estate planning for smaller estates · 5 estate planning for smaller estates. estate taxplanning....

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Estate PlanningFor

Smaller Estates

Givner & Kaye, A Professional Corporation

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Estate Planning For Smaller Estates

Table of Contents1. Distinguish Estate Planning and Estate Tax Planning. Pg. 32. Unplanned Estate. Pg. 63. California Intestacy Rules. Pg. 74. Small Probate Exceptions. Pg. 165. Probate Fees. Pg. 206. Small Planned Estates. Pg. 247. Holographic Wills. Pg. 278. California Statutory Will. Pg. 329. Advance Health Care Directive (CMA). Pg. 3910. Durable Power of Attorney – Asset Management. Pg. 5211. Customized Will. Pg. 6212. Pourover Will. Pg. 7113. “Blanket” Assignment Of Assets. Pg. 7614. Trust Certificate. Pg. 8315. Selecting Distribution Formats. Pg. 9016. Selecting Fiduciaries. Pg. 9217. Retirement Plan Distribution Decisions. Pg. 9518. Life Insurance Policy Decisions. Pg. 9719. Business Assets. Pg. 9920. Special Needs Trust. Pg. 10221. Charitable Bequests. Pg. 10522. Pet Trusts. Pg. 10723. Questions and Answers. Pg. 109


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Estate Planning vs.

Estate Tax Planning


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Estate Planning Discuss your goals and objectives so thatThe appropriate peopleGet the appropriate assetsIn the appropriate fashionAt the appropriate time.

In other words, Estate Planning is concerned with whogets your assets and how and when they get your assets.


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Estate Tax PlanningDiscuss your goals and objectives so thatThe appropriate assetsAre held or transferredIn the appropriate fashionTo achieve the desired valuation.

In other words, Estate Tax Planning is concerned with howyour assets are valued.


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Unplanned Estate1. California Intestacy Rules.2. Conservatorship for incompetence.3. Uncertain healthcare decisions.4. Small probate procedures.5. Otherwise, probate for death.


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California Intestacy

Rules


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Probate Code Section 6401 – To Spouse(a) As to community property, the intestate share of thesurviving spouse is the one-half of the communityproperty that belongs to the decedent under Section 100.

(b) As to quasi-community property,* the intestateshare of the surviving spouse is the one-half of the quasi-community property that belongs to the decedent underSection 101.

* The legal definition of quasi-community property is all real or personal property acquired by either spousewhile domiciled elsewhere which would have been community property had the spouse who acquired theproperty been domiciled in California at the time of the acquisition.


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Probate Code Section 6401 [continued]

(c) As to separate property, the intestate share ofthe surviving spouse or surviving domestic partner,as defined in subdivision (b) of Section 37, is asfollows:

(1) The entire intestate estate if the decedentdid not leave any surviving issue, parent, brother,sister, or issue of a deceased brother or sister.


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Probate Code Section 6401 [continued](2) One-half of the intestate estate in the

following cases:

(A) Where the decedent leaves onlyone child or the issue of onedeceased child.

(B) Where the decedent leaves noissue but leaves a parent orparents or their issue or the issueof either of them.




Probate Code Section 6401 [continued](3) One-third of the intestate estate in the

following cases:

(A) Where the decedent leaves morethan one child.

(B) Where the decedent leaves onechild and the issue of one or moredeceased children.

(C) Where the decedent leaves issue oftwo or more deceased children.




Probate Code Section 6402 –To People Other Than Spouse

Except as provided in Section 6402.5, the part of the intestateestate not passing to the surviving spouse or surviving domesticpartner, as defined in subdivision (b) of Section 37, underSection 6401, or the entire intestate estate if there is no survivingspouse or domestic partner, passes as follows:

(a) To the issue of the decedent, the issue taking equally ifthey are all of the same degree of kinship to the decedent, but ifof unequal degree those of more remote degree take in themanner provided in Section 240.




Probate Code Section 6402 –To People Other Than Spouse [continued]

(b) If there is no surviving issue, to the decedent'sparent or parents equally.

(c) If there is no surviving issue or parent, to theissue of the parents or either of them, the issue takingequally if they are all of the same degree of kinship tothe decedent, but if of unequal degree those of moreremote degree take in the manner provided in Section240.





(d) If there is no surviving issue, parent or issue of a parent, but thedecedent is survived by one or more grandparents or issue ofgrandparents, to the GP or GPs equally, or to the issue of those GPs if thereis no surviving grandparent, the issue taking equally if they are all of thesame degree of kinship to the decedent, but if of unequal degree those ofmore remote degree take in the manner provided in Section 240.

(e) If there is no surviving issue, parent or issue of a parent, GP orissue of a GP, but the decedent is survived by the issue of a predeceasedspouse, to that issue, the issue taking equally if they are all of the samedegree of kinship to the predeceased spouse, but if of unequal degreethose of more remote degree take in the manner provided in Section 240.





(f) If there is no surviving issue, parent or issue of a parent, GP orissue of a GP, or issue of a predeceased spouse, but the decedent issurvived by next of kin, to the next of kin in equal degree, but where thereare two or more collateral kindred in equal degree who claim throughdifferent ancestors, those who claim through the nearest ancestor arepreferred to those claiming through an ancestor more remote.

(g) If there is no surviving next of kin of the decedent and no survivingissue of a predeceased spouse of the decedent, but the decedent issurvived by the parents of a predeceased spouse or the issue of thoseparents, to the parent or parents equally, or to the issue of those parents ifboth are deceased, the issue taking equally if they are all of the samedegree of kinship to the predeceased spouse, but if of unequal degreethose of more remote degree take in the manner provided in Section 240.




Small Probate Exceptions




California Probate Code §6602.Petition requesting order to set aside estate; maximum value

A petition may be filed under this chapter requestingan order setting aside D's estate to D's surviving spouse andminor children, or one or more of them, as provided in thischapter, if the net value of D's estate, over and above allliens and encumbrances at the date of death and over andabove the value of any probate homestead interest set apartout of D's estate under §6520, does not exceed $20,000.




California Probate Code §13500.

Husband or wife dying intestate; survivingspouse; administration unnecessary.

Except as provided in this chapter, when H or W diesintestate leaving property that passes to the survivor under§6401, or dies testate and by his or her will devises all or apart of his or her property to the surviving spouse, theproperty passes to the survivor subject to Chapter 2(beginning with §13540) and Chapter 3 (beginning with§13550), and no administration is necessary.




California Probate Code §13100.Estates under $100,000; authorization to act without procuringletters of administration or awaiting probate

Excluding [joint tenancy; multiple party accounts; vehicles; mobile homes;up to $5,000 of compensation], if the gross value of D's real and personal property inCA does not exceed $100,000 and if 40 days have elapsed since D’s death, D’ssuccessor may, without procuring letters of administration or awaiting probate ofthe Will, do any of the following as to one or more particular items of property:

(a) Collect any particular item of property that is money due D.(b) Receive any property that is D’s tangible personal property.(c) Have any property that is evidence of a debt, obligation, interest,

right, security, or chose in action belonging to D

transferred, whether or not secured by a lien on real property.




Probate Fees




California Probate Code §10800. Ordinary Services - Basis of Compensation; Value of Estate.(a) …for ordinary services the personal representative shall receive compensationbased on the value of the estate accounted for by the personal representative, as follows:

(1) 4% on the first one hundred thousand dollars ($100,000).(2) 3% on the next one hundred thousand dollars ($100,000).(3) 2% on the next eight hundred thousand dollars ($800,000).

[$23,000 on the first $1,000,000](4) 1% on the next nine million dollars ($9,000,000).

[$113,000 on the first $10,000,000](5) 1/2% on the next fifteen million dollars ($15,000,000).

[$188,000 on the first $25,000,000](6) For all above twenty-five million dollars ($25,000,000), a reasonable

amount to be determined by the court.(b) …the value of the estate…is the total amount of the appraisal value of property in theinventory, plus gains over the appraisal value on sales, plus receipts, less losses from theappraisal value on sales, without reference to encumbrances….




Probate Fees For The Executor’s Lawyer

1. Probate Code Section 10801 gives the same schedule.

2. But these schedules are a maximum, and can benegotiated. For example, a $10,000,000 estate consisting of a CDwould require a lot less work than a $10,000,000 estate consistingof 10 investment properties each worth $10,000,000 each subjectto a $9,000,000 mortgage.

3. What is covered by the statutory fee? Opening the estate,inventorying, creditors’ claims, managing the estate, accounting,petition for final distribution. If someone files a claim and youaccept it, that is statutory. If there is litigation that isextraordinary. Disputed assets are extraordinary.




Probate Scare Tactics1. Probate Fees can exceed the value of the estate. Truesince they are calculated on the gross fair market value. So anestate that includes a $1,000,000 property with a $999,999mortgage would have, as to that property, a $113,000 maximumprobate fee for both the lawyer and the executor.

2. The multi-year delays of probate. Should not be true.Once Howard Jarvis, famous for Prop. 13, led the fight to repealthe California inheritance tax, so that the state of California got outof the estate business, the delays involved in closing estate areminimal. Probate estates are usually closed within 6 months.

3. The public nature of a probate. For most people that is anon-issue because most people are neither famous nor wealthy.




Small Planned Estates



1. The Very Small Estate.

Need a simple dispositive plan.

2. The Small Estate.

Need a customized dispositive plan

3. The Not Yet Large Estate.

Need to avoid probate.

4. The To Be Large Estate.

Need to plan to avoid estate tax.




1. The Very Small Estate: Need a simple dispositive plan.

Element #1: Holographic orCalifornia Statutory Will.

Element #2: Advance Health Care Directive(California Medical Association).

Element #3: Durable Power of Attorney forAsset Management.





Holographic Will




Probate Code Section 6111 – Holographic Wills(a) A will that does not comply with Section 6110 is valid as a holographic will, whetheror not witnessed, if the signature and the material provisions are in the handwriting of thetestator.

(b) If a holographic will does not contain a statement as to the date of its executionand:

(1) If the omission results in doubt as to whether its provisions or theinconsistent provisions of another will are controlling, the holographic will is invalid to theextent of the inconsistency unless the time of its execution is established to be after the dateof execution of the other will.

(2) If it is established that the testator lacked testamentary capacity at anytime during which the will might have been executed, the will is invalid unless it is establishedthat it was executed at a time when the testator had testamentary capacity.

(c) Any statement of testamentary intent contained in a holographic will may be setforth either in the testator's own handwriting or as part of a commercially printed form will.




California Statutory

Will




Advance Health Care

Directive (California Medical Association)




DurablePower of Attorney

For Asset Management



2. The Small Estate: Needs a customized dispositive plan

Element #1: Customized Will.

Element #2: Advance Health Care Directive (California Medical Association).

Element #3: Durable Power of Attorney for Asset Management.





Customized Will



3. The Not Yet Large Estate: Need to avoid probate.

Element #1: Simple Family Trust.plus pourover Will; “blanket” assignment of assets; trust certificate.



Element #4: Irrevocable Trust (Life Insurance)?





“Pourover” Will




“Blanket” Assignment Of Assets




Trust Certificate



4. The To Be Large Estate: Need to plan to avoid estate tax.

Element #1: Family Trust Which Creates Subtrustsplus pourover Will; “blanket” assignment of assets; trust certificate.



Element #4: Irrevocable Trust (Life Insurance)?





Selecting Distribution

Formats(for children)




FORMAT ADVANTAGES DISADVANTAGES

1. Outright at the parent’s death

Simplicity; children can blow the money and get on with their lives

Children can lose to creditors; children can blow the money on drugs and cults.

2. Staged distribution over time, e.g., 1/3rd at 25-30-35

Still relatively simple, very common, children can make mistakes with first distributions

Need trusted fiduciary; children can still lose to creditors; children will do nothing with their lives waiting for the next distribution.

3. Incentive distributions, e.g., trustee will match the child’s 1040

Less likely the child will sit around waiting for the next distribution.

Need trusted fiduciary and successors.

4. Complete discretion of trustee.

Children will not blow the money and will not become dependent. Takes advantage of GST and dynasty rules.

Need trusted fiduciary and successors.

5. Beneficiary controlled trust.

Gives children the ability to protect themselves from creditors through control over trustee.

Children can terminate the trust immediately.




Selecting Fiduciaries

(for children)





1 One Individual Simplicity. Need successors. What if that person changes from what you knew while you were alive?

2 Two Individuals They must agree to accomplish anything, so deadlock is possible.

Less likely to have loss of assets and inattention to beneficiaries.

3 Committee of Individuals

Breadth and depth of knowledge, appropriate for large estates.

Complexity and cost.

4 Inside and Outside Individuals

One makes financial decisions; other makes “parental” decisions.

Need successors.

5 Individual and Institution

Individual makes discretionary distribution decisions.

Clean delineation of responsibilities.

6 Institution Stability. Institutions will sell real estate and closely held businesses; not usually as good with discretionary distribution decisions over time.

7 Your Own Trust Company

Over the long term it can give the benefits of human touch.

Complexity and long-term cost.




Guardians1. May not be the same people as other fiduciaries.

2. Problem with wealthy children cared for by poor guardians (poorerrelatives – leave them money separately? Insurance policy?).

3. At what age do children have a say?4. Older children as guardians of younger children?

5. The “Bar Mitzvah” DVD for the guardians (and for other fiduciaries).




Retirement Plan Distribution Decisions





1. Take the money out now. Simplicity. Pay the taxes at what may be lower brackets than in the future.

Need to keep segregated to preserve California creditor protection.

2. Name the spouse, then the children by name.

Simplicity. If a child dies, that child’s children do not share. A child can lose his or her share to creditors.

3. Name the living trust. Probably OK as to spouse. Possibly OK as to children if trust for them in the living trust.

Children will be forced to take the money out over 5 years or at least over the oldest child’s lifetime.

4. Complex beneficiary designation.

Spell out all the possibilities in an attachment to the form provided by the plan sponsor.

Complexity, and must be sure that alternatives are not overlooked.

5. Standalone IRA beneficiary trust.

Allows each beneficiary the right to make that beneficiary’s own distribution decision; creditor protection.





Life Insurance PolicyDecisions




FORMAT ADVANTAGES DISADVANTAGES1. Terminate the policy

because it’s not needed for estate tax.

Simplicity. Save premiums. “I never met a widow who thought her husband was overinsured.”

2. Sell the policy. Simplicity. The policies that net much money are often the ones that make economic sense to keep in the family.

3. Name the spouse, succeeded by the children.

Fine as to spouse. Possibly OK as to children if they all survive.

Spouse can spend all the money or leave out one of the children. If a child dies, that child’s heirs can be excluded.

4. Name the living trust. Simplicity. Estate tax?

5. Standalone irrevocable trust.

Avoid estate tax if the insurance would balloon the estate’s value. Careful distribution format.





Business Assets




Business Assets In Smaller Estates1. The largest percentage of a smaller estate might be the interest in a closelyheld family business. Is one of the children active in the business and another not?Does the active child become an owner during the parent’s lifetime? If so, does thatchild get the balance at death? If so, is the balance at death “off the top”? Or does itcount against that child’s share? In fact, does the share that the active child gotduring lifetime count as a share of the estate at death? If so, is it valued at date ofgift or at date of death? These can be complex and emotionally difficult issues.When these situations exist, the need for an independent third party as trustee iseven more important than in other situations (though we believe it is alwaysimportant when there are multiple children.

2. Though there is no estate tax, is there a need for life insurance to provideliquidity to allow the business to continue after the key parent’s death? Will theactive child be able to continue the business and the income to the surviving inactiveparent?




Business Assets In Smaller Estates [continued]3. In all situations involving closely held businesses we encourage theparents to immediately (they seldom agree) add three independent members to theboard of directors: typically someone expert in HR; a retired executive familiar withthe industry; and a CFO type (not the business’s CPA). Pay them $2,500 per quarterlymeeting and have the management report to them. Institutionalize the business sothat the parents can gradually retire (in favor of the active child?) and to allow thebusiness to continue in an orderly fashion should the active parent die unexpectedly.

4. In the case of managed real estate assets, again, an independent third partymay be helpful so that the child who actively manages the real estate is not thesubject of hostile scrutiny by the inactive children. This is truly a situation where anounce of prevention (having an independent trustee, who can allow the active childto continue after the parent’s death) is worth many pounds of cure.




Special Needs Trust




The primary purpose of an SNT is to preserve government benefits,which have eligibility requirements, for disabled beneficiariesdespite what would otherwise be the receipt of an inheritance.

Two programs based on financial need are Supplemental SecurityIncome (SSI) and Medi-Cal (California’s version ofMedicaid). Housing subsidies, also called the Section 8 program, InHome Support Services, food stamps, and utility payment assistanceare also based on financial need.

Social Security and Medicare are not based on financial need, butare instead based on the applicant's age and earnings record.




The SNT: Instead of leaving assets directly to thedisabled adult child, the parents establish an SNT intheir living trust or wills. This trust would be under thecontrol of an independent trustee and would continuefor the child’s lifetime.

Benefits: The SNT has no obligation to notify the Stateor repay Medi-Cal payments after the child's deathbecause the child did not own the assets. The trustprevents the beneficiary from controlling the assets, butprovides a way to help the beneficiary.




Charitable Bequests




Charitable Bequests In Smaller Estates1. Usually consist of a small specific bequest, e.g., $10,000 to the AmericanCancer Society.

2. Possibility of a donor advised fund if larger amounts or a gift of the residue.Even a gift of the entire estate is unlikely to warrant setting up a private foundation.

3. Potential to endow a chair at a University. In February, 2007, UCLA accepted$1,000,000 for the first academic chair in the U.S. dedicated to sexual orientation inlaw and public policy. By contrast in February, 2011, the UCLA Anderson Schoolreceived $3,000,000 to endow the Howard and Irene Levine Chair in Real Estate,Finance and Economic Policy.

4. Structured gifts, e.g., testamentary charitable lead trust are possible but nottax driven.




Pet Trusts(as opposed to precatory language in a Will or Trust)




California Probate Code Section 15212

Summary: A person can create a trust for the care of a designated domestic or petanimal for the life of the animal. The duration will only be for the life of the pet,even if the trust instrument contemplates a longer duration. Note that the statuteuses the singular form of "animal" and the term "domestic" or "pet" is used.

(a) Subject to the requirements of this section, a trust for the care of ananimal is a trust for a lawful noncharitable purpose. Unless expresslyprovided in the trust, the trust terminates when no animal living on the date ofthe settlor's death remains alive. The governing instrument of the animal trustshall be liberally construed to bring the trust within this section, to presumeagainst the merely precatory or honorary nature of the disposition, and to carryout the general intent of the settlor. Extrinsic evidence is admissible indetermining the settlor's intent.




QuestionsAnd

AnswersIn person or by e-mail

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