The Basics of Estate Taxes

Here is a quick breakdown of all the basic points people should be aware regarding Estate Taxes. What are Estate Taxes? Estate taxes are paid to the federal government for the transfer of property upon death. Federal estate taxes are based on the size of the estate? What is the Current Estate Exemption? The current Exemption amount is at $5.25 Million per person. This amount is a total lifetime exemption for the estate. The exemption is not impacted by the number of beneficiaries or their relationship to the decedent. What is the Current Estate Tax Rate? Any amount over the exemption is taxed at a rate of 40%. What is the Unlimited Marital Deduction? The unlimited marital deduction means that an unlimited amount can be transferred from one spouse to another without any federal estate taxes. The federal government, currently, does not extend this deduction to same-sex marriages. The deceased spouses Estate Tax Exemption is used. This issue is set to be heard by the Supreme Court. Until the federal government recognizes gay marriage, estate planning for same-sex couples is critical. Does California Have an Inheritance Tax? No. We actually wrote it into the State’s constitution so bringing it back would require quite a bit of effort. Are There Ways of Reducing my Estate Tax Liability? The short answer is yes. There’s actually quite a few, but they go beyond the scope of this post. There are advanced estate planning strategies you could implement to reduce your tax liability. You can read more about them here: A-B trusts for Married Couples (using both exemptions) Using LLCs for income property (reduce the value by up...

What You Need to Know About Pet Trusts

Pets are the most often overlooked members of the family when it comes to estate planning. Some might think that it’s a bit silly to think about estate planning for pets, but pet loves sure don’t. It’s really a serious matter. Most pets eventually end up in some sort of a rescue shelter after their original owners pass away. Most pet owners assume, that if something were to happen to them, their loved ones, or a neighbor would take their pets in. There are financial responsibilities associated with owning a pet, family compositions change, and many people are unwilling or unable to take on the responsibility- hence why so many pets end up in shelters. California is one of a few states in the country, that recognizes that pets are more than just property. In 2008, Governor Schwarzenegger signed into a law Probate Code Section 15212, which allows you to create an enforceable pet trust. This vehicle makes sure that your pet will find a good home, and allows you to allocate funds to make sure your pet are well cared for. Pet Trusts are simple to create, and work much in the same way as the provisions you might insert into your trust to care for underage or special needs children. 5 steps to get started to get started with a pet trust: 1. Find the right home and care givers for your pet. 2. Determine the average cost to care for your pet. This includes costs such as food, vet visits, medicine, and grooming. 3. Multiply the average life expectancy of your pet by the average care...

Why You Should Rethink Joint Tenancy Agreements

Sometimes people can get a little too cleaver in their attempts to avoid probate, and save some money in legal fees. One of the maneuvers we see quite a bit involves adding children, or other family members to accounts are joint tenants. Unfortunately, this maneuver can have real world impacts on you and your assets while you’re still alive. What is a Joint Tenant? A joint tenant is a means of holding title to property so that two or more people (the joint tenants) hold title together with “right of survivorship.” This means that the surviving joint tenant or tenants are entitled to the property upon the death of one joint tenant, without probate. What are the dangers of Joint Tenancy? There are several dangers with adding joint tenants to any accounts or property, and they all stem from this simple fact— When you add a joint tenant to an account or property, you are adding a new owner. Here are some of the common issues we associated with this: 1. Capital Gains If one person owns the property, at that person’s death, the property basis is fully stepped up to the value at the day of death. With a joint tenant, only the decedent’s half is stepped up. This will lead to significant capital gains taxes that would have been entirely avoided if the joint tenant has not been created. 2. Loss of Control When you name someone a joint tenant to your property, you are making an immediate gift of one-half of that property to that person. This gives them ownership rights, and they could do things...

What is the Best way to Avoid a Conservatorship?

The best way to avoid a conservatorship is to plan ahead and make sure you’re protected in the event that you become incapacitated. Under California law, if a person is found to be legally incompetent, the probate court can appoint a conservator to oversee a person’s personal or financial affairs. This is where things can get pretty ugly. Some of the times you end up with one of these two scenarios: The wrong person as conservator. Fight over who should be the conservator. The first scenario does not really need that much explaining. You could end up with a conservator that is at geographic distance from you, which would make it harder, you could end up with someone who can’t manage your estate, or with someone you would never have chosen for your own reasons. The second scenario is just as bad. A lengthy legal battle over who should be your conservator could drive up legal expenses, which will be paid from your estate. Additionally, Conservatorships require bi-annual accounting, which in turn is yet another expense that will be paid out of your estate. As I said earlier, the best way to avoid a conservatorship is to plan ahead. There are sections inside of a Revocable Living Trust, where you can appoint and direct your Successor Trustee to step in and manage your estate during your incapacity for your benefit. The trustee you chose would then be able to step in and manage your estate during your incapacity for your benefit. He or She would be able to pay your bills, manage and/or reinvest your assets, and even sells assets...

How Can I Use a Trust to Take Care of my Children?

You can use a Revocable living trust to specify a trustee to hold the trust assets and keep them invested until your child or children reach an age your feel comfortable with. This type of trust is referred to as a Spendthrift Trust, and can be folded right into your Revocable Living Trust. Statistics show that, on average, within 3 generations a family fortune will be spent. In order to beat the statistics, you can arrange for the trustee to pay for the child’s college education, care and support until that age. This helps prevents the beneficiary from squandering their inheritance at a very young age. Most people chose between 21 and 30 years of age for distribution. Spendthrift trusts are a great way to protect your children from squandering their inheritance, but they do require foresight to make you can properly provide for your children until they reach that age. You’ll typically need the help of several professionals to make sure set it up correctly, including: Estate Attorney Financial Planner Life Insurance Specialist Accountant Real Estate Appraiser  ...

What does Stepped Up Basis mean?

The “Stepped up Basis” (new value) is a new basis which is available to property received through inheritance. The basis of a property is the value used to determine gain or loss for income tax purposes. Basically, it is the cost of the property (what you paid for it). The new value is determined by the of a value at the date of death of the person who owned it. This is the value of the property used to determine gain for income tax purposes. As you’ll read below there are tax advantages to ensuring that real estate passes through to heirs as inheritance, rather than as a gift during your lifetime. When does a property receive “Stepped up Basis?” Where it is received as an inheritance, either through a Revocable Living Trust or through a will (there will be probate fees and taxes when passed through a will), the piece of real estate receives a stepped up basis. However if it is received as a gift, for example, through a quitclaim deed, then the it retains the basis (value) established by the person who made the gift. For Example, let’s assume a man purchases a piece of home for $10,000 in 1940 and it was worth $1,000,000 at the time of his death. If the heirs of that man received the home as an inheritance (for example through a Revocable Living Trust) then the new value of that home would be $1,000,000. This means that if the heirs sold the house for $1,000,000, no income tax liability would accrue. However if the man transfered the house to the heirs during his...

What Kind of Revocable Living Trusts can a Married Couple Have?

Basically there are two types of revocable living trusts for married couples. The first type is called a simple or basic trust. With a basic trust, while both spouses are living, they continue to manage the estate together as they had before creating the trust. Upon death of one spouse, the surviving spouse has sole and absolute control over the estate. When the second spouse dies, the assets are distributed to their heirs as directed in the trust. The single trust is advisble for husband and wives whose estates mee the following conditions: The combined estate is under the estate tax exemption (Currently $5,125,000 in 2012) and will never exceed the tax exemption. The spouses are willing to allow the surviving spouse to have full control and unrestricted use of the trust assets after the death of one spouse. If the estate is over the tax exemption, or could grow past it, or if the spouses want to put restrictions upon the estate once one has died, then the couple would need to go through advanced estate planning to make sure they minimize taxes, and use an A-B Trust (although if an estate is particularly large, additional strategies would be put in place). An A-B Trust is a means of dividing a “husband and wife” estate into two trusts upon the death of one spouse. The main purpose of using the this type of trust is to prevent losing any portion of the federal estate tax exemption when the first spouse dies. For example, let’s assume that a married couple have an estate valued at $10,000,000. If the husband dies, leaving the estate to the wife and the wife dies after, leaving the estate to the children,...

Probate Law Changes Starting in 2012

There are a couple of new Probate Law changes this year: The threshold for file a probate went up from $100,000 to $150,000 pursuant to California Probate Coded section 13000. This amount does not include bank accounts held in joint tenancy or accounts with beneficiary designations such as paid on death (POD). Most Vehicles, boats and motor homes are also excluded from the amount under California Probate Code Section 13050. Additionally, the Federal amount excluded from estate tax increased from $5,000,000 to $5,120,000. The December 17, 2010 change in the law provided that the exemption amount is indexed for inflation. The Estate Tax exemption is still scheduled to significantly decline on January 1, 2013 to $1,000,000. The current tax rate is 35% and will rise to 55% on January 1, 2013. It is important that you review your estate plan with a licensed attorney committed to the practice of estate...

What is a Revocable Living Trust?

A Revocable Living Trust is an alternative to a will, is the cornerstone of most estate plans. You transfer your property from yourself, as trustor, to yourself as trustee. No one else is involved with your trust while you are living. You can buy, sell, trade, invest, and reinvest property without obtaining consent from any other party. In your trust document, you name who will be successor trustee and successor beneficiaries. Upon your death, the successor trustees distribute the estate to the successor beneficiaries exactly as you have directed in your trust. This can be accomplished through gifts, percentages, or a combination of both. There are several common misconceptions about Revocable Livings Trusts, including: Only the wealthy need to have trusts Trusts are too complex for people There are cases where advanced estate planning is necessary. This is typically for wealthy people who need to create particularly complex vehicles to make sure they minimize estate taxes. The simple reality is that essentially everyone should have a trust. In fact, if you have a family, especially with young children, and/or you own a home, it could be irresponsible not to have one. In addition to other benefits of having a trust should you be incapacitated, trusts are not overseen by a probate court, unlike a will. It is true that trusts are a bit more complicated than a will, which can be handwritten on a napkin, with guidance from an experienced estate planning attorney, they can be easy to set up, and maintain. For instance, a will does not need to be funded, but a trust does. Funded, basically refers to transferring necessary assets to the trust....