Why is probate a bad thing?

Avoid Probate!  Norman Dacey's 1960s book started the living trust revolution, and people took away at least this much of his message:  don't go to probate court.  Beyond that, most people aren't really sure why they're supposed to avoid probate.   The main reason is its cost.  The court costs and other costs are not too high, maybe $1,500 to $3,000, but the main expenses are the fees for the attorney and the executor.  They're based on the size of the gross estate (debts and liens are not subtracted from the total) and are $7,000 each to the attorney and executor for the first $200,000 of gross assets, 2% each of the next $800,000, 1% of the next $9,000,000, and 0.5% of the next $15,000,000. The court rules on the fee for estate amounts over $25,000,000.  The court can also allow "extraordinary fees" in addition to the fees above, usually for more complicated matters like selling assets, tax planning or dealing with disputes. Probate is generally required in California when one dies with or without a will, and the assets outside of trusts or beneficiary accounts are more than $100,000 in value. By contrast, the fees involved in settling living trusts are usually less.  Trustees, whose role is similar to that of executors, typically charge 1.5% to 0.75% on a sliding scale, with the percentage charged decreasing as the estate gets larger.  Attorneys can charge hourly or on a percentage basis, and their fees average between 0.5% and 1% of the value of the estate, with most being on the lower end of that scale.  Given the size of most estates in California, the administrative costs and fees for a trust will be less than those for a probate. The other advantage to trust administration is that it usually takes less time than a probate to settle.  There are still statutory waiting periods, but trustees can move faster without having to be tied to the court's schedule in getting hearings or waiting for orders to be approved and entered. So, probate is not a bad thing, and I've handled hundreds of probate matters, but given the choice, I'd say trusts and trust administrations are better, with less cost and stress for clients in most situations. Contact us at (888) 503-7615 or cjohnson@christopherbjohnson.com with your probate and revocable living trust questions.

Conservation easements

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One tool for estate planners is the conservation easement, by which a landowner voluntarily restricts his or her land from being developed, restricts the amount of development or protects existing features, like a building facade with historic value.

This may be particularly useful for families with a valuable family retreat they'd like to pass on to future generations, but whose value might mean a large estate tax.  With a conservation easement, the restrictions reduce the value so the estate tax is lowered, but the family members can still use the land as they always have and leave enough leeway for their future needs.

It can also be useful for owners of historic properties concerned about preserving them for the future--something like this may have saved one of my favorite properties, the Maslon house in Rancho Mirage, California, by architect Richard Neutra.  The original owners' children had to sell after the owners' deaths, and raised the price above market to attract what they thought would be an appreciative owner.  Indeed, the buyer swore he was truly in love with the house and would be a good steward, but less than 30 days later, he'd bulldozed the place to put up the Palm Springs equivalent of a McMansion.  I guess "good steward" is open to interpretation.  Actually, I've seen the same set of facts many times in my own practice--the buyers can promise all they want, but rarely are promises like keeping a house intact enforceable.

Had the original owners used a conservation easement, they may have been able to prevent the sale in the first place (as the need for cash to pay estate taxes would have been less or none at all) and also future destruction.  Trust, but verify.

The easement may also qualify for other tax benefits, but it should be carefully considered, as it's a permanent restriction on the land.


To determine the easement value, the land would be appraised at its fair market value without the easement restrictions, and also at its fair market value with the easement restrictions. 

On a different note, those living in historic properties in California should see whether they qualify under the Mills Act for lower property taxes--if so, they may see large reductions in their property tax.

For more information about conservation easements or other estate planning and probate questions, contact us today at cjohnson@christopherbjohnson.com or (888) 503-7615.

New estate tax law

It came, later than expected--there's a new estate tax and gift law, and it was worth the wait.  Estates under $5,000,000 will pass to beneficiaries estate tax free, and married couples can give double that amount.  The top tax rate has also been reduced, so if you're fortunate enough to have over $5,000,000, the tax rate has been lowered to 35%.

The other big news is that the gift tax exemption is once again unified with the estate tax, meaning the $5,000,000 limit applies to gifts you make during your lifetime as well, which means we'll probably see some large gifts being made over the next couple of years.

The only bad news is that these amounts are only in effect through 2012, when Congress will presumably agree on extending them or offering something even better.  If not, we'll be back to a $1,000,000 limit.

The new law means that very few people will be paying any estate tax.  Alan Rothschild, who chairs the American Bar Association's real property, trust and estate law section, estimates that less than one-half of one percent of people dying this year will leave estates owing any estate tax.  Back in 1977, 10.5 percent of estates paid estate tax.

Even if your estate is taxable, we still have plenty of options to reduce or eliminate it, and with the new limits, it's even easier to do so.

For the majority of people who don't have taxable estates, planning is a bit simpler now, but just as important as it's always been--a well-drafted plan avoids high probate fees, high conservatorship fees from incapacity and the wrong people getting what you have.  Contact us today at (888) 503-7615, cjohnson@christopherbjohnson.com or at our website to see how your plan can work with the new law.

Heirlooms

Ellen Lupton writes in the New York Times about "How to Lose a Legacy." In part, it deals with the heirlooms passed on from generation to generation, and the sentiment, or lack of it, that passes as well.

Where your treasures go is an important part of the estate planning process, as these items can lead to fights, or just outright theft--I'm aware of one estate that was plundered by a daughter who backed the U-Haul truck up to the house and emptied it while the rest of the family was at the funeral.

If dispositions aren't clear, there may be several people claiming "She told me she wanted me to have it!"

It helps to have someone like an executor or trustee with the authority to decide where things go in disputes, and under recent California law, you can leave a memorandum with instructions for where items should go--unlike a will or trust, the memorandum is simple to update as you gather more (or give away more) stuff.

It seems every third estate has a coin collection that was promised to multiple people, so be sure your plan is clear about your stuff!

What if I have uncollected child and spousal support from 1960?

Can I still collect it? Yes! If uncollected, and the order mandating it hasn't been modified, the law protects you, even after all these years. There are some defenses to paying the spousal support, but not the child support, and we're filing a case on this issue. For various (and good) reasons, they had not tried formally collecting until now, shortly after the man's death.

His death means the claim needs to be acted upon within a year, but the law does have several protections and priorities for child and spousal support claims, so don't give up!

The interest accrues from the date of the order, so that helps too, especially if it's from 1960.

Special Needs Trusts

I had dinner a couple of weeks ago with a terrific trust officer from Wells Fargo trust services, who was frustrated that a personal injury settlement of several million dollars was divided into a large structured settlement and a very small special needs trust. Her client, the injured party, wanted to have a house, which would disqualify him from benefits he needed. There wasn't enough money in the trust to purchase it, and the structured settlement funds, if used, would disqualify him. If the settlement had been placed in the trust at the beginning, they wouldn't have this problem, and it was now too late to fix it.

People understand the power of special needs trusts much more than they used to, but it's a tricky area and not yet understood. I'll be speaking in August about this issue for parents, whether the funds are from themselves or from a settlement, at the NAPA Center in Los Angeles. If you'd like to know more, please contact Cassandra Hanson in our office at (626) 683-8869.

Eyes wide open: The key to effective estate planning and asset protection

Here's the text of an article I wrote that appeared in today's Los Angeles Daily Journal, with some advice on where not to put your money (or your heart):

One of our firm’s maxims is “Don’t marry a stripper.” You may laugh, but we’ve seen a number of men (and women) come into our office after waking up to find their car, cash, bank account, collectibles and new wife or husband have all mysteriously disappeared. The once-besotted and now justifiably infuriated victim may have thought the object of his or her infatuation had a heart of gold and could be trusted, but experience in the law, let alone human history, tells us otherwise.

Another of our maxims is “Money’s not safe in a safe.” Sure, our banking system has taken some hits lately, but it is still quite surprising how many people squirrel away tens or even hundreds of thousands of dollars under the mattress, in linen closets and beneath floorboards. We’re not just talking gang bangers here, but people from all walks of life. And while a massive black safe in the garage may offer greater protection than a cookie jar during its owner’s lifetime, what about after the owner passes away or becomes incapacitated?

Unfortunately, the owner has typically informed a “trusted” family member or friend about the stash of cash, and in the case of a safe, provided the combination. When the rightful heirs open the safe, everyone is stunned to find the money, jewelry, coins, baseball cards and (gasp) the Star Wars action figures long gone. Even if the heirs have a good idea of who took everything, the burden of proof is on the executor, trustee or heirs themselves to not only prove who took it, but also how much was taken. Without a paper trail, it’s almost impossible.

So if a spouse turns out to be unreliable and a safe isn’t safe enough, who or what can an individual trust? Who can help ensure hard-earned wealth is protected and wishes carried out regarding the administration and/or distribution of assets in the event of incapacity or death? Can the trustee even be trusted?

You have to trust someone, don’t you?

Estate planning is often viewed as one of the gentler practice areas of the law, and perhaps it is. However, you still see plenty of tragedy. I probably see more of this than the average estate planning attorney because our firm is large, highly diverse and focuses on a variety of practice areas, including family law and probate litigation. Our attorneys often represent clients who did not come to us for estate planning initially, but are now seeking counsel because they are in danger of losing many or all of their assets to divorce, a contested will, improper administration of a trust, probate problems and more. For example, one of our litigators had a prospective client come in seeking redress from a sibling who had been named trustee of the family’s estate, and had even been allowed to create the trust herself. This trustee used the proceeds from the trust to open a restaurant, which subsequently folded, taking all of the siblings’ money with it. Since she lacked insurance, and had filed for bankruptcy herself, the money, sadly, was gone for good.

Or consider this: a kindhearted divorcee with young children wills his well-educated brother the family’s homestead. After the divorcee’s passing, his brother transfers title of the home to himself and then borrows against the equity. Unfortunately, the brother suffers several business setbacks, loses the money he borrowed and the house eventually goes into foreclosure.

Given that situations like these happen quite often, who can someone trust to manage his or her affairs in the event of incapacity or after death? This is one of the most difficult questions facing any individual or family. Many of our clients initially think of a close family member, particularly a son or daughter. This choice gives rise to a number of questions, which we invariably raise with our clients. Does the son or daughter have the time and knowledge to administer a trust, let alone a large estate? What about the daughter or son-in-law—can they be trusted? In the event of a child’s divorce and remarriage, will the client’s wishes still be carried out with respect to grandchildren? If you name one child as executor or trustee, how will the other children feel about it and what might they do to contest it? If you name all of the children as executors or trustees, will they get along?

Questions like these, and many more, are critically important to ask and very difficult to answer. The fact is, choosing an executor or trustee is a tough decision, particularly when you consider the financial stakes involved.

The rise of the professional fiduciary.

Professional fiduciaries have been around for many years, but they have not been widely used until fairly recently. Why? One of the primary reasons is that professional fiduciaries have earned, rightfully so, a reputation for undue prudence in the management of assets. To put it bluntly, in an attempt to avoid liability, professional fiduciaries have historically made extremely conservative investments and failed to obtain reasonable returns. (Of course, one could argue that a son, daughter, brother, uncle, etc. is not necessarily going to achieve stellar returns either. But hey, they’re family, right?)

The problem of professional fiduciaries being far too conservative in their approach to asset management began to change with the passage of several pertinent laws in California. One of the most important was the California Prudent Investment Act, which made professional fiduciaries liable if they did not achieve reasonable returns. Not a bad incentive for a individual or family to expect sound administration of a trust or estate. Another advantage of professional fiduciaries is that they must carry insurance, thereby providing greater protection to trust and estate assets. Combine these benefits with the numerous problems mentioned above in choosing a family member as executor or trustee, it is not so surprising that professional fiduciaries are becoming more and more popular.

So can a professional fiduciary be trusted? Well, at least their track record can be fully investigated. And even though, as any prospectus will tell you, “Past results do not guarantee future returns,” the professional fiduciary may very well be a sound choice to help ensure assets are protected, returns on investment are reasonable, wishes are carried out and legacies endure. In any case, it sure beats turning everything over to Uncle Fester. Like everything else in estate planning and asset protection, keep your eyes—and your ears—wide open.

Chris Johnson, Esquire, Co-Founder and Partner with the Law Firm of Russakow, Ryan, and Johnson, focuses on advanced estate planning, trusts and business succession. For more information visit www.rrjlaw.com.