomes a “present interest” gift. In other words, that letter transforms your transfer of premium money into the trust into a lifetime gift that can be eligible for the gift tax annual exclusion. The annual exclusion allows you to make gifts up to $15,000 per year per person and not result in any gift taxes owed.

There are certain rules: 

1. You can’t be the trustee of the ILIT

2. Because it’s irrevocable, you fund it and you walk away. The trustee is in control of it. 

3. When the insured person dies, the trustee invests the insurance proceeds and administers the trust for the beneficiaries of the trust. 

The ILIT trustee possesses all incidents of ownership in the policy, so the ILIT can provide the insured’s estate with liquidity, while shielding the insurance proceeds or assets bought with the proceeds from estate tax when the insured dies. 

Flipped the other way: if you own the policy and retain control, you can withdraw cash or change beneficiaries as much as you want during your lifetime. This makes it YOUR asset. This also means that the IRS would include the proceeds of your policy in your estate’s value when you die. 

For example: the current exemption amount for an individual is $11.58 million . If you have $10 million in assets, and a $2 million life insurance policy that you control and maintain, then you have $12 million of taxable assets — over the current exemption amount. If, however, the $2 million insurance policy is in an ILIT, then it’s not part of your taxable assets, and you can (assuming it’s done correctly) stay below the exemption amount, and in this case avoid owing estate taxes.

An ILIT can either be funded with an existing life insurance policy, or the ILIT can purchase the policy on your behalf. If you opt to transfer an existing life insurance policy into an ILIT and you die within 3 years of that transfer, the IRS will still include the proceeds in your estate for tax purposes. If you have the ILIT purchase the life insurance policy, you can avoid this, but you must fund the trust with sufficient money over the years to pay the premiums. 

If you and/or your spouse are the chief breadwinner(s) of the household, and that income is abruptly diminished while your children are young and there are substantial monthly expenses, oftentimes families are challenged to make ends meet. For some clients, especially those with young children and who also have a substantial mortgage to pay, life insurance can be a useful tool to “inject” cash into an estate at an unexpected time of need to help pay for your child’s living expenses so that your children’s home would not need to be sold to defray costs.

Make sense? If not, contact us!

What is... a Pet Trust?

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.

If you have a pet, you may be concerned about who cares for your pet when you are no longer able.

One approach is to create a pet trust. This is a special type of trust for the care of domestic animals or pets for the lifetime of the animal. 

The pet trust functions as a trust for a human beneficiary, like one’s children, except that the funds are used to support the animal’s life instead. Since we are not dealing with human beneficiaries, there are some looser requirements. For example, there is no reporting or accounting requirement for a trust with assets less than $40,000. Pet trusts also don’t have a duration limitation as other trusts do. 

Some things to consider: what if the pet dies before the money is all spent? Or before you do (and you forget to call us to update your documents)? Where would you want the leftover (residuary) to go? 

People like to have a pet trust in place because it provides a structure for caring for the pet, as well as funds for that to happen. Pet trusts are not the only way to care for pets. Check back for our upcoming post about caring for your pets!

US Treasury Confirms No Clawback

The Tax Cuts and Jobs Act (“Trump Tax Law”) of 2017 increased the federal estate tax exemption from $5 million dollars per taxpayer to $10 million. That amount is effectively doubled for married couples. The exemption amount is indexed for inflation, meaning that it goes up incrementally every year. It is the exemption amount in the year that someone dies that is used to calculate estate taxes owed. For this year (2020), the exemption amount, with inflation, is $11.58 million per person, or $23.16 million for a married couple. In simple terms, if someone dies this year owning less than $11.58 million (whether things, homes, cash, etc.), then no federal estate taxes are owed. 

The estate tax (gifts at the time of death) exemption is linked to our gift tax system (gifts during life). The amount of lifetime gifts you give is added to the total amount of property you own when you die. For example, if George makes $5 million of gifts during his life, and then dies owning $7 million worth of property, then he would be on the hook for $12 million of gifts. That would use  his entire $11.58 million dollar exemption, and his estate would owe some estate taxes. I know, it’s a pretty good problem to have.

The Trump Tax Law provision elevating the estate tax exemption is set to sunset (expire) on January 1, 2026. If Congress does nothing between now and then, the exemption level will revert back to the $5 million amount, indexed for inflation. Essentially, the exemption will be cut in half if Congress does nothing.

So what happens if someone makes lifetime gifts in 2025, and then the exemption amount reverts back to the lower amount in 2026, and then the person dies thereafter? (To use the example above, George gives $5 million in 2025 and then dies in 2027 when the exemption amount is “only” $5 million, indexed for inflation.)

On November 26, 2019, the Treasury Department and the IRS issued final regulations adopting the regulations that were proposed in November of 2018, effectively ensuring that if a decedent uses the increased exclusion amount for gifts made while the Trump Tax Law is in effect and dies after the sunset of the Trump Tax Law, the decedent won’t be treated as having made taxable gifts in excess of his or her exclusion amount.

In plain English, this means that there won’t be a clawback if George uses the exclusion amount in effect now, even if the exclusion amount is lower when George dies.  For George, the IRS will use the greater of the exclusion amount used during the transfer or on the date of death. So George will not be penalized later even though the exemption amount dropped.

The final regulations also reinforce the notion of a “use it or lose it” benefit and direct that a taxpayer who uses the exemption is deemed to use the base $5 million (indexed) exemption first and then the additional amount of exemption available through 2025.  For individuals dying after 2025, if no gifts were made between 2018 and 2025 in excess of the basic federal exclusion amount in effect at the time of death, the additional exclusion amount is no longer available. In other words, unless George uses the increased exemption amounts before 2026, he will not receive that benefit later.

Either way, the exemption amounts cover a vast majority of American estates. However, for very high net worth families, we anticipate very large transfers of wealth to occur between now and 2026 so that the benefit of the heightened exemption amounts are not lost.

What is... Guardianship?

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.

Guardianship is a court proceeding where a court grants legal authority to someone other than a parent to care for a minor child. It’s legally appointing new parents for a minor child. This can mean taking care of the child day-to-day or it can mean taking care of the child’s finances; or, it can mean both. This typically needs to happen for orphaned children, but it sometimes happens when circumstances arise when parents are deemed unsuitable to care for their children.

Guardianship nominations are typically made in your will. When we talk about guardianship with our clients, we have a discussion surrounding who will take care of their children when they pass away or are permanently incapacited. Guardians can be family members, relatives, or even someone unrelated. They must be an adult, and must meet the court’s satisfaction to be suitable as a legal guardian, as determined by what is in the best interest of the child.

Some common issues to address when nominating guardians for minor children are the following: Is your preferred guardian a married couple? Do you want to nominate both spouses in the couple? What if they divorce, is there a preferred guardian? Are you nominating a guardian that would require your child to be uprooted from her/his life? Are you nominating someone who has the resources—both financial and time—to dedicate to your child?

Biological parents have first dibs on guardianship. And a court is most likely to grant guardianship to the biological parent, unless there is a reason not to do so. 

• In the case of a blended family, this would mean that the children of dad and ex-wife would go to ex-wife before they go to stepmom. 

• In the case of parents who are unmarried (and never were married), the child would go to the living parent, regardless of marital status. 

Guardianship is why any parent needs a will (in addition to a trust). It’s an important decision, and you need to document your choice so that it can speak when you are unable to. Do not leave it up to chance.

The SECURE Act

On December 20, 2019, President Trump signed the “Setting Every Community Up for Retirement Enhancement” (SECURE) Act into law. The SECURE Act, effective January 1, 2020, impacts people with retirement accounts.

There are three main ways that this impacts most people: 1) you will now be required to withdraw from retirement accounts at age 72 instead of 70 ½ ; 2) the Act removes age restrictions for contributions; and 3) any inherited retirement accounts will have a ten-year distribution limit for most people instead of the “lifetime stretch”. The SECURE Act does provide a few exceptions to this new mandatory ten-year withdrawal rule: spouses, beneficiaries who are not more than ten years younger than the account owner, the account owner’s children who have not reached the “age of majority,” disabled individuals, and chronically ill individuals.

Before the SECURE Act

Previously, any non-spouse beneficiary who inherited a retirement account was able to stretch out the required minimum distributions over his or her lifetime. Since the money was not taxed until it was distributed, it allowed beneficiaries to take minimum distributions, only pay income tax on that distribution, and defer paying income taxes on the balance of the inherited retirement account until actual distribution. 

After the SECURE Act 

Now, any non-spouse beneficiary is required to take all the distributions from the inherited IRA within 10 years. This means that the inherited retirement account will be taxed sooner and potentially at a higher rate over time. 

Spouse beneficiaries: If you inherit a retirement account from your spouse, nothing will change from the previous law. You will still be able to roll over the deceased spouse’s retirement accounts into your own.

Planning for the SECURE Act

For married couples who have retirement assets, and plan to leave any remaining retirement assets to the surviving spouse, the SECURE Act does not change much for you. Your spouse can still rollover any inherited retirement assets from you. For those who are either unmarried or are currently the surviving spouse, and you plan on leaving retirement assets to someone who is not your spouse, then this means that your beneficiaries will have a much shorter time (a maximum of 10 years) within which to distribute the funds in the inherited retirement account. This may result in triggering income tax sooner than expected, and perhaps additionally losing creditor protection.

Contact us to discuss whether your current estate plan is impacted by the SECURE Act.

When It May Not Be So Simple - Family Dynamics

A lot of estate planning deals with issues other than clients’ net worth. The highest hurdles are often tethered to people and not things.

A vast majority of our clients contact us with at least one similar goal in mind: how can we care for our children when we are unable?

This may seem simple. Our clients want to leave everything leftover upon their deaths to their children in equal shares. Done deal.

Sometimes, however, there may be some… complications.

• What if their children are very young?

• What if their child has a physical or cognitive disability? 

• What if their child is incapacitated or has disabilities at the time this gift is made?

• What if their children have addiction issues?

• What if their children are financially or developmentally immature?

• What if they don’t like their children’s life partners? Or fear an acrimonious split?

• What if they want to care for their children, but not spoil them to the point where the children do not pursue their own careers or endeavors?

No one desires any of the above. But these challenges can happen, and must be met with a plan. Our clients need peace of mind that the resources left for a child actually aids that child—in the state they are in at that time, which may involve some of the above conditions. Clients need to be assured that their child’s inheritance doesn’t inadvertently hurt loved ones, or unexpectedly go elsewhere (like to an estranged spouse or lurking creditor).

Or, sometimes, the client doesn’t want anything to go to their children; or they want an uneven distribution to their children. That’s even more of a reason why they need to have a plan specifying their desires. Simply “leaving it up to them” or giving one child substantially less than another, without proper safeguards, invites litigation. And we know our clients certainly don’t want their life’s work to go into a bunch of litigation lawyers’ pockets.

We talk through these situations with clients, as well as ones with more complicated family dynamics. They are hard conversations, but so important to talk about and plan for now, while you can.

Call and schedule a consultation. We can talk about the above, or anything else specific to your situation.

Estate Planning for Noncitizen Spouses

Today, 44% of Californians were born out of the state. And the proportion of foreign-born residents (28%) is nearly double that of transplants from other states (16%). From an estate planning standpoint, the big-picture concepts hold true whether or not someone is born in California. Non-Californians own property just like Californians do. Similarly, most everyone has loved ones who they care for most, regardless of citizenship or residency.

However, tax treatment is different depending on one’s citizenship and residency. Complications arise when one or both spouses in a married couple are not U.S. citizens.

If you and/or your spouse are non-citizens of the United States, then two major concepts will play a role in your estate plan: 1) the Unlimited Marital Deduction; and 2) the Gift and Estate Tax Exemption.

1. Unlimited Marital Deduction
   Married citizen couples enjoy a tax benefit called the “unlimited marital deduction”. Citizen spouses can transfer property back and forth between each other⁠—lifetime gifts or transfers on death⁠—and it is never a taxable event. Non-citizen spouses do not get this benefit. If your spouse is not a U.S. citizen, and you give them a gift, then it is only tax-free up to $154,000 a year (in 2019). (This amount is indexed for inflation). For example, adding your non-citizen spouse onto the title of your family home could potentially become a taxable gift. Or upon the citizen spouse’s death, the non-citizen inherits all of the marital assets without the marital deduction. Thankfully, estate planners have techniques, like a Qualified Domestic Trust, to assist non-citizens avoid unnecessary taxable events.

2. Gift and Estate Tax Exemption
   Married couples who are both citizens, or if they are legal permanent residents (green card holders), are granted a unified gift and estate tax exemption. In plain terms, if citizens or green card holders transfer property in the amount of $11.4 million (in 2019) or less then no gift or estate taxes are owed. (This amount is also indexed for inflation). That amount includes all lifetime gifts with whatever you own at death. In large part, citizens do not need to worry about making transfers to their citizen spouses. However, non-citizens only receive a $60,000 exemption from the gift and estate tax. That’s not a typo. Leaving property to a non-citizen could result in a lot of estate taxes without proper planning. For more about the gift and estate tax, read our previous blog post.

Putting the above concepts to work, if spouses transfer property between each other, and the recipient spouse is a non-citizen, then the marital deduction is nonexistent, and the citizen spouse would have to employ their gift and estate tax exemption, if they have one, where they otherwise would not have to. Then later, if the non-citizen spouse passes property to any children, the non-citizen spouse would not have the gift and estate tax exemption a citizen spouse would have. The result could be an avoidable disaster.

Non-citizens largely have the same desires and wishes that citizens have. Their legal status is merely different than that of citizens. However, that legal distinction does create challenges for which a plan is necessary. Do not leave your loved ones with an undesired mess. Get ahead of the issues by planning now.

What is... a Holographic Will?

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.

“I’m going on vacation next month, so I sent an email to my family to tell them my wishes in case something happens to me while I’m away.”

We hear this a lot. People want to make sure their family members know what they want to happen with their things or who they want to serve as a guardian for their kids, so they send an email. They put it in writing, thinking that it’s better than nothing. And, thinking that typing up something is more official than handwriting it.

Spoiler: handwriting a will is more likely to be legally binding than typing an email that isn’t signed. In fact, if it’s handwritten, signed, and dated, that’s better than typing it. This is known as a hand-written, or holographic, will.

In California, the legal requirements for a valid holographic will are: 1) that it needs to be signed;  and 2) the “material provisions” are in the handwriting of the individual. There is no requirement for it to be dated; however, if the holographic will is not dated and there is any doubt as to whether certain provisions are controlling, then the holographic will may be invalid to the extent of the inconsistency (e.g., no one is sure which document was drafted later in time).

Additionally, if there are any questions as to whether the individual lacked capacity, the will may be deemed invalid. For example, someone who is going into surgery might hand-write a will, but this may bring up questions as to whether that person was on medication or otherwise lucid enough to make the decisions at the time it was written.

Holographic wills were recently in the news as Aretha Franklin was not believed to have a will or a trust. Instead, it was discovered that she had written out her wishes by hand on several different occasions. Michigan, where Aretha Franklin resided when she died, like California, recognizes holographic wills. The question will be whether what she wrote was valid, and which handwritten document would be controlling.

Holographic wills serve a valuable function when your options are limited. If available, the best option is to talk to a lawyer about your wishes and ensure that you have a comprehensive estate plan that benefits you and your loved ones both in the case of incapacity and in the case of death. Call us for a free consultation.

There's No Default For A Blended Family

For people who die without a will or trust, California law provides a default path (intestacy statute) for where your stuff goes after you die. The distribution path of the default law will sound pretty intuitive… for a conventional family. For example, it provides for your surviving spouse first, then your children, then your nearest family members. That sounds all well and good if families always consisted of a current spouse and joint children. But what if your children are from a previous relationship and you are currently in an unmarried relationship? Or what if you and your current spouse both have children from a previous relationship? Or what if you married someone who has children from a previous relationship, but her/his children are not legally or biologically yours? Welcome to the issues that surround being a member of what many call a “blended family”.

California law does not adequately provide a default for blended families. And for good reason. Because there isn’t a “typical” blended family. But if you do zero estate planning, that same default applies equally to everyone, whether or not you’re in a blended family situation. So it’s imperative that you state your desires— in a comprehensive estate plan— instead of relying on a default provision that may not adequately cover your family situation, or at best might create some unintended consequences.

With a comprehensive estate plan, you can specifically describe who you want to provide for after you die, and how. For example, without proper estate planning, all of your assets could be left to your spouse, who then leaves it all to her/his children, leaving your children out of the path of inheritance. Or, if you are in an unmarried relationship, if you don’t plan properly, your current partner could end up out in the cold with all of your assets going to your children or other family members and bypassing the person you most want to care for.

There are thousands of hypothetical situations we can describe. The critical message here is that if the default doesn’t address your family situation, then it’s important that you adequately describe your wishes in a comprehensive estate plan. Don’t leave your loved ones dealing with undesired— but avoidable— consequences.

What is... a Power of Attorney?

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.

At its core, a power of attorney is the legal authority to act for another person. It allows someone to “step into the shoes” of another person.

There are generally two types of powers of attorney relevant to estate planning: medical and financial. A financial power of attorney is sometimes called “durable power of attorney for financial management,” or just “durable power of attorney.” The medical power of attorney is sometimes called the “advance healthcare directive”, “healthcare directive”, or “living will”.

A power of attorney gives someone the power to make decisions on your behalf when you either can’t do so yourself or don’t want to do so. This may arise when you are incapacitated or elderly; it may also arise if you are out of the country and need someone to call your bank for you, or sign a check for a contractor, or something similar.

The key is to ensure that you have given someone the power of attorney in advance of when you need them to act. Once you are deemed incapacitated, it’s too late to sign a power of attorney. Without the necessary powers of attorney in place, someone will need to go to court to obtain the legal authority to act on your behalf in a time of crisis. Going to court always involves time, expense, and the public nature of court can sometimes be humiliating for the person incapacitated.

So when should you have a power of attorney? Now.

Contact us for a free consultation.