If President Obama’s 2014 budget is any prediction of the future the 2013 “permanent” estate tax law changes are not very permanent. Or, put another way, only politicians would call them permanent! I have read, in recent days, that President Obama is proposing going back to 2013 estate tax levels. That would mean a $3.5m exemption and a 45% tax rate. Read more on this web site HERE.
It’s been said many times that an estate plan is just that… a PLAN. Yes, it’s a group of form derived documents but, as I always say, it’s knowing WHICH FORMS to use. However, it’s more than that. One of the fundamental keys to an estate plan is for the client to understand how the documents work together. Yesterday a client asked me to explain the durable power of attorney document to them. To merely explain that one document by itself was made easier by showing how to fit into the PLAN. Here is an overview of the estate planning documents most commonly used in California.
The revocable living trust is the main document. It is the hub of the plan. The revocable trust holds most assets for most of our clients. It will hold the house, other real estate, bank accounts, stock accounts, and other investments. It will basically hold everything except the retirement accounts. In some cases even the retirement accounts will fund into the trust after death. The trust is effective while you are alive, and after death, for all assets that are in the trust.
The will, or pour over will, is next. It is only effective AFTER DEATH and only effective as to assets that are not in the trust and that do not have beneficiary designations. Typically this would be personal property only. A will is necessary as the pour-over action acts as a back up to get assets into the trust. However, it’s of limited application in most cases.
The durable power of attorney for financial affairs is next. It is only effective BEFORE death and only effective as to assets that are NOT in the trust. It also is often helpful for quasi-financial matters like dealing with the DMV and the post-office. Again, this ends at death.
The last main document is the advanced health care directive. It is totally separate from the other 3 documents. It deals with medical only. It generally is only applicable before death. However, there is carry over action, after death, for dealing with final disposition issues.
There are many ancillary documents which we will talk about it in the coming days. Those are: quitclaim deeds, general transfers, certified extracts, hippa releases and bank letters. Stay tuned!
I was asked to speak today to the Sacramento County Bar probate and family law joint meeting. That is, the monthly meetings normally take place separately. One for the probate/estate planning attorneys and one for the family/divorce attorneys. Today they met together. With me, on the panel, were two divorce attorneys and a superior Court Judge who does both family and probate law.
The issues were interesting running through many crossover issues between estate planning and family law. That is, what happens if you are about to get divorced and you get your estate plan done? Or what happens if you have a family law custody case, someone dies, and then someone files for a probate guardianship? Or change of beneficiary forms during divorce? Or how the automatic restraining orders apply to wills and trusts? Would an unfunded trust be ok during the divorce? Or what happens if a person dies during the divorce? We went through these and several other similar issues.
In the coming days I will answers them so stay tuned!
Let me start by saying that I love timeshares. I enjoy staying at timeshares on vacations. You can meet many friendly people while BBQing your dinner, sitting by the pool, playing ping pong, or at some of the organized activities. I also think they are fascinating from a business perspective. I like reading about the exchanges between timeshare salespeople (who seem to trump used car salesmen for stories) and innocent vacationers. This post is not to bash on timeshares but is merely a reminder of some things to think about when you are buying a timeshare.
Yes, a timeshare is an asset. In fact, just as the salesperson told you, it can be willed to your kids or other loved ones. I try to always ask clients about any timeshares they own when going through my estate planning questionnaire. I want to make sure to include it in their plan.
Owning a timeshare in a trust is important to make things easy on your loved ones. This is especially true for out of state real property (“deeded”) timeshares. If you live in California and own a deeded timeshare in Hawaii, Nevada or elsewhere you should be sure to put your timeshare into your living trust. This can be a huge problem after death!
However, today’s blog post is not focused on the asset planning side of timeshares. I want to talk about the side that the salesperson probably didn’t tell you as you sat on the patio overlooking the might Pacific ocean. They told you it’s an asset that can be willed to your kids. Did they tell you it’s a LIABILITY that can attach to your estate like a leech and never let go?
Maintenance fees or “MF’s” to timeshare experts are not talked about at great length during the typical timeshare sales presentation. Yes, it’s mentioned but it’s not mentioned that those MFs keep going, after you die, like the energizer bunny! They keep piling up until someone does something, legally, to stop it.
Your timeshare is actually a CONTRACTUAL OBLIGATION. It’s a contractual obligation where you agree to keep paying MFs until the end of time. The problem for your family is they can’t just disclaim the timeshare because the liability is still there. The liability attaches to your estate. A timeshare company could literally open probate, as a creditor, and suck assets out of your estate. If there are no probate assets it can get a judgement and go after trust assets. In some cases it can get a judgement and go after individuals who received assets from you at death.
I am not saying your family will have this happen but they can. Many timeshare companies will except the deed back, after death, and not go after the estate. However, that’s not a guarantee.
This problem is compounded when the timeshare is not in a trust. It’s compounded because your loved ones have to somehow clear title and this often means probate Court. In a case where the timeshare is in another state this can mean a multi-state probate. This means BIG MONEY! This often means spending much more money on the probate than the timeshare is worth just so your kids can give the timeshare back to the timeshare company or sell it (or give it) to someone else it.
If you have a trust then talk to your attorney about getting your timeshare into it. If you don’t have a living trust, and are in California, contact me to get one set up! -John
Why do you or your lawyer sometimes want or need a continuance in your probate Court?
There are some cases where a continuance is needed. For example, I am appearing today, via CourtCall, in Los Angeles Superior Court to ask for a continuance on a case. The case is extremely complicated and we have not been able to supply enough information to the Court for them to approve our petition. Though it’s likely the Judge may not grant it, in the end, there is no harm in getting a continuance to re-evaluate the options.
There are other cases where a continuance is a good idea for various reasons. Sometimes it’s a strategic thing where there is a reason to slow the case down. Or maybe it’s a cautious thing to make sure that every last tax issue is solved and every last creditor is resolved. Occasionally there are wild cards and thus a continuance is good to clear the air.
Is a continuance a bad thing?
In my opinion a continuance is rarely a bad thing. Yes, there are times when the attorney has made a mistake and yes that would be a bad thing. However, more typically it’s because the Court needs more time to review, the Court wants to give opponents time to file objections or the Court wants you to beef up your case regarding particular issues.
Do you have control over the decision?
Usually. I say usually because most often it is the client’s decision to get the continuance. However, when the attorney is not able to get the client’s desires then they typically will make the decision for them. A continuance is always safer than letting the Judge rule against you!
Can a continuance be had merely by a person showing up in Court and asking the Judge?
Sometimes. You never want to rely on this as there are some Courts who will not grant the continuance merely by the request of an objector. Thus you may need to file something in writing which would likely create the need to pay a filing fee (currently $435 in California). However, you need to be careful about making sure that it is not construed as an objection in case there is a no contest clause in the will or trust. Thus a “request for continuance” might be a softer way to label the document.
If you have questions about seeking continuances in probate or trust matters ask me. I am happy to answer!
I came across an interesting case lately that I thought I would share. Though the information will be a public record, in Court, I have modified the names, dates and particulars for privacy purposes. Here are the facts:
- Harold wrote a standard will (some call it a “simple will” or a “last will and testament”) in 1995 giving everything to Wendy.
- Harold and Wendy got married in 1996.
- Debbie was born to Harold and Wendy in 2001 and is thus a minor (i.e. under 18).
- Harold inherited property from his dad in 2010.
- Harold has personal debt, in his name alone, of approximately $50,000.
- Harold and Wendy lived in the inherited property.
- Harold died in 2012.
For simplicity let’s just say the home that Harold inherited from his dad is the only asset we are dealing with. Let’s assume that Harold and Wendy had no other assets of significance.
At first blush I was going to advise that Wendy file a spousal property petition. That would be a little less of a target for Harold’s creditors than a full probate but would clear title to the house. That is, Harold’s will says Wendy gets 100% of the assets.
Aha! Ahahhh! Debbie, the daughter, is a pretermitted heir or omitted child. That is, when Harold prepared his will he gave everything to Wendy. However, the law assumes that if Debbie had been alive he would have wanted to give something to her.
In fact, the law presumes that with separate property (in this case it’s inherited so it’s separate and not “community”) the law assumes Harold would have wanted to give his one child 50% and his wife 50%.
The fact that Harold has a will doesn’t matter. It’s as if the will is invalid as to the distribution paragraph. The law re-writes that to make it 50/50.
Thus, the inherited property is in Harold’s name and Wendy is forced to file a full probate. In that probate she only gets 50% and Debbie gets the other 50% which will be held until she is 18.
A full guardianship may be required by the Court to protect Debbie’s interests.
Harold’s creditors will now have an easy target to go after as a full probate creates an easy pool of assets for creditors to attack.
A probate is much more expensive than a spousal property petition.
If only Harold had written a new will after Debbie was born!
Situations like this are real and they happen every day! Get your estate plan made while you are healthy as you never know what will happen. If it’s too late, and you are cleaning up an estate after death, contact me to walk through all the options. Sometimes there are hidden answers that are not obvious on the surface.
A person asked me the other day to explain the step-up in basis rules. This can be very complicated so I will digest down to the very basic elements. Let’s say dad buys a house for $25,000 in 1966. Let’s say that house is now worth $300,000. If dad sells the house while he is alive he can likely qualify for the $250,000 exemption upon sale. That is, if he sells the house for $300,000 with a basis of $25,000 (let’s assume no adjustments to basis) he has a $275,000 gain on sale. However, he has the $250,000 exemption if he has lived in the personal residence for two of the last five years. That leaves only $25,000 subject to tax upon sale. Between federal and state capital gains tax you are probably talking 25-30% in California so $5k-$10k in tax to be paid.
The problem that some people create is they try to outsmart the law and avoid attorney fees. They come up with a master plan to avoid probate and avoid attorney fees. They will simply transfer the house from dad to son now, before death. Ok, there is a $5,240,000 gift tax exemption so the transfer is without gift tax as the house is only worth $300,000. However, what happens when son sells? Son receives dad’s basis of $25,000 and thus he is facing a $275,000 gain on sale. You can do the math… BIG TAX BILL!
The best answer, in most cases, is to let the house transfer from dad to kids at his death. By doing this the kids will receive a STEP-UP IN BASIS! A step-up in basis happens when a property transfers at death. It gives the inheritors the decedent’s date of death value as their basis. Thus $300,000 is the new basis. If the property is then sold for $300,000 there is ZERO TAX upon sale!
A huge problem we have encountered more and more lately is changing the mortgage from the deceased’s name into the family’s name. That is cases such as two I have right now where the property is in the deceased spouse’s name. I can easily transfer the title of the house by a spousal property petition. However, what about the mortgage? It’s in the decedent’s name too. If the Court order transferring title isn’t enough then we can piggy back it with a petition for letters of special administration. That petition can, and should, be limited to talking to the mortgage company about the mortgage. Court’s are not inclined to approve petitions for special administration unless they are emergencies and/or very limited and focused. In our office we do these procedures a lot, in counties throughout California, and can guide you through hte process. The key is knowing your options. Talk to an experienced attorney before you file! -John
Later today I am speaking to a group of Realtors at the Lyon Real Estate office in Folsom. I will be giving them a refresher course on transferring and selling real estate after death. Here’s my outline:
LYON REAL ESTATE – Folsom, CA
February 27, 2013
By: John B. Palley, Esq.
- Johnson, Fort, Meissner, Joseph & Palley
- Since 1979
- 8 attorneys
- Estate planning, probate, business, real estate, and related litigation
- Offices in Sacramento and Roseville – Practice throughout California
- John Palley is a Certified Specialist in Estate Planning, Trust and Probate
- Brief refresher on Estate Planning for Real Estate
- Real Estate sales in probate administration cases
- Real Estate sales in trust administration cases
- Some thoughts on pursuing probate and trust listings
B. Topics today (all related to selling real estate I hope):
II. Brief refresher on Estate Planning for Real Estate
- Transfer by deeds before death
1. Tax basis problems
2. Creditor problems
3. Out of order death problems
- Transfer by deeds after death (“Joint tenancy” and CP with ROS)
- Wills – Simple but some type of probate required when there is real estate
- Living Trusts – Great solution for most people that own real estate in CA
- Other Estate Planning (LLC’s, FLPs and QPRTs)
- Don’t forget about the property tax issues
- Don’t forget title companies make the law but are not perfect
III. Real Estate sales in Probate Administration
- Different types of probate if property worth less than $150,000
- Probate is a formal process that takes 7 months minimum
- The probate code (PC) and the Judge create a formal process
- The PC lays out strict guidelines for collecting assets & dealing with creditors
- When can you sell property in probate?
- Listing Agreements – Probate form recommended but not required – 90 day
- Probate Sales Form
- Probate Advisory Form
- Short Sales in Probate? (Protecting other estate assets)
- IAEA v. Non-IAEA (PC 10452 v. PC 10309)
- Selling Upside Down Houses in Probate – PC 10360 et seq.
- Notice of Proposed Action and/or Court Confirmation (waiver is possible)
- Document all marketing and pricing work very carefully
- Standard commissions
- Disclosures that are not provided by PR or trustee: The Transfer Disclosure Statement, The Seller’s Questionnaire, Earthquake Hazard Booklet, Earthquake Hazard Questionnaire, the signature on the Natural Hazard Disclosure but the report needs to be provided, and Smoke Detector Compliance.
- Disclosure that are required by PR or trustee: Lead Based Disclosure, Data Base Disclosure (Megan’s Law), Water Heater Disclosure and strapping, and disclosing anything that is personally known by the representative.
IV. Real Estate Sales in Trust Administration
- Overall a trust administration is much simpler than a probate but….
- Probate code says “may” instead of “shall” for trust administration
- Court not involved unless someone gets them involved
- Simpler than probate but lots of traps (Notice plus specific gifts)
- Duty to inform – Probate Code 16060
- When can you sell a house owned by a trust?
- Listing Agreements – Probate form recommended but not required – No max
- Trust Advisory – CAR Form TA
- Short Sales in Trusts? (Protecting other trust assets)
- Selling Upside Down Houses – Convert to probate?
- Disclosures (still must disclose known material facts)
- Notice of Proposed Action and/or Court Confirmation – 45 day – PC 16500
- Document all marketing and pricing work very carefully
- Standard commissions
- Crossover between trust administration and probate when there is a trust but
house is not titled in trust at death – “Heggstad” petition
V. Pursing Probate and Trust Listings
- Probate Court records are public (some Courts are relatively accessible on-line)
- Lots of low ball offers by investors
- Contact attorney or contact the individual?
- Make it easy if you contact attorney (Case Name)
- Customer service is still what wins you clients
- Working with a qualified probate attorney will make you look good
- Title companies are the actual makers of law!
- Contact me with any questions!
John B. Palley, Esq.
JOHNSON, FORT, MEISSNER, JOSEPH & PALLEY
1555 River Park Drive, Suite 108 Sacramento, CA95815
916-920-5983 (Ph) 916-920-9379 (fax)
THINGS A PROBATE/TRUST LAWYER LIKES TO SEE IN A
REAL PROPERTY SALE
1) Market Analysis Report in writing
2) Probate Listing Agreement
3) Marketing Plan
4) Keep detailed log of all marketing and offers
5) Use of Probate Sales forms
6) Fax/email agreement once fully signed
7) Title company information to attorney
8) At least 20 (or 45 – trust) days for escrow unless discussed beforehand
9) Final closing statement
10) Plus, everything you would do for a “regular” client!