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The KRASA LAW, Inc. Estate Planning Blog

Monday, September 27, 2010

Taking Charge of Your Health Care Wishes

Perhaps the most important component of comprehensive Estate Planning is creating a legally binding set of instructions with regard to your health care wishes in the event of incapacity.  Normally when you have a health issue, it is your basic civil right to weigh the medical options, examine the advice given to you by your health care providers, assess the risks and benefits, and settle on a course of action.  However, if you are incapacitated, who is going to make such important and personal decisions on your behalf and how will that person know what you would want?


The best way to address these issues is to execute an Advance Health Care Directive ("AHCD").  The AHCD has two main elements.  The first element is to designate an agent to make health care decisions on your behalf if you are incapacitated.  Your agent's role is to choose your doctor and your health care provider, speak with your health care team regarding your condition and your treatment options, review your medical record and authorize its release when necessary, and accept or refuse medical treatment, including artificial nutrition and hydration and resuscitation attempts.  In choosing your agent, you should consider if that person will be available when needed, is willing to speak on your behalf, knows you well and understand your beliefs, will be comfortable asking your health care team questions, will do his/her best to make decisions in accordance with what you would have wanted, and is willing to be an advocate on your behalf.  It is also a good idea to designate alternate agents in case your first choice is unwilling or unable to act as your agent.


The second element of an AHCD is to generally express your wishes with respect to your health care.  You can write your preferences about accepting or refusing life-sustaining treatment, receiving pain medication, making organ donations, indicating your main doctor for providing your care, or other things that express your wishes and values.

An AHCD is appropriate for all adults, regardless of age or health condition as it appoints an agent and acts as a general guide for your health care wishes.  If you are seriously ill or in poor health, you may want to consider executing a Physician Orders for Life Sustaining Treatment form ("POLST" form).  A POLST form compliments your AHCD and is a medical order signed by your doctor and you which gives much more detail about your wishes with respect to end-of-life decisions.   
 

Tuesday, August 24, 2010

Maintaining Your Prop. 13 Tax Base


Most real property owners in California have at least a rudimentary understanding of Prop 13, the landmark legislation passed by voter referendum in 1978.  The concern that prompted Prop 13 was dramatically increasing property values that resulted in dramatically increasing property taxes that many homeowners couldn't afford.  Prop 13 first froze the assessed or taxable value of every Californian's home to the March 1, 1975 fair market value level.  Secondly, Prop 13 restricted annual increases in assessed value of real property to an inflation factor not to exceed 2% annually.  The idea was that all homeowners would always have predictability with respect to what their property taxes would be in a given year.
Read more . . .


Tuesday, August 24, 2010

Traps for the Unwary

Most Americans have never done their Estate Planning.  Everybody knows that human beings are mere mortals and that it is a good idea to plan for the event of incapacity or death.  However, for most people, thinking about these issues is uncomfortable and there are many other tasks we'd rather focus upon such as planning a vacation, looking forward to a relative's graduation, and celebrating a birthday.


Some folks who decide to finally do their Estate Planning look for shortcuts such as "do-it-yourself" kits or "trust mills"- out-of-town companies that provide a "one-size-fits-all" plan for a nominal fee.  However, delving into the complicated world of Estate Planning without detailed knowledge of key issues can lead to traps for the unwary.


A common problem is when individuals attempt to draft their own Wills.  While the formalities of a legally binding Will are not complicated, they are specific.  If the Will is typed, the Will must be signed by the testator and must also be signed by two disinterested witnesses during the testator's lifetime.  A common mistake is to have a Will notarized instead of witnessed which does not comply with the law.  If a Will is not properly witnessed, it may still be valid if the material terms are in the testator's handwriting.  If a Will is not properly witnessed and if the material terms are not in the testator's handwriting, a Will may still be valid if there is "clear and convincing evidence" that the testator intended the document to be his or her Will.  While the Will may eventually be considered valid, a lack of proper formalities can create unnecessary hurdles. 


Another common problem relates to Trusts.  Most individuals decide to use a Trust rather than a Will in order to avoid probate.  However, a Trust will only control what is titled to it.  Many people who use "do-it-yourself" kits or "trust mills" will draft a trust but will fail to properly re-title their assets to their Trust.  As a result, they have an empty document that is ineffective and it is as if they never did their Estate Planning in the first place.


Finally, without proper guidance, many people do not realize that other mechanisms may supersede the provisions of a Will or a Trust.  For example, any property held in joint tenancy will automatically pass to the surviving joint tenant, even if the Will or Trust has a specific clause that gives the property to someone else.  Retirement plans and life insurance are controlled by beneficiary designations.  If there is a conflict between the beneficiary designation and the Will or Trust, the beneficiary designation controls.


Most people think their Estate Planning is simple.  However, without detailed knowledge of the complex laws, many people fall into unexpected traps that lead to tragic results.  
 


Thursday, July 29, 2010

Incorporating Savings for College in your Estate Plan

The cost of higher education in the United States is staggering and is climbing rapidly each year.  This fact combined with the scheduled dramatic reduction in the Estate Tax Exemption starting on January 1, 2011 causes many clients to think about planning for their children's or grandchildren's future college expenses in the course of addressing their Estate Planning.


One of the simplest ways to reduce the future impact of the Estate Tax is to make gifts.  If you have a smaller estate at death, there is less for the IRS to possibly tax.  However, there are two primary concerns that arise when contemplating making gifts to children or grandchildren to fund future college expenses as a way to reduce the impact of potential Estate Tax.


First, many parents and grandparents are not keen on the idea of giving children direct access to thousands of dollars.  As soon as the children or grandchildren turn 18, they're likely headed directly to the Porsche dealer.  Second, generally there are limits placed on how much donors can give away each year without impacting their Estate Tax Exemption.  Currently, the limit is $13,000 per year per beneficiary.

 
A solution that navigates both of these concerns is a § 529 College Savings Account ("CSA").   In a CSA, a contributor funds an account for purposes of meeting the qualified higher education expenses incurred by a beneficiary in the future.  Distributions made for qualified educational expenses are tax-exempt.   The contributor is typically the account owner, and retains significant controls over the account, including the ability to control distributions, to change the beneficiary, and to reacquire the assets in the account.  Contributions are not deductible for federal income tax purposes but are treated as completed gifts.  In addition, a special provision applicable only to CSA's allows a contributor to fund an account with an amount equal to 5 years' worth of $13,000 annual exclusions at one time, and elect to treat the contribution as if it were being made pro rata over 5 consecutive years.


Because the account owner holds such significant controls over CSA's, an individual's CSA should be considered at every estate planning juncture.  For example, if an account owner dies, who has control over the CSA?  This problem can be resolved by either naming a successor owner or by transferring ownership of the CSA into a Revocable Living Trust.  Any such Trust should have special provisions concerning the management and investment over the CSA.  Additionally, the specific CSA account agreement should be consulted to ensure that the particular plan allows for either successor owners or Trust ownership.
 


Tuesday, July 20, 2010

Press Release: Nationally Recognized Law Firm Forms "Of Counsel" Relationship with KRASA LAW

HEADLINE:
Wealth Strategies Counsel and Jeffrey R. Matsen, One of the Nation’s ”Top 100 Attorneys” according to Worth Magazine, has formed an “Of Counsel” relationship with the Pacific Grove firm of KRASA LAW.

DATE:
July, 2010
 
LOCATION:
Pacific Grove, California
 
SUMMARY: 
Kyle A. Krasa of KRASA LAW, a Pacific Grove, California Estate Planning Law Firm, is happy to announce that Nationally Recognized Estate and Business Planning Attorney, Jeffrey R. Matsen  and his Orange County, California firm, Wealth Strategies Counsel  (WSC) of Bohm, Matsen, Kegel, & Aguilera LLP, are “Of Counsel” to KRASA LAW.  This relationship provides KRASA LAW with additional resources and prestige associated with Attorney Matsen and his firm, ultimately increasing the services to clients with Estate, Business and Asset Protection Planning as well as the ability to provide Offshore services.
 
BODY:
Attorney Kyle A. Krasa is a native of the Monterey Peninsula.  He provides clients with personal, compassionate, and thorough legal services in the practice areas of Estate Planning, Elder Law / Medicaid Planning, Asset Protection, and Probate / Estate Administration.  He is a Certified Legal Specialist in Estate Planning, Trust & Probate Law by the State Bar of California Board of Legal Specialization.  Kyle is known for his Client-centered, holistic approach and for his ability to explain complex legal principles into easy-to-understand "plain English."  His clients' testimonials, which can be found on his website at www.krasalaw.com, describe him as patient, kind, knowledgeable, and a pleasure to work with.

Attorney Jeffrey R. Matsen’s knowledge, professionalism, responsiveness and integrity have vaulted him to the top of his field culminating in his designation by Worth magazine as one of "America’s Top 100 Attorneys", by Los Angeles Magazine as one of California’s "Super Lawyers". The Nationally Renowned Attorney Rating Service, ‘AVVO’ has rated Mr. Matsen a perfect "10/10 Superb" and he has continued to achieve the highest "AV rating" and has been designated a "Preeminent Lawyer" by the only other prestigious attorney rating directory, Martindale Hubble. He is internationally recognized in the areas of Asset Protection, International Trusts and Offshore Business Entity Formation and has a myriad of world-wide legal, financial and business connections.
 
Matsen is the founding partner of Wealth Strategies Counsel (WSC), the Estate Planning and Business Transactions Department of the Orange County California premier law firm of Bohm, Matsen, Kegel & Aguilera, LLP with offices in Orange County California, Chicago, Honolulu, Salt Lake City, Boise Idaho, New York City and now, Pacific Grove/Monterey/Carmel, California.  With over 35 years of experience, WSC handles complex and sophisticated asset protection, estate and business planning matters locally, nationally and internationally.  WSC serves a variety of clients by providing solutions they can count on and advisors they can trust.  WSC make certain that their client’s wishes are not only being fulfilled, but that they are sound and tax advantaged.

Both KRASA LAW and WSC are members of Wealth Counsel (WC), a national association of Estate Planning attorneys and a leading provider of tools and intelligence to the Estate Planning community. It provides its member attorneys with back office technology solutions and continuing legal education that keeps them on the leading edge of professional knowledge and engages the attorney membership in a collaborative network where each attorney can exchange ideas and problem solve. There are over 1000 member attorneys nationally in Wealth Counsel, including many of the leading Estate Planning practitioners in the country. Attorney Matsen has presented continuing legal education through WC and continually collaborates with other WC attorneys, which is how the two firms became associated and began working on mutual cases together.

 “I am excited to be affiliated with KRASA LAW and value Kyle's opinions and ideas!  The decision to join KRASA LAW on an 'Of Counsel' basis was made after considerable due diligence and concluding it is a very professional and outstanding firm. Our combined expertise and resources provide a strategic advantage to our mutual clients,” stated Jeffrey R. Matsen, Founding Partner, Wealth Strategies Counsel.
 
Kyle A. Krasa, of KRASA LAW said, "I am honored to have Jeff and Wealth Strategies Counsel as my 'Of Counsel.'  In this complex legal climate, it is important to be able to exchange ideas and brainstorm about various legal strategies in order to make sure all clients receive the best legal services possible.  Being able to collaborate with a prestigious and knowledgeable attorney such as Jeff, and to have a large, "big city" law firm and its sophisticated staff as a "back office," is invaluable and is another way to provide value-added service to my clients."

BRIEF BIO:
   
Jeffrey R. Matsen of Wealth Strategies Counsel helps his clients structure their personal and business assets in the best way possible to preserve, protect, and transfer them in the most efficient and tax saving manner.
            
Kyle A. Krasa, of KRASA LAW, takes a warm, personal, and guiding approach to assisting clients in the areas of Estate Planning, Asset Protection, Trust, Probate, and Medi-Cal Planning.
 
CONTACTS:
 
Kyle A. Krasa, Esq.
KRASA LAW
704-D Forest Avenue
Pacific Grove, California  93950
831-920-0205 (Phone)
831-274-8224 (Fax)
kyle@krasalaw.com
www.krasalaw.com
 
Ty Mangrum, Executive Director
Wealth Strategies Counsel
695 Town Center Drive Suite 700  Costa Mesa, CA 92626
Phone: 714.384.6500
Fax: 714.384.6551
www.wealthStrategiesCounsel.com
tmangrum@bmkalaw.com
 
Jeffrey R. Matsen, Esq. 
Wealth Strategies Counsel
695 Town Center Drive Suite 700  Costa Mesa, CA 92626
Phone: 714.384.6500
Fax: 714.384.6551
www.wealthStrategiesCounsel.com
jrmatsen@bmkalaw.com

Tuesday, July 13, 2010

Yankees Owner Gets Away With It Again!

Over the past several months, I have written several columns about the impact of the 2010 Estate Tax rules.  In summary, there is normally a Estate Tax or "death tax" on inheritances.  The Estate Tax is typically around 50%.  The good news is that not everyone is subject to the Estate Tax.  In most years, there is an Exemption that shelters a certain amount of inheritance from the Estate Tax.  The Exemption has ranged from $675,000 in 2001 to $3.5 Million in 2009.  Under current 2010 law, there is an unlimited Exemption from the Estate Tax which is another way of saying that there is no Estate Tax.  However, in 2011, the Estate Tax comes roaring back with only a $1 Million Exemption.

 
At the start of 2010, many observers felt that Congress would retroactively pass a law that would prevent an unlimited Exemption for decedents dying this year.  Although the House passed legislation in December 2009, the Senate was never able to ratify the bill.  Now that it is the middle of summer, most experts feel that Congress will not be able to pass any retroactive Estate Tax legislation for the year 2010.  Furthermore, observers felt that if an ultra wealthy person died in 2010, that person's heirs would have great incentive to challenge any attempted retroactive Estate Tax legislation.  As it turns out, a few ultra wealth individuals did in fact die in 2010, including New York Yankees owner George Steinbrenner.


When George Steinbrenner purchased the Yankees in 1970, he paid $10 Million.  Today, the team is worth approximately $1 Billion.  If George Steinbrenner died in any other year, his heirs would have been required to pay hundreds of millions of dollars in Estate Tax.  However, because the 80-year-old baseball icon died in 2010, his heirs will not have to pay the IRS a dime in Estate Tax!  If Congress attempts to pass a law that retroactively reinstates the Estate Tax in 2010, you can bet that heirs such as George Steinbrenner's family will hire high-powered attorneys to challenge the legality of retroactively creating such a law.  As the husband of a native New Englander and a loyal Red Sox fan, it's disheartening to see George Steinbrenner get away with another one.

  
With the passing of George Steinbrenner, it definitely appears that there will not be any Estate Tax for decedents dying in 2010.  However, observers thus far have not had good luck in predicting what will happen with regard to the Estate Tax law.  Almost all practitioners agree that Congress needs to come up with a permanent and fair Estate Tax solution for decedents dying in 2011 and beyond.


KRASA LAW is located at 704-D Forest Avenue, PG, and Kyle can be reached at 831-920-0205.


Tuesday, July 6, 2010

What can a Certified Legal Specialist Do for You?

When the legal world was simpler, it was common for attorneys to be "general practitioners" who practiced in an array of legal areas.  The same person who drafted your Will would also handle your divorce and even defend you in a criminal action.  Everybody within a particular community would visit the same "town lawyer" for all of their legal matters. 


However, today it is rare to find an attorney who will take anything that walks into the door.  The reason is that society has become much more complex and it is not possible for any one person to have the requisite depth of knowledge to practice competently in all practice areas.  It has thus become a necessity to focus in one or two key areas of the law.  Most laypersons understand this as a common question I receive when I state that I am an attorney is, "In what area do you specialize?"


With Estate Planning in particular, there is a problem with attorneys practicing without the requisite skill and depth of knowledge necessary to be competent and effective.  The reason is because many attorneys who advertise that they practice Estate Planning are really experts in other, more stressful fields such as litigation, and  turn to Estate Planning after "burning out."  How do you know if a particular attorney has requisite skill, education, and dedication to Estate Planning?  One way is to inquire as to whether the attorney is a Certified Legal Specialist in Estate Planning, Trust & Probate Law by the State Bar of California Board of Legal Specialization.


The California State Bar certifies Legal Specialists to help the public identify attorneys who have demonstrated proficiency in specialized fields of law and to encourage the maintenance and improvement of attorney competence in specialized fields of law.  Estate Planning, Trust and Probate law is complex and constantly changing - a Certified Legal Specialist stays current with the law.


A Certified Legal Specialist is more than just an attorney who specializes in a particular area of the law.  A California attorney who is certified by the State Bar as an Estate Planning, Trust & Probate Law Specialist must have (1) taken and passed a written six hour and fifteen minute examination in Estate Planning, Trust & Probate Law; (2) demonstrated a high level of experience in Estate Planning, Trust & Probate Law; (3) fulfilled ongoing education requirements; and (4) been favorably evaluated by other attorneys and judges familiar with his or her work.

 
For an alphabetical list by county of certified Estate Planning, Trust & Probate Law specialists, visit www.californiaspecialist.org


Kyle A. Krasa, Esq. is a Certified Legal Specialist in Estate Planning, Trust & Probate Law by the California Board of Legal Specialization.


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.
 


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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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