Giving Thanks

The end of the year is often a time when I remind people to work on their estate planning now. Why now? Well, first and foremost your estate plan is for your loved ones; family, friends, charities. What better time to think about your loved ones than Thanksgiving and the end of year holiday season!? Also, why not get it done now so you don’t start the year with another item on your to-do list. Get it done NOW and you can start the new year with one less thing to do.

However, this year is special.  The incredible tax saving opportunities put in place in December of 2010 are set to expire December 31, 2012. That is, you can currently give away $5.12 million, TAX FREE, and that option goes away in a little over a month.  If you have assets take advantage NOW!

We are doing a lot of qualified personal residence trusts, family limited partnerships and LLCs (“FLPs” or “FLiPs”), life insurance trusts, children’s trusts and other vehicles. Take advantage now!

Contact me to discuss. -John

The BEST estate planning tool in California

There are a lot of great estate planning tools available to use. Clearly everybody should have a will, a financial “durable” power of attorney and a health care directive (or “living will”).  However, there are other options. Two that I particular like are the Qualified Personal Residence Trust (QPRT) and the Irrevocable Life Insurance Trust (ILIT). Today I am going to talk about my favorite… the QPRT!

A QPRT is an irrevocable trust. That means that generally it can not be changed. However, we can build some flexibility into it.

The fact that it is irrevocable is what gives it the power. It’s what makes it superior to the basic living trust for the right clients. Let me stress that a QPRT is not right for everybody but when it’s right it’s really right!

One of the main advantages of a QPRT is that it removes the future appreciation of a home from one’s taxable estate at a reduced value.  That is a million dollar house might be removed from your estate using only $600k of estate tax exemption. More importantly, the future appreciation is gone too!  Yes, future appreciation is OUT OF YOUR ESTATE. For our clients with estates that might be subject to estate tax after death this is huge.

Additionally as an irrevocable trust there is some protection from creditors. Some call this asset protection or liability protection. I hate to use that as a “selling point” but I do agree there is asset protection here and that’s important to consider.  Of course nobody should undertake asset protection if they know of a liability as that can be criminal. However, if you have no reason to know about a future liability or creditor then asset protection is a nice benefit of this trust.

Some people use QPRTs as a house management tool. Sort of like a partnership. They put a house into a QPRT, with a short QPRT period, and then the kids become the owners but in trust. This is like a partnership when set up right. It can NOT be used for income producing property but it can be used for a vacation property. We have many clients with vacation homes at Tahoe and Bodega Bay, for example, and QPRTs are excellent for those.

Lastly, QPRTs are simple and not that expensive to set up!

There are more benefits and advantages to a QPRT. Contact me to discuss how it may benefit YOU. -John

Estate Planning with Family LLC’s (FLPs)

I met with a client recently with family assets that would be perfect for a family LLC or FLP.  The client owned three properties with their siblings. There was a valuable home and two commercial properties.  Currently each sibling owned 1/3 and thus they are a de facto “general partnership.”  This is probably not the ideal set up for many reasons but mainly liability protection and control issues if one should die or become incapacitated.

General partners or revocable “family trusts” provide no liability or asset protection for the creators of the entity. Thus all the assets are subject to creditors claims and lawsuits!

With a family LLC the family retains control at the sibling level (not kids or spouses) and they have liability protection. These are the crucial benefits of the LLC.

To take it a step further they could utilize multiple family LLC’s to create a diversified asset protection.  Some people use this system when they feel their properties have higher than average risk of liability.

Lastly, they can utilize individual revocable living trusts to hold the LLC interests. This can allow for distribution of the LLC interests at death. Of course, the living trusts would also include wills, financial powers of attorney, medical powers of attorney, and other ancillary documents.

In short, the use of family LLC’s and revocable living trusts can create a great deal of asset protection and estate planning to reduce tax, avoid probate, retain control, and create some asset protection.

If you find yourself in a similar situation to this client please contact us to discuss YOUR case!


What will tax laws be in 2013 and beyond?

I saw the following in Stephen Leimberg’s Estate Planning Newsletter.  This week’s issue written by Marty Shenkman and Bob Keebler who are well known national experts on tax law. I will quote Mr. Shenkman and Mr. Keebler’s words and then provide a couple of points below that as my added commentary:

“Likely Changes to the Current Estate and Gift Tax Laws:

  • The estate and gift tax exemption may decline. While the law provides for a $1 million exemption in 2013, President Obama has proposed a $3.5 million exemption.   However, the gift tax exemption is unsettled and may be only $1,000,000.
  • The generation-skipping transfer (GST) tax exemption is scheduled to decline to $1 million inflation indexed in 2013, but again President Obama has proposed a $3.5 million exemption.
  • The estate, gift and GST rate is scheduled to increase from the current 35% to 55%, but President Obama has proposed a 45% rate.
  • Grantor retained annuity trusts (“GRATs”) may be required to use a 10 year minimum term. This will substantially increase the mortality risk for using GRATs making the technique ineffectual for older taxpayers. Numerous bills to restrict GRATs were proposed previously.  For example, the House of Representatives passed the Small Business and Infrastructure Jobs Tax Act of 2010 on March 24 (H.R. 4849). Changes may be patterned after this or other prior proposals.
  • Grantor trusts have been proposed to be included in the grantor’s estate; however existing grantor trusts will be grandfathered in.
  • Portability of the estate tax exemption is set to expire in 2013. However, President Obama has proposed that it be made permanent. Regardless of what happens to portability it seems to be the consensus of most tax advisers that the shortcomings of portability generally make it only a technique to rely upon when better proactive planning was not pursued, or in a limited number of other circumstances.
  • Valuation discounts have been proposed for restriction or repeal numerous times. This may be another avenue of raising revenues on the wealthy. For example, Code Section 2704(b) provides that valuation restrictions which are more restrictive than state law should be ignored. State laws have been intentionally changed, e.g. Nevada, undermining the intent of this provision by incorporating into state law the restrictions that support valuation discounts.  This might be viewed as a loophole appropriate to close. Other anti-FLP provisions might mandate that certain restrictions be ignored. This could include certain categories of restrictions, such as the lack of a definite term in an agreement, the creation by transfer of only an assignee interest, inability to withdraw capital, and so forth. Lock in features might be ignored
  • Restrictions to multi-generational dynasty trusts could be significant if President Obama’s proposal to limit the allocation of GST exemption to 90 years is enacted.
  • Other restrictions to intra-family transfers may be proposed.

The collective effect of several, or perhaps all of these types of changes, could change the face of estate planning in a profound manner. The effective date could wreak havoc with 2012 planning that may still be in process if changes are enacted before year end.    We may wake-up on January 1, 2013 to find an empty estate planners toolbox.”

A lot of the above is self-explanatory I think.  The tax exemption will likely be lower, tax rates likely higher and planning is important. However, focus on a couple of the above shows that the government is cutting into the planning options for the wealthy but they will likely be grandfathered in. This tells me you need to plan NOW. The loss, or restrictions, on valuation discounts could be huge for families utilizing planning vehicles like the Family Limited Partnership (or family LLC).  Likewise the restriction on avoidance of the generation skipping tax could be huge down the road. It’s not likely to have a large impact during our lifetime but future generations will notice a difference  Thus, the wealthiest of us need to be taking action NOW! Not next week or next month but TODAY! Call you estate planning attorney right now and get your planning started!

Veteran’s Day 2012 and estate planning

As an estate planning attorney I often have the pleasure of meeting with retired veteran’s. On this day we are reminded to say THANK YOU!  I forget the other days but am occasionally reminded when a retired vet comes in, often very elderly, with their WWII hats and the like. What an honor it is to serve these clients and help protect their family’s future!

I do standard estate planning and sometimes more advanced estate planning. I do wills and I do trusts. However, no matter what it is I do for these retired vet clients I am truly thankful that I can help them.

I hope I remember to say thank you to the next retired vet client I see… and I hope all of my readers remember this too.



Fiscal Cliff and transfer taxes

I remember back in late 2001 when they came up with the major tax changes of 2002. I suppose those can be categorically called the “Bush Tax Cuts.”  It seemed like the ultimate politician’s agreement… a temporary fix to the estate and gift tax laws.

How can an estate planning attorney plan with a temporary fix? It made no sense. Of course that temporary fix was set to be about 8 years through the end of 2010. You may recall the government set in place a gradual increase of the estate tax exemption each year or two from $1,000,000 to $1,500,000… and up to 2010 when there would be no estate tax.  Interesting side note is that throughout that time the gift tax exemption stayed at $1,000,000.

Throughout those years most experts confidently said that the government would never let the estate tax go away in 2010. Oh ya, and then 2010 got here and billionaires died and paid ZERO estate tax.

So at the end of 2010 the government came up with a two year temporary fix. This one good until December 31, 2012.  The current estate tax exemption is $5.12m but that’s set to go to $1,000,000 on January 1, 2013. Will it?  This is of course part of the fiscal cliff.

We are now less than 2 months away from the fiscal cliff and the experts are now suggesting maybe Congress will come up with a 6 month extension of the estate tax exemption. Then what?

The key is none of us know what the estate or gift tax exemption will be. However, we can tell you what it is TODAY. As of today, November 8, 2012, you can give away $5,120,000 tax free during life or at death (but not both).

If your estate is anywhere close to this you probably should meet with an estate planning attorney quickly.

“Mr. Jefferson” in Court

Sherman Hemsley is deceased… and just like the Jefferson re-runs will go on forever… his probate case may also.  This is an interesting one and it clearly underscores the importance of a really good estate plan. Mr. Jefferson was a very successful businessman on the Jeffersons. My recollection is he made his money in the dry cleaning business. In fact, you may recall he was neighbors with bigoted Archie Bunker before he moved on up….

Fast forward 25 years and Mr. J is dead but a fight persists in probate Court!

His long time partner is battling against a brother who has come out of the woodwork and a distant cousin too.  No matter how successful a person may be that doesn’t mean they get a good estate plan.  He apparently died with a will but not a good one.

If you have family that may come out of the woodwork hire a good attorney and get your plan set up air tight!

Link to article on the Hemsley latest.

Who are you voting for today?

This blog is about taxes and specifically transfer taxes. That is, gift, estate, capital gains, and general income taxes. This is not a political commentary or a commentary about other aspects of who you vote for. I am only talking about the tax angle.

With that caveat said the question is does it matter who you vote for?

Again, just in terms of taxes. I am not talking about national security, abortion, gay marriage or any other issue. Just TAXES.

So, I again ask does it matter who you vote for?

That is, if Obama wins will your transfer taxes be off the chart high?

Likewise if Romney wins will your transfer taxes go away?

I have received many invitations for legal and tax seminars aimed at discussing what will happen depending on which candidate wins today. In my opinion those “experts” don’t know and, I am not sure it really makes that huge of a difference. I guess we shall see on that, eh!?

My opinion, based on everything I hear, is that taxes will likely be a little higher if Obama wins than if Romney wins. However, all the people that act like it’s either going to be extremely high tax or extremely low tax are off the mark.

Estate and gift taxes are not going away. It’s that simple. There will be an estate tax when you die. The question is what will the exemption be? If Romney wins I could see a $3.5 to $4m estate tax exemption or unified credit that equals that amount of tax free transfer. If Obama wins maybe it’s $2.5 or $3m.  Yes, I am GUESSING.

Taking that a step further does this directly effect most of us? No, of course not. Yes, there are arguments to be made about the trickle down affect and all that but in reality a lot of us talk about estate taxes but few of us have $2.5 or $3.5 million.

Similar analysis could be done on the other transfer taxes. That is, will there likely be a slightly higher capital gains tax if Obama wins than if Romney wins? Sure, logic and history would tell you that’s the case. However, if Romney going to abolish the cap gains tax? Or is Obama going to triple the cap gains tax? I would guess no on both accounts.

Good luck to both candidates and best of luck to all of us whoever wins!

Federal AFR Rates – November 2012

Right from the horse’s mouth, so to speak, here are the November 2012 AFR rates straight from the IRS website:
Section 1274.–Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property

(Also Sections 42, 280G, 382, 412, 467, 468, 482, 483, 642, 807, 846, 1288, 7520, 7872.)    Rev. Rul. 2012-30
This revenue ruling provides various prescribed rates for federal
income tax purposes for November 2012 (the current month). Table 1
contains the short-term, mid-term, and long-term applicable federal rates
(AFR) for the current month for purposes of section 1274(d) of the Internal
Revenue Code. Table 2 contains the short-term, mid-term, and long-term
adjusted applicable federal rates (adjusted AFR) for the current month for
purposes of section 1288(b). Table 3 sets forth the adjusted federal longterm rate and the long-term tax-exempt rate described in section 382(f).
Table 4 contains the appropriate percentages for determining the low income housing credit described in section 42(b)(1) for buildings placed in  service during the current month. However, under section 42(b)(2), the
applicable percentage for non-federally subsidized new buildings placed in
service after July 30, 2008, and before December 31, 2013, shall not be
less than 9%. Finally, Table 5 contains the federal rate for determining the
present value of an annuity, an interest for life or for a term of years, or a
remainder or a reversionary interest for purposes of section 7520.


REV. RUL. 2012-30 TABLE 1
Applicable Federal Rates (AFR) for November 2012
Period for Compounding
Annual Semiannual Quarterly Monthly

AFR .22% .22% .22% .22%
110% AFR .24% .24% .24% .24%
120% AFR .26% .26% .26% .26%
130% AFR .29% .29% .29% .29%


AFR .89% .89% .89% .89%
110% AFR .98% .98% .98% .98%
120% AFR 1.07% 1.07% 1.07% 1.07%
130% AFR 1.16% 1.16% 1.16% 1.16%
150% AFR 1.34% 1.34% 1.34% 1.34%
175% AFR 1.57% 1.56% 1.56% 1.55%


AFR 2.40% 2.39% 2.38% 2.38%
110% AFR 2.65% 2.63% 2.62% 2.62%
120% AFR 2.89% 2.87% 2.86% 2.85%
130% AFR 3.13% 3.11% 3.10% 3.09%


REV. RUL. 2012-30 TABLE 2
Adjusted AFR for November 2012
Period for Compounding
Annual Semiannual Quarterly Monthly
adjusted AFR .24% .24% .24% .24%
adjusted AFR .98% .98% .98% .98%
adjusted AFR 2.84% 2.82% 2.81% 2.80%
REV. RUL. 2012-30 TABLE 3
Rates Under Section 382 for November 2012
Adjusted federal long-term rate for the current month 2.84%
Long-term tax-exempt rate for ownership changes during the
current month (the highest of the adjusted federal long-term
rates for the current month and the prior two months.) 2.87%



REV. RUL. 2012-30 TABLE 4
Appropriate Percentages Under Section 42(b)(1) for November 2012
Note: Under Section 42(b)(2), the applicable percentage for non-federally
subsidized new buildings placed in service after July 30, 2008, and before
December 31, 2013, shall not be less than 9%.
Appropriate percentage for the 70% present value low-income
housing credit 7.38%
Appropriate percentage for the 30% present value low-income
housing credit 3.16%
REV. RUL. 2012-30 TABLE 5
Rate Under Section 7520 for November 2012
Applicable federal rate for determining the present value of an
annuity, an interest for life or a term of years, or a remainder or
reversionary interest 1.0%

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10.0John Bernard Palley
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