California Tax Attorney Blog

A durable power of attorney (DPA) for property management is the best protection against the financial consequences of becoming disabled. A DPA is a document often drafted by an estate attorney in which one person (the principal) gives legal authority to another person (the attorney-in-fact) to act on the principal's behalf. In California, probate law allows for the DPA to provide that it is "durable"; that is, that it will continue in effect after you become incapacitated. It terminates at your death or cancellation (you can cancel it at any time), or at a time you specify.

A DPA's flexibility is one of its main advantages. You can limit the authority of the attorney-in-fact in the document, giving him or her as many or as few powers over your property as you wish, attaching conditions and so on. You should check with an attorney before executing a DPA.

The DPA lets you appoint an attorney-in-fact (usually your spouse or child) to manage all or part of your business or personal affairs. The law imposes the responsibility on the attorney-in-fact to act as your fiduciary, but it might be difficult for you or you family to take him or her to court. Since this person can in effect do anything with your money, you should be sure to appoint someone you trust and in whose judgment and ability you have confidence.

Continue reading "California's Durable Power Of Attorney" »

When the IRS detects the false return, you the taxpayer — not the return preparer — must pay the additional taxes and interest and may be subject to penalties. This can be a very serious tax problem. Return preparer fraud generally involves the preparation and filing of false income tax returns by preparers who claim false deductions, inflated personal or business expenses, excessive exemptions on returns prepared for their clients or unallowable credits. Preparers may also manipulate income figures to obtain tax credits fraudulently. Sometimes, you may not have knowledge of the false expenses, deductions, exemptions and/or credits shown on your tax returns. While most preparers provide excellent service, be careful when choosing a tax preparer. You are ultimately responsible for all the information on the tax return even if someone else prepares a tax return. Consider the Following When Choosing Your Tax Preparer

No matter who prepares your tax return, you are ultimately responsible for all of the information on your tax return. Therefore, never sign a blank tax form. Use a reputable tax professional who signs your tax return and provides you with a copy for your records. Accept a referral to a preparer from a trusted friend or advisor. Avoid preparers who base their fee on a percentage of the refund amount. Ask questions. Do you know anyone who has used the tax professional? Were they satisfied with the service they received? Consider whether the individual or firm will be around to answer questions about the preparation of your tax return months or years after the return has been filed. Accountancy firms that have been around for awhile may continue to be around for awhile longer – at least long enough for your purposes. Review your tax return before and ask questions on entries you don't understand before you sign it. Find out the person’s credentials. Only attorneys, CPAs and enrolled agents can represent you before the IRS in matters including collection and appeals, and audits. Other return preparers may only represent taxpayers for audits of returns they actually prepared. Be careful with tax preparers who claim they can obtain larger refunds than other preparers.

Continue reading "Tax Fraud - Pick Your California Tax Return Preparer Carefully" »

If your tax problems result from your not having filed your federal income tax return, three specific penalties will likely be assessed by the IRS when you file your delinquent returns. These are the failure-to-pay penalty, the failure-to-file penalty and the estimated-tax penalty.

The non-filing and non-payment penalties can be waived for reasonable cause when circumstances beyond your control explain not filing your tax return.

Unfortunately, at the time you file your delinquent tax returns, more often than not the Internal Revenue Service will calculate and assess these delinquency-related penalties and you must then request that the IRS consider a waiver of the penalty assessment.

Continue reading "Late Filed Tax Returns And IRS Civil Penalties" »

The State Bar of California has a very informative website containing information specifically addressing the question of whether you should have a California estate attorney prepare a revocable trust, that is, a family trust to stay out of probate court.

The State Bar of California article asks these probate law related questions:

What Is a Living Trust?

What Can a Living Trust Do for Me?

Should Everyone Have a Living Trust?

How Does a Living Trust Help if I Am Incapacitated?

How Does a Living Trust Help at my Death?

Who Should Be the Trustee of My Living Trust?

What Are the Disadvantages of a Living Trust?

If I Have a Living Trust, Do I Still Need a Will?

Does a Living Trust Save Estate Taxes?

Does a Living Trust Pay Income Taxes?

What Other Estate Planning Documents Should I Have?

What Other Kinds of Trusts Are There?

How Do I Transfer Assets to My Living Trust?

Who Should Draft a Living Trust for Me?

How Do I Find a Qualified Lawyer?

Should I Beware of Someone Who Is a "Promoter" of Financial and Estate Planning Services?

How Much Does a Living Trust Cost?

To discuss how answers to some of these questions may effect you and your family, please call Mitchell A. Port at (310) 559-5259.

The website for the State Bar of California has a terrific series of articles addressing various topics. One of those topics of interest to California residents discusses Wills. Below are the topic headings the article discusses - some of which deal with probate law. The California State Bar also has a link to a free California statutory will.

What does a will do?

Your beneficiaries.

A guardian for your minor children.

An executor.

Does a will cover everything I own?

Life insurance.

Retirement plans.

Assets owned as a joint tenant.

“Transfer on death” or “pay on death.”

“Community property with right of survivorship.”

Living trusts.

Your spouse’s or domestic partner’s half of community property.

Are there various kinds of wills?

A handwritten or holographic will.

A statutory will.

A will prepared by a lawyer.

What if my assets pass to a trust after my death?

Can I change my will?

How are the provisions of my will carried out?

Who should know about my will?

What other planning should I do?

List of assets and debts.

Durable power of attorney for property management. In this document, you appoint another individual (the attorney-in-fact) to make property management decisions on your behalf if you are incapacitated.

Advance health care directive / durable power of attorney for health care.

How can I find a lawyer to write a will for me?

If you would like to discuss these and other California probate questions, please call Mitchell A. Port at (310) 559-5259.

The Office of the Attorney General, State of California, has a free medical power of attorney, also known as the advance health care directive, available just by clicking here.

No need for a California estate attorney to prepare the power of attorney - if that is all you want done - since the one for free is simple to use.

The California Attorney General's website recommends that you:

Designate Person To Carry Out Wishes. Select who should handle your health care choices and discuss the matter with them. You could name a spouse, relative or other agent.

Inform Key People Of Your Preferences. Notify your doctor, family and close friends about your end-of-life preferences. Keep a copy of your signed and completed advance health care directive safe and accessible. This will help ensure that your wishes will be known at the critical time and carried out.

Give a copy of your form to:

The person you appoint as your agent and any alternate designated agents

Your physician

Your health care providers

The health care institution that is providing your care

Family members

Other responsible person who is likely to be called if there is a medical emergency

For answers to questions about the California advance health care directive and other estate planning matters, call a Los Angeles tax attorney: call Mitchell A. Port at (310) 559-5259.

In California, a durable power of attorney for property management, also called a financial power of attorney, is a way for you to arrange for someone to manage your personal financial affairs if you become unable to do that on your own. Depending on the extent of the powers provided, a durable power of attorney may also be used to avoid a California probate, probate court and help minimize estate tax. An estate attorney should be consulted to be sure the document provides the terms you desire.

If you become incapacitated and unable to make decisions for yourself, the durable power of attorney avoids the messy alternative of a court proceeding. Your spouse, closest relatives, or someone else who cares for you will have to ask a court for authority over some or all of your financial affairs. Without the durable power of attorney, a California probate attorney may be required to obtain a conservatorship.

A durable power of attorney can be written so that it goes into effect immediately as soon as you sign it. Many of my estate planning clients have a durable power of attorney for each other in case something happens to one of them or for when one spouse is away. As an estate attorney, I often draft a “durable” power of attorney because if I don't, it will automatically end if you later become incapacitated; my document "endures" my client's incapacity.

My clients, some of whom live in Los Angeles County, Santa Barbara County, Orange County or Ventura County, specify that they do not want the power of attorney to go into effect unless a doctor certifies that they have become incapacitated. This is called a "springing" durable power of attorney. Its purpose is to enable you to keep control over your affairs unless and until you become incapacitated, when it springs into effect. I don’t like them as much as those which become immediately effective because it may be difficult to obtain a written medical opinion concerning your incapacity.

When you create and sign a durable power of attorney, you give another person legal authority to act on your behalf. In California, this person is called your attorney-in-fact.

Commonly, people want their attorney-in-fact to “step into their shoes” and give their attorney-in-fact broad power to handle all of their finances and property. But you can give your attorney-in-fact as much or as little power as you wish. You may want to give your attorney-in-fact authority to do some or all of the following:

Continue reading "Power Of Attorney: An Estate Planning Tool To Avoid California Probate" »

The IRS published a Q&A about basic trust law and trust taxation which is quite good. Any qualified California tax attorney worth his salt knows this material. Here are the "Qs" and for the "As" click here.

Basic Trust Law

Q: What is a trust?

Q: Who is a grantor of a trust?

Q: What is a trustee/fiduciary?

Q: What is a beneficiary?

Q: What is a simple trust?

Q: What is a complex trust?

Q: What is a grantor trust?

Q: What are irrevocable/revocable trusts?

Q: What are testamentary and Inter Vivos trusts?

Trust Taxation Questions

Q: IRS instructions for Form 1041 and Schedules A, B, D, G, I, J and K-1 provide general tax information and guidance for completing Form 1041. What law controls trust taxation?

Q: Do trusts have a requirement to file federal income tax returns?

Q: How does a trust compute its income tax liability?

Q: I have been told that I can assign income to a trust and I will not be taxed on that income. Is this true?

Q: May a trust deduct contributions to a charity?

Q: Will I owe Federal Gift Taxes on property contributed to a trust?

Q. The information presented by the promoter sounded legitimate. Now I have concerns regarding this promotion. Who do I contact to report information on the promotion and promoter?

Q. Can I get more information on the Internet?

Speak with a California tax lawyer about these and other questions you may have. Call Mitchell A. Port at (310) 559-5259.

Domestic trusts are trusts created in California and the rest of the country. Here are some common abusive domestic trust schemes:

Family residence trust
My wife and I transfer family residences and furnishings to a trust, which sometimes rents the residence back to us. The trust deducts depreciation and the expenses of maintaining and operating the residence including gardening, pool service and utilities. The courts have consistently collapsed these types of trusts, taxing income to us and disallowing personal expenses.

Charitable trust
My wife and I transfer assets or income to a trust claiming to be a charitable organization. The trust or organization pays for personal, education or recreation expenses on behalf of me and my wife or family members. The trust then claims the payments as charitable deductions on its tax returns. These alleged charitable organizations often are not qualified and have no IRS exemption letter; hence, contributions are not deductible. Charitable deductions are not allowed when the donor receives personal benefit from the alleged gift.

Business trust
This involves the transfer of an ongoing business to a trust. Also called an unincorporated business organization, a pure trust or a constitutional trust, it gives the appearance that I have given up control of my business. In reality, through trustees or other entities controlled by me, I still runs the day-to-day activities and control the business's income stream. Such arrangements provide no tax relief. The courts have held that the business income is taxable to me under a variety of legal concepts, including lack of economic substance (sham theory), assignment of income, or that the arrangement is a grantor trust. In some circumstances, the trust could be taxed as a corporation.

Asset protection trust
These trusts are promoted as a means of avoiding liability for judgments against an individual or business. However, beware of any asset protection trust marketed as part of a package to reduce federal income or employment taxes. The courts can ignore such trusts and order my property sold to satisfy the outstanding liabilities.

Equipment or service trust
This trust is formed to hold equipment that is rented or leased to the business trust, often at inflated rates. The business trust reduces its income by claiming deductions for payments to the equipment trust. This type of arrangement has the same pitfalls as the business trust, and it will result in no tax reduction.

Do you think you are involved in one of these and would like to extricate yourself? Call Mitchell A. Port, a California tax attorney, at (310) 559-5259.

Did you know that the Internal Revenue Service publishes a list of tax-exempt organizations which have lost their tax-exempt status? You can see a recent list by clicking here. Some of those troubled by tax problems are in California. No longer exempt under section 501(c)(3) of the Internal Revenue Code, these organizations no longer qualify to receive tax-deductible contributions under Code section 170(c)(2).

When the Internal Revenue Service revokes recognition of section 501(c)(3) status, Publication 78 does not immediately reflect the change. Instead, the IRS publishes the change in the Internal Revenue Bulletin (IRB), which can be accessed by clicking on the organization’s name here. Here is a cumulative list of such organizations published in the IRB from November 2005 to present. Click here for a page listing revocations back to January 2005.

Want to form a 501(c)(3) and it's equivalent in California? Call Mitchell A. Port for a consultation at (310) 559-5259.

Are you a California taxpayer with a tax problem involving income tax withholding? Have you found that your employer in Los Angeles County, Santa Barbara County, Orange County or Ventura County can be more helpful without having to consult with a tax attorney? The IRS published a list of 13 questions and answers about compliance with income tax withholding requirements. Here they are:

Q1: In the past, as an employer, I was required to submit all Forms W-4 that claimed complete exemption from withholding (when $200 or more in weekly wages were regularly expected) or claimed more than 10 allowances. What Forms W-4 do I now have to submit to the IRS?
A1: Employers are no longer required to routinely submit Forms W-4 to the IRS. However, in certain circumstances, the IRS may direct you to submit copies of Forms W-4 for certain employees in order to ensure that the employees have adequate withholding. You are now required to submit the Forms W-4 to IRS only if directed to do so in a written notice or pursuant to specified criteria set forth in future published guidance.
________________________________________
Q2: If an employer no longer has to submit Forms W-4 claiming complete exemption from withholding or claiming more than 10 allowances, how does the IRS determine adequate withholding?
A2: The IRS is making more effective use of information contained in its records along with information reported on Form W-2 wage statements to ensure that employees have enough federal income tax withheld.
________________________________________
Q3: If the IRS determines that an employee does not have enough federal income tax withheld, what will an employer be asked to do?
A3: If the IRS determines that an employee does not have enough withholding, we will notify you to increase the amount of withholding tax by issuing a “lock-in” letter that specifies the maximum number of withholding allowances permitted for the employee. You will also receive a copy for the employee that identifies the maximum number of withholding exemptions permitted and the process by which the employee can provide additional information to the IRS for purposes of determining the appropriate number of withholding exemptions. If the employee still works for you, you must furnish the employee copy to the employee. If the employee no longer works for you, you must send a written response to the IRS office designated in the lock-in letter indicating that the employee is no longer employed by you. The employee will be given a period of time before the lock-in rate is effective to submit for approval to the IRS a new Form W-4 and a statement supporting the claims made on the Form W-4 that would decrease federal income tax withholding. The employee must send the Form W-4 and statement directly to the IRS office designated on the lock-in letter. You must withhold tax in accordance with the lock-in letter as of the date specified in the lock-in letter, unless otherwise notified by the IRS. You will be required to take this action no sooner than 45 calendar days after the date of the lock-in letter. Once a lock-in rate is effective, an employer can not decrease withholding unless approved by the IRS.

Continue reading "Clarifying Income Tax Withholding Requirements" »