California Estate Plans and Property Tax Planning

With the 2015, large estate tax exemption of $5,430,000, most California estate plans now have no federal estate tax risks. But of increasing concern is how to avoid an increase in real property tax when California real property passes by gift or inheritance.

Under the general rule, the assessed value of California real property is changed when it transfers on death or by gift to the then fair market value, often resulting in a much larger property tax bill. Over time, those increases in property taxes can add up to a significant sum.

But special, protective rules apply to avoid an increase in California property taxes on property transfers in the following circumstances:

  1. Between spouses or between registered domestic partners;
  2. Of a person’s principal residence between parents and children (see below);
  3. Of other California real property (in addition to the residence) up to $1,000,000 of assessed value  between parents and children (see below).

A California principal residence can pass between parent and child without a reassessment in property tax, provided proper forms are timely filed with the County Assessor.

In addition to the principal  residence, a parent can transfer up to $1,000,000 of assessed value (not fair market value) to the children—or a child can do the same to the parents. (Assessed value is the value described on the property tax bill, not to be confused with fair market value.) This $1,000,000 exclusion is for the combination of transfers both during life and at death.

For these purposes, “children” means natural children (so long as not adopted by another person), children who were minors at the date of adoption, and, subject to rules beyond the scope of this article, stepchildren, foster children, and the children of a deceased child. (See California Revenue and Taxation Code Section 63.1.(c)(3).)

Without proper planning, property taxes will be reassessed may increase if one child buys out his or her sibling at their parent’s death in order for one child to inherit the house (or other protected real property) with the other child receiving assets of equal value. Proper planning is required to avoid the problem of the County treating a transfer after death as being between siblings, rather than from parent to child.

Excluding the residence, once a parent transfers (combined in life and in inheritance after death) more than $1,000,000  in assessed value, then all transfers to children will be reassessed to fair market value, with property taxes based on those (usually higher) fair market values.

Therefore, it is important to review the assessed values of the real estate in an estate plan in deciding upon which children will receive the benefit of the $1,000,000 assessed value exclusion, which children will receive the residence, and which children will be “stuck” with an increased property tax bill upon inheritance. (Similar rules apply from child to parent.)

California real property taxes will be reassessed to the then fair market value on a gift or inheritance to siblings, cousins, more distant relatives, and friends.

Hence, California real property tax planning is an important part of an estate plan.

Copyright James J. Phillips 3/8/2015

Selecting Guardian for Your Minor Children

Every parent knows how important it is to select a guardian for minor children. Many parents find this decision to be terribly stressful.

Here are some tips to help with deciding whom to nominate as the guardian of your child if neither parent is living  (or if both parents became incompetent).

In California, there are two types of guardians for minor children–guardian of the estate and guardian of the person. The guardian of the estate deals with any assets left to a minor child (not in trust for the minor). This post deals with the guardian of your child’s person.

The guardian of your child’s person makes the decisions about your child’s well-being for food, clothing, medical care, education, home, and recreation.

First, in considering whom to nominate as the guardian of your child’s person, take into consideration all of the possible candidates, from Mom’s relatives to Dad’s relatives to your friends and the parents of your child’s friends.

Of course, no one is required to act as guardian simply because you nominate them. So eliminate those whom you know would decline to act.

With your remaining list of possible candidates, consider these factors:

  1. Do you want the person only if that person remains married to the current spouse? Or is marital status irrelevant?
  2. Who has a genuine interest in your child’s welfare and best interest?
  3. Who has a present relationship with your child (and, if desired, your family)?
  4. Does the person possess your desired personal attributes for raising your child? (What are the personal attributes that are important to you?)
  5. Will the person seek the help that you would want in raising your child?
  6. Does the person have your desired level of integrity and stability to do what is in your child’s best interest?
  7. Will the person provide the social, financial, educational, moral, and religious upbringing similar to what you would have provided?
  8. Will the guardian work well with your child’s trustee (who has control of your child’s financial inheritance)?

I recommend that nominations of guardian include alternate choices. Your written nomination of guardian should be part of your estate planning documents and consistent with your trust for your minor child.

It is essential that you review your selection frequently, especially as your child gets older and as changes happen in your life and residence and in the lives of those whom you nominated as guardians of your child’s person. Revisit this annually.

In California, the determination of who serves as guardian is made by the court’s determination of what is in “the best interest of the child.”

In California, Probate Code 1514 requires the court to appoint the parent’s nominee who petitions for the position of guardian of the person “unless the court determines that the nominee is unsuitable.” But the law gives the court the ability to consider the child’s preference and to consider what the court believes is in the child’s best interest under the circumstances at that time.

In California, any relative or “other person on behalf of the minor” may seek to become the guardian of the minor’s person. Relative is defined as a spouse, parent, step parent, sibling or half sibling, uncle, aunt, nephew, niece, first cousin, “grand” or “great” relatives, and the spouse of those persons. (Probate Code 1513 (g).) Person on behalf of the minor would include whomever the minor’s parent nominated as guardian. Also, in California, once the minor is 12 years old, the minor may petition for appointment of guardian of the person of the minor’s choosing. (Probate Code 1510 (a).)

Copyright James J. Phillips January 2015

Why to Review Your Estate Plan in 2015

TOP 10 suggestions for reviewing and possibly updating your estate plan in 2015:

#10. Under your existing estate planning documents, who will be charge of your financial affairs if you become ill? Who did you name as your successor trustee and as your attorneys-in-fact under your durable general power of attorney? Has your opinion changed since the time that your trust and power of attorney were signed?

#9. Under your existing advance health care directive, who will be your health care advocate if you become unable to give informed consent to medical decisions? Who did you name as the alternates? Has your opinion changed since the time that your advance health care directive was signed? Did your document state your wishes about “heroic measures,” home health care, organ donation, burial/cremation, and who will be in charge of your memorial service/funeral?

#8. Are your “after income tax” (or “income tax deferred”) assets titled to your living trust? Do you have assets titled in joint tenancy that really should be held in your living trust? Are your assets titled correctly for tax purposes and for avoiding probate?

#7. Do the primary and secondary beneficiary designations of your IRAs, SEP/IRAs, 401(k), 403(b), pension plans, and other income tax deferred assets correctly state who is to inherit those “pre-income tax” assets? Or are these beneficiary designations out of date?

#6. Under your existing living trust and will, who will inherit your estate? How, when, and what will your beneficiaries inherit? Have your inheritance wishes changed since the time that your living trust and will were signed?

#5.  Have the life circumstances of your beneficiaries changed dramatically from the time that your estate documents were signed? Since the date that your estate documents were signed, have you changed your opinion as to what is best for your beneficiaries? For example, since the date that your living trust and will were signed:

  • has a beneficiary’s financial responsibility or trustworthiness changed?
  • has a beneficiary’s health become a concern to you?
  • is a beneficiary now on Medi-Cal or other important government benefits?
  • is a beneficiary’s marriage now of concern to you?
  • have hostilities or conflicts developed involving a beneficiary that warrant changes to your trust and will?
  • if you have minor children, is your designed guardian for them still correct?

#4.  What is your plan for payment of your future home health care or long term care, if needed? If you want your estate to have the option to have California pay for your skilled nursing care under the Medi-Cal program, then your durable general power of attorney should be reviewed and updated if it does not include so-called “Medi-Cal planning power” in it. Should there be changes to your assets to make yourself more “self-insured” for home health care or long term care? Should you consider long term care and home health care insurance?

#3. Does the current assessed value (not fair market value) on your California property tax bill of all of your California real property exceed $1,000,000? If so, then your estate plan should be reviewed to avoid a possible increase in real property taxes on your death (as there is a limit on how much real property can be inherited by your children without triggering an increase in property taxes).

#2.  Has your health or financial or family situation or your wishes changed significantly from the time that your estate documents were signed? If so, review your estate documents to make sure that they will still accurately reflect your wishes.

#1 MOST IMPORTANT REASON TO REVIEW YOUR ESTATE PLAN is to improve and simplify your estate plan due to new, generous estate tax laws. Washington recently replaced the uncertainty of the Bush era estate tax laws with generous estate tax laws, gift tax laws, and generation skipping transfer tax laws. You can still leave an unlimited inheritance to your surviving spouse (who is a U.S. citizen). But the amount that you can now leave without estate tax to others has increased to $5,430,000 for persons dying in 2015 (indexed to increase with inflation after 2015).

For a surviving spouse, there is now a new planning option to increase his/her $5,430,000 estate tax exemption by the estate tax exemption of the deceased spouse. For example, with proper planning, it is possible for a widow who inherits everything from her husband to inherit (via what is called “portability”) her husband’s estate tax exemption, leaving her with an estate tax exemption of $10,860,000 (so long as she does not remarry).

Hence, married couples whose living trust was written before 2012 may have trust provisions that are far more complicated than needed now under current estate tax laws. Note that the estate tax exemption used to be $600,000 in 1997, $675,000 in 2001, $1,500,000 in 2005, and $3,500,000 in 2009. These lower estate tax free amounts often lead to complicated bypass trust type living trusts in order to save estate taxes. For many couples, those bypass trusts may no longer be needed (unless they are used for “control” purposes or to save property taxes).

The amount that you can leave without federal gift tax now equals the same estate tax exemption amount, including the so-called “portability” rules applying to a surviving spouse. The current annual gift tax exemption is $14,000. The amount that you can leave without generation skipping transfer tax is also $5,430,000 in 2015, but without the “portability” benefits for a surviving spouse.

Copyright by James J. Phillips 12/29/2014


Music can bring life to the elderly who appear lifeless: award winning movie, Alive Inside.

At the CANHR Elder Law Conference that I’m attending today, the award winning film, Alive Inside, was featured. It’s powerful proof of how music can bring life to people who appear lifeless. iPods loaded with a person’s life music does what drugs can’t. A wonderful, helpful tool to help our elderly. Here’s a link to the documentary’s YouTube clip:

California’s new POLST form and importance of it with an Advance Health Care Directive


All California competent adults should consider signing a California Advanced Health Care Directive.

In the aftermath of the Terri Schiavo case in Florida, most people recognize how important this estate planning document is to protect yourself and your family.

In this document, you empower someone to make medical decisions for you if you become unable to give informed consent to your medical decisions.  You name your first choice and your alternate choices. Included in this document can be your wishes on such matters as:

  1. Whether and when you want so-called “heroic measures” used to prolong your life if you were in a terminal condition;
  2. Whether you want your health care agent’s authority to start now or only when you are unable to make health care decisions for yourself;
  3. Whether you wish to be an organ donor and, if so, for what purposes you want the donations;
  4. Whether and when nutrition and hydration may be withheld if you were in an irreversible coma;
  5. Whether you prefer home health care versus nursing home care, as long as home health care were appropriate;
  6. Whether you prefer to be told the truth or whether you prefer not to be told the details of your condition, especially if the news is bad;
  7. Whether you prefer to be buried or cremated or whether you prefer for your health care agent to decide;
  8. Whether your religious beliefs are to be considered;
  9. Who is to be in charge of your funeral or memorial service, if you want one.

Copies of your California advance health care directive should be given to your nominated agents, doctors, hospitals, and all health care providers.

California patients may also want to confer with their physician about a POLST form (Physician Orders for Life-Sustaining Treatment), which were updated October 1, 2014.  A POLST form states what kind of medical treatment patients want towards the end of their lives.  Printed on bright pink paper, and signed by both a doctor and the patient, POLST helps medical providers understand your wishes at a glance and helps give patients more control over their end-of-life care, including such matters as:

  1. Medical intervention for full treatment vs selective treatment vs comfort-focused treatment vs other orders.
  2. Artificially administered nutrition: long term vs trial period vs none at all vs other orders.
  3. Attempt resuscitation/CPR vs do not attempt resuscitation/DNR vs other orders.

Copyright James J. Phillips October 1, 2014

Surprisingly, knowing your family tree is essential in settling your trust or estate (and in any conservatorship proceeding)

Due process and California law requires that your closest blood relatives* be notified by the person in charge of your estate if you died or became incompetent in each of these California contexts:

  1. If probate is required because you died without a will, your administrator must notify your heirs*, as your heirs are those who would inherit. In some case where your spouse died before you and you had no children or descendants who survive you, this can include your spouse’s children (i.e., your stepchildren) or your spouse’s relatives.
  2. Your heirs must also be notified if there is a probate of your will, even if your will does not leave your estate to your heirs and even if your executor is not an heir. In some case where your spouse died before you and you had no children or descendants who survive you, this can also include your spouse’s children (i.e., your stepchildren) or your spouse’s relatives.
  3. Your heirs even have to notified by the trustee of your living trust, even if your living trust leaves nothing to your heirs.
  4. If a conservatorship of your person or estate is required due to your incompetency, your heirs must be notified (even if you would not want them notified).

But what if  no one knows the name or location of your children or your siblings or your niece and nephews or your cousins or your closest blood relatives? What if you kept as secret a child born outside of wedlock? What if you were estranged from some of your closest relatives?  What if your administrator or executor or trustee or conservator cannot identify your heirs? This can lead to the costly searches and delay, stress, and uncertainty, especially where the person who was incompetent or died:

  • Was estranged from the family.
  • Kept as a secret the existence of a child born out of wedlock.
  • Had no spouse and no offspring, but had step children or in-laws from a deceased spouse.
  • Had as closest relatives persons whose existence was unknown by others.

California law expects the person in charge of your estate to attempt to identify and locate your heirs with:(1) Inquiry of the relatives, friends, acquaintances, and employers; (2) Review of appropriate city telephone directories and directory assistance; and (3)Search of the real and personal property indexes in the recorder’s and assessor’s offices for the county where the person was last known or believed to reside. (See California Rule of Court 7.52; Probate Code Sections 1206, 1821,  6402, and 16061.7.)

Just imagine how difficult this would be if you keep the identity and location of your relatives a secret.

For these reasons, consider placing the names and last known address of your heirs* with your original will and trust and other estate planning documents in your safe deposit box. And consider giving a copy to your estate planning attorney.

*Your heirs are often your closest blood relatives, such as your spouse or registered domestic partner and:

            A.        Your children and the offspring of any deceased children.

            B.        If none, your parents. (Put see my post on September 14th

            C.        If none, the descendants of your parents.

            D.        If none, your grandparents or, if none, the descendants of your grandparents.

            E.         If none, the descendants of your  predeceased spouse may be included.

            F.         If none,  your next of kin.

Copyright James J. Phillips 2014


Terminating a trust because it has become unencomical to continue it.

In California, a trust terminates when any of  the following occurs:

  1. The term of the trust expires.
  2. The purpose of the trust is fulfilled.
  3. The trust purpose becomes unlawful.
  4. The trust purpose becomes impossible to fulfill.
  5. The trust is revoked.

On termination of the trust, the trustee continues to have the powers reasonably necessary under the circumstances to wind up the affairs of the trust. (California Probate Code section 15407.)

But when can the trust be terminated because it has become uneconomically low compared to the costs of keeping the trust (costs such as CPA fees, trustee fees, attorney fees, investment fees, and taxes)? California probate code 15408 gives the court authority to terminate a trust if the court determines that the fair market value of the trust has become so low in relation to cost of administration that continuation of the trust will defeat or substantially impair the trust purpose.

And, for California trusts,  if the value of the trust does not exceed $40,000, then the trustee has the power to terminate the trust. (California probate code section 15408 (c).)


If a parent abandons a child, should that parent be allowed to inherit if (years later) the child died without a will?

Historically, both parents have had a legal right to inherit from a child who died without a will, if that child died with no spouse, no registered domestic partner, and no descendants. This has long been the law in California, even in cases where a parent abandoned the child from birth, sometimes resulting in grossly unfair results.

For example, in one California case, a husband abandoned his pregnant wife, stranding her with no means of support in New Mexico. His wife gave birth to their son. The husband never communicated with his son and never provided any support. Yet when the son died 42 years later in California without a will, without a wife or registered domestic partner, and without descendants, the father was entitled to half of his son’s estate (sharing with the mother). (Estate of Shellenbarger (1975) 14 Cal 3rd 831.)

This grossly unfair result has been changed by new California Probate Code 6452 (a) (3), which prevents a parent from inheriting from a child who dies without a will if:

The parent left the child during the child’s minority without

an effort to provide for the child’s support or without communication

from the parent, for at least seven consecutive years that continued

until the end of the child’s minority, with the intent on the part

of the parent to abandon the child. The failure to provide support or

to communicate for the prescribed period is presumptive evidence of

an intent to abandon.”


What is reasonable trustee compensation?

Under California law, trustee compensation must be “reasonable” if there are no criteria or other guidelines set forth in the trust. (Probate Code section 15681.)

Often, trusts simply say that the trustee is entitled to “reasonable compensation” without any definition or any guidelines  to help determine the amount of trustee compensation. In those cases, California law provides for the following guidelines to consider when determining or approving trustee compensation (California Rule of Court 7.776):

  1. The gross income of the trust.
  2. The success or failure of the trustee’s administration.
  3. Whether the trustee possessed unusual skill, expertise, or experience.
  4. The amount of time spent by the trustee in performance of trustee duties.
  5. The custom and practice in the community.
  6. The charges of corporate trustees for trusts of similar size and complexity.

Applying these legal guidelines to each case requires application of the fact and circumstances of each case, as well as case law and the practices of the local courts. Strategy is often involved in asserting or opposing trustee compensation claims.

In contrast, a living trust can be drafted to specify the amount of trustee compensation and define the amount in different ways.

Copyright James J. Phillips 2014