Posted by Janet Brewer on Sat, Apr 28, 2012 @ 02:20 PM
I have written before about a few ways someone in the Bay Area can protect his or her assets [link: http://www.calprobate.com/services/asset-protection/] from creditors. I want to expand here a bit on the idea of a family limited partnership (FLP), and how this might be a beneficial estate management arrangement for you.
How a FLP Works
A family limited partnership functions much like a holding company, with general and limited partners who have an interest in the partnership. This allows family members to pool resources and assets into a single entity that is easier and less costly to manage.
For the sake of illustration, let's create a very simple two-person partnership: A mother, the general partner; and her daughter, the limited partner.
Suppose in this example that mother and daughter have an equal 50-50 interest in the partnership (usually that would not be the case – in most cases mother would be the “general partner” with a 1% interest and daughter would be the “limited partner” with a 99% interest). Because daugther is only a limited parter, she lacks any control over the assets or their marketability - only the general partner may acquire or sell assets in the partnership.
This offers two very useful forms of protection.
Protection From Creditors
Suppose in our case that the daughter, the limited partner, has outstanding debts. Her creditors could theoretically obtain a “charging order” (a court order to pay over any distributions) for part of her interest in the partnership. However, the creditors could only receive distributions from this interest when the general partner distributed anything. The daughter has no control over distribution.
Therefore, should her mother, the general partner, simply never distribute anything, her daughter's creditors could simply be left with a taxable income yet no cash distributions.
Protection From Some Taxes
Now, suppose the mother would like to contribute $200,000 cash to the partnership. After she has made the contribution, she gifts half of the contribution to her daughter’s share. If mother had given her daughter $100,000 directly, the fair market value of the gift would be $100,000 and it would be fully subject to gift taxes.
But mother didn’t give her daughter $100,000 – instead, she gave daughter a gift through the limited partnership, and there are restrictions on daughter’s ability to use that $100,000. Because of those restrictions that $100,000 gift is worth something less than it would have been if the mother had simply handed her daughter $100,000 in cash. As a general rule, the more restrictions there are on a gift, the less it is worth.
The fact that the limited partner has no control over the assets means her claim to that $100,000 might not be so valuable to anyone else. Once that lack of control is factored in to the valuation, fair market value for that gift in the partnership might only be $95,000. Therefore, the gift tax would be based on the $95,000 value.
While this exchange is perfectly legal, it needs to be noted that only a qualified appraiser can evaluate the fair market value of the limited partner's interest. It is also useful to note that gifts of cash within a limited partnership are usually appraised at “almost” the same value as the cash itself but that gifts of other types of property (such as land) are sometimes discounted by 15% to 40%.
If you require such arrangements to protect the your assets, you require experienced legal counsel to help you do it correctly. Put our expertise to work for you, and protect the assets that you have worked so hard to build! Contact us at (650) 325-8276 to explore your situation and execute the strategy you need.
All the best,
Posted by Janet Brewer on Sun, Oct 23, 2011 @ 12:53 PM
Q: What is the best way for my parents in China to give me money for buying a house in the United States?
My parents in China are ready to transfer $20,000 to me as a gift because my boyfriend and I plan to buy a house together. So far though, I'm just in the U.S. on a visitor's visa. How should I handle this to minimize tax on the gift? Should I ask them to transfer it into my boyfriend's bank account?
A: Having your parents transfer $20,000 to a bank account inside the U.S. is not necessarily a good idea from a gift tax standpoint. If you are here in the US on a visa (rather than a green card), it might be a better idea for them to transfer the money to you in China (for example, to your bank account in China, assuming you have one). That way the entire gift takes place "offshore", and would not be subject to US gift taxes.
Examples
Here is a sketch of three possible scenarios:
- Scenario 1: Having your parents make one $20,000 transfer to a bank account inside the U.S. -- since gift tax limit is $13,000, your parents would owe gift tax on the remaining $7,000. They would need to file a gift tax return (Form 709) and if the cumulative amount of the gifts exceeded $60,000 then they would have to write a check to the IRS.
- Scenario 2: Having each of your parents transfer $10,000 to a bank account inside the U.S. -- since each transfer is under the $13,000 limit, your parents would not owe gift tax.
- Scenario 3: Having your parents make the transfer to your bank account in China -- there is no limit on the transfer amount, but you may have to report the existence of the account under the "FBAR" rules if you are required to file a US income tax return
An FBAR is a Report of Foreign Bank and Financial Accounts. U.S. tax law requires that this report be filed by "any United States person who has a financial interest in or signature authority or other authority over any financial account in a foreign country, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year."
Even though your parents are non-resident aliens for US tax purposes, if they make the gift in the U.S. (by depositing it to a U.S. bank, for example) they are subject to the $13,000 annual gift tax exclusion -- they would also have to pay gift tax on the difference. Therefore, another suggestion would be for your father to gift $10,000 to you and then for your mother to separately gift $10,000 to you. That way, each gift would qualify for the gift tax exclusion under US laws.
New Guide: Buying U.S. Real Estate When Your Child Studies in America
International Estate Planning and Structuring Real Estate Ownership
Risks and Rewards of Buying U.S. Real Estate as a Non Resident Alien
The Sasakis Learn Risks of Online Legal Forms: An International Estate Planning Example
All the best,
Posted by Janet Brewer on Mon, Sep 19, 2011 @ 05:00 AM
Of all the topics I cover at this blog, probate seems to involve the most legalese. It's an ongoing challenge to translate legal jargon into examples and tips that make sense to non-lawyers. So I am glad to see that a new TV show called "Trial & Heirs" is in the works. Last time I checked, PBS was going to stream an episode in August and start airing it nationally in December.
While I don't litigate, I hope the show highlights how wills, trusts, and other elements of estate planning affect real people... and that it prompts more families to do sound planning.
Avoiding probate is important because probate adds stress, costs (including court filing fees), and other pressures on loved ones during a period that is already painful. In brief, get a comprehensive will and living trust in place and review them about every three years with an eye to whether your situation (or the tax law) has changed.
If you must deal with probate - an example
Suppose your relative, Roger, passes on at his home in Redwood City, and you learn that you are named in his will. Because he did not have a living trust, you will probably be involved in the probate of Roger's estate.
Probate is a legal procedure that identifies the heirs to an estate and determines how much of that estate the heirs are legally entitled to receive. It is used to sort out how much you owe to your creditors, to pay them, and to officially prove your Will is genuine (or to determine who should receive your property if you die without a Will).
Roger's estate must be probated in the county where he died. So Roger's Will should be filed with the Clerk of the San Mateo County Probate Court -- within 30 days after his death -- in Room B on the first floor of the Hall of Justice at 400 County Center in Redwood City.
Since Robert's will named beneficiaries, the representative filing the form fills out a “Petition to Probate Decedent’s Estate”. Filling it out requires:
- Name of the personal representative who will oversee the estate
- Estimated value of the decedent’s estate
- Names and addresses of the beneficiaries designated in the will
- Names and addresses of all legal heirs
Once the representative files the petition, the court sends a Notice of Petition to all parties named in the petition, publishes a notice in the newspaper, and sets a hearing date.
(If Roger died without a will -- or "intestate" -- the court may “administer” his estate. In such cases, rather than filing a Petition to Probate Decedent’s Estate, the petitioner would file a “Petition to Administer Estate”.)
After the hearing, the probate judge will enter an order granting or denying the petition. If the petition is granted, and all the required documents have been filed with the court, the court will issue Letters Testamentary (or Letters of Administration in cases involving an intestate estate).
Legalese, hearing dates, and more
As I said earlier, probate involves a ton of legalese. The Court provides some help navigating the process, including a link regarding Initial Petition documents. But on the subject of being your own lawyer it clearly states,
"...before taking any legal action it is highly advisable to consult with a lawyer who can inform you about important legal rights. An experienced attorney may be able to quickly assess your situation and highlight the best course of action to assert or protect your interests. Failure to consult with an attorney may result in unnecessary delays or costly measures in the future to remedy errors."
Getting legal help
Probate is often more complex, more stressful, and more time consuming in cases involving especially large estates (say $5M or more). If you face such a probate, hire the best San Mateo County probate attorney you can for legal help! He or she can represent you in all aspects of the probate process, from initial filing of the will and petition to closure.
Learn about retaining our services
Access additional free resources
All the best,
Posted by Janet Brewer on Tue, Sep 13, 2011 @ 05:00 AM
This is the second of two articles on reviewing a trust. In this one, discuss how we evaluate a living trust agreement, and how that differs from developing an estate plan.
My team and I examine dozens of things when we evaluate a trust document. To give you an idea, a few of them are:
- Does the trust agreement confirm to third-parties that a married trustor/trustee has authority to act when his/her spouse cannot (if desired by client)?
- Does the trust agreement include provisions to alter distributions to a surviving spouse in the event of remarriage after the death of the first spouse?
- Does the trust agreement include a common trust provision when one or more of the primary beneficiaries has not yet graduated from college?
- Does the trust agreement give the trustee of a continuing trust an appropriate amount of flexibility to make disproportionate distributions based upon the relative needs of the beneficiaries?
- Does the trust agreement set up continuing trusts for the beneficiaries, which are tailored to the needs of each trust beneficiary?
Is there evidence that the trust is properly funded? An unfunded or partially funded revocable living trust does not avoid probate. Great care must be taken to ensure that all necessary assets held by the trustor individually are either retitled to the trust, or that the trust is considered as an appropriate “designated beneficiary.”
The difference between evaluation of a trust and creating an estate plan
In trust reviews, my intention is to provide you with an objective analysis of the document, and nothing more. Still, my review may be very beneficial to you because your estate plan will eventually be interpreted by attorneys and financial professionals that you do not know. So it is far better to identify ambiguities or omissions in your estate plan while you are alive and healthy than when you are not.
When I am hired for estate planning, I conduct an in-depth "discovery" process that includes:
Gathering personal and financial information
First I need to review your personal data and your financial information, and discuss a potential plan to meet your goals and objectives. I need to learn about your family and how the various members handle money. I understand that this is sensitive information, something not always easy to talk about. I am not shocked by any characters lurking in your family tree – we all have our fair share of them!
Discussing goals and values
You have built up a large estate, and you probably have very specific wishes that you want someone to carry out. Before I can recommend any course of action, we need to meet in person so that I can learn about you, your values, what you are trying to accomplish and, maybe most importantly, what you want to avoid. When I am creating a plan for both spouses, it is an absolute requirement that both spouses meet with me.
Focus areas in an estate planning engagement
Here are a few of the many questions I ask the first time we get together to discuss your estate plan. The following is not a complete list - it is a sampling:
- Did you have any prior marriages?
- Have you signed any pre- or post-marriage contracts?
- Do you have an “umbrella” liability insurance policy?
- If any children are under 18, have you decided who would be their guardians?
- Do you have any business interests?
- Do you wish to leave money or assets to charitable or religious causes?
- Are you concerned about providing for your grandchildren’s education?
- Do you wish to prevent anyone from receiving a portion of your estate?
- Do you wish to make any provisions in your estate plan for your pets?
The more I understand about your circumstances, the better I can educate you about your choices and guide you so that your family members won’t need to make stressful decisions in trying times. You will have the peace of mind of knowing that you have “done right” by your family.
All the best,
Posted by Janet Brewer on Thu, Sep 08, 2011 @ 05:00 AM
This article is part of our series of articles on the risks and rewards of buying U.S. real estate as a non resident alien.
Accountants know a lot about keeping track of your money, but estate planning isn’t their primary job. By working with an attorney experienced in international estate planning law, you can get all your questions answered and gain peace of mind that your loved ones will not face a snarl of tax issues down the road.
If you own property outside of the United States, it’s even more important to have a network of experts to call upon when you have an issue. Not all countries recognize trusts and other tools that work here. To reduce or eliminate tax liability, you may need to choose an appropriate ownership structure. Keep in mind that the net tax savings will vary depending on the ownership structure as well as individual circumstances.
Ownership structures include:
- Individual
- Pass through entity (limited liability company or partnership)
- U.S. corporation
- Foreign corporation
- Foreign trust
- Real estate holding company
Not all of these structures will avoid U.S. estate and gift tax liability and some provide better income tax benefits than others. It is important that you seek competent legal advice before you purchase U.S. real property (or as soon afterward as possible).
Resources
Examples provided in our guides and here on this blog help illustrate this point:
All the best,
Posted by Janet Brewer on Tue, Sep 06, 2011 @ 05:00 AM
This is the first of two articles on reviewing a trust. In this one I address whether a Palo Alto family with a living trust should have the creator of the trust do the review, or find a different attorney to take a fresh look.
Q: We live in Palo Alto, California and in the 90s our family chose a Burlingame estate planning attorney to establish a living trust. Now we are trying to verify if the attorney who drew it up really is trustworthy and experienced with living trusts. We need a trust review. Specifically:
- Is it better to go to the same attorney for this "check up" or someone new?
- Since we are asking for a trust review, would the fees be much lower than if we were starting from scratch?
A: You were smart to use an estate planning attorney instead of using off-the-shelf forms or packages from a self-service legal website. You are smart to check and update your living trust, too. Circumstances can change alot in a short time. In fact, it is a good idea to do a trust review and update your trust every three to five years.
Vetting estate planning attorneys using Avvo
I am glad to hear that you are vetting estate planning attorneys before hiring anyone. One way to check out a lawyer is to look on Avvo. Search for "estate planning" in the Palo Alto area and see which lawyers' names appear with high Avvo ratings. See if they've answered questions and read the answers to see what you think of their approach.
Checking out attorneys using the State Bar website
Also check out the State Bar website. Use the "Advanced Search" feature and the "Additional Search Criteria" to find a specialist in Estate Planning law. Less than 1% of all California lawyers are certified as specialists in Estate Planning. In order to be certified, a lawyer has to pass a specialized bar exam and meet rigorous experience requirements.
Also, check out these individuals' websites to see what their approach is to estate planning to see if you think the "chemistry" will be right.
What you can expect to pay
You get what you pay for! If price is your most important criterion, then skip all of the above and just phone lawyers until you find the one with the lowest price. Just remember, if they don't do it right, it cannot be corrected after you die or become incompetent.
Depending on the complexities of your situation (and whether you're married or single, have children who need to be protected, etc.), an experienced attorney's fees will be anywhere from $2,000 to $10,000. As a very rough rule of thumb, figure out your net worth and multiply by 0.10% to 0.25%. That usually approximates the complexity of your estate and the cost of planning for it properly.
For example, if you have an estate worth $3 million dollars, you should expect to pay between $3,000 and $7,500... a little less if your situation is really "plain vanilla"; a little more if it's complex.
Look for the next article on trust reviews
In the next article on trust reviews, tentatively titled "How is Review of a Living Trust Different from Estate Planning?" I'll show an example of what we examine when we do a trust review, and how a trust review differs from creating an estate plan.
Getting legal help
If you are currently working with a highly qualified estate planning attorney that you are comfortable with, it is probably best to continue working with him or her. On the other hand, if you have doubts about the advice you are getting or the experience you have working with the person, it's time to look elsewhere.
All the best,
Posted by Janet Brewer on Sun, Sep 04, 2011 @ 05:00 AM
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A stack of forms can’t “know” the nuances of your situation. Work with an attorney experienced in international estate planning to craft a plan that fits your unique circumstances. Protect your loved ones and assets by examining your options now »
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This fictional example is drawn from our guide Buying U.S. Real Estate When Your Child Studies in America.
Hiro Sasaki, 19, will be a freshman at Stanford this fall (Class of 2015). Hiro’s parents, Emiko and Dai Sasaki of Tokyo, are looking to purchase a place for Hiro to live. They want to do everything they can to help him succeed, and that means providing a study environment free of the distractions common in a dormitory.
$675,000 cash for Palo Alto townhouse
The Sasakis identify a townhouse in Palo Alto listed for $675,000. It’s close enough for Hiro to bike to campus. Dai pays the listing price in cash, putting the title in his name.
Dai reads online about the importance of having a revocable living trust in the U.S. Dai has seen those online legal programs where it is possible to purchase do-it-yourself-forms. To Dai it seems like a good option. He uses a do-it-yourself form to establish the trust.
Establishing trust does not lower Sasakis' tax liability
Unfortunately, while a revocable living trust is useful for avoiding probate, it does not lower his tax liability. Dai still has only a $60,000 exemption. So if something happened to Dai, his family will have a massive estate tax bill – in the neighborhood of $142,800.
The online legal program where Dai purchased his form wouldn’t “know” about the unique circumstances he is in. And despite diligently completing the form he downloaded, he is about where he started off with respect to his tax liability.
A minor car accident in Tokyo gets Dai thinking again. He realizes he has not protected his loved ones from a big tax bill, should anything happen. He finds a Bay Area attorney experienced in international estate planning, and gets a sound plan in place.
Takeaway
This example is made up, but it's true that a stack of forms can’t “know” the nuances of your situation. If your situation is anything like the one described here, consider working with an attorney experienced in international estate planning to craft a plan that fits your unique circumstances.
All the best,
Posted by Janet Brewer on Fri, Sep 02, 2011 @ 05:00 AM
This article is part of our series on Buying U.S. Real Estate When Your Child Studies in America
Trend: more NRAs purchasing in college areas
The June 29, 2011 article “U.S. is Top Choice for Real Estate Investors,” in Generation America, has some interesting facts and figures from a survey was conducted by the National Association of Realtors as part of its 2011 Profile of International Home Buying Activity.
Among the survey’s findings (paraphrasing): real estate in the U.S. is the top destination for foreign buyers; the number of foreign exchange students at U.S. colleges and universities has increased the demand for real estate by foreign buyers; and some foreign families are purchasing U.S. properties in college areas so their child has a place to live.
The president of the National Association of Realtors observes that, "the U.S. has always been a desirable place to own property and make profitable investments. In recent years, we have seen more and more foreign buyers coming here to take advantage of low prices and plentiful inventory."
Why putting off estate planning is especially risky for NRAs
No one likes to think about dying someday. Some people even consider it bad luck to discuss death. But family members who have come to the United States from elsewhere may find U.S. tax law quite different than what they were used to.
It’s important to set aside our emotions and consider a key fact: Federal estate and gift tax laws impose onerous restrictions on non-citizens (even if you have a “green card”).
Consider:
- Outright gifts during your lifetime to a non-U.S. citizen spouse – including making him or her joint owner of certain assets – can trigger gift tax problems immediately.
- A non-resident non-citizen with no green card who bought a $1.5 million house with cash, intending to leave it to one of his children through a will or trust could trigger an estate tax of $495,000. With advice from the right expert, she could avoid that tax bill.
- Likewise, gifts at death to a non-citizen spouse may not qualify for the “unlimited marital deduction.” Your unsuspecting widow or widower may be forced to pay hundreds of thousands of dollars in estate taxes shortly after your death.
- If an investor buys a $1.5 million property in U.S. and dies owning it without ever having put it in a trust, the probate cost alone could be as much as $28,000. If that investor also happens to be a non-resident alien, the estate taxes could be $495,000.
Taking steps to protect your loved ones and your assets
Even if your estate is modest, the tax effects of poor planning on NRAs can be devastating. Choosing the right lawyer takes an investment of time and money, and it is a wise investment. We can set up documentation, write any complex agreements, and take other steps to help protect you. But you need to take the first step: contacting us. Protect your loved ones and your assets by examining your options now. Call +1 650 325 8276 or get started at our website »
All the best,
Posted by Janet Brewer on Thu, Sep 01, 2011 @ 02:48 PM
Presenting our newest guide on international estate planning
We've just posted a new international estate planning guide, Buying U.S. Real Estate When Your Child Studies in America. (Note: If you get value from it, would you please recommend it to others on Facebook, Twitter, or other places you're connected to friends and family? Thank you!)
In my 20+ years as an estate planning attorney, I've found that most families – and perhaps especially nonresident aliens (NRAs) – want straight talk when it comes to legal and financial matters. And in this guide I've tried to dispense with legalese and give you exactly what the title says.
Don't "fly in the dark"
Too many parents “fly in the dark” when it comes to securing the financial future of their loved ones. As someone who works on estate tax and probate issues with NRA families, I hear heart breaking stories of families having to pay dearly during painful times, just because they never found a trusted advisor to ensure they keep all the assets they deserve.
Five fictional examples illustrate key issues NRAs face
In this guide (as well as a previous guide, U.S. Gift Tax and Estate Tax Planning for Non-Residents and Non-Citizens), you'll find examples of nonresident aliens from several countries facing key questions, issues and choices. The examples are made up, but if your situation is anything like ones presented, you could probably use help from an experienced international estate planning attorney.
Comparing your options
Unfortunately, with the way that most international estate planning lawyers present themselves to the world, it seems like we’re all the same. In reality, each lawyer does have certain qualifications.
Some might be experts at tax law, or in working with corporations or with debt collection, or a whole variety of different things…but are they really providing what you, the family person, wants and needs?
Protect your loved ones and your assets by examining your options now
I hope this free guide and checklist opens your eyes to the importance of setting up your plan. My team and I can set up documentation, write any complex agreements, and take other steps to help protect you. But you need to take the first step: contacting us! Please call +1 650 325 8276 or get started using a simple form here at our website.
All the best,
Posted by Janet Brewer on Wed, Aug 10, 2011 @ 11:03 AM
I frequently answer questions on other sites about estate planning, wills, trusts, and probate law. Here is one question I recently answered.
Q: Can creditors force me to sell dad's assets to pay off his debts? Specifically:
- Can the bank holding the mortgage force me to sell his car and give them the money?
- Can the credit card companies that he owes force me to sell his car to pay off his debt?
A: If your father's "probate estate" -- that is, the assets that do not have beneficiaries named on them or are not held in his trust -- are worth less than $100,000 then you can transfer title to yourself by using the "small estates affidavit".
The California DMV has its own small estate affidavit. As you will see when you read the affidavit, you are required to "indemnify" anyone who transfers property to you against all claims. That means that if a credit card company sues to get the car or the proceeds from its sale after the DMV has transferred it to you, you are agreeing that you will "assume" responsibility for the debt.
So, yes, it is possible that the credit card companies can force you to sell the car to pay off the debts. The mortgage company may or may not be able to do the same thing... in California, the answer depends on whether the mortgage loan was:
- "Recourse" - meaning that the borrower is personally liable for repayment, or
- "Non-recourse" - meaning that the borrower does not have any personal liability.
By law in California, the loan your father took out to purchase the house originally was "non-recourse". If he refinanced, though, the loan is probably (but not necessarily) a "recourse" loan.
Getting legal help
Talk with a Bay Area attorney experienced in fiduciary counseling to determine what’s right for your situation. I am a board certified estate planning and probate attorney specializing in asset protection for Palo Alto -area clients, and the surrounding areas -- and can help you develop the best strategy.
Additional resources that may help you
Here are related blog articles that might help you:
All the best,