California Probate - Law Offices of Janet Brewer Blog

What Is an Estate and Gift Tax Treaty, and Will It Affect Your Estate Plan?

The United States has entered into estate and gift tax treaties with several other countries. The purpose of a treaty is to reach an agreement between governments of two countries on issues affecting both countries. The estate and gift tax treaties affect tax treatment of gifts and estates for people who have ties to more than one country.

Countries with which the United States has signed gift and/or estate tax treaties include the following:

• France
• Italy
• Germany
• Japan
• United Kingdom

The U.S. also has treaties with several other countries around the world. These treaties are not all the same. The United States has reached different agreements with each country, and some treaties affect only estate taxes, not gift taxes.

These treaties resolve various tax and legal issues for people living in both countries, making transactions in both countries, or holding property in both countries. The issues include locating an individual’s domicile, resolving possible dual-domicile issues, and reducing or eliminating double taxation. Some treaties provide deductions or tax relief.

Estate and gift tax treaties provide a number of advantages for international taxpayers. For one, they eliminate some of the issues described above. Domicile problems and double taxation otherwise could result in taxpayers having to pay twice the amount of tax on gifts to relatives or in estates paying taxes on the same property in two countries.

Second, treaties may allow non-residents of the United States who are domiciled in a treaty country to live or conduct transactions in the U.S. for some period of time without worrying about U.S. estate and gift taxes. Of course, whether non-residents will pay taxes varies widely depending on their circumstances. Just because your country of origin has a treaty with the U.S. is not a guarantee that you will not owe U.S. taxes. The provisions of the treaty will govern which and how much taxes you will pay.

If you believe that your country of origin has an estate or gift tax treaty with the United States that may change your tax liability and affect your estate planning, contact a qualified attorney today. Your attorney can help you understand the treaty and make changes to your planning to account for its benefits.

Planning your estate? Look to the Law Offices of Janet Brewer to help with these kinds of issues. You can schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.

Are California Trusts Taxed Differently than Trusts Formed in Other Countries?

If you are planning to form a trust to hold foreign property or managed by a foreign trustee, you may wonder if California trusts are taxed differently than trusts formed in other countries. Unfortunately, there is no simple answer to this question. If your trust has any cross-border involvement, you need to speak to tax and estate planning professionals about how to proceed.

There are many factors that affect the tax treatment of trusts, including but not limited to:

• Residency of trustees
• Whether a foreign resident trustee can control decisions about the trust
• Location of assets held by the trust
• Language in the trust document regarding where the trust will be administered
• Where the trust is actually administered
• Whether the trust is a grantor trust or non-grantor trust (a legal determination)

The first step in determining how the trust will be taxed is evaluating whether it is a “domestic” or “foreign” trust. Each receives different federal tax treatment. Determining the proper category is very complicated. Trusts can even switch from domestic to “accidental” foreign trusts by something as simple as changing the trustee to a non-U.S. citizen.

In addition, you will need to figure out how the trust is taxed in California. California has different rules than some other states for trust taxation. State law looks to (1) whether the trust crosses borders (by holding foreign property or having a foreign trustee), and (2) whether the trustees and non-contingent beneficiaries are California residents. If a trustee is a California resident, the trust must pay California taxes. If the non-contingent beneficiaries are California residents, then the trust must pay California taxes. This is true even if the trust holds no property located in California.

As you can see, determining where a trust will pay taxes and which taxes it will pay requires answering a number of questions and interpreting complicated tax laws. The location in which a trust is formed may not matter at all. Many different factors do matter and could greatly affect the amount of taxes that you pay. In fact, your trust could accidentally change from a domestic to foreign trust or the reverse without you knowing. Talk to an experienced and knowledgeable estate planning attorney when you set up the trust and before you make changes to the trust to learn about tax treatment.

Planning to form a trust that holds foreign assets or has a non-U.S. citizen trustee? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet has more than 20 years of legal experience and is certified as a California estate planning and probate specialist by the California State Bar Board of Legal Specialization.

To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.

Ownership of Property by Non-Residents: The Basics

If you are not a resident of California and want to purchase property here, figure out the basics of property ownership before you put down your hard-earned cash. The laws differ for non-resident United States citizens and non-resident non-citizens.

Can You Purchase Real Estate in California?

You do not have to be a resident of California to purchase property here. Nor do you have to be a citizen of the United States. While being a citizen and a resident can make financing easier, people from other places can hold property in their name as long as they can pay for it. 

Will Buying Real Estate in California Create Tax Problems?

If you plan to live in your California real estate, you could end up paying California’s high income tax rates for all of your income. If you purchase the property as an investment, for a child to use, or for rental income, you will pay California taxes on rental income in many situations. Since the tax situation can vary depending on how much time you spend in California and what you use the property for, consult legal and tax professionals to make sure you report everything correctly.

Will Buying Real Estate in California Impact Estate Planning?

Yes, in many cases California property purchases could affect your estate plan. For example, a non-resident, non-citizen who does not have a green card could purchase a $1.5 million house in California. The purchaser may intend to leave the house to his U.S. citizen child but pass away unexpectedly first. His estate could end up paying $495,000 in estate taxes in the United States due to that house purchase. In addition, his estate will have to pay thousands of dollars in probate costs. Working with an estate planning attorney before making the purchase could have saved his family hundreds of thousands of dollars.

How Can You Reduce or Eliminate Tax Liability?

You may need to place the property in an ownership structure or purchase the property through the ownership structure. Ownership structures refer to business entities like partnerships, limited liability companies, U.S. corporations, foreign corporations, foreign trusts, or real estate holding companies. Depending on the structure you choose and your circumstances (such as your green card status), your tax savings will vary. You need to seek competent legal advice about using these ownership structures before you buy the real estate, or if not, then as soon as possible after you make the purchase.

Planning to purchase property in California as a non-resident? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience and her certification as a California estate planning and probate specialist by the California State Bar Board of Legal Specialization will give you confidence and peace of mind.

To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.

Retirees Living Abroad May Face IRS Penalties

Some Americans want to hide money abroad, while other Americans just want to live there. Either way, be aware of FATCA and the IRS.

Retirees who would like to live abroad in European countries or other nations, should carefully consider the law enacted by Congress to enforce financial compliance by Americans with assets abroad, according to CNBC in “How to retire overseas and avoid IRS penalties.”  The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010.

FATCA works through what is called “dual reporting.” Other countries agree to report on assets owned by American account holders. Those living outside of the U.S. must report honestly what they have in those foreign bank accounts every year, when they file their income taxes.

For people who are not big-time tax evaders hiding large amounts of money offshore and make an honest mistake, it can become a nightmare.

One client forgot to tell his accountant about an account with $3,500 that he owned in a foreign bank. The penalties were stiff. An attorney who was experienced in tax situations faced by people living outside of the U.S. had to be retained.

Here’s the thing: most automated tax preparation programs default to answering “No” on Schedule B, where the person filling out the form is asked if they have a bank account in a foreign country.

Who has to file? All Americans living overseas are required to file a tax return. It doesn’t matter if you pay foreign taxes, or even if the U.S. has a tax treaty with the country.

In addition to a 1040 form, you must file additional forms for the foreign earned income exclusion or the foreign tax credit form.

The only exception might be if you receive Social Security benefits and have no other income sources. That is a “might,” though—check with your CPA!

Some people choose to retire outside of the U.S., in the hope of keeping healthcare costs manageable.  However, any gains from having lower healthcare costs would evaporate quickly in the face of tax penalties from the IRS.

Be certain to work with a CPA who has experience in overseas tax requirements and FBAR rules (Report of Foreign Bank and Financial Accounts).

Reference: CNBC (Aug. 25, 2018) “How to retire overseas and avoid IRS penalties”

You Can Determine Your Heirs or State Law Can

Do you really want the state to determine where your assets end up?

Dying without a will, means that the “intestacy laws” of your state will determine your heirs. That may not result in your assets going where your would have preferred, according to The Daily News in “’Are You My Heir?’-Who Inherits When You Die Without a Will,”

“Intestate” is the term used to describe the estate of someone who dies without a will. Each state has laws called “intestacy laws” that govern how probate assets are distributed, if someone dies without having a will and establishes the inheritance hierarchy based on a person’s family structure.

For example, if you are married but have no children and no grandchildren, your estate will be passed to your spouse. If two people die and there are no descendants (children or grandchildren), their parents, if living, will inherit their assets. A child who is legally adopted has the same rights of inheritance as biological children. Children born outside of the marriage may not.

If a child should predecease a parent, the living descendants of the child (if there are any) will inherit their share.

In some states, heirs are limited to family members who share the same grandparents. If your family is not geographically or otherwise close, you may have heirs you have never met.

Intestacy can become extremely complex, when there are children and grandchildren. Descendants inherit from their parents and grandparents in percentages dependent upon the total number of children and the number of children in each generation that follows.

If a grandfather has three adult children who are living and one adult child who has passed, then the estate will be divided by three—a third each to each of the two living children and the final third to the grandchildren of the third (deceased) child. The children of the deceased child are heirs, even if the parent has died.

Add non-marital children—children born outside of a legal marriage or step-children—and things start to get complicated. A court will have to determine the intestate inheritance, based on proof that the child is a descendant and if that relationship is established in a timely manner.

If the father’s name is on the child’s birth certificate, that is generally enough proof of the relationship. It doesn’t matter if they have a close relationship or have never met. The same applies to marital children—whether they have been close and caring or are estranged.

An estate planning attorney can advise you in creating an estate plan that fits your unique circumstances and makes distribution of assets by state law unnecessary. Contact The Law Offices of Janet Brewer today.

Reference: The Daily News (Sep. 7, 2018) “’Are You My Heir?’-Who Inherits When You Die Without a Will”

Empty Nest? Time to Adjust Emotions and Finances

Your lifestyle, budget and goals change.  However, it is a good idea to go slowly on those adjustments.

You start a family, you nurture the family and the kids move on to their own lives. It is a challenge in many ways and it is time to make adjustments, according to the Daily Messenger in “John Ninfo: Some advice for empty nesters.”

With one less person in the household, it’s time to re-adjust your budget. Many of your everyday expenses, such as electricity, food and gas, will likely be lower. However, you may have new expenses that are related to your new life. You may spend more on activities that were put off until the kids grew up or find yourself dining out more often. Go slow when it comes to spending money on pricey vacations or fancy dinners. You want to strike a balance between enjoying your new-found freedom and cash flow, as well as keeping retirement savings in mind.

Assuming your cash flow is easier now, it’s time to commit to paying down outstanding debts, especially credit card debt. Reduce any interest or finance charges that you can. You might even think about paying down your mortgage or paying off a high-interest car loan. If you’ve taken on student loans or a home equity loan, now is the time to try to knock those down. At the same time, try to minimize any new spending or borrowing.

Take another look at how your retirement saving is progressing. Will you have enough at your current rate of spending, or should you ramp up your efforts, if you have room in your budget?

Have you thought about downsizing, or decluttering? Even if you are not planning on moving, your home may be filled with things you don’t need or want anymore. Set some time aside to clear out what you don’t need, donate what you can to a local charity or start planning yard sales. You don’t have to tackle this project all at once.  It is possible to donate a few hours each weekend to the task.

When was the last time you updated your will and other estate planning documents? Now is the time to revisit these matters, as well as looking at any long-term care insurance. If you don’t have a long-term policy in place, this is the time to buy it—if you can.

Are you finding yourself with a lot of free time? We don’t often ask ourselves the important questions, like “What matters to me?” and “How do I want to be remembered?” Many people find the answers to those questions in service to others. 

Reference: Daily Messenger (August 26, 2018) “John Ninfo: Some advice for empty nesters”

Divorce Can Hinder Retirement for Women

‘Divorce gap’ can have an impact on income, as well as on retirement planning.

A study from the Center for Retirement Research at Boston College found that divorced women historically are better off than single, never married women, because of the assets they have accumulated before divorce, primarily home ownership. However, that can have a negative impact on retirement, according to Money in “This is The Single Best Way Divorced Women Can Secure a Successful Retirement.”

Many divorce lawyers and financial advisors say that keeping the house after divorce, isn’t always the best move. Many newly-single women find they don’t have the resources to keep up with mortgage payments, maintain the property, pay taxes and deal with unexpected crises.

One advisor says she’s concerned that these new numbers will lead to women who can’t necessarily afford to maintain a home to hang on to their homes.

However, a researcher involved in the study maintains that while the study mentions homeownership, there’s a bigger point being made. Married women who divorce benefit from receiving a share of marital assets. Single, never-married women do not and must rely solely on themselves for saving and accumulating assets that can be used to finance their retirement.

A critical fact that women who are divorced must do: whatever assets they get in the divorce settlement, commit to keeping those assets intact for retirement. It’s easier to do this with a house. However, it’s tempting to dip into assets that are intended for retirement.

An estate planning attorney can advise you in creating an estate plan that meets your unique circumstances, including retirement planning. 

Reference: Money (Aug. 10, 2018) “This is The Single Best Way Divorced Women Can Secure a Successful Retirement”

Estate Plan Can Guard against Elder Abuse

There are many types of elder abuse. A good estate plan can help prevent such actions.

Three cases of elder abuse have been handled by the Queens County Criminal Court of New York recently and are just a sampling of a far larger problem in the U.S., according to the Queens Daily Eagle in “Nuanced Directives, Power of Attorney Can Stem Elder Abuse.”

As the borough of New York ages, the instances of predatory behavior and outright scams are getting worse. Predators often start out as well-intentioned caregivers.  However, they then start to take advantage of the senior under their care. They may start as someone who comes every day to check on the senior, helping with bills and then they see the senior’s assets. Sometimes they begin thinking they are entitled to some or all the senior’s assets.

Other types of abuse include stealing deeds to homes, when younger people establish seemingly caring relationships with elderly people, marrying them and then stealing their money while isolating the victims from their families. This is sometimes called “granny-napping,” where the caregiver manipulates the senior and turns them against other loved ones or former caregivers.

Cases like this turn to heartbreak for genuine, caring family members. The abuser poisons their loving relationship with a parent or grandparents.

One way to stem this abuse is to ensure that older adults have advanced directives before something occurs. The estate planning or elder law attorney can tailor the document, so the person does not forfeit their rights or property while putting legal protection in place.

What needs to be understood is this: the person who signs the document and becomes a senior’s representative has a fiduciary duty to act in the best interest of the person. If they breach that duty, there are legal consequences.

Bar associations work with attorneys across the country to help them in identifying and stopping elder abuse. The attorneys work with people in the healthcare field and in real estate, two areas where elder abuse occurs.

When an attorney suspects that elder abuse is taking place, the attorney has an option not to represent the agent and refer a case for guardianship on the grounds that the adult is being abused.

In markets where real estate values have skyrocketed, another real estate scam is for property hunters to go to Surrogate’s Court and find out who has died and who has inherited their estate. They approach heirs they deem to be financially or emotionally vulnerable and coax them into selling their property, usually for far below market value.

An estate planning attorney can advise you in creating an estate plan that fits your unique circumstances and can also protect your loved ones, regardless of age. If you've spoken with us before and want to make sure everything is current or if you're a new client, we would be honored to look at your plan with you and help you in your unique situation. Contact us today to set up a meeting.

Reference: Queens Daily Eagle (Aug. 8, 2018) “Nuanced Directives, Power of Attorney Can Stem Elder Abuse”

It Is Important to Focus on Flexibility during Retirement

The 4% annual withdrawal fee is a starting point. However, there are many other factors to consider.

There are many old rules about planning for and living in your retirement years.  However, those rules are often put out of date by health costs and working well into your later years, according to Forbes in “Here’s How to Refresh Your Retirement: The 4% Rule of Thumb.”

It is now thought that the 4% rule is a decent baseline. However, you’ll need to go deeper into the details to plan for your retirement. Your spending also has a lot to do with what you expect from retirement and how expensive a lifestyle you choose.

One key factor today is tax-deferred investing. The importance of being taxed at the highest rate versus paying a lower tax rate can be misleading. Many people defer taxes on their investments because they don’t want to pay 30% to 40% income taxes when they could defer to a higher bracket if tax laws change.

Some are considering investment in single-family rental properties. If you buy a rental house with a small capital investment, the house will ideally appreciate over time on a tax-deferred basis. Owners benefit by depreciating expenses on their tax returns. The single-family rental home can be paid off in 15 years to 20 years and create income for the owner—predictable income that could also increase from year to year.

Another strategy is to create an investment portfolio that combines diversified stocks and high-quality fixed annuities, paired with a systematic withdrawal plan and a built-in buffer strategy to reduce risk in the case of severe stock market swings.

One advisor noted that if a retiree today relies on a traditional 60/40 stock/bond portfolio, they could be looking at a financial disaster. The yields on bonds are at historic lows and a 4% withdrawal is just asking for trouble.

An effective tax reduction strategy has the potential to raise a retiree’s safe withdrawal rate even higher.

The best advice is to have a plan in place that works for the lifestyle that you and your spouse want and being prepared to adjust, if necessary. Your plan may include working until you both reach full retirement age, working part-time during retirement, moving to a location that is more affordable or aging in place.

An estate planning attorney can advise you in creating an estate plan that fits your unique circumstances and will most likely include a solid retirement plan. Contact The Law Offices of Janet Brewer for your own custom estate planning needs.

Reference: Forbes (Aug. 7, 2018) “Here’s How to Refresh Your Retirement: The 4% Rule of Thumb”

‘LOVE’ Estate Hearings Private or Public?

Robert Indiana’s estate is estimated at $50 million. Many people are interested in it and where it will go.

There are a number of attorneys involved in the estate of the late “LOVE” artist Robert Indiana. A major question has arisen, on whether the legal proceedings should be public or private, according to the Press Herald in “Attorneys want hearings on the value of Robert Indiana’s estate held behind closed doors.”

No less than eight attorneys representing individuals and organizations connected to Indiana, creator of the “LOVE” sculpture, are asking that future hearings be held in closed sessions to protect people’s privacy and the value of some of his works of art, it reports.

Atty. James Brannan, who represents Indiana’s estate, is requesting information in a testimonial hearing to better determine the estate’s value.

Due to the disagreement, Judge of Probate Carol Emery postponed the testimonial hearing and set a new date for a hearing in mid-September. The first scheduled witness will be Indiana’s caretaker, Jamie Thomas.

Brannan has petitioned the court to order Jamie Thomas, the Morgan Arts Foundation, Michael McKenzie and American Image to provide documentation on any assets they may have, that belong to the estate, including contracts for royalties.

The attorneys representing Thomas said he’s concerned about confidential matters becoming public. The judge has asked attorneys to file arguments on how she can justify closing the proceedings. It’s not easy to do, because of the First Amendment.

The attorney said the publication of information about where pieces of art are located would create a safety issue and information about the number of existing artworks could have an impact on the value of pieces that are up for sale.

Indiana’s will wanted proceeds from the estate to be used to restore his home to museum quality and serve as an art environment that would be open to the public for classes and lectures, and to preserve his collection and the property itself.

The will directed that Jamie Thomas be the executive director of the museum.

Resource: Press Herald (Aug. 7, 2018) “Attorneys want hearings on the value of Robert Indiana’s estate held behind closed doors”