1. FEDERAL ESTATE TAX EXEMPTION AMOUNTS INCREASED
The estate tax exemption for individuals increased from $5.45 million per individual in 2016 to $5.49 million per individual in 2017. For couples, the estate tax exemption increased from $10.90 million per couple in 2016 to $10.98 million per couple in 2017.
2. ANNUAL GIFT TAX EXCLUSION REMAINS THE CHANGE
The annual gift tax exclusion remained unchanged, and still remains at $14,000.00 per year per individual and $28,000.00 per year per couple.
3. UNAMBIGUOUS WILLS CAN BE REFORMED TO REFECT A TESTATOR’S INTENTION
In Estate of Duke (2015) 61 Cal. 4th 871, the California Supreme Court held that extrinsic evidence can be admitted to reform an unambiguous will to reflect the intention of a testator at the time it was made.
4. TRANSFER OF DEATH DEEDS
Under Probate Code § 5600, a homeowners can prepare and file a “Revocable Transfer on Death Deeds,” which allows transfer of ownership of real property at the death of the owners without a will, trust or probate.
5. A TRUSTEE MAY SELL SPECIFICALLY GIFTED PROPERTY IN CERTAIN CIRCUMSTANCES
In Siegel vs. Fife, (2015) 234 Cal. App. 4th 988, the court held as follows:
“The court of appeal affirmed, rejecting the objector’s argument that the order granting the petition to sell the property violated Probate Code section 21402 regarding the abatement order for trust assets. The trust requires the trustee to apply trust principal to provide for Brown’s care. If the sale of assets becomes necessary, the trust expressly states that all remainder interests, which include the objector’s rights to the house, are secondary. The court noted the precarious nature of the trust estate and that work needed to repair the house and would cost over $225,572.33, although it is appraised at only $685,000.”]]>
Some people want to keep wealth in the family for generations. However, most states do not allow a family to keep a trust for hundreds of years or forever. Instead, there is an old law called the “Rule Against Perpetuities” that places time limits on trusts.
A few states, Delaware, Alaska, New Jersey and a few others allow Dynasty Trust, long-lasting trusts. The Dynasty Trust holds and invests the money for beneficiaries: the children, grandchildren, great-grandchildren and beyond. Thus, as long as there is money in the trust, the assets can pass on to generations without additional estate or generation skipping taxes.
The disadvantage of a Dynasty Trust is children, grandchildren and future generations may lose the motivation to work hard because they will learn to rely on their inheritance. The other disadvantages include setting the trust in a different state. Since the trust is in one of the states that allow Dynasty Trusts, then the trustee must also reside in one of those states. There is also the cost, time to transfer assets, and complex tax reporting.
Please consult with an attorney and tax professional before establishing a Dynasty Trust.]]>
A QPRT Trust allows families to pass on their personal residence to their heirs, free of estate tax. This method can be helpful if the personal residence will have future appreciation. However, there may be a gift tax when using a QPRT
The disadvantage of a QPRT is if the parent dies before the QPRT Trust ends, the property goes back into the estate. The other disadvantage is that the taxes on a QPRT can be complex.
Please hire an attorney and a tax professional before establishing a QPRT.]]>
GRATs are used for families who have promising high appreciating assets, like a tech stock IPO. The goal is to remove these fast growing assets out of one’s estate.
The benefits are that if the assets perform well, then these assets can pass to the heirs tax-free when the trust ends.
Typically, a parent transfers fast appreciating assets to a GRAT, and the parent receives a fixed annuity payments from the trust for a set period of time. However, a GRAT is subject to a special interest rate that is set and determined by the Internal Revenue Service, and this special interest rate is locked when the trust is created.
With a lower special interest rate, the GRAT has greater changes of passing more assets to the beneficiaries. If the interest rate is higher, the creator may consider a Charitable Trust.
The benefit is that if structured timely and properly, the parent may end up receiving back the principal he or she placed plus interest set by the IRS determined rate. The remainder of the trust goes back to the children tax-free when the trust ends.
The caveat is that if the creator dies before the end of the term of the GRAT, the trust assets can be taxed as part of one’s estate, defeating the GRAT’s purpose.
Please consult an attorney and a tax professional before establishing a Grantor Retained Annuity Trust (GRAT).]]>
Trusts are designed to maximize individual estate tax exemptions. Most married couples can pass a significant portion or all of their trust assets estate-tax free.
The Bypass or Credit Shelter Trust can hold up to the current (2011 year) maximum estate-tax exemption of $5 million dollars in 2011 to go into the trust upon the first spouse’s death. The assets of the Bypass or Credit Shelter Trust will ultimately go to the kids or heirs, depending on the trust instructions.
Upon the death of the surviving spouse, the children or heirs would inherit the money left over in the Bypass or Credit Shelter Trust in the surviving spouse’s estate.
Be aware, under the new tax laws, portability of the unused estate-tax exemption may or may not be transferable to a new spouse. In addition, the assets in the Bypass or Credit Shelter trust may not receive a step up in basis, so, the children or heirs may pay higher capital gains or other taxes.
There are other benefits to the Bypass or Credit Shelter Trust. First, these trusts shield any appreciation of the assets in the trust from estate tax. Second, these trusts are protected from most creditors. Third, if your surviving spouse remarries, the assets of the Bypass or Credit Shelter Trust will go to your children, not the new spouse or the children of the new spouse.
Please consult with an attorney and a tax professional before establishing a Bypass or Credit Shelter Trust.]]>
This trust helps the trust creator/settlor’s prevent his or her money and assets from being transferred to unwanted beneficiaries, like the surviving spouse’s new husband or wife and the kids of the new spouse after the creator/settlor dies.
The trust allows the creator/settlor to leave money to the surviving spouse to spend for the remainder of his or her lifetime but the leftover QTIP trust assets will pass as you directed in your trust, like your children – not your future step kids.
Many blended families use QTIP Trusts to ensure that children of the 1st marriage will receive any remaining assets once the settlors had passed away.
The QTIP Trust is often used after the trust and bypass or credit shelter trust is created but the tax treatment is very complex.
Please note that the QTIP Trust is different from the Bypass or Credit Shelter trust, and QTIP has different tax treatment. Consult an attorney and tax professional before establishing a QTIP Trust.]]>
The creator or settlor of the trust can name any person he or she like as his or her beneficiary (ies). When the creator dies, the beneficiaries stated in the trust cannot be changed. However, if the trust names a “Power of Appointment, then maybe the beneficiaries can be changed after the creator passes away.
There are two (2) basic types of “Powers of Appointment”: (1) Limited Power and (2) General Powers of Appointment. A Limited Power of Appointment allows a person, a spouse for example, to redistribute assets among a small group, like the children but not her or him. A Limited Power of Appointment is useful if the creator wants to leave assets to children but do not want to set the type or amount in stone. This tool is also useful to reward a particular helpful child.
The General Power of Appointment allows a person, a spouse for example, complete power to change beneficiaries, including him or herself. As a result, one should only give a General Power of Appointment to a person who really understands the creator’s wishes, and whom the creator completely trusts.
Please consult an attorney before implementing a Powers of Appointment Clause in your trust.
|TAX YEAR||ESTATE TAX EXEMPTION AMOUNT||TOP ESTATE TAX RATE|
|2010||$0 OR $5,000,000||0% OR 35%|
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act was signed into law by President Obama on December 17, 2010. This new law provides sweeping changes to the rules governing federal estate taxes, gift taxes and generation-skipping transfer taxes for the 2010, 2011 and 2012 tax years. Here is a summary of what the new law provides for the estates of decedents who die in 2011 or 2012: