California Estate Planning Attorney Blog

Life insurance is used in estate planning for support, education expenses, death taxes, and retirement. The main goal for insurance is to ensure beneficiaries are provided for. Proceeds from life insurance are received by the beneficiaries upon the death of the insured, but sometimes life insurance gets included in the decedent's estate when the proceeds are paid to the executor of the decedent's estate, the decedent at death possessed an incident of ownership in the policy, or there is a transfer of ownership within three years of death.

One type of insurance is the First-to-Die Life Insurance Policy, also known as joint whole life insurance. This is a group insurance policy where benefits are paid to the surviving insured on the death of one of the insured group members. A first-to-die policy can reduce taxes upon the death of the first spouse.

Another type of insurance is the Survivorship Life Insurance Policy, also know as second-to-die. This policy insures two or more people and pays out upon the last death instead of the first one. Because the benefit is not paid until the last insured dies, the life expectancy is greater and the premium lower. Survivorship policies are usually written to insure husband and wife or a parent and child. The premium on a second-to-die policy is based on a joint age.

If a life insurance policy is owned by the insured, he has control of the policy. If the spouse of the insured owns the policy, the insured has indirect control of the policy. If the spouse dies before the insured, the policy might revert to the insured and be included in his/her estate. If the children of the insured owned the policy, the death benefit would be included in the children's estate, not the parent's. The insured has no control over the policy, and if the children are minors it would require appointment of legal guardians before benefits can be paid. The policy might be owned by a revocable trust, where the insured might be in control of the policy and the death proceeds shielded from potential creditors of the insured. Because the insured has an incident of ownership through the revocable trust, the death benefit is includable in the insured's gross estate and could be accessible to the estate's creditors. If the policy is owned by an irrevocable trust, there is no inclusion in the gross estate, and the insured does not regain any control over the policy and cannot revoke the trust.

If an individual is named as beneficiary of a policy, the decedent cannot exert control over the death proceeds. The individual that inherits the death benefits can use the money for any reason.
If an estate is named beneficiary of the policy, the death benefits are includable in the decedent's gross estate and are subject to the e estate's creditors. If the beneficiary is an irrevocable trust, the trustee can distribute or withhold benefits available to the insured's estate, the assets are protected from creditors and the trust's assets can be assigned to professional money managers.

Continue reading "Life Insurance - Oakland" »

A charitable trust lets a settlor donate to a charity, and it gives the settlor and his heirs a tax break. Charitable trusts require someone to give up legal control of property because charitable trusts are irrevocable.

When a charitable trust is partly charitable and partly not, it does not qualify as charitable, unless the trust instrument allows for splitting into two trusts by dividing the corpus: 1) beneficiaries must be indefinite; where a specific individual is named, the trust is not charitable, even if the individual needs charitable assistance; 2) a charitable trust may be enforced by the Attorney General or a beneficiary acting with special interest in a trust; 3) legal title to trust res must vest in the trustee within the rules against perpetuities; once title vested, the rules of perpetuities does not apply when there is a shift from one charity to another, but applies if there is a shift from a charity to individual or vice versa.

The rule against perpetuities at common law invalidates future interests (contingent remainders and executory interests) that may vest beyond the time of perpetuities, meaning a person is prevented from putting qualifications in his will that continue to control or affect the distribution of assets long after he dies. The perpetuities period under the common law rule is not a fixed term of years. The rule limits the period to at the latest 21 years after the death of the last identifiable individual living at the time the interest was created (life in being). This measuring life could be the grantor, a life tenant, a tenant for a term of years, or a contingent remainder or executory devise to a class of unascertained individuals, the person capable of producing members of that class.

To set up a charitable remainder trust, set up a trust and transfer to it the property to donate to a charity. The charity must be approved by the IRS. The charity serves as trustee of the trust, and invests the property so it will produce income. The charity pays the settler a portion of the income for a certain number of years, or during life. When the period expires or at death, the property goes to the charity.

The tax breaks come when the settler takes an income tax deduction, spread over five years, for the value of the gift to the charity. The IRS deducts from the value of the property, the value the amount of income the settler estimates to receive from the property. When the trust property goes to the charity, it's no longer in estate so it isn't subject to federal estate tax. When appreciated property is sold for cash, the proceeds stay in the trust because charities, unlike individuals, don't have to pay capital gains tax.

Continue reading "Getting Tax Breaks for Doing Good - Walnut Creek" »

As of August 17, 2007, the Pension Protection Act of 2006 (PPA) changed the qualification requirements for tax-exempt charitable trusts being public charities. Charitable trusts that failed to satisfy the requirements automatically became private foundations.

Private foundations are subject to restrictions like 2 % tax on investment income, mandatory annual payout requirement equal to 5 % of investment asset value regardless of the trust spending limits, business holding limits, and prohibitions on grant-making to non-public charities and private individuals.

The Internal Revenue Service (IRS) recently proposed regulations clarifying the requirements. All organizations qualified as tax-exempt under section 501(c)(3) of the Internal Revenue Code (IRC), including charitable trusts, are presumed private foundations unless they qualify as a public charity. According to the proposed regulations, a charitable trust qualifies for PPA public charities status if:

1. The trust establishes it is responsive its supporting organizations. For example, a trust officer demonstrates a close, continuous working relationship with the officers and directors of its supported organizations like having regular meetings with an officer of its supported organizations on the priorities of grant-making and the management of its investments, giving the supported organizations voice in the grant-making and investment activities of the trust.

2. The trust annually expends at least 5 % of its investment asset value on grants and reasonable trust administration costs.

3. The trust provides at least one-third of its total 5 % distributions to or for the benefit of a supported organization to which the trust is responsive, and the trust demonstrates payments are significant to the supported organization that the supported organization cares about the trust's activities.

Continue reading "Charitable Trusts" »

Besides the weird effect on capital gains tax which the unintended estate tax repeal for 2010 had (see my referral to a NYT-article) the estate tax repeal has some other unexpected implications on living trusts.

Some living trusts are set up as a so called "bypass-trusts". Those trusts generally have multiple beneficiaries: the spouse, children and sometimes others which are supposed to inherit the trust property. One essential clause usually states in legalese: I want the amount that will not create any federal estate tax to go to my kids. I want everything else to go to my spouse. Such a clause formerly avoided a maximum in estate tax.

Now without a federal estate tax the basis for such a clause falls apart if one spouse dies in 2010. If read literally, the clause now states that every single asset of the trust will go to the kids (because there is no federal estate tax at all). The spouse would not receive anything!

Naturally if the couple was very wealthy the spouses would have intended otherwise. Before 2010 with such a clause in place, the surviving spouse would have got a significant share of the estate that ensured his or hers financial independency. Now the surviving spouse has every reason to challenge the trust on the basis that it did not reflect the true will of the grantors. In the end (after a long battle in court) a judge would have to decide. Havoc!

Continue reading "Estate Tax Repeal Causes Havoc in Bypass-Trusts" »

On January 8th the reputable New York Times featured an article of Paul Sullivan about the 2010 repeal of the federal estate tax (see the article here).

I have already discussed the issue within another blog entry (see here), but Mr. Sullivan's article provides some additional detail to the matter. The article especially sheds some light on the estate tax repeal's impact on capital gains tax. Mr. Sullivan is concerned that changed property evaluation standards could finally lead to some tax dues despite the repeal. If you think, that you inherit a property in 2010, which was held for a long time and increased in value over time, the article is well worth reading.

Continue reading "New York Times Coverage of Estate Tax Dilemma" »

Finally the new year has arrived and despite several predictions that congress would provide some clarity on the issue of federal estate taxes, it didn't revise the law. Also congress has passed a bill to reinstate the estate tax in 2010, it failed to pass the senate. The lawgiver's inactiveness has produced a situation of uncertainty in the estate planning community.

Due to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) there are no more estate taxes for estates that are bequeathed in 2010 under current law. However many analysts predict a retroactive action of the lawgiver. With a retroactive bill the legislative could enact a law which has an effective date that precedes the actual passage date.

The exact contents of such a bill and it's implications on taxation of estates can't be foreseen at this time. Nevertheless it is very likely that the current structure of estate taxation would not be changed. If the version proposed by the House of Representatives prevails, 2010 might bring a 45 % estate tax rate and a $3.5 million personal exclusion. If the lawgiver remains inactive through 2010 estate taxes will return to the year 2000 level in 2011. Back then estate taxes were due for all estates over $1 million and taxed up to 55 %.

From an estate planning perspective it would be unwise to change an existing estate plan to match a still uncertain tax situation. It is rather advisable to stick with the existing plan. If there won't be any estate taxes in 2010 and an estate is passed to the heirs the heirs can only profit from the repeal of the tax. One should keep an eye open (or read this blog) for upcoming changes in law. If the lawgiver has taken action it may be time to revise your estate plan.

Continue reading "Welcome to 2010 - Still No News on Estate Taxes" »

Gift taxes are an important thing to consider, when it comes to estate planning. This tax is as important as the infamous estate tax. In fact the gift tax was set up by the government in order to prevent workarounds regarding estate taxes. If there was no gift tax, but an estate tax, everybody would simply transfer her or his estate to their heirs or living trusts before they died. Then no estate tax would be due in the event of death.

Because there is gift tax which taxes gifts equally to bequests, the pre-death transfer does generally not help to save taxes. However the aforementioned loophole is still open to a certain extent, because there is the annual gift tax exemption. In 2009 the gift tax exemption threshold is $13,000, meaning that all gifts made to one person are not taxable if their combined value does not exceed $13,000. If there is more than one donee, the annual exclusion applies to gifts to each of them. Staying under this number means that no gift tax is due and no gift tax return has to be filed.

As Christmas comes closer, many will think about Christmas checks for their children and grandchildren. An important regulation of the IRS is that the check is considered to be a gift in the year in which the check was cashed. Therefore if you use checks to make gifts, you should make sure, the check is cashed within the year in which you intent to use the according gift tax exemption.

Further information can be found on the website of the Internal Revenue Service.

In my last entry I have already outlined life insurance policies as important part of almost everyone's estate plan. Today I'd like to direct your attention to a less widely known impact, that a life insurance policy could have on your overall estate plan. If applied properly, life insurance policies can help to avoid estate taxes.

The life insurance policy is bought for a specially set up irrevocable trust, called Irrevocable Life Insurance Trust (ILIT). Money is regularly transferred to the trust to pay the insurance premiums and the trust also becomes the owner and beneficiary of the life insurance. If the trust and the policy is set up in the right way the insurance proceeds are not considered part of to the taxable estate of the deceased person for tax purposes.

Unlike revocable living trusts, which I already described within the firm's learning center, the ILIT needs a different person as a trustee, who is not "close" to the grantor. Also the individual payments to the trust must be kept below the yearly gift tax exemption in order to avoid tax-liability for the premium payments. Furthermore, in order to be recognized as a gift by the IRS, the beneficiary of the trust must have the choice in between withdrawing the payments or leaving them in the trust in order to pay the life insurance premiums.

The intended receiver of the life insurance proceeds is named as beneficiary of the ILIT. Therefore for example children of the ILIT's grantor can profit from the life insurance proceeds without triggering federal estate taxes. In addition the trust, which is then funded by the life insurance proceeds, can provide liquidity to the deceased's estate. The only thing to do for the trustee is to buy real assets of the estate for cash.

Continue reading "Life Insurance as a Tax Saving Instrument" »

QTIP is the abbreviation for "Qualified Terminable Interest Property". A QTIP Trust can delay estate taxes that arise when one spouse leaves property to the other spouse. Technically it is a basic revocable trust, like the living trusts I have already described in our learning center.

A QTIP style trust is designed in a way, that grants the surviving spouse a lifetime interest in the grantor's estate but does not transfer the assets of the deceased upon death of the grantor. The surviving spouse may receive the income but usually not the principal of the trust (some exemptions can be stipulated in the trust document).

The grantor is the person who chooses the final beneficiaries (when the surviving spouse has died). Therefore the most common situation for a QTIP Trust is when a wealthy spouse has children from a previous marriage. Like all living trusts property, property enclosed in a QTIP-Trust does not have to go through probate.

Continue reading "What is a QTIP-Trust" »