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A recent study in 2011 found that more than 50% of Americans do not have an estate plan. Furthermore, the study found that 92% of adults under 35 do not have one. A favorite saying among estate planning practitioners is, “Everyone has an estate plan. If you don’t create it yourself the State of California will create one for you.” This simply means that if you don’t create your own plan then the State of California will tell your family members where your assets will go upon your death. This is called intestate succession. To avoid this, everyone, young or old, should have a Last Will and Testament. A Durable Power of Attorney and Advance Health Care Directive are two additional necessary documents that every person should possess.

Last Will and Testament

This document outlines who you would like to inherit your assets at your death. You nominate an Executor to administer your estate and you can also nominate a guardian for any minor children you may have at the time of your passing. You can also nominate a pet guardian for any pets that you may leave behind as well. This is the most basic form of estate planning. Having a Last Will and Testament will allow you to have choose who will inherit your assets but it will necessitate a court proceeding called, “probate” in order for these assets to pass to your heirs.

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Probate attorneys are well versed in handling contentious probate estates. Usually the problems involve money and beneficiaries and most of the time these problems are never publicized. However, probate problems with famous estates are a different matter entirely. These cases highlight the necessity for good estate planning for everyone.

Rosa Parks was a national figure in the civil rights campaign of the 1950s-1960s. She famously refused to give up her seat on a bus which launched the Montgomery Bus Boycott and became an integral part of the civil rights movement. However, she continued to receive publicity even after her death in 2005 but this time for an entirely different reason. Her last will and testament became part of a six year legal battle in a probate court in Wayne County, Michigan.

At the heart of the matter was a challenge to the validity of Parks’ will between Parks’ nieces and nephews and a charity she designated to receive her estate. The parties finally reached an agreement that gave the family members 20% and the charity the remaining 80% of the estate. However, the litigation could have been avoided entirely with better estate planning documents.

A good estate plan will designate with specificity what your wishes are regarding your entire estate. It will outline to whom you want to receive certain gifts. It will also be clear why you’re choosing to disinherit some heirs. Furthermore, the circumstances under which an estate plan is created should be carefully examined. Estate plans are more likely to be subject to challenges when they are done while an individual is ill, has been diagnosed with a disease, or when there is apparent duress.

Rosa Parks’ estate is a great example why individuals need to have good estate planning documents. No one wants to assume that their heirs will challenge their will but unfortunately this happens all too often. However, with good documents these challenges are less likely and very often completely avoided.
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Some states are better than others for decedents dying in the year 2012. Although California boasts a relatively high income and sales tax, it is actually a great place to die for tax purposes. As a way of background, it is important to understand some different terms. An estate tax is a tax paid by the estate of a decedent. An inheritance tax is paid by heirs who receive a distribution from an estate. The Federal estate tax exemption is currently set at $5 million indexed for inflation. There is no federal inheritance tax.

The California estate tax was phased out in 2005 and heirs have not paid an inheritance tax since 1982. However, Washington D.C. and 22 other states do impose an inheritance or state estate tax. Most of the states that impose the estate tax exempt around $1 million per estate with the highest tax rate at 16%. Kentucky and five other states impose only an inheritance tax. Pennsylvania, for example, imposes an inheritance tax of 4.5%-15% on money left to anyone other than a spouse. New Jersey and Maryland impose both taxes. New Jersey imposes an estate tax of up to 16% with the lowest state estate exemption of $675,000. New Jersey also imposes an inheritance tax from 11-16% on money left to nieces, nephews or friends but no inheritance tax on money left to parents, siblings, children or grandchildren.

Coinciding with federal changes in estate tax law, many states revamped their laws regarding estate taxes in 2011. Ohio abolished their estate tax effective January 1, 2013 while Illinois brought back its estate tax for decedents dying in 2011 and after. Connecticut lowered the exemption amount from $3.5 million to $2 million per estate. North Carolina, Rhode Island, Vermont and Maine all raised their exemption amounts.

Estate taxes continue to raise numerous questions and concerns for families today. However, California residents have far less concerns since we have a more favorable tax system for decedent estates.
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The IRS released the final version of Form 8939: Allocation of Increase in Basis for Property Acquired from a Decedent. This is the form necessary to elect out of estate taxes for decedents who died in 2010. The form was originally due November 15, 2011 but because of delays and ambiguities in the form it is now due January 17, 2012. The IRS released Notice 2011-76 setting the new deadline and giving some guidance on the form’s application.

Even though the thought of paying no estate taxes seems like a great idea, personal representatives and trustees need to meet with their attorneys and CPAs before making this election. The increase in basis of assets held by a decedent may not actually outweigh the benefit of paying no estate taxes. For more information on this form and its implications check out our previous article here.

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The staff at Burt + Clerc love to support those who help others. The annual “Paint El Paseo Pink” walk event will be held on October 15, 2011. Hundreds of individuals will walk up and down El Paseo to raise money for the Desert Cancer Foundation. Desert Cancer Foundation is a charity organization that helps local residents suffering from cancer. We love these individuals and we support their charity work. As a way of saying thanks, every year Burt + Clerc gives out free water bottles to everyone (man, woman, child and pet alike) who participates in this incredible event.

Come out with your walking shoes and sunglasses and walk for a great cause. We’ll be outside wearing pink and handing out our now famous “thank-you bottles.” To register, please visit the Desert Cancer Foundation’s website here.

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After a long-awaited delay, the IRS finally issued some guidance on August 5, 2011 with respect to the filing of the new Form 8939. Notice 2011-66 describes how administrators can opt-of estate taxes for decedents who died in 2010 using Form 8939. Revenue Procedure 2011-41 outlines the tax rules that apply to these “opted out” estates.

Last December, Congress finally approved a new law on estate taxes. This law set the exemption at $5,000,000 and the tax rate at 35%. The law was also made retroactive to January 1, 2010 but allowed for an intriguing twist. If someone died in 2010, the administrator had two choices. They could operate under the old law where there were no estate taxes. Or, they could use the tax rules of the new law. Opting out of estate taxes has a potential disadvantage of also opting out of stepped-up basis rules and opting into modified carryover basis rules. However, opting out also means no estate tax is due no matter how large the estate.

To elect to use the old 2010 provisions with no estate tax, administrators must file the new Form 8939 no later than November 15, 2011. The IRS will not grant extensions to file this form and will only accept late-filed forms under very limited circumstances. To elect to use the new tax laws for 2010 decedents, administrators must file the traditional Estate Tax Return Form 706 by September 19, 2011.

The IRS believes that “7,000 executors of estate who died in 2010 will… [opt out of estate taxes] and thus will be required to file Form 8939, and that it will take approximately 8 hours to prepare.” Although Form 8939 is due in three months, as of August 10, 2011, the IRS has yet to release the final form or any instructions.
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A member of Burt + Clerc was named as a “Top Lawyer” by Palm Springs Life in their June 2011 issue. Julia E. Burt was recognized for her years of experience and exceptional service in the field of estate planning. 62 of the Coachella Valley’s finest legal professionals made the 2011 list of Top Lawyers. Congratulations to every one of them but especially our very own Julia Burt!

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Many Coachella Valley residents have revocable trusts which include a provision for a “bypass trust” otherwise known as an “A/B split trust.” Some residents are considering amending or restating their trusts to remove this provision. Although this may seem wise, there are numerous reasons why these provisions are still important today.

Under the old estate tax laws, every individual had an exemption amount of $3,500,000 but married couples also enjoyed an unlimited marital deduction. Therefore, if Warren Buffet wanted to give his entire estate to his Spouse, no estate tax would be due until her death. Unfortunately, he would have lost his personal estate tax exemption and higher estate taxes would be paid upon the Spouse’s death. However, if Mr. Buffet funded a bypass trust with his personal exemption amount ($3,500,000 in 2009) then this amount would still be available for the wife to use for her health, education, support and maintenance AND it would be exempt from estate taxes. In this scenario, Warren Buffet’s wife saved $1,575,000 in estate taxes that would otherwise have been paid to the US Treasury upon her death.

In December 2010, a new law was passed and the estate tax exemption was raised to $5,000,000. Additionally, the exemption is “portable” to Surviving Spouses so even if the first spouse doesn’t use up the whole $5,000,000 the unused portion is passed onto the Surviving Spouse. Thus, a Surviving Spouse can effectively have an exemption amount in excess of $5,000,000. With these higher exemption amounts and the option to “port” any unused exemption, why would you still need a bypass trust?

There are many reasons why bypass trusts are still important tools in most estate plans. First, the new estate tax laws are temporary. They are scheduled to expire in 2013 along with the $5,000,000 exemption and the notion of portability. The exemption amount will fall to $1,000,000 on January 1, 2013. Second, bypass trusts remain excellent mechanisms for ensuring where some money eventually gets distributed. Although Surviving Spouses have access to the funds in a “bypass trust” they cannot change who the ultimate beneficiaries are, nor can they frivolously or lavishly spend down these funds. Third, under most circumstances the bypass trust is a great way to protect assets for the children of one Spouse when there is a second marriage. Fourth, assets in a bypass trust cannot be reached by creditors of a Surviving Spouse.

Although getting rid of that bypass trust provision may seem like a good way to simplify your estate plan, prudent estate planning attorneys would advise keeping this provision until more permanent estate tax laws are in place.
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Burt + Clerc previously wrote about the need for everyone to have some basic estate planning documents in place. One of these fundamental documents is a will. In California, the probate courts allow an individual to create holographic will. This is essentially a handwritten will. There are some risks involved with this however, and therefore we advise everyone to engage a knowledgeable estate planning attorney to draft your estate planning documents. Sometimes, time will not permit this or there are other reasons why someone may choose to draft his/her own will.

The basic will should include most, if not all of the following elements:
Your full name and place of residence The names of your immediate family members (i.e. children, spouse etc.)
List of specific gifts and their corresponding beneficiary (i.e. car, residence or jewelry)
Names of other beneficiaries Statement regarding the payment of expenses and debts owed by you Name of executor to manage your assets and affairs Name of at least 2 alternate executors in case your first choice is unable to act as executor Statement regarding posting a bond by the executor Name of guardian for minor children along with 2 alternate guardians Your signature Witnesses’ signature and attestation clause

Although the process of creating a will is relatively painless and actually pretty easy, about 50% of Americans die without one. When someone dies without a will it is called intestate and the laws of California determine who will receive your assets and property. This is usually not the distribution that most people would have chosen.
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Retirement accounts and most other beneficiary designated accounts are traditionally left out of estate planning documents. A trust attorney will usually recommend that clients keep their IRAs and life insurance polices outside of a trust. However, there is a huge caveat to this advice, you MUST have the appropriate beneficiaries designated.

For parents with minor children, the issue of who to designate is usually incorrectly assumed. Most parents will name their spouse as the beneficiary and then name their children as contingent beneficiaries. If all of your children are adults this scenario works beautifully. However, if you name your minor children as beneficiaries you now have a huge potential problem. For example:

Case No. 1

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