California Tax Attorney Blog

The Los Angeles Times ran an article on March 7, 2010 by Kathy M. Kristof in the personal finance section discussing the need to either amend your existing living trust or have one prepared along with a will, durable power of attorney for property management and an advance health care directive. Here is what the Times said:

If you're rich, the best estate planning advice would be to die quickly. If you're not, the best advice is to either review or rewrite your estate planning documents to make sure your heirs aren't left high and dry if you die.

That's because estate taxes that could allow Uncle Sam to nab up to 45% of your bequeathed assets are currently -- and very temporarily -- kaput.

A decadelong phase-out of the estate tax eliminated the tax completely as of January. The catch: If nothing's done, estate taxes will boomerang back to historic levels in 2011. That means any bequest of more than $1 million would be hit with a heavy levy on any amount above that limit after December.

But estate planning isn't just about taxes, and it's not just for the rich.

The legal vacuum that was created by the temporary elimination of the estate tax has created potential pitfalls even for people with modest estates.

For example, if you were to die this year and had an old "by-pass" trust, the elimination of the estate tax could cause you to accidentally disinherit your spouse, said Clay Stevens, director of strategic planning for Aspiriant, a wealth management firm in Los Angeles.

These trusts, aimed at reducing estate taxes, often have boilerplate provisions for bequeathing children an amount equivalent to the estate tax "exclusion." This year, that exclusion is unlimited, so everything goes to your kids and unintentionally there would be nothing left for a spouse, he said.

Then, too, as long as the estate tax is phased out, so is something called the "step-up" that reduced capital gains taxes on your appreciated assets after you died.

You can still get that break if you make a few strategic fixes to your estate plan this year, Stevens said. But, if you do nothing, your heirs could face capital gains taxes on all but a pittance of your appreciated property.

"This is the one year when you can't procrastinate," said Herbert E. Nass, a New York lawyer and author of "101 Biggest Estate Planning Mistakes." "Absolutely everyone should review their documents."

What if you have no documents? Then get cracking.

Studies indicate that the vast majority of Americans don't have wills, trusts or powers of attorney. That can leave heirs in a rough spot, said Danielle Mayoras, coauthor with her husband, Andy, of "Trial & Errors: Famous Fortune Fights."

Act now, avoid trouble later

Ignoring your estate plan can land your children with ill-suited guardians or give them a pile of cash that they're too young to handle, she said.

If you become incapacitated before you die, it can mean that your care could be dictated by a stranger -- or even an enemy. And, doing nothing can cause your heirs to bicker and battle in court -- sometimes for decades.

"People never think their family is going to end up fighting," Andy Mayoras said. "But, especially in this economy, families are fighting over money more and more."

Nass contends that neglect of an estate plan may have cost one wealthy New Yorker his life. Wall Street titan Ted Ammon, in the throes of an acrimonious 2001 divorce, was killed by his estranged wife's boyfriend, Nass said. The boyfriend went to prison, but the estranged wife got the estate because Ammon hadn't yet changed his will.

"That was big news out here for a long time," he said.

What do you need? First and foremost you need a will, which distributes your assets at death. Wills can be simple -- a matter of a few paragraphs -- or very complex. It depends on your wishes and whether you expect to draw up additional documents, such as a trust.

If you don't want a trust, your will should name personal guardians for any minor children, economic guardians who can distribute assets to your children and other heirs, and an executor who will make sure the terms of the will are carried out. Finally, it should include a simple statement about what you own and who should get it.

If you're leaving assets through a will, it's wise to also execute powers of attorney for both financial and healthcare matters, Stevens adds. That will give somebody you trust the ability to pay your bills and make medical decisions for you if you become incapacitated before you die.

But if you want your heirs to be able to avoid probate -- a time-consuming and costly legal process that involves a court reviewing the distribution of assets bequeathed through a will -- you'd be better off to also create a trust. If you have a trust, your will essentially can be a one-liner: "I want all my nonretirement assets to go into my trust."

(Retirement accounts such as IRAs should be left directly to people, not trusts. That gives your heirs the ability to withdraw those assets, and pay taxes on them, over a longer period of time.)

A trust would then distribute the assets based on the formula you'd drawn up. Trusts can accommodate difficult issues, such as whether you want to attach a few strings to your bequests as you might if you're leaving assets to heirs who are not financially or personally responsible.

Divide and conquer . . . the IRS

Trusts also typically contain clauses that dictate who would handle your financial affairs should you become unable to handle them yourself. And many include a "by-pass" or a "two-step" provision that essentially splits the trust in two.

Splitting the trust is aimed at saving estate taxes. That's because husbands and wives can leave each other all their assets without tax consequences, but if they want to leave money to anyone else, any amount over a set threshold is subject to tax.

The amount that's "excluded" from estate taxes has been a moving target for the last 10 years, but is unlimited today and likely to amount to $1 million in 2011.

As a result, savvy couples with estates in excess of $1 million (in any year but 2010) would each execute a by-pass trust, leaving the amount of the estate tax exclusion to their kids or other heirs and the rest to their spouse.

That would preserve the estate tax exemption for the spouse who is the first to die. In the case of someone with $2 million in assets, that could save heirs a tidy $550,000 -- or 55% of the second $1 million.

But the most important thing may be to simply make your wishes known so your heirs know that you've thought about them and how you'd like to provide for them when you're gone. That alone could eliminate a lot of family bickering.

Both Nass and the Mayorases wrote books about what celebrities have done wrong with estate planning. They say they did so to give parents and their children a way of bringing up the topic to explore how they could do it better.

"It's a way to get the dialogue started," Andy Mayoras said.

Danielle Mayoras adds that entertainer Ray Charles' estate plan provides a blueprint of how to do it right. He got his 12 children and their nine respective mothers in a room to talk about what he was planning, which was to give most of his money to charity. But everyone was provided for in some way, she said.

"The beauty of doing that is that everything is out in the open," she said. "It gives the family some comfort and the ability to talk about it."

Call Mitchell A. Port, an experienced estate planning attorney, for a consultation now. Call (310) 559-5259.

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LIABILITIES AND DUTIES OF PERSONAL REPRESENTATIVE

When the California probate court appoints you as personal representative of an estate, you become an officer of the court and assume certain duties and obligations. An attorney is best qualified to advise you about these matters. You should understand the following:

1. INVENTORY OF ESTATE PROPERTY
Locate the estate's property

Determine the value of the property

You must arrange to have a court-appointed referee determine the value of the property unless the appointment is waived by the court. You, rather than the referee, must determine the value of certain "cash items." An attorney can advise you about how to do this.

File an inventory and appraisal
Within four months after Letters are first issued to you as personal representative, you must file with the court an inventory and appraisal of all the assets in the estate.

File a change of ownership
At the time you file the inventory and appraisal, you must also file a change of ownership statement with the county recorder or assessor in each county where the decedent owned real property at the time of death, as provided in section 480 of the California Revenue and Taxation Code.

2. MANAGING THE ESTATE'S ASSETS

Prudent investments
You must manage the estate assets with the care of a prudent person dealing with someone else's property. This means that you must be cautious and may not make any speculative investments.

Keep estate assets separate
You must keep the money and property in this estate separate from anyone else's, including your own. When you open a bank account for the estate, the account name must indicate that it is an estate account and not your personal account. Never deposit estate funds in your personal account or otherwise mix them with your or anyone else's property. Securities in the estate must also be held in a name that shows they are estate property and not your personal property.

Interest-bearing accounts and other investments
Except for checking accounts intended for ordinary administration expenses, estate accounts must earn interest. You may deposit estate funds in insured accounts in financial institutions, but you should consult with an attorney before making other kinds of investments.

Other restrictions
There are many other restrictions on your authority to deal with estate property. You should not spend any of the estate's money unless you have received permission from the court or have been advised to do so by an attorney. You may reimburse yourself for official court costs paid by you to the county clerk and for the premium on your bond. Without prior order of the court, you may not pay fees to yourself or to your attorney, if you have one. If you do not obtain the court's permission when it is required, you may be removed as personal representative or you may be required to reimburse the estate from your own personal funds, or both. You should consult with an attorney concerning the legal requirements affecting sales, leases, mortgages, and investments of estate property.

3. Record Keeping
Keep accounts
You must keep complete and accurate records of each financial transaction affecting the estate. You will have to prepare an account of all money and property you have received, what you have spent, and the date of each transaction. You must describe in detail what you have left after the payment of expenses.

Court review
Your account will be reviewed by the court. Save your receipts because the court may ask to review them. If you do not file your accounts as required, the court will order you to do so. You may be removed as personal representative if you fail to comply.

4. INSURANCE
You should determine that there is appropriate and adequate insurance covering the assets and risks of the estate. Maintain the insurance in force during the entire period of the administration.

5. NOTICE TO CREDITORS
You must mail a notice of administration to each known creditor of the decedent within four months after your appointment as personal representative. If the decedent received Medi-Cal assistance, you must notify the State Director of Health Services within 90 days after appointment.

6. CONSULTING AN ATTORNEY
If you have an attorney, you should cooperate with the attorney at all times. You and your attorney are responsible for completing the estate administration as promptly as possible.

When in doubt, contact your attorney. Call lawyer Mitchell A. Port at (310) 559-5259. This statement of duties and liabilities is a summary and is not a complete statement of the law. Your conduct as a personal representative is governed by the law itself and not by this summary.

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The “National Taxpayer Advocate” 2009 Annual Report to Congress in part discusses the notice of federal tax lien (NFTL). The Report said that on average, a lien filing reduces a taxpayer’s credit score by 100 points. Unpaid tax liens may remain on a taxpayer’s credit history, leaving a derogatory mark on the credit history indefinitely. Released liens, including those paid off by the taxpayer, are not generally removed from the credit history until seven years from the date of release. Thus, an NFTL has a significant long-term impact on a taxpayer’s credit record. As a result, some lenders decline to extend credit to a taxpayer if the IRS has filed an NFTL against the taxpayer’s property. Others will charge substantially higher rates, even if the lien is subordinated. Impaired credit history can also affect a taxpayer’s ability to obtain insurance or rent an apartment on reasonable terms. Moreover, some licensing boards require members to maintain a clean credit history and some employers require employees to do so as a condition of employment. Thus, a lien filing can mean that employees lose their jobs and self-employed individuals cannot maintain the licensing necessary to remain in business. It can also hamper the taxpayer’s ability to stay compliant and obtain credit needed to pay preexisting tax debts.

Properly applied, the notice of federal tax lien (NFTL) can be an effective tool in tax collection. It gives the IRS a priority interest in the taxpayer’s property, such as a home or a car, and may enable the IRS to collect all or a portion of the tax debt if the taxpayer sells or refinances the property.

If improperly applied, however, tax liens have the potential to cause needless harm to taxpayers and undermine long-term tax collection.

If improperly applied, however, tax liens have the potential to cause needless harm to taxpayers and undermine long-term tax collection. Assume, for example, that a taxpayer loses his job during a recession and becomes unable to pay his tax bill. The filing of a tax lien can significantly harm the taxpayer’s credit and thus negatively affect his or her ability to obtain financing, find or retain a job, secure affordable housing or insurance, and ultimately pay the outstanding tax debt. Moreover, the government must consider that its role as a creditor is different from that of a private entity creditor. If the filing of a tax lien drives up the taxpayer’s costs and renders him or her unemployed or underemployed, the government may be forced to make outlays in the form of unemployment benefits, food stamps, and the like. Thus, the imprudent filing of a tax lien has the potential to badly damage the taxpayer and the taxpayer’s family and simultaneously reduce federal revenue – a lose-lose proposition.

For this reason, the decision whether to impose a tax lien should be made on a case-by-case
basis. Yet, the IRS files many liens systemically….

The results of research done by the Taxpayer Advocate suggest that the IRS’s use of liens may not be furthering the agency’s revenue collection objective and, equally significant, that the IRS has shown very little interest in evaluating the effectiveness of liens for itself.

A federal tax lien (FTL) arises when the IRS assesses a tax liability, sends the taxpayer notice and demand for payment, and the taxpayer does not fully pay the debt within ten days. An FTL is effective as of the date of assessment and attaches to all of the taxpayer’s property and rights to property, whether real or personal, including those acquired by the taxpayer after that date. This lien continues against the taxpayer’s property until the liability either has been fully paid or is legally unenforceable.

It is IRS policy not to use the NFTL as a negotiating tool. The IRS is required to release a lien not later than 30 days after the underlying liability either is fully satisfied through full payment of tax or is legally unenforceable (typically, by expiration of the statutory period for collecting the tax).

If you have tax problems, call a qualified tax attorney. Call Mitchell A. Port at (310) 559-5259.

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Ever thought of providing in your California will or living trust for unequal distributions to your children, disinheriting a child or leaving gifts to charity or to friends, then this posting is important. Some parents believe that unequal distributions may be necessary because they have already helped to support or educate one of their children or feel that one of their children has a spendthrift issue. There may also be times when a parent has remarried and wants to leave assets to his or her current spouse and is concerned that the children of the first marriage will not understand.

A recent article in the New York Times discusses having a conversation with your children about your plans before you die in order to decrease the chance that they will challenge your estate plan after you die. The article quotes a wealth mediator who says that the children and grandchildren may not like what you have chosen to do, but at least they can feel like they were informed and hopefully will respect your wishes. The kids may get angry at the situation but their anger will be directed at you, not at the favored beneficiaries after your death. Communication can also help relieve the tension between the adult children of a first marriage and the children and/or spouse of the second marriage. The article is worth reading.

If you want to discuss how to distribute your property to your beneficiaries with a qualified California tax lawyer, call Mitchell A. Port at (310) 559-5259.

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An irrevocable trust is one that usually cannot be amended, changed or revoked. Trusts can become irrevocable in several ways.

Some trusts for married couples become irrevocable at the first spouse’s death. A common example is an A/B trust, sometimes called an Exemption Trust or a Bypass Trust. With this type of trust, the deceased spouse's trust becomes irrevocable after the first death and cannot be amended, changed or revoked.

Irrevocable life insurance trusts and qualified personal residence trusts are made to be irrevocable at the time they are created. The life insurance trust is a type of trust that is created to hold life insurance and pass the insurance death benefit to the beneficiaries of the trust without any income or estate taxes on the placement of the policy in the trust or upon the insured’s death. Such a trust cannot be revoked, changed, or amended after it is created except by court order.

There are some times, however, where an irrevocable trust can be modified by court order. California Civil Code Section 3399 permits a contract like a trust to be reformed when the writing, through mistake or fraud, fails to express the intent of the parties. For instance, reforming a trust might be appropriate when due to a drafting error or scrivener's error.

California Probate Code Section 15409 also permits a trust to be changed if “owing to circumstances not known to the settlor (person creating the trust) and not anticipated by the settlor, the continuation of the trust under its terms would defeat or substantially limit the accomplishment of the purposes of the trust.” In this situation, what the court can do is extensive. The Probate Court can authorize acts that are forbidden by the terms of the trust or not authorized.

Under California Probate Code Section 15403, when all beneficiaries of an irrevocable trust consent to modification or termination of a trust the court can permit that to occur unless the court finds that a material purpose remains for continuance of the trust and that purpose outweighs the arguments for termination or modification.

Speak to a tax attorney about amending, changing or revoking an “irrevocable” trust. Call Mitchell A. Port at (310) 559-5259.

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As a solo tax and probate lawyer in Los Angeles, I read an interesting article in the February 15, 2010 issue of the Los Angeles Times that clients believe they get better service and value from solo attorneys and small firms than they get from the large firms. Here are some of the article's highlights:

Solo and small boutique law practitioners across the country have been better able to adapt to a shifting legal landscape than big law firms that had to shed more than 4,600 lawyers nationwide last year….

In an inverse demonstration that size matters, small firms able to quickly reinvent themselves have benefited despite shrinking spending on legal services and a more demanding clientele….

Boutiques flourish because they deal on a more personal level with the legal consumer and they tailor services to individual needs. Smaller firms also have less overhead and can be more flexible and affordable….

Clients perceive that they will get more efficient legal services and more bang for their buck in the context of a small, more agile firm….

Some of the big firms went overboard, charging upward of $700 an hour, and when the economy changed, their clients were no longer in a position to pay that. The rainmakers left and started their own firms. One told me he tells his clients, “I'm not any dumber but now I'm $400 an hour less….”

There is a preference among some lawyers to create a better work-life balance than that experienced by attorneys struggling to stay on a partnership track at the huge corporate entities of the American Lawyer 100, firms with as many as 4,000 attorneys….

A solo practice satisfies an attorney’s quest for meaningful practice, community involvement and quality time for home and family….

The defections from big law firms to boutiques to attorneys' recognizing “the path to riches is through niches.”…

“The age of the generalist is dead. Clients are requiring attorneys to know more and more about less and less. Everyone wants to be treated by a specialist.”…

Call me to discuss your probate issues, IRS and California Franchise Tax Board tax problems, wills and living trusts as well as business transactions in which you are involved. Call (310) 559-5259.

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During income tax filing season, there are a lot of IRS impersonation schemes. These schemes may take place by email, phone, fax, internet sites and social networking sites.

The IRS will not send you unsolicited e-mails about your tax situations, tax accounts or personal tax issues. If you receive such an e-mail, most likely it's a scam.

Some impersonations may be commercial internet sites that you unknowingly visit, thinking you’re accessing the genuine IRS Web site, IRS.gov. However, such sites have no connection to the IRS.

Many impersonations are identity theft scams that try to trick you into revealing personal and financial information that can be used to access your financial accounts. Some email scams contain links or attachments that download malicious code (virus) that infects your computer or direct you to a bogus form or site posing as a genuine IRS form or Web site when you click on them.

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The New York Times ran an article last month describing the effect of suspending the estate tax so that no death tax is owed for those dying in 2010. Concepts like losing the step-up in basis and the application of capital gains taxes are explained. The article advises readers to update their wills, living trusts and other estate planning documents to take into account the changes in the laws applying to death taxes.

Call your California estate planning attorney now.

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There exists an official YouTube channel of the Internal Revenue Service. It features videos produced by the IRS on various tax administration topics. Information is available about all kinds of topics, including the the appeals examination process, appeals collection process, tax tips, record keeping, choosing a tax preparer, how to track your tax refund, how to check your tax withholding and the homeowner credit claim.

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A post on January 23, 2010 in Wills, Trusts & Estates Prof Blog provides a chart listing the best states for trusts. The ranking factors considered are (1) state income tax in the state, (2) directed trust statute, (3) asset protection trust availability, (4) dynasty trust ability, and (5) the number of trust companies in the state.

The top four states include Alaska, Delaware, Nevada and South Dakota.

The next best include three states: Florida, New Hampshire and Wyoming.

Finally, the last group of states include: Colorado, Idaho, Ohio, Utah and Wisconsin.

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A recent article published in the Los Angeles Times addresses “Selling What the Dead Leave Behind”.

If you die in Los Angeles County without a will or heirs, your belongings will probably end up in a warehouse in the City of Industry. There, the walls are stacked with hundreds of wooden crates. County employees and private auctioneers divide the contents into lots and sell them at daylong auctions held on the second Saturday of the month, typically 10 times a year. Proceeds go back into the estate and often are used to cover burial expenses and other costs. Whatever is left goes to the state of California.

To avoid this from happening to you and your property, prepare a Will. Better yet, consult with an estate planning attorney about your options. Call Mitchell A. Port at (310) 559-5259.

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Here are some things to know if you need copies of your federal tax return information from the IRS.

There are2 options for obtaining free copies of your federal tax return information — tax account transcripts and tax return transcripts.

A tax account transcript shows any later adjustments either you or the IRS made after the tax return was filed. This transcript shows basic data – including marital status, type of return filed, adjusted gross income and taxable income.

A tax return transcript shows most line items from your tax return as it was originally filed, including any accompanying forms and schedules. It does not reflect any changes you, your representative or the IRS made after the return was filed. In many cases, a return transcript will meet the requirements of lending institutions, such as those offering mortgages and student loans.

To request either transcript by phone, call 800-829-1040 and follow the prompts in the recorded message.

To request a tax return transcript through the mail, businesses, partnerships and individuals who need transcript information from other forms or need a tax account transcript must use the Form 4506T, Request for Transcript of Tax Return. Individual taxpayers should complete IRS Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript. Form 4506T-EZ is only for individuals who filed a Form 1040 series return.

You should receive your tax account transcript within 30 calendar days from the time the IRS receives your request. Allow 10 working days for delivery of a tax return transcript.

If you still need an actual copy of a previously processed tax return, it will cost $57 per tax year and take much longer. Complete Form 4506, Request for Copy of Tax Form, and mail it to the IRS address listed on the form for your area. Allow 60 days for actual copies of your return. Copies are generally available for the current year as well as the past six years.

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