California Estate Plans and Property Tax Planning

With the 2016, large estate tax exemption of $5,450,000, 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:

  • Between spouses or between registered domestic partners;
  • Of a person’s principal residence between parents and children (see below);
  • 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 12/31/2016

How to include your charitable causes in your living trust and estate plan

People are often invested deeply in their charitable causes. Some give their money. Some donate their time. Some share their talent. To them, their charitable causes are an important part of who they are.

It is important for such clients to discuss with their attorney whether they want that legacy to continue in their estate plan after their death. Here are some examples of living trust provisions that address helping your charitable causes after your death:

  • You can have your pattern of charitable giving continue after your death to your desired charity and for your desired charitable purpose.
  • Your lifetime charitable efforts could continue after your death with your bequest to pay for continuation of your charitable work.
  • Your charitable causes or campaigns or efforts could be supported after your death with a thoughtfully planned bequest.
  • You could give your family members roles in your charitable bequests, if you wish, doing so in a manner that might promote their philanthropy (or that might inspire their passion for your charitable causes).

If you are uncertain whether there will be enough funds in your estate both for your family and for your charity, you could use any of these planning techniques:

  1. The charitable bequest occurs only if your total net worth exceeds a certain amount.
  2. The charitable bequest could equal the lesser of a certain dollar amount or x% of your net worth.
  3. The charitable bequest could apply only if certain family members die before you.

Copyright James J. Phillips January 2017

Estate planning for pets

If you have pets, consider including them in your estate plan. In doing so, your documents can address:

  • Who will take your pets if you die or become incompetent?
  • Who will find them a good home?
  • How will the costs of your pets be handled?

Regarding who will take your pets or who will find them a good home, options include:

  1. Your estate documents can give your pets outright to someone you know, ideally a responsible, trustworthy person.  You can designate alternate choices to take your pets.  If you wish, funds can be given to the caregiver for each pet.  You may wish to provide detailed care and feeding instructions; or
  2. For California residents, you can use a trust to provide for your pets.  This provides a flexible method for managing the funds to care for your pets.  Funds remaining in the trust can be distributed in the manner directed by you.  With a pet trust, you should nominate a trustworthy and suitable caretaker (and alternates) or instruct the trustee regarding the trustee’s responsibility for finding a suitable home for your pets.  The pet trust can pay for all expenses related to the proper care of your pets; or
  3. When you have no suitable person to take your pets, you can leave your pets to an organization.  A number of California animal protection organizations have programs that provide permanent care or guarantee placement of companion animals when their owners die or become incompetent.  Here are some examples:
  • San Francisco Society of Prevention of Cruelty of Animals-Sido Service
  • Animal Rescue Foundation-Guardian Program
  • Berkeley East Bay Humane Society
  • California Cat Center, Inc-Lifecare Program
  • East Bay SPCA-Pet Survivor Placement Program
  • Friends of Cats, Inc-Lifetime Care
  • Helen Woodward Animal Center
  • Hopalong Animal Rescue Pet SurvivorHumane Society of Marin County
  • National Cat Protection Society-Retirement
  • North County Humane Society-Friends of Life
  • Pet Pride (Los Angeles)
  • Pets in Life-Guardian Program
  • SPCA of Monterey-Guardian Angel Future Care Program
  • Tony La Russa’s Animal Rescue Foundation (ARF)-Guardian Program
  • Valley Animal Center-No Kill Shelter (Fresno)

Your durable general power of attorney, will, and living trust can include provisions as to who will be responsible for implementing  your pet plan.

Your documents can also provide that a sum of money be given to each person (or organization) who takes each pet.

In the end, your estate documents can reflect your wishes as to who will take your pets, how they will be carried for, and what financial assistance is to be provided.

Copyright James J. Phillips January 2017


Your family tree: its due process importance in estate administration, trust administration, and conservatorships

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. And your heirs even have to be 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.

This can be very problematic in cases where the person who is 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.
  • Had a child who was “adopted out.”

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 this reason, 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.

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

  1. Your children and the offspring of any deceased children.
  2. If none, your parents.
  3. If none, the descendants of your parents.
  4. If none, your grandparents or, if none, the descendants of your grandparents.
  5. If none, the descendants of your predeceased spouse may be included.
  6. If none, your next of kin.

Copyright James J Phillips January 2017


Trust inheritance provision to help your beneficiary buy a home

Your living trust can provide that, after your death, wealth remains in trust for your child (or other intended beneficiary) to help with designated purposes.

Well known examples of such purposes are health and education. But another purpose is help with buying a house. For example, your trust could provide that, after your death, the trustee may help your  beneficiary buy a house, with such assistance not to exceed a certain percentage of the purchase price (such as 20% or 30%). In other words, the trust could provide the down payment  for the house.

Under this trust concept for assistance in buying a house, elements to consider include your wishes as to:

  1. Is this assistance solely for a principal residence?
  2. For a married beneficiary, do you want the assistance to acquire a separate property interest?
  3. What are the minimum age and minimum educational requirements to be eligible for this assistance?
  4. Must the beneficiary qualify for whatever mortgage is necessary in order to buy the house?
  5. Who will be trustee (and alternate trustees) of the trust? (See prior post on that subject.)
  6. Is this concept consistent with how you would like the inheritance to improve your beneficiary’s life?

Copyright James J. Phillips January 2017

Trust provisions to protect your children’s inheritance from in-laws

Just because California is a community property State does not mean that an inheritance here is community property. For a married Californian, property received by gift or inheritance is separate property, not community property.

For many parents, that fact alone is enough protection for a child’s inheritance. Perhaps most parents have confidence that their children will do the “right thing” with the inheritance, be that keep it separate or commingle it. But many parents fear that any number of “bad results” will follow from their son-in-law or daughter-in-law’s influence over the inheritance.

Some parents fear their child’s inheritance may be lost in a divorce. Others fear that the in-law’s children from a prior marriage may wind up with the inheritance. Many simply want to protect their child from a divorce or from a manipulative in-law. Such parents wonder what can be done to protect their child’s inheritance.

Here are two planning options to help preserve the separate property character of your child’s inheritance:

  • Your trust could state your wishes that, before your child receive his or her inheritance, your consult privately with an attorney as to how to preserve the separate property character of the inheritance. In other words, you want your child to get an education about this before the trustee gives the inheritance.
  • Some parents believe that simply asking their child to get such an education before the inheritance is received will not work.  Perhaps the child cannot withstand the ongoing pressure or manipulations of the spouse. Perhaps the child is incapable of following directions. Perhaps it would inevitable that the child would commingle the separate property with community property so as to make the inheritance “50-50″ community property. Perhaps, to the parents’ dismay,  the child simply wants to make it “50-50.” For these parents, the options to explore involve leaving the child’s inheritance in trust. While there are countless types of such trusts, what they have in common is that the inheritance in trust remains separate property and is bound by the terms written by the parents for their child. For example, such a trust would spell out:
  1. Appointment of the trustee and the successor trustees;
  2. Guidelines for trust investments;
  3. When trust income and trust principal can be used for the child (or the college education or other needs of the child’s children);
  4. When the trust ends and who inherits the trust when it ends;
  5. Who inherits if the child dies during the trust; and
  6. Tax planning for the trust, including estate tax, income tax, property tax, and generation skipping transfer tax planning.

The point is that, in California,  there are many options available (from simple to more complicated) to protect your wishes as to how to preserve the separate property character of your beneficiary’s inheritance.

Copyright James J. Phillips January 2017


Planning how to improve your life with your inheritance

Over the years, I’ve seen lots of people regret what they did with their inheritance. Regrets over how their inheritance was spent or how it was invested or how it was taxed or who gained access to it. Regrets over who will inherit it. And regrets about what happened to their inheritance in a divorce.

People tend to do something that they “wanted to do” with their inheritance without first  identifying all of their  “wants” or without prioritizing all of their “wants.”

So my advice to clients is to create an “inheritance plan” of how to improve your life with your  inheritance, following these four steps:

Step 1: IDENTIFY ALL OF YOUR WANTS: Without being critical or judgmental of yourself, write down all the things that you want do that involves money. Dream. Think of your present and your future. Include what wealth you want to leave on your death for others. Identify any health, family, or financial necessities (as opposed to wants or desires). Try to fill up at least one page. For example, consider:

  • Your health wants or needs
  • Paying off debt
  • Your education
  • Your career
  • Your home or second home
  • An emergency fund
  • Helping your children (or grandchildren or others) with college
  • Helping your children (or others) buy a home
  • Increasing your income now
  • Increasing your income upon retirement
  • Reducing your income tax liabilities (or your estate tax liabilities)
  • Financial security throughout the rest of your life, including your wants for home health care or independent living
  • Travel
  • Cars and “toys”
  • If you are married, keeping your inheritance your separate property or sharing it with your spouse
  • Charity

Step 2: RANK (PRIORITIZE) YOUR WANTS. Now be serious. Based on your values and your goals, rank the above wants from least important to most important. It’s a good idea to repeat this process until you find that your ranking of your wishes has not changed. When you are confident that your priorities are well informed and won’t change, then go to step 3.

Step 3: INVEST (OR SPEND) YOUR INHERITANCE ACCORDING TO YOUR PRIORTIES.  Don’t be swayed by the first “want” that hits you or by pressure from others. Be intentional. Be thoughtful. Understand any potential investment (and the tax implications) before you make the investment.  Ask your legal, tax, and investment advisors for their objective input. Spend or use your inheritance according to your most important, most valued, most long lasting “wants.” Doing this, I believe, gives you the best opportunity (a) to improve your life with the inheritance and (b) to avoid regret.

Step 4: Create or update your estate planning documents to reflect your wishes as to (a) how these investments are to be handled if you become ill and (b) who inherits these investments on your death. Seek the counsel of your accountant, investment advisor, and estate attorney. While you go through this process, keep your inheritance safe.

Copyright James J. Phillips January 2017


Selecting the guardian for your minor child

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, guardian of the estate and guardian of the person. The guardian of the estate deals with assets left to a minor child (and not in trust for the minor). This article deals with the guardian of your child’s person.

First, in considering the guardian of the person, take into consideration all of the possible candidates, from each parent’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 important to you, 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. Would the person create the time needed to help raise your child?
  8. Will the person provide the social, financial, educational, moral, and religious upbringing similar to what you would have provided?
  9. 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.” 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 2017


Who will be in charge of your estate if you have no will or trust?

California law states who has priority to serve as administrator of your probate estate if you died without a will and with a California estate large enough to require a California probate. Specifically, a person in the following relation to the decedent is entitled to appointment as the California administrator in the following order of priority:

  1. Surviving spouse or registered domestic partner
  2. Children
  3. Grandchildren
  4. Other descendants
  5. Parents
  6. Brothers and sisters
  7. Descendants of brothers and sisters
  8. Grandparents
  9. Descendants of grandparents
  10. Children of a predeceased spouse or domestic partner
  11. Other descendants of a predeceased spouse or domestic partner
  12. Other next of kin
  13. Parents of a predeceased spouse or domestic partner
  14. Descendants of parents of a predeceased spouse or domestic partner
  15. Conservator or guardian of the decedent
  16. Public administrator
  17. Creditors
  18. Any other person (i.e. friends)

See California Probate Code Section 8461 and the exceptions at Probate Code Sections 8462-8469.

Of course, these statutory rules do not apply if the decedent had a will that nominated an executor who was willing and able to act. Nor should these rules apply if the decedent’s assets were titled properly in a living trust and with proper beneficiary designation.

Copyright January 2017 James J. Phillips


Who should be trustee of your living trust?

In selecting a successor trustee for a living trust, people often gloss over the complications involved and think in terms of such broad generalizations as “manage my estate” or “take care of my beneficiaries” or “settle my estate.” In reality, a trustee performs very specialized functions.

The trustee must prudently invest assets, consider distribution requests, keep accurate records, file tax returns, account to the beneficiaries, and carefully weigh often complex legal and tax issues. The trustee must obey strict duties for the benefit of your beneficiaries, being financially liable to them if the trustee violates those duties. Also, being trustee is usually a time-consuming, frequently thankless job.

For living trusts, a trustee is needed for at least three separate situations:

  • First, who serves as trustee for you if you became incompetent?
  • Second, who serves as trustee upon your death to administer and distribute your trust?
  • Third, who serves as trustee of ongoing trusts created on your death for your beneficiaries?

In each of those three contexts, successor trustees should be named.

The personal attributes of the trustee should be of paramount importance in the selection process. A trust that works for tax purposes will be of little benefit if an imprudently selected trustee dissipates the trust assets through poor administration.

There are four possible choices for trustee:

  • A family member;
  •  A trusted friend;
  •  A corporate trust department;
  •  A private fiduciary.

As discussed below, each choice has advantages and disadvantages. Factors to consider include: reliability, integrity, and financial responsibility; willingness and ability to devote time to the job of trustee; relationship to the beneficiaries; personal dynamics among the beneficiaries; judgment, experience, impartiality, and potential for conflict of interest; and the size and type of trust assets.

Unlike an “outsider,” a family member knows you and the personalities involved. A family member may also serve for free, although my experience is they usually are paid.  However, there can be significant disadvantages to having a family member as trustee. The family member may lack experience in the crucial functions performed by a trustee. The family member trustee may be subject to pressure or influence by beneficiaries. Throwing a family member in the middle of family hostilities by naming him or her as trustee could become a ticking time bomb that eventually may explode. Will the family member tirelessly withstand the beneficiary who is constantly asking for funds?  Will the family member resist the temptation to play favorites among beneficiaries? The very intimacy that seems to make a family member an ideal choice can be a burden and disadvantage sometimes. Also, conflicts of interest may arise when the family member is both a trustee and a co-owner of trust property or a beneficiary.

In considering a trusted friend as an option, be mindful that being a trustee for someone else’s trust is time-intensive and can entail a high degree of personal liability. A friend should not be expected to serve as trustee for free. As with a family member, the trusted friend probably is inexperienced in trust administration and will require assistance from a lawyer, an accountant, and possibly a financial advisor.

A corporate trust department employs individuals with specialized training and experience in all the diverse areas involved in trust management and administration. A trust department employs lawyers, tax specialists, investment professionals, and trust administrators. This team of individuals should possess a higher degree of knowledge across all these areas than almost any one individual. A corporate trustee provides neutral and objective supervision, treating all beneficiaries in the same way. Corporate trustees also have the accounting and record keeping capabilities required for trust administration. They can provide accounting which distinguishes between principal and income and can track investment information, such as cost basis and current yield.  Certainly, a corporate trustee will charge a fee for serving. That fee should be compared against the fee charged by an individual trustee plus the accountant and attorney’s fees incurred by the individual trustee.

In California, another option involves nominating a California private fiduciary as trustee. As with corporate trustees, private fiduciaries could be interviewed, with their potential services and fees described. (See Professional Fiduciary Association of California’s web page  and Department of Consumer Affairs Professional Fiduciaries Website

Your trustee is bound by several legal duties, including the duty to be prudent, the duty of loyalty, and the duty of impartiality. Other duties include the duty to identify and collect property, to protect property, to account to your beneficiaries, to delegate wisely, and to carry out the purposes of your trust. These are complicated duties. A trustee can be held personally liable for losses that occur if such a fiduciary duty is violated.

In selecting a trustee, ask yourself these questions: (1) Is the trustee capable of handling the types of assets that will be held in the trust?; (2) Is the trustee capable of, and inclined to, resolve problems that may arise with the trust and its beneficiaries?; (3) Is the trustee capable of managing the trust investments?; (4) Will the trustee be able to devote the time and attention needed to avoid problems?; (5) How well will the trustee get along with the beneficiaries? Will there be hostility or antagonism between the trustee and a beneficiary?; (6) Is the trustee capable of communicating with the beneficiaries?; (7) Will the trustee’s greed prevent proper trust administration?; (8) Will the beneficiaries respect and accept the trustee?; (9) Is the trustee capable of understanding and fulfilling the fiduciary duties and responsibil­ities of trusteeship?; (10) Is the proposed trustee likely to suffer major personal problems (health, family, or financial)?; (11) Do the beneficiaries have inflated ideas of their financial needs?  If so, can the trustee handle them?; and (12) What compensation may the trustee receive?

Some clients prefer the option of the successor trustee working in conjunction with special trustees. For example, if you nominate a corporate trust department or California private fiduciary as trustee, you could nominate as special trustees the individuals in your life whose judgment you trust. Those individuals could be given many powers over the trustee. For example, the special trustees could nominate the trust department or private fiduciary to serve as trustee, fire that trustee, and replace it with another trust department or private fiduciary as trustee. The special trustees could be entitled to regular accountings and status reports.  You could also require the trustee to confer with the special trustees prior to any significant changes to the trust assets. Special trustees could even be given a veto power over the trustee’s proposed actions.   (You can also use this special trustee concept when your trustee is a family member or friend.)

Copyright James J. Phillips March 2016