Probate, Trusts, and Estate Law Blog

Act Fast to Capture Benefit of Current Gift Tax Exemption

Bay Area families are running out of time to take advantage of the generous gift tax exemption in place this year. Now is the time to leverage any gifts into ones that hold greatly increased potential value for the recipients. Get started now »

Bay Area families that have yet to take advantage of the current gift tax exemption are running out of time. As of midnight on December 31, 2012, the $5 million exemption disappears and will be replaced by a $1 million exemption. As it stands right now, gifts in excess of $1 million given after January 1, 2013, will be taxed at a whopping 55% top rate!

Last year, Congress raised the gift tax exemption from $1 million per year to a whopping $5 million per year ($5,120,000 per person, to be precise). In addition, the estate tax rate has been reduced from 55% to 35%. However, the increased exemption and reduced rates will last for only the 2011 and 2012 fiscal years, making it imperative to act now to create and revise estate plans to take advantage of these extraordinarily favorable terms.  

According to the IRS, the gift tax occurs when a person or estate transfers money or property to another either for nothing or for something less than the full value of the property. Congress passed the tax specifically in response to wealthy individuals trying to avoid the estate or “death” tax by giving away their assets prior to death. Before this year, the relatively low threshold of the gift tax exemption discouraged large pre-death bequests.  

I have previously said that those with a high net worth should do advanced estate planning beyond a basic will. The generous gift tax exemption currently in place makes now the best time to leverage any gifts into ones that hold greatly increased potential value for the recipients. Some strategies include:  

• LLC: Starting a LLC and then making a large gift to capitalize the company. It’s important to note that the process of creating an LLC takes time; all the necessary documents have to be drafted and then approved by the Secretary of State. A prudent planner would need to begin the process right away if he wishes to take advantage of the favorable exemption.

• FLP: Related to starting an LLC is the pooling of assets into a Family Limited Partnership. I have previously discussed the benefits of such partnerships here.

• Trusts: Another option involves placing certain gifts in trusts. We advocate using various kinds of trusts to protect assets from creditors and con artists alike. This article from the Wall Street Journal contains an excellent rundown of the various trusts one can create to take advantage of the gift tax exemption. Some trusts, such as the Grantor Retained Annuity Trust can be structured so that there are no gift tax consequences.

• Real estate: Real estate, much like closely held businesses, is notoriously hard to value and can greatly increase in worth over time. One only needs to look at the massive increase in home values in the Bay Area over the past 25 years (or the dip for the past several) to know how volatile the real estate market can be. Home prices may be lower now, but can increase in value substantially over the next decade or two, increasingly the value of the gift for the recipient. The current economic environment, in which many asset values are depressed and interest rates are at historic lows, actually makes this a perfect time to make gifts, since these factors can really help maximize the benefits of gifting.

Even if you can only afford to give smaller gifts between $1 million and $4.999 million (small being a relative word), it would still be wise to take advantage of this generous exemption before the year’s end and the $5 million ceiling expires. If you have not yet tried to take advantage of the exemption, you need to act quickly. The likelihood of Congress extending this exemption is widely seen as unlikely given that it is an election year.  

Creating a gift plan that will suit your individual needs takes time. Appraisals, business valuations, and trust documents must often be created in order to ensure the gift tax exemption is applied properly in your situation. Talk to your California gift-planning attorney right away if you want to take advantage of the exemption before it ends.  

Source: “The $5 Million Tax Break,” by Anne Tergesen, published at WSJ.com.

See our related blog posts:

• The Importance of Advanced Estate Planning for Bay Area High Net Worth Families
• Will a Family Limited Partnership Protect Your Assets?

All the best,

How is Review of a Living Trust Different from Estate Planning?

Learn more about our asset protection legal services, probate services, and fiduciary counseling »

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,

Palo Alto Family Needs a Trust Review - Use Same or New Attorney?

Learn more about our asset protection legal services, probate services, and fiduciary counseling »

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

All the best,

Planned Charitable Gifts Can Ensure Family Legacy, Shrink Tax Bill

Not only is charitable giving a praiseworthy choice, it can also reduce tax liability. Certain kinds of gifting is income- and estate tax deductible, and in this article I share the IRS's guidelines.

In order to take advantage of the income tax savings benefits of charitable giving, a donation must meet certain requirements established by the IRS.

IRS rules for charitable giving

1. The donor cannot benefit from the donation*
2. The donor must be able to substantiate the donation
3. The donation must be made to or for the benefit of a qualified charitable organization, and
4. The donation may not exceed the current statutory ceiling

* However, structured properly, you can receive an income stream from a charitable trust and still receive an income tax deduction for the charitable portion of the gift - please contact us to discuss your particular situation.

Taxes and charitable giving

Let's distinguish between the income tax side and the estate/gift tax side:

• If it goes to charity it is deductible from your estate

• If it goes to loved ones, it's not

The Tax Code limits the income tax savings of a charitable gift to a percentage of the donor’s adjusted taxable income (or AGI) reported each year on your 1040. But every dollar you give to charity is deductible if  the charitable gift it is made as part of your will or trust. So people like Warren Buffet and Bill Gates can give their kids up to $5M - and pay no estate tax if they give their other billions to charity through their will or trust.

Outright gifts vs. deferred gifts

Charitable gifts fall into two categories: outright gifts and deferred gifts. An outright gift is an immediate gift made to a charitable organization. An outright gift has the following characteristics:

• The donor has no influence or control over the charity
• The donation is at the disposal of the charity, and
• The donor retains “no legal or equitable interest” in the donated property

A deferred gift is also known as a planned gift or a partial gift and may take any of the following forms:

• A bequest in a will or living trust
• A beneficiary designation on a retirement plan or life insurance policy (caution: this needs to be handled carefully to avoid unintended tax consequences)
• An irrevocable commitment to transfer property to a specific charity upon the death of a specific beneficiary or after the lapse of a stated period of time (a Charitable Remainder Trust); or
• An irrevocable commitment to convey property temporarily to charity in trust with the understanding that the property will be returned to a non-charitable entity upon the death of a designated beneficiary or after the lapse of a stated period of time (a Charitable Lead Trust)

Getting legal help

Charitable gifts can take many forms. Talk with an attorney experienced in planned giving to determine what’s right for your situation. It depends on your age, your goals, age of beneficiaries, size of the gift, and more. In addition to trusts, there are several other charitable gifting strategies which may be utilized to maximize estate tax savings. I am a board certified estate planning and probate attorney specializing in the representation of high-net worth clients in Los Altos, Santa Clara, Palo Alto, Stanford, and the surrounding areas -- and can help you develop the best strategy.

Get started >>

All the best,

Is a CLT Too Good to be True? A California Probate Attorney Weighs In

A vehicle that allows you to regularly give money to charity and pass a substantial sum to family members free of gift or estate taxes may seem too good to be true. But it’s not — it’s called a charitable lead trust (CLT).

You set up this trust to pay the annuity interest to a charity for a term of years. You designate to whom the remaining trust assets (called the “remainder interest”) will be paid when the term ends. The (perfectly legal) trick is to make the charity’s interest large enough so the remainder interest’s value (as determined by IRS tables at the trust’s inception) is low. The remainder interest’s value is a taxable gift but can be sheltered from gift tax by your $1 million gift tax exemption.

For example, suppose you transferred $500,000 to a CLT in March 2004 and provided for the charity to receive $35,000 a year for 25 years. Assuming the trust grows at 7%, the remainder interest value and the taxable gift at the trust’s inception would be $6,713.50. In 2029, at the end of the 25th year, the balance in the CLT ($500,000) would pass to your children tax free.

Unlike a charitable remainder trust, a CLT must pay income tax on its income and capital gains. But it can deduct the amount distributed to the charity as a charitable deduction.

A CLT is an excellent device if you are making regular charitable contributions anyway, because it lets you pass a large amount of money to family members free of gift or estate tax. And why not do everyone a little good?

All the best,