A new development in probate law involves the use of transfer on death deeds for real property located in California. Other states have authorized the use of such deeds but it has only been available in California since January 1, 2016. Essentially, the deed works like any other transfer on death designation. When you die, your designated beneficiary inherits your house. The process sounds great in theory. Such a deed would completely circumvent a probate process. However, the use of such deeds should be done with extreme care and caution.

First, the transfer on death deed must be drafted in substantially the form outlined in the Probate Code Section 5642. The deed must be notarized and the beneficiary, or beneficiaries, must be specifically named. You cannot state, “to my children” or “to my siblings.” Such language is invalid and the transfer on death deed would fail.

Second, the person executing the deed must have “contractual capacity.” This is different than “testamentary capacity” and is a higher standard. Preparing a will requires only testamentary capacity. Testamentary capacity means that you understand that you’re signing a will, you understand who your natural heirs are, and you have an understanding of the types of property you own. Contractual capacity is a higher standard and requires that a person understand fully and completely whatever they are contracting to do.

Forbes magazine just asked this controversial question in a recent article. The answer is almost always yes with relatively few exceptions. In California, everyone has an estate plan. Either you’ve created one yourself with a Will or a Trust or the State of California has an estate plan for you. This one is called intestate succession and the California Probate Code explains who will inherit from your estate if you die without your own documents.

It is true that a form of estate planning is the use of joint tenancy and beneficiary designations on your bank and brokerage accounts. These will trump the provisions in a Will even if you have one. However, what happens if the heir dies? What if your beneficiary designations are out-of-date? Also, often times it is unadvisable to hold property jointly with your children.

Another issue often overlooked are your personal effects. There is no way to put a beneficiary designation on an art collection or family heirlooms. A Will directs the disposition of where these items should go and to whom.

We are pleased to announce that long-time Probate Attorney Barbara G. Knox is joining the firm as Of Counsel. She will be working in our Palm Springs office assisting clients with Estate Planning, Probate, Conservatorship and Guardianship issues.

Estate taxes issues present headaches for the simplest estates. These potential issues are compounded when the decedent is a celebrity. In the wake of Prince’s untimely death, his estate attorneys will be tasked with the momentous task of valuing his name and likeness. Essentially, someone will set a monetary value on Prince’s profit potential calculated on the day he died. A recent Wall Street Journal article explains that this task will inevitably lead to an IRS battle as the estate attorneys understandably want to make this value as low as possible while the IRS will want a very high number. A similar battle is currently taking place in the U.S. Tax Court in Michael Jackson’s estate.

It is common that a married couple in their late sixties creates an estate plan which names their child or children as Trustees and/or Agents. This is a great first step in setting up a plan that can help when the parents are no longer able to care for themselves or their finances. However, the second step is the talk openly with your children regarding your assets. Far too often children are faced with the challenge of taking over their parents’ finances only to find out they have no idea where to start. What does Mom and Dad own? Where are their accounts?

The Wall Street Journal just published an article discussing the importance of sharing financial information with your loved ones. The untangling of financial information by children for their parents is a common problem. The problem can be mitigated significantly if you write out a list of your assets or otherwise have a roadmap so that your successors and agents can get access to accounts when necessary.

A surprising number of families learn the painful lesson that divorce doesn’t fully resolve beneficial ownership issues with certain retirement accounts. Any plans governed under the Employee Retirement Income Security Act of 1974 (ERISA) must follow specific rules and provisions, which will override the provisions in a marital settlement agreement. The only exception to this rule is if the couple has a Qualified Domestic Relations Order (QDRO) as part of the divorce settlement. The effect of all this is that if you designate your spouse as a beneficiary under an ERISA plan, and neglect to change that beneficiary designation after divorce, the now ex-spouse will receive the asset at your death.

Many states, California included, have enacted laws that prevent an ex-spouse from inheriting from the estate of a prior spouse. California Probate Code § 5600 states that if an individual designates a spouse as a beneficiary on an account, that spouse will not inherit the asset if the spouse is divorced at the time the individual dies. This makes sense. In general, most people wouldn’t want to leave any assets to an ex-spouse at their death. This code section was enacted to cure the simple mistake of not updating beneficiary designations after divorce.

Unfortunately, accounts governed by ERISA don’t follow state laws and thus the protection provided in the Probate Code doesn’t apply. The US Supreme Court has consistently ruled that beneficiaries listed on ERISA plans will receive the asset even if the beneficiary is an ex-spouse. This is true even if the couple has been divorced for decades. The only exception is a QDRO. Many do-it-yourself divorces don’t include a QDRO because the parties may not know what it is or may not know that it is required for their assets. According to the IRS, a QDRO must contain specific information regarding the retirement plan including the nomination of an alternate beneficiary, with his or her last known mailing address, and the amount or percentage to be paid to the alternate beneficiary. A simple marital settlement agreement will not be deemed a QDRO absent the required language.

On October 5, 2015, Governor Jerry Brown signed legislation allowing terminally ill patients in California the option to end their lives. The so-called Option to Die Act will not come into effect until sometime in 2016.

California joins Oregon, Washington, Vermont, Montana and New Mexico as the only states where medically aided suicide is legal.

How does the law work?

We frequently get calls from beneficiaries wanting to change the title to California vacation homes. They already have a probate process in another state and merely need help “transferring title.” However, transferring title to real property after the death of an owner is usually not a simple process. If there is no joint tenant on the property, and the property is not in a Trust, a probate will be required to transfer title to the heirs or beneficiaries of a Will.

An ancillary probate is a probate proceeding for a decedent who was a resident of another state or country. This comes up frequently when residents of another state have a vacation home in California worth more than $150,000. In this case, there will be a primary probate in the decedent’s home state and then an ancillary probate in California. Unfortunately, the distinction between a primary and ancillary property is merely semantic. The same rules and procedures must be followed for an ancillary probate as they would for a primary probate. This means the process will take a minimum of four months, requires a formal petition and at least two hearings, the property must be inventoried and appraised and a publication must be made in a local paper.

An ancillary probate can be avoided if the property is in a Trust. An uncomplicated trust set up in California funded with the California real property will allow a much simpler transfer of title to that property. Furthermore, even a Trust set up in another state can hold real property in California.

The U.S. House of Representatives voted earlier this month to repeal the Federal Estate Tax. Republicans have long voiced their opposition over this tax but a vote to repeal hasn’t occurred in over a decade. The measure passed with 240 in favor and only 179 opposed. The vote breakdown was almost entirely on party lines with 7 Democrats joining Republicans in favor of repeal. However, there aren’t enough votes in the Senate and the President would likely veto the repeal so Estate Taxes aren’t going away anytime soon. However, this move sets up a potential repeal in the future especially if Republicans gain more seats in both houses of Congress and the Presidency in 2018.

As previously discussed here, the Estate Tax exclusion amount is currently $5,430,000 (and is indexed for inflation). So, if you die with less than that amount in your estate, you pay no estate taxes. The Tax Policy Center estimates that only 2 out of every 1,000 people who die pay any estate taxes. Most families won’t have to worry about this tax at all. The President’s Budget includes a provision lowering the exclusion amount to $3,500,000 which would open that tax liability for more individuals and families, but the vast majority of Americans would still be entirely unaffected by this tax. It will be very interesting to see what happens to the Estate Tax in the next few years.

Bankruptcy can disrupt your estate plan. We previously discussed here the problem bankruptcy creates if you have assets in joint tenancy with a bankruptcy debtor. However, bankruptcy can also effect your estate plan for your beneficiaries if certain precautions are not followed. A recent case, Frealy v. Reynolds, highlights this problem. A Trust beneficiary was part of bankruptcy and the bankruptcy Trustee attempted to get all of the beneficiary’s interest in a Trust to pay off creditors. The Ninth Circuit ruled that a bankruptcy trustee’s recovery was limited to 25% pursuant to the Probate Code. However, 25% is still a large amount.

Imagine the situation of leaving your entire trust estate to two children outright and free of trust. You think this is fair and equitable. However, if one of them is in a bankruptcy, his share will be greatly reduced after the bankruptcy court takes 25% to pay off your child’s creditors. Your intention of providing equally for your children has now been disrupted.

A more effective approach would leave the bankrupt child’s assets to a spendthrift Trust or keep the assets retained in Trust with spendthrift provisions. The Trustee could have the discretion to distribute to the child but not if the money will be used to pay creditors. The Trustee would not be obligated to make payments and therefore the beneficiary is not considered the owner of the assets. Since the beneficiary is not the owner the bankruptcy court cannot compel the distributions which would go to the creditors. Instead, the Trustee may wait until the bankruptcy proceedings are over to make any distributions to the beneficiary.

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