The Dayton Law Firm

Active Ownership: Planning for Business Owners

This is a general reminder that ownership of a closely held or family business should be integrated in your estate plan. While sophisticated planning can be done to maximize estate and gift tax treatment, even those who do not have estate tax concerns can benefit from pre-planning. In situations where the owner is the manager of a business, providing the correct authorizations for agents and trustees to act on your behalf can save your business legal costs and delays associated with an important manager/owner falling ill or worse.

Your powers to manage your business are often tied to ownership in small, closely held, and family businesses. Unless specific planning is done in the business entity documents, owners have many voting rights tied to either making management decisions or deciding to remove and replace managers. Unfortunately, if the ownership is in your name (rather than held in a trust), then a court must appoint a representative to act for you in situations of incapacity or death. Appointing this appropriate conservator or administrator could take months and cost thousands. Any small business owner knows that few decisions can wait months and few balance sheets can easily take that hit.

However, doing an attorney advised estate plan and making sure your attorney knows you own a small business can help avoid the courts. Creating an appropriate Trust and Durable Power of Attorney document, funding/assigning as many interests in the Trust, and ensuring both documents have business interest powers built in can be the solution. This plan allows the owner to assign someone the power to make decisions and sign documents on behalf of the business owner in times of incapacity or death. Because the person was pre-designated, there is no need for the court’s delays and costs.

Thus, business owners can benefit from having their business interests included in their estate plans. If you have a plan but it was done before creating the business or without discussing it with the attorney (or if the plan was not attorney advised), then there are benefits to be gained by revisiting the plan and incorporating your business interests.

Will Your Evil Sister-in-Law Raise Your Children?

You may be surprised to find some of the most important parts of an estate plan have nothing to do with money. Planning includes naming who is in control of everything you own and everything you are responsible for. This means your parental rights over your children are also something that should be handled with your plan.

Many parents are familiar with how this works, but just as review: until your children reach the age of majority (age 18 years in California) or are Court emancipated, they do not have the right to sign contracts, open bank accounts, or make medical decisions. Until then, the minor’s rights are controlled by their parent or Guardian.

A Guardian is a Court appointed adult who is accountable for managing the child’s living situation and assets (including government benefits available for the child). Technically, the Guardian of the Estate (who manages money) and Guardian of the Person (who manages living situation) are not required to be the same person. In special circumstances, you may see these jobs separated, but generally a single person is appointed by the Court to take both jobs.

The Court must be involved with appointing the Guardian of a child who has lost a parent (or if the parent is unavailable to act for some reason). There are default laws for the Court to use to decide who gets to take the job. This rule is a list of relatives of the natural parents. The highest person on the list who asks to take the job is normally given it after a thorough investigation and hearing any objections from other relatives. Thus, if you don’t name your preferred guardians, there is a long list of relatives of natural parents (including your favorite in-law) who may end up as Guardian.

In California, the place to name your Guardians is in your will. Even if you have a trust, having a “pour-over” will can be important for many reasons, especially to name your preferred Guardians. Keeping your list of Guardians updated may change more often than other decisions, so you can know just changing this is a very small update that only requires changing the will. While it is necessary to vet your choices carefully, you can also feel safe that the job is not required, and relieving themselves of the responsibility to let your next named person act is as easy as a signed one-page document.

If you have already done a comprehensive estate plan, then you have already handled this. If you are a parent or planning on being a parent, deciding to create an estate plan can be for purposes beyond just yourself.

Vacation Planning

Summer is everyone’s favorite time to go adventuring across the world.  Clients of ours who completed a comprehensive estate plan can head off on those journeys knowing they have their affairs in order.  For those out there who either haven’t completed a plan or haven’t started, we offer the following tips to try and get things in a good situation.

 

  1. Make sure you have an Advance Health Care Directive (or your state’s equivalent). A general version of this is included in our comprehensive package, but specific versions are normally available from your primary care physician if you ask.
  2. Once you’ve done an Advance Health Care Directive, be sure you save a copy of the order of names and phone numbers of those you named as your agents. Then, when you are asked to list emergency contacts while out on potentially risky activities, you’ll know exactly who to name.
  3. Financial planning is not as essential for vacation emergencies, but being sure you have correctly set up authorized access on your accounts for your agents (often through a bank’s own special Power of Attorney form) can help in time of need.

 

All of that said, if you have time to put a comprehensive plan in place, a complete set of documents that all cooperate with each other cuts more red tape than the above method.

When Asset Protection Fails

The California Supreme Court recently clarified how spendthrift trusts are treated in federal bankruptcy, and the news is not good for those who want to protect assets from creditors.  Carmack v. Reynolds, opinion filed 3/23/2017, answered a question about how much of the current and future payments of a spendthrift trust are payable to the creditors of the beneficiary of the trust.  Over the course of the opinion, the Court lays out the following formula as an interpretation of Probate Code Section 15306.5: Unless the distributions are designated for the beneficiary’s support and are actually required for support, a creditor may collect the full amount of distributions that are payable now, and in addition the creditor may collect now up to 25% of all future known payments.  The creditor may then request to be paid the remaining 75% in each year that a future payment becomes currently available.  This is despite the trust’s spendthrift provision because the Trust includes a way to calculate distributions.  Near the end of the opinion, the Court felt a hypothetical was needed.  It clears up the otherwise convoluted formula:

 

“As an illustration, suppose a trust instrument specified that a beneficiary was to receive distributions of principal of $10,000 on March 1 of each year for 10 years. Suppose further that a general creditor had a money judgment of $50,000 against the beneficiary and that the trust distributions are neither specifically intended nor required for the beneficiary‘s support. On March 1 of the first year, upon the creditor‘s petition a court could order the trustee to remit the full distribution of $10,000 for that year to the creditor directly if it has not already been paid to the beneficiary, as well as $2,500 from each of the nine anticipated payments (a total of $22,500) as they are paid out. If the creditor were not otherwise able to satisfy the remaining $17,500 balance on the judgment, then on March 1 of the following years, upon the general creditor‘s petition the court could order the trustee to pay directly to the creditor a sum up to the remainder of that year‘s principal distribution ($7,500), as the court in its discretion finds appropriate, until the judgment is satisfied.”

 

The full opinion can be found here, above section can be found on page 15:

http://www.courts.ca.gov/opinions/documents/S224985.PDF

 

What are the takeaways? For now, asset protection in California is best achieved with unspecified discretionary distribution language to be exercised by an independent trustee.  This can be achieved with the help of an estate planning attorney, and is our firm’s default version of option for asset protection trusts.  However, this area of law changes often.  Anyone with a trust that incudes asset protection should consider having it reviewed regularly.  Had Rick Reynold’s parents updated their plan to sure up the asset protection, their son would not have lost their trust to his own creditors.

Sometimes The Greatest Change Brings About Even Greater Opportunity

After learning who won the election, many of us went looking to the president’s campaign website for his policy choices. Those of us in the estate planning world took note of the industry-changing decision to repeal the federal estate tax. At this point, the federal budget is still working its way through congress before the new President has his say about what it should include, but it does looks likely it will not include a federal estate tax.

A California state representative, however, has seen the potential repeal of the federal estate tax as an opportunity. California Senator Scott Wiener proposed S.B. 726, which mirrors the current federal estate tax and would include a maximum 40% rate and an approximate $5.5 million lifetime exemption. The only major difference is the checks are cut to California instead of the United States. Due to the way California handled this issue in the past, even if S.B. 726 clears the State Senate it will need to pass a statewide public vote. This makes the bill unlikely to become a law.

Despite the hurdles in his way, it seems Senator Wiener took advise from the fake Teddy Roosevelt in the movie Night at the Museum, “…and who knows, sometimes the greatest change brings about even greater opportunity.”

 

For the curious, the full text of the proposed bill can be found here: http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201720180SB726

Update: Funeral Expenses Out Of Control

While we all wait with bated breath for the government to implement the promised federal estate tax reforms to see how they will change estate planning, there is news of a lighter nature.

 

The story of Hunter S. Thompson’s funeral is one of estate planning legend.  With his estate illiquid, the executors couldn’t fund the famed writer’s last wish: for his ashes to be fired out of a cannon on his property.  However, because Mr. Thompson made sure one of his best friends knew of his wishes, Johnny Depp gave the estate the funds for the funeral/firing.  The lesson from the tale is to make sure the important people in your life know your wishes or know how to find them.

 

Now details from a lawsuit by his former managers claim the cannon and party cost a total of $3 million, and contributed to Mr. Depp’s financial ruin.  I guess the new lesson is to be careful about how you phrase your wishes and who you let do the party planning.

Estate Planning Tips for Noncitizen-Residents of the United States

In light of recent events, we felt offering a few free tips for noncitizen-residents was in order.  While we don’t know much about immigration law, Estate Planning and Administration are an important part of everyone’s life.  National boundaries may cause some complexities, so below are a few tips to help you navigate:

 

  1. Your estate is administered in the nation you are residing in, regardless of your citizenship or where you were located at the time of your death. This means long-term resident-noncitizens of the United States should do estate plans just like any other resident or citizen.  In California, this generally includes a Will, Trust, Power of Attorney for Financial Affairs, Advance Health Care Directive, and HIPAA Waiver.  Failure to plan will mean your estate will be distributed according to the laws of the State you were a resident of under a Court supervised probate.
  2. There is a generally recommended subtrust to be included in a Revocable Living Trust when planning for a noncitizen-resident: the Qualified Domestic Trust. While not always needed, including a standby version of a “QDOT” in a Trust where a beneficiary may be a noncitizen can help minimize the tax burden of the gift and ongoing income taxation of the Trust.
  3. It is important to carefully choose your Trustees and other fiduciaries. A nonresident trustee may cause a trust to get a big tax bill for being a foreign trust.  A health care agent who cannot be easily contacted by your U.S. hospital may cause delays in an emergency situation.  California Courts require additional bonds for nonresident Executors, even where the bond is waived in your Will.  To avoid these pitfalls and many others, it is important to discuss who you plan to name in your documents with your Attorney.

How To (Estate) Plan For 2017

As we prepare to ring in the new year, there are a few upcoming legal changes set occur early next year.  These are both from the Federal and California State governments, and some are still yet to be determined.  Below is a brief rundown of major legal changes related to estate plans in expected in early 2017:

 

First, let’s talk about what we know for certain: California is encouraging its residents to create a trust.  Built into the California 2017 budget is a provision disallowing Medi-Cal estate recovery from reaching revocable living trusts.  This means a funded trust based estate plan has an even bigger additional benefit than before.  The new rule provides a roundabout tax-cut to those with revocable living trusts who end up receiving Medi-Cal at the end of their life.  The issue they are trying to resolve is that the California Courts are over-scheduled, with many county Probate Courts being months behind.  While a Will based estate plan still has to go through a Court Supervised probate, a funded and uncontested revocable living trust avoids going to Court.  Thus, by exempting them from estate recovery, California is encouraging its citizens to make Trusts in hopes to reduce Court cases.  This means 2017 will be a good time for California residents to do a new estate plan or update a Will based estate plan into a Trust based estate plan.

 

Second, we have a law we know is certain, just not when it goes into effect.  After a bipartisan push to fix an unintended drafting error, Federal law now allows individuals with physical disabilities who receive government needs based benefits to sign their own estate plan without interfering with the government benefits.  Under prior law, any disability would prevent an individual from being able to sign their own “Special Needs Trust.”  Unfortunately this lumped in people with purely physical disabilities who are perfectly competent to sign legal forms.  Now this is fixed under Federal law.  However, they did this while California’s legislature was on recess, so we will have to wait until January 2017 to know when and how this will be adopted in our state.

 

Last but not least, is the least certain: the incoming Republican administration’s tax proposals.  Unfortunately, the President and his Congress are set to disagree on several budget decisions that may directly affect your estate plan.  This means we won’t know exactly how to do tax planning until that dispute is settled and the Federal budget is passed.  Among the things they do agree on are (1) repealing the Estate Tax (2) changing Capital Gains Tax step-up basis on death rules, and (3) changing income tax rates for nongrantor trusts (ones that pay their own taxes).  Like everyone in our industry, we wait with bated breath to see just how different the tax code will look in the coming years.  For those with tax planning in their estate plans (e.g. Bypass or QTIP Trust), the second half of 2017 will be a good time to check in and see if any of that could be updated to be more efficient under the new tax regime.

 

We at the Dayton Law Firm wish everyone (especially those who made it to the end of this lengthy blog post) a great holiday season and happy new year.

What the 2016 Election means for your Estate Plan

The results of the 2016 Election have been surprising to say the least.  Most experts were expecting a very different result, and it has caught the professional planning community off guard.  Up until early November, estate planners expected a certain set of tax rules to stay in place.  Interestingly enough, among the possible Budget proposals expected for 2017 include wholesale replacements of those exact tax rules.  Specifically, we are expecting a repeal of the Estate Tax and a substantial change to how Capital Gains tax is affected by the property owner’s death.  This means an estate plan put in place to prevent unnecessary taxes under the current rules may need a revision in the next few years.

 

However, not everything needs to be thrown out with the bath water.  After the big changes to tax law in 2013, our firm started using a flexible tax planning technique which we call the A/C/B trust.  Our clients who obtained a tax planning trust in the past few years are likely okay for now.  If you are a married couple with a Trust, we would be happy to take a look and let you know what type of Trust you have.

 

We will keep our ear to the ground on this subject to ensure we offer the most up-to-date planning available.  Check back and we will have a new blog post in early 2017 after the dust settles a little more.

Who to choose as your fiduciaries?

One of the biggest decisions we counsel people through when creating an Estate Plan is who will be responsible after you are gone.  The nominated agents and trustees who act under the powers in your estate planning documents (Trust, Will, Power of Attorney, Advance Health Care Directive, etc.) are known as fiduciaries.  This is a term that carries with it a specifically legal meaning.  There are two parts of being a fiduciary that most aren’t aware of: (1) being a fiduciary carries personal legal liability if the job is done incorrectly, and (2) the role is not mandatory, so a named person may can decline to act or step down, leaving the next in line to act.  With these in mind, let’s review the general options available for choosing fiduciaries:

 

Family and friends:

Pros: Least expensive, even when they do request fees.  Sometimes already involved with the estate, so low effort required to collect and administer assets.

Cons: Estate Administration can be complex and confusing, and leaving this responsibility to someone ill-prepared can be a troubling situation to dump on their lap.  Many of your friends and family are not ready for the job and/or do not want to take on the liability if it is done wrong.  Luckily, they can decline to act if they don’t want the job.

 

Private Professional Fiduciaries

Pros: Available in California as a less expensive alternative to a Corporate or Bank Trustee.  They are Certified, bonded, and are willing to work on almost anything you request.  They are also efficient, since their job regularly entails administering estates.

Cons: They charge a fee, either hourly for services provided or a percent of assets under management.

 

Corporate and Bank Trustee

Pros: They have their own legal department, and will be an absolute stop against beneficiaries trying to get money earlier than you wanted.

Cons: Known to charge the highest fee of all as a percent of assets under management.  Their legal department may be stubborn for any request that does not comply with their internal policy, which may be based on federal rather than California law.

 

We generally recommend listing out at least four fiduciaries for every role, and in the order of friends and family, then Private Professional Fiduciaries, and then (just in case) name one Corporate or Bank Trustee. This way each can consider whether they want to take the job or just decline to act, leaving the next more-expensive option available to take over if needed.