For the most part, the results of our work are not seen by our clients. When we prepare an estate plan for someone, it is generally not implemented until the client’s incapacity or death.

What other professions is that true about? You go to the accountant or to the doctor, or to the dentist, or to the mechanic – well you get the picture – and you see the results fairly quickly. When you ask your friends for recommendations or read recommendations on the internet for those professions and most others, you are talking with people who have experienced the results of the work – not just the process of the work.

In my profession, people can recommend me because they liked “my bedside manner” or they enjoyed the process, but they are taking it on trust that I have designed an estate plan that works well.

It is why many people make a determination on their estate planning based upon price. They do not know what they do not know so they call our office and ask how much we charge. They generally would not select a medical doctor in that way, but to have their living trust or will done, they vary well may.

Even wealthy clients fall into this trap or decide to put off planning. That is why as they get older, they begin to sell assets that they would like to keep in the family, but that they do not have the liquidity to keep and to pay the estate tax.

I frequently use Sam Walton as an example of a great businessman who understood that it was not just about building, but also about retaining. Not only did he build the biggest company in the world and become at the time of his death in 1992 the richest (or second richest) man in the world, but he engaged in estate planning from the beginning of the creation of Wal Mart.

His family – he had a wife and four children – benefitted immensely. From 1992 until 2005, five of the ten richest people in the United States were the Waltons. This was true despite upon his death there being an estate tax rate of 55%.

Sam Walton was proactive in his estate planning. In fact he utilized GRATs (Grantor Retained Annuity Trusts) to such a degree and in such a manner that there is now in the estate planning community a special type of GRAT known as the Walton GRAT.

The important point to understand is that estate planning attorneys can be of benefit and not just for the very wealthy. We can structure estate plans for people that do not have taxable estates so that their children’s assets are protected from divorce, creditors, lawsuits, and their own spending.

Many people want to help out family members while they are alive while at the same time wanting to reduce the size of their estate. The easiest way to do this is to give $13,000 per person to as many people as you want. Thus a couple can give $26,000 per year to a person. For most people, a few years of doing that be more than enough to decrease the chance of estate taxes.

There are some people with significant wealth. They have to engage in more “sophisticated” estate planning. While it does not sound that sophisticated, they may wish to give larger gifts. In addition to the $13,000 annual gifts, an individual can give away $1,000,000 over his or her lifetime without incurring a gift tax. By getting money out of the estate, the growth of that money is not subject to estate tax.

What about for very wealthy people? Are gifts still a good thing? Many would argue yes. Currently our gift tax rate of 35% is the lowest it has been since 1934 when it was 33.5%. Next year the rate will be 55% unless a new law is passed. Therefore, if someone wants to give away $1,000,000 (and has already used up his $1,000,000 lifetime amount) he would have to pay $350,000 to the federal government. On the other hand, if he leaves the amount in his estate and dies with a taxable estate and the estate tax rate is at 55% as it is set to be in 2011, then it will take over $2,000,000 to get his heirs $1,000,0000. In other words, it makes a lot of sense to gift the money now.

However, many very wealthy are not doing this. For some, the idea of paying any taxes to Uncle Sam goes against the grain. They believe in avoiding taxes or deferring them. Many have been able to do that with their income taxes. For others, giving away a large amount of money is worrisome. Many are scared they will run out of money.

I tell all of my clients that come to my office for trusts, wills, asset protection, and sophisticated estate planning to think about gifting. It is a powerful tool!

Q. Is an IRA protected from Bankruptcy for the Original Owner?

A. The short answer is “Yes”. In 2005, the Bankruptcy Abuse Prevention and Consumer Protection was enacted. Under that law, all types of IRAs are bankruptcy protected. Typically if an individual files for bankruptcy protection, he/she can keep the IRA (regardless of what kind of IRA it is) from his/her creditors in bankruptcy court.

Q. Is an inherited IRA protected from Bankruptcy?

A. The short answer is “Maybe”. In a 2010 Minnesota case a woman filed for bankruptcy only four months after she had inherited an IRA. The Minnesota bankruptcy court ruled that “transferred amounts did not lose their character as retirement funds.”

Contrast the Minnesota bankruptcy court with an Eastern District of Texas bankruptcy court ruling also in 2010. In that case the court held that the funds in an inherited IRA are not intended for retirement and therefore were not protected from creditors in bankruptcy proceedings.

So what should an IRA owner do to protect his IRA from the potential of an heir filing for bankruptcy. Probably the best thing one can do is to name an IRA Inheritance or Inheritor’s Trust as the beneficiary – some may even call it an IRA Beneficiary Trust with someone other than the heir as the trustee.

A knowledgeable estate or trust lawyer can discuss this with you. Attorneys who practice in this area of law can help IRA owners make the correct decision with their IRA.

In my estate planning practice, I continually receive questions about what I think Congress (the House and the Senate) will do concerning the estate tax. I always say “no one knows”. This article, although almost a month old, demonstrates my point!

In late April I posted an entry about Dan Duncan being the first billionaire to pass in 2011. The result of his passing was that the Internal Revenue Service will not be able to collect in the neighborhood of $4 billion in estate taxes from his estate.

The New York Times has recently printed an article that explains about Duncan’s estate, the history of the estate tax, and what the future holds regarding this issue.

The article points out that the estate tax was enacted in 1916. The rate of tax has varied, but when John Rockefeller died in 1937, the estate tax rate was 70%. While the estate tax rate has varied, 2010 marks the first time since 1916 that there has not been an estate tax.

The estate tax is responsible for a small percentage in the amount of revenue that the federal treasury collects. In 2008 that amount was $25 billion. Many wealthy do sophisticated estate planning which includes more than a living trust and will. It is not clear to me whether Mr. Duncan had done sophisticated estate/tax planning although no one has indicated that he had.

The fact that there is not an estate tax does not mean that Uncle Sam will never see any money. When the assets are sold, capital gains tax will be paid based upon the difference of the selling price and the price by which Mr. Duncan acquired the asset. As the capital gains tax rate is increased, that will make up for some of the difference in the lost tax.

In my practice, this is important. I certainly do not want to be preparing estate planning documents for people that are incompetent. By definition, someone who is incompetent cannot be signing a trust, a will, a power of attorney, an advance health care directive, or any other legal/estate planning document.

In California, our probate code sets forth the criteria to be used in determining whether someone is incompetent. (The probate code deals with a lot more than wills and includes living trusts.) As a preparer of estate planning documents, it is important for me to be confident that the client is competent. This is true, because some day I might be required to give a deposition explaining why I thought the client was competent.

It is true that generally speaking the party seeking to invalidate the living trust or will has the burden of proof. They must demonstrate that at the time of executing the document the person either did not understand what he is signing; or did not know what he owns; or did not know who is being affected by his actions; or suffers from a deficit in a mental function and there is evidence of a correlation between the deficit(s) and the acts in question.

As someone who is also involved in probate litigation, I get a fair number of calls from people who want to challenge wills and trusts. Our firm works with people from throughout the state of California. I certainly am interested in potentially representing these people, but I also need to be convinced that they have a valid claim.

Practicing estate planning law in Southern California is always interesting. I get to become the lawyer to a variety of different types of people. More and more that means that I serve as the attorney for international clients.

Recently I attended a two day seminar in the San Francisco Bay Area that was exclusively geared to representing international clients. The speakers were some of the top attorneys and certified public accountants in the field.

Topics included identifying assets that are subject to the United States transfer tax; planning ideas for the non-citizen client or couple; pre-immigration planning; choosing a guardian for minor children when all of the family is overseas; Canada’s laws and the Canadian citizen; and more!

On the estate tax and gift tax fronts, the laws and rules are different depending on whether someone is a domiciliary; non-domiciliary; or a citizen. People have to take the time to understand the law as it applies to them; have their trusts drafted accordingly; and undertake their income tax and estate planning based upon their citizenship, domicile, and plans for the future.

From time-to-time, I will write about specific international estate planning issues, but just know that it makes the planning puzzle a bit more complex.

This is a follow-up to my thoughts after reading Mr. Jackson’s trust. Obviously, he was not an ordinary person and while he was certainly different than my clients, his desires were very similar to the great majority of my clients and to people everywhere.

In his “family” trust, he divides his estate into three shares in the short term. He provides that twenty percent of his gross estate shall be distributed to “one or more charities for the benefit of children and/or children’s causes.” He appoints his mother and the two co-executors of his will to select the charities.

One-half of the remainder of his estate, after all expenses and taxes have been paid, is to be divided equally for his children. Until a child is 21, the trustee is instructed to pay to or use for the benefit of the child the net income of the trust. Any net income not used, shall be added to principal. Upon the child attaining age 21, the instructions to the trustee change only slightly as it appears that all of the net income is to be utilized on behalf of the child. When a child attains age 30, he is to receive one-third of his/her trust; when the child attains age 35, one-half of the remainder or the second third; and at age 40, the child is to receive the balance of the trust.

The remaining one-half to be held in trust for his mother. She is to receive “as much of the net income and/or principal of the trust estate as the Trustee deems necessary or desirable, in his absolute discretion for KATHERINE’S care, support, maintenance, comfort and well-being.” Upon her death, the amount held in trust for her is to be added to Michael Jackson’s children’s trusts.

The distribution scheme, or a variation thereof, for his children is used quite frequently. Query, might he have set-up a different type of trust for his children that would have shielded and protected the assets from creditors, divorce, and wasteful spending.

That is something that I will explore in an upcoming post!

Michael Jackson’s trust is available on the internet for anyone to read. The fact that it is easily accessible dispels to some degree one of the “advantages” that attorneys (including this one) have offered of living trust over will and that is that the document is a private document and is not public record.

It is true that revocable living trusts, frequently called family trusts, are not required to be filed in the probate court upon the trust maker’s (also known as a settlor, trustor, or grantor) death as a condition of administering the trust. However, in the event that there is litigation, the trust will have to be filed in the probate department of the superior court. Once that happens, it is open season.

Does that mean that living trusts are not advantageous? No. I believe that living trusts are advantageous over simply doing a will in California because of the avoidance of probate. In some other states, New York and New Jersey come to mind, probate is a much simpler process than it is in California so that advantage is negated and there are many esteemed attorneys in those states who have a different view of revocable living trusts than do lawyers in California.

In my next post, I will provide a summary of what Michael Jackson’s trust actually says!