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"Estate
Planning Choices... in California"
by Valerie K. deMartino
Taking Charge: Everyone has a choice of who will
get their assets when they die. One can take an active role in
deciding who gets their estate or one can do nothing, in which
case your estate will pass by intestate succession to the people
the State Legislature has decided are entitled to inherit from
you. The decision of the legislature may not always be the same
decision a person would make himself. Therefore, it is prudent
to take charge of your estate by making a Will or some kind of
Trust. Both a Will and a Trust stipulate who is to get your assets
when you die.
Probate: A Will is a document wherein you state who will
inherit your estate when you die. A Will must be probated, which
means the distribution of the estate and payment of any creditors
is supervised by the court. Probate is a lengthy and expensive
procedure. Fees for the attorney handling the probate as well
as the executor or administrator are set by statute and are based
on a percentage of the appraised value of the probate estate.
For example, the minimum statutory fee for a $100,000 estate
is $4,000 and for a $500,000 estate is $13,000. The contents
of a probate file is available to the public. Furthermore, if
you own assets in more than one state, frequently probate proceedings
will have to be opened in each state where there are assets.
Assets which are held in joint tenancy, life insurance benefits,
retirement plans and the like do not pass pursuant to a will
and are not probated. see article ["What is Probate"]
Joint Tenancy is Not a Substitute for Good Estate Planning:
It is true that probate can be avoided by placing property in
joint tenancy (i.e. "John Smith and Mary Smith, as joint
tenants"); however, the property would still have to be
probated at the time of the second joint tenant's death, and
joint tenancy can result in gift tax liability, possibly increased
property taxes, and income tax to your survivors. Any time you
add a joint tenant to property you already own, if the value
of the new joint tenant's half is more than the amount you can
pass tax free, you have a possible gift tax liability. Since
July 2001, in California property may be held by a husband and
wife as "community property with right of survivorship".
Property held this way will get a stepped up basis for the entire
property upon the first death, as it would if the asset was held
as community property. Property held in joint tenancy only gets
a stepped up basis for the decedent's half.
Reasons to have a Trust. While both a will and a trust
will get your assets to your heirs, a living trust has several
advantages over a will, particularly if your estate is greater
than the amount a person may pass to their heirs tax free. A
trust is a contract between you and the person you name as trustee.
Pursuant to this contract, you transfer your property to the
trustee and the trustee has a fiduciary duty to manage and use
that property for your benefit and that of your heirs. Trusts
can be irrevocable or revocable. A revocable trust can be amended
or revoked during your lifetime. Irrevocable trusts cannot be
changed and are generally only used in special circumstances.
There are a number of advantages to having a revocable living
trust. First of all, there is no probate of your estate required,
regardless of where the property is located. This generally means
the estate can be distributed to the heirs more quickly and with
much less cost than if you had only a will. The contents of a
living trust are not public. Since living trusts are established
during your life and are generally in existence for many years
before your death, it is much harder for anyone to contest a
living trust than a will. Because one of the advantages is tax
savings, the cost of setting up a living trust (while usually
higher than writing a simple will) may be tax deductible. Finally,
once all of your assets are transferred into a trust, the trustee
can administer the trust for your benefit regardless of your
capacity; so if you become temporarily or permanently incapacitated
a conservatorship of the estate is generally not necessary.
Federal estate tax is based on the gross date of death value
of all your assets less your debts and includes assets which
pass outside probate, such as IRAs, life insurance and joint
tenancy assets. Estate tax is payable whether your estate is
probated, passes by right of survivorship, or you have a living
trust and includes assets transferred within three years prior
to your death. In 2013, the American Tax payer Relief Act ("ATRA")
was passed, changing the lifetime gift tax exemption amount to
$5,250,000. Thus, in 2013, under ATRA, anything estate $5,250,000
will be subject to tax at the rate of 40%. Anyone can leave
unlimited property to their surviving spouse without tax by using
what is called the Marital Deduction. When the second spouse
dies and leaves the estate to the children, if it exceeds $5,250,000
the predeceased spouse's exemption amount may be lost if the
surviving spouse's estate representative does not file a Federal
Estate Tax Return and take advantage of the portability rules.
Commencing in 2011, the law was amended to allow married couples
to add any unused portion of the estate tax exemption of the
first spouse to die to the surviving spouse's estate tax exemption.
This is commonly called "portability." This means
in 2013 a married couple can pass on $10,500,000 to their heirs
free from federal estate taxes with absolutely no planning at
all, as long as the surviving spouse files a Federal Estate Tax
Return (form 706) in order to take advantage of the deceased
spouse's unused estate tax exemption. If a return is not timely
filed after the surviving spouse's death, the predeceased spouse's
exemption will be lost. Thus, having an A/B Trust can still
be a benefit because it will shelter the first decedent's exemption.
A trust established to use the gift tax exemption amount must
be an irrevocable trust. When the trust is irrevocable,
the assets held by the trust will not be included in the grantor's
estate for federal estate tax purposes. The grantor cannot exercise
dominion and control over the trust assets or the IRS will include
the trust in his or her estate. Therefore, neither the grantor
nor anyone controlled by the grantor (such as an employee) can
be the trustee. Additionally, in order to qualify for the annual
gift tax exclusion, the beneficiary must have the right to take
possession of any gifts made to the trust for his or her benefit
each year. This is called a "Crummey" power after the
case entitled Crummey v Commissioner of Internal Revenue (9th
Cir. 1968). Setting up the trust to allow the beneficiary a short
window of time within which to exercise this withdrawal power
is sufficient. As its name implies, this kind of trust cannot
be amended or revoked. This type of trust should have a separate
tax identification number, file income tax returns, and pay tax
on income earned each year.
Other Tax Savings Ideas: Remove assets from your estate
before you die by gifting. You can gift up to $14,000 per year
($28,000 per married couple) to as many people as you wish. There
is no limit to the number of people to whom these $14,000 gifts
can be made. The trustee can invest in anything within reason
or buy life insurance, the proceeds of which can be used to pay
estate taxes.
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