California Tax Attorney Blog

Sophisticated California investors and their local financial advisors in Los Angeles, Orange County, Santa Barbara or Ventura know that the charitable remainder trust (CRT) is one of the most effective and flexible tools in philanthropic financial planning. But this tool is not limited only to sophisticated investors or those who are philanthropically minded.

Many individuals who are retired or planning to retire own low-yield, highly appreciated assets, such as stock or real estate, and don’t want to sell them because of the capital gains tax. A CRT allows you to unlock the income-producing potential from such an asset without paying a substantial amount of capital gains tax.

In most cases, when you create a CRT, you fund it with low-yield, highly appreciated assets. In many instances, you may serve as the trustee and retain power over managing trust property. As the CRT’s trustee, you sell the assets and because the CRT is a tax-exempt entity, no capital gains tax is due on the sale. The trustee then may reinvest the total value of the assets instead of the assets’ after-tax value. When 100% of the property’s value is invested, a wonderful outcome results.

A CRT delivers a stream of income earned on 100% of the asset’s value to you and, in some cases, your beneficiaries for life (or a specified term of years). If the CRT invests in tax-exempt bonds, your and your beneficiaries’ payout can be tax-exempt. When the trust terminates, the remaining trust assets will pass to a charity of your choice. Depending on how the trust is designed, the trust will terminate at your death, the death of your surviving beneficiary, or at the end of a term of years.

From a tax standpoint, a CRT provides you with an immediate income tax deduction for the portion of the assets that will eventually pass to your charity, which increases your spendable income now. This deduction may then be used over a period of years to offset future income.

Also, you save estate taxes in the future because the assets transferred to the CRT will not be subject to estate tax.

Your investment specialist or estate planning attorney will be able to discuss these and other estate planning vehicles in depth and to determine which are best suited to meet your specific financial goals. If you would like to speak with Mitchell A. Port, Esq. about your estate planning, please call for a free consultation at (310) 559-5259.

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It's a good idea to update your California estate plan every few years or after the occurrence of significant life events such as marriage, divorce, the birth of a child and grandchild, or adoption.

Meet with your tax attorney while you’re still thinking about the changes you want to make to your plan.

Even if you haven't experienced any of these events since you last updated your estate plan, there have been changes in California state and federal tax laws or changes in your financial situation that necessitate a reevaluation of your estate plan.

Your desires as far as how your property will be distributed are likely to change over the years, especially as certain events occur in your life. For example, if you get a divorce, you probably don't want to make the same bequest to your former spouse as you did when you were married. In Los Angeles County, Ventura County, Santa Barbara County and Orange County, California, provisions regarding an ex-spouse in your will are not disregarded.

The birth or adoption of a child is another life event that will require you to update your estate plan. Even if your will or trust already provides for children, it is a good idea to update it each and every time you have a child.

Other significant events that will require you to update your estate plan are marriage, re-marriage, the death of a beneficiary, and the death of an executor or trustee.

California provides that a statutory share of the estate will go to a surviving spouse. If this statutory requirement is not in keeping with your estate planning desires, you will need to revise your estate plan or have a valid pre-nuptial or post-nuptial agreement to avoid it.

This becomes particularly important for individuals in a second marriage who have grown children from a first marriage. In this situation, you may want to provide for the support of your current spouse during his or her lifetime, but you will want to make sure that your children ultimately inherit your assets.

Without proper planning, your current spouse's children could end up inheriting your assets, instead of your own children.

Another thing that tends to change over the years is your financial situation. If your current estate plan was made even a few years ago, your net worth may have changed enough that you will need to incorporate more estate tax planning into your estate plan.

Finally, you should reevaluate your desires from time to time. You may find that you've changed your mind about a variety of issues addressed by your estate plan. Do you want a different person to be the trustee of your estate, rather than the one who is currently named in your will or trust? Did you grant a health care power of attorney to one of your children and now that child has moved to a different state? Is there something about the way one of your beneficiaries is leading his or her life that would make you want to put their bequest into a trust rather than granting an outright distribution?

You may have become aware that one of your children has trouble managing money and you fear their creditors might end up with the inheritance.

If you already have an estate plan in place, you deserve congratulations for planning ahead and being prepared. But you also need to remember to update it from time to time as your situation or needs change.

To discuss this in more detail, please call Mitchell A. Port at (310) 559-5259.

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Posted In: Probate , Estate Planning

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During a recent evening event with other professionals in Los Angeles, California, I was asked whether a probate of a living trust created and signed in Los Angeles is necessary. My knee-jerk reaction was to say “of course not”. But after hearing more about the situation, I had to reconsider.

The circumstances were that the California based trustee in charge of the estate after the settlors of the trust died wanted to transfer the trust’s investments from one investment firm to another firm. Both securities firms were located in Ventura County with offices in Santa Barbara County and Orange County, California. The firm currently holding the investments asked the trustee whether he knew with certainty that the trust he had in his possession was the most recent version and that it had not been amended.

Until the trustee could somehow prove that he had the most recently drafted trust which had not been amended, the investment firm would not release the property. To make matters worse, the investment firm would not accept a mere written statement (not even a notarized one) from the trustee that he had the latest trust and that there were no amendments to it.

I suppose that the California investment firm had the experience of releasing funds to a trustee without asking whether the living trust the trustee presented was the latest version and whether it had been amended. My guess is that after releasing the investments to the trustee, another person connected to the estate approached the investment firm with a later version of the trust which may have named that person as the trustee in place of the trustee who previously obtained access to the investments. The investment firm probably had no choice but to require proof that the living trust presented by the second trustee was the most recent version and once it received that proof it handed-over the property upon demand. As a result, the firm was out-of-pocket the value of the investment account one time too many.

How does a trustee prove that the living trust he or she possesses is the latest version and has not been amended? The trustee will have to petition a California probate court having jurisdiction over trust administration seeking an order confirming the status of the living trust as the last living trust or amendment signed by the settlors. The trustee can then present that order to the investment firm so as to obtain control over the investments and transfer them to the other firm as he or she originally tried to do once becoming the trustee.

If you would like help by consulting with an attorney experienced in trust administration, you are welcome to call Mitchell A. Port at (310) 559-5259.

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One of the decisions that you will be asked to make as you are completing the purchase of real property in California, is how you are going to hold title to the property (the vesting). The vesting will appear on the Deed of Trust and the Grant Deed, which are recorded documents in the county where the property is located such as Los Angeles County, Ventura County, Orange County or Santa Barbara County. Usually, your escrow officer or lender, or possibly both, will ask you how you want to hold title. The manner in which you hold title may have significant legal and tax consequences. Some of the issues that you should consider will be explored in this blog.

SOLE OWNERSHIP

Real property in California can be owned in either Sole Ownership or in Co-Ownership. There are three options for holding property as a Sole Owner:

A Single Man or Woman, defined as a man or woman who has never been married.

An Unmarried Man or Woman, defined as a man or woman who has been married in the past, but is now legally divorced or is widowed.

A Married Man/Woman, as His/Her Sole and Separate Property, defined as a married man or woman who wishes to acquire title in his or her name alone.

In California, any assets that are acquired during marriage become community property, (i.e., belonging to both spouses), unless they are specifically acquired as separate property. Real property that is conveyed to a married man or woman is considered community property, unless it is stated otherwise. In order for a married individual to acquire title in his or her name only, the spouse must relinquish all right, title and interest to the property. Usually, this is done by executing a Quitclaim Deed to the property, which is recorded concurrently with the deed to the property.

CO-OWNERSHIP

For residential property, the primary methods for holding title are Community Property, Joint Tenancy, and Tenancy in Common. Tenancy in Partnership will not be addressed in this article.

Continue reading "How Do I Take Title to Property In California?" »

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The limited liability company (“LLC”) is a relatively new type of entity which is now available in almost every state in the U.S., including California. It has a combination of features which is not found in any of the other available business forms.

The LLC is very desirable for situations in which the California business owners wish to have partnership-type flow-through tax treatment, along with protection from personal liability. These are the same features which attract business owners to the S corporation, but the S corporation form has many limitations which restrict its use. Many California based businesses which would like to use the S corporation form are not eligible for S corporation status. In addition, the S corporation rules have many prohibitions and conditions which make it less attractive, even when it is an option.

Since corporations and non-resident aliens cannot be shareholders of an S corporation, the S corporation structure is not an option for enterprises owned by foreigners or for joint ventures involving corporations.

The desirable flow-through tax treatment (passing the tax consequences of losses, investment tax credits, and depreciation through to the individual owners) is regarded as “partnership” tax treatment, as opposed to “corporate” tax treatment. The tax return of the organization - the S corporation or LLC – shows the profits and losses, but the tax consequences of that informational return are prorated among the shareholders (or “members” in an LLC).

The key benefits of this flow-through of tax consequences are that profits and gains are taxed only once and taxed at the tax rate of each shareholder or member.

The tax treatment of LLCs can be more fully described as follows:

Continue reading "Taxation of California Limited Liability Companies" »

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The creation of an LLC which will operate in Los Angeles County, Orange County, Ventura County, Santa Barbara County and throughout California requires the filing of articles of organization with the California Secretary of State’s office and execution of an operating agreement among the members. A qualified business attorney can be helpful in accomplishing this.

The articles of organization for an LLC formed under California law must set forth the LLC’s name, a date for its dissolution, a statement of purpose, the agent for service of process, and a statement indicating whether the LLC is to be managed by managers and not by all of its members or managed by only one manager.

The operating agreement is not a legal requirement under California law, but it is a necessity, since the parties will find it necessary to define all the rights, privileges and obligations of the members of the LLC. The operating agreement should contain provisions addressing at least the following topics:

1. The rights and duties of members;

2. Contribution of cash, property, or services by members and other issues relating to capital structure;

3. Allocations of profits and losses and other tax consequences of the LLC;

4. Distributions to the members;

5. Maintenance of capital accounts, accounting records and financial information, and delivery of financial reports and tax information to the members;

6. Meetings of members, meetings of managers, and voting requirements;

7. How the LLC is to be managed, whether by the members, by a management group of members, or by hired management;

8. Disposition of interests of members, termination of memberships, assignment of membership interests, admission of additional members, and withdrawal of members;

9. Rights of the LLC or other members to buy out the interest of a member under specified circumstances;

10. Rights of the LLC or other members to buy out the interest of a deceased member;

11. Dissolution of the LLC; and

12. Procedures for amending the operating agreement.

Mitchell A. Port, at (310) 559.5259 is available to consult on these matters as well as other business transactions.

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The LLC is not the perfect entity for any business in California. All aspects of the LLC must be considered for each business situation.

An important limitation in California is that most licensed occupations are prohibited from using the LLC. If the business must hold any type of state license, check out the potential licensing limitations on the LLC first. The broad prohibition on using an LLC for state licensed activities has been an unwelcome surprise for many business people.

Another concern in California is that LLCs are subject to the minimum franchise tax of $800, plus a gross receipts tax according to a schedule. The gross receipts tax kicks in at $900 on gross receipts of $250,000 to $499,999, $2,500 on gross receipts of $500,000 to $999,999, $6,000 on gross receipts of $1,000,000 to $4,999,999, and $11,790 of gross receipts of $5,000,000 or more.

In California, S corporations pay a 1.5% tax on their net income. LLCs are taxed on their gross receipts. So depending on the entity's ratio of gross receipts to taxable income, there may be an advantage to operating as an S corporation. For example, assume a grocery stock with $10,000,000 of gross receipts and profits of $200,000. As an LLC, the grocery store would pay $8,585 in taxes (the maximum for gross receipts, $800 + $11,790, but only $3,000 as an S corporation (1.5% of $200,000). However, if the entity earned $5,000,000 in income, as an LLC it would still pay the maximum of $12,590 in taxes, but as an S corporation, it would pay $75,000 in taxes (1.5% of $5,000,000). Thus, understanding the gross receipts to net income ratio of the entity is extremely important when deciding whether to operate as an S corporation or LLC.

Continue reading "California Limited Liability Companies" »

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When I worked as a revenue officer for the IRS in Los Angeles County, California, I took your money out of your bank account or levied your salary earned at your job by simply mailing a form – a levy - to the bank or to your boss. Those were the good ol’ days. These days, as a tax lawyer I help those who are at the receiving end of a levy.

The IRS issues a levy to satisfy a tax debt by seizing your property. Levies and liens are not the same. To secure its claim for unpaid taxes, the IRS files a lien in the county where you have property, be it in Los Angeles County, Santa Barbara County, Ventura County, or Orange County. In contrast, a levy actually takes the property to satisfy your tax debt.

If your property is levied or seized, contact your tax attorney first and then have your attorney contact the employee who took the action. You also may ask the manager to review your case. If the matter is still unresolved, the manager can explain your rights to appeal to the Office of Appeals.

The IRS may seize and sell any type of real or personal property that you own or have an interest in throughout the United States if you do not pay your taxes (or make arrangements to settle your debt). For instance, the IRS

Can seize and sell property that you hold such as your car, boat, or house, or --

Can levy property that is yours but is held by someone else such as your wages, commissions, bank accounts, California State tax refund, licenses, rental income, accounts receivables, retirement accounts, dividends, and the cash loan value of your life insurance.

Often, the IRS will levy only after 3 requirements are met:

Continue reading "My Bank Account Was Levied; The IRS Just Levied My Wages" »

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Liens give the IRS a legal claim to your property as security or payment for your tax debt. A Notice of Federal Tax Lien is filed in the California county where you live whether it is Los Angeles County, Ventura County, Santa Barbara County or Orange County.

The lien may be filed only after the IRS assesses the tax liability, sends you a Notice and Demand for Payment which is a bill that tells you how much you owe in taxes, and you neglect or refuse to fully pay the debt within 10 days after being notified about it. If you want to pay in installments, the IRS will likely file a lien until the debt is paid in full. In either case, consult with a tax attorney immediately.

Once these requirements are met, a lien is created for the amount of your tax debt and may include some penalties and interest. By filing notice of this lien, everyone knows that the IRS has a claim against all your property, including property you acquire after the lien is filed. The courts use this notice to establish priority of claims against you in certain situations, such as sales of real estate or bankruptcy proceedings.

All your property such as your house or car and all your rights to property such as your accounts receivable, if you are a business, is attached by the lien. To add insult to injury, the IRS charges you the fee required by the county to record the lien.

Once a lien is filed, your credit rating will be harmed. Getting a loan to buy a house or a car, getting a new credit card, or signing a lease will probably be very difficult because few will extend credit to you when the IRS has a prior claim. Therefore, resolving your tax liability as quickly as possible before the lien is filed is important.

You can obtain a Release of the Notice of Federal Tax Lien within 30 days after you satisfy the tax due (including interest and other additions) by paying the debt or by having it adjusted, or within 30 days after you guarantee payment of the debt by submitting a bond accepted by the IRS. Refer to Publication 1450, Request for Release of Federal Tax Lien. Usually 10 years after a tax is assessed, a lien releases automatically if it has not been re-filed. Just call the IRS to get the pay-off amount.

Continue reading "The IRS “Liened” My Property So What Do I Do Now?" »

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Tax scams are all around us. Don’t fall victim to them! These schemes take several forms, ranging from promises of large tax refunds to illegal ways of escaping your tax obligations. These scams emanate from everywhere including Los Angeles, Santa Barbara, Orange, Ventura; no county in California is immune.

No matter what you are told, remember these three things:

Sign a tax return only after looking it over to make sure it is accurate.

Anyone who promises you a bigger refund without knowing your tax situation is probably misleading you.

You are responsible and liable for the content of your income tax return.

Here’s a sample of some common tax schemes to be avoided:

Frivolous Arguments: Scam artists have been known to make absurd claims that the Sixteenth Amendment concerning congressional power to establish and collect income taxes was never ratified; that wages are not income; that filing a return and paying taxes are merely voluntary; and that being required to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy. Don’t believe these or other similar claims. Such arguments are false and have been thrown out of court. You always have the right to contest their tax liabilities in court but you have no right to disobey the law.

Telephone Tax Refund Abuse: Some individual taxpayers have requested large and improper amounts for the special refund of the telephone tax. In some cases, taxpayers appear to be requesting a refund of the entire amount of their phone bills, rather than just the three-percent tax on long-distance and bundled service. The IRS is investigating potential abuses. You may request a refund on your 2006 tax return if you paid long distance telephone excise taxes after February 28, 2003 and before August 1, 2006. Generally, the telephone tax refund will be $30 to $60.

Identity Theft: The IRS does not use e-mail to contact us about issues related to our accounts. If you have any doubt whether a contact from the IRS is authentic call 800-829-1040 to confirm it. It pays to be choosy when it comes to disclosing personal information. Identity thieves have used stolen personal data to access financial accounts, run up charges on credit cards and apply for new loans. The IRS is aware of several identity theft scams involving scammers posing as the IRS itself.

Return Preparer Fraud: Avoid being victimized by dishonest tax return preparers who can cause endless headaches for you. These preparers derive financial gain by skimming a portion of your refund and charging inflated fees to prepare your tax return. They attract new clients by promising large refunds. Beware.

If you think you're about to be scammed, call a qualified tax attorney to discuss it before it happens. Call Mitchell A. Port at (310) 559-5259.

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