San Jose Estate Planning Attorney Blog

Tim McCrone, a CPA in Los Altos, asked me yesterday whether or not beneficiaries of a trust are required to be given notice. Like many answers Lawyers give, it depends.

California Probate Code Section 16061.7 requires the Trustee of any Trust to provide notice to the beneficiaries (and heirs) on the occurance of either of two events:

1. The Trust becomes Irrevocable.
2. There is a change of Trustee.

This means that you do not have to provide anyone notice if your trust is still revocable. But if you die, your trustee will have to notice the current and remainder beneficiaries.

Notice is required to your heirs (i.e. next of kin) so that someone doesn't fraudulently create a trust for you leaving all of your property to them without your children knowing what happened to it.

There are a couple of states, however, that do not require notice like California does. A few require no notice to beneficiaries at all. If you have a client that wants absolute secrecy, they can find it.

Property tax bills on many homes in Santa Clara County are lower now than in 2006 because of the decrease in property values. However, many people are not aware that this reduction in tax is only temporary.

Under Prop. 13, a baseline value is established when you purchase your house. As property values increase, the law limits the growth of your assessed value to a 2% annual increase. If values drop below your baseline value, then you will be assessed at fair market value (i.e. current value). If property values go up, then you are assessed at your baseline value.

Today, with property values having come down, many taxpayers property is worth less than what they paid for it. Hence, their property tax will be based on current values (which is lower than their baseline value). However, as property values increase, their taxes will go right back up to their baseline value. This increase is not limited to the 2% annual growth. That only applies to baseline value.

There is a way to stop this increase and lock in the lower baseline value. Clients need to do a ""Change of Ownership" within the California Revenue and Taxation Code rules.

If you follow the rules properly, clients will be able to create a new, lower, baseline value for their property. This will permanently lower their property tax bill now, but also lock in the future growth of their assessed value to the 2% annual increase.

These rules apply to your primary residence. However, they also apply to all other real property you own in the state of California. If your client owns a commercial property, or an apartment complex, or any other real property that has significantly declined in value over the last couple of years, this strategy may be appropriate for them.

Take for example, the client who purchased a property in Palo Alto for $2,000,000 in 2006. It's current value is only $1,500,000. Based on a tax rate of 1.25%, the tax difference between these values is $6,250 a year. However, as values rise, the clients taxes will go right back up to their baseline value of $2,000,000. Implementing this strategy will allow the client to save $6,250 a year and make the $1,500,000 their baseline value. This will save taxes this year, and every year after that since the $1,500,000 will only be able to be increased by 2%. It will take 15 years before the assessed value returns to its prior level of $2,000,000. That's a lot of savings.

We have a new law!

President Obama signed the new tax law on Friday extending the Bush tax cuts for two years. Included in this new law are significant estate tax ramifications. While the overall impact on advisors remains to be seen, there is no doubt that this is bad news for some and good news for others. As a general rule, however, this is good news for the rich.

Here is a quick summary of the estate tax provisions of the new law:

1. $5 million exemption: There is now a $5 million estate tax exemption for each individual. This means $10 million can be exempted from estate taxes for a married couple.

2. Reunification: The estate, gift, and GST tax exemptions have been unified to the $5 million amount. This means that a client can gift $5 million into a dynasty trust while they're alive, using up their estate tax exemption, and not have to wait until they die to take advantage of the increased exemption.

3. Portability: clients who no longer plan for their estate tax exemptions me transfer their unused portion of that exemption to their spouse when they die. If husband dies, he can transfer his $5 million exemption to his wife, and she will now have a $10 million exemption upon her death as she leaves the property to her kids.

4. 2010 election: for clients dying in 2010, they have a choice of law. The client may elect to have a $5 million estate tax exemption with a full step up in basis on all of the decedents property. The client could also choose an unlimited estate tax exemption, but they would only get carryover basis with the additional allocated basis maxing out at $4.3 million.

This law is going to create huge planning opportunities. But there is no doubt, that planning options will change. For many, this means simpler plans which are also less expensive. However, the opportunities for the wealthy to plan and avoid estate taxation have never been better.

We will be conducting a couple of workshops in San Jose, at the end of January or the beginning of February to better help the advisors that we work with understand the details and planning options more fully.

I will post the details in the future.

They say the best time to plant an oak tree is a thousand years ago. Today, you would have a gorgeous tree. The second best time, however, is NOW!

You can't start any earlier.

This blog is aimed at legal & financial professionals who work with clients on issues regarding their wealth, their business, and their families.

In the past, I have worked with Lawyers, CPA's, EA's, CFP's, and insurance agents, to help educate them on estate planning and wealth transfer issues. It is my hope that this blog will continue that effort.

As you may know, there are many legal blogs on the web at this time. Many on estate planning. Why the need for one more?

This blog is different. It is not aimed at the clients per se. It is aimed at the client's advisers. I expect that we will have a deeper discussion, and perhaps a more technical, certainly more strategic dialogue then the other blogs contain.

I look forward to joining with you on this wonderful journey.