 When we’re out discussing estate planning with folks, one of the most commonly posed questions is: “How do I know if I need a Trust?” And it’s a great question . . . one that deserves a bit of deeper analysis. In California, the California Probate Code serves as the “bible” governing the inner workings of Trusts and other testamentary instruments, and it dictates that “assets not held in trust must pass through probate.” (You’ll need to consult some of the previous blog posts on our website to gain an appreciation as to why it is so critical to avoid probate.) Consequently, many people assume that the only way to avoid probate is to establish (and properly fund) a revocable living trust. And for most of the folks we meet, this route ends up being the most appropriate mechanism for them (with the caveat, of course, that a living trust is not the “be-all, end-all” – it serves best as but one component of a comprehensive, integrated estate plan, featuring several legal documents engineered to work in a complementary manner to achieve the desired results). But in the course of our ongoing interactions with clients, we occasionally run into one of the following scenarios: mom and dad have sold the longtime family home and are downsizing – perhaps moving into an assisted living facility; maybe moving in with one of their children. Consequently, they no longer own real estate, and have consolidated their assets into a couple of bank accounts, maybe a brokerage account, and their (tax-deferred) retirement accounts. In addressing their well-founded desire to avoid probate, we counsel them that it can be done relatively simply: by designating beneficiaries on their accounts (assuming that a beneficiary outlives them) the account(s) designating beneficiaries will pass to those beneficiaries probate-free. And we know that, baring a catastrophic fail, their retirement accounts already have primary and contingent beneficiaries designated. Probate successfully defeated. However, defeating probate is but one of the several compelling reasons to engage in estate planning (and, honestly, it’s a favor you’re doing for other people) – what about protecting yourself if you become incapacitated? The avoidance of “conservatorship” is perhaps a more compelling objective served via proper estate planning. For unprepared people, in the event of incapacity, a probate judge is charged with the responsibility of determining who will be in charge of the financial and transactional matters of the incapacitated person, as well as who will be empowered to make medical decisions for them. And married people beware – there is no guarantee that one’s spouse will automatically be the one designated by the court (remember Terri Schiavo’s infamous case?). So, for people who might not need a trust to avoid probate due to the fact that they own no real property and have beneficiaries in place on all financial accounts, they still need a pair of critically important documents to eliminate the risk of conservatorship: a financial power of attorney (“General Durable Power of Attorney”) and a medical power of attorney (“Advance Health Care Directive”). The combination of these documents ensures that one has pre-ordained, in a legally-enforceable manner, who will manage their affairs in the event of incapacity – without the indignity and intrusiveness of a formal conservatorship proceeding in a public forum. Then, while we’re preparing a “downsized” estate plan for people who don’t necessarily need a Trust, we typically include a Last Will and Testament – simply to facilitate the orderly distribution of one’s personal property. While this approach often addresses the needs of the hypothetical client identified above (older folks in downsizing mode), it also can perform well for people on the other end of the spectrum: often the children of our clients. Often a young adult is getting started with their career, maybe they’ve already started a family, but they don’t own a home yet. For them, the “Will Package” described above will similarly adequately address their estate planning needs. So, the time-honored cliché that we bandy about at Botti & Morison: “We only buy blank paper!” is actually true – it is never proper to attempt to force differently-situated clients into the same estate planning approach; each prospective client of Botti & Morison will be afforded a thorough analysis to determine what their particular needs are, and a custom estate plan will be crafted to most effectively (from cost and document production perspectives) properly serve their needs. If you have any questions or would like more information, please don't hesitate to call (877-585-1558), email us or register to one of our free webinars. Paul Morison
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 For beneficiaries of an IRA inheritance, the SECURE Act (Setting Every Community Up for Retirement Enhancement) can significantly impact the amount of time they have available to withdraw the funds available to them. The changes to inheritance tax law brought about by the SECURE Act, passed in December 2019 and taking effect in January 2020, do not affect inherited IRAs where the original owner died in 2019 or before. Though once the initial beneficiary has also died and the IRA is passed to another, the rules effective as of January 2020 will take effect with a few built-in exceptions.
In general, the longer the span of time the withdrawals are made over, the more time the IRA has to grow, potentially providing decades of growth. The prior laws allowed the withdrawals to be spread out based on the beneficiary's own life expectancy. Referred to as "stretch IRAs" this ability also allowed withdrawals to be made that would have the least impact on taxation responsibilities while also meeting the minimum annual distribution requirements. With the SECURE Act in place, however, the time allowed for certain beneficiaries to completely withdraw the entire balance of the account has been reduced to 10 years. At the end of the ten years, whatever remains in the account will have a 50% penalty placed on it. The withdrawals can still be spread out over those ten years, but the long-term ability to allow the account to grow has been removed. For estate planning, these changes can greatly impact the ways in which inheritances are designed, particularly those who planned to allow the taxation to be stretched over a longer span of time to reduce the financial impact. There are a few different ways that anyone who inherits an IRA can choose to handle the additional income and resulting tax responsibilities. Anyone can disclaim the inheritance as long as they do it within the first nine months and if they haven't taken possession of the assets in any way. Disclaiming passes it on to the next listed beneficiary and is a good option for those who do not want or need the additional taxable income. Anyone can also take a lump-sum distribution though it will be taxed, potentially in a higher bracket, if the funds were in a tax-deferred account and may face a 10% early withdrawal penalty. Although these rules apply to some beneficiaries, there are a few that remain exempt and will be able to continue to spread withdrawals out over their lifetime in some cases or an extended period for others. The spouse of the original owner of the IRA or 401(k) can continue much the same as previously. Other eligible designated beneficiaries include someone who is less than ten years younger than the owner, a minor child of the owner, or someone who is disabled or chronically ill. There are a few caveats for some of these exemptions. The minor child exclusion does not cover grandchildren. This exemption also only applies until they are 18 or 21; the age cutoff varies by state, 18 in California for example, at which point they have an additional ten years to finish withdrawing the assets. For those who qualify for the disability or chronic illness exemption, it only applies to those defined as such by the Internal Revenue Service. For spouses of the deceased, they can transfer the full amount into their own IRA; however, they will have to pay any subsequent penalties and taxes associated with early withdrawal. With the exception of the minor children, all exempt beneficiaries could put the funds into an inherited IRA. The distributions would then be based on their own life expectancy instead. This option does have a variety of age-related rules around it based not only on the beneficiary's age but also on the age of the account's original owner. Suppose the inherited IRA is placed in an accumulated trust, with multiple lifetime and remainder beneficiaries involved. In that case, the ten-year rule generally applies as it is unlikely that all of them would qualify as an eligible exemption. If the accumulation trust is created for a single beneficiary, who is disabled or chronically ill, as defined by the IRS, an exception would be made and the distributions based on their life expectancy instead of the remainder beneficiaries if they are younger or the same age. As altered by the SECURE Act, estate planning can be more complex with different long-term requirements needing to be taken into account. Having expert advice can help anyone find the best way to plan for the future and advise how to proceed with various types of inheritances. If you have any questions or would like more information, please don't hesitate to call (877-585-1558), email us or register to one of our free webinars. Christopher Botti  When we’re discussing estate planning with folks, one question almost invariably comes up. Can I designate more than one person as my successor trustee? It’s a great question, and one that warrants significant thought.
Aside from dictating who you wish to inherit the assets you leave behind, the designation of your successor trustee (“executor” in last will jargon) is probably the most significant decision you’ll make when establishing an estate plan. Ideally, your designation will establish your first choice and will be augmented by at least one alternate designee. In the majority of cases, trustors (the person or people creating the living trust at the core of the estate plan) elect to designate their children as their successor trustees, and many folks struggle with the idea of being perceived as favoring one child over another. Often, this results in a concession to a form of political correctness, resulting in a simple sequence based on age – e.g., oldest child as first designee, middle child as first alternate and youngest as second alternate. This approach may work out in some cases, but it fundamentally ignores the fact that one should truly be basing important decisions such as the designation of a successor trustee on more compelling factors like “which child is actually best-suited for the task” rather than simple birth order. Next in people’s thought progression is often: can I designate my kids to serve together as co-successor trustees? The short answer is “yes.” But the concept justifies considerable further reflection. Firstly, although there is no statutory bar to designating multiple successor trustees, it is strongly recommended that one never consider more than two co-trustees – the resulting “committee” approach may well lead to gridlock (or worse). What most people fail to comprehend when contemplating the designation of multiple co-trustees is that the California Probate Code (the statutory authority governing the administration of trusts) mandates that co-trustees act unanimously. That means that the “two out of three” concept that most people assume would control is not how it works. Therefore, it is obvious that the more “cooks in the kitchen,” the more chance there is for a lack of unanimity – and the harsh reality of how gridlock is broken among co-trustees is a visit to probate court – the very place one is seeking to avoid when establishing a living trust. And, to make matters worse, when co-trustees end up litigating a disagreement as to the course of a trust’s administration, each co-trustee’s legal fees and costs are borne by the trust! And I know what many of you might be thinking: “What could our kids possibly disagree about? Our estate is simple.” Well, the classic example of a matter that could very well give rise to a disagreement among co-trustees is something as fundamental as what to do with the family home. One of the children (a co-trustee) believes that it should be sold as soon as possible in as-is condition; another child (co-trustee) thinks that they should spend some money fixing it up prior to sale; and the third child (also a co-trustee) feels that they should keep the home “in the family,” and rent it out. If they fail to reach an agreement, they may end up litigating the matter – while the attorneys end up devouring a good chunk of the estate in hourly fees. Finally, there is a less well-known aspect of co-trustees that can be extremely scary: if one of the co-trustees breaches their fiduciary duty (for example, by stealing trust funds), each co-trustee is what is known as “jointly and severally” liable. That means that each co-trustee is potentially liable for the misdeeds of their colleagues, even if they did nothing wrong! With all that said, however, there are, I believe, a couple of situations where designating co-trustees (but still never more than 2) can be a good idea. The first is the most basic: parents have only two adult children, each child is responsible and could handle the task if called upon, the kids get along well, and the estate plan calls for a 50/50 division of assets between the children. In this case, designating them as co-trustees is ideal, in that the responsibilities and effort needed to administer the parents’ trust can be shared between the children, and the fact that they’re co-trustees eliminates the need for one to provide the other with an accounting, thus making the task simpler. Also, the co-trustee approach eliminates the inherent inequity that exists when one of two children is designated solely as trustee (that one does all the work while their sibling simply sits back and incessantly questions what is taking so long) when, at the end of the process, assets are divided equally. The other situation where one may want to give serious consideration to designating co-trustees is in the context of a blended family. In this case, it is certainly more potentially volatile than the example noted above, but often parents of a blended family want to know that “their side” of the family is not being subordinated to the “other side.” Only consider this if you firmly believe that at least one representative of each branch of the family can get along and function smoothly with the representative of the other branch – otherwise you may be setting yourself up for failure. Hopefully this brief discussion has shed a bit of light on a common question, but one which is not as simple as it might initially seem. When considering co-trustees . . . tread carefully. If you have any questions or would like more information, please don't hesitate to call (877-585-1558), email us or register to one of our free webinars. By Paul Morison  Many revocable living trusts for married couples established prior to 2009 contain mandatory provisions to divide the trust into two or more sub-trusts upon the death of the first spouse for federal estate tax or “death tax” planning purposes. These trusts are known as A/B or A/B/C trusts. They were employed primarily to reduce or eliminate estate taxes, by preserving the federal estate tax exemption of the first to die. The federal estate tax exemption is the value of assets which can pass free of tax. An A/B trust works like this. When the first spouse dies the B trust is funded with the first to die’s assets (one half of their community property and all of their separate property) up to the federal estate tax exemption amount which acts as a cap. Any remaining assets of the first to die along with all of the assets owned by the surviving spouse are allocated to the A Trust. The A trust assets are included in the surviving spouse’s estate and get an additional cost basis adjustment at the surviving spouse’s death. Although the B trust avoids estate tax, assets held in this trust do not receive a basis adjustment upon the death of the surviving spouse. However, the future growth of these assets remains outside the gross estate of the surviving spouse at their death.  An A/B/C trust is similar to an A/B trust. It is used in larger estates when the first to die’s assets are greater than their federal estate tax exemption. The excess assets of the first to die above the exemption are allocated to Trust C by using the “unlimited marital deduction.” The unlimited marital deduction means there is no limit to the amount one spouse can leave the other spouse tax free. A properly drafted A/B/C trust eliminates estate tax on the first spouse’s death. However, assets allocated to trust C and trust A may face estate tax on the death of the surviving spouse. After the first spouse's death, Trust B and Trust C will each usually be required to file their own income tax returns. The net income of these trusts generally is payable to the survivor and passes through to the survivor for income tax purposes. The B and C trusts can have limits and restrictions on the availability of principal for the survivor. Both the A trust and the C trust assets will receive second basis adjustment when the surviving spouse dies. The B trust will not.  Since the estate tax exemption prior to 2009 was much less than now, these A/B or A/B/C trusts were prudent for many middle-income families. They made economic sense because the administrative burden of having an A/B or A/B/C trust paled in comparison to the possibility of having assets in excess of the federal estate tax exemption taxed at a rate as high as fifty-five percent (55%).
The new tax law, effective 2018, increased the federal estate tax exemption dramatically. The 2020 exemption is $11.58 million for individuals and $23.16 million for married couples. As a result, the overwhelming majority of people have estates that are far below the $11.58 million exemption thereby eliminating the need for federal estate tax planning with the use of A/B or A/B/C trusts. Married couples can maintain one trust until the second spouse dies without the need for any sub-trust division on the first death. This type of joint trust is called a non A/B trust and is far easier to administer. Here are the cons of an A/B or A/B/C trust: 1. It costs money and is more complicated. Significant legal and accounting fees may be required to implement the mandatory A/B or A/B/C trust split. The total date of death value of all assets must be obtained. Real estate and business interests must be appraised. Once the sub-trust division has occurred, the surviving spouse will be required to file a separate tax return for each sub-trust on a go forward basis, in addition to their own personal tax return. 2. Lack of Privacy. California law requires that the beneficiaries of the B or B/C trusts are entitled to notification and a copy of the relevant portions of the trust document within 60 days from the date of the death of the first spouse. Moreover, these beneficiaries have legal rights that enable them to receive accountings of the trust assets and allow them to petition the probate court in the event that the surviving spouse does not properly fund and/or administer the B or B/C trusts. Surviving spouses often begrudge that beneficiaries have these rights. 3. Irrevocability. The surviving spouse’s control over the sub-trust assets usually is limited because the B trust or the B/C trusts are irrevocable and can only be changed by the surviving spouse by seeking court intervention at great expense and uncertainty. There are plenty of valid reasons why a surviving spouse may want to amend their estate plan to account for changed circumstances of a beneficiary. 4. The “Second Step up in Basis.” Due to the high estate exemptions, the tax planning focus has shifted from estate tax avoidance to capital gains tax avoidance. Assets that are community property in California will receive a step up in basis at the death of the first spouse, which allows the surviving spouse to sell the assets without capital gains tax liability. Another step up in basis will occur for the assets that are funded in the A trust at the death of the surviving spouse, allowing the children to sell the A trust assets without capital gains tax liability. Although the assets allocated to the B trust will receive a step-up in tax basis upon the death of the first spouse, those B trust assets will not receive another step-up in tax basis upon the death of the second spouse. Removal of the B trust will allow all of the assets to receive a second step up in basis on the second death. 5. Here is an example of how the loss of the second step up in basis can hurt financially. John and Jane Davis set up an A/B Trust in 1993. They were California residents. They owned one home and some Microsoft stock. John died in 1996. After John died, Jane placed the home in Trust A, and the Microsoft stock valued at $100,000.00 (the first step-up in basis) in Trust B. At the time when Jane died in 2019, the Microsoft stock was worth $1,000,000.00 ($900,000.00 in appreciation and no second step-up in basis). Their entire estate will pass federal estate tax free because it was far below the single exemption of 11.4 million dollars. Regrettably, because the stock was in Trust B when Jane died, the Davis children will owe approximately $225,000.00 in capital gains tax (both federal and state) on the sale of the stock (because of its low basis of $100,000.00). Had there been no A/B trust or if the stock was allocated to trust A, the capital gains tax hit would have been avoided completely. 6. Portability. Portability refers to the ability of a surviving spouse to claim the deceased spouse’s unused estate tax exemption (the “DSUE amount”) and “bank it” for future use. Portability can to simplify estate planning for married couples by eliminating the need for a B trust. With portability a married couple can transfer $23.16 million federal estate tax free in 2020. Prior to the law change you needed to fund the B trust in order to preserve the first to die’s exemption. Portability must be elected, it is not automatic. In order to preserve the DSUE amount the surviving spouse must file a federal estate tax return (Form 706) even though such return would not otherwise be required. Here are the pros of an A/B or A/B/C trust: 1. Bloodline Protection. The B trust or the B and C trusts are irrevocable. For example, if spouses have children from a previous relationship, and wish to limit a surviving spouse’s ability to change the trust beneficiaries, a B trust or the B and C trusts may be desirable. Although inconvenient for the surviving spouse, the restrictions and associated administration costs may well be worth the peace of mind knowing that children will receive an inheritance. 2. Caregiver manipulation. You have all heard the stories about the manipulation by a caregiver later in life that results in an amendment of the estate plan that benefits the caregiver. Although there are laws in California designed to disqualify these types of gifts, an A/B or A/B/C will significantly limit the damage that can be done. 3. Late in life marriages. We have seen individuals get married with the new spouse promising “don’t worry, I will take care of your kids.” An A/B or A/B/C will prevent the surviving spouse from leaving everything to the new spouse. 4. Large estates. Estates in excess of the single federal estate tax exemption (currently $11.58 million) should consider retaining the B trust or the B and C trust provisions to avoid the possibility of a 40% death tax owed upon the second spouse’s death. 5. Creditor protection. Because the B and C trusts are irrevocable, they provide creditor protection. This can be significant for individuals in high risk professions such as doctors or general contractors. A surviving spouse can be sued and loose all of the A trust assets to a creditor. But the B and C trust assets are protected and will be available for the surviving spouse and ultimately the children. Additionally, “spend thrift” provisions can be added to the B and C trusts to protect the trust assets from the creditors of the children. What should you do? You must weigh the pros and cons of using A/B or A/B/C trust planning and make the best choice for your personal circumstances. Many of our clients are converting their trust to a non-AB trust by way of a trust amendment. The recommended approach for most families whose assets are far below $11.58 million exemption is to create a non-AB trust, or amend their current trust to a non-AB format. We are encouraging our clients and potential clients to contact us should they wish to discuss these important issues further. If you have any questions or would like more information, please don't hesitate to call (877-585-1558), email us or register to one of our free webinars. By Christopher Botti  Whenever one embarks on the process of creating an estate plan, whether it is in the form of a comprehensive, integrated plan featuring a Living Trust at its core, or a more simple plan utilizing a Last Will, perhaps the most basic foundational assumption is that the person evidencing their intentions with respect to the disposition of the assets they leave behind possesses the requisite mental acuity to act in this regard. Interestingly, however, there is a significant difference in the way the governing law, as set forth in the California Probate Code, defines the level of capacity that the creator of an estate plan (the “testator”) must possess, depending on whether the dispositive instrument is a Last Will or a Living Trust.
Historically, the capacity standard for Wills has been relatively low. In California the standard is set forth in the California Probate Code Section 6100.5, which provides that a testator has the capacity to make a Will if he or she can (1) understand the nature of the testamentary act, (2) understand and recollect the nature and situation of his or her property, and (3) remember and understand his or her relations to immediate family members and those whose interests are affected by the Will. This is known as "testamentary capacity." In that the creation of a Living Trust is technically regarded as the establishment of a contractual relationship between the trustor and the trustee (in most cases, the same person or people), the capacity standard is higher, and requires that the individual be able to communicate, understand and appreciate (1) the rights, duties and responsibilities created or affected by his or her decision, (2) the probable consequences of the decision, and (3) the significant risks of, benefits of, and reasonable alternatives to the decision. California Probate Code Section 812. This is often referred to as "contractual capacity." As estate planning practitioners, one of the more significant responsibilities we face is to make a determination as to a testator’s possession of the requisite capacity to execute the documents they have evidenced a desire to implement. This is an essential determination, inasmuch as any documents executed by a testator who lacks the required capacity may be subsequently invalidated, thus resulting in less than optimal outcomes – including the need for a probate proceeding based on the rules of intestacy (see the previous blog regarding that topic). Further, as one might expect, testators who have marginal testamentary capacity are susceptible to undue influence that often results in outcomes that differ from what the testator may have intended. Naturally, our objective as estate planning attorneys is to craft legally enforceable documents that direct the disposition of assets in the way the testator intends (with the person or people that the testator deemed appropriate to serve as executor or successor trustee). Inherent in that objective is the good-faith belief, based on personal experience, that the testator possesses the requisite capacity. As one might expect, in real-world applications, the stated outcome of testator’s estate plan may factor into a practitioner’s determination of capacity – if the testator wishes to divide her estate equally among her three children, the “capacity threshold” may be deemed lower than if the testator expresses her intent to divide her estate equally among two of her three children, while disinheriting the third. This is because a collateral challenge to the documents based on an assertion of testator’s lack of capacity is significantly greater since, in this example, testator disenfranchised one of her children. So, what’s the “takeaway?” Don’t wait to establish your estate plan – one should always try to avoid issues such as lack of testamentary or contractual capacity, and the best way to eliminate that concept from becoming an issue is to establish your plan while there is no doubt as to your capacity. If you have any questions or would like more information, please don't hesitate to call (877-585-1558), email us or register to one of our free webinars. By Paul Morison  Since 2016, California’s End of Life Option Act (EoLOA) has provided terminally ill, decision-capable adults with an option to legally and safely end their suffering. But the law isn’t as simple as choosing to end one’s life; the petitioning individual must meet specific criteria and follow the steps exactly as prescribed by the law to receive the California law’s protection. As should be the case with something as critical as choosing to end one’s life, this law isn’t meant to make it easy, it’s meant to make it available. Even then, there are natural barriers to its use as well as practical and ethical considerations that must be made. We’re going to explore the key provisions of the law, considerations providers and participants should make, and how the process works.
Key Provisions of the EoLOA The End of Life Option Act allows certain individuals to request medical assistance to end their lives. These individuals must be California residents, they must be at least 18 years old, and they must have received a diagnosis of an incurable and irreversible disease with less than six months to live. They must be able to make sound decisions as determined by a health professional, and they must be able to administer the aid-in-dying drug themselves. The person must voluntarily request the prescription, and any suspicion of coercion would be a red flag for providers. Additionally, physicians are legally required to discuss all end-of-life options, not just this one. Key Considerations for Providers and Participants This law has been in and out of litigation for years, and researchers and physicians have grappled with the questions it poses with vigor. There are several considerations this law requires both providers and participants to make before making this end-of-life decision.
The law prescribes the exact steps an individual must take before availing oneself of this California law’s provision. 1. A patient must make two verbal requests directly to the physician directly responsible for his or her care. These requests cannot be made less than 15 days apart. 2. After making two oral requests, the patient must make one request in writing using the state’s prescribed “Patient’s Request for Aid-in-Dying” drug form. It must be signed by the patient as well as two witnesses and provided directly to the physician that is attending to his or her care. There is not a specification as to when the written request should be made. 3. Once these steps are made, the patient must then discuss the request with his or her attending physician alone, with no one else in the room with very few exceptions. This is to determine that the request has been voluntarily made. 4. The patient is then required to consult a second physician to confirm the diagnosis, prognosis, and decision-making ability. If either physician has questions or concerns about the patient’s mental faculties, they must refer him or her to a mental health specialist to determine cognitive ability.The request for this type of medicated death cannot be made in an advance directive, by a health care agent or surrogate or any other health care decision maker. It must be made by the patient, directly to the attending physician, and following the steps as outlined in the law. The law stipulates that this kind of end-of-life decision should not adversely impact estate planning. If done correctly, the death certificate will show that the patient died due to the underlying disease. It’s important to discuss these issues and make sure everything is in order, that the physician is well-versed in the stipulations of the law before proceeding so that you and your loved ones are protected. Other issues There is the chance, because disease diagnosis and prognosis are difficult and imperfect, that the timing required by the law causes problems for the patient. If the disease advances too quickly, or the patient delays decision-making, they may no longer qualify. Additionally, there have been instances when the physician or health care provider will not even discuss this option with a patient, and because it is voluntary, they are not required to do so. Finding a participating physician can be emotional and complicated. Finally, there have been problems finding a pharmacy that will fill the prescription for the drug. It’s important that participating individuals know what resources are available to them to find and receive the drug. Final Thoughts To date, the majority of people availing themselves of the EoLOA are over the age of 60 and predominately white. Roughly 60% of the people who obtain the medication use it, and most have been diagnosed with terminal cancer. Any law such as this could be easily abused which is why it is so prescriptive. End-of-life decisions are emotionally and legally fraught, and no one should feel pressure to choose one way or the other. It’s important that patients are aware of the options, the challenges, and the impact of their decision. If you have any questions or would like more information, please don't hesitate to call (877-585-1558), email us or register to one of our free webinars. By Christopher E. Botti  In our world of Estate Planning, we often delve into subjects that are somewhat prickly. There’s a popular misconception that “everybody fights about money when someone dies.” (Not actually true.) And after all, the very essence of estate planning is coming to terms with the reality of one’s own mortality – not necessarily a rosy foundation on which to build.
But aside from that somewhat unpleasant aspect of our profession, one of the more amusing aspects is the nomenclature. Today’s topic: Intestacy – sounds like a gruesome disease (probably not as horrible as a topic for another day – per stirpes), but can be almost as bad. The laws of intestacy are the rules that govern the way in which assets are distributed to survivors of a decedent who dies with no will or living trust. Leaving it up the California Probate Code to dictate the division of your estate is the result of an abject failure to plan. And more often that not, allowing the government to get involved in one’s personal business will result in a sub-optimal outcome. For example, consider the following outcomes that the Probate Code has in store:
So, is your head spinning yet? Clearly the old maxim “Failing to Plan is Planning to Fail” is never more true than in the context of intestacy. Don’t let this happen to your assets or to your family – taking control of the destiny of the assets you leave behind will not only prevent arbitrary (and often illogical) outcomes such as those detailed above from becoming a reality, but it also is an empowering event that ensures that your wishes will be adhered to. By far the most common reaction that our clients give us after completing their estate plan is peace of mind. If you have any questions or would like more information, please don't hesitate to call (877-585-1558), email us or register to one of our free webinars. By Paul Morison  When it comes to passing on your legacy to your children or heirs, there are more things to tackle than your assets, debts, and taxes. An ethical will is an opportunity to impart important life lessons, memories, family values, history, and rituals, just to name a few. To get the desired results of an ethical will, it’s essential to know what it entails and how you go about incorporating one in your estate planning.
Definition and History of Ethical Wills The tradition of an ethical will has its roots in Christian and Jewish religions. The practice was documented in religious texts where fathers passed their blessing, values, history, and wishes for the family’s future to their sons. Some persons have gone as far as to call the document a ‘spiritual-ethical will’ because of the spiritual legacy you can leave for your loved ones. Over time, the practice has expanded from a father-son dynamic to include anyone who would like to pass on essential information or values to those they will leave behind. In essence, an ethical will is a highly personalized document that you can use to communicate information you deem to be important. Differences Between an Ethical Will and a Legal Will The most important difference between an ethical will and an estate plan that includes a living trust and a “pour over” legal will (or just a stand along legal will if you have no living trust) is that the latter is legally binding. This is why a legal estate plan has a standard structure and many details that need to be addressed so you’re sure all of your needs have been covered. A good way to think about it is that a legal estate plan will helps you dictate how those you leave behind will handle your physical assets while an ethical will helps you pass on wisdom, family history and guidance. This is important to note because while you can express these wishes in an ethical will if you want, no one will be bound by law to follow your directive. You can have one document that is read to all your heirs in full or you can have individualized sections. It would be helpful, however, to include a reference to your ethical will in your legal estate plan so your loved ones know where to find it. Legal estate plans aren’t just vital for disseminating assets, but they are also needed for expressing your debts and liabilities, as well as any taxes that might be owed. These are areas your loved ones will need to address after your passing so having iron-clad legal documents will be pertinent. Most importantly, legal documents help the process run more smoothly and your loved ones will avoid the expensive and time-consuming probate process. If you have family heirlooms you’d like to pass on to certain loved ones, it’s recommended that you include that in your legal estate plan. That way, there will be no room for disobedience or fighting. This is crucial if the heirlooms have significant financial value. You can always use the ethical will to explain what the heirlooms mean and why they’re valuable to you and the family. If you want to, you can even explain why you’ve left them to different people. What to Include in an Ethical Will The details of what you include in your ethical will vary depending on what you would like to pass on to your children or heirs. For example, if you have rich family traditions or values that you would like to see continue, you can write about that. By including the history of the tradition and why it’s important, your loved ones are more likely to appreciate it. Traditionally, persons also write about personal experiences that have shaped their lives and decisions. This is an opportunity to let your family get to know you better and understand more about what motivated you in life. They can also gain a few stories to pass on to their children. If you have children and an estate plan that includes protective trust provisions, then an ethical will is a perfect way to provide instructions to your guardians and trustees concerning how you would like your minor children raised and how the money that you have set aside for them should be used. If you were in the position of acting as your child’s guardian and trustee, what information would you need to know about that child? Topics such as educational and religious preferences should be addressed. Additionally, this is an opportunity to provide critical information concerning your child’s medical, social or emotional needs. Ethical wills will often contain future wishes for the family and what you’d love to see your children or heirs accomplish. Historically, the document would be used to pass on much-awaited blessings from the head of the household. In that vein, you could express what you’ve always admired about your children. Most importantly, an ethical will is not the place to express your disapproval of your family’s lives or actions. An ethical will aims to pass on positive and helpful information so you should focus on what will build your family. If you dig deeper into why their behavior upsets you, you may find that the traditions and values you’ve included could influence positive changes. When to Write an Ethical Will There are no time restrictions on when to write an ethical will but just as your financial position can change over time so can your mindset. That means while you can prepare an ethical will at any age, you’ll have more to add as you age. Since you have no control over your passing, you should consider writing one now and adding to it when it’s necessary. If you take that route, however, make sure you only keep a copy of the most recent modification so there’s no confusion when the time comes for it to be read. How to Write an Ethical Will Even though many references are made to ‘writing’ an ethical will you can use different media to express your wishes. While there’s a nice personal touch to a handwritten document, you can also use a video or audio recording. It depends on what’s most convenient for you. Video and audio recordings are most helpful if you’re putting the ethical will together at a time when you have physical limitations. Since this kind of document is not the same as a legal will, you also have more freedom when it comes to how you put all the information together. There are no restrictions on the format of your ethical will or standards for what you must include. Instead, the emphasis is on making sure you have said what you want to. You also don’t need a lawyer to draw one up for you or even a witness as it’s not a legally binding document. Conclusion An ethical will is a great addition to your estate planning. Once you’ve taken care of the legal aspects that will come with your passing or incapacitation, passing on traditions and values should be next on your list. These will be another asset for your loved ones to cherish and value. It will also encourage them to do the same for their children or heirs. The wisdom and lessons you pass on now could influence multiple generations. If you have any questions or would like more information, please don't hesitate to call (877-585-1558), email us or register to one of our free webinars. By Christopher E. Botti (Image credit: Albert Anker)  Conventional wisdom holds that a properly crafted and implemented estate plan serves to defeat two horrible outcomes: probate and conservatorship.
Probate is a certainty if something is not done to avoid it, since it is a process which occurs after one’s death. It is the formal process by which title is changed on assets left behind by a decedent – but it is truly a nightmarish process. It is a formal court proceeding which freezes all assets, takes at least 18 months (usually considerably longer), makes one’s personal affairs public, and is essentially a court-sanctioned forum for families to fight. And, it costs a ton of money. Conservatorship is what “the system” has in store for unprepared people who don’t quite die, but rather become incapacitated. Whether a person is young or old, if they are rendered unable to manage their own affairs, if they have not prepared for this possibility they will be subjected to a superior court process in which a judge will determine who will be put in charge of the incapacitated person’s financial affairs, and who will be given authority to mange their medical care. And married folks – it’d be reasonable to assume that your spouse would automatically have such authority, right? Wrong. There is no “automatic” designation of a conservator – a spouse would likely have the “inside track,” but they would nonetheless need to endure the conservatorship process. Which, like probate, is heard in a public forum, takes a long time and… surprise – costs thousands of dollars to get started. And even worse than probate, it will continue indefinitely until the subject either regains their capacity or dies. Thankfully, as noted above, a properly prepared estate plan will conclusively defeat these two horrible processes. But wouldn’t it be nice if one’s estate plan could go beyond merely beating down bad outcomes and could, in fact, deliver an amazing tax outcome as a sort of “bonus?” Good News – as residents of California which happens to be one of nine so-called “Community Property” states, we are fortunate to be graced with the ability to completely eliminate capital gains tax on any asset that is held in one’s living trust – Twice, if you’re married! That’s the good news… the bad news is that the triggering event that delivers what is known as a “full step-up in cost basis” is a trustor’s death. What that means on a practical level is that as soon as one completes the process of “funding” their trust, all assets that are then (properly) titled in the trust are then positioned to receive the “step-up” upon death. This is particularly compelling for married couples, since the first step-up occurs upon the death of the first spouse/trustor to die, meaning that the surviving spouse/trustor could then sell ANY asset of the trust, and pay NO capital gains tax. This effect is achieved regardless of the nature of the asset (e.g. a primary residence, a rental property, a bar of gold, etc.), regardless of how much it has gone up in value since the date of its acquisition – not the date of its transfer into the trust, mind you, and regardless of how long you’ve owned it. (Single folks get this result as well, but only once.) Back to our married example, though – if the surviving spouse opted to not sell the asset following the death of their spouse, when the assets flow to the children (or any beneficiary) upon the death of the survivor, the children are entitled to a SECOND step-up, meaning that they could sell any highly appreciated asset and pay NO capital gains tax! The way that this amazing “double step-up in cost basis” is obtained is by way of any ancillary document that can accompany one’s living trust – it has different names, but we at Botti & Morison call it a “Community Property Agreement.” Its purpose is to have all assets of the trust treated for tax purposes only, as if they had been titled as Community Property. This way, one can truly obtain the best of both worlds – when an asset is properly titled in one’s trust, it will be afforded the probate avoidance that the trust titling delivers, but when it is treated for tax purposes as if it had been titled as Community Property, it is eligible for the double step-up in basis that Community Property titling delivers. Just when you were about to give up on California and move to Oregon (which happens to ironically NOT be a Community Property state), you may want to reconsider. Just kidding – if you establish your estate plan here, you may be able to take this amazing tax advantage with you wherever you decide to move. At this point, we’re on the verge of delivering nuanced tax advice, and, although tax planning is an integral component of well-rounded estate planning, we recommend you confer with your tax preparer to verify that you can take this tax benefit with you wherever you go – and anyway, have you seen Bend, Oregon lately? It’s turned into Orange County – you might as well stay here. If you have any questions or would like more information, please don't hesitate to call (877-585-1558), email us or register to one of our free webinars. By Paul Morison  Understanding the Federal Estate Tax system is extremely important to know about for every citizen. "Inheritance Tax" is not a reference to "Estate Tax" –– however, both terms are often used interchangeably. This is because both fall under the (somewhat morbid) umbrella term "Death Taxes". An Estate Tax is levied against a person’s estate (the “transferor”) upon their passing. An Inheritance Tax is levied against an individual (the “transferee”) receiving a distribution from a deceased person. There is no Inheritance Tax in California.
While it is difficult to think about emotionally, estate planning is important. A comprehensive and well-thought-out estate plan determines what happens to the assets of all individuals after they pass away. Estate is used to describe the fair market value of a deceased person's total assets and is taxed accordingly at the time of collection. Rules of the Federal Estate Tax are changed every year and are based on numerous factors, such as inflation rate, government policies, new tax deductions or credits, and fair market value of the estate at the time of valuation. The IRS allows unique exceptions to the outlined rules. The exceptions are reevaluated annually and can be changed. Reviewing rule changes and estate plans frequently is important for ensuring exemptions are fully utilized. Since rates, figures and exemption can change every year, one's estate that once fell below the taxable threshold, could become taxable the following year. This possibility reflects the reality and importance of an annual estate plan review –– creating comfort and security for one's assets and their family upon their death. A Brief Background Instances of asset taxation upon the death of US citizens are found as early as 300 years ago. Methods of implementing this tax have changed multiple times––most recently in 2018, with the implementation of the Tax Cuts and Jobs Act (TCJA). Currently still in effect, the TCJA indexes estate tax rates for inflation each year, as well as the exemption amount allowed –– which is how much of an estate's value is not taxable before the tax rate is applied. Before 2018, estate taxes were subjected to more volatility. For instance, in 2010, the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act (TRUIRJCA) set the maximum estate tax rate at 35%. This act was implemented such that 35% would remain the maximum rate for estate taxation until December 31, 2012 –– after which the rate would become 55% in January 2013, and the new exemption amount would be $1 million. In 2013, the American Taxpayer Relief Act (ATRA) was passed––changing the rules on how estates, gifts, and transfer taxes were structured permanently. What to Know in 2020 As mentioned, the applicable rates and exemptions on estates change annually, and are indexed based on inflation. The estates of all US citizens are subject to federal estate taxation –– however, this depends on the valuation of the estate at the time of the owner's death.
The federal government allows gifts of money––and property valued up to $15,000, non-taxable –– to be given without reporting to the IRS each year. This is known as the “annual exclusion amount” and is also subject to inflation index adjustments. Gifts exceeding this amount must be reported to the IRS, but are still considered non-taxable as long as they are within IRS rules and regulations. These are options many owners of estates exceeding the exemption amount utilize in an attempt to decrease the taxable amount of their estate. Working with a professional estate planner is by far the best way to ensure proper asset allocation, and that the maximum amount of an estate possible will be utilized as desired. Requirements for a Taxable Estate If an estate's gross value exceeds the exemption amount for the year, such as the $11.58 million amount for 2020, Form 706 must be filed with the IRS and submitted alongside payment at the same time. The requirement –– if not filing for an alternative valuation date –– is nine months after the descendant's death. If an extension is needed, Form 4786 is the appropriate application used to determine eligibility for an extension by the IRS. However, if an extension on an estate tax filing is applied, the payment will begin to accrue interest after the initial nine-month requirement. This among many other reasons is why the expertise of a professional estate planner is beneficial. The Unlimited Marital Deduction Among the many deductions applicable to estate taxes is the Unlimited Marital Deduction. This enables a first spouse to die to claim a deduction on everything transferred to their surviving spouse. It should be noted that there are restrictions if the surviving spouse is not an United States citizen. What is "Portability"? Portability provides the option for a spouse to transfer any unused exemption amount of the first spouse to die to a surviving spouse, for use as an exemption on their estate at their time of death. For example, if Spouse A is leaving their estate to Spouse B –– and the estate is valued at a total of $5 million (after deductions and credits) –– the $6.58 million difference in Spouse A's estate that fell below the 2020 exemption amount, would then be added to Spouse B's overall exemption allowance at the time of their death thereby allowing the surviving spouse to “bank” the unused exemption of the first to die for future use. Therefore, Spouse B's exemption amount at their time of death would be $6.58 million, plus whatever exemption that they had at the time of their death assuming that they had not remarried. Additionally, it is important to know that Form 706 must still be filed by the estate's executor/administrator, if portability is elected –– notifying the IRS that there is intention to elect the portability option. In Conclusion By planning and preparing for the distribution of an estate, one can make certain their estate assets will be utilized as intended upon their death. While often uncomfortable to discuss, estate planning is extremely important, as obligations such as Federal Estate Taxes are sometimes owed to the IRS. Being knowledgeable and working with a professional estate planner can mitigate uncertainty, as well as risk of mismanaged assets after one's passing. If you have any questions or would like more information, please don't hesitate to call (877-585-1558), email us or register to one of our free webinars. By Christopher E. Botti Photo credit: Olga Delawrence |
