 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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 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  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)  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) |
