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The Laws of Intestacy

7/29/2020

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:

If a decedent is survived by a spouse, but no living descendants, parents or siblings, the spouse will receive the entire estate.

If a decedent is survived by a spouse, and a parent or parents, but no descendants, the surviving spouse will inherit all of the decedent’s community property and one-half of the decedent’s separate property. The surviving parent(s) will inherit the other one-half of decedent’s separate property.

If a decedent is survived by a spouse and a sibling or siblings, but no parent(s) or descendants, the surviving spouse inherits all of the decedent’s community property and one-half of the decedent’s separate property, while the sibling(s) inherit the other one-half of decedent’s separate property.

If a decedent is survived by a spouse, descendants and parent(s), the surviving spouse inherits one-half of the decedent’s community property and one-half or one-third of decedent’s separate property (depending on whether the deceased spouse left one child or more than one child). The children would then inherit the other one-half (or two-thirds) of the decedent’s separate property and the remaining one-half of decedent’s community property.

If a decedent is survived by descendants but no spouse, the children will inherit the entire estate.

If a decedent leaves no surviving spouse, descendants, parents or siblings, the assets will flow to nieces and nephews. If there are none, then it would go to grandparents, aunts, uncles, great aunts or great uncles, cousins, or even the children, parents or siblings of a predeceased spouse (in that order). In the event that there are none of the above, the entire estate will escheat (i.e. be inherited by the State of California)!

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

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The Use of Ethical Wills

7/22/2020

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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)

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How to Defeat Capital Gains Tax

6/25/2020

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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

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Federal Estate Tax

6/19/2020

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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 estate tax exemption amount for 2020, is $11.58 million and is subject to inflation adjustments each year until the law “sunsets” on December 31, 2025. That means on January 1, 2026, the federal estate tax exemption would sunset to the level of $5.49 million, plus an inflation index adjustment for the period from 2018 to 2025.
The applied tax rate on estates valued over $11.58 million after deductions and credits will depend on the valuation of each estate, and how far over the exemption threshold it is valued.
For estates with a valuation larger than $11.58 million after deductions and credits, estate tax brackets and their rates can be found at www.irs.gov.
An estate with a valuation less than $11.58 million, after deductions and credits, may pass to its heirs and/or beneficiaries without federal estate taxation.
The date of estate valuation is considered to be the date of the estate owner's death.
If an estate is expected to lose value, the estate owner/executor may request a six-month alternative valuation date using Form 706.

Most estates will not be subject to federal estate tax with the $11.58 million exemption amount. However, if an estate is currently valued at or above this amount, estate planning and restructure is even more important.

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

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The Dangers of Joint Tenancy

5/22/2020

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The origins of Joint Tenancy, the most common form of ownership of real property for co-owners (usually married couples), date back to 16th Century England. The primary reason for its continued popularity is its simplicity. The right of survivorship that is at its core renders the transfer of property between co-owners when one dies essentially automatic. In other words, if two co-owners hold title as Joint Tenants, when the first one dies, the property simply becomes the sole property of the survivor.

This simplicity has effectively made Joint Tenancy the “default” form of ownership for co-owners. And this form of ownership is not limited to real property – if, for example, two people have a joint bank account, that account’s legal form of ownership is Joint Tenancy.

Fun Fact – if you see the term “Joint Tenancy With Right of Survivorship,” (not uncommon) the inherent right of survivorship that defines Joint Tenancy renders that phrase redundant and repetitive.

So, all good, right? Maybe not so much.

The problems with Joint Tenancy start to accumulate when one examines Joint Tenancy in the context of Probate. Obviously, when the first of two Joint Tenants dies, the right of survivorship ensures that the asset flows to the surviving Joint Tenant free of probate. But what happens when the resulting sole owner dies? Probate happens.

Even if that surviving Joint Tenant had a will that states their intention as to who they want to inherit the asset, the asset would have to be the subject of a probate proceeding. Therefore, Joint Tenancy does not avoid probate, but merely puts it off. And the very nature of the right of survivorship that makes the transition so smooth from two Joint Tenants to one after the death of the first has the effect of lulling folks to sleep: “Gee, that was easy when Dad died, everything just flowed to Mom, therefore it’ll be easy when Mom dies, it’ll all flow to us, right?” Wrong.

And it can get worse. Of all the bad advice out there, for some reason this piece gets followed more than most. Often that surviving Joint Tenant will try to “beat the probate system” by adding another person to title as a Joint Tenant (most commonly, the surviving spouse will add one of the children to title as a Joint Tenant) so that the “string” of Joint Tenants is extended, thus avoiding probate. Then, the expectation is, that after the death of the second parent, that one child who was the surviving Joint Tenant will “do the right thing” and divide the property among all the children. Maybe . . . but there is no legal obligation for that to happen and, in many cases, that child will turn to his or her siblings and say something to the effect of “Well, I guess Mom and Dad must’ve like me best”, and there would be nothing the siblings could do about it – even if the parent’s will declared that it was to be divided equally. That is due to the fact that form of title trumps everything!

And, even if that sibling wanted to “do the right thing,” he or she would face gift tax implications if they shared with the brothers and sisters (since they’re at that point giving away what is legally theirs).

Well, you’re thinking, why not simply add all the kids as Joint Tenants to eliminate the possibility of one child not sharing with the siblings? Because by eliminating that one problem that parent would be exposing themselves to a whole host of potentially devastating outcomes. Keep in mind that multiple Joint Tenants own what is known as a 100% undivided interest in the asset while living – that means that if one of the Joint Tenants has a problem such as a divorce, a car wreck, bankruptcy, outstanding child support obligations, etc., the creditor can take the entire property – not just a fractional share!

Consequently, if someone tells you that you can defeat probate on your home by adding your kid or kids to title with you as Joint Tenant(s), DO NOT BELIEVE THEM – you are getting bad advice.
And, to complete the panoply of reasons why Joint Tenancy is far from optimal (despite the irony of it being the default form of ownership for couples), it leads to a vastly inferior tax treatment than that available via alternative forms of ownership – the ultimate, of course, being ownership vested in a Living Trust.

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

Photo Credit: Nani Chavez

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Why It Is Important To Have End Of Life Treatment Options And Prepare An Advance Healthcare Directive‏

5/12/2020

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In light of the recent Covid 19 Healthcare Crisis that, worldwide, has claimed over 237,000 lives, it is important to ensure that your medical wishes are well-known and documented. The best practice to do so is to prepare a California Law compliant Advance Healthcare Directive, sometimes referred to as a Durable Power of Attorney for Health Care or a Living Will. An Advance Healthcare Directive will ensure that if you cannot give informed consent or denial any longer, that your medical wishes are adhered to up to and including the final moments of your life. It allows you to appoint an healthcare agent to act on your behalf and avoids the need to establish an expensive probate proceeding known as a Conservatorship.

‏However, after cases such as Terri Schiavo (nee Schindler) in Pinellas Park, Florida, resulting in over 14 appeals to both the Florida Supreme Court and the Supreme Court of the United States, it is imperative to have an advance healthcare directive in place that clarifies your wishes and beliefs on end of life treatment options. Schiavo's husband and parents were in a legal battle regarding her feelings on the Right To Die law, also known as the Death With Dignity law. After 13 days of surviving without a feeding tube, Terri Schiavo succumbed to dehydration after living in a vegetative state for over 15 years in a Pinellas Park hospice center. ‏

How Do You Find An Advance Directive Form?‏

You can download a generic one from the California Medical Association for a modest fee. Better yet, you can have a fully customized Advance Directive prepared by an attorney at our firm, also for a modest fee.

The advance healthcare directive form can be especially vital in cases of cognitive diseases, such as Alzheimer's disease, in which you lose cognitive abilities as the disease progresses. In addition to making healthcare decisions about day to day medical care, DNR and DNI orders can be obtained and put into effect. A DNR (do not resuscitate) and DNI (do not intubate) order can ensure that you aren’t left in a vegetative state for an indeterminate period of time, and that your end of life treatment decisions are adhered to, even if you are incapacitated. ‏

‏Once you have your advance healthcare directive completed, and if necessary, witnessed and notarized, you should provide a copy to both your primary care physician and your healthcare proxy. This is to ensure that there is more than one person with your end of life treatment options working to ensure that your wishes are met. In the case of Terri Schiavo, it is important to note that there was no advance healthcare directive in place.

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: Piron Guillaume)

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The Laws of Intestacy

The Use of Ethical Wills

How to Defeat Capital Gains Tax

Federal Estate Tax

The Dangers of Joint Tenancy

Why It Is Important To Have End Of Life Treatment Options And Prepare An Advance Healthcare Directive‏

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