Do you know when it's time to review and update your estate plan

Dear Readers:

It’s that time of the year again.

Many of you already have revocable trusts that you made years ago, or maybe your parents have been kind enough to give you a copy of theirs. Many people are under the impression that since they have a trust, they don’t need to do anything else. That’s not true. The trust you created years ago may not be appropriate for you now. Don’t blame your lawyer. Things change. What was a good idea fifteen years ago may not be such a good idea today. As a rule of thumb, you should look through your trust at least every other year. If you are an optimist, do it during the Summer or Winter Olympic Games. If you are a pessimist, review your trust during the National Election. Let’s do it now. Go get your trust binder. We’ll wait.

Start with the Table of Contents, if there is one. There should be a paragraph labeled something like, “Successor Trustees.” Turn to that page. Are the trustees you named still alive? Are they honest? Are they good with money? Do they get along with the rest of your family, or are they a source of conflict? If the eldest son you named as trustee (you know that you did) thinks that since he’s trustee he can lord it over his brothers and sisters, then he’s not the right man for the job.

Next, find the paragraph that says something like “Disposition on Death” or “Disposition on Death of Surviving Spouse.” That’s the paragraph that says who gets what when you die. Read it. Does it still make sense? Have any of your children died? Are any of your children now disabled? Do you have a spendthrift child who can’t be trusted with money? Does your trust leave your son’s ex-wife an inheritance you don’t want her to get any longer? Does your grandson have a drug problem? Maybe you need to make some changes.

Now look at the last pages of your trust. There should be a Schedule of Trust Assets. Read it. Have you moved? If so, is your new home in the trust? Are your retirement accounts listed in your trust document (they shouldn’t be). Who are the beneficiaries of your retirement accounts and life insurance policies? Did you leave your IRA to the trust? (Don’t unless your lawyer says so.)

If you’re married, find the part of the trust that talks about what happens between the first death and the second. Do you have an A/B trust that divides everything between a “Survivor’s Trust” and a “Bypass Trust” or “Exemption Trust?” If so, then maybe you don’t need or want an A/B trust any longer. An A/B trust is a great way to avoid death tax, but it’s more expensive to administer after the death of the first spouse to die.

As of January 2017, up to $5,490,000 of your assets may pass free of Federal Estate Tax upon your death, and that amount goes up annually with inflation. Even better, this death tax exemption won’t expire - it will remain the law unless and until the Congress and President change it. This means that many of you with A/B trusts should restate (amend in full) your trusts to the ordinary type of trust that leaves everything to the surviving spouse, answerable to no one.

Is either you or your spouse in a nursing home? Do you suffer from an ailment that will likely put you in a nursing home before you die? Are you already on Medi-Cal running up an estate claim that will be due and payable upon your death? If so, it’s not too late to protect your assets from the cost of your medical care.

If you are not completely comfortable with the answers to all of these questions, then you need to see a trusts and estates attorney and update your estate plan.

Len & Rosie

Will I have to sell inherited property to pay property taxes | California Proposition 19

Dear Len & Rosie,

My parents have multiple properties that I’m supposed to inherit after they pass. I’ve read that because of the passage of Proposition 19, the property tax bills on each of their properties will skyrocket. I may have to sell properties to come up with the money to pay property tax. Is there any way to avoid this?

Sarah

Dear Sarah,

Proposition 19 limits the parent-to-child transfer reassessment exclusion to just your parents’ residence, and only if you establish your own residence there within one year of its transfer to you. Also, if the market value of your parent’s home is greater than $1,000,000 above the property’s “base value” (that’s the assessed value reported on your parents’ property tax bill) then the amount in excess that will be added to your new assessed value.

For you, the most important date of the new year may be February 15, 2021. Your parents can still transfer property to you under the old Prop 58 rules, as long as the deeds are recorded on or before that date. If your parents own income property whose income they don’t really need, they can give it to you now, saving you thousands of dollars a year in property tax for the rest of your life.

There is a downside. Basis follows Gift. The cost basis of your parents properties (that is, the amount they’ll get tax free if they sell them) be stepped up when they die if they give these properties to you now. You’ll have their old cost basis, and thus more capital gains tax to pay if and when you ever sell these properties.

There’s a way to avoid that too. Your parents can create an irrevocable trust specifically designed to accomplish the following: First, your parents will retain no beneficial interest in the trust. Instead you will be the beneficiary. That means funding the trust, on or before February 15, 2021, will qualify the transfer under the Prop 58 parent-to-child transfer reassessment exclusion.

Second, if the trust includes a provision allowing your parents to change the trust beneficiary to someone other than you, but not themselves, then the trust properties will receive a step-up in cost basis upon your parents’ deaths under Internal Revenue Code section 2036(a)(2). This will give you the best of both worlds - avoiding reassessment while giving you a higher cost basis upon your parents’ deaths.

Don’t forget the February 15, 2021 deadline. To be safe, you’ll want everything to be complete, including the recording of the deeds, by that date.

Len & Rosie