San Jose Estate Planning Attorney Blog

8 ASSETS THAT AVOID PROBATE

Wed, 22 Feb 2012 09:20:30 -0800

Avoiding Probate is often a key goal for clients in their estate planning. This article will give you eight examples of property that passes directly to your beneficiaries without the need for probate.

1. Property Passing Outright to the Surviving Spouse

California has a very simple probate procedure for property that passes outright to the surviving spouse. The spouse may file a Spousal Property Petition with the probate court. If no one objects, the court will generally grant the petition and the property will ordered to the surviving spouse. We commonly do these for estates where the first spouse died without a Will or a Trust. Under California law, under those circumstances, the surviving spouse would get all of the Community Property and a third to half of any Separate Property of the deceased spouse. The Spousal Property Petition avoids the need for the lengthy and expensive probate process most client's dread needing.

2. Estates of Less than $150,000 in Value

Small estates do not have to go through the full probate process. A Section 13100 affidavit is given to the institution holding the property. Upon receipt of the affidavit, the institution will turn over the asset the Personal Representative for distribution to the proper beneficiaries. You cannot do a 13100 affidavit, however, if the estate consists of any real property, no matter the size of the estate.

3. Assets in a Trust.

Generally, assets that are in a Trust do not pass through probate. The Trust terms declare who is to receive the property when the Trustmaker's pass away. The Trustee follows the terms of the Trust and distributes the property to the Trust beneficiaries.

4. Life Insurance

If there is a valid beneficiary designation the life insurance will be distributed to the beneficiaries named on the designation. The life insurance contract governs who the beneficiary will be, so there is no need to probate the life insurance policy. However, if there is no named beneficiary of the policy, then the insurance company will usually require that the policy be included in the probate so they know who should get the death benefit of the policy.

5. Retirement Plans and Annuities

In the same way that life insurance usually avoids probate, retirement plans like your 401(k), 403(b), etc. avoid probate if there is a valid beneficiary designation. Avoiding probate of the retirement plans is especially important due to the negative income tax consequences of having the probate estate as the recipient of the plan proceeds.

6. Bank and Brokerage Accounts

Most financial institutions offers the ability to use a beneficiary designation on the account. This will cause the account to pass to the named beneficiary and avoid probating the account. Sometimes these are called “Pay on Death” designations. Other times, they may be called “Totten Trusts.”

7. Buy-Sell Agreements

In a Buy-Sell Agreement, the owners of a business agree among themselves to purchase the ownership interest from any owner who passes away. This allows the business to continue operating the way it has in the past without interference from the spouse or children of the deceased owner. In exchange for purchasing the ownership interest, the surviving business owners pay the deceased owner's beneficiaries in cash or in kind. These payments are made directly to the beneficiary and avoid probate.

7. Property Held as Joint Tenancy

If you own property as Joint Tenants, title to the property will pass to the remaining joint tenants on the death of one of the joint tenants. I would not advise using Joint Tenancy as your method for transfering property outside of probate without consulting a lawyer to work out the potential problems and unintended consequences that can occur. Certainly, do not expect that if you name one of the children as the joint tenant that you are leaving the property to all of the children. The property passes by law to the surviving joint tenants, not all of the brothers and sisters of that joint tenant.

5 TIPS FOR MAKING INTRAFAMILY LOANS

Tue, 14 Feb 2012 09:06:28 -0800

One of the best strategies for clients with wealth is to find ways to maximize the value and economic efficiency of that weath in a way that benefits the family without increasing the tax impact on the client's estate. An intrafamily loan is often an excellent strategy.

Loans to the children and grandchildren can be used to help the kids purchase a home, pay for living expenses, start a business, and many other things. With short term interest rates less than .25% per year, even loaning funds for investment purposes can be an excellent freezing technique for the client's estate.

Here are 5 tips to avoiding traps when making an intrafamily loan.

1. Always Have the Loan in Writing

The importance of making the loan in writing cannot be overstated. How do you prove to the IRS what the terms of the loan were? What if someone dies before repayment of the loan? Who gets the future income and payments? Will other family members be upset that one child got “free” money that they didn't get? If you need to prove that the loan was a bona fide loan and not a gift (very important for tax purposes) you will need documentation to prove it.

2. Take Advantage of the Annual Gift Tax Exclusion

Every year, a client can give $13,000 to as many different individuals as they wish. If the client is married, the couple may give a combined $26,000 per year. If there is a loan outstanding, the client could potentially forgive the annual exclusion amount of the loan each year until it is paid off. This is often preferable to an outright gift that use up exemption and may create negative tax consequences. However, be careful not to merely “loan” the money and then never expect repayment because of future forgiveness of the annual exclusion amounts. This may impact whether or not you actually make a bona fide loan in the first place. You will want to work with a qualified attorney to help avoid that pitfall.

3. Show That You Intended to Collect the Loan

This follows from the comment above. You must have every intention of collecting according to the terms of the loan. I think it is important to have some repayment history on the loan.

4. What if the Loan is in Default

It is not appropriate to let a loan linger in default. This goes towards whether or not you have a bona fide loan. Some attempt at collecting should be made. If the loan is secured, for example, against a house, you will need to consider whether or not foreclosure is appropriate.

5. Charge Interest on the Loan

The Treasury Regulations require that interest be paid on the loan at the Applicable Federal Rate (AFR). The AFR is divided into Short Term (up to 3 years), Mid-Term (3 to 9 years), and Long Term (over 9 years) interest rates. In any intrafamily loan, you must charge at least the appropriate interest rate. In most cases this interest is taxable income to the client and should be reported on their 1040 income tax return. Even if the interest is not paid or is forgiven as a gift, the interest income is still reportable taxable income.

USE POWERS OF APPOINTMENT TO CREATE FLEXIBILITY

Wed, 01 Feb 2012 13:20:37 -0800

A power of appointment can be an effective estate planning technique, facilitating how your property may ultimately pass to your heirs. There are two types of powers of appointment: general & limited. Both of these powers are the same with one exception: The general power allows the power holder to appoint the property to themself, their estate, their creditors, or the creditors of their estate. If you grant a general power of appointment, allowing the power holder to appoint to themself, the property will be included in the powerholder's estate for estate tax purposes.

Greatest Benefit of Creating a Power of Appointment

There is one great benefit to granting a power of appointment to the beneficiary of a trust you create: Flexibility!!!

It is very difficult to know what the future will hold. What are the needs and wants of the beneficiary in the future. Who is better able to manage the trust assets as they pass to third and fourth generations? A Power of Appointment can create that flexibility to allow each beneficiary to make the best appropriate decision based on the information they have available rather than mandating a distribution scheme that may be inappropriate in the future.

Reasons to Choose a Limited Power of Appointment

Most of the time, the attorney will recommend a limited power of appointment. This will create flexibility in your estate plan by allowing the beneficiary of the trust to determine who gets the trust property next (after they die) without having to worry about estate tax inclusion. This also allows you to preserve the generation skipping transfer tax exemption so all of the assets in that trust that are exempt will not be included in the beneficiary's estate, no matter how large they have grown into.

Reasons to Choose a General Power of Appointment

You should not create a general power of appointment without the recommendation of your attorney. The power of the beneficiary to appoint the property to him or her self, their estate, their creditors or the creditors of his or her estate will cause the enitire trust amount to be included in the estate of the beneficiary for estate tax purposes. The whole trust estate could also be subject to the payment of the claims from creditors of the beneficiary. Finally, the beneficiary may be able to subvert the original intent of the trustmaker (or power grantor) by appointing the property to his or her estate and then leaving the property to someone else in their Will.

SMALL ESTATE AMOUNT INCREASED TO $150,000

Mon, 02 Jan 2012 15:03:07 -0800

The State of California has increased the amount that may pass through the Small Estate procedure by affidavit. The amount is now $150,000. This is a much needed increase from $100,000 previously.

The Personal Representative may now transfer Probate Estates less than $150,000 without the need for court petitions and supervision.

CARRY-OVER BASIS & ESTATE TAX RETURNS FOR 2010 GET ANOTHER EXTENSION

Wed, 14 Sep 2011 08:33:31 -0800

Two weeks ago I wrote about the unique rules for decedents dying in 2010.

On Tuesday, the IRS gave another well needed extension to Fiduciaries who are responsible for filing tax returns for decedents dying in 2010.

As you know, Congress changed the tax code on December 17, 2010, creating confusion and complications for both the IRS and the estate tax attorney's, CPA's, and Enrolled Agents who work with Fiduciaries needing to be in compliance with the new law.

Here are the new deadlines you need to know.

Form 8939, the form to allocate Carry-Over Basis, for decedent's electing out of the $5,000,000 exemption, will now be due on January 17, 2012. This is a change from a couple of weeks ago where they announced a November 15, 2011 filing deadline. No statement or filing is required for this change. The IRS, however, is saying that extensions will only be given

For the 706 estate tax return, if you file a timely 4768 request for extension, you will have until March 15, 2012 before the return needs to be filed. Interest will be charged, however, for failure to pay any tax owed on time.

Details are in Notice 2011–76.

By the way… There is still a September 19, 2011, deadline to disclaim property.

GETTING THE MOST OUT OF A CONFERENCE (PART 3)

Mon, 12 Sep 2011 11:57:20 -0800

I have previously posted Part 1 & Part 2 of this series looking at Networking while attending or speaking at a conference.

Today I want to finish this series with some thoughts for maximizing your results through follow-up after you get home from the conference.

1. Always implement at least ONE idea you learned at the conference.

I usually learn much more at a conference than I can possibly implement right away. However, I make it a point to implement one idea right away. It may come from one of the seminars or presentations. It may also come from one of the meetings you set up earlier. Either way, that one idea usually makes the whole trip worthwhile. And I still have the rest of those ideas I can work on later.

2. Follow Up With Thank You Cards & Phone Calls

Emails are cheap. They don't take much effort. Accordingly, they don't produce the best results. Follow up with a thank you card if someone did something nice for you. Make thank you phone calls to the others.

Ask them to join your network on LinkedIn. Arrange to meet at a different conference you will both be attending. Ask questions about how they are implementing what they learned at the conference. Pick up where you left off.

After this, emails will be fine for staying in touch to maintain the relationship.

3. Offer Something of Value

Invite them to visit your office or take them out to lunch when they are in town. Offer to send them a form you created from an idea you discussed at the Conference.

You don't measure the ROI on attending a conference based on the number of business cards you collected or the information you learned. Ultimately, it is about relationships. How many did you make, and how long will they last. You may not meet the referral source of your dreams at the conference.

But I am confident about this: You will meet more people at your next conference than you did at the last one. You will be more productive, and you will have more fun.

SILICON VALLEY COMMUNITY FOUNDATION HAS A NEW WEBSITE

Wed, 07 Sep 2011 14:22:10 -0800

If you are not familiar with the Silicon Valley Community Foundation you are doing yourself and your clients a disservice.

Check out their new, redesigned website at www.siliconvalleycf.org.

They are an excellent resource for charitable giving information, and they provide support and administration for various charitable trusts and foundations. They also have an excellent Donor Advised Fund many of our clients use.

No matter your client's situation, even if working with the community foundation or some other charitable organization, make sure that they work with a qualified charitable planning attorney to plan their gifting and create the necessary documents.

Should Our Family Limited Partnership Be in California?

Wed, 31 Aug 2011 10:00:16 -0800

I am often asked why we have recommended making a different state the location for a client's Dynasty Trust, Family Limited Partnership, or LLC. Since setting a trust or entity up in another jurisdiction is

There are many different reasons for doing so.

Some states allow a trust to last forever. California, on the other hand, severely limits the length of time the trust may exist. This can have real negative tax consequences to my clients.

Some states allow for great restrictions on the Limited Partners or LLC Members. California, on the other hand, is fairly loose. This means that those entities do not get the best valuation discounts nor the asset protections afforded by other states.

Recently, Tamara Pow of the Structure Law Group, posted on the San Jose Business Lawyers Blog an article on Choice of State for a New Corporation. In it, she compares California, Nevada, Delaware as places to form your new corporation. She discusses the pros and cons of each. I commend her post for your perusal.

Obviously, these are complex issues that require time and an understanding of the client's goals and objectives. It is not uncommon, in my practice, for clients to decide to do the more convenient thing rather than the most “tax efficient” thing. They may a business decision. Or they make a family decision.

But it is very important that clients be given options… so they can make a decision. In my experience, most Santa Clara County Estate Planning Lawyers only advise and recommend California trusts and entities. They often don't know better.

Make sure you client's get options. Fill out our Contact Form or call the office to comment or ask questions. A reminder… our office is in San Jose near the airport with convenient freeway access and free parking.

PALO ALTO CPA ASKS ABOUT 2010 DEATH & TAXES

Tue, 30 Aug 2011 10:12:33 -0800

Bert Torres, a Palo Alto CPA, recently asked about the estate tax results for people who died in 2010. If the decedent's estate is less then $3,000,000, does an estate tax return or the 8939 (Carry-Over Basis Form) need to be filed?

Answer: When Congress changed the law on December 17, 2010, they modified the default rules that apply for decedents who died in 2010.

First, the traditional rules applying to estates prior to 2010 are the rules that will apply in 2010 itself. However, the estate tax exemption is $5,000,000 for 2010. This means that all assets in the decedents estate (with the exception of IRD) qualify for a Step-Up in Basis. No estate tax return needs to be filed for estates less than $5,000,000.

If the estate is greater than $5,000,000, you will need to file the estate tax return, pay tax on the taxable estate at the rate of 35%, and get your step-up in basis.

Second, Decedent's estates may “Opt Out” of the traditional rules on Form 8939. Instead of paying estate tax, you may have an unlimited estate tax exemption. However, you only get a limited amount of basis to allocate among the assets.

All estates may increase basis a maximum of $1,300,000. An additional $3,000,000 in basis may be increased for property that is passing to the spouse.

The deadline is fast approaching to make decisions regarding 2010 estates. Call the Sheffield Law Office if you have any questions or we can help in any way. Our number is (408) 920–2500.

GETTING THE MOST OUT OF A CONFERENCE (PART 2)

Mon, 29 Aug 2011 10:00:13 -0800

Last week I posted Part 1 here. It focused on the planning and arrangements you could make before the conference begins. Today we will focus on what you do while attending the conference. There are many benefits to attending a professional conference. Most CPA's, Enrolled Agents, and Financial Advisors I know attend so they can satisfy their Continuing Education Requirements and learn from the presenters so they can improve the quality of the services they provide to their clients.

However, taking advantage of these suggestions will help. Here are some suggestions to implement while attending the conference.

1. Make a Point of Meeting Everyone You Called Face to Face

Meet everyone! Over breakfast, lunch or dinner. For a quick coffee or tea. Talk about the things that made you put them on your list. But don't forget to ask about them. Why are they at the conference? What sessions are they attending and why? The point is NEVER eat alone. There is always someone to meet and someone to talk to.

If you will be attending the same session at some point, make arrangements to sit together. This gives you a chance to connect again. It also gives you a chance to talk about what you a learning at that session and how the two of you will implement those concepts in your various practices.

2. Meet the Leader of the Next Conference

If you want to be a speaker at the next conference, make sure you meet the person responsible for running the conference next year. Let them know of your interest and find out their process for selecting speakers. When you follow up later, they will be able to put a face to the name.

3. Host a Dinner

Every year in January I attend the premier estate planning conference, the Heckerling Institute, in Orlando, Florida. Often I will arrange a dinner for a number of people that I am trying to build relationships with. I don't usually pay; we go Dutch Treat. However, I make the reservations and invite the people I want to know.

You can also look for people that seem to be all alone (the orphans). They will be grateful for the new friend and someone to talk to. You never know how that will turn out.

4. Use Free Information as an Incentive to Collect Names & Addresses

I have never done this, but it will work depending on your goals for the conference and whom the attendees are. If your firm has a company newsletter, email subscription list, etc., you can offer to send someone a copy if they give you their business card. It is a lot less threatening for someone to hand you their contact information face to face then fill out a form online to receive it.

5. Ask People You Meet to Help With Your Article Research

If you are writing an article for publication, as attendees you meet to help. What thoughts do they have on your topic? Do they find it interesting? Any comments or suggestions they might make?

We do not have a Comments section on this blog. Your feedback is appreciated, however. Please call the Sheffield Law Office and talk to Amy or myself to let me know your comments, or if you have any questions on how better to implement the above suggestions.

FIRST FOOTBALL PARTY OF THE YEAR INVITE

Fri, 26 Aug 2011 10:02:53 -0800

Football season is right around the corner, and it's time for our annual first game of the season party.

As many of you know, I am a Dallas Cowboys fan (don't hold it against me). They are playing the New York Jets on Sunday evening, September 11 at 5pm.

Rob Ryan, the Cowboy's Defensive Coordinator will be going up against his brother Rex Ryan, the head coach for the Jets.

Seating is limited. And this is invitation only.

Please call the office at (408) 920–2500 for an invite and directions to my house.

We will have Pizza and Drinks (beer, margaritas, soda, etc.)

Can't wait to see you there.

GETTING THE MOST OUT OF A CONFERENCE (PART 1)

Mon, 22 Aug 2011 10:57:42 -0800

As a thought leader in the legal community, I am often asked to speak at conferences in the Bay Area and around the country. Last month, I was in Chicago speaking at Wealth Counsel's Annual Conference. I believe there were close to a thousand estate planning attorneys at the conference. My topic was International Estate Planning (or estate planning for Non-Citizens and Non-Resident Aliens who own property in the United States).

Since most of us travel from time to time to attend classes, annual updates, and conferences; I thought I would give some suggestions on how to maximize your personal branding and connect with others at a conference.

In this post, I will talk about attending a conference composed mostly of your peers. Depending upon the nature of your practice, you may or may not get many referrals from this group. But there are still things you can do to enhance your reputation in your community that will have a positive impact on your practice.

Let's start with things to do before the conference starts.

1. Have a Game Plan

What is your goal for attending the conference? The purpose is to make or deepen relationships with the people you meet at the conference. Pick a realistic goal for you. Is it 2 or 20?

2. Get a List of Attendees

If you can get a list of attendees before you travel to the conference you will be able to target the people you want to meet. If you can't get this years list, get a copy of last years. Many of the same people will probably be in attendance. Worst case scenario: go over the list of attendees when you get to the conference, and target a few names at that point.

3. Set up Breakfast, Lunch and Dinner Appointments with your Targeted Attendees

Call or email the people you would like to connect with and invite them to meet. Everyone has to eat, and most people will welcome an invite from another attendee to break bread. If you are nervous about meeting someone one-on-one, get a group together. Make the meal around further discussions of one of the topics presented at the conference. You can use any reason that your targeted attendees will find useful. They will want to meet with you to see what you know as well.

In future posts I will discuss some potential targets for your meetings. I will also provide a strategy for what to do during the conference and after as well.

If you have any great ideas on how to make our reader's next conference a better marketing opportunity send me an email or fill out the Contact Us form with some comments we can include in future posts.

3 ASSETS TO CONSIDER WHEN CREATING A CHARITABLE REMAINDER TRUST

Thu, 18 Aug 2011 06:50:59 -0800

Yesterday I posted an article entitled 8 Assets to Avoid Placing Into A Charitable Remainder Trust. Today, I want to follow that up with 3 suggestions for assets you can consider using when you create a Charitable Remainder Trust.

Remember, each asset class is unique. You should work with your qualified estate planning attorney when setting up and funding the CRT.

1. Marketable Securities with a Low Basis and High Appreciation Potential

Selling Marketable Securities within the CRT does not trigger immediate taxation for capital gains, and the trust does not pay income tax. Any capital gains on the securities sold is deferred usually until payments are made from the trust.

2. Closely Held C Corporation Stock

The tax treatment for C Corporation stock is the same as for marketable securities discussed above. However, make sure that you comply with the self-dealing rules if you are running the corporation. If the closely held stock is not sold by the trust, it will have to be reappraised each year if you have a Charitable Remainder Unitrust.

3. Appreciated Unencumbered Real Estate

The deferral of capital gains taxes is a major plus. However, since real estate is often illiquid and may be difficult to sell, you can also use it to set up other types of CRT's like the FLIP-CRUT that don't start paying the income out of the trust until after the property is sold.

8 ASSETS TO AVOID PLACING INTO A CHARITABLE REMAINDER TRUST

Wed, 17 Aug 2011 12:50:01 -0800

A Charitable Remainder Trust is a wonderful vehicle for taking Long Term Capital Gain property and converting it into Income Producing Property without the immediate tax hit from the sale of the property. You also get a nice income tax deduction for the gift into the trust.

However, there are some assets that may not be a good fit for Charitable Remainder Trusts. Caution should be used before transferring any of these assets into a CRT. Make sure to see a qualified estate planning attorney to set up and help fund the Charitable Remainder Trust

1. Assets that are Required to be Sold

If an assets is already under contract for sale, the IRS will treat the gift of that property differently than the normal rules of CRT contributions. The donor will have to report the sale and pay capital gains tax. The donor will be treated as having donated cash to the CRT. The trust is irrevocable and is not available to pay the tax liability on the sale of the asset.

2. S Corporation Stock

Charitable Remainder Trusts are not qualified shareholders for S corp status. Donating S corp. stock will disqualify the corporation and all shareholders from pass-through treatment of earnings on their shares.

3. Partnership and LLC Interests

Caution should be exercised before donating Partnership or LLC interests because they can create Unrelated Business Taxable Income – income earned from a trade or business that is not substantially related to the Charitable Trust's purpose. This may result in taxes and penalties to the CRT.

4. Personal Residence

Donating your personal residence violates the self-dealing rules if the donor is living in or using the residence. You would also lose your Section 121 capital gains exemption upon sale of the residence.

5. Encumbered Real Estate

This is the one I get the most calls on in my office. If you donate real estate that has a mortgage on it, you will have negative tax consequences. The loan may trigger debt-financed income (income produced by assets acquired with borrowed funds), which is considered unrelated business taxable income to the CRT.

6. Tangible Personal Property

Not only may the income tax deduction be limited significantly, but it may be delayed as well. No deduction may be taken until all interests and rights to possession or enjoyment of the property have expired or are held by persons other than the donor.

7. Restricted Securities.

This depends upon the type of security and the restrictions on it. There may be company specific or regulatory restrictions on the transfer. These may significantly affect the valuation of the gift, if you can do the gift at all.

8. Employee Stock Options

There may be many restrictions on your ability to transfer the options and difficulties valuing them as well. Many options are also not long-term capital assets.

Are there any other assets you can think of that may be a problem placing into a Charitable Remainder Trust? Call, send me an email, or send a comment on the Contact Us form to the left.

NEW STUDY GROUP STARTING

Wed, 17 Aug 2011 07:38:52 -0800

I run a small study group for CPA's and Enrolled Agents every Thursday Morning at 7:30. We meet until 9 A.M.

Each month, different members take turns leading the group. We cover all topics related to estate planning, probate & trust administration, fiduciary duties, etc.

It is a great time to come ask some questions and learn from each other.

We are starting a new year, and if you would like to join, call Amy at my office for an invitation.

I provide bagels or donuts, coffee and juice for all attendees.

I hope to see you there.