CA Estate Planning

TAX PLANNING & CHARITABLE DONATIONS

Giving to charity can be a very noble thing and to many of us it comes quite naturally, unfortunately it’s also rather easy to give incorrectly, at least as far as taxes are concerned. To prevent a simple but all too common mistake, the Wall Street Journal offers a mantra: “Get the letter. Get the letter. Get the letter.”

If you are making a donation of more than $250, the charity must properly acknowledge your donation before the IRS will, and that means a letter. Indeed, the IRS is surprisingly literal about this and refuses to bend or accept other means of proof, even when people go out of their way to offer alternatives. You must have a letter written by the charity that clearly delineates the amount of the donation. Further, the letter also must affirm that no goods or services were rendered or, if there was an exchange, the letter must itemize and deduct the cost of those goods and services from the overall donation.

When comes to any tax deduction, charitable or otherwise, remember the IRS likes to have hard answers and cold facts. Laura Peebles, a director at Deloitte Tax in Washington summed it up for the WSJ, “If you don't have the correct paperwork, there's no way to fix the problem.”

For more answers to your Estate Planning questions please visit our website. This blog is intended to provide general information only and is purely a public resource (See website disclaimer).

 

ESTATE PLANNING & GIFT TAXES

If you own private business interests or other rapidly appreciating assets, and would like to gift those to the next generation at the lowest possible tax cost, you may want to act sooner rather than later. The Tax Relief Act of 2010 included a 400 percent increase in the lifetime gift tax exemption, from $1 million in 2009 to the current $5 million ($10 million for a married couple). These provisions are due to expire on the last day of 2012. If you are considering a gifting strategy, you are wise to start exploring your options now, while you have time to carefully consider, since giving away assets requires careful thought and planning,

There are several strategies we could use to maximize the value of the exemption, to include an advanced strategy known as an installment sale to an Intentionally Defective Grantor Trust (IDGT). Gavin Morrissey of Commonwealth Financial recently wrote in detail about how this strategy works. The bottom line is that this complex strategy, when properly executed in the proper circumstances, can result in quite significant tax savings.  As Morrissey points out, the strategy works best when the assets to be transferred are rapidly appreciating – such as private business interests or pre-IPO stock.

For more answers to your Estate Planning questions please visit our website. This blog is intended to provide general information only and is purely a public resource (See website disclaimer).

 

 

FORBES does its readers a great disservice regarding estate planning!

In the May 30, 2011 issue of Forbes, Steven Gibson wrote that the “vast majority of people no longer need sophisticated estate planning to avoid estate tax” and that “people are reluctant to pay fees for work that does not currently benefit them.”

This is unfortunately misleading, and Gibson does the “vast majority” of people a disservice:  They have never had a need for estate tax planning. 

What the vast majority do need is an estate plan, however rudimentary or complex, for a wide variety of non-tax reasons.  As Gibson concedes, people still need to plan their estate, with the assistance of an estate planning attorney, because “poorly-drawn, ambiguous documents can spark litigation, and fail the testator’s purpose.” 

A well-written estate plan not only ensures a person’s property is distributed in accordance with her wishes, especially in blended families or second marriages.  It dictates what happens in the case of incapacity, so often fraught with problems, and, apart from avoiding probate when needed, it can be critical for so many other non-tax reasons.

The growing proliferation of online non-lawyer document providers offering wills and trusts for $75, or less, can have disastrous consequences for those you most love, as I see in my office only too often.

For more answers to your Estate Planning questions please visit our website.

BOOMMERS, BEWARE HOW YOU HANDLE THAT INHERITANCE!

According to recent research from The Center for Retirement Research at Boston College, 70% of baby-boomer households will receive inheritances worth a total of $8.4 Trillion. With an average of $300,000 for most inheriting households, and an average of $1.5 million for the wealthiest inheritors, the better part of a generation is expected to see a nice bump in their assets.

 

The question, then, is what to do about it.

 

Ashlea Ebeling of Forbes recently approached the topic with a number of considerations, from warnings to ideas.

 

Consider keeping it Separate. The first thing to take stock of is how your state handles inheritances. California considers an inheritance the separate property of the person who received it, as long as it is kept separate. So think carefully before you put the money into a joint account – or use it to make major improvements on a jointly owned home, for example. Keeping an inheritance separate also can provide a level of asset protection – it can shield it from loss due to your spouse’s debts and/or lawsuits.  If you don’t have a revocable (“Living”) Trust, now may be the time to set one up so as to avoid probate. 

 

Remember, you can usually transfer your inherited separate assets into an existing revocable trust jointly held with your spouse (or with a registered domestic partner in California) or any other person, as long as it is identified as your separate property.  You can also designate in the trust who is to receive the separate property on your death.  It does not have to be your spouse or partner; it could be a child from a former marriage, for example.  To transfer separate property into an existing joint trust, it is advisable to consult an estate-planning attorney to ensure the transfer is done correctly. It is also a good time to review your estate plan, if you have one.

 

Special Treatment for Retirement Assets. If the inheritance is an IRA then you can use it to stretch out the withdrawals over your own life expectancy and in this way maximize the tax benefit on those funds. Don’t try to take the money out and redeposit in your own IRA. That’s not allowed. Instead, the IRA should be renamed. If you want to move it from one custodian to another, do so in a “trustee-to-trustee” transfer. In certain circumstances, you may even want to “disclaim” the account and give it to your children if you don’t need it.

 

Review Your Own Estate Plan. Whatever the inheritance, it is now part of your estate. A sizable inheritance could push you into estate tax territory. Even if you aren’t in danger of estate taxes, you will still want to review your current plan to account for the inheritance assets.

 

In the final analysis, receipt of an inheritance is one of those lifetime events that calls for proper assessment and planning. You can learn more about estate planning on our website. You also can review a checklist of other life events that may alter your estate planning needs on Page 3 of this month’s issue of our estate planning e-newsletter.

 

ESTATE PLANNING: WHY YOU SHOUDN’T AVOID IT

It certainly is understandable that no one enjoys a conversation about death – especially their own! And, with the estate tax exemption now set at $5 million for an individual and $10 million for a couple, many people may believe they have no reason to consult an attorney about their estate planning. But avoiding the topic of estate planning can mean unnecessary expense, confusion and conflict.

SmartBusiness last week highlighted the fundamentals of a “well-thought-out estate plan,” with topics that everyone should consider – whether prince or pauper.

• Why do you need an estate plan? A comprehensive estate plan ensures that when you die your estate is distributed according to your wishes, it protects you in the event of your own disability, and allows you to plan for minor children, pets, and charitable causes.
• What are the basics everyone should have? SmartBusiness (should be hyperlink as above) recommends at a minimum a power of attorney for healthcare and a living will.  In California where I practice law these documents are combined in an Advance Health Care Directive. This Directive is critical should you become ill and unable to make your health care wishes known.   Your appointed health care agent can make sure your wishes are followed.  Also strongly recommended is a Power of Attorney for Finances and Personal Affairs.  This allows whoever you appoint to pay the mortgage, utilities and take care of your cat if you are unable to do so for yourself.  In my experience, people in hospital without such a Power, are often more worried about such matters than their illness! 
• What about a will? Absolutely, you should have one, otherwise the State where you live will distribute your estate according to its probate rules, which may not reflect your wishes.  You certainly can write your own will and there are many online sites to help you do so! However, as in most things of life, you do get what you pay for. Improperly drafted or last-minute, hand-written wills are frequently contested and invalidated in court. If you don’t know what you’re doing, the outcome could be much different than you expect.
• What about trusts? Many people choose to create trusts to help their heirs avoid the time, expense and lack of privacy in probate proceedings.  A trust can help reduce estate taxes if applicable to you,  Trusts also can help shield assets from spendthrift children, divorce, children of a second spouses, and other unforeseen circumstances, such as lawsuits against your heirs.
• What mistakes to people tend to make in estate planning? The writer points out two common mistakes: failure to plan for their personal effects which can lead to more family disputes than the distribution of money, and failure to review and update estate plans over time.

You can learn more about comprehensive estate planning in the Grain Law FAQ's section of our site.

 

PROTECT YOUR CHILDREN FROM SQUANDERING THEIR INHERITANCE. INCLUDE A CHILD’S TRUST IN YOUR ESTATE PLAN.

Many parents are concerned that their children or grandchildren might squander their inheritance if they receive it when they are too young to appreciate its value.  It is therefore not uncommon to put such inheritances into children’s trusts to limit the age at which the child receives the capital outright, and sometimes even limits the income paid to them.

It is quite common now for a child to receive an inheritance in three stages: at age 25, 30 and 35.  A trustee appointed for the purpose, usually has a wide discretion whether to make advance payments out of the trust’s capital where circumstances suggest it is right to do so.  For example, if a child is married and wants to buy a house before the trust is due to make a payment of capital outright, the trustee can decide to distribute the down-payment on the house.

Often, the trustee has the discretion to distribute all the funds outright if he or she considers the child is mature enough to manage a large sum of money.  Other times, a child might be appointed co-trustee of his or her trust, or even replace the original trustee at a certain age.  There are often advantages in leaving a child’s inheritance in trust for life.  This can provide many protections, for example if the child divorces, the ex-spouse cannot access the trust fund in a divorce settlement.

There are other strategies to consider if the estate is over the estate tax exclusion (currently $5 million, and $10 million for a married couple). The greatest inheritance protection is achieved when the estate plan creates a Long-Term Discretionary Trust to administer the inheritance for the children. Such an arrangement can make both income and principal available to the children for their health, education, maintenance and support, as well as for any purpose deemed appropriate in the discretion of your appointed inheritance managers. This can have favorable estate tax consequences.

You can learn more about Long-Term Discretionary Trusts and other estate planning strategies in the July issue of our estate planning newsletter, Majoring in Minor Children (this link is to Kyle’s website.  We should have the same newsletter on our site). Be sure to sign up to subscribe to our free monthly e-newsletter, which is full of estate planning tips for you and your family (ditto).

Call (877)-858-4724 or Email richard@grainlaw.com to schedule your free consultation today.

 

ARE YOU, YOUR FRIENDS OR CLIENTS IN A CALIFORNIA REGISTERED DOMESTIC PARTNERSHIP? THEN READ ON.

If you are in a California registered domestic partnership (RDP) you should know about a little-publicized IRS announcement last year. Starting with 2010 Tax Returns, the IRS will treat 2010 income earned by both partners in an RDP* as community property, thus applying the “income-splitting” rules until now only applicable to the community property of different sex couples. 

Mandatory for 2010, the IRS requires that all income earned by both RDP partners treated in California as community property must now be added together and allocated equally to each partner’s federal tax return.  Unlike different-sex couples, RDPs must continue to file separate federal tax returns.

This could have a major impact on the amount of income tax owed by the individual partners.  It makes the preparation of 2010 federal tax returns for RDPs even more complex than before requiring a tax professional with experience in preparing LGBT tax returns to determine how the new IRS position will affect them. For CPAs in Los Angeles known to have experience in preparing LGBT returns, visit the following websites (David Paddock’s and William Hurtt’s websites)

It should be noted that the change in treatment only applies to community property and not the separate property of each party.  Determining what is separate property is not always an easy task, and an attorney or tax professional should be consulted where classification is difficult. 

As a consequence of the new IRS treatments, LGBT couples contemplating registering as domestic partners may want to consider beforehand whether they should enter into a pre-partnership agreement to have their incomes treated as separate income if registration would have a negative impact on their tax positions.  For those RDPs who are greatly affected by the new IRS rules may want to consider a post-partnership agreement, although they raise several critical issues. 

For more information on such agreements, contact Richard Grain, an attorney focusing on the LGBT community, at richard@grainlaw.com.

* NOTE: the new IRS position although it does not mention them will probably apply to California same-sex married couples as well.

 

TALKING TO THE PARENTS

    Having “the talk,” is never easy. Whether you are 10 years old and your parents are having “the talk” with you … or you are 50 years old and having “the talk” with them … the topics, though vastly different, are never easy. But your parents were brave enough to sit down and explain the facts of life with you when it was needed. Now, it may be your turn to return the favor and talk about the facts of the estate tax.
    Though the estate tax is currently on a one-year sabbatical, it looks increasingly like it will return next year – and with a vengeance, pouncing upon estate assets in excess of $1 million. Now would be a good time to talk to your parents about how the estate tax could affect them, when previously they may have assumed they were “safe.”
    A recent article in US News & World Report offers some tips on how to bring up this sensitive topic, including making sure that your parents realize you do not have designs on their money. The article is a good read, but I’d like to add another tip. Refer your parents to this blog, to my website, or to our monthly e-newsletter.  Talk about the issues you read, and how they affect your own lives, and the live of your loved ones – including your parents.