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Fiduciary Duties Owed by Trustees: Part II

Trustee

By Tiffany A. Halimi, Esq.

Individuals who create a trust will frequently name family members or friends to act as the successor trustee of their trust. Family members or friends are typically not professional trustees, and thus have no prior experience acting as a trustee.  If you have been named as a trustee of a trust, you should seek the advice of counsel to provide guidance regarding your fiduciary duties, obligations and responsibilities.

As discussed in our prior blog article entitled “Fiduciary Duties Owed by Trustees: Part I,” the trustee of a trust owes many fiduciary duties to the beneficiaries of the trust.  In addition to the duties owed by a trustee discussed in Part I of this series, there are two important duties of a trustee:  The Duty of Disclosure and the Duty Not to Delegate.

  1. The Duty of Disclosure and Duty to Report and Account

California Probate Code Section 16060 states that the “trustee has a duty to keep the beneficiaries of the trust reasonably informed of the trust and its administration.” Accordingly, a trustee must furnish to each beneficiary all material information necessary to protect the beneficiary’s interests in the trust.  The trustee’s disclosure must be full and complete.  California Probate Code Section 16062 requires the trustee to furnish an accounting of the trust assets at least annually, at the termination of a trust and upon a change of trustee to each beneficiary to whom income or principal is required or authorized in the trustee’s discretion to be currently distributed.  California Code Section 16064 lists exceptions to the trustee’s requirement to account to beneficiaries, which includes the case in which a beneficiary waives the right to receive an accounting.

  1. Duty Not to Delegate

The Duty Not to Delegate is rooted in California Probate Code Section 16012(a). While the general rule is that the trustee may not delegate the trustee’s duties, the trustee may delegate acts that a person would ordinarily delegate in the management of his or her own affairs, such as hiring accountants, attorneys, investment advisers and appraisers to advise and assist the trustee with the trustee’s administrative duties. In the event a trustee has delegated a matter to an agent, co-trustee, or other person or professional, the trustee has a duty to exercise general supervision over the individual performing the delegated matter.

A trustee must perform and adhere to a significant number of duties and responsibilities. When administering a trust, the trustee should be cognizant of the several specific deadlines and penalties for missing those deadlines.  This blog article only covers two duties and does not discuss any of the deadlines.  It is imperative that  a trustee seek the advice of an expert. If you have been named as a trustee of a trust, and have questions about your responsibilities or the administration of that trust, please feel free to contact one of our Trusts & Estates lawyers.


Thank you for joining us on ClarkTalk! We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interest relating to the subject matter covered by the blog.  If you have any questions about fiduciary duties owed by trustees, please feel free to email Tiffany Halimi at thalimi@clarktrev.com or to call her at 213.629.5700. For more information about Clark & Trevithick’s Trusts & Estates practice, please visit our website at www.ClarkTrev.com

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What Does a Trump Presidency Mean for Estate Taxes?

By Tiffany A. Halimi, Esq.

Donald Trump was elected the 45th president of the United States of America.  What does this mean for our estate tax laws?

One of President-Elect Trump’s campaign promises was to eliminate the federal estate tax, a forty percent (40%) tax that is imposed on estate asset transfers in excess of $5.45M (indexed annually for inflation). Who would this affect from the payor’s perspective?  Who would this affect from the payee’s perspective? What impact would a reduction in the estate tax have on our federal tax revenue?  To understand the answer to these questions, we must first understand the current state of our estate and gift tax (i.e. transfer tax).

Current Estate Tax

Currently, in 2016, each individual has a $5.45M exemption from federal transfer tax that they can apply to transfers of assets made during life or upon death. Any transfer made in excess of the exemption will result in a 40% transfer tax (also known as an “estate tax” for transfers at death or “gift tax” for transfers during life).  A married couple can apply both spouses’ $5.45M exemption towards their joint estate, for a total exemption amount of $10.9M.

Current Capital Gains At Death

Under the current law, the basis of an individual’s assets will adjust to fair market value as of the date of death of that individual. Typically, this adjustment results in a step-up in basis (rather than a step-down).  For more information on basis, please see our previous blog post entitled “Think Three Times Before Gifting Real Property: The Interplay of Gift Tax, Capital Gains Tax and Property Tax.”  Receiving a step-up in basis can result in significant tax advantages for a deceased person’s heirs because they have the ability to avoid paying a capital gains tax, which can be a significant tax, particularly on a highly appreciated asset.

Proposed Repeal of Estate Tax

President-Elect Trump has proposed eliminating the estate tax. Citizens would be able to pass assets of any amount to their heirs without the obligation to pay any estate tax at the federal level.  In 2015, the federal government collected approximately $17B in estate taxes.  This source of revenue would be extinguished if the estate tax is repealed.  However, under President-Elect Donald Trump’s proposed estate tax changes, he also suggests modifications to the capital gains laws, which would affect the basis of a deceased individual’s assets, and possibly increase federal tax revenue in an area that revenue is not currently generated.

Proposed Changes to Capital Gains Tax Upon Death

The President-Elect further proposed that a deceased individual could pass up to $10M of gain to their heirs without incurring a federal capital gains tax. All assets passed to heirs that exceed a $10M gain would be subject to a federal capital gains tax as to the gain.  It is unclear what event would trigger the gain.  Would the gain be triggered automatically at death?  Or would the gain be triggered by the usual events that trigger gain (such as a sale)?  This is a point that needs further clarification.  Assessing a capital gain tax on assets that otherwise would not be subject to such taxation could be significant to the deceased’s state’s revenue as well, since most states impose a state-level capital gains tax, but not all states impose an estate tax.

The changes that President-Elect Donald Trump proposed during his campaign could have significant consequences for taxpayers and tax planners alike. To discuss tax planning strategies, please contact one of our Trusts & Estates lawyers.  Stay tuned for more information on if and how the estate tax changes!


Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog. If you have any questions, please feel free to contact the author, Tiffany Halimi, by email at thalimi@clarktrev.com or telephonically at (213) 629-5700.

Circular 230 Disclaimer: To comply with IRS requirements, please be advised that, any tax advice contained in this blog is not intended or written to be used, and cannot be used, by the recipient to avoid any federal tax penalty that may be imposed on the recipient, or to promote, market or recommend to another any referenced entity, investment plan or arrangement. For more information, please go to www.Clarktrev.com.

 

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A Trust May Not Protect You or Your Beneficiaries From Paying Child or Spousal Support

By Tiffany A. Halimi

The Fourth District of the California Court of Appeal issued an opinion last month (September 6, 2016) in the case of Pratt v. Ferguson upholding the Court’s power to order a trustee to make distributions from a trust to satisfy a beneficiary’s community property judgments and child support obligations.  In other words, even if a trust has provisions that would typically protect a trust’s assets from a beneficiary’s creditors (such as a spendthrift provision) those protections could be pierced by the beneficiary’s children or ex-spouse for the purpose of providing child support or satisfying a community property judgment.

The opinion highlights the power of the California Probate Code, which gives the trial court discretion to order a trustee to make distributions of income and principal to satisfy child support orders. The Court held that the Probate Code supersedes a spendthrift clause in the trust instrument, which would otherwise allow trustee to refuse to make distributions that would be subject to claims of creditors.

The opinion of Pratt v. Ferguson is not limited to child support; it also extends to Community Property judgment liens, which one spouse may obtain against another spouse during a divorce proceeding.  The Court opined that the California Code of Civil Procedure gives the Court discretion to direct a trustee to satisfy a community property judgment lien from a beneficiary’s share of the trust.

This ruling is important for spouses who either owe or expect to receive child support obligations or a Community Property judgment lien. Such obligations can be satisfied from a person’s beneficial interest in a trust, even if the trust’s provisions purport to protect the beneficiary’s interests from the beneficiary’s creditors.

If you or a client of yours is a trustee of a trust, you may want to consider a consultation to determine if the administration of that trust is in compliance with all rules, regulations, statutes and case law. To learn more about trust administration, please contact Tiffany A. Halimi, Esq. or one of our other trust and estate attorneys.

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.

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Think Three Times Before Gifting Real Property: The Interplay of Gift Tax, Capital Gains Tax and Property Tax

By Tiffany A. Halimi, Esq.

Think three times before making a gift of real property! To avoid unintended tax consequences, the gifting and receiving parties should consider the interplay of several types of taxes that affect a gift of a real property interest.  Specifically, the trifecta of taxes to be considered are: (i) estate and gift tax, (ii) income tax and (iii) property tax.

  1. Estate and Gift Tax

Each U.S. citizen is entitled to a unified estate and gift tax exemption of $5,450,000 per individual.  The unified estate and gift tax exemption means that an individual may transfer up to $5,450,000 of assets without incurring a 40% gift/estate tax.  Additionally, each individual may gift up to $14,000 to another individual, within a calendar year, without using any of the unified estate and gift tax exemption.  However, to the extent a gift exceeds $14,000 in value, the excess value will be treated as a taxable gift and must be reported on IRS Form 709.  The value of the taxable gift is applied against the gifting taxpayer’s unified estate and gift tax credit.  For example, if a taxpayer gifts a property valued at $1,000,000 to another individual, the taxpayer will have made a taxable gift of $1,000,000 less $14,000, which is $986,000.  The gifting party’s lifetime unified estate and gift tax exemption of $5,450,000 will be reduced by the taxable portion of the gift ($986,000).  Therefore, when making a gift of real property, the value of which is often in excess of $14,000, a taxpayer must consider to what extent such gift will reduce his or her unified gift and estate tax exemption.

  1. Income Tax

Another tax consideration relating to the gifting of real property is income tax – more specifically, the capital gains tax.  Upon the sale of real property, a capital gains tax is imposed on the taxable profit of the sale, which is generally the difference between the net sales price and the cost basis for which the property was acquired.  It follows that the greater the cost basis, the smaller the gain.  In other words, an increased basis will reduce the difference between the sales price and the basis.  Accordingly, a taxpayer has an interest in having a higher cost basis in order to reduce a possible capital gains tax.

When a gift is made, the recipient of the gift receives the same cost basis that the gifting party had in the real property for the purpose of determining future capital gain. For example, if the gifting party acquired the gifted real property 30 years ago for $100,000, then the receiving party will carry forward that same cost basis of $100,000, regardless of the value of the property at the time the gift is made.

However, the rules about basis are different on death. When an individual dies, the basis of the assets owned by that individual will adjust to fair market value as of the individual’s date of death (usually a step up in basis).  For example, if an individual owned real property that was purchased 30 years ago for $100,000, then, for simplicity of this example, we will assume his basis is $100,000.  If he still owns the property when he dies, and the property is worth $800,000 at the time of his death, his heirs will inherit the property with a basis of $800,000.  Accordingly, if the heirs sell the property for fair market value at $800,000, and their basis is $800,000, they will not have to pay any capital gains tax.  Had the taxpayer gifted this same property during his life, the heirs would not have enjoyed a step up in basis.  Thus, if they sold the property for $800,000 and had a basis of $100,000, they would have to pay a capital gains tax on $700,000 (less allowable deductions).  With respect to the capital gains tax, and without giving consideration to advanced estate planning techniques that consider discounting methods, it is often wise for an individual to arrange to “gift” real property at death, rather than while alive.

  1. Property Tax

Another tax consideration is property tax, which is calculated from the property tax assessed value.  The higher the assessed value, the higher the property tax.  Thus, unlike income tax considerations, where the capital gains tax is reduced by a higher cost basis, with property tax, the tax is reduced by having a lower assessed value.

How do you keep the property tax assessed value low? There are only a few ways to make a gift of real property that results in the recipient keeping the same low property tax assessed value.  First is a gift between spouses.  Second is a gift between parents and children.  Third is certain gifts between grandchildren and grandparents.  There are limitations as to the nature and value of real property that qualifies for the exclusion from property tax reassessment, which will be the subject of a subsequent blog.

 

If you are considering making a gift of real property to another individual, you should consult with an estate planning attorney and make sure all the tax consequences of your gift have been thoroughly considered prior to making your gift. To learn more about estate planning, please contact Tiffany A. Halimi, Esq. or one of our other estate and tax planning attorneys.


 

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  You should certainly consult legal counsel of your choice when considering this or any other trust and estate issue.  If you wish to consult with the author of this post, please contact Tiffany Halimi by email at thalimi@clarktrev.com or telephonically by calling her at (213) 629-5700.

Circular 230 Disclaimer: To comply with IRS requirements, please be advised that, any tax advice contained in this article is not intended or written to be used, and cannot be used, by the recipient to avoid any federal tax penalty that may be imposed on the recipient, or to promote, market or recommend to another any referenced entity, investment plan or arrangement. For more information, please go to www.ClarkTrev.com

Disclaimer: Certain examples and explanations provided herein have been grossly oversimplified for the purpose of explaining complex tax matters. You should always seek the advice of competent tax professionals to assess how these rules will affect your specific circumstance.

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Can I Use My Spouse’s Estate Tax Credits? What is Portability and Why Does It Matter to Me?

By Tiffany A. Halimi 

Have you had an estate plan check-up recently?  If you or a client of yours has not had your trust reviewed by an estate planning attorney recently, your trust may be structured in a way that may be more complicated and cost your surviving spouse and your beneficiaries more than what might be necessary.

Current Transfer Tax Exemptions:

In 2016, each individual has a $5.45M exemption from federal transfer tax that they can apply to transfers of assets made during life or upon death.  Any transfer made in excess of the exemption will result in a 40% transfer tax (also known as an “estate tax” for transfers at death or “gift tax” for transfers during life).  A married couple can apply both spouses’ $5.45M exemption towards their joint estate, for a total exemption amount of $10.9M.

As of this year, an individual can transfer up to $14,000 to any number of recipients without using any of their gift or estate transfer tax exemption.  However, any transfers in a calendar year that exceed $14,000 to the same individual will result in the using of a person’s lifetime transfer tax exemption.

Prior to 2010, an individual’s exemption was personal to that individual  — either they would use it during life or use it at their death.  Either way, their exemption could not be transferred to any other individual’s use, not even their spouse.

Because an individual’s exemption needed to be used upon their death, at the very latest, in order for a married couple to take advantage of using their joint exemption amount, they would need to establish a trust with subtrusts.  The subtrusts may have required a separate tax identification number for each subtrust, a separate tax return filed annually and care by the surviving spouse  not comingle assets between the subtrusts.

Portability is Changing the Way Individuals Can Take Advantage of Their Spouse’s Unused Exemptions.

A concept called “portability” was adopted effective January 1, 2010 and made permanent by the 2012 American Taxpayer Relief Act.  With portability,  the surviving spouse can use the deceased spouse’s unused exemption against the surviving spouse’s future gift or estate taxes.  This allows trusts to be more simply constructed, as the surviving spouse can utilize the entire unused exemption amount of the deceased spouse without necessarily creating a subtrust (often called a Bypass Trust, Credit Shelter Trust or Exemption Trust).

Today, spouses can enjoy the simplicity and flexibility of just one trust while still taking advantage of their joint transfer tax exemption through the use of portability.

This structure has advantages and disadvantages that should be discussed in detail with your estate planning attorney to determine if it is compatible for your situation.

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  You should certainly consult legal counsel of your choice when considering this or any other trust and estate issue.  If you wish to consult with the author of this post, please contact Tiffany Halimi by email at thalimi@clarktrev.com or telephonically by calling her at (213) 629-5700.

Circular 230 Disclaimer: To comply with IRS requirements, please be advised that, any tax advice contained in this article is not intended or written to be used, and cannot be used, by the recipient to avoid any federal tax penalty that may be imposed on the recipient, or to promote, market or recommend to another any referenced entity, investment plan or arrangement. For more information, please go to www.ClarkTrev.com

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Do I Need a Will, a Trust or Both?

By Tiffany A. Halimi |

To some, Trusts are believed to be used exclusively by the ultra-wealthy.  Should your baby be a Trust fund baby?  Is there a minimum level of wealth a person should have in order to benefit from a Trust?

Given today’s legal climate, a living Trust is a great tool for any individual whose total assets exceed One Hundred Fifty Thousand Dollars ($150,000) or whose real property assets exceed Fifty Thousand Dollars ($50,000).  Once an individual’s estate exceeds either or both of those minimum thresholds, then that estate must go through the probate court system before it can reach the heirs, unless the deceased individual (“decedent”) executed a Trust, or took some other action, prior to the decedent’s demise.

Intestate-SuccessionThe use of a Trust can (a) facilitate the avoidance of probate and (b) direct to whom and how assets will be distributed.

A.     Avoid Probate

A funded Trust allows a decedent’s estate to pass directly to the decedent’s designated beneficiaries, without having to go through probate.  Avoiding probate is beneficial to the beneficiaries for several reasons.

1.) Trust administration can expedite the time it takes to administer an estate.

First, the probate courts in Los Angeles County are severely backed up, and a probate administration often takes a year or more to complete.  The decedent’s estate cannot be paid out until the probate administration is complete.  Currently, a petition to open a new probate in Los Angeles Superior Court will not be heard for at least 4-6 weeks.  A Trust, on the other hand, can often be administered without court supervision, thereby expediting the total process.  Additionally, the Trustee will have immediate ability to manage the assets that are held by the Trust, and will not have to wait 4-6 weeks for a Court to grant such authority.

2.)  Trust administration keeps the decedent’s information confidential from the public.

Second, a probate becomes public record, making otherwise private information relating to a decedent’s assets publicly accessible.  A Trust administration without court supervision is private.

3.)  Trust administration does not give an attorney a percentage of the decedent’s estate.

Third, an attorney is statutorily entitled to take attorneys’ fees as a percentage of the estate, regardless of how much time the attorney puts into the matter.  See Probate Code Section 10810.  With a Trust administration, an attorney can offer guidance to the Trustee and only bill for the attorney’s time, rather than take a percentage of the estate.

Thus, in order to avoid administration through the probate courts, an estate that is comprised of total assets valued more than $150,000 or real estate valued more than $50,000 should be administered pursuant to a Trust declaration

B.     Decide Who Receives Your Assets

In addition to avoiding probate, there is another important reason to consider a Trust or a Will.  A Trust or a Will allows a person to determine to whom they would like their assets to pass and when.  For more information on the distributive benefits of a Will or a Trust, please see If Uncle Sam Already Bought You an Estate Plan, Why Hire an Attorney? The Pitfalls of Intestate Succession.

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  You should certainly consult legal counsel of your choice when considering this or any other trust and estate issue.  If you wish to consult with the author of this post, please contact Tiffany Halimi by email at thalimi@clarktrev.com or telephonically by calling her at (213) 629-5700.

Circular 230 Disclaimer: To comply with IRS requirements, please be advised that, any tax advice contained in this article is not intended or written to be used, and cannot be used, by the recipient to avoid any federal tax penalty that may be imposed on the recipient, or to promote, market or recommend to another any referenced entity, investment plan or arrangement. For more information, please go to www.Clarktrev.com

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If Uncle Sam Already Bought You an Estate Plan, Why Hire an Attorney? The Pitfalls of Intestate Succession

By Tiffany A. Halimi

Why spend a few thousand dollars on an estate plan when federal and state law bought one for you for free? Why pay for private health insurance when you can rely on Medicaid?  Why purchase media (books, magazines, music), when you can use it online or in a public library for free?

The law’s default estate plan that is in place for individuals who do not have their own estate plan can be a useful stop gap for specific situations and certain individuals.  But free initiatives implemented by the government are not always the best approach for each individual.

All U.S. citizens who die without a Will or a Trust will have an estate plan in place for them free of charge, compliments of federal and state law.  That estate plan is referred to as “intestate succession” and is set forth under the Probate Code[1].  Pursuant to Probate Code Section 6400 et seq., intestate succession (when a person dies without a will or trust) mandates that the estate of a deceased individual (“decedent”) who was married shall pass to that individual’s spouse, if that individual dies without children.  If the decedent dies with a spouse and one child, and no children or grandchildren from a deceased child, then the decedent’s estate passes one-half (1/2) to that decedent’s spouse, and the other one-half (1/2) to that decedent’s sole child.  The estate of a decedent who dies intestate with a spouse and more than one child will pass one-third (1/3) to the surviving spouse, and the other two-thirds (2/3) to be divided equally among the surviving children and the offspring of any deceased children. These are general guidelines, which can change depending on the facts and circumstances of each specific case.

cinderella_s_evil_step_sister__drizella_by_lemiacrescent-d8f5h8z
Drizella, Cinderella’s evil stepsister.

When the Probate Code refers to a child, what is included in that definition?  Under Probate Code Section 21115, a child includes, but is not limited to, halfbloods, adopted persons, persons born out of wedlock, stepchildren and foster children.  Thus, a person who may not wish to leave their estate to a stepchild, but who dies intestate, may be out of luck.

By using  a Will or a Trust, a person can change the recipient of their estate assets to individuals other than the ones provided for by the Probate Code section relating to intestacy succession.  Additionally, a person can choose to leave all or part of their estate to an entity, such as a charity or a school.  Through the use of a Trust or a Will, a person can even control when a beneficiary will receive their distribution, within certain limitations.

Not only is the distribution of the property of the intestate decedent provided for by federal and state law, as illustrated above, the estate tax and property tax planning of the intestate decedent is also provided for by federal and state law.  To learn more about estate tax and property tax planning, please contact Tiffany A. Halimi, Esq. or one of our other estate and tax planning attorneys.

[1] All references to the Probate Code are to the California Probate Code