As estate planning attorneys, many clients come to us for an estate plan, including a living trust and ancillary documents.  Frequently, when they explain their situation, we are able to assist them in ways that they did not contemplate.  What follows is one example.

Currently Internal Revenue Code Section 121 provides an exclusion from the sale of the taxpayer’s principal residence up to $250,000 of gain ($500,000 for a married couple filing a joint return) as long as the residence was the principal residence for 2 or more years out of the 5 year period ending on the date of sale.  Moreover, the exclusion may be used once every 2 years.

Besides individuals, the exclusion may be used by: (1) the estate of a decedent; (2) any individual who acquired the home from the decedent within the meaning of IRC Section 1022 (which deals with the treatment of property acquired from a decedent dying after December 31, 2009); and (3) a trust which was a qualified revocable trust immediately before the death of the decedent.

This summer Congress passed the “Housing and Economic Recovery Act of 2008” which primarily is concerned with the increase in foreclosures and other concerns in the housing market. However,  it also amends section 121.  Beginning this coming January, “gains shall be allocated to periods of non-qualified use.”  What this means is that the exclusion amount will now be adjusted to deal with periods where the property is used as a second home or rental property. 

Here is how it will work beginning January 1:  if a homeowner uses a home as a rental property for the first three years of the five year period and then uses the home as a primary residence for the next two years, the homeowner will only be able to exclude 40% (2/5) of the gain.

The IRS will only look at January 1, 2009 and thereafter.  Any non-qualified uses prior to that time are exempt.  Moreover, if the homeowner first uses the home as a primary residence and then converts it to a rental property in or after year three, there should not be proration. 

Do not rely on the above.  It  is always wise to talk to your tax preparer or an estate planning attorney prior to engaging in any acts that might decrease the capital gain tax exclusion.  In certain circumstances, the taxpayer may still be able to utilize Internal Revenue Code Section 1031 (Exchange of Property Held for Productive Use or Investment).

As an estate planning and probate attorney, I frequently hear two statements which in some ways conflict with each other: the rich do not have to pay estate taxes because they pay attorneys to find loopholes.  Another statement that I hear is that I do not need more than a will or a simple living trust (whatever that is) because I do not have much.

Kevin Gorman and Mike Prisuta wrote an interesting article in the Pittsburgh Tribune-Review (July 11, 2008) titled “Estate tax threatens NFL’s old guard of owners”.  While the focus on the article is on the longtime owners of the Pittsburgh Steelers, the Rooney family, it also details some of the other recent ownership changes in the NFL.

Let’s start with the Rooney family who have owned the Steelers since 1933.  Five brothers ranging in age from their late 60s to mid-70s collectively own 80% of the team which is valued somewhere near a billion dollars.  Some of the brothers are concerned with their own estate taxes and therefore are looking to sell their interests.

The estate tax rate is 45% — which is the lowest it has been in a long time – and depending on who the next president is, it could increase to 55% which is where it was until the early part of this decade.

The writers explain that Lamar Hunt gifted the Kansas City Chiefs to his children and paid the gift tax while he was alive.  He regretted not doing it earlier, but he did it early enough that it was a lot cheaper because of the continued appreciation of the value of the team than had he waited until his death. 

The Miami Dolphins were sold by the Robbie family to Wayne Huizenga in 1994 because the surviving family members could not pay the estate taxes to keep the team.  Recently Mr. Huizenga sold one-half of the team and all of its stadium rites in February 2008 and stated that one of his reasons was estate planning.

This is not limited to football.  In Southern California, we have seen the O’Malley family and the Autry family sell the Dodgers and Angels respectively because of estate taxes.  On the other hand, the owner of the Los Angeles Lakers has indicated that ownership of  the Lakers is going to stay in his family.  One would think that the owner, Mr. Buss, has done some estate planning to ensure that result.

The message is that not all wealthy people do all of the estate planning that they should.  In virtually every case, had the owners thought early enough about their estate planning they would have been able to keep the team within the family.  However, as Lamar Hunt said in an interview in 2000 which was six years before his death: “ But for some people, it’s hard to think in terms of dying.  They don’t want to admit it happen to them at any time.”  In the same interview, he lamented not having done the estate planning even earlier than he did it as he said “[i]f I was real farsighted, I would have done it when the franchise was worth $10 million.

Yes.  Many trusts now provide for multiple trustees.  While for the most part this is associated with well-off Americans, it is filtering down to the middle class.  Still for the vast majority of my clients in Culver City (and the surrounding areas including Mar Vista, Palms, Marina del Rey, Playa del Rey, Playa Vista, Westchester, Cheviot Hills, Santa Monica, Brentwood, and Venice), naming a trustee is a fairly simple process.

Most of my clients appoint a family member; most frequently it is a child. I do counsel my clients to think about the position seriously and select the individual who will most successfully implement their wishes.  Even for those clients that do not appoint a family member, it has always been fairly straightforward to select a family advisor such as a CPA or the trust department of a bank or an entity that specializes in managing trusts.

Like virtually everything in life, there are advantages and disadvantages to utilizing more than one trustee.   The advantages can include segregation of duties and also asset protection.  Segregation of duties may benefit the performance of the trust. At least that is the idea.

(On another posting to this blog, I will discuss “trust protectors” which are people who monitor the trustee.)

The asset protection idea is that if a beneficiary has the ability to distribute assets from his/her trust, it is more ripe for creditors.  Thus, many parents are thinking twice about making their child(ren) the distribution trustee.  On the other hand, they may allow their child to determine the investment strategy or to manage a family business.

The negatives include the possibility of higher fees associated with administering the trust.  Moreover, if assets do not perform well, there could be issues as to has the fiduciary responsibility to the trust.

As an estate planning and probate attorney, it is always interesting to see what clients and/or decedents have done with regard to beneficiary designations on their various assets.  When a new client (throughout this essay I may be referring to a single person and to a husband and wife as a “client”) come to see me, after I have spent time getting to know them, I eventually ascertain the assets that comprise their estate.

Frequently clients have a haphazard list of beneficiaries.  Even if they have been consistent, it may not be well thought out.  I suggest that everyone, whether you have a living trust, a will, or not review your beneficiary designations.  Here are some things that you should consider. 

1.  Understand the Fundamentals

Beneficiaries can be listed for many types of assets, including, but not limited to, life insurance policies, retirement plans and annuities.  Furthermore, payable on death or transfer on death can be done on many accounts at the bank.

Virtually anyone and anything can be listed as a beneficiary.  The obvious choices are spouses, children, trusts, and charities.  When a beneficiary is named, the asset will be paid to the listed beneficiary.  This may or may not be what you would have wanted.  You may have gotten married (or divorced) since you named the beneficiary.

This leads us to point number two.

2.  Maintain Current Designations

Undoubtedly if you visited with an estate planning attorney and you undertook an estate plan, whether it be living trust based or will based, the lawyer asked you to provide him or her a list of your assets.  More than likely, he/she asked you for the beneficiary designation. 

However, if you have not met with an attorney, or if it was several years ago, or if there have been significant changes in your life (e.g. divorce, marriage, birth or death), you may need to change beneficiaries.

3.  Taxes are always Lurking

This is where an estate planning attorney can be especially helpful.  Just because an asset has a beneficiary on it, does not mean that it is not part of your estate.  Keep that in mind for potential estate taxes (this year one can have $2,000,000 without there being any federal estate tax and in 2009 the amount is $3,500,000).  Also, when distributions are taken on retirement assets, taxes have to be paid. 

You may have noticed this week that the man who designed the packaging system for Pringles potato chips was cremated.  Nothing out of the ordinary there.  However what happened with those ashes is unusual.  He had a request that his ashes be buried in one of those Pringles cans and the family complied.

When I prepare an estate plan for either an individual or a couple, in I prepare a living trust, a will, a power of attorney, an advance health care directive, a HIPAA release, deeds for real property (real estate) and for married couples frequently a marital property agreement.

Some living trust attorneys include a paragraph in the Will that contains instructions, if any, concerning funeral, memorial service, burial or cremation.  Other lawyers provide forms for the client to complete that allow the client to indicate the handling of their remains; the type of remembrance service; and to provide instructions.

Most of my clients have something they want to say concerning these issues; and some have very well thought out instructions that include what type of music should be played, food served, etc.

I always caution clients to let their family, successor trustee/executor know their thoughts or let them know where they have listed those thoughts so that they can be found immediately.  Otherwise, there is a risk that something happens that the client would not have wanted.  Obviously, my client will not be aware if his/her wishes were not complied with, but the family members will.

A conscientious estate planning attorney will ask the kind of questions to allow the client to consider issues that he or she may not have previously considered.  This is simply one such issue.  Read past and future blog posts to learn about other issues or call if you would like to make an appointment.

This is an area of estate planning that can be incredibly beneficial to those individuals who have been dealt a tough hand.  For parents of a special needs child there is an extra incentive to do everything correctly including making sure that they have done the proper estate planning.

Obviously when one has a child with special needs, one has a responsibility that lasts a lifetime.  Many parents become “experts” in their child’s situations as they deal with medical, educational, and therapeutic professionals.  With special needs children, it rarely gets easier.  Rather, the challenges change.

Virtually every parent of a special needs child, concern themselves with what will occur when they are no longer around.  People want their child to continue to have the care that they have provided and yet worry about who will care for their child and the cost associated with the care.  Estate planning attorneys contend that they can benefit virtually all families – it is especially true of those families that contain an individual with special needs.

It is important that planning is done because if a child inherits assets directly it may adversely affect the benefits that the special needs child is receiving from the government.  The idea is that the recipient of government benefits should not have his or her own assets.

A special needs trust is a trust that has been entered into by the parent or parents of a special needs child.  Frequently its creation is provided for in the underlying living trust.  The special needs child is almost always the only beneficiary of the specific special needs trust.

Most of the time a special needs trust is irrevocable – meaning that it cannot be changed.  Moreover, it generally provides so that the trust benefits do not interfere with or duplicate the benefits that the individual is receiving from the government.  There is special language that needs to be used so as not to interfere with the government benefits.

The trustee is given specific instructions on how to distribute assets and is told not to act in such a way that will cause the government benefits to be lost.  Once again, the provisions should be drafted by an experienced estate planning lawyer.

As in any situation that calls for a trustee, care should be taken in determining the identity of that person.  Additionally, a second and third choice should also be indicated in the special needs trust.  One of the jobs of the attorney, is to guide his or her client in this area.

Depending on the amount of money in the family, life insurance may be used to fund the special needs trust.  In any event, a properly drafted special needs trust can almost guarantee that the special needs child will both continue to  receive the government benefits that he or she is legally entitled to receive as well all the extras that the law allows for him or her to have.

Taking the time to meet with an estate planning lawyer to create a special needs trust will be one of the wisest investments of your life.  It will give you peace of mind to know that you have done what you can to benefit your child.

Estate planning is similar in other respects to other purchases we make or medical procedures we have done.  Once we buy the item, we have to maintain it.

An irrevocable life insurance trust is created to hold a life insurance policy.  It is utilized by people who have taxable estates.  Today, that means an individual with over $2,000,000 or for a couple with over $4,000,0000; however, next year that increases to $3,500,000 for an individual and $7,000,000 for a couple. 

The way it is supposed to work is that a lawyer prepares the trust.  In the trust, the trustor or trustmaker appoints a trustee who then applies for life insurance on the insured’s life.  In reality, it does not always happen exactly that way, but most of the time it is fairly close.

As with a lot of things, the devil is in the details.  For example, if a married individual is having the trust prepared, the premiums should be paid from separate property funds.  The trust should have its own checking account.  Crummy letters (named after the family in an important court case) need to be sent to each of the beneficiaries every year explaining to the beneficiaries that they have the right to withdraw money from the trust for a certain period of time.

You, the client, need to ask the professionals (attorneys, CPAs, financial planners, and insurance agents) questions when you do estate planning so that the trusts provide the benefit that they are meant to bring.

Uncle Sam taxes those with an estate above two million dollars at their death.  In a sense, this is double (if not triple) taxation, as people are taxed annually on their income.

It is double taxation because the estate tax is taxing monies that have already been taxed once before.  As with most anything else in life, there are ways to avoid or reduce the tax.  However, it does take some planning.  That is where a California estate planning attorney can be of assistance.  Depending on your age, size of your estate, your goals and desires, we can show you a variety of ways in which your estate can be “reduced” so that ultimately more is distributed to those whom who you wish to have it and less to Uncle Sam.

If you think you may benefit from estate planning, and you are in Southern California, please contact our office.

Everyone wants to avoid probate.  This causes people to do all kinds of things in the name of avoiding probate.  For example, some people will give away assets.  Others will put a child on an asset with them.  Both of these “solutions” lead to their own problems which are often much worse than the cost of probate.

Penny wise; pound foolish.  Estate planning is different than most other things in that frequently the results are not measured until after death.  It therefore leads people to try to save money.  There is now a movement for California to join 9 other states and make legal a means to avoid probate.  There is a bill, AB 250, that would create the revocable transfer on death (“TOD”) deed for real property. 

Like everything else, there can be problems.  One is leaving minors as beneficiaries.  In the event that you pass, then there will probably be more administration and court proceedings than under a simple probate.  Certainly a living trust would have been much better.

How about when you leave more than one beneficiary?  Now there are multiple owners of the property.  This may sound good until you actual think about the practical circumstances.  What if one party wants to sell and the others do not?  Ideally there would be a buyout, but what if they cannot agree on price.

What if one beneficiary is deceased?  Now his/her estate is an owner?  There may have to be a probate of the beneficiary’s estate before anything can be done.

What if there is fraud involved?  Undue influence?  In my practice, I frequently see senior citizens do things that they would not have done years earlier.  They are more susceptible to being manipulated.

Frequently, the biggest winners in these attempts to avoid attorneys are lawyers themselves!  That is because, it is much more expensive to litigate than it simply would have been to prepare a living trust.  Frequently instead on there being one attorney in drafting a living trust, there are two are more attorneys.  Unfortunately by the time there are problems, the person who executed the deed, is either incompetent or deceased, so he or she never sees the problems.

Penny wise, pound foolish.  Do not let that be you.  See an experienced California estate planning attorney.  In the event that you are in Southern California, we are available to assist.

Frequently people come in to my office and are unaware of what their estate planning documents say. For all they know, their attorney made herself the beneficiary of their estate.  While that is extremely unlikely and while most of the time, the documents do what they are supposed to do, it is important that you understand what your documents state and also what they can accomplish on your behalf. 

I also see many clients who have not reviewed their California estate planning documents since their attorney drafted them (I use the word “attorney”, but about 20 percent of the time, I review documents that were drafted by paralegals or companies that claim to do things like an attorney, but are not an attorney – more about that in another post).

Your attorney should explain to you in detail what you are signing.  I realize that there are a lot of documents and frankly some of my clients do not want to hear everything.  However, I make certain that my clients have a basic understanding of their estate plan when they leave my office.

Compare it to the purchase of a car.  Before you buy the car, most people do some research about the car; they talk to the salesman; and they learn about the car.  The same thing should be done with regard to an estate plan. 

If you do not understand something that the attorney is explaining to you, speak up!!  Make him give you an example or two.  I am not talking to hear myself talk, but to convey the benefits of the document to my clients.  I attempt to tailor the explanation to my client, but sometimes I need to be asked to explain things in a different way.

In summary, you need to make sure that what you are signing is something that you understand and that is appropriate for you.  If it is not the way you want it, then just as with the car salesman, have the attorney craft the document to meet your needs.