Homestead

Some people have recorded a document entitled homestead indicating that they want a certain dollar amount of the value of their principal residence to be protected from their creditors. Some companies even solicit people to have the company prepare and record the homestead on the homeowner’s behalf. But California law grants owners of a home a homestead, whether or not a document has been recorded. Stated differently, a certain dollar amount of a person’s personal residence is protected from creditors whether or not a written homestead document has been recorded on the home. This benefit that California law gives to homeowners is sometimes called a statutory homestead.

Recorded homesteads and statutory homesteads do not interfere with the sale of the residence.Recorded homesteads and statutory homesteads do not interfere with the placing of a mortgage (note secured by deed of trust) on the residence. Recorded homesteads and statutory homesteads do not interfere with a later transfer of the residence to a revocable living trust.

Assuming that a creditor obtains a judgment against a homeowner and that the homeowner’s equity in his or her home exceeds the dollar amount that is protected by the homestead, the creditor can force the home to be sold and the creditor can get that excess amount in satisfaction of the judgment.

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When the original of the trust document has been lost

A person who has a revocable living trust may inadvertently lose the original trust document. He or she will typically continue to hold title to assets in the name of the trust. The person can still furnish copies from his or her copy of the trust if and when a bank, broker, insurance company or title company asks for a copy.

If that person asks whether there will ever be any negative consequences to not having the original, there is no clear answer. It is possible that a title company or a bank or a broker will some day ask to inspect the original, but it is also possible that this will not occur. If the person who has lost the original of his or her trust wants to guarantee that there will be no future problems, he or she could ask his or her attorney to prepare a new trust and to assist the person in re-titling the assets from the name of the old trust to the name of the new trust.

If the person asks whether this new project is absolutely necessary, the answer is no. But the answer is no because it is not clear whether or not a future problem will occur because the original trust document has been lost. The real question is whether or not the person feels it is worth it to pay to create a new trust in this situation. Each person needs to decide that for himself or for herself.

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NEW IRS RULES

New IRS ruling where surviving spouse forgot to timely file the deceased spouse’s federal estate tax return and thereby failed to make portability election

When one spouse dies on or after January 1, 2011, his or her federal estate tax exemption can be transferred to the surviving spouse if the surviving spouse files a timely form 706 federal estate tax return for the first-spouse-to-die. Under certain conditions, based on Rev Rul 2014-18 which the IRS issued on January 27, 2014, a late-filed 706 will be considered as if it were timely filed, ie it will be treated as effective for purposes of making the portability election. Those conditions are:

1. The first-spouse-to-die was a U.S. citizen or resident
2. The first-spouse-to-die died in 2011, 2012 or 2013
3. A form 706 was not previously filed for the first-spouse-to-die
4. A form 706 was not required to be filed for the first-spouse-to-die because the estate of the first-spouse-to-die was not large enough to require it being filed.
5. The form 706 for the first-spouse-to-die must be filed no later than December 31, 2014
6. The form 706 for the first-spouse-to-die must state at the top of page one: Filed Pursuant to Revenue Procedure 2014-18 to elect portability under Section 2010(c)(5)(A)
7. The filer of form 706 is the executor of the estate of the first-spouse to die.

If you are a surviving spouse, or if you know of a surviving spouse who finds himself or herself in this position, it is critical that this opportunity be taken advantage of. Stated differently, if the above conditions all exist, the surviving spouse needs to file the first-spouse-to-die’s estate tax return form 706 no later than December 31, 2014 with the required statement on the top of page one in order to transfer the first-spouse-to-die’s estate tax exemption to the surviving spouse.

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Is there a need to save estate tax?

For persons dying in 2014, the estate tax exemption is $5,340,000. If the surviving spouse files a timely estate tax return for the first-spouse-to-die, the first-spouse-to-die’s exemption can be added to the surviving spouse’s exemption. This is called portability. Unless the current exemptions are reduced, and there is no longer a sunset date at which they will expire, the assets of most people will not be subject to the federal estate tax at their deaths. President Obama has put forward a proposal which would reduce the exemption to $3,500,000, but at this time there are not enough favorable votes in Congress to pass this proposed legislation. It is important for people to monitor future changes in the law that Congress might choose to enact.

In 2014 the annual free gift is $14,000 per donor per donee. Many people make gifts to family members either out of love or to help meet a need of the donee. But if the only reason for making the gift is to save estate taxes, donors need to consider whether or not their assets are likely to be subject to estate taxes based on the current rules discussed above.  Further, there are advanced techniques to reduce estate taxes such as family limited partnerships, grantor retained annuity trusts, sales to defective grantor trusts, and qualified personal residence trusts. In determining whether or not these advanced techniques are worth considering, donors again need to consider whether or not their assets are likely to be subject to estate taxes.  

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Assets Located Outside of the United States

Sam and Jill have created a revocable living trust. They have been told to transfer their assets into their trust in order to avoid probate. When their attorney asked them to list their assets, they forgot to tell him about assets they own in one or more foreign countries.

Most foreign countries do not allow living trusts. Sam and Jill have pour-over Wills which say that all assets they forgot to transfer into their trust while they were living will go to their trust when they die. When Sam dies, Jill sends a copy of his Will to an attorney in France in order to get his real property located there re-titled into the name of the trust. Only then is Jill told that the Will is going to cause trouble and confusion in France because they don’t allow trusts.

If Sam and Jill had told their attorney about their foreign assets, their attorney could have advised them to hire an attorney in each foreign country in which they own assets and to direct that attorney to prepare a Will disposing of their assets in that specific country. In this way, each foreign Will can comply with the laws of that country and be valid and effective. 

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State Inheritance Tax

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California no longer has a State Inheritance Tax. The Federal Estate Tax Exemption in 2013 is  $5,250,000. This does not mean that a person dying with an estate that is less than  $5,250,000 will not be subject to a State Inheritance Tax.

California residents may die owning assets in other states. Those other states may or may not have their own inheritance tax. If they do, those states may have exemptions that are lower than $5,250,000.

Some other states that still have an inheritance tax compute their tax based on the deceased person’s assets located both inside and outside of that state and then allocate the tax by multiplying the total by the fraction of the assets that are located in their state. 

For example, assume that State X allowed an exemption of  $3,500,000 and had an inheritance tax of 30% on the excess. A California resident died with $3,000,000 worth of assets located in California and $1,000,000 worth of assets located in State X. In step one of the computation State X’s 30% tax rate is multiplied by ($4,000,000 value of all assets  minus $3,500,000 State X exemption) totaling $150,000. The State X inheritance tax would then be 25% multiplied by $150,000 totaling  $37,500.   

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Re-Evaluating your Successor Trustee

Odysseus, the legendary Greek King of Ithica and the hero of Homer’s epic poem the Odyssey, spent years away from his kingdom fighting in  the Trojan Wars. During that time, his wife had to remain faithful to him and she had to use her wits to resist many potential suitors.

Like Odysseus’ wife, your successor trustee will at your death, resignation or incapacity be given the challenge of being faithful to your estate plan and to the beneficiaries it is meant to protect. You should periodically review the people you have designated in your trust as successor trustees. You should then ask yourself whether the people currently named to act are still the best choices, or whether other people would be better suited for this role. If changes need to be made, you need to see to it that your trust is amended as soon as possible.

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