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We had a very great summer here at Burt + Clerc. Palm Springs Life named Julia Burt as a Top Lawyer in the field of Estate Planning again this year in their June 2011 issue. Julia also recently received her specialist designation in Estate Planning, Trust & Probate Law by the State Bar of California on June 30, 2012.

A Successor Trustee must follow all the provisions in the actual Trust document. However, a California Trustee must also follow the rules and procedures mandated by the California Probate Code. The following are some of the most common pitfalls that get Trustees into Trouble.

Failing to serve the required Notice to Beneficiaries AND heirs-at-law

Whenever a Trust becomes irrevocable, or there is a change in Trustees of an irrevocable Trust, the Trustee must send out notice pursuant to Probate Code § 16061.7. Failure to give timely notice or no notice at all can open the Trustee up for personal liability as well as allow for any beneficiaries or heirs-at-law to contest the trust for a prolonged period.

Failing to Account

Some Trust documents waive all accounting and thus a Trustee may believe that he or she is not required to provide any accounting. However, under California law a Trustee must account at least annually and any waiver of such accounting is against public policy.

Failing to Act Impartially

Trustee must act impartially among all the beneficiaries of a Trust. Favoring one beneficiary over another may result in a breach of fiduciary duty.

Failing to Keep Trust Assets Separate

A Trustee must manage an estate completely separate from the Trustees own personal assets. Trust accounts have their own EINs and must be vested in the name of the Trust, not the Trustee individually.
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A Conservatorship is a legal proceeding where a judge appoints an individual to care for another adult who is incapable of caring for themselves or managing his or her own finances. If you have a complete estate plan which includes a Durable Power of Attorney and an Advance Health Care Directive, then a conservatorship can usually be avoided. However, there are times when this proceeding is absolutely necessary and thus you should nominate a conservator while you are living. This can easily be accomplished by including nomination language in your Durable Power of Attorney or your trust instrument. If you do not nominate someone, then a judge will appoint someone over you and possibly your estate.

A recent article in the Los Angeles Times highlights the need to have your wishes clearly defined with respect to your potential conservator. The infamous Zsa Zsa Gabor is in poor health at the age of 94 and requires a conservator to manage her heath care and finances. Zsa Zsa’s daughter petitioned the court for appointment as conservator but was denied in favor of Zsa Zsa’s husband, Frederic von Anhalt, and a team of attorneys. Von Anhalt will serve as conservator of the person (making medical decisions for Zsa Zsa) while several attorneys will oversee Zsa Zsa’s finances.
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A recent article in the Wall Street Journal claims that the baby boomer population will find themselves without a hefty inheritance from their parents. Traditionally, children could expect to receive something from their parents when mom and dad died. Unfortunately, many baby boomers have relied on this notion as a way to pay for retirement. They expected to cash in on mom and dad’s estate only to find that no such estate exists. Many have not properly funded their own retirement while also suffering from huge financial losses in 2008.

Individuals are living longer and requiring more money for their living and medical expenses. Although these parents were diligent savers, they did not expect to live into their 80s and beyond. Longevity is a blessing and unfortunately a financial curse for some families. Baby boomers are finding themselves in the scary situation of expecting zero inheritance while simultaneously dipping into their own financial pockets to pay for their parents’ care.

The anxiety surrounding inheritance and financial woes is often worsened by parents’ refusal to discuss such issues with their children. Many parents are uncomfortable discussing finances with anyone, let alone their own children. However, an open discussion can help ease anxieties and create valuable planning opportunities for both parents and children. It can also set realistic goals and expectations for future expenses.

The tax law changes enacted in 2010 under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act made significant changes to estate and gift tax laws for 2011 and 2012. However, these changes will expire at year’s end barring an act from our legislators on Capitol Hill. Estate planning attorneys and their clients find themselves in the same predicament they experienced at the end of 2010. Back then, it appeared that exemption amounts would decrease to pre-2000 levels beginning on January 1, 2011. Again, if Congress fails to act (and because this is a presidential election year such a fear is warranted) the estate and gift tax world will resemble that of 1999.

Important Changes for 2013

ESTATE TAX EXEMPTION
The estate and gift tax exemption is $5,120,000 for 2012, but will decrease to $1,000,000 in 2013.

GENERATION-SKIPPING TRANSFER TAX

The GST tax is currently $5,120,000 but will decrease to approximately $1,390,000 in 2013
TAX RATES
Estate, gift and GST tax rates are capped at 35% in 2012 but will increase to 55% in 2013
PORTABILITY
Estate tax exemptions were made portable in 2011-2012. This means that one spouse can port his or her unused exemption amounts to the other spouse on the first spouse’s death. This portability option will expire in 2013.

The uncertainty of the next six months is a valuable time for creative estate planning and gifting opportunities. Many clients with substantial wealth may find outright gifts very attractive. They can transfer some of their wealth during life and enjoy the lower tax rates and higher exemption amounts available for 2012. Additionally, many estate plans should be reviewed to ensure that there are no unintended tax consequences under the new law.
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Until recently, it was pretty easy to determine heirship. If you died leaving children, they were your heirs. However, in an age of assisted reproductive technologies (ART) the definition is becoming significantly murkier. Today, you may have biological children born years after your death. Are these children your heirs? Do they have rights to your property and estate in the same way that children born during your life enjoy?

These are some of questions facing the United States Supreme Court this term in Astrue v. Capato. In this case, a Florida widow used the frozen sperm of her deceased husband in a successful in vitro fertilization giving birth to twins eighteen months after her husband’s death. She subsequently applied to the Social Security Administration for surviving child’s insurance benefits. The Social Security Administration denied the benefits and the woman appealed. The District Court affirmed the finding because Florida intestacy laws would not recognize the twins as children of the deceased husband. The woman then appealed to the 3rd Circuit which reversed the District Court’s ruling. Now, the case will be heard in front of the United States Supreme Court for clarification of the definition of the word “child.”

The finding by the Supreme Court will likely have widespread implications for Social Security Administration benefits. However, children born through ART may still face challenges under state inheritance laws. If heirs can include posthumously conceived children then presumably probate estates would need to be open indefinitely.

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

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

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

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

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

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

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

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

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

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

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

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

The IRS believes that “7,000 executors of estate who died in 2010 will… [opt out of estate taxes] and thus will be required to file Form 8939, and that it will take approximately 8 hours to prepare.” Although Form 8939 is due in three months, as of August 10, 2011, the IRS has yet to release the final form or any instructions.
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