California Tax Attorney Blog

There is now tax relief for homeowners. In a news brief issued by the IRS for the benefit of those with troubled loans, the government now says that if your mortgage debt is partly or entirely forgiven during 2007, 2008 or 2009 you may be able to claim special tax relief by filling out Form 982 and attaching it to your federal income tax return for that year. Usually, forgiveness of debt results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude from tax up to $2 million of debt forgiven on your primary residence. The limit is $1 million for a married person filing a separate return.

Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. The debt must have been used to buy, build or substantially improve your principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.

Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be available.

If you have other federal or California state tax problems, speak with a qualified tax attorney about finding a solution. Call Mitchell A. Port at 310.559.5259.

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Your California estate planning documents (the living trust, will, durable power of attorney for property management and advance health care directive) are usually on paper and you want to be sure that they stay safe and can be easily found when your family needs to find them. So, where should you store them?

There are people who store them in very odd places like their freezers. It’s a better idea to keep your originals in a fire-resistant safe in your house and to notify friends and family where they are and how to get it open. Better yet, you can simply keep them in an accessible place where they can easily be found; if they are lost or destroyed before you need them, your estate planning attorney can provide you with another copy.

It is probably not a good idea to store your estate plan in a safe deposit box at the bank. Unless your friends or family are co-owners of the box (and sometimes even if they are), it won’t be easy for them to open it if you’re not there. Having the key isn’t enough to get the bank to open it up for them — the bank wants you to prove that you have the legal authority to require them to open it up. Think about it: the document granting your friends or family the right to act on your behalf as an executor is INSIDE the box, and until the box is opened, they can’t prove that they have the authority to get the bank to open it… (and so on).

Another concern about using a safe deposit box is those small keys to safeguard. Lost keys are create an expensive problem. When you rent a box from the bank, they give you two keys. The only way the box can be opened is when one of your keys and one from the bank are used at the same time. If you lose both of your keys, you have to pay the bank to drill out and replace the lock on the box.

For other information about California estate planning, call an estate tax attorney – call Mitchell A. Port at 310.559.5259.

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I am often asked about restraining orders that become effective when a divorce action is filed in California and how those orders impact estate planning by my clients who live in Los Angeles County, Santa Barbara County, Ventura County or Orange County. I am also asked about the ability of my clients to do estate planning when they terminate their marital status before the final disposition of property.

When a dissolution action is filed, pursuant to California Family Code section 2040(4)(b), parties are prevented from creating a nonprobate transfer or modifying a nonprobate transfer that could affect the disposition of the property being transferred without having first obtained the written consent of the other party or a court order. Nonprobate transfers include revocable trusts, joint tenancies and beneficiary designations such as payable on death accounts, IRAs, profit sharing pension plans and life insurance.

As a result, a trust can be created but cannot be funded. While this will allow my client to immediately fund the trust at the conclusion of the dissolution action, this does not solve the problem of dieing during the dissolution action without an estate plan in place.

Therefore, if my client has the luxury of time, creating or modifying a revocable trust should be done before a dissolution action is pending. If this is not possible, then revoking any and all family trusts should be considered and an interim Will should be created. This will insure a disposition of my client’s separate property and one-half of the community property to persons whom my client would want to receive the property should their death occur during the pending dissolution action.

Because people often choose to terminate their marriage before the final disposition of property, what about estate planning of such property once the parties divorced? The issue was that while restraining orders became effective upon the filing of the dissolution action, Probate Code section 5600 provides that spousal beneficiary designations are automatically revoked at the termination of marital status if an asset is a “non probate transfer asset,” as defined in Probate Code section 5000 unless there is either (1) clear and convincing evidence that the transferor intended to preserve the nonprobate transfer in favor of his or her former spouse, or (2) an order from the Court. Effective January 1, 2008, the California legislature resolved this question in California Family Code section 2337(c)(7A).

California Family Code section 2337 addresses the situation where a party seeks to terminate their marital status before the disposition of property and protections that may be put in place to protect the spouse that did not seek the early termination of their marital status. Section (c)(7A) now provides that the Court may specifically order a party, as a condition of their seeking to be divorced, to maintain the other party as a beneficiary of a nonprobate transfer of one-half, or upon good cause, all of a nonprobate transfer asset until a judgment is entered with regards to the property and the property is in fact distributed.

As a result of this new development, it is important that when my clients tell me they are divorced, I must inquire further. I need to know if they were divorced after January 1, 2008; and if so, if they have a final judgment on their property issues. If not, I need to see their Status Only Judgment of Dissolution to know if the Court imposed a California Family Code section 2337(c)(7A) condition on the termination of their marital status so I know how to proceed with their estate planning.

If you are contemplating a divorce and you are concerned about your spouse getting your estate upon your death because that is what your Will or living trust provides, then speak with me about resolving this issue. I am an estate planning attorney and can help.

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For the purpose of determining inheritance when there is no Will or other instrument disposing of property (called “intestate succession”) by, through, or from a person, California Probate Code Section 6450 provides that a relationship of parent and child exists in the following circumstances:

(a) The relationship of parent and child exists between a person and the person's natural parents, regardless of the marital status of the natural parents.

(b) The relationship of parent and child exists between an adopted person and the person's adopting parent or parents.

California Probate Code Section 6452 says that if a child is born out of wedlock, neither a natural parent nor a relative of that parent inherits from or through the child on the basis of the parent and child relationship between that parent and the child unless both of the following requirements are satisfied:

(a) The parent or a relative of the parent acknowledged the child.

(b) The parent or a relative of the parent contributed to the support or the care of the child.

For answers to this and other probate questions, please call Mitchell A. Port at (310) 559-5259.

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The IRS issued a revenue procedure which lists the various factors necessary to satisfy to obtain equitable relief as an innocent spouse.

If you have a tax problem, and believe that you maybe qualify for innocent spouse relief contact the Mitchell A. Port at (310) 559-5259.

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California tax lawyers and many of their clients are familiar with the advantages of accelerating charitable bequests into charitable remainder trusts: income for life for beneficiaries of the client’s choosing, capital gains tax savings, generous income tax charitable deductions and eventual support for important charitable causes. CRTs typically involve six-figure funding amounts, however, and come burdened with a variety of complexities and reporting requirements.

On the other hand, it is possible for clients age 60 and older to blend support for their charitable cause with a simple plan that will provide significant payments for life from gifts as small as $3,000 as well as large income tax deductions, potential capital gains tax savings and payments that are partly tax free. The technique that makes these benefits possible is a charitable gift annuity.

A gift annuity is a contract between a donor and a not-for-profit organization in which the donor exchanges cash or securities for an annuity for one or two recipients.

Immediate payment gift annuities have greatest appeal to older clients who are charitably motivated and wish to add a fixed income component to their portfolios. Both payout rates and deductions are high for this age group (the average gift annuity donor is age 77).

Gift annuities seem to have appeal for women. Women continue to live longer than men by roughly 5 years and so may have a greater interest in “an income that a person cannot outlive.”

Gift annuities also can be arranged to make payments for the lifetimes of two people, such as a husband and wife, brothers and sisters, parents and children or close friends.

Investors can use gift annuities to get investment profits and receive annual payments form the charitable organization that range from 5.5% to 10.5% depending on the age or ages of the persons receiving the payments. In general, 30 to 50% of a donor’s capital gain escapes capital gains tax completely. The remaining gain will be reported in small annual installments as part of the donor’s annuity payments and taxed at only 15% or possibly less.

Retirees who are unhappy with low CD returns can increase their spendable income with gift annuities and also enjoy payments that are partly tax-free. Capital gains savings are advantageous to investors who wish to move from equities into a fixed income arrangement.

Deferred payment gift annuities provide higher payout rates and larger charitable deductions, however, tax-free payments are smaller as a percentage of the annuity payment.

For other tax planning opportunities, call your tax lawyer. Call Mitchell A. Port at (310) 559-5259 for a tax consultation.

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The American Institute for Cancer Research has developed programs to assist California's tax lawyers and financial planners in providing their clients with accurate and current information related to charitable gifts. The Institute appreciates the role that California tax attorneys and financial planning professionals play in the consideration of charitable gifts by AICR supporters.

In the AICR's Estate Planners Corner: Services for Attorneys, Financial Professionals and Investment Advisors, it provides free publications and updates on a variety of tax and gift planning issues related to charitable gifts. Some of the publications include tax topics such as:

Minimizing Gift and Estate Taxes Through Charitable Trusts

Planning and Drafting Gifts and Trusts of Closely Held Stock

Selecting Assets for Charitable Gifts - Outright and in Trust

Supplementing Retirement Savings With Charitable Gifts

Charitable Remainder Trust Agreements Approved by the IRS

Minimizing Income Taxes and Transfer Taxes with Charitable Gift Annuities

Planning and Drafting Charitable Gifts and Trusts with Real Property

Planning and Drafting a Testamentary Charitable Remainder Trust

Planning and Drafting Charitable Lead Trusts

Administration and Investment Strategies for a Charitable Remainder Trust

For more detailed information on these estate planning topics, you are invited to call Mitchell A. Port, a tax attorney in Los Angeles, California, at (310) 559-5259.

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When you have a California living trust, generally the trust is revocable while you are alive. That means no one has the right to ask to see it and it's contents remain private. However, when either you or your spouse dies, a part or all of your California living trust becomes irrevocable. Once your trust becomes irrevocable, it's contents are no longer private and any beneficiary can request a copy of it. California Probate Code Section 16061.5(a) provides that:

"When a revocable trust or any portion of a revocable trust becomes irrevocable because of the death of one or more of the settlors of the trust, or because, by the express terms of the trust, the trust becomes irrevocable within one year of the death of a settlor because of a contingency related to the death of one or more of the settlors of the trust, the trustee shall provide a true and complete copy of the terms of the irrevocable trust, or irrevocable portion of the trust, to any beneficiary of the trust who requests it and to any heir of a deceased settlor who requests it."

A California probate attorney may be helpful in this and other estate matters. For a consultation, call Mitchell A. Port at (310) 559-5259.

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Last week, California's governor approved a bill providing that on and after January 1, 2010, any instrument, whenever executed, that became irrevocable on or after January 1, 2001 the law regarding no contest clauses will change.

Existing law, in relation to wills, trusts, and other instruments, defines and regulates no contest clauses, which are provisions in otherwise valid instruments that, if enforced, penalize beneficiaries if the beneficiaries file a contest with the court. Existing law provides that a no contest clause in a will or a trust is generally enforceable and defines a "contest" and "direct contest" in this regard. Existing law provides that certain actions do not constitute a contest unless expressly identified in the no contest clause as a violation. Existing law exempts certain contests from the enforcement of the no contest clause under specified circumstances, including if there is reasonable cause to believe that instrument has been revoked. Existing law permits a beneficiary to apply to a court for a determination of whether a particular motion, petition, or other act by the beneficiary would be a contest within the terms of a no contest clause.

This bill, beginning January 1, 2010, would revise, recast, and clarify these provisions. The bill would limit the application of a no contest clause to specific contests. The bill would redefine "direct contest," and would provide that a no contest clause may be enforced against a direct contest only when it is brought without probable cause, which the bill would define for these purposes. The bill would delete the provisions regarding the authority of a beneficiary to apply to a court for a determination regarding a no contest clause, as described above.

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In May and June alone, taxpayers reported almost 700 separate phishing incidents to the IRS.

The most common scams involve tax refunds and, this year, economic stimulus payments. The Internal Revenue Service cautions taxpayers to be on the lookout for a new wave of scams using the IRS name in identity theft e-mails, or phishing, that have circulated during the last two months.

The IRS has an interesting news article where the full details are available.

Here is a part of the article:

How Scams Work

"To lure their victims, phishing scams use the name of a known institution, such as the IRS, to either offer a reward for taking a simple action, such as providing information, or threaten or imply an unpleasant consequence, such as losing a refund, for failing to take the requested action.

"The goal of the scams is to trick people into revealing personal and financial information, such as Social Security, bank account or credit card numbers, which the scammers can use to commit identity theft.

"Typically, identity thieves use a victim’s personal and financial data to empty the victim’s financial accounts, run up charges on the victim’s existing credit cards, apply for new loans, credit cards, services or benefits in the victim’s name, file fraudulent tax returns or even commit crimes. Most of these fraudulent activities can be committed electronically from a remote location, including overseas. Committing these activities in cyberspace allows scammers to act quickly and cover their tracks before the victim becomes aware of the theft.

"People whose identities have been stolen can spend months or years — and their hard-earned money — cleaning up the mess thieves have made of their reputations and credit records. In the meantime, victims may lose job opportunities or may be refused loans, education, housing or cars."

Topics in the article also include:

Refund e-Mail Scam

Tax Court Scam

Economic Stimulus Payments Scam

Company Report Scam

Substitute Form 1040 Fax Scam

What to Do

Do you have other tax problems with the IRS or California tax authorities? If so, speak with Mitchell A. Port, a tax attorney in Los Angeles, about your concerns.

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