How will proposed tax reform affect your estate plan?

Posted January 30, 2015 in Business Law, Estate Planning, Probate by Jennifer Mispagel.

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January 30, 2015
How will proposed tax reform affect your estate plan?
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On January 20th, 2015, President Obama stood before a joint session of Congress and delivered the annual State of the Union address. Some of the topics discussed were the current State of the Union, College Savings Plan reform, his legislative agenda as well as several White House proposed tax reforms for the upcoming fiscal year.

While many of his new policies will affect all Americans in some way, several of his proposed tax increases will particularly affect upper-income persons and financial corporations. One in particular is a proposed change to the tax on appreciated estate property, otherwise referred to as the “trust-fund loophole.”

Taxation on Appreciated Estate Property

The term Capital Gain stands for the profit realized on the sale of a non-inventory asset that was purchased at a cost amount that was lower than the amount realized on the sale.  In the United States, individuals and corporations pay U.S. federal income tax on the net total of all their capital gains just as they do on other sorts of income. “Long term” capital gains are generally taxed at a preferential rate in comparison to ordinary income.

Currently, the law states that property which has appreciated in value that is owned by an estate is generally not subject to tax at death. Under this tax scheme, children and other heirs typically receive and sell property with little or no capital gains tax since most property receives an increase in basis to fair market value. For example, a parent who dies can pass along a valuable asset to their child or heir with no capital gains tax being due. When the child or heir eventually sells the asset, the current law limits the eventual tax bill by figuring the taxable gain only since the parent’s death. While this is a feature commonly known as a stepped-up basis the administration refers to this as the “trust fund loophole” and is looking to change it.

The White House proposal is to tax this appreciated estate property. The proposal states that the tax will be at 28% if the difference between the cost of the property and the fair market value at death exceeds $100,000 per person. There would be a separate exclusion for a personal residence of $250,000 per person. The proposal would not include clothes, furniture and most other personal items.

In arguing its case for revising this aspect of the tax code, the White House claims that all of the gain on valuable property or assets that occur prior to the death of a parent unfairly escapes tax. The White House claims it is in good company. Critics of the current tax code say that it is outdated. They claim that while the current policy reduces disputes over prices paid for assets long ago, they acknowledge that revision to the tax code would unlock capital by removing an incentive for holding valuable assets for generations.

Many experts, such as USC tax expert Edward Kleinbard, agree. Mr. Kleinbard notes that the capital gains tax is our only truly voluntary tax. Taxpayers can defer it for a considerable amount of time simply by withholding on the sale of their taxable assets. He argues that if you’re rich enough to hang onto your stocks and bonds, or can utilize financial strategies to enable you to exploit their value without selling them, you can defer paying capital gains tax your entire life.

Whether the White House prevails in passing this legislation remains to be seen. It seems clear, however, that negotiations on tax policy will continue in attempts by the current administration to eliminate tax loop-holes. Eliminating the lock-in effect, where holders of appreciated assets avoid selling because of the taxes imposed on the sale, could have a major impact on estate planning strategies and should prompt concerned individuals to look more closely at their estate plans, which should be revised periodically to ensure the best treatment of ones assets.

These are issues that make estate planning a complex field. Whether you are concerned with devising a plan for either a family estate or that of a business, it is important to get good advice. The attorneys at Lonich & Patton have decades of experience handling complex estate planning matters including business succession plans, wills, and living trusts. If you are interested in developing an estate plan or reviewing your current estate plan, contact the experienced estate planning attorneys at Lonich & Patton for further information as we are happy to offer you a free consultation.

Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results.  While this post may detail general legal issues, it is not legal advice.  Use of this site does not create an attorney-client relationship.

 

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Who gets the family pet in a divorce?

Posted October 27, 2014 in Estate Planning, Family Law by Lonich and Patton.

If I had to ask you to put a price on your dog, cat or your pet hermit crab, could you? For some, perhaps they could but the vast majority would likely agree that their pets are priceless. However, disputes regarding who gets the family pet in divorce proceedings has become commonplace in family law.

Earlier this year, Melanie Griffith and Antonio Banderas made a statement that they were ending their two-decade marriage but vowed to remain friends and to move forward lovingly. However, shortly after, reports surfaced that a custody battle was flaring up – not over their 17 year old daughter, but over the couple’s three dogs.

Although these days some people treat their pets better than their own children, in the eyes of the law pets are still only considered the property of their owners, much like their furniture is[1]. Legal experts agree that pet owners invest hundreds sometimes thousands of dollars and hours researching proper training, good food choices, and the perfect toys, groomers and veterinarians for their pets. Those same individuals might also take precautions with their estate by writing a prenuptial agreement. But how often do those pet owners think about legal issues associated with pet ownership?

Family law attorneys agree that the best way to handle a situation with a pet is to put it in a prenup. If you came into your relationship with Maxwell, put it in writing that if you are to leave the relationship Maxwell is coming with you. If you and your significant other purchased a pet together during the relationship, but you both agree that one of you should have the pet in the event of a breakup, a post-nuptial agreement would make sure that in the event of a divorce or separation the pet would go with the spouse more bonded with the animal.

Without something in writing, trouble could land you arguing in court. Last year a New York judge granted a divorcing couple the right to engage in oral arguments over pet custody for the first time in the state’s judicial history. The landmark legal showdown was ultimately averted. The couple settled out of court.

In the event of a heated breakup, pets can be protected.  If a party feels that he/she and the pet is in danger at the hands of the other party, California law provides for the family pet to be included on a protective order. Since 2008, courts have had the ability to make an order that the restrained person stay away from the pet. Family Code Section 6320 provides that upon a showing of good cause, the court may include in a protective order a grant of the exclusive care, possession, or control of any animal owned, possessed, leased, kept, or held by the spouse or minor child resident in the residence.

Family Code section 6320 makes strides toward addressing the established connection between animal abuse and family violence commonly referred to as the “Link.”[2] One of the first studies that described this Link found that of a survey of women with pets who had entered a shelter in northern Utah, seventy-one percent reported that their partner had threatened or actually hurt or killed one or more of their pets.[3]Another study of fifty of the largest shelters in the United States found that eighty-five percent of battered women and sixty-three percent of children with pets had experienced incidents of pet abuse.[4] An alarming consequence of these studies is that victims may feel that they cannot leave their abuser because they worry for the safety of their pets.

The Certified Family Law Specialists at Lonich & Patton have decades of experience handling complex family law matters.  If you are interested in learning more about prenuptial or post-nuptial agreements, please contact the Certified Family Law Specialists at Lonich & Patton for further information.  Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results.  While this post may include legal issues, it is not legal advice.  Use of this site does not create an attorney-client relationship.


[1] Kimes v. Grosser (2011) 195 Cal.App.4th 1556

[2] Am. Humane Ass’n, Learn About the Link, http://www.americanhumane.org/site/PageServer?pagename=lk_about (last visited Aug. 4, 2007); see also Senate Judiciary Committee, Committee Analysis of SB 353, at 2-5 (Mar. 27, 2007) (explaining the connection between animal abuse and family violence). There are also several studies that report that children who witness abuse, or are abused themselves, tend to, in turn, abuse animals. See Phil Arkow & Tracy Coppola, Expanding Protective Orders to Include Companion Animals 5 (2007), http://www.americanhumane.org/site/DocServer/PetsinPO2007.pdf? docID=5061 (describing the harmful effects upon children of witnessing domestic violence).

[3] Frank R. Ascione, Battered Women’s Reports of Their Partners’ and Their Children’s Cruelty to Animals, 1 J. Emotional Abuse 119, 125 (1998).

[4] Frank R. Ascione et al., The Abuse of Animals and Domestic Violence: A National Survey of Shelters for Women Who are Battered, 5 Soc’y & Animals 205, 211-12 tbl.1 (1997), available at http:// www.syeta.org/sa/sa5.3/Ascione.html.

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Estate Planning Lessons from Robin Williams

Posted August 22, 2014 in Estate Planning, In the Community, Probate by Michael Lonich.

As many of us mourn the loss of this great comedic genius, new information is still coming forward about Robin Williams. According to ABC News, with more than half of his movies portraying Williams as the leading man, his movies grossed over $6 billion throughout his career. While he was paid $165,000 per episode for his one season of The Crazy Ones, it is unclear whether he returned to television because of alleged “bills he had to pay” following his two divorces.

Robin Williams is survived by his third wife, Susan Schneider, who was married to him for 3 years, and his three adult children from his prior two marriages whose ages range from 22 to 31. The question for them now is what was the state of his financial affairs when he passed away?

While it appears from public record that Williams left real estate with equity of around $25 million behind, it is unclear what else he left for his heirs. What is clear, however, is that Williams appeared to have several estate planning documents which will be invaluable to his family. These include two different trusts. The first is the “Domus Dulcis Domus Holding Trust” (Latin for “home sweet home”). TMZ also reported that someone had leaked a copy of a different trust, which Williams created in 2009. This would have been while Williams was in the middle of his divorce from his second wife, Marsha Garces.

This trust reportedly named his three children as beneficiaries, splitting their trust funds into three equal distributions for each of them, set to pay out when they reach ages 21, 25, and 30. While the Domus Dulcis Domus Holding Trust appears to have been done to minimize estate taxes, this second trust accomplishes the goals of safeguarding privacy for Williams and his family since trusts avoid probate, keeping his affairs private (as long as they are not leaked to the media).

If you would like to learn more about trusts or avoiding probate in general, call Lonich & Patton to schedule a free half-hour consultation. Our attorneys are passionate about estate planning and have decades of experience handling complex estate planning matters, including wills and living trusts. If you are interested in developing an estate plan or reviewing your current estate plan, contact the experienced estate planning attorneys at Lonich & Patton for further information.

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Tax and Estate Planning for Same-Sex Couples

Posted August 1, 2014 in Estate Planning, In the Community, Probate by Michael Lonich.

Earlier this week, the U.S. Court of Appeals for the 4th Circuit struck down Virginia’s same-sex marriage ban, saying that withholding the fundamental right to marry from same-sex couples is a form of segregation that the Constitution cannot tolerate.

In June 2013, the Supreme Court of the United States in United States v. Windsor, held that the federal government must recognize same-sex marriages and that it is up to state Legislatures to define marriage within state boundaries. Since then, numerous law-suits challenging the constitutionality of state DOMAs on equal protection and due process grounds have prevailed in various federal and state courts. Currently, 19 states, including California, plus the District of Columbia recognize same-sex marriage (recognition states), while 40 states prohibit it (non-recognition states).

The prevailing prediction is that a Supreme Court guarantee of a right to marriage is on its way. American support for same-sex marriage is at a new high of 55 percent, and California support is at 61 percent and increasing, if the trends continue. It is important for all couples to create an estate plan. Additionally, it is important for same-sex couples to be aware of the potentially complicated issues that arise when they move across state lines.

Same-Sex Couples Living in California

Same-sex married couples now living in California enjoy the same benefits and burdens under state and federal law as married opposite-sex couples. Before Windsor and IRS Revenue Ruling 2013-17 (which extended federal tax benefits to married same-sex couples, regardless of their state of residency), many married opposite-sex couples likely took this preferential treatment for granted.

Some of these benefits include:

  • Property transferred between spouses incident to a divorce is not subject to income or gift tax;
  • Spousal support (alimony) payments are tax deductible to the paying spouse;
  • Child support payments are not subject to income tax;
  • Spouses receive a community interest in 401(k) accounts and other retirement plans; and
  • Spouses receive all community property and anywhere from one-third to all of the deceased spouse’s separate property for intestate (when a person dies without a will or other non-probate instrument) inheritance purposes.

All couples should be aware of their legal rights at marriage, divorce, and death. It is important for both same-sex couples and opposite-sex couples to consider pre-marital agreements, estate plans, and any tax consequences that arise from marriage or divorce.

The Marital Status of Migrating Same-Sex Couples

When a same-sex couple moves out of California, their marital status will depend on the other state’s law with regards to various issues including, state tax filing status, intestate succession, guardianship and conservatorship appointments, and adoption and artificial reproductive technologies. In other words, a non-recognition state may not recognize the otherwise valid same-sex marriage.

If and when the Supreme Court guarantees a right to marriage, moving across state lines will no longer be an issue for same-sex couples. However, in the interim, it is important to be aware of the possible legal consequences.

For example, under Florida law, the definition of “heir” does not include same-sex spouses for intestate inheritance purposes. This means that a same-sex couple that was married in California, but permanently living in Florida, will not inherit from each other under the Florida intestate system. Some courts in non-recognition states are willing to recognize same-sex marriage in certain contexts through the doctrine of comity, which is where a court gives deference to another state’s laws. However, most surviving spouses want to avoid litigation because it can be a headache, requiring time, money, and mental energy.

In some cases, it might be worthwhile for same-sex spouses to opt out of the intestate system with non-probate instruments, such as estate plans. A same-sex couple’s estate plan needs to be drafted with precision, specifically naming beneficiaries, rather than using general terms such as “spouse.” This becomes especially important if a same-sex couple moves to a non-recognition state, where the court may not interpret a same-sex spouse to qualify as a spouse or heir. If any other blood related heirs of the deceased spouse were to contest the non-probate instrument, they could end up inheriting property that would have gone to the same-sex spouse in California or another recognition state.

If you are a same-sex couple and are considering marriage, or need to create or update an estate plan, please contact our California Certified Family Law Specialists. Our attorneys have decades of experience handling complex family law and estate planning matters and offer a free consultation.

Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results.  While this post may include legal issues, it is not legal advice.  Use of this site does not create an attorney-client relationship.

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Your Business Exit strategy should start today

Posted July 15, 2014 in Business Law, Estate Planning by Rebecca Sternbach.

If you draft a will in order to ensure that your heirs are taken care, developing a business succession plan will ensure your company continues to thrive after you are gone.

As the economy slowly emerges from the shadow of The Great Recession of 2009, businesses are also starting to thrive again. While storefront businesses are still a staple of the American dream, use of the internet and the relatively low cost of creating a website and selling a unique product or idea has lowered the barrier to entry for entrepreneurs who wish to start a family business.

If you own or are starting a family business, you are in good company: Forbes estimates that family businesses account for 50 percent of the current Gross Domestic Product in the U.S. This includes 35 percent of Fortune 500 companies (the top 500 U.S. publicly and privately held companies ranked by their gross revenue and published by Fortune magazine) that are controlled exclusively by families.

However, there is a problem with the family business model. According to a Pricewaterhouse Coopers survey, only 52 percent of family businesses expect members of the next generation to be able to run their business. Junior members lack of experience for running a company coupled with poor succession planning are the main culprits.

Get a Prenup for Your Business

If a premarital agreement can reduce headache and anxiety in the event of a divorce, then a similar mechanism for a family business – labeled a Shareholder’s Agreement* – will reduce anxiety and hard feelings when it becomes necessary to distribute assets or make tough decisions regarding the family business.

An agreement among shareholders or family owners lays the ground rules of a family business in terms of important topics such as governance, succession, transfer of assets, liquidity and taxes among others. A Shareholder’s Agreement may address such questions as:

  • Board composition:
    • Will each sibling be represented?
    • Will there be a board of directors?
    • Will executives from outside the family be allowed?
    • What training experience will be required?
  • Decision-making process:
    • What is the number of votes needed to approve key issues?
    • What is the method for dispute resolution?
    • What are the rights of family members?
    • Family members not involved in the business?
    • Non-family involved in the business?
  • Business and Owner Estate Plan:
    • Who are the business successors (both managers and owners of the business)?
    • What is the compensation for owners?
    • What is the remaining profit distribution?
    • What are the taxation implications upon sale or transfer of ownership?
    • Is there an estate plan? Is it in writing? Is there a timeline for implementation?

Although many small businesses fail, by addressing these issues a small business owner takes steps towards ensuring his or her family’s interests while saving money, and avoiding conflict.

Careful estate planning can ensure that a family business continues to benefit family members and that ownership of the business is not diluted until the business is ready to accept outside investors. Owners’ estate plans should use trusts or other mechanisms to restrict the ability of their heirs to transfer shares. A successful family business is an excellent means to provide financial security for the small business owner and his or her loved ones as well as employment opportunities for interested family members.

Estate planning is a complex field. Whether you are concerned with devising a plan for either a family estate or that of a business, it is important to get good advice. The attorneys at Lonich & Patton have decades of experience handling complex estate planning matters including business succession plans, wills, and living trusts. If you are interested in developing an estate plan or reviewing your current estate plan, contact the experienced estate planning attorneys at Lonich & Patton for further information as we are happy to offer you a free consultation.

Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results.  While this post may detail general legal issues, it is not legal advice.  Use of this site does not create an attorney-client relationship.

*Source

 

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