For typical homeowners, a house is their largest investment yet most don’t go through the extra step of protecting that asset. If you are a homeowner or have children, or both, then you might seriously consider creating an estate plan that includes a revocable trust. Take care of your estate so that you can relax and focus on what matters most now. Avoid Probate. Assets held in a revocable trust avoid expensive and time-consuming probate; a court supervised process that typically takes months or even years to complete. In California, both the executor and attorney are entitled to receive fees payable from the decedent’s estate. Worse yet, those fees are calculated by statute and based on gross value without considering mortgages or liens: 4 percent of first $100,000 3 percent of next $100,000 2 percent of next $800,000 1 percent of next $9,000,000 0.5 percent of next $15,000,000 Reasonable amount above $25,000,000 As an illustration, the executor and the attorney are each entitled to receive $33,000 for probating a home valued at $2,000,000. If the house has a sizable mortgage, there won’t be much left for your family or friends. These expenses can be avoided by simply investing a relatively minimal amount for a plan now. Protect Your Beneficiaries by Planning in Advance. Minor children may inherit property through probate if a parent dies unexpectedly; and under California law that child is entitled to manage his or her inheritance at 18. The first thing many people do with inherited money is look for ways to spend it. By creating a revocable trust, you can provide thoughtful distribution of assets and ensure funds are spent responsibly. Provide an orderly way to distribute your assets and avoid probate in the process!

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was enacted by Congress on December 20, 2019, and signed into law on that date. On July 18, 2024, the Internal Revenue Service released final regulations under the SECURE Act relating to required minimum distributions from retirement accounts (87 Fed. Reg. 10504-01). Under the SECURE Act and the final regulations, most designated beneficiaries of retirement accounts may no longer stretch distributions over their lifetimes. The ability to stretch distributions using a life expectancy calculation is now reserved for individuals who qualify as “Eligible Designated Beneficiaries” (“EDBs”).   EDBs include spouses of account holders, those who have a disability or chronic illness, those not more than 10 years younger than the decedent, minor children of decedents, or “See-Through” trusts. Eligible Designated Beneficiaries Exempt from the 10-Year Rule The SECURE Act provided a few exceptions to the mandatory 10-year withdrawal rule with a list of eligible designated beneficiaries: ● Spouses ● Beneficiaries who are not more than 10 years younger than the account owner ● The account owner’s children who have not reached the age of majority ● Disabled individuals and chronically ill individuals New Provisions in the SECURE 2.0 Act On December 29, 2022, President Biden signed the Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0 Act) which made quite a few enhancements to clarify the original legislation. Several of the key enhancements are summarized below: ● It raises the RBD age for RMDs to 73 in 2023 and 75 by 2033. ● It decreases penalties for not taking RMDs to 25 percent of the RMD amount and 10 percent of IRAs if corrected timely. ● Employees will be automatically enrolled in 401(k) and 403(b) plans but may opt out within 90 days. ● Higher catch-up contributions are allowed for participants over 50 ($7,500 in 2023). ● There is more flexibility in annuity payments paid from qualified retirement plans. ● Early distributions are permitted for long-term care contracts without penalty. ● Qualified charities can be named as remainder beneficiaries after the death of a disabled or chronically ill beneficiary without disqualifying the trust as a see-through trust. ● Plan sponsors may match contributions made on student loan repayments on the same vesting schedule as elective deferrals, effective 2024. ● 529 plans maintained for at least 15 years may be rolled over into a Roth IRA with a $35,000 lifetime limit, effective 2024. Exceptions to the Early Distribution Rule The SECURE 2.0 Act allows exceptions to the 10 percent early distribution excise tax, including the following: ● Qualified births and adoption expenses ● Terminally ill individuals ● Federally declared disasters ● Emergency personal expenses ● Domestic abuse victims The new provisions and exceptions in the SECURE 2.0 Act may change the decisions you have made for your intended beneficiaries and alter the path to achieving your long-term goals. Under the old law, beneficiaries of inherited retirement accounts could take distributions over their individual life expectancy. Under the SECURE Act and SECURE 2.0 Act, the shorter 10-year time frame for taking distributions will accelerate income tax due, possibly bumping your beneficiaries into a higher income tax bracket and causing them to receive less of the funds in the retirement account than you may have originally anticipated. Eligible designated beneficiaries exempt from the 10-year rule may still have the opportunity to benefit from future retirement plan growth. Your estate planning goals likely include more than just tax considerations. You may also be concerned with protecting a beneficiary’s inheritance from their creditors, future lawsuits, and a divorcing spouse. In order to protect your hard-earned retirement account and the ones you love, it is critical to act now. Review Your Revocable Living Trust or Standalone Retirement Trust We may have addressed the distribution of your retirement accounts in your living trust, or we may have created a retirement trust that would handle your retirement accounts at your death. Your trust may have included a conduit provision, which requires that retirement distributions be immediately distributed to or for the benefit of the beneficiaries (rather than being held in trust). With the SECURE Act’s passage, a conduit trust structure may not be the best choice any longer because the trustee will be required to distribute the entire retirement account balance to most types of beneficiary within 10 years of your death (which, as discussed above, can create an income tax headache for the beneficiary). Under the current rules, if a person dies prior to their required beginning date for RMDs, then designated beneficiaries will not be required to take out RMDs during the 10-year payout period (but would need to take full distribution by the end of the 10-year payout period). However, if the person died after their required beginning date, the beneficiary must continue to take out RMDs on an annual basis (with full distribution at the end of the 10-year payout period). We should discuss the benefits of an accumulation trust, an alternative trust structure through which the trustee can take any required distributions and continue to hold them in a protected trust for your beneficiaries. Consider Additional Trusts For most Americans, a retirement account is the largest asset they will own when they pass away. If we have not done so already, it may be beneficial to create a trust to handle your retirement accounts. While many accounts offer simple beneficiary designation forms that allow you to name an individual or charity to receive funds when you pass away, this form alone does not take into consideration your estate planning goals and the unique circumstances of your beneficiary. A trust is a great tool to address the mandatory 10-year withdrawal rule under the SECURE Act, providing continued protection of a beneficiary’s inheritance. If you have beneficiaries with a disability or chronic illness, you may want to consider a special needs or supplemental needs trust. Beneficiaries are exempt from the mandatory 10-year payout rule, giving them more time for the retirement account to grow tax-deferred. Review Intended Beneficiaries With the changes to the laws pertaining to retirement accounts, now is a great time to review and confirm your retirement account information. Whichever estate planning strategy is appropriate for you, it is important that your beneficiary designation is filled out correctly. If your intention is for the retirement account to go into a trust for a beneficiary, the trust must be properly named as the primary beneficiary. If you want the primary beneficiary to be an individual, they must be named on a beneficiary designation form. You should ensure that you have listed contingent beneficiaries as well. If you have recently divorced or married, you will need to ensure that the appropriate changes are made to your current beneficiary designations. At your death, in many cases, the plan administrator will distribute the account funds to the beneficiary listed, regardless of your relationship with the beneficiary or what your ultimate wishes might have been. Other Strategies Although these new laws may be changing the way we think about retirement accounts, we are here and are prepared to help you properly plan for your family and protect your hard-earned retirement accounts. If you are charitably inclined, now may be the perfect time to review your planning and possibly use your retirement account to fulfill your charitable desires. A charitable remainder trust can use annuity and unitrust payments to mimic the “stretch” provided by using life expectancy. Assets are funded into the trust and then liquidated or sold by the trust. The money from the sale is then invested to produce a stream of income. The sale avoids capital gains tax at the trust level because the trust is liquidating the account and is tax-exempt. However, the noncharitable recipient of the income stream will still be responsible for income tax on the distributions. In contrast, you may distribute your entire retirement asset directly to a charity, and they will not have to pay tax on the income from the plan. Additionally, If you have a significant estate, there may be an estate tax charitable deduction. Following the recent changes to the SECURE Act, you may be concerned about the amount of money that will be available to your beneficiaries following your death and the impact that the potential accelerated income tax may have on that ultimate amount. We can explore different strategies with your financial and tax advisors to infuse your estate with additional cash upon your death. Give us a call today to schedule an appointment to discuss how your estate plan and retirement accounts might be impacted by the SECURE Act and SECURE 2.0 Act. If you have any questions about how the SCEURE Act might affect your estate plan, I'd be happy to chat. Call me today! (714) 619-4145 DISCLAIMER: The information provided on this blog is for general informational purposes only. While we strive to ensure that the content is accurate and up-to-date, we make no guarantees about the completeness, reliability, or suitability of the information contained herein. Any reliance you place on such information is strictly at your own risk. We are not responsible for any errors or omissions, or for any losses, injuries, or damages arising from the use of this blog or its content. Additionally, the blog may contain links to external websites, which are provided for convenience. We do not endorse or take responsibility for the content of these external sites. Please consult with a qualified professional for specific advice tailored to your situation. By using this blog, you agree to indemnify and hold harmless the blog's authors, publishers, and affiliated parties from any claims, losses, or damages arising out of your use of or reliance on the information provided.

Creating a will is a crucial step in securing your assets and distributing them according to your wishes after you pass away. While traditional wills are common, a pour-over will offers a unique and versatile approach to estate planning. In this blog, we will delve into the concept of a pour-over will, its benefits, and why it might be the perfect addition to your estate planning strategy. Understanding the Pour-Over Will: A pour-over will is a legal document designed to complement your existing estate planning, usually a living trust. The primary purpose of a pour-over will is to ensure that any assets not explicitly transferred to the trust during your lifetime will automatically "pour over" into the trust upon your death. Essentially, it acts as a safety net, safeguarding your estate and preserving your final wishes. Advantages of a Pour-Over Will: 1. Seamless Asset Transfer: One of the main advantages of a pour-over will is its ability to seamlessly transfer assets into your living trust. If you inadvertently forget to transfer an asset to the trust during your lifetime, the pour-over will steps in, automatically transferring the asset upon your passing. This avoids the need for probate, which can be costly and time-consuming. 2. Protecting Privacy: Probate is a public process, meaning that the details of your estate become part of the public record. In contrast, a pour-over will facilitates the transfer of assets privately within the trust, preserving your family's privacy. 3. Flexibility and Control: A pour-over will allows you to maintain control over your assets during your lifetime. You can amend or revoke the trust and the pour-over will at any time, as long as you are mentally competent. This flexibility ensures that your estate plan remains up-to-date with your changing circumstances. 4. Cost-Effective: Probate can be expensive due to court fees, attorney costs, and other related expenses. By incorporating a pour-over will, you can potentially reduce the probate costs for any assets that might have been inadvertently left outside the living trust. The Process of Creating a Pour-Over Will: 1. Consult with an Estate Planning Attorney: To ensure that your estate planning aligns with your specific needs and goals, seek guidance from an experienced estate planning attorney. They will help you draft a comprehensive pour-over will that complements your living trust. 2. Identify Assets: Make a list of all your assets, including financial accounts, real estate, personal belongings, and investments. Determine which assets you want to include in the living trust and which you would like to pour over. 3. Create the Pour-Over Will: Your attorney will draft the pour-over will, clearly stating your intentions for the distribution of assets that are to be poured into the trust upon your death. 4. Execute the Will: Sign the pour-over will in the presence of witnesses. A pour-over will is a powerful tool in estate planning, providing a safety net to ensure that all your assets end up in your living trust as per your wishes. By seamlessly transferring assets and avoiding probate, a pour-over will can offer peace of mind to you and your loved ones during an emotionally challenging time. To ensure that your estate plan is tailored to your unique circumstances, it's essential to consult with an estate planning attorney who can guide you through the process and help you secure your legacy for generations to come. We can help! Call me today to get started (714) 619-4145.

Estate planning is a vital step in ensuring that your assets are protected and distributed according to your wishes after you pass away. It allows you to have control over your financial affairs, protect your loved ones, and leave a lasting legacy. In this blog post, we will delve into the key aspects of estate planning and provide you with essential information to help you navigate this important process. Understand the Importance of Estate Planning: Estate planning goes beyond the distribution of assets; it encompasses various elements such as wills, trusts, powers of attorney, and healthcare directives. By creating a comprehensive estate plan, you can minimize potential disputes, reduce tax liabilities, and provide for your family's financial well-being. 1. Take Inventory of Your Assets and Debts: Begin by making a detailed list of all your assets, including property, investments, bank accounts, retirement funds, and life insurance policies. Also, consider any outstanding debts or liabilities that may need to be settled. This inventory will serve as a foundation for your estate planning decisions. We provide a helpful Worksheet for you to complete before beginning the planning process. 2. Create a Will: A will is a legal document that outlines your wishes regarding the distribution of your assets after your passing. It allows you to designate beneficiaries, appoint an executor to handle your estate, and even name guardians for minor children. Ensure your will is up to date and accurately reflects your intentions. If you are including a trust in your estate plan, your will is what sets the foundation and pours over into our trust. 3. Explore Trusts for Added Control: Trusts offer a valuable tool for estate planning, allowing you to exercise more control over the distribution of your assets. They can be particularly useful for managing complex estates, providing for special needs dependents, or protecting assets from excessive taxation. Seek professional advice to determine which type of trust suits your specific circumstances. 4. Appoint Power of Attorney: A power of attorney grants someone you trust the legal authority to make financial and legal decisions on your behalf if you become incapacitated. Choose a reliable individual who understands your wishes and will act in your best interests. 5. Establish Healthcare Directives: Advance healthcare directives, such as a living will or a healthcare proxy, outline your medical treatment preferences and designate someone to make medical decisions if you are unable to do so. These documents ensure your healthcare choices align with your values and save your family from making challenging decisions during emotional times. 6. Review and Update Beneficiary Designations: Regularly review and update beneficiary designations on retirement accounts, life insurance policies, and other financial assets. Failing to update beneficiaries can lead to unintended consequences, such as assets going to ex-spouses or deceased individuals. 7. Minimize Estate Taxes: Consult with an estate planning attorney or tax professional to explore strategies for minimizing estate taxes. Options may include lifetime gifting, charitable donations, or the establishment of a family trust. Proper planning can help preserve your wealth and ensure more of it goes to your intended beneficiaries. 8. Communicate Your Plan: While it may be uncomfortable, open communication with your loved ones about your estate plan can help prevent misunderstandings and conflicts. We strongly encourage this you to discuss your decisions, clarify your intentions, and provide an opportunity for your family members to ask questions. This transparency can foster understanding and reduce the likelihood of disputes in the future. 9. Regularly Review and Update Your Estate Plan: Life circumstances change, so it's crucial to review your estate plan periodically and make necessary updates. Major life events such as marriage, divorce, birth of children or grandchildren, or significant financial changes should prompt a thorough reassessment of your plan. Conclusion: Estate planning is an essential aspect of securing your legacy and ensuring your wishes are carried out. By taking the time to create a comprehensive estate plan, you can protect your assets, provide for your loved ones, and leave a lasting impact on future generations. Seek professional guidance to navigate the complexities. We are here to help! Contact our office today to get started: (714) 619-4145

The reasons for setting up an estate plan are many and the downsides few. Most people delay planning for their future because of the time and expense involved so more and more online programs are offering do-it-yourself options to creating a will and revocable trust along with other estate planning documents. These sites offer tempting low fees and fewer perceived obstacles than going through the process with a qualified attorney. This article explains the risks. Importance of Planning Ahead We have discussed why estate planning is so important in other blog posts, but here is a refresher list of the most important points: Avoid costly probate Protect yourself in the event of incapacity Ensure timely distribution of assets Minimize taxes Name a guardian for your minor children Ease the strain on your loved ones by avoiding conflict Online Forms vs. In-Person Planning With so many new options to create an estate plan, deciding on how to proceed can get confusing. It seems reasonable to want to save a few bucks and prepare these important documents yourself but after years of creating plans for hundreds of clients, I have come to see some of the same problems: 1. One Size Does Not Fit All. The DIY online templates are designed to fit the general population. I have found that yes, there are some very simple estates that only require very general terms and simple language, but most family situations have at complex circumstances. Some families may have a child with special needs while others have stepchildren who don’t get along. Whatever the situation, rarely does one trust share all the same terms as another. The DIY templates fail to incorporate sophisticated estate planning strategies that are required to meet the needs of each client. 2. DIY Templates Can Be Too Open-Ended. Many DIY estate planning services tout their forms’ flexibility as a helpful feature yet that same flexibility can create confusion and uncertainty. The typical user is not familiar with state laws or legal terms specific to estate planning. Not knowing if you are making a mistake is the scary part of trying to create your own legal document. Many of these companies are not touting legal advice so your mistakes could go unnoticed and wreak havoc on your intentions. 3. In-Person Advice Can’t be Underestimated. Online question and answer sessions can’t strategize and use expertise to provide thoughtful advice in response to a client’s concerns. No matter how simple the estate, I always take the time to talk with my clients to find out their intentions and work to prepare a plan with their ideas on paper. People who look to save a few bucks at the outset don’t get this type of service and are simply clicking through boxes of choices with legal language that is typically foreign to them. Some of these online companies may offer to refer you to an estate planning attorney if you feel that you’re in too deep and need some professional assistance. But doesn’t that put you back in the boat of requiring an attorney’s personal attention to get your wishes down on paper? 4. Execution. Finally, too often the person completing online forms do not know that there are specific requirements to make your estate plan effective. It is not simply a matter of printing out what you created and sticking it on a shelf. Depending on the document, it must be either witnessed or notarized. Then you have the question of how to fund a particular asset to your trust. Without performing these extra steps that you must undertake on your own, you don't have an effective plan. Peace of Mind in Estate Planning Online estate planning tools can be a tempting option if you’re looking to save a few bucks but consider what is at stake. Most people work their entire lives to build a nest egg with, hopefully, a few bucks to pass to to their kids or other family members. My office is concerned with making your plan how YOU want it and not what is most expedient to create. I take the time to listen and understand your concerns. I can help you navigate the complexities of the process without losing sight of your ultimate goal. This article was written by Lynn Girvin of Lynn K. Girvin Law. We are here to help you make informed and empowered decisions for your life and the people you love. We offer comprehensive estate planning services and walk you through every step. Get started by calling our office today at (714) 619-4145 to schedule an appointment. We look forward to hearing from you!

Most of us have accumulated digital assets on one or several devices that have either sentimental or financial value. It’s time to consider that those assets are an important part of your estate whether you want to pass them down or have them deleted. As Part Two to this article about how to handle digital assets in your estate plan, I will provide ways to help ensure that this property is not lost forever. Step One – Create a Digital Inventory Only you know what digital assets are stored on your devices and which ones that you would want your loved ones to access. It's imperative that you take inventory and make a comprehensive list complete with username and password for each asset that you choose to pass on. There are convenient password managers that can help simplify this effort or you can write the information down on a piece of paper to store with your other estate planning documents. If you own cryptocurrency, consider leaving detailed instructions because your relatives may not understand or know about how they work. Also, be aware that this information should not be attached to your will as that document could become public once it is filed with the Probate Court at your death. Lastly, it’s important to remember that your instructions should include what devices store which asset. Step Two – Include Your Digital Assets in Your Plan Now that you have gathered your digital assets information, consider to whom you intend that asset to be distributed. Do you want all your photos to be given to your children? Should your cryptocurrency be divided among several beneficiaries? You can specify what you want done with a particular asset in your will or trust document including those certain accounts that you want closed or deleted by your chosen fiduciary. And if you have numerous encrypted digital assets, consider naming a separate co-fiduciary to manage them. Step Three – Review the Terms of Service for Your Accounts The last and most laborious step is to determine what kind of access the service provider will allow. Some like Google, Facebook, and Instagram provide tools that allow you to easily designate to whom you will permit access but it’s important to include the same information in your plan. If the fiduciaries you name in your estate plan conflict with the names given your service provider, the provider will default to information that you supplied rather than what you included in your estate plan. And most service providers will not allow access without your specific instructions and/or login information, a death certificate, and proof that your fiduciary is a lawful representative. As with all of your documents, it’s essential that you keep your choices up to date and in sync. Conclusion Including digital asset information is an often-overlooked step in the process of creating your estate plan. It’s easy to forget that our devices contain important and sentimental value and for the most part, shouldn’t be lost when we die. We are here to assist you in not only creating a plan for your more traditional property but for your digital assets as well. This article was written by Lynn Girvin of Lynn K. Girvin Law. We are here to help you make informed and empowered decisions for your life and the people you love. We offer comprehensive estate planning services and walk you through every step. Get started by calling our office today at (714) 619-4145 to schedule an appointment. We look forward to hearing from you!

Most of us can’t remember what life was like before home computers and cell phones. Digital technology has made our lives easier by providing a way for us to keep in touch, pay bills, manage subscriptions, store photos, and more. As we have adjusted to technology becoming an inextricable part of our daily lives, it has accumulated and for most people, become an often-forgotten asset that is part of our estate. What Is a Digital Asset? Digital assets include anything that can be stored electronically on a computer or other digital device and are associated with ownership or use rights. The owner has the right to use and access that technology with usernames and passwords protecting it from intrusion by others. This protective layer helps to safeguard your assets on the one hand, while causing headache or heartache for loved ones who want access at your death or incapacity, on the other. Financial value assets include cryptocurrency like Bitcoin, online payment accounts like Venmo, loyalty program benefits like frequent flyer miles or credit card reward points, domain names, websites and blogs, as well as other intellectual property like photos, videos, music, and writing that generate royalties. NFTs are a newer concept that can represent various properties, including ​​artworks, collectibles, virtual reality and gaming items, domain names, and ownership records. All these types of assets could have financial worth for your loved ones, not only in the immediate aftermath of your death or incapacity, but potentially for years to come. Then there are assets with sentimental value that might include things like photos, video, music, social media accounts, and websites or blogs. Most of us routinely use our phones to take family photos on vacation or at school events and unlike a physical photo album, those images aren’t stored in a physical location in your home. Those images accumulate over time and before you know it, you've documented much of your life and those around you. It’s easy to forget that this digital media resource could be forgotten in your estate plan and ultimately lost forever if you don’t take steps to protect it. Who Can Access It? Until recently, the law was not very helpful in determining who could access these files and accounts if the user became incapacitated or died. Who had the legal right was not easy to figure out. If the decedent left no usernames and passwords, the estate representative or family member would have no way to access them. Even if an estate representative could log in, state and federal privacy laws typically prohibit such access so as a result, digital assets would linger on the internet or on devices long after the person's death, untouchable by family and friends. This hole in the law caused heartache and headache for families who wanted access to treasured family photos or other digital assets from their loved one's online accounts or libraries. And sadly, the loss of valuable items or information were the norm. Until recently, California provided no direction or authorization for anyone other than the account owner to manage the digital assets of a decedent or incapacitated loved one. But on September 24, 2016, California Governor Jerry Brown signed into law the Revised Uniform Fiduciary Access to Digital Assets Act which authorizes a decedent’s personal representative or trustee access and management of digital assets and electronic communications. Even with this law in place, many of the accounts we all use daily are still governed by a Terms of Service Agreement or privacy policy prohibiting access by anyone other than the original account owner. Most of us click through those company policies without much thought as to what will happen when we die so it’s a good idea to review those contracts to make sure your intentions will be honored. As you can see there is not one straightforward answer when it comes to leaving your digital assets to loved ones. Including detailed instructions in your estate plan is a crucial first step to ensure that your assets are not lost. Part Two of this article will provide useful ways to manage digital assets in your estate plan and pass down what you rightfully own and want your family to enjoy. This article was written by Lynn Girvin of Lynn K. Girvin Law. We are here to help you make informed and empowered decisions for your life and the people you love. We offer comprehensive estate planning services and walk you through every step. Get started by calling our office today at (714) 619-4145 to schedule an appointment. We look forward to hearing from you!

The question often arises as to whether your company, a corporation, LLC, or limited partnership, should be owned by your revocable trust. Ownership is probably not the best way to characterize it because a company is "owned" by whomever owns the stock. Rather, the stock or membership interests are an asset that require your signature to transfer it. Because probate is the formal process whereby title to assets are transferred at the owner's death, your company's interest will be subject to probate if it is held in your name at your death (subject to various factors, including value). In order to avoid probate, ownership interests may be held in the name of a revocable trust so when the individual dies, the interest or stock is not held in his or her name, but the trust’s name. So at the business owner's death, the interest held by a revocable trust avoids probate because the owner as an individual is not the title holder. The named successor trustee has full power to sell the stock or do whatever is necessary in order for the company continue. Basically, the trustee does what is required per the instructions provided in the trust document and corporate by-laws. By simply making sure your revocable trust “owns” the company, your loved ones can avoid the time, expense, and frustration of probate. You have effectively maneuvered around all the problems and headache associated with probate. Smooth Sailing! Disclaimer: This article is intended for general informational purposes only and is not intended to provide estate planning advice. You must consult your estate planning attorney, accountant or other tax advisor for any specific income, business or tax guidance.

What is the best form of co-ownership between husband and wife? Is it best to hold title to your home or other assets as joint tenants or as community property? Consider that there may be unintended tax consequences before you decide. WHAT IS INCOME TAX “BASIS?” Basis is generally the amount of your capital investment in property for tax purposes. In most situations, the basis of an asset is equal to the amount that the asset cost to acquire, plus any improvements. There are two methods for determining basis: “carryover” and “step-up.” Carryover basis occurs when a property transfer also results in a transfer of the transferor's basis in the property. This happens when property is gifted during the lifetime of the transferor. The transferor's basis in the property "carries over" to the property recipient. By way of illustration, if you gifted property to a sibling during your lifetime, your sibling would use your capital investment amount to calculate realized gain for tax purposes. On the other hand, the basis of inherited property is equal to the property’s fair market value on the date of death of the transferor. This is often referred to as “stepped-up” basis. Rather than the basis remaining at the decedent’s investment amount, the person receiving the property gets a step-up to fair market value. The step-up creates an income tax advantage because the beneficiary will not have to pay income taxes on realized gain. Basis is an important factor in determining how married couples should hold title to their home because, depending on the form of ownership, you may or may not be able to take advantage of a step-up in basis should you outlive your spouse. JOINT TENANCY Joint tenancy is a form of ownership commonly used to title property between spouses because no probate is required at the death of the first spouse. Rather, the survivor simply inherits the decedent’s share of the asset resulting in 100% ownership interest. It is created by simply adding the words “joint tenancy” in the title documents. Joint tenancy is a straightforward probate avoidance tool because California does not require a formal court proceeding to confirm the transfer. It is automatic at the death of one joint tenant. Joint tenancy is generally not recommended for married couples who own assets that can increase in value, such as a residence, because the U.S. Internal Revenue Code does not allow the surviving joint tenant to receive a "step-up" in cost basis to fair market value at the date of death of the spouse. For assets held in joint tenancy, stepped-up valuation applies only to the deceased partner's share of the property. For example: Fred and Mary are married and hold title to their home as joint tenants. Their home has a basis of $300,000 (purchase price plus improvements) and fair market value of $500,000. If Fred dies, Mary inherits the property without probate and has a new stepped-up basis, calculated as follows: Fred’s share (stepped up value): ½ of $500,000 = $250,000 Mary’s share (basis value): ½ of $300,000 = $150,000 New basis value: $250,000 + $150,000 = $400,000 After Fred’s death, if Mary immediately sold the home she would owe capital gains on $100,000; representing the difference between fair market value of $500,000 and the adjusted basis amount of $400,000. COMMUNITY PROPERTY Community property is also a form of co-ownership but is applicable only between husband and wife. Like joint tenancy property, each spouse’s interest in community property is equal during their marriage. Unlike joint tenancy, however, each owner has the right to dispose of his/her one half of the community property by will. Thus, each spouse’s one-half community property interest may be subject to probate or similar proceeding to transfer title to the surviving spouse. The U.S. Internal Revenue Code provides special treatment for property owned by a married couple as community property. When a married couple owns an appreciated asset as community property, the surviving spouse is allowed a step-up in basis to fair market value at the date of death of the other spouse. Consequently, if the surviving spouse must sell the residence, he or she is not likely to incur any capital gains. For example: Fred and Mary are married and hold title to their home as community property. Their home has a basis of $300,000 and a current market value of $500,000. If Fred dies, Mary inherits the asset and has a new stepped-up basis for both Fred's and Mary's share of the assets: Fred’s share (stepped up value): ½ of $500,000 = $250,000 Mary’s share (basis value): ½ of $500,000 = $250,000 New basis value: $250,000 + $250,000 = $500,000 After Fred’s death, if Mary immediately sold the home she would not owe capital gains because the fair market value equals her basis of $500,000. CONCLUSION Many married couples have their home titled as joint tenants. This can create a problem when one spouse dies, and the survivor later sells the property because only the decedent’s portion of the property gets the step-up. The basis adjustment is limited to the decedent’s one-half interest. The community property survivor, on the other hand, gets a step-up in basis at the death of the first spouse potentially creating significant income tax savings if the survivor sells the property. In order to capture the best of both situations, it is possible to transfer property into a “revocable trust” (thus avoiding any probate court proceedings) while also retaining its character as “community property” (thus obtaining a full “adjusted basis”). Call the Law Office of Lynn K. Girvin to learn more about estate planning and what manner of titling your home best fits your situation (714) 619-4145! © Law Office of Lynn K. Girvin *This discussion is intended to provide you with general information about income tax basis and does not include all the variables in determining how your estate plan should be prepared. This handout is not intended to provide tax advice or legal opinions. Before making and changes to your estate plan you should consult with your estate planning attorney and tax advisor to determine the best options for you and your family.

There is a misconception that a revocable trust protects trust assets during the lifetime of the settlor. While revocable trusts serve several worthwhile purposes, protection of assets during your life is not one of them. Unfortunately, simply transferring certain assets to yourself as trustee of your revocable trust does not create a barrier from creditors because you are still the beneficial owner. At your death or the death of your surviving spouse, however, your revocable trust does become irrevocable simply because you are no longer alive to make changes or revoke it. An irrevocable trust with specific language limiting how and when a beneficiary is permitted to receive assets provides a layer of protection not otherwise available to you during your life. You may include provisions that help to ensure money going to your children does not go to your child’s potential future ex-spouse or other unintended creditors. Most revocable trusts are typically established to avoid probate and have the added feature of including a distribution plan for beneficiaries, typically children of the settlors. A common theme is to set up different ages at which time the children will inherit and as the child reaches certain specified milestones, he or she can simply “demand” that the specified asset value be distributed. For example, if a trust provides that the child has a right to one-half of the trust assets at age 30 with the remainder at 35, the child may demand up to that amount upon reaching those assigned ages. This is a very common way of distributing funds to a child but what if your child takes no withdrawals and leaves those funds in the trust? Or what if your child got sued and thoughtfully decided against taking a distribution because it would make those funds available for seizure? Here is where it gets interesting. If the acting trustee is related or subordinate to the beneficiary then he or she must make distributions for “health, education, maintenance or support.” The term “related or subordinate” is a legal term used to describe a person who has a familial relationship or subject to the authority of the beneficiary (i.e., an employee) to either the person who established the trust or the person receiving its benefits. In a situation where your child is the named trustee and is the beneficiary it is apparent that those distributions must be made because both titles belong to the same person. In this situation, the danger exists that a creditor could step into the beneficiary’s shoes and demand that those distributions be made, arguing that the money being requested is for the health, education, maintenance or support that an “interested” trustee must make. This problem can be averted by one of two ways; either by naming an independent “discretionary” trustee as successor directly in the trust document at the outset, or making sure that your child knows to resign immediately and name an independent discretionary trustee in the event of divorce, creditor issues or lawsuits. An independent trustee can make distributions based solely on their discretion without relying on the “health, education, maintenance or support” standard for those related or subordinate to the beneficiary. In this situation, the trust must be written with specific language for this to properly work permitting the independent trustee to make distributions for any reason or for no reason at all. This allows the trustee to simply deny any benefits to a creditor. Creating estate planning documents can be a laborious process but the benefits of creating a continuing asset for your children are huge.