Valerie K. deMartino
4326 Atlantic Avenue
Long Beach, CA  90807

ph: (562) 628-0287
fax: (562) 394-9504
send us an

"Estate Planning Choices... in California"
by Valerie K. deMartino

Taking Charge: Everyone has a choice of who will get their assets when they die. One can take an active role in deciding who gets their estate or one can do nothing, in which case your estate will pass by intestate succession to the people the State Legislature has decided are entitled to inherit from you. The decision of the legislature may not always be the same decision a person would make himself. Therefore, it is prudent to take charge of your estate by making a Will or some kind of Trust. Both a Will and a Trust stipulate who is to get your assets when you die.
Probate: A Will is a document wherein you state who will inherit your estate when you die. A Will must be probated, which means the distribution of the estate and payment of any creditors is supervised by the court. Probate is a lengthy and expensive procedure. Fees for the attorney handling the probate as well as the executor or administrator are set by statute and are based on a percentage of the appraised value of the probate estate. For example, the minimum statutory fee for a $100,000 estate is $4,000 and for a $500,000 estate is $13,000. The contents of a probate file is available to the public. Furthermore, if you own assets in more than one state, frequently probate proceedings will have to be opened in each state where there are assets. Assets which are held in joint tenancy, life insurance benefits, retirement plans and the like do not pass pursuant to a will and are not probated. see article ["What is Probate"]
Joint Tenancy is Not a Substitute for Good Estate Planning: It is true that probate can be avoided by placing property in joint tenancy (i.e. "John Smith and Mary Smith, as joint tenants"); however, the property would still have to be probated at the time of the second joint tenant's death, and joint tenancy can result in gift tax liability, possibly increased property taxes, and income tax to your survivors. Any time you add a joint tenant to property you already own, if the value of the new joint tenant's half is more than the amount you can pass tax free, you have a possible gift tax liability. Since July 2001, in California property may be held by a husband and wife as "community property with right of survivorship". Property held this way will get a stepped up basis for the entire property upon the first death, as it would if the asset was held as community property. Property held in joint tenancy only gets a stepped up basis for the decedent's half.
Reasons to have a Trust. While both a will and a trust will get your assets to your heirs, a living trust has several advantages over a will, particularly if your estate is greater than the amount a person may pass to their heirs tax free. A trust is a contract between you and the person you name as trustee. Pursuant to this contract, you transfer your property to the trustee and the trustee has a fiduciary duty to manage and use that property for your benefit and that of your heirs. Trusts can be irrevocable or revocable. A revocable trust can be amended or revoked during your lifetime. Irrevocable trusts cannot be changed and are generally only used in special circumstances.
There are a number of advantages to having a revocable living trust. First of all, there is no probate of your estate required, regardless of where the property is located. This generally means the estate can be distributed to the heirs more quickly and with much less cost than if you had only a will. The contents of a living trust are not public. Since living trusts are established during your life and are generally in existence for many years before your death, it is much harder for anyone to contest a living trust than a will. Because one of the advantages is tax savings, the cost of setting up a living trust (while usually higher than writing a simple will) may be tax deductible. Finally, once all of your assets are transferred into a trust, the trustee can administer the trust for your benefit regardless of your capacity; so if you become temporarily or permanently incapacitated a conservatorship of the estate is generally not necessary.
Federal estate tax is based on the gross date of death value of all your assets less your debts and includes assets which pass outside probate, such as IRAs, life insurance and joint tenancy assets. Estate tax is payable whether your estate is probated, passes by right of survivorship, or you have a living trust and includes assets transferred within three years prior to your death. In 2013, the American Tax payer Relief Act ("ATRA") was passed, changing the lifetime gift tax exemption amount to $5,250,000. Thus, in 2013, under ATRA, anything estate $5,250,000 will be subject to tax at the rate of 40%. Anyone can leave unlimited property to their surviving spouse without tax by using what is called the Marital Deduction. When the second spouse dies and leaves the estate to the children, if it exceeds $5,250,000 the predeceased spouse's exemption amount may be lost if the surviving spouse's estate representative does not file a Federal Estate Tax Return and take advantage of the portability rules. Commencing in 2011, the law was amended to allow married couples to add any unused portion of the estate tax exemption of the first spouse to die to the surviving spouse's estate tax exemption. This is commonly called "portability." This means in 2013 a married couple can pass on $10,500,000 to their heirs free from federal estate taxes with absolutely no planning at all, as long as the surviving spouse files a Federal Estate Tax Return (form 706) in order to take advantage of the deceased spouse's unused estate tax exemption. If a return is not timely filed after the surviving spouse's death, the predeceased spouse's exemption will be lost. Thus, having an A/B Trust can still be a benefit because it will shelter the first decedent's exemption.
A trust established to use the gift tax exemption amount must be an irrevocable trust. When the trust is irrevocable, the assets held by the trust will not be included in the grantor's estate for federal estate tax purposes. The grantor cannot exercise dominion and control over the trust assets or the IRS will include the trust in his or her estate. Therefore, neither the grantor nor anyone controlled by the grantor (such as an employee) can be the trustee. Additionally, in order to qualify for the annual gift tax exclusion, the beneficiary must have the right to take possession of any gifts made to the trust for his or her benefit each year. This is called a "Crummey" power after the case entitled Crummey v Commissioner of Internal Revenue (9th Cir. 1968). Setting up the trust to allow the beneficiary a short window of time within which to exercise this withdrawal power is sufficient. As its name implies, this kind of trust cannot be amended or revoked. This type of trust should have a separate tax identification number, file income tax returns, and pay tax on income earned each year.
Other Tax Savings Ideas: Remove assets from your estate before you die by gifting. You can gift up to $14,000 per year ($28,000 per married couple) to as many people as you wish. There is no limit to the number of people to whom these $14,000 gifts can be made. The trustee can invest in anything within reason or buy life insurance, the proceeds of which can be used to pay estate taxes.

LEGAL NOTICE: This site is designed to acquaint you with Valerie deMartino and the services she can offer. It is NOT intended to provide legal advise or create an attorney client relationship. The information on this site is intended for education and discussion only. You should consult a professional about your particular facts, circumstances and goals. Ms. deMartino is licensed to practice law only in the State of California and cannot advise you on the laws of other states. This website is not intended to be advertising and is not intended to solicit anyone desiring representation based upon viewing this website in a state or other jurisdiction where it does not comply with local laws and ethical rules.