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The KRASA LAW, Inc. Estate Planning Blog

Tuesday, June 8, 2010

Reverse Estate Planning

When most advisors and their clients consider Estate Planning, they look "downstream" to future generations.  They think about how to structure the Estate Plan so as to provide for children, grandchildren, and other younger beneficiaries.  The perspective is always, "How can we benefit future generations?"  While this is a key aspect of any Estate Planning, there is not enough focus on the reverse: "upstream" Estate Planning.  Clients should also focus upon how gifts and inheritances they expect to receive should be structured in order to benefit themselves.


Basic Estate Planning usually involves creating a Living Trust for the purpose of avoiding conservatorship in the event of incapacity and avoiding probate upon death.  There is no question that for the vast majority of clients, being able to avoid the cost, expense, frustration, and other hassles with conservatorship and probate is worth the legal fee in creating a Living Trust.

 
Traditionally, most attorneys and other advisors have not seen additional benefits of creating a Living Trust beyond avoiding conservatorship and probate.  As a result, provided the beneficiaries are mature enough to manage their inheritances, most Living Trusts terminate upon the death of the client(s) and the beneficiaries receive their inheritances free of trust, in their own name(s).  This is simple, straight-forward, easy-to-understand Estate Planning.


Recently, the trend among national experts in Estate Planning, especially in light of the plummeting economy and the resulting dramatic increase in litigation, is to keep inheritances in trust for beneficiaries.  The reason is because when a Trust is created for the benefit of a third party, the Trust can provide so many more benefits than avoiding conservatorship and probate.  A Trust can provide superior creditor protection for the third party beneficiary in the event of frivolous lawsuits or extraordinary health care bills.  A Trust can also provide significant divorce protection and even additional Estate Tax protection for the third party beneficiary.  If the beneficiary is mature, the beneficiary can even be in charge of his/her Trust share.


However, such protections are only effective if a Trust is created by someone else for the benefit of a third party: i.e., you cannot enjoy the same benefits if you try to create such a trust for yourself.  With all this focus on protecting future generations, how can you provide yourself with these same benefits?


One answer is to ask your potential benefactors (parents, grandparents, etc.) to structure their Estate Planning in order to provide "in trust" inheritances rather than outright inheritances.  Some benefactors don't want to dramatically alter the structure of their Estate Planning.  In that case, clients can have their own attorneys draft a special kind of Trust designed to receive assets from third party benefactors, sometimes referred to as a "Heritage Trust."  The Heritage Trust will have all of the protections necessary to allow the beneficiary to enjoy as much creditor protection, divorce protection, and Estate Tax protection as possible.  The benefactors would simply be asked to sign the Heritage Trust and would be asked to make a slight modification to their Estate Planning to leave any inheritance to the Heritage Trust.  Any lifetime gifting should also be made to a Heritage Trust in order to provide for the same protections.


The key is for clients and their advisors to be aware of the concept of "reverse" or "upstream" Estate Planning and for clients to ask their benefactors if they'd be willing to sign a Heritage Trust and make a slight modification to their Estate Planning.  As a nationally recognized expert on the subject once said, "It is rare that a parent would say 'No' to a mature child who asks the parent to do this.  The parents often say, 'Hmmm...It protects it from your spouse!  Where do I sign up?'"
 


Tuesday, May 25, 2010

Children: A Reason to Plan NOW!

Four days ago, I had the honor of experiencing the birth of my first child.  (Admittedly, my wife "experienced" it a bit more than I did.)  At that moment, I suddenly understood all the clichés about having children: how it's miraculous; how it changes your life; how you experience an instant love-at-first-sight like none other; how you would do anything to protect them.  That's when I realized: we need to change our Estate Plan!


Having young children is one of the most important reasons to execute an Estate Plan in the first place.  Unfortunately, most young parents don't think about Estate Planning.  They are too busy with work, raising their children, school activities, slumber parties, and family vacations.  It isn't until they near retirement and their children have become adults that most people start seriously thinking about Estate Planning.  However, Estate Planning is probably most important for young parents because young children need much more detailed planning than older children.


Guardians.  One of the biggest issues facing parents with young children is designating legal Guardians to take care of their children in the event of incapacity or death.  Most parents realize that they should nominate Guardians but would rather not think about someone else raising their own children and thus fail to plan.  Unfortunately, without taking the time to designate legal Guardians, parents leave it up to chance as far as who will eventually be appointed as Guardians of their own children.  It's a difficult issue but one in which parents with young children should tackle right away.  It's traumatic enough for a child to lose a parent and there is no need to add uncertainty and family squabbles into the mix.

 
In selecting Guardians, parents should think beyond the obvious choices.  While close family members often make good candidates, parents should also think about extended family members and even friends.  Sometimes a friend may have closer religious beliefs, moral values, educational values, social values, and child-rearing philosophies than relatives. 
 

It takes time for a Court to legally appoint a Guardian, even if that Guardian is designated in a parent's Estate Plan.  As a result, it is a good idea to also designate temporary Guardians who can take care of the children until a Court is able to legally appoint the Guardian of the parents' choice.  Without a temporary Guardian designation, children may have to go into the custody of child protective services in the meantime.


It is also important to name alternate Guardians.  Just as something could happen to a parent, something could happen to a Guardian.  Although it's difficult to come up with even one person to designate as a Guardian, designating at least two or three alternate Guardians should be part of every parent's Estate Plan.


Inheritance.  Most parents assume that all their assets - their bank accounts, investment accounts, retirement accounts, homes, other real property - will automatically be given to their children.  While it is true that children are the default heirs of their parents, careful planning is still necessary.  Without proper Estate Planning, the parents' estates will have to be subject to Probate, a very time consuming, public, and expensive court-supervised process.  Furthermore, until the children reach age 18, all assets will likely need to be placed in a custodial account with an adult custodian who will be designated to manage the assets.  Once the child turns 18, he or she will be entitled to 100% of his or her share of the inheritance without any guidance.  Most parents realize that not many 18 year old individuals have the maturity and the foresight to properly manage money.


For most parents, the best solution is to establish a Trust for their children.  With a Trust, the parents can select a successor Trustee, an adult of their choice who will have the responsibility to manage the assets of each child's share of the inheritance.  The Trustee can be the same person designated as the child's legal Guardian or the Trustee can be a different person.  Parents can also select an age in which the children assume management and control over their inheritance.  Until the child reaches that age, the inheritance is still available to the child, but it is in the discretion of the Trustee, usually with certain guidelines established by the parents.


When children reach the designated age to be able to assume management and control over their inheritance, good planning will provide that the Trust remains intact and that the child simply takes over as Trustee, rather than terminating the Trust and distributing the inheritance to the child directly.  By keeping the inheritance in Trust, the child may be afforded some Estate Tax and GST Tax benefits, a degree of divorce and creditor protection, and options in the event the children ever develop Special Needs.


Values.  An effective Estate Plan can also instill parents' values in their children.  Part of this process includes the choice of guardians and the manner in which the inheritance is received as mentioned above.  However, a comprehensive Estate Plan should include an "Ethical Will" - a statement of the parent's life story, childhood, background, and philosophy.  In addition, parents can provide guidelines to the Guardian, the Trustee, and the children directly regarding their approach to life.  Such guidelines can include books or "must see" movies that embrace parents' ideas, views about religion, moral values, personal relationships that the parents wish the child to maintain, activities and hobbies that the parents wish the child to engage, and particular goals the parents wish the children to have.


Comprehensive Estate Planning should be near the top of the "to do list" for every parent.  Unfortunately, it is an issue that most parents never think about in the midst of raising their children.  Those parents who do take the time to execute a comprehensive Estate Plan will be providing their children with an invaluable gift and will be providing themselves with peace of mind.    
 


Tuesday, May 11, 2010

Protecting Your Home

Even in today’s market, your home is likely your most valuable asset.  It is also your most important asset.  Not only does it provide necessary shelter and comfort, but it is an outward manifestation of your very existence.  Sentimentally, your house is priceless.  Of all your assets, your house is the most important to protect from frivolous lawsuits (i.e. traffic accidents, former employees, professional malpractice) and creditors (i.e. unpaid health care bills).  Ironically, your house is also the most difficult asset to protect.


You may be under the mistaken assumption that your house is somehow protected from creditors and/or bankruptcy in the form of a “homestead exemption.”  Only a few states – such as Florida and Texas – provide an unlimited homestead exemption for your personal residence (this is the primary reason O.J. Simpson moved from California to Florida in the wake of his loss in a wrongful death lawsuit).  In California, the homestead exemption is limited to $75,000 in equity for a single person, $100,000 in equity for a family, and $175,000 for homeowners over 65 or disabled.  As a result, if a creditor has a claim against you for more than the homestead exemption amount, the creditor can force the sale of your home.


The most common form of asset protection for real property – a Limited Liability Company or “LLC” – is typically unavailable for your house due to the requirement that you must have a “business purpose” in order to form an LLC.  You ordinarily do not have a legitimate “business purpose” when it comes to your personal residence.  (If you have a true home office or rent out a room or a guesthouse, you may have a legitimate “business purpose,” but there are other potential problems with transferring your personal residence into an LLC.)


A popular  form of asset protection for your home is a practice known as “equity stripping.”  The basic idea behind equity stripping is to take out a loan against your house in an amount that leaves little or no equity.  Your home thus becomes “valueless” in the eyes of a creditor.  You can invest the liquidity in rental property or other assets that are easier to protect with the use of LLC’s or other structures.  The most common form of equity stripping is to take out a Home Equity Line of Credit (“HELOC”) on your house, which can also provide liquidity for emergencies or unexpected financial obligations.


Another method for protecting your home is to establish a Domestic Asset Protection Trust (“DAPT”).  Only 11 states - such as Nevada and Delaware but not California - allow DAPT’s.  Nevertheless, many clients still place California homes in an out-of-state DAPT on the theory that doing so is better than leaving the house completely vulnerable.  An even stronger barrier is to combine equity stripping with the use of a DAPT, making it much harder for a creditor to go after the home and thus much more likely to settle or give up all together.


As with all asset protection planning, you should always employ equity stripping and DAPT’s long before there is any hint of a potential lawsuit.  It is best that any such transaction is “old and cold” by the time a creditor asserts a claim. 
 


Friday, May 7, 2010

Will Everybody Need Advanced Estate Planning?

The bad news is that the Estate Tax, or "Death Tax," is a confiscatory tax on inheritance with rates as high as 55%.  The good news is that everyone is entitled to an exemption from the Estate Tax.  Over the last decade, the exemption has rapidly risen from $675,000 in 2001 to $3.5 million in 2009.  As a result of these rules, most clients over the last decade have not had to do more than Basic Estate Planning such as setting up an A/B Trust.  However, beginning in 2011, many clients may have to engage in Advanced Estate Planning, once only reserved for extremely wealthy individuals.


Currently in 2010, there is no Estate Tax.  However, in 2011, the Estate Tax comes back and the Estate Tax Exemption is scheduled to drop to $1 million.  This means that if you add up the fair market value of everything you own, any amount over $1 million will be subject to a 55% Estate Tax.  Advanced Estate Planning may be the answer.


One Advanced Estate Planning technique is to make annual gifts to relatives.  Each person may gift up to $13,000 per person per year without any Gift Tax or Estate Tax ramifications.  Many clients make it an annual habit to gift $13,000 to children, grandchildren, and other loved ones.  Some clients take it a step further by forming Family Limited Partnerships or Family LLC's and giving away fractional interests in such entities.  By doing so, they can take advantage of "fractional discounts" - the principal that a minority interest in an entity is worth something less than the proportional fair market value of the interest since there is no control over the entity.  This technique allows you to give more away at a lower Gift Tax "cost."


Another Advanced technique is to gift an asset that is expected to appreciate.  If you give away more than $13,000 to a single person in a single year, you start using up your Estate Tax Exemption.  However, if you think a particular asset will dramatically appreciate in value in the future, you may want to gift that asset now, while the value is low, and allow the appreciation to occur in your beneficiary's Estate rather than in your Estate.  This technique is known as an "Estate Freeze."

A sophisticated "Estate Freeze" technique is a special kind of irrevocable trust known as a Qualified Personal Residence Trust, or a "QPRT" (pronounced “cue-pert”).  Our homes are often our most valuable assets and hence one of the largest components of our taxable estate.  A QPRT allows you to give away your house or vacation home at a great discount, freeze its value for estate tax purposes, and still continue to live in it.  Here is how it works: You transfer the title to your house to the QPRT (usually for the benefit of your family members), reserving the right to live in the house for a specified number of years. If you live to the end of the specified period, the house (as well as any appreciation in its value since the transfer) passes to your children or other beneficiaries free of any additional estate or gift taxes.  After the end of the specified period, you may continue to live in the home but you must pay rent to your family or designated beneficiary in order to avoid inclusion of the residence in your estate.  This may be an added benefit as it serves to further reduce the value of your taxable estate, though the rent income does have income tax consequences for your family.  If you die before the end of the period, the full value of the house will be included in your estate for estate tax purposes, though in most cases you are no worse off than you would have been had you not established a QPRT.  An added benefit of the QPRT is that it also serves as an excellent asset/creditor protection vehicle since you no longer technically own the property once the trust is established and your residence is transferred to the QPRT.

In addition, there are other Advanced techniques that may be worth discussing with an attorney in anticipation of the scheduled 2011 Estate Tax Exemption.
 


Wednesday, April 14, 2010

Don't Fall Into a Property Tax Trap

Thanks to Proposition 13, if you’ve owned real property in California for several years, it is likely that your property taxes are relatively low.  Proposition 13 essentially freezes the assessed value of your California real property for property tax purposes until either there is (1) new construction or (2) a change in ownership.  The idea is to give homeowners predictability with regard to their annual property tax liability, especially in a state where real property values have soared over the past 30 years while many homeowners’ incomes have not necessarily increased.  Many homeowners have become accustomed to their property tax rates and hope that their heirs can enjoy the same benefits.


Under Proposition 58, a transfer of the principal residence between a parent and a child is completely exempt from a property tax reassessment despite the change of ownership.  In addition, a transfer of real property other than a principal residence between a parent and a child is exempt up to $1,000,000 of assessed value.  In order to preserve this exemption, proper estate planning and estate / trust administration is essential.  For example, if multiple children are the beneficiaries of an estate but only one child wants to keep certain real property, the trustee or executor should determine whether the trust or will allows non-pro rata distributions of property.  If this is the case, the trustee or executor should refrain from distributing all of the inheritance in equal shares to the children and instead transfer 100% of the real property to the child who wants to keep the real property and transfer other assets of equal value to the other children. 
 

In addition, Proposition 193 excludes from reassessment transfers of real property from grandparents to grandchildren, providing that all the parents of the grandchildren who qualify as children of the grandparents are deceased as of the date of transfer.


In order to claim either the parent/child exclusion or the grandparent/grandchild exclusion, be sure to file the proper forms upon the death of a real property owner.  These forms include the Death of Real Property Ownership Report, the Preliminary Change of Ownership Report, and the Parent/Child or Grandparent/Grandchild Exclusion forms.
 


Friday, April 2, 2010

Is Your Well-Meaning Friend Out of Luck?

Establishing your estate plan is a very personal and sensitive task.  More important than the actual money or property that you leave to a loved one is the acknowledgment of appreciation that mentioning someone in your estate plan conveys.  However, without careful planning, sometimes the best intentions can accidentally create a legal mess.


In 1992, the L.A. Times ran a series of articles about estate planning attorney James D. Gunderson who had an office within Leisure World, a Southern California gated retirement community.  Mr. Gunderson had a habit of inserting himself in his clients' estate plans.  Over the years, his clients "left" him millions of dollars in cash and other property.  Many observers questioned the propriety of the estate plans Mr. Gunderson drafted.  In response, the California legislature passed Probate Code Section 21350 which disqualified estate planning gifts made to the drafting attorney, the law partners of the drafting attorney, and employees of the drafting attorney with narrow exceptions.


Five years later, in 1997, the California legislature added a new sub-section to Probate Code Section 21350 which also made "a care custodian of a dependent adult" disqualified from receiving gifts through estate plans.  The concern was that in-home caregivers might unduly influence vulnerable seniors and manipulate them into handing over their estates.  Originally, California courts held that only professional or paid caregivers fell into the disqualified category within the meaning of the statute.  However, in 2006, the California Supreme Court case of Bernard v. Foley held that "care custodian" included unpaid caregivers, even friends who simply shopped, did banking, and cooked for the senior.  This expansive interpretation of the law results in disqualifying gifts to well-meaning friends of the senior.


Fortunately, there is a saving grace.  If you intend to leave part of your estate to a friend who occasionally runs errands for you, the best practice is to have a second attorney sign a "Certificate of Independent Review" which states that the second attorney has explained the estate plan to you and believes that you are not under undue influence or fraud.  If your estate plan creates a gift for a friend, you may want an attorney review it to make sure the "Certificate of Independent Review" procedure is not necessary.  Your estate plan may have been created prior to the 2006 case.  Furthermore, what was a friend at the time you signed your estate plan may have since turned into a "care custodian."
 


Tuesday, March 9, 2010

Destroying the Incentive to Litigate

Many people are increasingly concerned about becoming the targets of lawsuits and other creditors.  We live in a litigious society and there is no greater tragedy than losing everything that one has worked hard over a lifetime to attain due to an aggressive plaintiff's attorney and a persuaded jury.  It seems that there are no limits as to why someone is sued.  Recently the Associated Press reported that actress Lindsay Lohan filed a lawsuit against E-Trade claiming that an advertisement featuring babies referring to a "milkaholic" named Lindsay is modeled after her and is damaging her reputation.  With endless possible ways to be on the wrong end of a subpoena, proper Asset Protection Planning is generating more interest. 


Perhaps the most common form of Asset Protection involves creating entities such as corporations or Limited Liability Companies ("LLC's") to hold business or investment property.  If you run a business or own rental property, holding such assets in a corporation or an LLC will provide you with a degree of creditor protection.  "Inside creditors" - those individuals who claim they have been harmed by the business or on the rental property - generally will be limited in their recourse to the assets that are held in the corporation or LLC and will not be able to go after your personal assets.  If the LLC is structured in a certain way and is governed under an Asset Protection friendly state such as Nevada, "outside creditors" - those individuals who claim they have been harmed personally by the defendant - generally will be limited in their recourse to personal assets and not the business assets.


Protecting personal assets is more difficult.  Historically, it was not possible to create an entity in the United States that shielded your own assets from your own creditors.  However, years ago foreign jurisdictions such as the Cook Islands allowed so called "Asset Protection Trusts."  The idea was to create a trust in a foreign jurisdiction, hire a foreign trustee, and rely upon the foreign jurisdiction's laws to protect your personal assets.

 
More recently, states such as Nevada and Delaware have amended their laws to allow domestic Asset Protection Trusts.  The idea is similar to a foreign Asset Protection Trust but instead of moving title to your assets off-shore, you only need to move title to your assets to another state.  This method is generally less expensive and it is less worrisome for most clients to hold title in another state rather than in another country.

 
Both foreign and domestic Asset Protection trusts are not foolproof but the idea is to make it harder and more expensive for a potential plaintiff to go after your assets.  The concept is to put as many obstacles between the potential plaintiff and your assets in order to destroy the economic incentive to litigate.

 
For more information, I am hosting two seminars on Asset Protection Planning with special guest, nationally-known Asset Protection attorney Jeffrey R. Matsen.  Both seminars will be held on Thursday, March 25, 2010.  Please call Marilyn Beans at 831-920-0205 to RSVP.
 


Thursday, February 25, 2010

Seminar Advertisement: What Everybody Should Know About Asset Protection

The Pacific Grove law firm of KRASA LAW presents two seminars on "What Everybody Should Know About Asset Protection," with special guest, Jeffrey R. Matsen, Esq. 

Never before has the subject of Asset Protection been more important and topical!  More and more people are using the legal system to deprive others of their life's work.   Numerous lawsuits are filed in the United States every year, many of which are frivolous or settled for sums greater than the actual liability. 
 
Business owners, professionals such as doctors, dentists, lawyers and accountants, and property owners in particular should be aware of the risk associated with conducting their business, practicing in their respective fields, and taking responsibility for others.
 
Asset Protection is about assisting clients in arranging their finances, real property and other assets in a manner that minimizes their exposure to potential creditors.
 
KRASA LAW presents two informative seminars on "What Everybody Should Know About Asset Protection," co-presented by Jeffrey R. Matsen, Esq.
 
 1.  For Advisors / Professionals:
     Thursday, March 25, 2010, 12:00 to 1:15 pm
      Bay Park Hotel
      1425 Munras Avenue, Monterey, California
      Lunch Provided
 
  2.  For Clients / Consumers: 
       Thursday, March 25, 2010, 6:00 to 7:15 pm
       700 Jewell Avenue, Pacific Grove, California 
       Refreshments Provided
 
Host Kyle A. Krasa, Esq. of KRASA LAW in Pacific Grove, California is a native of the Monterey Peninsula and a local Estate Planning attorney.  He is well known for his personal, client-centered approach to his practice. 
 
Special guest Jeffrey R. Matsen, Esq. of Bohm, Matsen, Kegel & Aguilera, LLP in Costa Mesa, California has been recognized by Worth Magazine as one of the "Top 100 Attorneys" in the country and is well known nationally as a leading and cutting edge lawyer in Asset Protection.  
 
Please RSVP to Marilyn Beans at 831-920-0205.  Seating is limited.
 

Tuesday, February 23, 2010

On Schedule

Most Estate Plans utilize a Revocable Living Trust as the primary legal document that governs the management and distribution of one's assets in the event of incapacity and upon death.  One of the main reasons that Revocable Living Trusts are so popular is the fact that they allow the avoidance of Probate.  Rather than subjecting your loved ones to an expensive, time-consuming, public, court-supervised process, a Revocable Living Trust allows your representative to take inventory of your estate, pay your taxes and creditors, and distribute your assets to your loved ones privately, without court-supervision.  Although there is still a process involved, Trust Administration is faster and less expensive than a probate.
 

The key to effectively avoiding probate with a Revocable Living Trust is to make sure that assets are titled to the Trust.  This means that the financial institutions need to change the owner of record from the individual client to the Trust.  Stocks held in certificate form showing the individual as the owner should be swapped for stock certificates showing the Trust as the owner.  Real property such as houses, condominiums, commercial real estate, and vacant land should be re-deeded to the Trust.  Mobile homes should be re-registered to the name of the Trust.  Even timeshares should be re-titled to the Trust.


It can be very complicated and time-consuming in order to re-title one's assets to a Trust.  However, failing to do so may cause an unintentional probate - the very scenario most clients attempt to avoid by taking the time and effort to create a Revocable Living Trust.  Furthermore, it takes time to re-title one's assets to a Trust and something could happen in between the time a Trust is created and the time that assets are re-titled to a Trust.  Fortunately, California offers a saving grace, known as a Heggstad Petition.

On October 20, 1990, Halvard L. Heggstad died.  He had executed a Revocable Living Trust a year earlier and re-titled all of his assets to his Trust except for an interest in real property located in Menlo Park.  At the same time, he listed all of his assets - including his interest in the Menlo Park real property - on a "Schedule A" attached to his Trust.  The Trust referred to the "Schedule A" and stated that it was Mr. Heggstad's intent to transfer all of the assets listed on "Schedule A" to his Trust.   In a 1993 case, the Court ruled that because he demonstrated his intent to transfer his interest in the Menlo Park real property to his trust by listing it on the "Schedule A," the property was in the Trust and thus a probate was not necessary.

 
Subsequently, there have been numerous cases with the same facts: a person died with assets titled to the individual's name but there was a "Schedule A" or other written document that expressed the person's intent to transfer that asset into the Trust.  This kind of case is known as a "Heggstad Petition."  If you can demonstrate some written intent to transfer the property into the Trust, courts will typically rule that such property is in fact in the Trust and that a probate is not necessary.  As a result, a simple stopgap measure for avoiding a probate is to take the time to make a list of assets you intend to transfer into the Trust by completing a "Schedule A."  I usually have my clients sign their "Schedule A" for added protection though it is not necessary.  While it is still best to make sure assets are re-titled to the Trust, executing a "Schedule A" contemporaneously with executing a Trust is an easy way to ensure that the Trust carries out its objectives in avoiding probate.
 


Tuesday, February 2, 2010

Updating Your Estate Plan

Many years ago, you finally fulfilled your long-time resolution and had your Estate Planning completed by signing a Living Trust, a Will, a Power of Attorney, an Advance Health Care Directive, and other related documents.  It was so long ago that you don’t remember the exact choices you made with respect to the plan.  When you look at it, you’re not sure what it says because of the complex “legalese” that lawyers like to use.  How do you know if it needs to be updated?


If it has been several years since you completed your Estate Plan, it is a good idea to have an attorney review it to makes sure that it is up-to-date.  One of the first issues I address when clients bring in existing Estate Plans is whether or not their Trusts are fully funded.  A Trust will only control those assets that are titled to it.  Your Trust can have the most beautiful, detailed language possible but if your assets are not properly titled to your Trust, it’s as if you never did Estate Planning in the first place.


Another key factor in reviewing existing Estate Plans is to make sure that you are still happy with your nominations for Successor Trustees, Power of Attorney Agents, and Advance Health Care Directive Agents.  What seemed like a good nomination years ago might not be a good nomination today.


You also want to think about whether your family circumstances have changed.  Has there been a birth or a death in the family?  Have any of your beneficiaries developed special needs?  Do any of your beneficiaries have creditor problems or are they facing a divorce?  Amended provisions can address these issues.


Tax laws – such as the 2010 Estate Tax and Capital Gains Tax laws – and other laws may have altered since you signed your Estate Plan.


If your changes are relatively small, you can update your Trust by executing an Amendment, a 1-3 page document changing only specific paragraphs.  This is analogous to changing spark plugs in a car.  If more than a few paragraphs need to be changed or if you already have several Amendments, then a “full body restoration” might be in order and you might want to sign a Restatement.  A Restatement amends your Trust in its entirety but keeps the same name and date so that your existing funding doesn’t have to change.
 


Tuesday, January 26, 2010

Now What?

In my last blog, I discussed the fact that the federal Estate Tax under current law has expired for one year only in 2010.  I outlined how your Estate Planning might be affected in light of these changes.  These new rules that took effect on January 1, 2010 also impact Trust Administration and Probate.


Many married couple's Estate Plans divide the estate into a Bypass Trust and a QTIP Trust upon the death of the first spouse.  It is common for an Estate Plan to include a mathematical formula based on the Estate Tax in order to allocate part of the estate to the Bypass Trust and part of the estate to the QTIP Trust.  In a year such as 2010 where there is no Estate Tax, Successor Trustees will not be sure how to properly interpret such a formula. 


The 2010 rules also abolish old reporting requirements for Trustees/Executors and introduce new reporting requirements.  For estates of decedents dying before and after 2010, the law requires the Trustees/Executors to obtain date of death values for all assets.  If the value of the decedent's estate exceeds the Estate Tax exemption, there is a requirement to file an Estate Tax Return (IRS Form 706).  Under the current rules for decedents dying in 2010, there is no need to file a 706.  However, Trustees/Executors are required to report transfers at death of noncash assets in excess of $1.3 million and certain appreciated property that the decedent had acquired within three years of death. 


Adding to the confusion is the strong belief among many commentators that Congress will pass a new law within the next few weeks or months that will return the pre-2010 Estate Tax rules and have it apply to decedents dying in 2010.  As a result, Trustees/Executors do not know whether to conduct Trust Administrations and Probates based upon the "old" rules or the "new" rules and may not know for some time.   


Because there is so much confusion in this area and we are experiencing an unprecedented uncertainty, I am holding a Free Seminar on February 18, 2010 from 6 to 7:15 pm at 700 Jewell Avenue, Pacific Grove, California.  Please call 831-920-0205 to RSVP.
 


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KRASA LAW assists clients with Estate Planning, Elder Law, Pet Trusts, Asset Protection, Special Needs Planning and Probate / Estate Administration in Pacific Grove, CA(93950), Monterey (93944, 93940, 93943, 93942), Salinas (93901, 93905, 93906, 93907), Hollister (95023,95023) Pebble Beach (93953), Carmel By The Sea (93921), Seaside (93955) and Carmel (93923, 93922) in Monterey County and San Benito California.

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