Also in this Issue:
-Tax Traps
-Real Estate No-No's
-How Not to Run Your Business
A Handy List of Don'ts
And you thought lawyers were all nay-saying deal-killers? In this issue of The Springboard, we hope to prove you...RIGHT! Yes, that’s right. This issue is devoted to admonitions from us to you about what you should NOT do - a handy list of "DON’TS" for common situations faced by our clients and friends. The first article contains helpful estate planning "don’ts" from Tom Stikker. Next, Jeff Detwiler tells you what not to do about your taxes. Jonathan Rivin’s list of real estate "no-no’s" follows. Finally, Andy Dudnick takes his turn at telling you how not to run your business. We hope you enjoy sifting your way through all of the negativity. We welcome your feedback and questions.
The information contained in The Springboard is general, and while it is intended to present useful background material to our clients and friends, it is not legal advice and should not be relied upon in any specific instance or for any specific matter. Please consult with your counsel prior to making any decisions or taking any action in respect of the matters discussed in The Springboard.
ESTATE PLANNING DON'TS
by Tom Stikker stikker@ddrs.com
Of all of the "dos" and "don’ts" in the estate planning arena, my top 10 "thou shalt not" commandments are as follows:
Don’t hold title to community property assets (generally assets acquired by a husband and wife during marriage from the earnings of either spouse) as joint tenants with right of survivorship. You and your spouse may own your home and other assets in joint tenancy. However, in holding title as joint tenants rather than as community property, you may be forfeiting a very significant income tax benefit at the death of the first spouse. In particular, at the death of the first spouse assets titled as community property generally receive a full stepped-up income tax basis to the fair market value of the entire property as of the date of death, for purposes of computing any capital gain or loss on subsequent sale. Thus, any pre-death appreciation in the value of your residence, securities or other appreciated assets gets wiped off the slate for capital gains tax purposes at the death of the first spouse. Joint tenancy assets only receive an adjusted income tax basis for the deceased spouse’s one-half interest, with the surviving spouse’s one-half interest retaining its original cost basis.
Don’t be the custodian for accounts you set up for your children under the California Uniform Transfers to Minors Act (CUTMA). If you are making gifts to your children (or other minor beneficiaries) by putting money or securities aside in a CUTMA account for them with a bank or brokerage firm, name someone other than yourself (your brother, your accountant, your best friend or whomever) as the custodian of those funds. If you are the custodian, your authority to manage and disburse those funds for the benefit of the children will cause the assets to be included in your estate for estate tax purposes if you die with the account still in existence. This defeats one primary purpose of setting up the CUTMA account in the first place, i.e., getting the assets out of your estate for tax purposes. Note: It is generally o.k. to be custodian for your children if you are not the one funding the account (for example, if your parents are making the gifts to the CUTMA accounts for your children).
Don’t overfund CUTMA accounts. Keep in mind that while CUTMA accounts are very convenient vehicles to make relatively small transfers to your minor children or other beneficiaries, the assets in those accounts generally must be turned over to the children when they reach age 18 (the age can be extended if you set up the account correctly at the outset, but the very oldest the child can be is age 21). If you get on a regular program of transferring your gift tax annual exclusion amount of $10,000 per year ($20,000 per year for a married couple) to a CUTMA account for each of your children, the accounts can build up to a very high level by the time the child reaches age 18 (or 21). You probably will feel very uncomfortable turning over significant cash or financial assets to an 18 year old, no matter how great of a kid he or she is! Consider setting up a trust as a gifting alternative in these situations.
Don’t put your children on title to your home or other real estate as joint tenants to pass the property to them at your death. Generally, adding your children as a joint tenant with you on title to real property is a bad idea if your estate is large enough to generate an estate tax liability ($650,000 this year, assuming you do not make taxable gifts during life). Adding someone on title to real estate generally constitutes an immediate gift for gift tax purposes. It will require you to file a gift tax return, use all or some portion of your $650,000 exempt amount and possibly even generate a gift tax liability to the IRS, depending on the value of the property and other factors.
Don’t name minors as direct beneficiaries of life insurance or retirement plan benefits. You may have designated your spouse and then your children as beneficiaries of your life insurance or retirement plan benefits at your death. This can result in serious problems if your spouse does not survive you and your kids are still minors at the time you die. Court proceedings may be necessary and the children may end up receiving these assets when they turn 18. If you want your minor children (or other minor beneficiaries) to receive life insurance or retirement plan benefits when you die, you probably should name a trust for their benefit as the beneficiary. Be sure to check that the trust will work to hold these benefits and that maximum deferral of income taxes on retirement plans will result (not all trusts will work for these purposes).
Don’t pay directly the premiums on life insurance policies held in an irrevocable life insurance trust. If you have set up an irrevocable trust to hold life insurance policies on your life to avoid having the death benefits subject to estate tax when you die, never pay the annual policy premiums yourself. Instead, make a cash contribution to the trust so that the third party trustee can pay the premiums from the trust. Paying the premiums yourself can foul up your careful tax planning and needlessly subject large insurance payments to estate tax.
Don’t hold assets in your own name individually if you have set up a revocable trust to avoid probate when you die. One of the primary purposes of using a revocable living trust as an estate planning vehicle is to avoid the need for a court-supervised probate administration of your estate at your death (which is expensive and cumbersome). If you have such a trust, make sure all of your assets are held in the name of the trust at all times. If you own or acquire an asset in your own name (as opposed to in your name as trustee of your revocable trust), it may need to go through probate when you die, even though your will directs it to be distributed to the trust!
Don’t rely on a Durable Power of Attorney for Health Care signed before January 1, 1992. Under prior California law, Durable Powers of Attorney for Health Care expired automatically seven years after they were signed (unless you were incompetent at that time to sign a new one). This rule applies to all Durable Powers of Attorney for Health Care signed before January 1, 1992. If you have such a power, it already has expired and is no longer valid. Durable Powers of Attorney for Health Care signed on or after January 1, 1992 are valid indefinitely (unless you revoke the document or specify in it a shorter period of duration).
Don’t assume your group disability coverage at work is adequate. Statistically speaking, you probably are more likely to become disabled from working than you are to die before retirement. While you may be fully aware of the level of life insurance you carry, you may not have a clue what your disability insurance benefits are if you cannot continue to work at your current occupation because of illness or injury. Not having sufficient coverage may mean a dramatic change in lifestyle for you and your family. Check your level of disability coverage and if it is not sufficient to cover your monthly "nut," consider acquiring supplemental coverage.
Don’t forget to review your estate plan regularly. Many people create an estate plan, place the documents in a drawer and promptly forget about them. However, the laws affecting wills and trusts and related tax matters are constantly changing. In addition, changes in your personal and financial circumstances may make additional or different planning critical to achieve your estate planning objectives. (For example, that little gambling problem of your brother-in-law which just surfaced may cause you to reconsider whether or not he and your sister should be named as trustees for and guardians of your children if something happens to you!) View estate planning as an organic process which needs to be reviewed and updated periodically as the world continues to change.
All of these commandments have exceptions. Circumstances of a particular situation may dictate that you actually do one or more of these don’ts. However, if you have broken or are contemplating breaking one of the above commandments, be sure to get some sound professional advice to avoid unintended consequences.
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