California Probate - Law Offices of Janet Brewer Blog

Naming Non-Citizens as Beneficiaries, Trustees, and Executors

When your family includes non-U.S. citizens and you want to make them beneficiaries, trustees, or executors for your estate, you need to talk to an estate planning professional immediately. Unfortunately, United States laws concerning non-citizens may lead to difficulties and unexpected expenses for your estate and relatives if you name them in fiduciary positions.

Beneficiaries

If you plan to name a non-U.S. citizen and non-resident as a beneficiary to your trust or an heir to your estate, be aware that there could be financial consequences. For one, trusts must withhold 30 percent of distributions to foreign beneficiaries for tax purposes, which results in the beneficiaries receiving a lot less per distribution.

Trustees

While you can choose a non-citizen trustee, you should look for someone who is, at minimum, a resident of the United States to be your trust’s fiduciary. You want to avoid the risk of your trust being classified as a foreign trust for federal or California tax purposes. If your trustee is a non-citizen and does not have residency in the United States or California, your trust may be a foreign trust upon formation. If your trustee lives here but moves outside the United States, your trust may change from a domestic to a foreign trust. Both will cost the trust money in excess taxes.

When the trust becomes a foreign trust, the trust will owe capital gains tax on each asset in the trust if its fair market value exceeds its adjusted cost basis. (Internal Revenue Code § 684.) The trust will owe other special taxes as well.

Executors

Technically under California law, you could name a non-resident of the United States as your executor and then that person could request that the court appoint him or her to perform executor duties. (Probate Code §§ 8465(a)(2), 8402(a)(4).) Non-citizens who are U.S. residents can be executors too. However, just because you can does not mean you should. If the executor moves out of the country between the time you make your will and your death, it could be a substantial hassle for your relatives to even locate the executor and inform him of his duties.

If all or most of your assets are located in California, someone local and likely to remain in the country would be the best candidate for an executor.

Planning your estate? 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 your own “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.

Estate Tax Portability and Marriage in California

The concept of estate tax portability allows married couples to share their gift and estate tax exemptions in ways that can result in tax benefits.

If you are married and making lifetime gifts or planning your estate, you should factor in portability when making planning decisions. Please note that the discussion below refers to spouses who are both U.S. citizens; laws differ for non-citizens.

Estate tax portability is a United States federal tax concept. Married couples have twice the individual estate and gift tax exemptions, and portability gives the surviving spouse the remainder of the deceased spouse’s exemption amounts. In 2018, the individual exemption amount for both gift and estate tax exemptions is $11.18 million, making the married couple exemption twice that at $22.36 million.

The exemptions permit you to have a total of $11.18 million in lifetime gifts to other people and the value of your estate combined, without paying additional taxes (besides gift taxes if your yearly gifts exceed a certain amount).

When one spouse in a married couple passes away, he or she may have some exemption amount remaining. For example, he or she could have made $5 million in lifetime gifts and have a $2 million estate. That leaves $4.18 million in exemption value. If the surviving spouse takes advantage of estate tax portability, he or she can add the $4.18 million in exemptions to his or her own remaining exemption amount. A surviving spouse who had not made any lifetime gifts would then have a total estate and gift tax exemption of $15.36 million.

To receive the benefits of estate tax portability, a surviving spouse or estate executor must make the appropriate election on the estate tax return for the estate of the deceased spouse. If this election is not made, the surviving spouse will not receive the benefits of his or her spouse’s remaining exemption amounts.

In other words, the spouse in the example above would have only his or her individual exemption amount of $11.18 million, not $15.36 million. Whether the surviving spouse needs to make or should make the election will vary based on his or her circumstances and the size of the deceased spouse’s lifetime gifts and estate.

Since many married couples choose to leave their estates to each other, portability decreases the likelihood that a surviving spouse who inherits a large estate from the deceased spouse will have an estate that exceeds the exemption.

For some couples, portability makes a big difference in their tax liability. For other couples, using alternative estate planning structures, such as trusts, may have more of an impact. People who are part of blended families, who have married more than once, who have other designated heirs besides their spouse, or who want to make a multi-generational estate plan should consult an estate planning attorney to determine how portability matters for them.

Planning your estate? 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.

All Grown Up Now? Then You Need an Estate Plan

Do you want to decide your estate plan or leave it up to the state to decide?

The creation of an estate plan is something that causes hesitation in many Americans. However, there are some very good reasons why you shouldn’t delay, according to Forbes in “6 Reasons Why You Need an Estate Plan.” 

Here are a few of the reasons why an estate plan is a good idea:

Plan for your needs. If you should become incapacitated or unable to make your own decisions, an estate plan will protect you, your assets and your family. Part of your estate plan is preparing for this type of scenario. What kind of cash flow will you need and is there insurance missing from your plan? You should designate a healthcare proxy or a power of attorney who can make medical and financial decisions on your behalf, if necessary. Speak with the people who you want to name to these key roles, so they are prepared and understand your wishes in advance.

Dispose of your assets. With no will, your state will decide how to distribute your assets. At the very least, check your beneficiary designations on accounts so your financial and investment accounts and insurance proceeds go to the right people. A will clearly defines how you want your assets distributed at your death and saves your family from the time, expense and frustration of trying to figure out what you wanted, and what the law allows.

Minimize taxes. If there’s a substantial amount of wealth involved, that you want to transfer to other family members or loved ones, the estate planning process can help you do this in the most tax-efficient way possible. Speak with your estate planning attorney about different types of taxes to consider: the estate tax, gift tax, and generation-skipping transfer taxes. Since the IRS places limits on how much money can be transferred and to whom without being taxed, an estate plan outlines a wealth transfer strategy.

Create a philanthropic legacy. How do you want to be remembered after you die? Do you want to create a family foundation, endow a scholarship or participate in a donor-advised fund to support a cause that is important to you? There’s also the question of giving while you are alive, to enjoy seeing the results of your generosity.

Protect the wealth of the family. Your assets can come under pressure in many different ways, while you are living. Frivolous lawsuits can become an expensive nuisance. Estate planning can remove your name from assets and put them into legally-protected vehicles, such as trusts or limited liability entities. Insurance is also a part of estate plans, with certain types of insurance used to protect you against a variety of legal challenges.

Prepare future generations. For families that have accumulated large amounts of assets, instilling and preserving the family values over generations is a difficult but do-able task. Families that are successful in building long-lasting legacies devote time to teaching children about stewardship, civic and fiscal responsibilities and their role as part of a family that takes its achievements seriously.

An estate planning attorney can advise you in creating an estate plan that fits your unique circumstances.

Reference: Forbes (Sep. 13, 2018) “6 Reasons Why You Need an Estate Plan”

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”