Articles Posted in ESTATE PLANNING

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If you have a child or other relative who is irresponsible with money or is the subject of a number of creditor judgments, you might consider including a spendthrift clause as part of your estate planning. A spendthrift clause, also known as a spendthrift trust, allows you to leave money to a beneficiary with certain restrictions. Technically, you leave the money to a trustee, who can make payments to the beneficiary per your instructions.

Since the principal of the spendthrift trust remains with the trustee, in most cases the beneficiary’s creditors cannot go after these funds. For example, a creditor could not attach a lien against the trust’s assets. But there are exceptions to this rule, as illustrated by a recent California appeals court decision.

Trustees Ordered to Pay Brother’s Wife

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In a revocable living trust, the person making the trust (the grantor) usually decides how the trust’s assets should be distributed after he or she dies. However, there may be circumstances where the grantor wants to give that power to someone else, usually one of the trust’s beneficiaries. This is known as a “power of appointment.”

Court Rules Son Improperly Used Father’s Power of Appointment

If the grantor places no restrictions on a power of appointment, it is considered a “general” power. This means the beneficiary can name anyone–including themselves or their creditors–as recipients of the trust property. A special power of appointment, in contrast, restricts the beneficiary’s discretion.

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The federal estate tax has long been a source of political controversy. The tax applies to the transfer of assets upon a person’s death, but there are a number of exemptions that effectively exclude all but a handful of estates from paying. No estate with a gross value of $5.45 million ($5.49 million as of January 1, 2017) is liable for the tax. Additionally, one spouse can leave an unlimited amount of property to the surviving spouse without owing any tax. While some states still impose their own estate tax, California does not.

Trump Expected to Undo Obama Rules Changes

In August, the U.S. Treasury Department proposed new regulations that it claimed would close “loopholes” in the estate tax. According to the White House, these regulations would make it more difficult for estates to restrict the use of certain assets in order to “discount” their value for tax purposes. Many business owners, in California and elsewhere, have spoken out against the proposed rules, arguing that they will raise their projected estate tax liability and force them to sell their businesses instead of leaving them to their children.

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Most California residents have some form of retirement savings. These accounts usually do not pass as part of a person’s probate estate. Instead, the account holder is expected to name one or more beneficiaries who automatically receives any funds upon death.

Types of Retirement Accounts

There are several different kinds of retirement savings. The two most common are traditional individual retirement accounts (IRAs) and 401(k) plans. Both accounts offer tax benefits. Contributions to an IRA are tax-deductible while 401(k) contributions are made with “pre-tax” dollars. Tax is therefore deferred until the account holder makes withdrawals, which must begin by the age of 70 years and 6 months. The account holder must also pay a penalty if funds are withdrawn “early,” which is defined as before the person reaches the age of 59 years and 6 months.

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If you have multiple children, it is a natural desire to provide for them equally in your estate plan. For some types of assets this is no big deal. You can easily divide a bank account into equal shares. But other types of property, such as real estate, can prove trickier to deal with. In many cases it may not be practical for multiple children to jointly inherit a parent’s home.

Son’s “Obstruction” Delays Sale of Property

A recent case from Santa Clara offers a helpful illustration. Here, a father of three adult children owned a 2.9-acre piece of land including a residence. The property was held in a revocable living trust. When the father died, his two daughters took over the trust as successor co-trustees.

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There are many questions you may have when thinking about estate planning. In addition to worrying about making a will, or setting up a trust, and dealing with decisions about whom to leave your property, there are also more mundane issues to consider. For example, do you still have to file tax returns after your death?

It probably will not come as a surprise that the answer is “yes.” Tax obligations do not end at death. In fact, death raises a number of tax issues that your surviving spouse (if you are married) or the executor of your estate will need to handle.

Personal Income Taxes

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It is not uncommon for a person entering a second marriage to keep certain assets as separate property for the benefit of any children from the first marriage. If you are in this situation, it is important to make sure that your estate planning reflects your intentions so as to avoid any potential misunderstanding with your current spouse. You have every right to leave separate property to your children without interference from your spouse.

Court Rejects Wife’s Estate’s Effort to Claim Husband’s Estate

Unfortunately, there are some cases where a person may still and try and challenge a deceased spouse’s estate plan. A California appeals court recently issued a series of three decisions in a long-running Orange County probate dispute involving the children of now-deceased spouses.

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If you co-own real property with others, it is important to clearly establish each party’s interest. Among other reasons, this can have a significant impact on your estate planning because your will or trust can only dispose of your own interest in real estate. Your estate plan will not affect the rights of the other co-owners in most situations.

Brothers Fight Over Share of Mother’s Property

Here is an illustration from a recent California case. In 1978, a mother and her three children–two sons and a daughter–acquired a piece of real estate in Los Angeles. There were a number of title changes made to the property over the years. According to a 1986 deed, ownership was divided as follows: a one-third interest belonged to a revocable trust established by the mother, a one-third interest belonged to the daughter, and the final one-third interest belonged to one of the sons (who is the defendant in the lawsuit discussed below). In 2002, the daughter effectively transferred her one-third interest to her mother’s trust.

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When you name someone as a beneficiary of your last will and testament, you are effectively making a gift to that person (conditional on your death). A testamentary gift can take the form of cash, property, or even forgiveness of an outstanding debt. For example, if you loaned your child $10,000 during your lifetime, you may include a clause in your will canceling the loan, thereby absolving her of any legal duty to repay your estate.

Sisters Continue Lengthy Fight Over Father’s Forgiveness of Business Loan

California law defines a gift as “a transfer of personal property, made voluntarily, and without consideration.” If you plan to forgive a debt as part of your estate plan, it is important to do so expressly in writing. California does not recognize “verbal” gifts “unless there is an actual or symbolical delivery of the thing to the donee.”

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You should never procrastinate when it comes to estate planning. If you are thinking about making a will or trust—or amending an existing document—you should speak with a San Diego estate planning attorney as soon as possible. After all, you never know what sudden or unexpected event may leave you unable to put your estate plan into action.

Divorce, Death Prevents Funding of New Trust

A recent case from here in San Diego offers a cautionary example. A husband and wife established a joint revocable trust. Some time later, the couple began divorce proceedings. The wife hired an estate planning attorney to assist her in revoking the joint trust and establishing her own trust. She wanted to ensure her 50% interest in the couple’s community property would go to her heirs.

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