California Probate - Law Offices of Janet Brewer Blog

Why You—and Everyone—Needs an Estate Plan

“What's going to happen to your assets after you die? Your parents die? Your spouse dies? It's a conversation that's uncomfortable to have, but one that's extremely important.”

At its essence, estate planning is any decision you make concerning your property if you die, or if you become incapacitated. There are a number of things to keep in mind when creating an estate plan, says KTUU in the article “Estate planning dos and don’ts.”

The first task is not what most people think. It’s very basic: making a list of all of your assets and how they are titled. Remember, the estate plan is dealing with the distribution of your assets—so you have to first know what those assets are. If you are old enough to have lived through the sale of several different financial institutions, do you know where your accounts are? Not everyone does!

Next, you need to be clear on how the assets are titled. If they are joint with a spouse, Payable on Death (POD) or Transfer on Death (TOD), jointly with a child, or owned by a trust, they may be treated differently in your estate plan, than if you owned them outright.

Roughly fifty percent of all adults don’t make a plan for their estate. That becomes a huge headache for their loved ones. If you don’t have an estate plan, your property will be distributed according to the laws of your state. What you do or don’t want to have happen to your property won’t matter, and in some instances, your family may be passed over for a long-lost sibling. It’s a risk.

In addition, if you don’t have an estate plan, chances are you haven’t done any tax planning. Some states have inheritance taxes, others have estate taxes, and some have both. Even if your estate’s value doesn’t come anywhere close to the very high federal estate tax level ($11.4 million per person for 2019), your heirs could inherit far less, if state and inheritance taxes take a bite out of the assets.

For a blended family, there are a number of rules in different states that divide your assets. In Alaska, for instance, if some of the children of one spouse are not the children of the other spouse, there is a statutory formula that depends on how many children there are and which of them are living. Different percentages of money are awarded to the children, which becomes complicated.

Another reason to have an estate plan has to do with incapacity. This is perhaps harder to discuss than death for some families. Estate planning includes preparing for what the individual would want to happen, if they were injured or too sick to convey their wishes to others. Decisions about health care treatments and end-of-life care are documented with a Living Will (sometimes called an Advanced Care Directive), so your loved ones are not left wondering what you would have wanted and hoping that they got it right.

One last point about an estate plan: be sure to check beneficiary designations while you are doing your estate plan. If you own retirement accounts, life insurance policies, or other assets with named beneficiaries, the assets will pass directly to the named beneficiary, regardless of the instructions in your will. If you opened an IRA when you had one child and have had other children since then, make sure to include all of those children and the proportion of their shares. There may be tax implications, if only one child receives the assets, and there may also be family fights if assets are not distributed equally.

You can read more about how our process works, how we can make sure we are a good fit for your needs, and how to get started on creating or updating your estate plan today right here.

Reference: KTUU (August 14, 2019) “Estate planning dos and don’ts”

Why You—and Everyone—Needs an Estate Plan

“What's going to happen to your assets after you die? Your parents die? Your spouse dies? It's a conversation that's uncomfortable to have, but one that's extremely important.”

At its essence, estate planning is any decision you make concerning your property if you die, or if you become incapacitated. There are a number of things to keep in mind when creating an estate plan, says KTUU in the article “Estate planning dos and don’ts.”

The first task is not what most people think. It’s very basic: making a list of all of your assets and how they are titled. Remember, the estate plan is dealing with the distribution of your assets—so you have to first know what those assets are. If you are old enough to have lived through the sale of several different financial institutions, do you know where your accounts are? Not everyone does!

Next, you need to be clear on how the assets are titled. If they are joint with a spouse, Payable on Death (POD) or Transfer on Death (TOD), jointly with a child, or owned by a trust, they may be treated differently in your estate plan than if you owned them outright.

Roughly fifty percent of all adults don’t make a plan for their estate. That becomes a huge headache for their loved ones. If you don’t have an estate plan, your property will be distributed according to the laws of your state. What you do or don’t want to have happen to your property won’t matter, and in some instances, your family may be passed over for a long-lost sibling. It’s a risk.

In addition, if you don’t have an estate plan, chances are you haven’t done any tax planning. Some states have inheritance taxes, others have estate taxes, and some have both. Even if your estate’s value doesn’t come anywhere close to the very high federal estate tax level ($11.4 million per person for 2019), your heirs could inherit far less, if state and inheritance taxes take a bite out of the assets.

For a blended family, there are a number of rules in different states that divide your assets. In Alaska, for instance, if some of the children of one spouse are not the children of the other spouse, there is a statutory formula that depends on how many children there are and which of them are living. Different percentages of money are awarded to the children, which becomes complicated.

Another reason to have an estate plan has to do with incapacity. This is perhaps harder to discuss than death for some families. Estate planning includes preparing for what the individual would want to happen, if they were injured or too sick to convey their wishes to others. Decisions about health care treatments and end-of-life care are documented with a Living Will (sometimes called an Advanced Care Directive), so your loved ones are not left wondering what you would have wanted and hoping that they got it right.

One last point about an estate plan: be sure to check beneficiary designations while you are doing your estate plan. If you own retirement accounts, life insurance policies, or other assets with named beneficiaries, the assets will pass directly to the named beneficiary, regardless of the instructions in your will. If you opened an IRA when you had one child and have had other children since then, make sure to include all of those children and the proportion of their shares. There may be tax implications, if only one child receives the assets, and there may also be family fights if assets are not distributed equally.

Reference: KTUU (August 14, 2019) “Estate planning dos and don’ts”

Will Charitable Giving Reduce Your Taxable Estate?

If you give to charity or plan to start giving, one of your goals in giving may be to reduce your taxable estate. United States tax laws incentivize charitable giving to some types of organizations by offering deductions.

How Do Charitable Deductions Work?

Tax laws in the United States allow you to deduct charitable contributions from your overall taxable income. In other words, you can reduce the amount of income on which the IRS actually assesses a tax by taking the deductions. (In contrast, credits apply after the IRS assesses your applicable tax rate.) Charitable donations or contributions to a wide variety of organizations qualify for the deduction:

• 501(c)(3) charitable organizations, which include many foundations, funds, community chests, and other groups
• Religious organizations
• War veterans’ organizations
• Fraternal societies, if the contribution is used for charitable purposes
• Other groups, including U.S. states

If you plan to deduct charitable contributions, keep track of the money you give during the year. Even though you will not need to pay gift taxes on your contributions, you will need to list them out on your taxes to get the deductions.

How Do Charitable Contributions Reduce Your Taxable Estate?

Again, charitable contributions allow you to take deductions, rather than paying gift tax on the amounts you donate. By giving money to someone else, you decrease the amount of cash in your estate. Whether you give during your lifetime or in your will, you also decrease the overall basis for estate taxes. If you have a larger estate, giving can bring your estate’s value below the $11.18 million estate tax exemption. This could save the estate a lot of money and protect your planned bequests to relatives.

You can make charitable contributions outright or through structures such as trusts or donor-advised funds. To get started with charitable giving, speak to an estate planning lawyer in your area.

Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience 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.

When Doesn’t the Estate Have to Pay Estate Taxes?

While prior estate planning to minimize estate and gift tax liability is important, in the end not all estates will owe any estate taxes. An estate is not liable for estate taxes if its value does not exceed the estate tax exemption, which may happen simply because the estate was smaller or because the deceased person made a thoughtful estate plan.

What Is the Estate Tax Exemption?

To determine whether an estate owes taxes, the IRS looks to the value of nearly everything a deceased person owned upon death. The United States tax laws allow an exemption of $11.18 million in 2019, so if the estate’s total value is less, the estate may not owe any estate tax.

However, the tax laws also “unify” the estate tax and the gift tax. In other words, the IRS adds the value of all lifetime gifts you made to the value of your estate. If that amount exceeds $11.18 million, the estate owes estate taxes at a high rate. But if the amount is less than $11.18 million, the estate does not have to pay. Many people make large lifetime gifts that could affect their available estate tax exemption.

Unfortunately, people who are not U.S. citizens or permanent residents have only a $60,000 estate tax exemption. Since modest estates can easily exceed $60,000 in value (such as if the deceased person owned real estate), estate planning is important to potentially reduce tax liability.

Which Property Is Part of Your Taxable Estate?

For estate tax purposes, the IRS considers the majority of your property to be part of your taxable estate. This includes:

• Cash
• Real estate
• Securities such as stocks and bonds
• Insurance paid into the estate
• Some trusts
• Annuities
• Business interests

Whether trusts and some other property belong in your estate depends on your degree of control or ownership. For example, you can set up some kinds of trusts so that money held by them is not considered to be part of your estate.

Finally, the IRS also allows some deductions and changes to the total value of the estate. The executor may be able to deduct the amount of a mortgage, property that passed to a spouse, charitable donations, and even estate administration expenses. The resulting value is the taxable estate on which the IRS may assess estate taxes.

Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience 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.

California Tax Requirements for Estates

When an executor or personal administrator begins managing an estate, he or she should know that California has tax requirements for probate estates. Beyond filing federal tax returns, the administrator may need to comply with specific state laws regarding taxes.

Which Taxes Might the Estate Owe?

Depending on the deceased person’s financial status at death, the estate may need to pay federal estate taxes, as well as both federal and state income taxes. The executor or administrator should speak to an accountant to decide what to file, but in general he or she may need to prepare a federal “fiduciary” tax return, a state “fiduciary” tax return, and federal and state income tax returns.

The fiduciary returns indicate that someone else is filing on behalf of the deceased taxpayer’s estate. The income tax returns reflect any income that the deceased person earned in the year he or she passed away.

Does California Have an Estate Tax?

Currently, California does not have an estate tax, death tax, inheritance tax, or gift tax. Prior to 2005, some estates did have to file California estate tax returns. Now, though, executors and administrators only need to handle paying federal estate taxes. If the deceased person had property in any other states, then an accountant in those states should be consulted about the need to pay any taxes there.

Are There Any Other California Tax Requirements?

If a probate proceeding is opened to administer an estate, the executor or personal representative must notify the California Franchise Tax Board of the proceeding. (Probate Code § 9202.) The notification should be made within 90 days after the court appoints the executor or personal representative to represent the estate.

Does the Executor or Personal Representative Have to Pay the Taxes?

When an executor or personal representative accepts responsibility for administering and managing an estate, he or she also accepts responsibility for paying the estate’s taxes. There is a chance that a representative who knows that taxes are due, but does not pay them, may become personally liable for the taxes, plus penalties and interest. The same is true if the representative does not complete due diligence about which taxes may be due. For this reason, representatives should seek professional tax and legal advice about their obligations. Doing so can help them assess which California taxes the estate owes.

Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience 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.

Understanding Portability in Estate Planning

Should you be worried about federal estate taxes? Not unless you have $11.4 million.

If you have $11.4 million in assets or $22.8 million as a couple, then you need to be concerned with the federal estate tax. Otherwise, there are other issues that should be taken into consideration, according to The Times Herald in “Federal estate tax and portability considerations.”

Individuals and couples with significant assets are advised to have an estate plan created by an estate planning attorney with experience working with people with large assets There are numerous tools that are used to minimize the federal tax liability.

However, when one spouse dies, it is generally recommended that the surviving spouse file a Federal Estate Tax return for reasons of portability. That is because when the first spouse dies, they use a portion of the Federal Estate Tax exemption, but there’s usually a portion available for the surviving spouse.

If IRS Form 706 is filed in a timely manner, the surviving spouse can “port over” or protect the remaining amount of Federal Estate Tax exemption that the deceased spouse has not used. This return needs to be filed within nine months of the date of death, although the surviving spouse can obtain an extension.

No tax will be owed, since the return is filed merely for reporting purposes. The assets in the entire estate must be reported, including everything the person owned. That may be cash, securities, real estate, insurance, trusts, annuities, business interests and other assets. It should be noted that this will likely include probate as well as non-probate property. Appraisals and significant documentation are not usually required on a return just for portability purposes.

Why does a return need to be filed to claim the unused exemption, if no taxes are going to be paid? For one thing, the law may change and if the Federal Estate Tax exemption amount is reduced in the future, the surviving spouse will have protected their additional exemption amounts for his or her heirs. If the surviving spouse remarries and acquires significant assets, they will need proof of their exemption. The surviving spouse might own land or other property that increases dramatically in value. The surviving spouse may also inherit a large amount of assets.

Completing an IRS Form 706 for portability is not a complex task, but it should be done in conjunction with settling the estate, which should be done with the help of an estate planning attorney to be sure any tax issues are dealt with properly. 

Reference: The Times Herald (July 7, 2019) “Federal estate tax and portability considerations”

Did You Just Renounce Your Citizenship? Next Estate Planning Steps

If you renounced your citizenship in the United States or another country, you may need to make changes to your estate plan. Depending on your net worth and other factors, your renunciation may lead to taxes now or taxes later.

How Does Renunciation Affect Taxes Now?

People who renounce their United States citizenship may owe taxes now if they are covered expatriates. Covered expatriates have:

• A net worth of more than $2 million on the date of expatriation;
• Average annual U.S. income tax liability of more than $165,000 for the five years before the year of expatriation; or
• Incorrectly filed U.S. tax returns for the five years before the year expatriation.

If you fall in any of these categories, the IRS may assess very expensive taxes against all of your property. Fortunately, some estate planning before renunciation can help. You potentially can reduce your taxable estate by strategies such as making lifetime gifts or starting a trust. Also, you can work with your accountant to potentially reduce income tax liability.

How Does Renunciation Affect Taxes Later?

When you become an expat from the United States, you lose tax benefits such as the $11.18 million estate tax exemption, the unlimited marital deduction, and estate tax portability. Instead, you will have only a $60,000 estate tax exemption. This can lead to expensive estate taxes after your death unless you plan ahead.

In short, if you still own any property in the United States that exceeds a $60,000 value, your estate may owe taxes on it after your death. Further, gifts to relatives who are U.S. citizens or to a citizen spouse could lead to taxes later too. Careful estate planning takes into account future taxes and potentially helps you reduce tax liability through structures such as qualified domestic trusts or holding companies.

The same tax consequences are true if you renounced citizenship in another country but are not yet a U.S. citizen or permanent resident. It’s a good idea to do some estate planning in the U.S. to protect yourself and your spouse from the expensive taxes that non-citizens often owe.

Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience 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.

Did You Just Become a Citizen? Next Estate Planning Steps

Becoming a citizen can have many useful benefits, including little-known advantages in estate planning for U.S. citizens. If you just became a United States citizen, now is a great time to update your estate plan. If you just became a citizen of another country, you may have estate planning needs in the U.S. as well.

Estate Planning for New United States Citizens

Congratulations on receiving your United States citizenship. You now have the estate planning advantages of the unlimited marital deduction and an increased estate and gift tax exemption. If you had a green card before receiving citizenship, then you already had these advantages. However, your estate plan may not have reflected it, so it’s a good time for an update.

Before you became a citizen, you could not make unlimited transfers of property to your spouse without paying taxes. Now, you can make as many transfers as you like – including in your will or the rest of your estate plan. Your estate tax exemption amount goes up to $11.18 million for both you and your spouse if he or she is a citizen. In addition, you and your spouse can use estate tax portability. It allows either you or your spouse to use the remaining amount of estate tax exemption left over after one of you passes away.

If your spouse is not a citizen or permanent resident, then you may need to update your estate plan too. Your current plan may not take into account the very low estate tax exemption that non-citizens receive – only $60,000 – or the lack of a marital deduction for gifts to spouses. If not, you or your spouse could end up owing significant taxes due to transfers of property to each other and relatives.

Estate Planning for New Citizens of Other Countries

People who just became citizens of other countries may need to estate plan in the United States too. If you own any property located in the United States, you may owe income taxes now and estate taxes in the future. An estate plan can help you set aside money, or even move your property to a holding company that could affect tax liability.

Further, you may need to make a will in your new country – and possibly one in the United States as well. Sometimes, more than one will is appropriate for dual citizens or people with ties in several countries. Other times, just one will or other estate planning structures are best. Talk to estate planning lawyers in both countries to find out more.

Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience 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.

Reducing Your Taxable Estate by Passing Wealth to Grandchildren

When you start to think about passing on wealth to your grandchildren, there are a few hidden pitfalls that you need to consider. In addition, you can both pass on the wealth and reduce your taxable estate at the same time.

Pitfalls of Giving to Grandchildren

The IRS imposes an onerous tax on grandparents who pass on wealth directly to grandchildren. Called the generation-skipping transfer tax, it requires grandparents to pay a significant tax on the value of assets given to their grandchildren. The tax is imposed in addition to other estate and gift taxes. For obvious reasons, you should try to avoid paying the generation-skipping transfer tax (GSTT).

Fortunately, there is an exemption to the generation-skipping transfer tax available if your total gifts to grandchildren are below a certain amount. Further, you can give up to $15,000 to each grandchild per year without paying gift or generation-skipping transfer taxes. With careful planning, you can give to your grandchildren during your lifetime.

Techniques for Reducing Your Taxable Estate While Giving

When giving to your grandchildren, also consider how to reduce your taxable estate so that all of your heirs benefit. First, you can take advantage of the annual exclusion of $15,000. Even if you give your grandchildren only small gifts each year, these can add up over time. Giving gifts of money or property under the annual exclusion amount reduces your total estate while helping your grandchildren.

Further, you could consider setting up a trust or trusts to manage assets for your grandchildren’s benefit. If you contribute assets to the trust totaling less than the generation-skipping transfer tax exemption, you can potentially avoid any taxes that would reduce the amounts your grandchildren receive. Special types of trusts can help too. To ensure that you set the trust up properly and limit tax liability, talk to an estate planning attorney.

Some grandparents decide to give money to their children, with the intent that the children give some of the money to the grandchildren. This strategy avoids the GSTT, but it has other risks. For example, you have no guarantee that your grandchildren will receive the money. Your children might spend it, they might leave it to someone else in their wills, or it could be eaten up by taxes when your children pass away. If this is a concern for you, consider contributing to a college fund or setting up a trust rather than making direct gifts. If this is not a concern, then at a minimum speak to your children about your intent that some of the money ultimately go to your grandchildren.

Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience 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.

Reducing Your Taxable Estate by Passing Wealth to Your Spouse

When you begin estate planning, transferring wealth to your spouse may top your list of priorities. Many people who are making estate plans want to protect their spouses and provide for them in the future. Further, you can accomplish even more with your plan by reducing your taxable estate.

Marital Deduction

Spouses who are U.S citizens can take advantage of the marital deduction, which allows them to transfer assets tax-free to one another. The transfers can take place at any time, even after the death of one spouse through estate planning structures such as a will.

While making a transfer to your spouse will reduce the size of your own taxable estate, it might have unforeseen consequences too. The transfer will increase the size of your spouse’s estate, which could result in estate taxes owed later. However, this usually does not occur unless you and your spouse exceed the joint estate tax exemption ($22.36 for married U.S. citizen couples in 2018).

Qualified Terminable Interest Property Trust (QTIP)

A qualified terminable interest property trust (QTIP) allows you to control distribution of assets to your spouse after your death, while still taking advantage of the marital deduction. To use the marital deduction, the IRS requires that the recipient spouse have full ownership of the property he or she receives from the other spouse. A QTIP is an exception to this rule. You can place property in a QTIP, also place restrictions on its distribution to your spouse, and still receive the marital deduction as long as your spouse has a lifetime income interest in the property.

Qualified Domestic Trust (QDOT)

If you or your spouse is not a U.S. citizen or permanent resident, you may want to consider a qualified domestic trust (QDOT). Non-citizen non-residents cannot receive the same estate tax exemption amount as citizens; instead, they receive a total exemption of just $60,000. To protect a non-citizen spouse from expensive taxes, you can transfer property into a QDOT. Like a QTIP, a QDOT allows you to receive the marital deduction despite the property being held by a trust.

In short, you have many options to consider when trying to pass wealth to your spouse and reduce your taxable estate at the same time. Speak to a local, experienced estate planning lawyer to learn more.

Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience 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.