A wise man once said, “the only two things certain in life are death and taxes.” Although we have very little control over when the first occurs, many of us go to great lengths to try to minimize the “ouch” factor of the second. When my parents turned 70, they felt the 3,000 square foot home they lived in for over 30 years was way too much for them. They knew they could sell their home for a lot of money and buy a smaller home very easily. However, my parents were worried about paying a much higher annual property tax bill year after year, since they believed that their new property tax would be based on the price they paid for another home.  Luckily, I found two constitutional amendments passed by California voters that provide property tax relief if you are 55 years and older.  If you live in a “principal residence” in California for at least 5 years, are 55 years or older, buy a replacement property of “equal or similar value” within 2 years of the sale of your principal residence, and timely file a form BOE-60-AH with the County Assessor’s Office you may be able to transfer the tax basis from the home you sell to your new home.  There are certain conditions that must be met to be eligible. My parents sold their home and bought a newer smaller home, with less maintenance, for about the same price.  As a bonus, they were able to transfer the property tax base of $3,000 a year from the home they sold to their new home, saving them approximately $7,000 per year.  Without the exemption, my parents’ property taxes would have increased to approximately $10,000 per year.

It’s been said, “It is better to give then to receive.” I think we can all agree it is much better to receive without worrying about paying taxes.  Under current federal law, most individuals can receive annual gifts of up to $13,000 without being subjected to a federal gift tax. This amount is set to increase to $14,000 in 2013.  While many may know about the $13,000 gift-tax exclusion amount, many may not know that there are two exceptions that provide for greater gifting opportunities without taxation.  One is when the gift is for tuition and the other is when the gift is for medical expenses.  Any amount paid for someone else’s tuition directly to a “qualifying” educational institution is excluded from the gift tax calculation.  “Qualifying” educational organizations include those where their primary function is formal instruction.  The organization must maintain a regular faculty and curriculum with students that attend where the educational activities are conducted.  Also, if the organization has non-educational activities, these must be incidental to the educational programs. A comprehensive definition of “qualified” medical expenses can be found in Internal Revenue Code Section 213, but includes payments for medical insurance and long-term care services such as cost of nursing homes or assisted living facilities, if provided by a licensed health care provider.  However, it should be noted that “qualified” medical expenses do not include cosmetic surgery, unless to correct a birth defect or disfigurement.

We are often asked by clients “How should I take Title to My Home?”  It is important to make sure you have titled your home and any other real property correctly to insure that your real property passes to your heirs.  There are 3 common ways people hold title to their homes:

Joint tenancy: If real property is held in a joint tenancy, the owner who dies first does not control what happens to the property after his death.  A house will pass to the surviving joint tenant outright and the surviving joint tenant has discretion and control to leave the asset to whoever she wants.  And if the property is in the surviving joint tenant’s individual name at the time of her death, the property will need to go through probate before it is finally distributed.  Further, under current law, the surviving joint tenant only receives a one-half step-up in basis on the property and may end up paying capital gain on one-half of the property after the first joint tenant’s death.

Community Property with Rights of Survivorship: Holding title as community property with rights of survivorship will take care of the capital gains issue.  However, like a joint tenancy property, he who dies last wins!  In other words, the property will pass outright to the surviving spouse, who can then distribute the property as she sees fit and may disregard the deceased spouse’s wishes.  Further, if the property is still in the surviving spouse’s name on her death, then the property will need to be probated.

Revocable Living Trust: Property titled in a revocable living trust will avoid the probate process.  Further, both spouses will have input into how the property passes.  Finally, if the transfer of the property to the Trust is done correctly, the surviving spouse will avoid paying capital gains on sale of the property.

We are often asked whether one should name individuals or their Trust as the designated beneficiary on their retirement plans.  There is no one answer to this question.  In other words, it depends!   Here are some considerations when naming beneficiaries on your retirement plans:

Do you and your spouse have different heirs? Naming your spouse, individually, as the beneficiary does not insure that your retirement plan will be passed to your beneficiaries upon your spouse’s death later on.

Do your retirement assets make up a significant part of your estate? If so, then leaving them individually to your beneficiaries may use up your estate tax exemption and reduce the amount available to fund your credit shelter or bypass trust.

How much control do you want to give to your beneficiaries? In naming a beneficiary individually, he will have full control over the assets (and can spend frivolously).

When will your spouse need to take distributions? In naming your spouse individually, you preserve the option for your spouse to “roll-over” the retirement account, and defer distributions (as well as its tax consequences) for a later day.  However, if you name your Trust, your spouse may be required to take distributions immediately after your death (and therefore pay taxes too).

Everyone should review their beneficiary designations frequently to make sure you have made the proper designation.  Work with your estate planning attorney to make sure you have made the proper designation which will accomplish your goals.

The focus for many people when they create a Trust is the distribution of their assets at the time of their death. We are seeing more clients who are living past their ability to direct and maintain their own finances. Make sure your Estate Planning documents are clear as to what you want for yourself in the event that a Conservator is appointed for you or in the event your Successor Trustee takes control of your finances during your lifetime.  What care and level of living do you want? Do you want to remain in your home for as long as possible despite the cost of home healthcare? Do you want annual gifts that you make to continue during your lifetime? Remember your Agent for Power of Attorney does not have authority or control over your Trust assets. If a Lease needs to be renewed or a Certificate of Deposit needs to be renewed and the assets are in the Trust name it will take the power of your successor Trustee to direct those assets.

Preparing your estate plan can feel like a daunting task, but once your estate plan is completed, it is a comfort to know that just in case something happens to you, your family is protected. Many young families preparing an estate plan are focused on the distribution of assets to their children and who will be handling it. What young families also need to consider is what important family values they would want passed on to their children. Appointing a guardian is the first step. Choosing someone who shares your core values and life priorities ensures that your values will be implemented. Many times the guardian of your children will not be the same person best suited to handle your children’s finances. This financially responsible person is known as a trustee. If your children’s guardian and trustee are not one in the same, you should make sure your plan appoints a trustee who will work well with your guardian and who is aware of your child’s needs. Your estate plan should document your core values and goals for your children so that both your guardian and your trustee are able to carry out your wishes. This plan is an evolving document and will change as your family grows and your values change. You should make sure to review your plan frequently (at least every 5 years) to reflect changes in your family, family relationships and growth of your children.

In the short term, adding a joint tenant could be convenient however, in the long run it could cause family ripples. For a good read on this topic, see a recent article by Forbes.com:

Top 5 Reasons To Beware Of Joint Ownership Between Generations

Celebrities are not the only ones to make mistakes with their estate planning.  It happens to people all across the country on a regular basis.  The end result — just like with the rich and famous — often is an ugly and expensive family fight in court.  One of the most common estate planning mistakes that people make is joint ownership.

For the most part, we’re not talking about when a husband and wife have joint bank accounts or the title to their home is held in both of their names.  While not ideal for estate planning, this is quite common and can often be used without problems, except in many second-marriage situations or large estates that may suffer adverse tax consequences… < continue reading at Forbes.com >

This is an interesting article I found about a possible estate tax consequence concerning Al Davis’ ownership of the Oakland Raiders. Begin reading below:

Posted on Forbes.com October 8th
Estate Of Al Davis Could Face Huge Tax Bill On Oakland Raiders

The estate of Al Davis could potentially face big inheritance taxes on the Oakland Raiders.

Al Davis, who died today, bought a 10% interest in the Oakland Raiders for $18,500 in 1966 and increased his stake to 67% over the years before selling 20% of the NFL team for $150 million in 2007. The Raiders are currently worth $761 million by our count. The ownership of the team is being left to the late owner’s wife, Carol.

But Davis’ son, Mark, who has been involved in some business aspects of the football team but is not listed in the team’s media guide, is going to run the team and he could be face hundreds of millions of dollars of taxes based on the price appreciation of the Raiders if his mother, Carol, eventually leaves the team to him … < continue reading at Forbes.com >