San Diego Estate Planning Blog: Creating Legacies

From the Desk of Kristina R. Haymes, San Diego Trust and Estate Attorney

August 16, 2010

Virtually everyone knows about the estate tax (unless they’ve been living under a rock for the last ten or twelve years).  But if you’re planning to leave property directly to your grandchildren or even great grandchildren, there’s another tax you need to plan for now.  

A tax that can be just as costly as the estate tax…

The Generation Skipping Transfer Tax.

The Generation Skipping Transfer Tax (GST) is a tax on property passed directly from a grandparent to a grandchild or great grandchild by way of a will or a trust.  The GST even applies to property passed on to individuals not related to you if they are more than 37.5 years younger.  While currently repealed, like the estate tax, the GST will be resurrected in 2011. 

Congress designed the GST to close a loophole in the estate tax.  Parents were leaving their estates to their children and the children paid estate tax on the inheritance.  Then, those children would subsequently pass their estates on to the grandchildren, incurring estate taxes a second time.  Eventually someone figured out that by leaving the estates to the grandchildren directly, they could avoid paying one set of estate taxes.  Congress passed the GST to tax transfers to related individuals more than one generation away and to unrelated individuals more than 37.5 years younger to eliminate the ability to skip paying taxes on the inheritance of one generation.

How much will the GST cost your heirs?  More… »

Here is what you need to know if you have been tempted or, if like me (before my current profession) have attempted to prepare your own will, trust, or other estate planning documents.

Buyer Beware — you get what you pay for.

There are many potential problems with on-line wills and trusts, but I am only going to discuss the top 3…

1. In California, having just a will guarantees your loved ones go through probate!  Many people are shocked to discover that having a will guarantees their loved ones must go through the court process known as “probate.”  Yet, it’s true, if all you have is a will and you die, your loved ones will need “to prove” your will is valid and then the long, drawn out, expensive probate process begins…
2.  Your Living Trust Is Not Fully Funded.  A fully funded living trust is the only way to avoid probate.  But, chances are your on-line kit probably did not tell you that and you may have no idea how to fund your living trust, so it remains unfunded and won’t work!  I know, I’ve been there.  When we had bought our first home, I had a new baby, a full-time job, a husband in medical school and I learned about the importance of having a trust to avoid probate and other problems.  So, I used an on-line trust kit thinking I would just take care of this myself.  The problem, of course, was not only was the trust sorely lacking, even though I knew we needed to transfer title of our home to our trust, I never did.  We were so busy, trying to get through those crazy days.  I didn’t know where to begin.  How did I prepare the deed and where did I send it and how much would it cost?  I didn’t have a clue.  So, we put it off.  The problem is that if your living trust is not funded (e.g. your house is not owned by the trust and your other significant assets are not owned by the trust), then, guess what?  Your trust won’t work and your loved ones will be back in the probate court process.  So, you were basically throwing your money away.  Nobody likes to do that.
3. If Your Trust Is Not Set Up Properly — You Could Owe The Government Hundreds of Thousands of Dollars in Taxes!  This one really surprises people because they just do not know any better.  This is a situation where ignorance is not bliss.  Right now, if you die and your trust is not set up properly in 2010 and you have assets that have experience significant appreciation, your loved ones could be paying capital gains tax!  This tax is only 15-20% —  nothing compared to the whopping 55% estate tax that is scheduled to come back next year; yet, it’s not insignificant!

             In addition, next year if the estate tax exemption amount goes back down to $1 million dollars and your trust is not set up properly, your children could be paying 55% — that is over half of every dollar over $1 million.  Now, you might be saying, who cares?  We don’t have over a million dollars!  Or, you may be saying, holy moly, we have over a million dollars!  If you have minor children, own your own home, and have life insurance to provide for your children in the event something happens to you, then, chances are your estate is over one million dollars.  Yet, if your trust is set up right, you and your spouse can preserve your $1 million exemption, and you can pass $2million estate tax free to your children if you were both to die. 

I hate to say it, but yesterday I was reviewing a trust that a couple prepared themselves using one of those on-line do-it-yourself services, and their trust did not preserve the estate tax exemption.  So, if they were to die next year or any year that the exemption is low (e.g. one million dollars), their children would be paying a quarter of a million dollars to the federal government in taxes!  Not a happy thought.  How many years of college would that pay for instead?  What else could your loved ones use that money for?

The thing is, these taxes are often voluntary.  With a little proper planning you can avoid paying them.  Unfortunately, the on-line do-it-yourself solutions do not provide the answer.  Sometimes, penny wise and pound foolish applies.

Estate planning is one area where you really do want to make sure you seek the help of trust advisor, your trust is fully funded, and your trust is set up properly to preserve your exemptions and help eliminate taxes.  It is not difficult to do, but you need to work with a lawyer that focuses their work in this area.

If you are in San Diego area, I’d love to help.  Check out my website and give us a call.  I can help you avoid the common pitfalls and make sure your plan will work for your loved ones when they will need it.  The reason we plan is because it will make things so much easier for our loved ones and it is so much easier for us to take care of it now then for them to suffer the consequences later.

Responsible families, we are here to help you get your legal documents in order!

Do not put it off, no one is promised tomorrow.

To your family’s health, wealth and legacy,

Kristina Haymes

San Diego

Personal Family Lawyer

p.s.  We are having a Mother’s Day — May Special.  Mothers (and fathers) who come in for a complimentary Family Wealth Planning Session (normally $750) will be able to nominate guardians for their children for absolutely free!  Make sure your children never end up in the arms of strangers.  Just call our office at 858-794-1426 and ask for Sarah, my client services director or go on-line and fill-out the contact form and Sarah will email you or call to schedule your appointment.  It’s that easy.  Offer ends May 30, 2010, and is limited to the first 5 families only!

Trust Administration is the process of doing what needs to be done when someone dies and he or she had a living trust or other types of trusts (such as irrevocable trusts).

Trust adminstration is much easier, faster, and less expensive than the probate court process (and loved ones of those who did not have an estate plan, or merely had a will have to suffer through the probate process).  We estimate probate costs 5% of a decedent’s assets (which unfortunately for you includes the fair market value of the home).

Further, while probate is a public process, trust administration is a completely private process that takes place in the comfort of your lawyer’s office. 

Nonetheless, despite the many benefits of trust administration, there is still some work to be done.

The first issue is whether the person who has died was single or married.

Trust administration is very important when the person who has died was married and had a joint revocable trust with his or her spouse.  Trust administration for a single person is also important, however, it is often a simpler process.

The second important issue is what type of trust design did the deceased have?

Was it a disclaimer trust?  Was it a Clayton Election?  Did the Trust have a formula (pecuniary formula) or a fractional share formula?

Fortunately, a review of the Trust (or the trust declaration) will reveal the type of trust.

The next important step is to marshall all the assets.

Our clients, especially those on our membership program, will know their assets because we keep up-to-date family wealth inventories.  Those clients who are not on membership, will keep their own family wealth inventory up-to-date.  That way, if someone were to die, it makes it very easy to marshall the assets and create a trust administration asset inventory.

Depending upon the trust design, there may be disclaimers to be made (which must be made within 9 months of the date of death), there may be elections to be made — funding various subtrusts.  These steps are critical to preserve estate tax exemptions (but not this year).   This year, the issue is capital gains tax.  So, if someone dies in 2010, funding subtrusts is still important.  And, for those who may have a trust that was drafted several years ago they may have a formula trust, e.g. at the death of the first spouse, there is a formula (which is usually tied to the estate tax) about how the credit shelter (family bypass) trust is funded and whether a QTIP or marital trust is funded.

BAD NEWS for you if someone dies this year with a formula trust design and they have assets that have significant appreciation.  Why?  because there is a very high chance (it depends on the precise wording used) that all assets will either go to the credit shelter trust, OR, to the revocable survivor’s trust.  The bad news is that neither one of these trusts allow a surviving spouse to take up to $3million in appreciated assets without paying capital gains tax.

BUMMER!  The solution is to update your trust before that happens to you.

Now, if this is all too complicated and doesn’t make any sense to you… fear not.

We are here to help you.  We will walk you through this process, explain it to you every step of the way and make sure that your Trust Administration is handled properly with grace and ease.

The reality is that if your loved one or spouse has died, you are going through a very difficult time and our goal is to make this process as easy for you as possible.

Warmly,

Kristina Haymes

p.s. if you haven’t had your Trust reviewed recently, you should bring it in, we will do a complimentary review and if you have formula funding that puts you at risk, we will update your Trust so that it works for you to minimize taxes and hassle for your loved ones.