San Jose Estate Planning Attorney Blog

I think you will acknowledge that it is hard to meet a client's objectives unless you understand what it is they need and want.  Understanding is one of the underpinnings of good advice.  Without it, you can't give it.

But how do you come to this understanding?

Do we just know what the client needs?  Is this client the same as the last one who was the same as the one before?

Many of you know that my practice is not based on just filling out some forms and producing documents.  We are a Counseling oriented practice.  We take time with the client to find out what their needs and want's are.   We do that by … LISTENING!

Can you really understand what the client needs without listening to what the client tells you?

So, how do you listen?  Or, let me put it another way, what part of you does the listening?   If you said your ears, you are only partly correct.

What about eyes and ears?  Getting closer.  Certainly the eyes are as important as the ears because non-verbal communication is important.  How someone is saying what they are saying matters as much as what they are saying.

When a client is talking about their children, it is important to me to watch their body language as they describe them.  Some parents light up when they talk about one child and then slump or frown when they talk about another.  This helps me to follow up with questions for additional feedback on their relationship or issues regarding the child's ability to get along with siblings or their ability to manage money.

Everyone knows that email messages don't always communicate the best (especially with emotional content) because the reader may take something written in a way that the writer never intended.  Talking on the phone is similar.  Only 45% of the message is communicated over the phone.

This is why we always try to meet with client's in person if possible.

Early in my practice, I was so eager to show client's how much I knew, I didn't stop to listen.  I was always talking.  Of course, if you are talking, you are not listening.

Suppose a prospective client told you that her current professionals were “not responsive.”   Most professionals would not bother to ask “why” or “how” or “in what way,” etc.  Instead, they immediately launch into a speech about how they are “responsive.”  But what did the client mean when they said “responsive.”  Did it mean that their advisors didn't return phone calls?  Maybe they don't explain things very well?   Frankly, it could mean any number of things, but you won't find out unless you dig deeper and listen to their response.

Listening takes concentration and patience.  It is not easy.  But listening also build's trust with the client.  Demonstrating that you understand where the client is coming from or the feelings they are communicating will help you help them.   And isn't that what we are trying to do in our professions anyway?

Mary Emery was Dean of Admissions at the University of Santa Clara School of Law since 1985.  She was one of the first three women to graduate from the law school, completing her degree in 1963.

You can read a very nice tribute to her in the San Jose Mercury News.

While I was a student at the school, she awarded me a scholarship helping defray the large cost of tuition. 

I first met Dean Emery through her admin Patti.  Patti's brother Jeff was best man at my wedding. With my career “wandering in the wilderness,” Patti suggested I meet with Dean Emery about attending law school. 

It was Dean Emery, with Patti's help, who provided me a path into law school, who encouraged me when things were tough, and who remained my friend after graduation as well.

She will be missed.

For many years, the GRAT has been a staple of estate planning strategies. It was something that every high net worth client considered as a freezing technique.

With the new estate tax law that became effective last December, a GRAT may not be the best strategy for many clients going forward.

While the GRAT is an excellent method for shifting the future growth of an asset to the children, there are a number of risks associated with this strategy. For example, the trust maker must survive the entire GRAT term for there to be any benefit. In addition, payouts from the GRAT must be done on a regular basis (monthly, quarterly, annually, ect.) and each payment must be basically the same amount (no more than a 20% increase) as the previous payment.

For many client’s, there is a better technique available to accomplish the same goals but without these risks. This technique is an installment sale to a grantor trust (IDGT).

How does the installment sale work? The trust maker sells the property to a grantor trust at its fair market value in exchange for a note. There are two important aspects to this strategy. First, the trust must be structured as a grantor trust so it can be disregarded as a separate taxpaying entity for income tax purposes. Second, the transfer for fair market value must be a bona fide sale for full and adequate consideration to avoid any gift tax issues. After the note has been paid in full, whatever remains in the trust may be distributed to the beneficiaries (usually the trustmaker's children and/or grandchildren) free of estate and gift taxes, and if appropriately structured, generation-skipping transfer taxes as well.

If the assets in the trust appreciate at a rate greater than the interest rate due on the note, there will be assets remaining in the trust at the end of the note term to pass to the beneficiaries. Ideally, we would like the income produced by the assets to be greater than the interest only payment due on the note. This allows for maximum compounded growth of the principal. The trustee, however, may use the trust's capital assets to pay the note if necessary.

Generally, any assets with appreciation potential or yield in excess of the note interest rate are candidates for this installment sale strategy. Assets that can be valued at a discount, such as a minority interest in a family business or a fractional interest in real estate produce significant savings because the face amount of the note will be based on the discounted value of the assets sold rather than on the full economic value. At some point in the future, however, when the assets are sold, the discount is recaptured and the discounted benefit fully realized.

In the coming weeks we will continue to blog further about GRAT's and Installment Sales.

Make sure your client's are working with an Excellent Estate Planning Attorney who understands both planning and tax.

I have tried to model my marketing efforts about this simple phrase.

Be a “Problem Solver.”

How can you help a client solve a problem?  Is there a referral source that could use your help?

Make yourself valuable to others irrespective of whether you get paid or not.

Will everyone thank you?  No!

Will everyone send you a client?  No!  Become a client?  No!

But some will remember.  Some will become clients.  It will create opportunities to work with others.  To get to know them better. 

And along the way, you have the satisfaction of knowing that you helped someone else with whatever was troubling them. 

San Jose Estate Planning Attorney Responds: It is not uncommon for financial planners to believe that their conversations and records regarding the information they learn from a client is confidential. In fact, the CFP Board Code of Ethics requires planners to keep client information confidential.

However, there are many areas where a financial planner’s documents or testimony regarding conversations may be discoverable by a court of law or the IRS. This is particularly true in the advanced estate tax planning area.

There is no legal privilege for financial planners. Conversations with your clients regarding tax planning and strategies may be subject to discovery. Papers detailing and explaining these strategies in your possession may also be discoverable.

You do not want to fall into the trap this financial planner did. As his clients decided to go aggressive in some of their estate tax planning strategies, the planner was involved in every aspect of the planning along the way. He sat in meetings with the attorney involved. He helped the client understand the strategies and what they involved. No one told him that there was a problem. No one told him that there was no privilege.

Later, after an estate tax audit, the IRS subpoenaed records from the financial advisor. You can guess the rest of the story.

A good financial planner is invaluable to the planning team. In fact, for many of our clients, it is the financial planner who quarterbacks the team and leads the process. However, it is important to remember where the limits of the financial planner's involvement may need to end. There are times when a good attorney will want everyone to leave the room except for the client. The attorney is trying to bypass the other advisors. They are asking you to leave so they can have a private, attorney-client privileged conversation with the client. If any one else is there, whether it is the client's children or advisors, there is no attorney-client privilege. And therefore, no protection.

Never Forget: your work papers, correspondence, and recollections or notes of client conversations are all discoverable in court or by the IRS.

Many of the advisor's we work with have asked us to blog about marketing issues.

Of course, they don't put it quite like that.  They ask questions on how to take care of clients, how to get new clients, and how to network.  They want to know why we did our Boot Camps and were they successful for us. Others wonder about internet marketing, blogs, and social media opportunities.

Marketing Monday will be a regular column on this blog designed to flesh out some of these questions.  Hopefully we can provide some answers.  Or, at a minimum, some food for thought.

Do not expect life changing secrets.  In fact, most things we will write about may be well known to many of you.  However, they do provide thoughtful reminders to all of us that without Client's we do not have a business.  If we can't take care of them, and provide them with meaningful service, then what are we doing?

I know very few CPA's, Enrolled Agents, and Financial Planners who don't genuinely care for their client's well being.  Many have known their client's for a very long time.  They try their best to protect their client's from harm. When one of them is hurting, they hurt too.

Together, let's see if we can improve the service we provide to our clients.  And hopefully find a few more as well.

Look for Marketing Monday every Monday on our blog:  San Jose Estate Planning Attorney Blog

What is the proper way to plan for taking advantage of the deceased spouse’s portability exemption amount? I have written previously on portability planning here and here.

In traditional estate planning, the client will create an ABC trust where the A Trust is for the Alive Spouse, the B Trust is for the Buried Spouse, and the C Trust is the leftover amount of the deceased spouse’s remaining property not placed in the B Trust. The C Trust qualifies for the marital deduction so there is no estate tax owed on the first death.

As we have discussed previously, however, for many estates, there is no income tax benefit for using a traditional ABC Trust model in your planning.

Instead, we are recommending that client's consider having an ACB Trust instead. Technically, we want the trust to be drafted to allow for the making of a Clayton election.

Essentially, all of the deceased spouse's property is allocated to the C trust. Remember, the C Trust qualifies for the marital deduction so there is no estate tax owed on the first death. It also does not use up any of the deceased spouse's estate tax exemption. This allows for maximum usage of the estate tax exemption by the Surviving Spouse.

The trustee has 15 months from the first spouse's date of death to claim the marital deduction on a timely filed estate tax return. If the trustee claims the marital deduction, they will also elect portability of the deceased spouses exemption amount on the same return.

If the trustee does not claim the marital deduction on the estate tax return, then the property will be placed in the B trust. Some or all of the deceased spouse's estate tax exemption will be used. Whatever is not used is still available to be ported over to the surviving spouse.

Using this Clayton Election Strategy gives the surviving spouse maximum flexibility to determine what the best course of action is at the time the decisions matter. Trying to draft an estate plan in today's ever changing tax climate is like shooting at a moving target and hoping to hit the bullseye.

On the first death, the surviving spouse can take a survey of the assets owned, the tax law in place, and the economic conditions and assumptions going forward to create the best result for themselves and their families at that moment.

This is almost impossible to do today unless clients are going to change and revise their plans every time the law changes beneath them.

It is easy to find problems with something or to claim that it will not work. Previously, I blogged about the arguments that many attorneys are using against portability in an effort to avoid change.

It is much more difficult to champion something, to investigate, and to find a way to explain how something may be beneficial to a client.

There is essentially ONE reason why clients should consider Planning for Portability. It minimizes taxes while maintaining control over the ultimate disposition of the assets. The traditional estate planning structure does not do this!!!

The Traditional Model
On the first death, traditional estate planning will place all of the deceased spouses assets, up to the estate tax exemption amount, into a Credit Shelter Trust (what is sometimes called a Bypass Trust). The surviving spouse is generally given all of the income and principal distributions if necessary for his or her health, education, maintenance and support.

This trust preserves the estate tax exemption of the first spouse to die. No matter how large the trust grows it is not subject to estate tax on the death of the surviving spouse.

The structure has been used for years as a fundamental concept of estate tax planning. Always preserve the deceased spouse's estate tax exemption.
The strategy worked very well when the estate tax exemption was only $600,000 as in the mid-90s. Even as the exemption was raised to $1 million in 2001 and continuing to $3,500,000 in 2009, the strategy was fundamental to estate tax savings.

However, in today's estate tax environment, where each person receives a $5 million estate tax exemption, very few families will have estate tax issues. As I have been speaking to CPA's, Enrolled Agents, and CFP's and their professional associations, I have been explaining to them that the estate tax is only one of many taxes that proper planning investigates.

The income tax is now as important as the estate tax. Consider that the top estate tax rate is 35%. This is also the top tax rate for the income tax. In fact, saving income taxes may be more important than saving estate taxes once you factor in California's 9.3% state income tax rate.

Minimize Taxes
One of the primary reasons for Portability Planning is to minimize income taxes on the second death. When the surviving spouse dies, all of the assets in his or her estate are "stepped-up" to fair market value but, not the assets in the Credit Shelter Trust.
When the beneficiaries acquire the assets from the Credit Shelter Trust, they typically sell them immediately. This usually creates a capital gain and taxes must be paid on the growth of those assets. Portability Planning allows beneficiaries to avoid paying the tax because they will get a step-up in basis on the property included in the surviving spouses estate.

Maintaining Control
The only way to get a step-up in basis is to have the assets included in the surviving spouse's estate. Assets in the Credit Shelter Trust do not get basis. If you leave all of the assets to the surviving spouse, you get basis, but the surviving spouse can choose who gets the property when [he or] she dies. In other words, you have no control.
In our next post, we will blog about the proper use of portability planning, and how it is used to properly plan for clients.

If you have questions on whether portability planning is appropriate for you or not, please contact a qualified estate planning attorney.

6 ARGUMENTS AGAINST PLANNING FOR PORTABILITY

It seems like all I hear or read from other lawyers are all of the problems and uncertainties that exist in Portability Planning in the client's estate plan. Last week I listened to another attorney go on and on about the best course of action to take: "Keep Doing Things The Way We Have Always Done Them! Portability has problems!!!"

Living in the past is not usually the best solution for our clients. It is true that there are unknowns in Portability Planning. There are also some situations where it is not appropriate for that particular client. However, for most clients who have non-taxable estates, planning to use the deceased spouse portability exemption is the BEST planning available to them. At a minimum, it ought to be actively considered in the planning process.

Over the next couple of weeks, I will examine the potential problems of portability planning and the advantages and benefits as well.

Problems of Portability Planning

There are six primary arguments I hear attorney's make when they speak against planning for the surviving spouse to use Portability.

1. "It is only a two year law. Portability is only possible if the client dies in 2011 or 2012. Since that is not likely, why spend much time on it. Who knows what the law will be in 2013."

While it is certainly true that the law may change in 2013, not everyone will live to see that day. But we create estate plans to be in place when client's die. They need to be accurate and subject to the best information we have available at the time. It is not a good response to say, “I did not think you were going to die today?

2. "The law is ambiguous and there are no regulations and cases to help us interpret the law."

This one really upsets me because it is one of the reasons lawyers have such a bad reputation among the general public. Attorneys are generally perceived as being too conservative. In this case, however, the attorney, along with the rest of the client team of advisors, needs to weigh the risks and rewards of the strategy. As we will discuss in later posts, the benefits for some clients, clearly outweigh the risks.

3. "Use of the Portability Exemption is not automatic. It requires you to file an estate tax return."

True again. But at what cost? The cost of filing the return may be very small compared to the taxes lost for failing to tax advantage of Portability. In addition, there is the possibility the IRS will create a 706A short form as an alternative to the standard 706 Estate Tax Return currently required.

4. "There is no statute of limitations for examining the estate tax return."

There is also no statute of limitations if you don't file a return at all. However, if a return is filed, the IRS may only examine it after three years for a limited purpose and not to assess taxes. There are no limitations for an unfiled return."

5. "Although the surviving spouse estate tax exemption is indexed for inflation (also only for the next two years), there is no inflation adjustment for the deceased spouse Portability Exemption."

This is a risk to be considered in implementing Portability after the first spouse dies. It is not a reason not to plan. For many clients, this will not matter. It is good information to know, but it does not stop us from planning to use Portability.

6. "Portability only applies to Estate and Gift Taxes.. It does not apply to Generation Skipping Transfer Taxes."

Finally, an argument that makes sense! Therefore, if GST planning is important to the client, you should not use Portability as a planning option.

In our next post, we will discuss the many positive benefits for Portability Planning for clients.

Liz Chamberlin, Principal of Leland High School in the Almaden Valley is the years top principal according to the National Forensics League (Speech & Debate).

I am proud to say that I was a member of the Speech & Debate team at Leland when I was in high school. (I even won a couple of awards).  At that time, we had about 20 kids competing in various events.  My best friend in high school, Dennis Galvan, went to Nationals.  He is now an International Relations Associate Professor at the University of Oregon. 

Today the program has almost 400 members.  It is the largest team in the nation.  Much of the success of the Speech and Debate team goes to Gay Brasher.  She is a member of the National Forensics League Hall of Fame, and taught at Leland for over 40 years.  Even though she is currently retired, she continues to devote her time to helping high schoolers learn the art of speaking in public.

Many of you have seen me speak in public at our Boot Camp or at a lunch or dinner for your professional organization.  As a lawyer, I am often called to represent clients in court.  Speaking skills are an essential part of my work.

I can honestly say that most of the speaking skills I have are learned from Gay Brasher.  Many days, after school, she would work with us on our techniques, hand placement, vocal intonation, etc.  And there are thousands of others who can say the same.

This is my Thank You to her.  For her efforts to make me a better speaker.

However, she could not do it alone.  While we only had Mrs. Brasher to work with.  Today, there is a team of volunteers who help.  But there are also many others without whose support the Speech & Debate program would not exist. It is nice that the National Forensics League is recognizing that and making Liz Chamberlin their first Principal of the Year.

Our law office is based in San Jose, California.

I recently came across a wonderful blog all about San Jose.

I thought you might enjoy.

www.thesanjoseblog.com

The Qualified Personal Residence Trust (QPRT) is an important and valuable estate tax planning technique for efficiently transfering the value of your primary residence or vacation home to your children on a tax advantaged basis.

The QPRT is an Irrevocable Trust which takes advantage of certain provisions in the tax code to allow you to leverage your gift of your home using a discounted value. Because it take advantage of provisions in the Treasury Regulations, it is a safe and secure way to accomplish your goal without any legal or tax risks.

To create a QPRT, the homeowner transfers his or her residence to a trust for a set period of time (4, 7, 11 or 15 years). You pick any number of years for the term. You continue to reside or use the home as you see fit during this time.

At the end of the term, the property is transfered to the beneficiaries you have named in the trust (usually your children).

It's All My Kids Fault :) A recent article in the San Jose Mercury News suggested that young children may make parents less fit. As many of you know, my wife and I adopted two young girls from Russia a few years ago. They are 5 & 4 now. And I am out of shape. :)

However, I am starting to remedy that situation by eating healthier and getting some exercise. This made me think about planning for parents of young children. If someone is the parent of a young child, what should they look for to make sure their affairs are in order.

Here are 8 suggestions to make sure your planning is good to go if you don't.

1. Is your Trust (or will) up to date? if you haven't reviewed your estate plan recently, you should do so. The law has been changing a lot recently. in 2010, we had another major change. The last thing you want is the Probate Court to decide your children's future.

2. Have you selected an appropriate guardian? I have bloged before about suggestions for choosing a guardian here. Make sure that the people you have named as guardians are still willing and able to serve. Do you have temporary guardians in case your permanent guardian needs to travel to San Jose to get your kids? Have you planned for contingencies? Will the guardian need your financial resources to support their family along with your children?

3. Do you have adequate Life Insurance? I can't tell you the number of clients we see in our office who come in with very little life insurance. All of the documents in the world only direct what happens to the money and assets you own. If you don't have much, there is not much there for your suriving spouse or children. The documents do not create wealth. Life Insurance creates weath. Give our office a call if you need a referal to a quality Life Insurance Agent who can work with you to make sure you are adequately insured.

4. What if you become incapacitated? Who will manage your finances if you can't manage them yourself. Are they trustworthy?

5. Do you have an Advance Health Care Directive? This is the one document that protect you. Are you sure that the person you have asked to be your agent to make medical decisions for you will follow your instructions? Will they ask questions of the doctor? Get a second opinion? Consult with other family members?

6. Do you have a HIPAA Release? Without one, the doctor will not tell anyone about your private medical condition. This can make it difficult for your successor trustee and your health care agents to actually take over if necessary. If the doctor can't talk to them about your condition, he or she will also not be able to sign the necessary paperwork to allow them to effectively take care of you. Since there were no HIPAA releases just a few years ago, make sure you have an updated one in place.

7. Is your Trust funded? Have you titled all of your property into the trust. Unfortunately, there are many attorneys who never talk to clients about trust funding, so they don't know that it needs to be done. Make sure all of your bank accounts, brokerage accounts, real estate and other properties are actually titled in the name of the trust. If they are not, your Trustee will be heading to court after you die to either Probate the assets or get another court order to establish proper title to the property. Either way, this is easily avoided if you actually title the assets in the Trust.

8. Do you have an Estate Tax Reduction Strategy? Most people no longer have an estate tax problem. The Estate Tax Exemption is now five million dollars ($5,000,000) per person. If, however, you are one of the lucky ones with assets greater than five million, make sure you see a qualified estate tax attorney like Sheffield Law Office to better help you reduce the tax burden on your children.

My best friend from law school (Santa Clara University School of Law) was Hilary Newcomb. She is now a Trust & Estates Litigation attorney in Portland, OR. We work with her occasionally on our client's litigation matters in San Jose. Because her billing rate is lower, it saves our clients money.

Yesterday, she won her first jury trial.

This is a quick shout out to her. Congratulations Hilary.

Choosing a qualified Guardian for your children is one of the most difficult things my clients ever have to do. For many, they can't do the rest of their estate planning until they resolve this issue. And then the planning doesn't get done.

Here are a few suggestions and tips to naming a Guardian for your children:

1. Family is NOT required. You do not have to name family members. You can pick anyone you wish.

2. No matter who the guardian is, make sure that both of your families have access to the children. This should include age appropriate taveling to meet with relatives who may not be local. It is important that the guardian understand, from the nomination document, that you expect this. It is not uncommon for the guardian to not like the other sides family. He or she may think they are a bunch of uncouth hillbillys and a bad influence on the children. But these are your children. You should decide who should have influence.
By the way, we generally suggest that the guardian create a web site for the child and keep it updated with school photos, information regarding activities and such.

3. Have Backups. Life happens. Sometimes the person that we are counting on to be the guardian has some drama in their life at the time they are needed. Perhaps they were in the car with you when you had the accident? Make sure that you have enough people on your list, so someone you trust will be appointed the guardian.

4. You Don't Have To Ask Everyone You Put On The List. I would recommend that you ask the first or second choice whether they are interested and get a commitment from them, if possible. However, we often will have clients give us a list of 15 names. I don't expect the client to ask all 15. But if, God forbid, anything happens to your primary choices, it is better to have someone on the list who is willing, then to have your children go into the Foster Care System because nobody steped forward. Sometimes, people will only step forward if they are asked. Otherwise, they may not even know there is a need.

5. Only Nominate Individuals. I do not recommend nominating couples. What if the relationship falls apart. Do you want your children part of their custody battle?

6. Make Good Use of Contingincies. Instead of nominating a husband and wife, if you want a couple to raise your children, use a contingency. For example, "Mary, if she is married to Bob." You can use a contingency for location, such as: "Alice, as long as she lives in Los Gatos." Or perhaps you want to broaden that to Northern California. If Alice moves to Arizona, she is no longer an acceptable guardian.