Creighton Law Offices

Estate Planning Defined—How can a Successor Custodian of an UTMA Account be Appointed?

James B. Creighton — Wed, 23 Feb 2011 18:29:17 +0000

Issue: Earlier this week, a potential client emailed me with a question about the manner in which a successor Custodian of an UTMA Account can be appointed. She wrote the following:

My father recently died. Several years ago, he established an UTMA account for my 15 year old daughter. The financial institution where the account is held requires a court order appointing a successor Custodian before it will allow any changes to be made to the registration of the account or to the investments held in the account. Is this true? Can you tell me what I need to file with the court to get it to appoint a successor Custodian for the UTMA account for my daughter?

My response was as follows:

Are you certain that your father did not designate anyone to succeed him as Custodian of the UTMA account? He could have done so at the time he created the account. Try to obtain a copy of the document(s) he completed at the time he established the Uniform Transfers to Minors Act (UTMA) account and confirm for yourself that he did not designate a Custodian to succeed him. Let’s assume, however, that your father did not designate a successor Custodian when he completed the paperwork creating the UTMA account for your daughter, his granddaughter. What are the steps one must take to designate a successor Custodian of the UTMA account? See § 3918 of the California Probate Code; it contains the specific rules one must follow in order to appoint a successor Custodian of an UTMA account.

If you find that your father did not designate a successor Custodian, you may still be able to avoid incurring the expense of seeking a court’s order appointing a successor Custodian. This is because your daughter is over the age of 14 years. You see, § 3918(d) of the Probate Code provides that if a Custodian dies without having effectively designated a successor Custodian, then the minor for whom the UTMA account was created may designate an adult member of the minor’s family, a court-appointed guardian of the minor, or a trust company to be the successor Custodian, provided that the minor is at least 14 years old. However, act quickly because if your daughter does not designate a successor Custodian to take over the management of the UTMA account within sixty (60) days after the vacancy (i.e., in this case, within 60 days of your father’s death), the court-appointed guardian of the minor becomes the successor Custodian. I realize that there may be no court-appointed guardian for your daughter. Therefore, EITHER the personal representative of your father’s estate (either the Successor Trustee of his trust or the court-appointed Executor of his estate), OR an adult member of your daughter’s family (e.g., you, your daughter’s father, an adult sibling, etc.) can petition the court asking it to appoint a successor Custodian. There is no form, per se, that you can complete and provide to the court yourself. However, we would be honored to prepare the petition on your daughter’s behalf and file it with the court (assuming she has missed the 60-day deadline for appointing the successor Custodian). Since the only purpose of the petition is to ask the court to appoint a successor Custodian of the UTMA account, we could prepare and file it for a modest fee.

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Disclaimer: Please note that the information in this blog post does not constitute legal advice, and should not be relied on, since each state has different laws, each situation is fact-specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue. Finally, the information provided to you in this blog post does not create an attorney-client relationship.

Notwithstanding the disclaimer, I hope this information has been helpful. Please leave a comment about this post if you have the time. Thank you. James B. Creighton, Esq., Creighton Law Offices

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Estate Planning Defined – What are the Current Rules regarding the Taxation of Gifts?

James B. Creighton — Tue, 01 Feb 2011 18:22:27 +0000

Issue: Earlier this week, one of my clients emailed me with a question about the current status of the federal gift tax laws, as follows:

I’d like a little advice on a gift tax issue. Until now, I have kept gifts to my various family members under the taxable level (or at least in good faith tried to). One of my sons may be in a situation where neither he nor his wife is employed, at least for a while, and they may need pretty substantial financial help from me. Until now I have never treated any of my gifts as taxable gifts; thus I don’t know how gift taxes are assessed if I give more than the annual exclusion. I have understood that any gift tax is paid by the donor, not the donee. Is that right? What is the tax rate charged on taxable gifts? In other words, once we’re in the taxable-gift territory, how much more does it cost me to give my son (and his wife) a gift of money to use for living expenses?

My response is as follows:

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Tax Act of 2010“), signed by President Obama on December 17, 2010, increased the cumulative fair market value of property (e.g., either real property, or tangible personal property, or intangible personal property) that a person can transfer during his lifetime free of federal gift taxes tax-free from $1 million to $5 million. No gift taxes are due on the first $5 million in property that is given away. After the donor has already transferred property equal to $5 million during his lifetime, any further transfers of property during life are taxed, for gift tax purposes, at 35% of the fair market value of the property that is transferred. Note that these new rules do not affect the annual gift tax exclusion. The annual gift tax exclusion permits a person to give cash or other property valued at up to $13,000 a year to as many people as s/he wishes without those transfers affecting the lifetime gift tax exclusion of $5 million.

Example:

In Year 2011, Andy makes a cash gift of $75,000 to Ben and Ben’s spouse, Cathi. Andy intends for Cathi and Ben to use the cash gift equally (to put a down payment on a new home, to pay or defray household expenses), although this wouldn’t really change the result in this example.

How are Andy’s gifts to Ben and Cathi analyzed for federal gift tax purposes?

Under the gift tax regime I have just described, Andy can make an annual gift tax exclusion gift of $13,000 to Ben and an annual gift tax exclusion gift of $13,000 to Cathi. This removes $26,000 from the total gift of $75,000, thus leaving $49,000 of the gift to be accounted for. This amount, $49,000, is deducted from the $5 million lifetime gift tax exclusion that Andy has been given by the Tax Act of 2010. Assuming Andy has made no other gifts of property that exceed the annual gift tax exclusion to any one done in any one year, Andy’s lifetime gift tax exclusion has been reduced FROM $5 million TO $4.951 million. In other words, the excess amount of the gift over the annual gift tax exclusion ($49,000) must be accounted for when determining the federal gift tax that is due on future gifts during Andy’s lifetime.

How does Andy report the making of the gifts to the IRS?

Whenever a person (the “donor”) transfers property valued at more than the annual gift tax exclusion to any other person (the “donee”) during any one calendar year—even if the value of the property transferred is still less than that person’s remaining lifetime gift tax exclusion—the donor must prepare and file with the IRS a federal gift tax return, known as IRS Form 709, on which the donor provides the following information:

The fact a gift or gifts of property were made by the donor during the calendar year;
The value of the property that was gifted (i.e., that was transferred);
The person or persons to whom the property was transferred;
A calculation of the affect the transfer of the gift(s) has on the donor’s remaining lifetime gift tax exclusion; and
If any federal gift tax is due, a calculation of the federal gift tax that has been incurred (which gift tax is paid when the return is filed).

IRS Form 709 is due on April 15^th of the year after the year in which the gifts were made and the filing of Form 709 can be delayed until October 15^th of that year (i.e., the rules of extending the time to file IRS Form 709 and to pay the gift tax due are the same rules as apply to the filing of Form 1040 and paying of income tax due).

In addition, you should know that there are several kinds of gifts that—if made in a specific manner—will not count either towards the annual gift tax exclusion of $13,000 OR towards the lifetime gift tax exclusion of $5 million, no matter how valuable the gift. Such gifts include payments of medical expenses that are made directly to the medical provider and payments of school tuition (but not “room and board”), provided that the tuition payments are made directly to the educational institution. See Internal Revenue Code Section 2503(e)(2). Thus, if anyone to whom you wish to make a gift has incurred any medical expenses or is attending private school or university, you can pay these expenses directly to the medical provider or educational institution and such payments will not count towards the $13,000 annual gift tax exclusion or the $5 million lifetime gift tax exclusion that you now have under the Tax Act of 2010.

Finally, a gift of cash or other property from the donor to a donee is not subject to income tax. However, any interest, dividend, or other income that is earned by the gift after its receipt by the donee (e.g., bank account interest, dividends paid on stock shares after the shares were gifted, etc.) is subject to income tax. The corpus of the gift itself however, is not subject to income tax.

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Estate Planning Defined – What is a Form 706 and When Does It Have to Be Filed?

James B. Creighton — Wed, 12 Jan 2011 00:31:09 +0000

Issue: I received the following question from a Caller:

My mother recently died and I have just learned that I am the Executor of her Estate. My wife told me that she thinks I will have to file a “706,” which she says is used to pay taxes on my mother’s estate. Is this true? What is a “706″? Where does it have to be filed, and with whom? The IRS? When is it due? Is this something I can do on my own or do I need a CPA?

A Federal Estate Tax Return (which is commonly referred to as “IRS Form 706“) is generally due within nine (9) months from the date of death of the decedent whose estate is at issue. In this case, the Form 706 is normally due nine (9) months from your mother’s date of death. However, it is possible to request—and automatically obtain—a six-month extension of time to file the Form 706. To obtain the automatic extension of time to file the Form 706, you, since you are the Executor of your mother’s estate, will need to complete and send to the Internal Revenue Service IRS Form 4768 (which is entitled, “Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation Skipping Transfer) Taxes“), which is the proper manner by which to request the automatic 6-month extension of time to file the estate tax return. NOTE: The IRS MUST RECEIVE the Form 4768 PRIOR to the date that is nine (9) months from your mother’s date of death. Thus, if you need an extension of time to file Form 706, don’t delay! If you miss the deadline to request an extension of time to file Form 706, penalties and interest will begin to accrue.

Important: You should understand that there is a significant difference between asking the IRS for an extension of time to FILE the Form 706 and asking the IRS for an extension of time to PAY the estate tax that is due. Generally, it is much more difficult to receive an extension of time to PAY the estate tax that is due than it is to receive an extension of time to FILE the Form 706. Form 4768 can be also be used to ask the IRS for an extension of time to PAY the estate tax; just be sure to complete Part III of Form 4768. Part III of Form 4786 is entitled, Extension of Time to Pay—Section 6161 and this section must be completed accurately. In addition, there are additional “hoops” that you will have to jump through and certain criteria your mother’s estate has to satisfy to get an extension of time to PAY the estate tax.

Any estate tax that is due to the IRS is calculated and reported on Form 706. The IRS’s current version of Form 706 and the Instructions for Form 706 are available at http://www.irs.gov. Be careful to use the appropriate version of the Form 706 since these forms are revised often, usually annually, by the IRS. How do you know you’re using the correct version of Form 706? Look under the title of Form 706 at the top of the first page of the form. You will find a statement indicating for which year or years that version of the Form 706 applies. The most current version of Form 706 must be used for persons who died in the preceding year. Importantly, as you may know, Congress just enacted and (on December 17, 2010) the President signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This law makes substantial changes to the manner in which estate taxes are assessed against a decedent’s estate. The IRS may not yet have prepared the Form 706 that should be used in your mother’s estate.

As you may have gathered by now, the estate tax return is quite complicated and involved. Very few publications provide detailed information on how to complete a Form 706. The IRS does publish Instructions for Form 706 as well as several other publications dealing with estates and estate tax issues, such as IRS Pub 559 (Survivors, Executors, and Administrators) and IRS Pub 950 (Introduction to Estate and Gift Taxes). This should be a good starting place for you.

Finally, it is very important for you, as the Executor of your mother’s estate to retain the services of either (1) an Accountant (a CPA or an Enrolled Agent, sometimes called “EAs”) or (2) an Estates & Trusts Attorney to prepare the Form 706 for your signature as the Executor. The Accountant or the Attorney should have SUBSTANTIAL AND PROVEN EXPERIENCE completing the federal estate tax return; they are not for the “faint of heart.” There are many traps for the unwary.

I am sorry to hear of your mother’s passing. I know that this is a difficult time for you. However, please take your job as the Executor of her estate seriously. Do not wait to get started with the administration of her estate. There are many decisions that you may have to make as the Executor. Fortunately, you can and should seek legal and accounting advice from qualified professionals.

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Estate Planning Defined – Can The Trustee of a Continuing Trust Who is Also The Beneficiary Withdraw Trust Principal?

James B. Creighton — Mon, 27 Dec 2010 17:25:41 +0000

Issue: I recently received the following question from a Caller:

I am a beneficiary of a “Bypass Trust,” which was set up after my Father’s death and had been managed for the benefit of my Mother during her remaining lifetime. My Mother just died. I have been told that my share of the property remaining in The Bypass Trust is to be put into a Continuing Trust for my lifetime benefit. I was also told that I am the Trustee of the Continuing Trust. Since I am the Trustee of the Continuing Trust and I am the only beneficiary during my lifetime, do I have to keep the property in the Continuing Trust? The property that will go into the Continuing Trust for my benefit is real estate, which I had hoped to contribute to an LLC. What are my options?

I responded as follows:

First and most important: Always, always, always start by reading all of the provisions of the document (or documents) that will govern your Continuing Trust. What document might that be? That document will almost always be the same document that your parents signed when they first created their own Trust. You must also familiarize yourself with any amendments your parents, or either of them, made to that original trust document. I know it’s boring and may seem like a useless exercise, but you will find some real gems hidden in the provisions of that document—and you will help yourself at the same time.

Pay close attention to the sections of the document that discuss your rights—as a beneficiary—to distributions of trust principal and to trust income. Trust Income may take the form of interest on bank accounts held in your Continuing Trust, or rental payments by the tenants renting real property held in your Continuing Trust, or dividends paid on any mutual funds or shares of stock held in your Continuing Trust.

Generally, even if you are the Trustee of your own Continuing Trust, the property deposited into your Continuing Trust must stay in the Continuing Trust (with some exceptions, explained below). Even though you are the Trustee, you cannot simply pull the property out of the Trust and put it in your name. Your parents would have left the property outright to you if they wanted you to have the property in your own name. However, depending on your personal financial and health-related circumstances, you—as Trustee—may be entitled to distribute to yourself—as the beneficiary—trust principal of the Continuing Trust for your bona fide health, education, support, and maintenance needs. You will almost always be entitled to all of the net trust income earned by the assets held in the Continuing Trust. However, with regard to distributions of trust principal OR trust income, you must read the document that governs the Continuing Trust to know for sure what your rights are as a beneficiary of the trust.

In addition, even though you are the Trustee of your Continuing Trust, you may have to account for your actions as Trustee to other persons (other beneficiaries) who would inherit the property, if any, that remains in your Continuing Trust upon your death. This is a primary reason that you cannot simply take the property out of the Trust and put it in your own name—you would have to notify those other beneficiaries of your intention to pull the property out of the Trust and may even have to get their approval before doing so.

You also said you wanted to contribute the real property that is to be held in your Continuing Trust to a Limited Liability Company (an “LLC”). Even if you could not take the property out of your Continuing Trust and put it in your own name (and then contribute it to an LLC), you MAY be able—in your capacity as Trustee of your Continuing Trust—to contribute the real property to an LLC. It’s just that your Continuing Trust would be a member of the LLC, instead of you, an individual, being a member of that LLC. In exchange for contributing property to the LLC, the Continuing Trust would receive a membership interest in the LLC. However, before you, as Trustee, do this, you MUST BE SURE that the terms governing the Continuing Trust—especially the terms governing your actions as Trustee of the Continuing Trust—permit the Trust to hold interests in entities like LLCs, and permit the Trust to transfer trust property into an LLC in exchange for an interest in the LLC. If you wish to transfer trust property into an LLC, you may also have to notify (and even get the approval of) the other beneficiaries of the Continuing Trust who would receive the property that remains at the time of your death.

Finally, I don’t know you, so please don’t take this personally, but please keep in mind that your parents had their reasons for keeping your share of The Bypass Trust in a Continuing Trust for your lifetime benefit. Many of my clients do the same thing. Their overall goal is to protect the property they want their children to enjoy—sometimes from the children themselves! Some children are not good with money, or are in marriages that could end in divorce (and subject the inherited property to division between the child and soon to be ex-spouse), or are disabled and easily taken advantage of. Any of these reasons are valid reasons for parents to leave property for their children in Continuing Trusts like yours.

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Estate Planning Defined – What are the “Pros” and “Cons” of “Transmuting” Property Owned by a Married Couple in California?

James B. Creighton — Tue, 14 Dec 2010 23:49:19 +0000

Issue: Married couples who reside in California have the opportunity to accumulate community property, separate property, quasi-community property, or some combination of the three. Sometimes a married person may wish to convert his or her separate property to the community property of the married couple or even to the separate property of the other spouse. Such a conversion of one spouse’s separate property to the community property of the couple or the separate property of the other spouse is known as a TRANSMUTATION of the character of the property, i.e., transmutation is the process by which the property rights of married persons are changed.

If either or both spouses intend(s) to transmute the character of property that either or both of them own(s), it is advisable that they do so via a written agreement. Such agreements are used for a variety of estate planning purposes. For example, it may be desirable in a long-term marriage to convert the property that a wife inherited from her family to the community property of the wife and her husband to achieve a “stepped-up” basis in the property at the time the first of the spouses dies. (“Basis” means the “starting value,” or what you paid for the property, when calculating the gain from a sale of property. For example, if you pay $250,000 for a piece of real property that you later sell, your “basis” in the property, for purposes of calculating the gain on the later sale, is $250,000. A “stepped-up” basis means an increase in that “starting value,” which will ultimately reduce the amount of capital gains tax that will be owed when the property is eventually sold.) By converting property in this manner, the married couple and their beneficiaries avoid unnecessary capital gains upon the spouses’ respective deaths by receiving a double step-up in the basis (on both halves) of their newly created community property; one step-up in basis on the entire property occurs upon the death of the first spouse and another step-up in basis on the entire property occurs upon the death of the second spouse. (By contrast, property held in joint tenancy receives only a step-up in basis on the one-half of the property that was owned by the first spouse to die; the basis in the property owned by the surviving spouse is NOT “stepped-up.”) Below, I discuss some of the primary advantages and disadvantages of transmuting one’s property.

Advantages of Transmutation. Let say, for example, that Gwen has a much larger estate than her husband, Chris. In the estate planning context, it might be advisable for Gwen to transmute some of her separate property to Chris’ separate property (i.e., to give Chris some of her separate property), so that Chris can take full advantage of the federal estate tax exemption known as the applicable exclusion amount. The applicable exclusion amount is the amount of property that a person can transfer at his or her death free of federal estate tax. If the cumulative value of Chris’ estate is less than the applicable exclusion amount, then Gwen might consider transmuting some of her separate property to Chris’ separate property, thereby increasing the size of Chris’ estate. Then, when Chris dies, his estate can more fully use this important federal estate tax exemption, which would result in an overall reduction in estate taxes on the couple’s family (because Chris has maximized the size of his estate, while not exceeding the applicable exclusion amount, and Gwen has minimized the amount by which her estate exceeds the applicable exclusion amount by giving Chris some of her property).

In other situations, it may be necessary to transmute property so that the actual ownership of the property reflects the couple’s intentions. For example, if both spouses agreed that one of them should take legal title to real property in his/her name alone to more easily complete the financing of the property, but their ultimate intent was that both of them own the property as community property, then the spouses must remember to transmute the property from the one spouse who took legal title alone to both spouses as their community property. In the case, Marriage of Brooks and Robinson (2008) 169 CA4th 176, 86 CR3d 624, the real estate agent recommended that just the wife take legal title to the couple’s residence because this would make it easier to borrow against the property (i.e., take out a mortgage on the property). The husband agreed, and the wife took legal title to the home in her name alone, as her separate property. The couple used the husband’s earnings from his employment for the down payment. In addition, the husband made payments on the mortgages that were secured by two deeds of trust. Unfortunately, the couple decided to divorce and the true ownership of their home became a matter of dispute. The court held that since the wife had the husband’s consent to take legal title to the family home in her name alone, the home was NOT the community property of both spouses, but instead was presumed to be the wife’s separate property. Although the court explained that this presumption could be overcome by clear and convincing evidence that the legal title on the deed was not the couple’s intent, unfortunately for the husband, the facts that the legal title to the home was taken in this manner to facilitate financing and that the down payment and subsequent payments on the mortgages were traceable to the husband’s community property earnings were not sufficient to overcome the presumption that legal title was conclusive as to ownership of the property. The court concluded that the home was the wife’s separate property. Now, few, if any, married couples would expect that following the advice of a real estate agent that one spouse take legal title to the property to make financing the property easier would result in a court deciding that the spouse on title is the sole owner of the property. How could the couple have avoided this result? They could have avoided this result by signing a Transmutation Agreement that clearly explained their intentions. Such an agreement would have provided the clear and convincing evidence that was needed to overcome the title presumption so that both spouses would have owned their home as they intended, i.e., as their community property.

Disadvantages of Transmutation. In harmonious and fully functional families, transmutations of property can achieve a number of estate and tax planning advantages for the spouses and their intended beneficiaries (e.g., their children).

However, anyone who is thinking of transmuting his or her real property or substantial personal property should always seek legal assistance before doing so. Not to do so would invite peril. For example, let’s say Margaret’s husband, Tom, used $170,000 of his separate property cash to purchase 2,000 shares of Google stock at $85 per share when it went public in August 2004. The shares of stock were then deposited into a newly opened Charles Schwab account and the title to the account read, Margaret and Tom, Joint Tenants With Right of Survivorship (JTWROS). By taking title to the brokerage account in this way, Tom made a gift of $85,000 of his separate property cash to Margaret (as her separate property), which she then used to purchase 1,000 shares of Google stock. Right? It certainly looks that way. However, the couple did not want to pay an attorney to draft a transmutation agreement and they certainly didn’t want to pay two more attorneys to review the agreement with them. So, neither Margaret nor Tom signed such an agreement.

Now, over six years later, Margaret and Tom are getting divorced, due to irreconcilable differences. The Google stock is trading at $595.00 per share, meaning that the initial $170,000 investment is now worth $1,190,000! And, guess what? Tom claims that he never intended to make any gift of his cash to Margaret. He claims that he put her on title to the Schwab account for convenience only—in case something happened to him and she needed to access the account—and not because he intended her to own half of the Google stock in the account. Of course, Margaret argues that Tom clearly intended to transmute $85,000 of his separate property cash Margaret’s separate property.

Could this disaster have been avoided?
YES! The better course of action would have been for Tom and Margaret to have entered into a written transmutation agreement. Clearly, in this case, the cost of assistance from attorneys would have easily been outweighed by the value of the stock Tom and Margaret are fighting over.

Can a couple transmute property solely for estate planning purposes and not for marital dissolution purposes?
NO! Courts in two important cases have held that a transmutation agreement made for estate planning purposes is also valid and must be used for purposes of divorce as well. See Marriage of Holtemann (2008) 166 CA4th 1166, 83 CR3d 385 and Marriage of Lund (2009) 174 CA4th 40, 94 CR3d 84. In short, there is no such thing as a transmutation of property only for estate planning purposes.

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Estate Planning Defined – How Can an HEIR AT LAW Recover Her Share of an Inheritance After the Close of the Probate of Her Relative’s Estate?

James B. Creighton — Wed, 08 Dec 2010 18:29:56 +0000

I recently received a question from a potential client who called me regarding the probate of a relative’s estate. She told me that her relative died without a Last Will & Testament in place. Apparently, the Caller was not notified that her relative had died and she did not receive any property from her relative’s estate, even though her siblings received property from the estate. The Caller told me that the Executor of the estate—who was another of her relatives and with whom she has had poor relations—purposely ignored her both in providing her notice of the relative’s death and in distributing the property in the relative’s estate. The Caller asked me the following question: “Since my relative died without a valid Will in place, I, as one of her heirs at law, should be entitled to receive a share of the estate, right? The problem is that I was never notified of my relative’s death and I never received any property from the estate, even though my siblings received some property. I only just found out about this issue over the Thanksgiving Holiday. Now, the probate of my relative’s estate has already been closed. Can I correct this mistake and receive my share of the estate?”

I responded to the Caller as follows:

First of all, if the deceased person (who is referred to as the “Decedent”) died intestate, then this means that the Decedent did not have a valid Will & Testament in place when he or she died. Assuming this to be the case, then the title of the person who is appointed by the Court to oversee the administration of the estate of a Decedent who died without a valid Will & Testament in place, i.e., who died “intestate,” is the ADMINISTRATOR of the Estate—not the Executor of the Estate. (An EXECUTOR is the title of the person who is appointed by the Court to oversee the administration of the estate of a Decedent who died WITH a valid Will & Testament in place). In addition, the appointment of the ADMINISTRATOR would only have come in response to a Petition to open a FORMAL PROBATE of the Decedent’s estate.

Who Could Have Filed the Petition for Probate in the Caller’s Case? Anyone who has an interest in a Decedent’s estate can prepare and file a Petition to open a FORMAL PROBATE of the Decedent’s estate. Under California law, such “interested persons” include spouses, children, siblings, other relatives, friends—even the creditors of a Decedent can file a petition to open a probate of the Decedent’s estate.

After the Court has appointed the ADMINISTRATOR to “be in charge” of the Decedent’s estate, he or she has certain responsibilities that must be carried out. Among the Administrator’s responsibilities is the duty to notify all of the Decedent’s HEIRS AT LAW that the Decedent has died (by the way, in the Caller’s case, this task would have had to have been completed when the Petition for Probate was filed with the Court). In addition to other bits of information contained in the Petition for Probate, it would have had to clearly state that the Decedent died intestate.

Thus, under California law, the Decedent’s HEIRS AT LAW—who have survived the Decedent by 120 hours from the time of the Decedent’s death—are entitled to share the property of the Decedent’s estate after all of the Decedent’s debts, taxes, and expenses of administration have been paid.

Who Are the Decedent’s HEIRS AT LAW in the Caller’s Case? Based on what the Caller told me, I assumed that the Decedent was not survived by a spouse or a registered domestic partner. I also assumed that the Decedent was not survived by any children (the Caller did not tell me how she was related to the Decedent). California Probate Code Section 6402 provides the list of persons who are entitled to inherit the property of an estate of a Decedent who died intestate and was not survived by either a spouse or registered domestic partner.

Section 6402 provides, in part, that the property remaining in the Decedent’s estate at the close of probate is distributed to the following persons (see Section 6402, subsections (a), (b), (c), and (d)):

If the Decedent is not survived by a surviving spouse or registered domestic partner, then the property passes to the Decedent’s Issue (e.g., children, or if a child predeceased the Decedent but leaves children of his or her own who survive the Decedent, then the Decedent’s grandchildren by that predeceased child; the term, issue, includes children, grandchildren, and more remote descendants);
If the Decedent is not survived by a surviving spouse, registered domestic partner or any issue, then the property passes to the Decedent’s parent or parents (equally) who survive the Decedent;
If the Decedent is not survived by a surviving spouse, registered domestic partner, any issue, or any parents, then the property passes to the issue of the Decedent’s parents (who would include the Decedent’s siblings and half siblings, nieces, nephews, and more remote issue; the shares of property to which each of these persons would be entitled would depend on how closely the relative and the Decedent were related).
If the Decedent is not survived by a surviving spouse, registered domestic partner, any issue, any parents, or any issue of parents, then the property passes to the Decedent’s surviving grandparent or grandparents, with those grandparents to share the property equally; if none of the Decedent’s grandparents survives him/her, then the property passes to the issue of the Decedent’s grandparents, the shares of property to which each of these persons would be entitled would depend on how closely the relative and the Decedent were related).

If, based on the foregoing, the Caller was an HEIR AT LAW of the Decedent AND the Administrator did not make a good faith effort—based on a reasonable and diligent search through the Decedent’s papers and the use of all available tools, including computer-based search tools—to locate the Caller, then the Caller may very well have a case against the Administrator for failing to carry out his/her appointed duties. I told the Caller that she would have to decide whether to pursue the inheritance that she believed she was entitled to. Factors for her to consider when deciding whether to pursue her claim of an inheritance include the following:

The size of the Decedent’s estate;
The Caller’s ability to pay for an attorney at assist her—at least in the beginning (she may be reimbursed for her legal fees later, if the Administrator is found to have acted recklessly or carelessly); and
The certainty that her familial relationship to the Decedent entitled her to be considered one of the Decedent’s HEIRS AT LAW and, thus, entitled to share the property of the Decedent’s estate.

Notwithstanding the disclaimer, I hope this information has been helpful. Please leave a comment about this post if you have the time. Thank you. James B. Creighton, Esq., Creighton Law Offices

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Estate Planning Defined – What Is Community Property?

James B. Creighton — Wed, 03 Nov 2010 22:28:43 +0000

In this post, I define community property, which is a term that, I have found, is not always clearly understood by those who use it.

First, community property can be either
real property (farm land, raw land, land improved with buildings, a condominium, a townhouse, a single family dwelling, etc.) or personal property (bank accounts, investment accounts, life insurance, furniture, artwork, paintings, partnership interests, etc.) that is owned by a married couple living in California (either a heterosexual couple or one of the more than 18,000 same sex married couples in California) or a couple who have registered with the California Secretary of State as domestic partners (Registered Domestic Partners (RDPs) may be either a same sex couple or a heterosexual couple).

Second, in general, community property is any real property that is located in California or any personal property—regardless of where such personal property is located—that is acquired by either member of the couple during the term of the couple’s marriage or registered domestic partnership, EXCEPT that community property does not include any real property or personal property that either member of the couple acquires from an inheritance or as a gift from a third person or specific property that is the subject of a prenuptial or post-nuptial agreement, if the spouses have entered into such an agreement. (Property that a member of the couple acquires by gift or inheritance is the separate property of that person.)

In addition, the ownership interest that each spouse or registered domestic partner has in the couple’s community property is (1) present (i.e., the ownership interest exists NOW and not at some point in the future); and (2) equal in value (or in percentage) to the ownership interest in the couple’s community property that is held by the other spouse or registered domestic partner.

Community Property Includes Employment Earnings of either member of the Couple, Items Acquired with such Earnings, and Appreciation in Value of Such Items. Important: Community property includes all of the employment earnings of either or both member(s) of the couple, including all pre-tax earnings that are deposited into the retirement plans owned by either or both member(s) of the couple. Community property includes all of the items purchased or acquired with such employment earnings. Finally, community property also includes all of the appreciation that accrues over time to the items that were purchased or acquired with such employment earnings.

Example #1: Husband and Wife live in California. During their marriage, Wife purchases shares of Google common stock using her employment earnings that she earned during her marriage and while living in California. The shares of Google stock become the community property of both Husband and Wife.

Example #2: Husband and Wife live in California. During their marriage, Husband’s mother dies. Husband inherits his mother’s home from her estate. The home is Husband’s separate property and Wife has no ownership interest in the home when Husband inherits it.

Example #3: Husband and Wife live in California. Prior to their marriage, Wife owned her own home. There was a mortgage on the home. After their marriage, Husband and Wife move into and live in Wife’s home. Wife did not add Husband’s name to the legal title of Wife’s home. Husband and Wife use their earnings to pay down the mortgage on Wife’s home. Under these facts, part of Wife’s home is owned solely by Wife as her separate property and part of Wife’s home is owned by Husband and Wife as their community property. How much of Wife’s home is the community property of Husband and Wife? The answer is complicated and depends on a number of factors, including but not limited to (1) the value of Wife’s home when Husband and Wife married, (2) the value of the mortgage that was paid down after Husband and Wife married, and (3) the appreciation that has accrued to the Wife’s home since Husband and Wife married.

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Finally, the character (or classification) of the real property or the personal property that is owned by either or both member(s) of a married couple or registered domestic partnership may be either
community property, separate property, quasi-community property, or some combination of community, separate, or quasi-community property. In future posts, I’ll define each of these other types or characters of property.

We hope this information has been helpful. Please leave a comment about this post if you have the time. Thank you. James B. Creighton, Esq., Creighton Law Offices

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Estate Planning Defined – What Is an “Estate Plan”? (Part 3 of 3)

James B. Creighton — Thu, 28 Oct 2010 16:43:29 +0000

This post is Part 3 of our 3-part series in which we answer the question: What is an “Estate Plan”? From Part 1 of this series, I gave you the general definition of an estate plan and listed the two primary types of estate plans:

An Estate Plan that is built around a Last Will & Testament (LW&T); or
An Estate Plan that is built around a Revocable Living Trust (RLT).

From Part 2 of this series, I listed and explained the documents that typically make up an estate plan built around a Last Will & Testament. In this post, I have listed and explained the documents that typically make up an estate plan that is built around a Revocable Living Trust.

As I’ve indicated in the previous posts of this series, there are pros and cons to each of these types of estate plans. However, the important thing to remember is that—so long as you have your wits about you (i.e., so long as your retain your mental capacity)—you can always make changes to any of the documents that make up your estate plan whenever you wish (e.g., if your own circumstances or estate planning preferences change). Nevertheless, it is vitally important that you get an estate plan in place now because you don’t know when you will lose your mental capacity or die. Any estate plan that is built around a Revocable Living Trust (RLT) should—at a minimum—include the following documents:

A document that establishes and governs your Revocable Living Trust (RLT). Usually this document is referred to as either a Declaration of Trust or a Trust Agreement. As the person who establishes the RLT, you are referred to as the Settlor, or Trustor, of the RLT. Most of the time the Settlor will also be the Trustee of the RLT, at least at the beginning. The terms of the document governing the RLT provide for the management and administration of those items of real and personal property that are held in the RLT BOTH during your lifetime (thus enabling you and your estate to avoid a conservatorship if you become incapacitated later in life) AND after your death (thus enabling your estate to avoid a probate—at least with regard to the property that is held in the RLT at the time of your death).
A Last Will & Testament (LW&T), which is a document that you sign in your capacity as the “Testator.” In an estate plan built around a RLT, the LW&T is often referred to as a “Pour Over Will.” The terms of your Pour Over Will do not become effective until your death. This means that you can change your Pour Over Will as often as you want during your lifetime. A key part of any well drafted Pour Over Will is the nomination—by you, the Testator—of the person or persons you want to serve as the Executor of your estate. The Executor of your estate is the person who will “be in charge” of the administration of your estate after your death. The Executor’s primary tasks include (1) making an inventory of the property in your estate; (2) getting control of that property (to protect it from waste or neglect); (3) paying your outstanding debts and taxes (that you owe at the time of your death); and then (4) distributing the property that remains to your loved ones, according to the terms of your Pour Over Will. However, in the estate plan that is built around a Revocable Living Trust, the Executor distributes any property that would make up your probate estate to the Successor Trustee of your RLT—rather than directly to your loved ones—because the document governing your RLT already provides for the distribution of your property to your beneficiaries. This is the reason that this kind of Last Will & Testament is often referred to as a “Pour Over Will,” because any property that is controlled by your Last Will & Testament (remember that this is property that was held in your name alone—in your individual capacity—at the time of your death) is transferred (i.e., is “poured over“) to the Trustee of your Revocable Living Trust.
1. A Durable Power of Attorney for Property Management (DPAPM), which is a document you sign in your capacity as the “Principal” and by which document you appoint an Agent to manage and protect—on your behalf—any items of your real and personal property (e.g., including your home, your financial accounts and investments, including your retirement plans, annuities, life insurance policies, etc.) that are held outside of your Revocable Living Trust. An Agent under your DPAPM can also act for you regarding other financial or personal matters involving you personally (e.g., health insurance, income taxes, etc.). Importantly, your Agent generally has the power to transfer into your Revocable Living Trust most items of your real and personal property that are not already held in your RLT so that such property will avoid a probate upon your death. This is an important reason to have a DPAPM as part of an estate plan built around a RLT— to enable you to avoid a conservatorship if you become incapacitated later in life and to enable your estate to avoid a probate—at least with regard to the property that is held in the RLT at the time of your death. Usually, your DPAPM remains in effect until your death (unless you revoke it).
2. An Advance Health Care Directive (AHCD), which is a document you sign in your capacity as the “Principal” and by which document you appoint a Health Care Agent to act on your behalf to make medical decisions for you if you become unable to make these decisions for yourself (i.e., if you become incapacitated). Your AHCDremains in effect until your death (unless you revoke it). This often overlooked document—so simple to put into place—is critical to any estate plan, regardless of how complex or simple the estate plan. Even if you do nothing else, please sign an Advance Health Care Directive so that—if you ever become unable to make your own medical decisions—a trusted family member, friend, or advisor (someone who knows you and understands your values) will be able to make those critical decisions for you.
Documents related to Funding your RLT with your real and personal property, which documents include the following:
1. Trustee’s Certification and a Redacted copy of the Governing Trust Document, which documents are provided to financial institutions as part of the “trust funding” process (i.e., financial institutions will need documentation about your RLT before opening accounts that are formally held in the RLT);
2. Trust Transfer Deed for each parcel of real property that you own, by which deed you transfer the legal title to each parcel of real property from yourself as an individual to yourself as Trustee of the RLT;
3. Letters of Direction from You to Each Financial Institution with which you have cash and investments directing the financial institution to change the title to, or registration of, each cash or investment account from yourself as an individual to yourself as Trustee of the RLT so that the assets in the bank or investment account become part of the RLT; and
4. Standardized or Institution-Specific Forms that are required by financial institutions in which cash or investments of the RLT will be held.

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Comparison of the Estate Plan built around a Revocable Living Trust with the Estate Plan built around a Last Will & Testament. There are advantages and disadvantages of each of these traditional estate plans when compared to each other. Among them are the legal fees and expenses to establish each plan and the ease of administration of each plan upon either your incapacity or death.

Legal Fees & Expenses. Generally, the estate plan that is built around an RLT is more expensive to establish than the estate plan built around a LW&T. Why is this so? One reason for the extra expense has to do with the fact that the document governing your RLT must include additional terms (in addition those that are normally included in a LW&T) that direct the Trustee regarding the management and administration of the trust property during your lifetime and not just after your death. Remember that your LW&T becomes effective only after your death; your RLT is effective on the date you sign the Trust Agreement or Declaration of Trust. Another reason for the extra expense of an estate plan built around an RLT relates to the costs involved in funding your RLT with your property (i.e., changing the legal title to, or registration of, the various items of property that are transferred into the RLT). There is no trust to fund in an estate built around a LW&T.

However, the estate plan built around an RLT is far less expensive to manage upon your incapacity or death than the plan built around a LW&T because the estate plan built around an RLT enables you to avoid a conservatorship if you become incapacitated and your estate to avoid a probate upon your death.

In other words, the “front-end” costs of an estate plan built around a LW&T are less than those of a plan built around an RLT but the “back end” costs of the estate plan built around a LW&T are usually much higher than those of the plan built around an RLT.

Ease of Administration Upon Your Incapacity or Death. Generally, the estate plan built around an RLT is easier to administer upon either your incapacity or death because of the centralized management provided by the RLT; most, if not all, of your property is held in the RLT and would be managed by the Successor Trustee (upon either your incapacity or death). Moreover, there is usually little or no need for intervention by a Court, which would likely be required upon either your incapacity or death if you had an estate plan built around a LW&T. With such an estate plan, if you lose your capacity, then a conservatorship of your estate may be needed to protect your property (if financial institutions refuse to honor the authority of your Agent under the Durable Power of Attorney). And, upon your death, a probate of your estate would be necessary (to pass your property to your intended beneficiaries).

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The type of estate plan you decide to establish will depend on (1) your overall estate planning objectives; (2) the type of the property you own; (3) the value of the property you own; and (4) your current personal and family circumstances. Moreover, one type of plan may suit you perfectly at this time and be not at all suitable for you in the future. That’s OK; you can always make changes later. Just get a plan in place NOW.

We hope this information has been of help in deciding which estate plan is best for you. If you wish to discuss in more detail the “pros” and “cons” of each type of plan, please let us know. Also, please leave a comment if you have the time. Thank you. James B. Creighton, Esq., Creighton Law Offices

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Estate Planning Defined – What Is an “Estate Plan”? (Part 2 of 3)

James B. Creighton — Mon, 18 Oct 2010 17:46:32 +0000

This post is Part 2 of our 3-part series in which we answer the question: What is an “Estate Plan”? From Part 1 of this series, I gave you the general definition of an estate plan and listed the two primary types of estate plans:

An Estate Plan that is built around a Last Will & Testament (LW&T); or
An Estate Plan that is built around a Revocable Living Trust (RLT).

There are pros and cons to each of these types of estate plans (which I discuss in Part 3 of this series) but you need to remember that—so long as you have your wits about you (i.e., so long as your retain your mental capacity)—you can always make changes to your estate plan if your own circumstances or estate planning preferences change. However, it is vitally important that you get an estate plan in place now because you don’t know when you will lose your mental capacity or die.

Any estate plan that is built around a Last Will & Testament (LW&T) should—at a minimum—include the following documents:

A Last Will & Testament (LW&T), which is a document that you sign in your capacity as the “Testator.” The terms of your LW&T (sometimes a LW&T is simply referred to as a “Will”) do not become effective until your death. This means that you can change your LW&T as often as you want during your lifetime. One key part of any well drafted Last Will & Testament is the nomination—by you, the Testator—of the person or persons you want to serve as the Executor of your estate. The Executor of your estate is the person who will “be in charge” of the administration of your estate after your death. The Executor’s primary tasks include (1) making an inventory of the property in your estate; (2) getting control of that property (to protect it from waste or neglect); (3) paying your outstanding debts and taxes (that you owe at the time of your death); and then (4) distributing the property that remains to your loved ones, according to the terms of your LW&T. This brings me to the second key part of any well drafted Last Will & Testament: clear instructions regarding your wishes about “who gets what and how” of the items of property you’ve left behind. Your LW&T should clearly state who is to receive your property upon your death.
A Durable Power of Attorney for Property Management (DPAPM), which is a document you sign in your capacity as the “Principal” and by which document you appoint an Agent (sometimes an Agent is referred to as an “Attorney-in-Fact”) to manage and protect—on your behalf (i.e., if you become incapacitated)—your real and personal property (e.g., including your home, your financial accounts and investments, including your retirement plans, annuities, life insurance policies, etc.). An Agent under your DPAPM can also act for you regarding other financial or personal matters involving you (health insurance, income taxes, etc.). Usually, your DPAPM remains in effect until your death (unless you revoke it).
An Advance Health Care Directive (AHCD), which is a document you sign in your capacity as the “Principal” and by which document you appoint a Health Care Agent to act on your behalf to make medical decisions for you if you become unable to make these decisions for yourself (i.e., if you become incapacitated). Your AHCD remains in effect until your death (unless you revoke it). This often overlooked document—which is so simple to put into place—is critical to any estate plan, regardless of how complex or simple the estate plan. Even if you do nothing else, please sign an Advance Health Care Directive so that—if you ever become unable to make your own medical decisions—a trusted family member, friend, or advisor (someone who knows you and understands your values) will be able to make those critical decisions for you. We have seen firsthand the extreme cost and heartache that falls on the loved ones of an incapacitated person who never signed an Advance Health Care Directive—a judge had to appoint someone to make medical decisions on behalf of the patient (it was a very expensive process that left everyone involved feeling awful).

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In Part 3 of this blog series, we’ll explain an Estate Plan that is built around a Revocable Living Trust and then we’ll close with a comparison of this kind of estate plan with an estate plan that is built around a Last Will & Testament—there are “pros” and “cons” of each of these types of estate plans over the other type. I hope this information is helpful to you. Please leave a comment if you have the time. Thanks again. JBC

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Estate Planning Defined – What Is an “Estate Plan”? (Part 1 of 3)

James B. Creighton — Mon, 20 Sep 2010 18:32:54 +0000

Hello! Welcome to the first blog post of Estate Planning Defined. I am James B. Creighton, attorney at law, and I am the author of this blog, which is intended to provide estate planning, probate, trust, and long term care planning information to the community. My firm is Creighton Law Offices and we are located in San Mateo, California. Check out our website at www.creightonlaw.com.

What is an Estate Plan? What does it mean to have an Estate Plan? Clients ask me these questions all the time. I’ve answered them so many times, I thought I’d start this blog to help readers understand the meaning and importance of estate planning. After all, just because I eat, drink, and live estate planning every day of my life doesn’t mean everyone else does. This is not easy stuff. We’re talking about death and dying, subjects that most of us push aside for many reasons. But, like a pink elephant in your bathroom, it’s not going away. So, let’s start from the beginning.

In general, an estate plan is nothing more than a set of instructions that clearly (we hope) spells out the manner in which your property should be managed and distributed (to you or to your loved ones) both during your lifetime and after your death. That’s all there is to it. An estate plan is a set of instructions. Whose instructions? Your instructions! Your estate plan must be about your life, not your attorney’s. Your attorney is just a glorified scribe channeling your wishes onto paper. OK, my role as an estate planning attorney is a little more involved than simply taking dictation. But we’ll get to how I can help later. For now, it’s just important that you understand that your estate plan should be a reflection of your life—your values and the choices your values helped you to make. Thus, you must fully participate in the creation of your own estate plan. Otherwise, you’ll be left with your attorney’s vision of what your estate plan should be like, rather than your vision.

Also, it’s usually the case that more than one document is necessary to make up your estate plan because a good estate plan deals with the management of your property and financial affairs not only after your death but also during your lifetime and especially if you have lost your mental capacity.

With that in mind, there are two main types of estate plans:

An Estate Plan that is built around a Last Will & Testament (LW&T); or
An Estate Plan that is built around a Revocable Living Trust (RLT).

There are pros and cons to each of these types of estate plans (which I discuss in Part 2 and 3 of this series) but you need to remember that—so long as you have your wits about you (i.e., so long as your retain your mental capacity)—you can always make changes to your estate plan if your own circumstances or estate planning preferences change. However, it is vitally important that you get an estate plan in place now because you don’t know when you will lose your mental capacity or die.

People tend to focus only on what happens to their property after their death (i.e., who should get what). But don’t overlook what happens if, for example, you’re in an accident and don’t die but become disabled. Or what if you live to a ripe old age, healthy as a Spartan physically but feeble as a wet noodle mentally? Life is not just made up of two (2) phases: (1) the time spent alive and (2) the moment that life ends (the moment of your death). Oftentimes, many of us experience a third, very difficult phase: the time spent alive but without sufficient mental capacity to manage our own affairs. Think about your own family: remember when you told your mother that Aunt Mary was “losing it,” and “getting goofy“? If Aunt Mary has indeed “lost it” and gotten “completely goofy,” who is going to make her medical decisions for her? Who is going to take care of her finances? Pay her bills? Keep her from being swindled by some door-to-door salesman selling fake lottery tickets? Hopefully your Aunt Mary thought about her future and put together an estate plan that included instructions for your cousin Tom to look after her and her finances if she “got goofy.” Thus, even the simplest estate plan should include documents that spell out not only “who gets what, and how” when you die but also “who do I want to care for me and my property, and how” if you should “lose it,” and follow your Aunt Mary down into the abyss. Keep this in mind when you read Parts 2 and 3 of this series.

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In our next post, we’ll discuss the specifics of an Estate Plan that is build around a Last Will & Testament (LW&T). In Part 3 of this series, we’ll explain an Estate Plan that is built around a Revocable Living Trust and then we’ll close with a comparison of these two main types of estate plans. Thanks for your time! JBC

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