IRS Withdraws Its Support of The Proposed Change to The Estate Tax Valuation Rules

Posted December 5, 2017 in Estate Planning by Michael Lonich.

The US Treasury originally enacted IRC Section 2704 in 1990 to prevent people from taking advantage of the tax system. Specifically, IRC Section 2704(b) states that in valuing property for estate and gift tax purposes, some restrictions on the ability of an entity to liquidate would be disregarded. Currently, the regulation permits certain discounts for lack of control (minority interests) and lack of marketability that are commonly applied to lower the value of transferred interests for gift, estate, and generation-skipping tax purposes.

On August 3, 2016, The Treasury published proposed regulations under IRC Section 2704 that would have disallowed valuation discounts for interest in family controlled businesses that currently apply to gift and estate tax planning. By eliminating the valuation discounts, the proposed regulation would negatively impact succession planning for many small family owned businesses.

On October 4, 2017, the Treasury announced its withdrawal of the proposed regulations, explaining that they took an “unworkable” approach to the problem of artificial valuation discounts. In a press statement, the Treasury stated that the IRC Section 2704 proposed regulations: “would have hurt family-owned and operated businesses by limiting valuation discounts. The regulations would have made it difficult and costly for a family to transfer their businesses to the next generation.” Certainly, if passed, the proposed regulations would have disallowed discounts for lack of control and marketability commonly used by families in wealth transfer planning.

While the Treasury withdrew its proposed valuation regulations, it has released its annual inflation-indexed amounts for 2018:

1.   The annual gift tax exclusion amount (i.e., the amount that can be given annually gift-tax-free to an unlimited number of donees) will increase to $15,000 per donee (or $30,000 for a married couple that elects to split gifts for the year), up from $14,000 in 2017.

2.   The annual gift tax exclusion amount for gifts to a spouse who is not a United States citizen will increase to $152,000, up from $149,000.

3.   The gift, estate, and GST tax exemption amount (i.e., the amount of taxable transfers that can be given transfer-tax-free in the aggregate during lifetime or at death) will increase to $5.6 million per person (or $11.2 million for a married couple), up from $5.49 million.

4.   Recipients of gifts from foreign persons who are corporations or partnerships must report such gifts if the aggregate value of the gifts received in 2018 exceeds $16,111. The threshold for reporting gifts from a foreign person who is an individual will remain at $100,000.

Consulting with an attorney to learn about how valuation and taxation can impact your testamentary wishes is always wise.  If you have any questions about your estate planning needs, please contact the experienced attorneys at Lonich & Patton—we offer free half-hour consultations.

Lastly, 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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Estate Planning for Special Needs Children

Posted June 16, 2017 in Estate Planning by Michael Lonich.

Having a child with special needs brings countless challenges to overcome. Parents of these children, regardless of age, are their biggest advocates, providers, and caretakers. Life is unpredictable, but if parents have a well thought out plan they can take comfort in knowing their child will continue to be provided for. Therefore, it is essential that parents of a special needs child plan early regarding their estate.

Setting out an estate plan to provide for a child with special needs has its own unique hurdles. One is to design a plan that supplements a child’s government benefits while enhancing the quality of the child’s life. As a parent, if you leave your child too much outright this may risk them losing their public benefits. Another hurdle to overcome is to figure out how to provide for proper supervision, management, and distribution of the inheritance through a third party created and funded Special Needs Trust. The task of estate planning may feel daunting at times, but with a knowledgeable attorney and good organization parents can execute a successful estate plan.

The ultimate goal is to preserve public benefits for a disabled child. Parents will want the plan to provide a lifetime of money management for the child’s benefit, protect the child’s eligibility for public benefits, and ensure a pool of funds available for future use in the event public funding ceases or is restricted.

These goals can be accomplished by executing a Special Needs Trust. If properly drafted and administered, a Special Needs Trust will allow the child to continually qualify for public assisted programs even though their parents have left them an inheritance. This occurs since the assets are not directly available to the child and because this type of trust has strict limits on the trustee’s availability to give money to the child.

Parents who draft a Special Needs Trust will appoint a trustee to act as the child’s money manager. This is a very important decision because it will ensure the long-term success of the Special Needs Trust. Parents should closely counsel with their attorney before making this selection.

Parents may also wish to appoint a guardian or conservator. A conservatorship or guardianship are court proceedings that designate a person to handle certain affairs for an incapacitated person. Where a conservator cares for the estate and financial affairs, a guardian is responsible for personal affairs such as where the child lives or what doctor they see.

Parent’s planning will ensure their child is cared for in the best way possible. But it is important to plan now. If you are considering drafting an estate plan and would like more information about Special Needs Trusts or other options available, please contact the experienced estate law attorneys at Lonich & Patton.

Lastly, 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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Understanding the Impact of the Spousal Fiduciary Duty on Estate Planning

Posted March 21, 2017 in Estate Planning, Family Law by Michael Lonich.

We have outlined the spousal fiduciary duty on this blog before; now, we’re delving a bit deeper to discuss the impact of the spousal fiduciary duty on estate planning.  Traditionally, California courts rely on a common law burden-shifting framework when confronted with the possibility that a spouse has unduly influenced his/her spouse’s estate planning decisions.  However, a 2014 case from a California Court of Appeal—Lintz v. Lintz— took a different approach, and instead, relied on the statutory spousal fiduciary duty articulated in California Family Code section 721 to resolve an estate planning/undue influence claim.

The common law framework provides that the person alleging undue influence bears the burden of proof.  However, the challenger can shift the burden to the proponent of a testamentary instrument by establishing, by a preponderance of the evidence, three elements: 1) a confidential relationship, 2) active procurement of the instrument, and 3) an undue benefit to the alleged influencer.

Departing from the common law, the Lintz court—faced with an allegedly abusive wife who intimidated her husband into amending his trust to her tremendous benefit and to the extreme detriment of her stepchildren—looked to Family Code section 721 when it decided in favor of the husband’s estate.  Section 721 creates a broad fiduciary duty between spouses that demands a duty of “the highest good faith and fair dealing.”  Further, neither spouse may take unfair advantage of the other.  As a result, if any inter-spousal transaction advantages only one spouse, a statutory presumption arises under section 721 that the advantaged spouse exercised undue influence.  The presumption is rebuttable—the advantaged spouse can demonstrate that the disadvantaged spouse’s action was freely and voluntarily made, with full knowledge of the facts, and with a complete understanding of the transaction.

California Family Code section 850 describes three categories of inter-spousal transactions: 1) community property to separate property, 2) separate property to community property, and 3) separate property of one spouse to separate property of other spouse.  Notably, the section does not consider transferring community or separate property to trusts.

The court concluded that section 721 applies because section 850 does include property transferred to revocable trusts—in Lintz, Wife’s undue influence caused Husband, via his trust, to transmute a large part of his separate property to community property.  Accordingly, the court held that Family Code section 721 creates a presumption of undue influence when one spouse names the other as a beneficiary in a revocable trust.

Criticism of the decision abounds—all estate plans that name a spouse as a beneficiary, by their very nature, benefit one spouse.  In turn, use of the Family Code undue influence presumption threatens to disturb all testamentary instruments, and litigation may flood the family courts as spouses seek to rebut the seemingly automatic presumption that Lintz creates.  On the other hand, some commenters believe Lintz does not indicate a new paradigm, but rather, showcases a court’s eagerness to remedy the serious injury inflicted by a spouse’s egregious influence.

At the very least, the Lintz case does demonstrate that estate planning and family law are deeply intertwined.  Consulting with an attorney to learn how a marriage or divorce can impact your testamentary wishes is always wise.  If you have any questions about your family law and/or estate planning needs, please contact the experienced attorneys at Lonich & Patton—we offer free half-hour consultations.

Lastly, 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.


California Family Code section 721

California Family Code section 850

Lintz v. Lintz (2014) 222 Cal.App.4th 1346.

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Trust Administration: How a Trustee Can Collect Reasonable Fees

Posted January 24, 2017 in Estate Planning by Michael Lonich.

Although trusts do avoid the complication and expense of probate proceedings, a trustee—the person given power to hold legal title to and to manage trust assets—is not necessarily spared the administrative burdens that can accompany estate management.  Trustee responsibilities can include clearing title to property held in the decedent’s name, the preparation and filing of estate and income tax returns, and the collection of insurance proceeds—essentially any task necessary to administer the trust as the trust instrument instructs.  Typically, the creator of the trust—the settlor—will appoint a trustee in the trust instrument and provide compensation from his or her estate for the trustee’s services.  However, if the trust instrument does not specify any compensation, California Probate Code § 15681 allows a trustee to receive “reasonable compensation under the circumstances.”

In re McLaughlin’s Estate defines “reasonable.”  First, the trial court has wide discretion when making a fee determination, but it should consider the following factors:

1) The gross income of the trust estate

2) The success or failure of the trustee’s estate administration

3) Any unusual skill or experience which the trustee may have brought to his/her work

4) The fidelity or disloyalty displayed by the trustee

5) The amount of risk and responsibility assumed by the trustee

6) The time spent by the trustee in carrying out the trust

7) Community customs as to fees allowed by settlors/courts or as to fees charged by trust companies and banks

8) The character of the administration work done

9) Whether the work was routine or involving skill and judgment

10) Any estimate which trustee has given of his/her own services.

In McLaughlin, the appeal court concluded, after considering the above factors, that the trial court justly allocated reasonable fees—the trustees had profitably and with special skill managed the trust property, had accurately summarized receipts and transactions, and had committed a large amount of time to the trust’s administration.

Estate of Nazro provides another example of the above factors in action: Here, although the trustee received dividend checks, made bank deposits, wrote checks, prepared quarterly accountings, and reviewed trust assets, the work did not consume much of the trustee’s time.  Further, the court noted that corporate trustees in the area customarily charged management fees based on a schedule of percentages of the value of the various trust assets.  Therefore, the court held that $2,500 was an appropriate amount of compensation for the trustee’s services.

Ultimately, managing a trust estate is not always a walk in the park—if not otherwise provided, trustees should not be afraid to ask for compensation for their services.  However, keep in mind that compensation must reasonable and proportional to the work done on behalf of the trust.

If you have recently been named or appointed as a trustee or you are interested in creating a trust, please contact the experienced attorneys at Lonich & Patton.  We can help you understand what being a trustee entails, and if you want to create a trust, how you can properly compensate your chosen trustee.

Lastly, 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.


California Probate Code § 15681

In re McLaughlin’s Estate (1954) 43 Cal.2d 462

Estate of Nazro (1971) 15 Cal.App.2d. 218

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Estate Planning for Millennials

Posted September 28, 2016 in Estate Planning by Michael Lonich.

While estate planning may sound like an activity reserved for the baby boomer generation, even Millennials can get in on the fun!  Further, estate planning is not only for people with ample assets—planning for your future can extend to healthcare decisions and even your Facebook account.  Of course, thinking about death—especially one’s own—is hard, but there are many benefits to be reaped from laying out a few guidelines for your loved ones.

To begin, estate planning at a young age may not involve complex financial considerations, but there are two key areas to focus on: healthcare and personal property.

First, once you turn 18 years old, family members no longer have the legal right to access your medical records, and should you become incapacitated, your family would not be able to speak to your doctors or make medical decisions on your behalf.  Estate planning ensures that in the event of your incapacitation, your health is taken care of according to your wishes and by people you trust—

1) Advanced Healthcare Directive: A legal document in which you detail what medical actions should be taken if you are incapacitated or unable to make decisions on your own.  This document can be used to record your preference (or not) for a “do not resuscitate” order.

2) Durable Power of Attorney: A legal document which, should you become incapacitated, gives power to a person of your choosing to make medical or financial decisions on your behalf.  A durable power of attorney works in conjunction with an advanced healthcare directive to ensure that your health preferences are understood and heeded.

3) HIPPA Release Form: This form allows people listed on your advanced healthcare directive to access your medical records.  Access to your records makes it easier for your designated caregivers to make informed decisions regarding your health.

Second, you may not have a lot of assets, but most likely, you do have some treasured possessions.  To prevent your assets from being waylaid by intestacy (in which state laws determine how your property is distributed), consider making a will or trust—

4) Wills and Trusts:  A will and/or trust details to where and to whom your assets will go after your death.  While you may be content to let intestacy laws distribute your estate, creating a will or trust can streamline the process and assure your relatives that they are honoring your true wishes.  Importantly, besides money, you should consider other cherished aspects of your estate.  First, your pet—who will take care of your beloved fur friend?  Second, consider family heirlooms passed down to you through grandma and grandpa—a will or trust ensures that those items fall into the right hands.  Third, do you want to allocate any assets to a significant other?  If you and your partner are not married, he or she is not entitled to any of your assets and will likely receive nothing through intestacy either.  Whether you want to leave money or possessions—valuable or sentimental—a will or trust ensures your significant other receives a piece of your estate.

5) Digital Assets:  Social media accounts and digital files need postmortem management, especially if you would like your family to shut down your various online accounts.  Federal law does not require that websites permanently delete the account of a deceased user.  Therefore, designating a digital “executor” and creating an inventory (with updated usernames and passwords) of your online accounts that details what you would like done with them can ensure your online presence is handled according to your wishes.

Death is a difficult subject, but estate planning ensures that your family is not left without direction for how your final wishes should be carried out.  Therefore, if you are interested in learning more about estate planning, please contact the experienced attorneys at Lonich & Patton.  We can help determine what documents would best safeguard your assets and/or your medical wishes.

Lastly, 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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