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Our Palm Desert estate planning attorneys continually see clients who have not updated their Will or Trust since it was first established….20 or more years ago. Although out-of-date documents are better than no document at all, current and updated documents are best. Estate tax laws change regularly and so do changes in state laws regarding estates and trusts. We recommend clients review their estate planning documents at least every five years. However, there are some circumstances which necessitate reviews and revisions sooner than the five year mark.

MAJOR FAMILY LIFE CHANGES
If your immediate family experiences a major event such as a marriage, death or birth, you should review your current documents.

SIGNIFICANT CHANGES IN ESTATE TAX LAWS
Current estate tax rates and exemption levels are set to end on December 31, 2012 absent an act from Congress. The new law effective January 1, 2013 is dramatically different than our current laws.

CHANGES IN REAL PROPERTY
When you buy or sell a home you need to revisit your estate plan and make sure you update your documents to reflect this change. If you have a trust, make sure that all new pieces of real estate are vested properly.

FINANCIAL SUCCESSES AND SETBACKS
Whether you sold a business and are expecting significant financial gains or realized considerable losses, you need to review your plan. Some estate planning mechanisms may no longer work for your changed financial status.
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The current estate tax laws are likely to revert to pre-EXTRA levels beginning on January 1, 2013. This means that the estate taxes will be levied at estates over $1,000,000 with a tax rate of up to 55%. Considering the value of real property, life insurance and retirement accounts many individuals may find themselves included in the estate tax bracket. However, 2012 has historically low tax rates and historically high exemptions which allows for creative and unique planning before January 1, 2013.

GIFTING

The current lifetime gift exemption is $5,000,000. The annual exclusion amount is currently at $13,000 but an individual can give up to $5,000,000 during life tax free. This gift exemption is scheduled to go back to $1,000,000 as well in 2013. Therefore, 2012 is a great year for making lifetime gifts.

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A Successor Trustee must follow all the provisions in the actual Trust document. However, a California Trustee must also follow the rules and procedures mandated by the California Probate Code. The following are some of the most common pitfalls that get Trustees into Trouble.

Failing to serve the required Notice to Beneficiaries AND heirs-at-law

Whenever a Trust becomes irrevocable, or there is a change in Trustees of an irrevocable Trust, the Trustee must send out notice pursuant to Probate Code § 16061.7. Failure to give timely notice or no notice at all can open the Trustee up for personal liability as well as allow for any beneficiaries or heirs-at-law to contest the trust for a prolonged period.

Failing to Account

Some Trust documents waive all accounting and thus a Trustee may believe that he or she is not required to provide any accounting. However, under California law a Trustee must account at least annually and any waiver of such accounting is against public policy.

Failing to Act Impartially

Trustee must act impartially among all the beneficiaries of a Trust. Favoring one beneficiary over another may result in a breach of fiduciary duty.

Failing to Keep Trust Assets Separate

A Trustee must manage an estate completely separate from the Trustees own personal assets. Trust accounts have their own EINs and must be vested in the name of the Trust, not the Trustee individually.
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A Conservatorship is a legal proceeding where a judge appoints an individual to care for another adult who is incapable of caring for themselves or managing his or her own finances. If you have a complete estate plan which includes a Durable Power of Attorney and an Advance Health Care Directive, then a conservatorship can usually be avoided. However, there are times when this proceeding is absolutely necessary and thus you should nominate a conservator while you are living. This can easily be accomplished by including nomination language in your Durable Power of Attorney or your trust instrument. If you do not nominate someone, then a judge will appoint someone over you and possibly your estate.

A recent article in the Los Angeles Times highlights the need to have your wishes clearly defined with respect to your potential conservator. The infamous Zsa Zsa Gabor is in poor health at the age of 94 and requires a conservator to manage her heath care and finances. Zsa Zsa’s daughter petitioned the court for appointment as conservator but was denied in favor of Zsa Zsa’s husband, Frederic von Anhalt, and a team of attorneys. Von Anhalt will serve as conservator of the person (making medical decisions for Zsa Zsa) while several attorneys will oversee Zsa Zsa’s finances.
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A Trust is a written document that directs where your assets go when you die. However, unlike a will, a trust is a private instrument that does not require court intervention. If you have a trust you will avoid the court directed probate process and your estate can be administered privately and promptly.

Traditionally, trusts are used as probate avoidance techniques. However, Trusts are also beneficial for individuals wanting to have more control in the distribution of assets. Assets are distributed outright when they are distributed through probate, beneficiary designation or pay-on-death. A trust can instead provide that assets remain in trust until a beneficiary reaches a certain age, accomplishes some goal or indefinitely.

Trusts are especially helpful, yet overlooked, in the case of parents with young children. Many parents with minor children may still be establishing a career and may not be as financially secure as other adults. They may believe they do not have assets that warrant establishing a trust. However, they usually have substantial life insurance policies. Naively, the beneficiary designations on these policies generally lists the spouse first and then the children. The problem with this beneficiary designation is what happens when both parents die while the children are still minors? In this scenario, the life insurance policy will retain the proceeds until the children reach the age of 18. During the child’s minority, his or her guardian will not have access to these funds to care for the child. Additionally, the child will get the entire proceeds of the policy upon his or her 18th birthday. To avoid designating your minor children as the life insurance beneficiary, you can name your trust as the beneficiary after your spouse. This allows the trust provisions to designate when, where and how the proceeds are distributed.

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New parents have a lot on their minds. Between 2:00 a.m. feedings and baby proofing, most parents have not even begun to think about making a will. This is a grave mistake. Having a valid will is one of the most important things you can do for your child.

Although wills can designate who will inherit your bank accounts, real property and jewelry, more importantly, they designate a legal guardian for your children. All children under the age of 18 require a legal guardian. While parents are still living they enjoy this role. However, when parents die leaving minor children a court must decide who will be appointed legal guardian. If you have a will, you can designate who this person will be. If you do not have a will, the courts will decide for you.

Designating a guardian for your children is probably one of the toughest issues parents face. Should it be grandma? Or your best friend? Or your sister who lives 3,000 miles away? Every family is different and every child is different. In one family it may be grandma who is best suited for this role. In another it may be a friend and not a family member at all who is the best person to care for your children. Once you have decided who the individual is you must put it in writing in your will.

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Everyone needs an estate plan. However, too often we get calls to do an emergency house call because Mom or Dad received a bad prognosis and doesn’t have any estate planning documents in place. While we endeavor to accomplish the needs of these individuals, sometimes we simply cannot. California law requires that an individual have testamentary capacity to sign a Will or Trust. A person is not mentally competent if she or he doesn’t understand the nature of the document, cannot remember the nature and types of his or her property, and doesn’t recall his or her relations to living relatives.

A dementia diagnosis does not automatically prohibit someone from having testamentary capacity. However, it is crucial to have your estate planning documents in place before you become severely ill or disabled. Children whose parents suffer from a memory disorder should try and determine if Mom or Dad has sufficient planning before the disorder gets worse. This does not mean that children should have access to Mom or Dad’s will, but an honest conversation with parents about the state of their affairs is certainly prudent. Too often we have clients come in trying to sort of their parents’ estate because they were too embarrassed to talk to Mom or Dad while they were living.

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A recent article in the Wall Street Journal claims that the baby boomer population will find themselves without a hefty inheritance from their parents. Traditionally, children could expect to receive something from their parents when mom and dad died. Unfortunately, many baby boomers have relied on this notion as a way to pay for retirement. They expected to cash in on mom and dad’s estate only to find that no such estate exists. Many have not properly funded their own retirement while also suffering from huge financial losses in 2008.

Individuals are living longer and requiring more money for their living and medical expenses. Although these parents were diligent savers, they did not expect to live into their 80s and beyond. Longevity is a blessing and unfortunately a financial curse for some families. Baby boomers are finding themselves in the scary situation of expecting zero inheritance while simultaneously dipping into their own financial pockets to pay for their parents’ care.

The anxiety surrounding inheritance and financial woes is often worsened by parents’ refusal to discuss such issues with their children. Many parents are uncomfortable discussing finances with anyone, let alone their own children. However, an open discussion can help ease anxieties and create valuable planning opportunities for both parents and children. It can also set realistic goals and expectations for future expenses.

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The tax law changes enacted in 2010 under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act made significant changes to estate and gift tax laws for 2011 and 2012. However, these changes will expire at year’s end barring an act from our legislators on Capitol Hill. Estate planning attorneys and their clients find themselves in the same predicament they experienced at the end of 2010. Back then, it appeared that exemption amounts would decrease to pre-2000 levels beginning on January 1, 2011. Again, if Congress fails to act (and because this is a presidential election year such a fear is warranted) the estate and gift tax world will resemble that of 1999.

Important Changes for 2013

ESTATE TAX EXEMPTION
The estate and gift tax exemption is $5,120,000 for 2012, but will decrease to $1,000,000 in 2013.

GENERATION-SKIPPING TRANSFER TAX
The GST tax is currently $5,120,000 but will decrease to approximately $1,390,000 in 2013
TAX RATES
Estate, gift and GST tax rates are capped at 35% in 2012 but will increase to 55% in 2013
PORTABILITY
Estate tax exemptions were made portable in 2011-2012. This means that one spouse can port his or her unused exemption amounts to the other spouse on the first spouse’s death. This portability option will expire in 2013.

The uncertainty of the next six months is a valuable time for creative estate planning and gifting opportunities. Many clients with substantial wealth may find outright gifts very attractive. They can transfer some of their wealth during life and enjoy the lower tax rates and higher exemption amounts available for 2012. Additionally, many estate plans should be reviewed to ensure that there are no unintended tax consequences under the new law.
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Until recently, it was pretty easy to determine heirship. If you died leaving children, they were your heirs. However, in an age of assisted reproductive technologies (ART) the definition is becoming significantly murkier. Today, you may have biological children born years after your death. Are these children your heirs? Do they have rights to your property and estate in the same way that children born during your life enjoy?

These are some of questions facing the United States Supreme Court this term in Astrue v. Capato. In this case, a Florida widow used the frozen sperm of her deceased husband in a successful in vitro fertilization giving birth to twins eighteen months after her husband’s death. She subsequently applied to the Social Security Administration for surviving child’s insurance benefits. The Social Security Administration denied the benefits and the woman appealed. The District Court affirmed the finding because Florida intestacy laws would not recognize the twins as children of the deceased husband. The woman then appealed to the 3rd Circuit which reversed the District Court’s ruling. Now, the case will be heard in front of the United States Supreme Court for clarification of the definition of the word “child.”

The finding by the Supreme Court will likely have widespread implications for Social Security Administration benefits. However, children born through ART may still face challenges under state inheritance laws. If heirs can include posthumously conceived children then presumably probate estates would need to be open indefinitely.

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AV PREEMINENT
State Bar of California
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Phone: 760-340-0034Fax: 760-340-0035

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