Irvine, CA Estate Planning Blog

Many grandparents who are financially stable love the idea of making gifts to their grandchildren. However, they are usually not aware of the myriad of issues that surround what they may consider to be a simple gift. If you are considering making a significant gift to a grandchild, you should consult with a qualified attorney to guide you through the myriad of legal and tax issues that are involved in making such gifts.

Making a Lifetime Gift or a Bequest:  Before making a gift, you should consider whether you want to make the gift during your lifetime or leave the gift in your will. If you make the gift as a bequest in your will, you will not experience the joy of seeing your grandchild’s appreciation and use of the gift. However, there’s always the possibility that you will need the money to live on during your lifetime, and in reality, once a gift is made it cannot be taken back. Also, if you anticipate needing Medicaid or other government programs to pay for a nursing home or other benefits at some point in your life, any gifts you make in the prior five years can be considered as part of your assets when determining your eligibility.

What Form Gift Should Take:  You may consider making a gift outright to a grandchild. However, once such a gift is made, you give up control over how the funds can be used. If your grandchild decides to purchase a brand-new sports car or take an extravagant vacation, you will have no legal right to stop the grandchild. The grandchild’s parents could also in some cases access the money without your approval.

You could consider making a gift under the Uniform Gift to Minors Act (UGMA) or the Uniform Transfer to Minors Act (UTMA), depending on which state you live in. The accounts are easy to open, but once the grandchild reaches the age of majority, he or she will have unfettered access to the funds. You could also consider depositing money into a 529 plan, which is specifically designed for education purposes. Finally, you could consider establishing a trust with an estate planning attorney, which can be more expensive to set up, but can be customized to fit your needs. Such a trust can provide for spendthrift, divorce and creditor protection while allowing for more flexibility for expenditures such as education or purchase of a first home.

Tax Consequences: If you have a large estate, giving gifts to grandchildren may be a great way to get money out of your estate in order to reduce your future estate tax liability. In 2011 and 2012, a single person can pass $5 million at death free of estate tax, and a couple can pass a combined $10 million without paying estate taxes. In addition, a person can give $13,000 in 2011 to any number of individuals without incurring any gift taxes. A grandparent with 10 grandchildren could give $130,000 per year to all grandchildren (and a married couple could give $260,000), thereby removing that property from his or her estate.

You’ve likely heard that one of the many benefits of estate planning is reducing the amount of federal, and state, taxes owed upon your passing. While it may seem like estate tax planning must run afoul of IRS rules, with the proper strategies, this is far from the case.

It is very common for an individual to take steps to try to reduce the amount of federal estate taxes that his or her "estate" will be responsible for after the person's death. As you may know, you may pass an unlimited amount of assets to your spouse without incurring any federal estate taxes. You may pass $5.25 million to non-spouse beneficiaries without incurring federal estate tax and if your spouse died before you, and if you have taken certain steps to add your spouse's $5.25 million exemption to your own, you may have $10.5 million that you can pass tax free to non-spouse beneficiaries.

If your estate is still larger than these exemption amounts you should seek out a qualified estate planning attorney. There may be legal, legitimate planning techniques that will help reduce the taxable value of your estate in order to pass more assets to your loved ones upon your death and lessen the impact of the estate taxes. After your death, the duty normally falls on your executor (or perhaps a successor trustee) to file the appropriate tax returns and pay the necessary taxes. Failure to properly plan for potential estate taxes will significantly limit what your executor/trustee will be able to accomplish after your passing.

If you have taken steps to try to reduce the taxes owed, it is possible that the IRS may challenge the reported value or try to throw out the method you used. This does not mean that the executor/trustee will be in trouble; it just means that they will need to be prepared to support their position with the IRS and take it through an audit or even a tax court (or other appropriate court system). In the event of a challenge, a good attorney will be critical to ensure all of the necessary steps are taken.

If you’ve been named a beneficiary in a loved one’s estate plan, you’ve likely wondered how long it will take to receive your share of the inheritance after his or her passing.  Unfortunately, there’s no hard or and fast rule that allows an estate planning attorney to answer this question. The length of time it takes to distribute assets in an estate can vary widely depending upon the particular situation.

Some of the factors that will be involved in determining how long it takes to fully administer an estate include whether the estate must be probated with the court, whether assets are difficult to value, whether the decedent had an ownership interest in real estate located in a state other than the state they resided in, whether your state has a state estate (or inheritance) tax, whether the estate must file a federal estate tax return, whether there are a number of creditors that must be dealt with, and of course, whether there are any disputes about the will or trust and if there may be disagreements among the beneficiaries about how things are being handled by the executor or trustee.

Before the distribution of assets to beneficiaries, the executor and trustee must also make certain to identify any creditors because they have an obligation to pay any legally enforceable debts of the decedent with those assets. If there must be a court filed probate action there may be certain waiting periods, or creditor periods, prescribed by state law that may delay things as well and which are out of the control of the executor of the estate.

In some cases, the executor or trustee may make a partial distribution to the beneficiaries during the pending administration but still hold back sufficient assets to cover any income or estate taxes and other administrative fees. That way the beneficiaries can get some benefit but the executor is assured there are assets still in his or her control to pay those final taxes and expenses. Then, once those are fully paid, a final distribution can be made. It is not unusual for the entire process to take 9 months to 18 months (sometime more) to fully complete.

If you’ve been named a beneficiary and are dealing with a trustee or executor who is not properly handling the estate and you have yet to receive your inheritance, you should contact a qualified estate planning attorney for knowledgeable legal counsel.

We all want to be in control, to go where we want at our leisure.  As we age, however, our senses and reaction times begin to slow which can make getting behind the wheel increasingly hazardous. It is important to be realistic about the driving abilities of loved ones as they reach a certain stage and to prepare accordingly. Not only will it keep seniors safe, but planning ahead will help them financially as they make other arrangements for transportation.

The first step is to reduce the need to drive. Find ways to bring the things they need right to them, like ordering groceries online for delivery and encouraging in-home appointments. Suggest that they invite friends and family over for regular visits instead of going out. They may be surprised by how many things are possible from the comfort of their own home.

For the times your loved ones need to, or want to, venture elsewhere, look into other transportation options. Although there is usually no need to quit driving all at once, look to family, friends, taxis, and public transportation when you can, especially for longer trips. Use the money you’ve been saving, along with what would have been spent on gas, on alternate modes of transportation. Their town may even have designated senior transportation services. 

The time to start making this transition may be sooner than you or your loved ones think. Don’t wait until an accident leaves them with no alternative. It may be time to start talking about limiting driving if they report noticing subtle difficulties, like trouble reading traffic signs or delayed breaking. Keep an eye out for small dings in your loved one’s car or surrounding items, like the mailbox or garage door, along with slower response time or difficulty finding their way around familiar territory. Ask them to watch for these things as well.

Asking a loved one to turn over their keys can be tough but with an open dialogue, the right support system and reasonable alternatives in place to ensure that they can continue to live an active lifestyle, a smooth transition is feasible.  

Imagine if writing a last will and testament were a pre-requisite to graduating from high school.  The graduate walks across the stage, hands the completed will to the principal, and gets the diploma in return.   It might sound strange because most 18 year olds have little in terms of assets but it’s a good idea for all adults to draft a last will and testament.

Graduation from college is another good milestone to use as a reminder to create an estate plan.  If you haven’t created a will by the time you marry – or are living with a partner in a committed relationship – then it’s fair to say you are overdue.

Think you don’t need an estate plan because you’re broke?  Not true.  Here are eight excellent reasons for young people to complete a last will and testament.  And they have very little to do with money.

You are entering the military.  Anyone entering the military, at 18 or any other age, should make sure his or her affairs are in order.  Even for an 18-year-old, that means creating a will and other basic estate planning documents like a health care directive and powers of attorney.

You received an inheritance.  You may not think of the inheritance as your asset, especially if it is held in trust for you.  But, without an estate plan, the disposition of that money will be a slow and complicated process for your surviving family members.

You own an animal.  It is common for people to include plans for their pets in their wills.  If the unthinkable were to happen and you died unexpectedly, what would happen to your beloved pet?  Better to plan ahead for your animals in the event of your death.  You can even direct the sale of specific assets, with the proceeds going to your pet’s new guardian for upkeep expenses.

You want to protect your family from red tape.  If you die without a will, your family will have to take your “estate” (whatever money and possessions you have at the time of your death) through a long court process known as probate. If you had life insurance, for example, your family would not be able to access those funds until the probate process was complete.  A couple of basic estate planning documents can keep your estate out of the probate court and get your assets into the hands of your chosen beneficiaries much more quickly.

You have social media accounts.  Many people spend a great deal of time online, conversing with friends, storing important photos and documents and even managing finances. Without instructions from you, will your family know what to do with your Facebook account, your LinkedIn account, and so forth?

You want to give money or possessions to friends or charities.  When someone dies without a will, there are laws that dictate who will receive any assets.  These recipients will include immediate family members like parents, siblings, and a spouse.  If you want to give assets to friends or to a charity, you must protect your wishes with a will.

You care about what happens to you if you are in a coma or persistent vegetative state.  We all see the stories on the news – ugly fights within families over the prostrate bodies of critically ill children or siblings or spouses.  When you write your will, write a health care directive (also called a living will) and a financial power of attorney as well.  This is especially important if you have a life partner to whom you are not married so they can make decisions on your behalf

 

Creating a Will is not a one-time event. You should review your will periodically, to ensure it is up to date, and make necessary changes if your personal situation, or that of your executor or beneficiaries, has changed. There are a number of life-changing events that require your Will to be revised, including:

Change in Marital Status: If you have gotten married or divorced, it is imperative that you review and modify your Will. With a new marriage, you must determine which assets you want to pass to your new spouse or step-children, and how that may relate to the beneficiary interest of your own children. Following a divorce it is a good practice to revise your Will, to formally remove the ex-spouse as a beneficiary. While you’re at it, you should also change your beneficiary on any life insurance policies, pensions, or retirement accounts. Estate planning is complicated when there are children from multiple marriages, and an attorney can help you ensure everyone is protected, which may include establishing a trust in addition to the revised Will.

Depending on jurisdiction, this may also apply to couples who have established or revoked a registered domestic partnership.

If one of your Will’s beneficiaries experiences a change in marital status, that may also trigger a need to revise your Will.

Births: Upon the birth of a new child, the parents should amend their Wills immediately, to include the names of the guardians who will care for the child if both parents die. Also, parents or grandparents may wish to modify the distribution of assets provided in their Wills, to include the new addition to the family.

Deaths or incapacitation: If any of the named executors or beneficiaries of a Will, or the named guardians for your children, pass away or become incapacitated, your Will should be revised accordingly.

Change in Assets: Your Will may need to be changed if the value of your assets has significantly increased or decreased, or if you dispose of an asset. You may want to modify the distribution of other assets in your estate, to account for the changed value or disposition of the asset.

Change in Employment: A change in the amount and/or source of income means your Will should be examined to see if any changes must be made to that document. Retirement or changing jobs could entail moving to another state, thus subjecting your estate to the laws of that state when you die. If the change in income modifies your investing, saving or spending habits, it may be time to review your Will and make sure the distribution to your beneficiaries will be as you intended.

Changes in Probate or Tax Laws: Wills should be drafted to maximize tax benefits, and to ensure the decedent’s wishes are carried out. If the laws regarding taxation of the estate, distribution of assets, or provisions for minor children have changed, you should have your Will reviewed by an estate planning attorney to ensure your family is fully protected and your wishes will be fully carried out.

Generally, a "pooled trust" holds assets for people that have a disability, and/or elderly individuals. The trust is established and run by a not-for-profit organization, which will establish separate accounts for each individual within their system. However, the money of all of the individuals served is added together (in other words, it is pooled together) for investment and management purposes.

There are typically two types of pooled trusts. The first type is sometimes referred to as a "first party" trust. In this type of trust the disabled person places his or her own assets into the trust. Doing so will cause those assets to be non-countable for government benefit programs, such as Medicaid. The trustee of the trust (the not-for-profit organization) can use that person's money to pay for things that Medicaid will not cover. So, the assets are still there for the benefit of the person but their use is restricted. In this type of "first party" trust, any assets that remain when the person dies must be paid to the state up to the amount that the state has paid out for the person's care under the Medicaid program.

The second type of pooled trust is referred to as a "third party" trust. This means that the money did not come from the disabled person. For example, a parent with a disabled child could leave that child's inheritance to a pooled trust for the benefit of the child. The benefit is that the money would still be there for the child but would not disqualify the child from receiving SSI or Medicaid because the money would not be counted for these government programs. Unlike the first party trust, upon the death of the disabled person (in this example, the child) any remaining assets do not have to go to the state but can pass to any other beneficiaries that the parent wanted to have them.

Whether a pooled trust would be of any benefit to you depends upon many factors. Seek the advice of a qualified estate planning attorney to determine your best course of action.

Transfer of property at death can be rather complex.  Many are under the impression that instructions provided in a valid will are sufficient to transfer their assets to the individuals named in the will.   However, there are a myriad of rules that affect how different types of assets transfer to heirs and beneficiaries, often in direct contradiction of what may be clearly stated in one’s will.

The legal process of administering property owned by someone who has passed away with a will is called probate.  Prior to his passing, a deceased person, or decedent, usually names an executor to oversee the process by which his wishes, outlined in his Will, are to be carried out. Probate property, generally consists of everything in a decedent’s estate that was directly in his name. For example, a house, vehicle, monies, stocks or any other asset in the decedent’s name is probate property. Any real or personal property that was in the decedent’s name can be defined as probate property.  

The difference between non-probate property and probate centers around whose name is listed as owner. Non-probate property consists of property that lists both the decedent and another as the joint owner (with right of survivorship) or where someone else has already been designated as a beneficiary, such as life insurance or a retirement account.  In these cases, the joint owners and designated beneficiaries supersede conflicting instructions in one’s will. Other examples of non-probate property include property owned by trusts, which also have beneficiaries designated. At the decedent’s passing, the non-probate items pass automatically to whoever is the joint owner or designated beneficiary.

Why do you need to know the difference? Simply put, the categories of probate and non-probate property will have a serious effect on how plan your estate.  If you own property jointly with right of survivorship with another individual, that individual will inherit your share, regardless of what it states in your will.  Estate and probate law can be different from state-to-state, so it’s best to have an attorney handle your estate plan and property ownership records to ensure that your assets go to the intended beneficiaries.

Your family-owned business is not just one of your most significant assets, it is also your legacy. Both must be protected by implementing a transition plan to arrange for transfer to your children or other loved ones upon your retirement or death.

More than 70 percent of family businesses do not survive the transition to the next generation. Ensuring your family does not fall victim to the same fate requires a unique combination of proper estate and tax planning, business acumen and common-sense communication with those closest to you. Below are some steps you can take today to make sure your family business continues from generation to generation.

• Meet with an estate planning attorney to develop a comprehensive plan that includes a will and/or living trust. Your estate plan should account for issues related to both the transfer of your assets, including the family business and estate taxes.
• Communicate with all family members about their wishes concerning the business. Enlist their involvement in establishing a business succession plan to transfer ownership and control to the younger generation. Include in-laws or other non-blood relatives in these discussions. They offer a fresh perspective and may have talents and skills that will help the company.
• Make sure your succession plan includes:  preserving and enhancing “institutional memory”, who will own the company, advisors who can aid the transition team and ensure continuity, who will oversee day-to-day operations, provisions for heirs who are not directly involved in the business, tax saving strategies, education and training of family members who will take over the company and key employees.
• Discuss your estate plan and business succession plan with your family members and key employees. Make sure everyone shares the same basic understanding.
• Plan for liquidity. Establish measures to ensure the business has enough cash flow to pay taxes or buy out a deceased owner’s share of the company. Estate taxes are based on the full value of your estate. If your estate is asset-rich and cash-poor, your heirs may be forced to liquidate assets in order to cover the taxes, thus removing your “family” from the business.
• Implement a family employment plan to establish policies and procedures regarding when and how family members will be hired, who will supervise them, and how compensation will be determined.
• Have a buy-sell agreement in place to govern the future sale or transfer of shares of stock held by employees or family members.
• Add independent professionals to your board of directors.

You’ve worked very hard over your lifetime to build your family-owned enterprise. However, you should resist the temptation to retain total control of your business well into your golden years. There comes a time to retire and focus your priorities on ensuring a smooth transition that preserves your legacy – and your investment – for generations to come.

How is the funding handled if you decide to use a living trust?

Certificates represent shares of a company. There are generally two types of company shares: those for a publicly traded company, and those for a privately held company, which is not traded on one of the stock exchanges.

Let's assume you hold the physical share certificates of a publicly held company and the shares are not held in a brokerage account. If, upon your death, you own shares of that company's stock in certificated form, the first step is to have the court appoint an executor of your estate.

Once appointed, the executor would write to the transfer agent for the company, fill out some forms, present copies of the court documents showing their authority to act for your estate, and request that the stock certificates be re-issued to the estate beneficiaries.

There could also be an option to have the stock sold and then add the proceeds to the estate account that later would be divided among the beneficiaries. If the stock is in a privately held company there would still be the need for an executor to be appointed to have authority. However, the executor would then typically contact the secretary or other officers of the company to inquire about the existence of a shareholder agreement that specifies how a transfer is to take place after the death of a shareholder.  Depending on the nature of the agreement, the company might reissue the stock in the name(s) of the beneficiaries, buy out the deceased shareholder’s shares (usually at some pre-determined formula) or other mechanism.   

If you set up a revocable living trust while you are alive you could request the transfer agent to reissue the stock titled into the name of the trust. However, once you die, the "trustee" would still have to take similar steps to get the stock re-issued to the trust beneficiaries.

If you open a brokerage account with a financial advisor, the advisor could assist you in getting the account in the name of your trust, and the process after death would be easier than if you still held the actual stock certificate.

In general, wills or living trusts that are valid in one state should be valid in all states. However, if you’ve recently moved, it’s highly recommended that you consult an estate planning attorney in your new state. This is because states can have very different laws regarding all aspects of estate planning. For example, some states may allow you to disinherit a spouse if certain language is used, while other states may not allow it.

Another event that can cause problems with moving and estate planning is moving from a community property state to a common law state or vice versa. In community property states, all property earned or acquired during marriage is generally owned in equal halves by each spouse, with some exceptions, such as any property received by only one of them through gift or inheritance. The property that is considered community property includes income, anything acquired with income during the marriage, and any separate property that is transformed into community property. Separate property includes anything owned by either spouse before marriage, property received by only one spouse by gift or inheritance, and any property earned by one spouse after permanent separation. One spouse is not required in community property states to leave his or her half of the community property to another spouse, although many do.

In common law states, property acquired during a marriage is not automatically owned by both spouses. In common law states, the spouse who earns money and acquires property owns it by himself or herself, unless he or she chooses to share it with his or her spouse. Common law states usually have rules to protect a surviving spouse from being disinherited.

Whether a couple lives in a community property state or a common law state is important for estate planning purposes, because that can directly affect what each spouse is considered to own at death.

If a couple moves from a common law state to a community property state, there are different rules about what happens depending on where you move. If you move from a common law state to California, Washington, Idaho or Wisconsin, the property you bring into the state becomes community property. If you move to another community property state (Alaska, Arizona, New Mexico, Nevada, or Texas), your property ownership won’t automatically change. If a couple moves from a community property state to a common law state, each spouse retains a one-half interest in property accumulated during marriage while they lived in the community property state.

As you can see, the laws of different states vary significantly with respect to incapacity planning, estate planning and inheritance rights. Therefore, it’s important to contact an estate planning attorney in your new area, especially if you are moving from a community property state to a common law state, or vice versa.