Gifts For Your Children: Selling or Transferring Property To Your Kids (Plus a Few Tax-Time Tips)

At this time of the year, we feel compelled to remind our followers of a couple of tax-time tips, all of which we have discussed several times in recent months:

  1. Recent changes to the law have forced financial institutions that manage brokerage accounts to distribute many more 1099 forms to clients than in previous years, which has caused a very late delivery of many of these forms. Some corrected 1099 forms may still on the way.

    If you submit a corrected 1099 to the IRS after you have already file your taxes, you will most likely be subjected to a manual review, which is first step to being audited, so you want to avoid that, if at all possible. If you have just received your 1099, we recommend you apply for an extension to file your tax return.

  2. If you are not in compliance with the laws regarding offshore assets, we strongly urge you to take advantage of the current IRS initiatives in place to make being compliant as painless as possible. The possible criminal penalties for non-compliance can be severe, so the sooner you make amends with your Uncle Sam, the better.

    The FBAR form for reporting foreign assets needs to be mailed to a separate IRS office in Michigan and it needs to be filed by June 30, regardless of whether or not you have received an extension beyond that date to file your standard 1040 tax reporting form.

We discussed these tax-time tips on a recent edition of our weekly radio and web broadcast on KDOW 1220 AMWealth Management and You with Connie Yi.

Our primary topic of this show concerned the best ways to transfer your property to the next generation, with the main considerations being whether it is better to give real estate to your children as a gift or to sell it to them.

Some of the points we mentioned about this topic include:

  • If you are transferring a house and/or land, you must have an appraisal from a licensed real estate appraiser, not your Realtor’s or real estate broker’s professional opinion, despite how accurate it might be.
  • If you gifted more than $13,000 to an individual in 2011, you must file Form 709 with your tax return.
  • You must inform the IRS if you gift more than $5 million in your lifetime.
  • For an inter vivos gift (aka “love & affection gift”), no transfer tax is due at the time you record the deed.
  • A parent to child real estate transfer is exempt from reassessment, but you must file an exclusion report for reassessment with the county recorder’s office within three years or you lose that exemption.
  • If you gift real estate, after you file a gift tax return and you file the deed, determine the gift income tax basis, so if your children sell the property they will only pay the transfer tax on the difference in the amount you paid and the amount for which they sell the house.
  • If your heirs immediately sell property they’ve inherited, no gift tax is due.
  • An existing mortgage on a property that is inherited as a gift can complicate matters, because a “due on sale” clause in the mortgage may apply, so consider that aspect of the transaction when creating your estate plan.
  • If you “sell” real estate to your children, they should sign a promissory note to pay for the property over time, plus interest, at fair market value. Your children can then make interest-only loan payments back to you and receive a tax write-off for those payments. This can be advantageous, because in many cases the middle-aged children will be in a higher tax bracket than their retired parents.

Go to Radio Show Podcast ArchiveIn our final segment of this show, we briefly discussed the issue of being designated as a trustee of an estate, which we have also mentioned before.

The points we mentioned about voluntarily assuming this fiduciary responsibility include:

  • You do not have to accept the role of a trustee, if you feel you are not up to the task. It is an important job, especially to the beneficiaries of the estate.
  • A trustee does not need special skills, but should be familiar with the family. A trustee can hire legal and financial assistance to manage an estate, at the expense of the estate.
  • It may be a good idea to appoint co-trustees, to help family communications and avoid conflict.
  • A trustee, upon the death of the testator, must (1) send a copy of the trust to all of the beneficiaries, who then have 120 days to content the will, and (2) send a copy and updates of the trust’s asset inventory to the beneficiaries.

If you missed the original broadcast of this show, you can listen to a podcast by directly streaming or downloading the MP3 file in our Radio Show Archive.

If you have questions or concerns about any of the topics mentioned above and would like a free consultation with Connie Yi, a California estate planning attorney, please contact us. We have four conveniently located offices around the Bay area: San Francisco, San Mateo, San Jose, and Pleasanton.

Posted in Estate Planning, Estate Tax, Gift Tax, Radio Show: Wealth Preservation and You, Residential Real Estate, Tax Law, Trusts & Estates | Tagged , , , , , , , , , , | Leave a comment

Trust Provisions: A-B Trust vs. A Trust; College Planning: How to Fund Higher Education

We frequently mention that trusts are a good way to avoid the probate process, which takes time, costs money, and has an unknown outcome.

The A Trust and the A-B Trust are two popular types of trusts to help married or legal couples avoid probate, which we discuss on the most recent edition of our weekly radio and web broadcast on KDOW 1220 AM, Wealth Management and You with Connie Yi.

An A Trust is rather simple and is best for a couple with no children or other desired heirs. With this type of trust, when one partner dies, the surviving partner inherits and controls 100% of the deceased partner’s estate.

An example of an appropriate use of an A Trust would be a married couple who want to eventually leave their estate to a charitable organization, and who have no children and little concern about tax issues regarding their estate of less than $1 million.

An A-B Trust is currently well-suited for couples who have additional heirs and less than about $5 million, which is the current federal estate tax exemption level.

Congress may or may not extend the current death tax legislation, which is set to expire at the end of 2012, so estate planning during 2012 will be a bit confusing until we know one way or the other what the inheritance tax laws will be in 2013 and beyond.

The death benefits of a life insurance policy are consider a part of an estate that is subject to the current exemption level, unless they had been specifically assigned to an irrevocable trust as part of an estate plan.

When a spouse or legal partner dies, one tax-free “marital deduction” is available to the couple. If no estate plan and trust exist, the marital deduction is used by default when the first partner dies, so that when the second partner dies, the estate then becomes subject to an inheritance tax.

With an A-B Trust, the “marital deduction” would not be used when the first partner dies, because the estate passes to the trust, a “taxpayer” other than the surviving partner.

An A-B Trust is also a good way to ensure that the benefits intended for the surviving spouse and the couple’s children are separated, to protect the children’s inheritance from mismanagement by the surviving partner and his or her possible new spouse.

College Planning: How to Fund Higher Education

During this week’s show, we also spoke on the phone with Jeffrey Morrison of Campus Pathway about how parents can prepare for the expense of higher education for their children heading to college.

Jeffrey is a registered financial adviser who focuses on helping parents find, select and afford the best colleges for their children.

We initially discussed the current cost of putting a child through college at the different level of schools available, from an elite private university to a large top-tier state school, for example USC and UCLA here in California, to a smaller state school.

An elite private school can cost a family from $50K to $60K per year for all expenses: tuition, books, and day-to-day living expenses.

The large most-popular state schools will currently cost about $33K per year while a smaller state school will be around $25K annually. Those smaller less known schools in state systems tend to be the best value in education these days.

When asked how most family’s are able to afford these types of costs, Jeffrey’s unfortunate reply was that going into debt is the primary option in most cases, because the recent economy has negatively affected everyone’s savings.

This is potentially setting up another major setback in the economic recovery, as thousands of college graduates are and will soon be entering the workforce with huge amounts of student loan debt. The loans could be difficult to pay off when good-paying jobs are not immediately available for several years, if ever, to a considerable percentage of this group.

Part of the problem is that many university systems and colleges, both public and private, raised their tuition a few years ago when easy credit was available to families through home equity lines of credit.

It is not so easy for those schools to roll back their tuition rates nor is it easy for families to obtain lines of credit these days, so the situation is approaching critical mass, especially as more and more people are trying to obtain a degree as a means of adapting to the new needs within the evolving American workforce.

Jeffrey mentioned that many of the private universities, knowing they are in competition with the better state schools in a tight economy, offer a variety of scholarships that can help reduce the cost of attending an elite private school to about the same as a large state school.

Go to Radio Show Podcast ArchiveA good way to obtain a better understanding of all that you need to know is to attend one of Jeffrey’s highly-informative and free college planning seminars, where he discusses the various admissions processes and related financial issues, as well as how to locate and use existing databases about scholarships and other financial aid available.

When asked about California’s 529 college savings plan, Jeffrey stated his opinion tends to buck the conventional wisdom that favors it. Though the plan has some advantages and may be appropriate for some families, the aspects of the 529 Plan that hinder it are:

  • Limited funds
  • High fees
  • Limited changes to the plan allowed by the IRS
  • Expenses must be “qualified”
  • In some cases, the fund may add to total family assets, which may hinder its ability to acquire financial aide

When you are in a position to start planning for a child’s higher education, we believe a few good steps to take are:

  1. Consult with a professional, like Jeffrey Morrison, who is trained and experienced in college education financial matters and keeps up with the huge volume of ever-changing information about the schools and scholarships to consider.
  2. Establish a trust fund for saving money for college rather than the 529 Plan.
  3. If grandparents are contributing to the education savings, consider having them give the money directly to the parents rather than the student, to avoid any generation-skipping tax issues.

Troubled Children and Beneficiaries with Substance Dependencies

After our illuminating conversation with Mr. Morrison, we switched gears to discuss children who may not be headed for such a bright future, but who instead are “troubled,” for lack of a better phrase, which may include alcohol and/or other substance dependencies.

If you are concerned about how troubled children may handle an inheritance, denying  a child a share of a family’s estate will probably have negative effects on the family dynamics of the survivors.

An alternative worth considering is to set up a trust for a troubled child and to allow the trustee to use his or her discretion to determine when and how it is appropriate to make the funds in the trust available.

In these types of family situations, it may be best for the trustee to be an objective third-party from outside of the family, but who has knowledge of the family’s history and circumstances.

For more information about the variety of tax credits, deductions and savings plans available to assist with the expense of higher education, visit the IRS Tax Benefits for Education Information Center.

If you missed the original broadcast of this show, you can listen to a podcast by directly streaming or downloading the MP3 file in our Radio Show Archive.

If you have questions or concerns about any of the topics mentioned above and would like a free consultation with Connie Yi, a California estate planning attorney, please contact us. We have four conveniently located offices around the Bay area: San Francisco, San Mateo, San Jose, and Pleasanton.

Posted in College / Higher Education, Estate Planning, Family Law, Radio Show: Wealth Preservation and You, Trusts & Estates | Tagged , , , , , , , , , , , , , , , , , , , , , | Leave a comment

The Probate Court Process; What Constitutes a Proper Will; Contested Wills

The most important message we like to communicate about probate court is that it should be avoided at all costs – under most circumstances.

We recently discussed this issue on our weekly radio and web broadcast on KDOW 1220 AM, where it was a pleasure to have the distinguished Mark Morris back in the saddle this week as a co-host.

Probate is a court process that estate planners usually try to avoid, primarily to eliminate the added expenses and time involved.

However, in some cases, it may be best to have a will probated, because the probate court will act as a supervisor to the process, which ensures that all beneficiaries are legitimate and that no conflicts-of-interest arise in the management of the estate.

Other points we discussed include:

  • It is advisable to have an attorney present in probate court, but with enough research and knowledge, you can represent yourself. Naturally, the more practice you have dealing with these matters, the better your chances of obtaining a decision in your favor.
  • If the execution of a will is contested or involves a complex family structure, then having an experience attorney involved is definitely recommended.
  • If the beneficiaries are designated and the amount inherited is less than $100,000, then probate should not be required.
  • Financial accounts that have designated beneficiaries, such as an IRA, are exempt from probate proceedings.
  • Real estate included in a will can cause problems in relation to liquid assets that are frozen during the process. Sometimes, a house may need to sold, so that estate taxes can be paid, which will then allow the other liquid assets in the estate to be unfrozen.

During our broadcast, we also addressed the topic of what constitutes a proper will. Two basic types of wills are accepted as being proper:

  1. A will drafted in pen that is 100% written by you entirely in your own handwriting. It should be dated, but, no formal format is required.
  2. A will that is typed or written by someone else is acceptable, if it has been witnessed and notarized by two disinterested parties.

Most disputed wills concern either its validity or the state of mind and testamentary intent of the decedent when it was drafted.

Creating a video of the signing of a will helps to create potential evidence in court to support the validity and intent of a will.

If a will includes a No Contest clause, which will remove any beneficiary from an estate who contests its validity, then a possibly acceptable method to indirectly challenge it would be to claim that undue influence was used to change the will.

Other points we covered on the subject of wills include:

  • Do not store your will in a bank safety deposit box, because it will not be immediately accessible unless someone else has the key and signatory access. Keep it in some other safe place, such as a fireproof lockbox in your home, and tell the estate trustee where it is located.
  • The probate process usually takes a minimum of nine months, with a four-month window for creditors to file a claim.
  • If your estate contains a house or other property, the best way to avoid probate is to transfer ownership of your real estate to a living trust.
  • To implement a probate process, a will must be submitted to a court, so that jurisdiction can be established. The executor usually submits a will for probate, but other parties, such as a creditor, can also file the will.
  • In some cases, multiple family members will file a will for probate, with the intent of each person being designated as executor of the estate. In such cases, the court will  decide which petition to accept.
  • The executor must notify known creditors of the death. A public notice must also be filed according to local requirements.
  • The California Probate Code is clear about what assets need to go through probate, so you can effectively create your estate plan and be well-prepared for life’s only inevitability before it occurs.

Go to Radio Show Podcast ArchiveIf you missed the original broadcast of this show, you can listen to a podcast by directly streaming or downloading the MP3 file in our Radio Show Archive.

If you have questions or concerns about any of the topics mentioned above and would like a free consultation with Connie Yi, a California estate planning attorney, please contact us. We have four conveniently located offices around the Bay area: San Francisco, San Mateo, San Jose, and Pleasanton.

Posted in California Trust Law, Estate Planning, Probate, Radio Show: Wealth Preservation and You, Trusts & Estates | Tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

Whitney Houston Update; IRS Publishes “Fresh Start” for Struggling Taxpayers; California Residency

We are in the heart of tax season, so naturally we have recently been addressing many related issues. We wish we had time to discuss them all on our weekly radio and web broadcast on KDOW 1220 AM, and then write about them here, but we have covered a few we feel are worth mentioning in the limited amount of time we have each week.

On a recent broadcast, we mentioned a testamentary trust, in relation to the recent passing of Whitney Houston, which is an estate planning term that we had not previously discussed here, as we normally focus on creating and managing living trusts.

A testamentary trust, also known as a will trust, is a type of trust that is designated in the will of a “settlor,” but which is not established until the will is executed upon death. Testamentary trusts are frequently created when babies are born as a sort of umbrella protection against worst-case scenarios.

A living trust, also known as inter vivos trust, is created during the settlor’s lifetime and is often establish for the purposes of minimizing estate taxes.

Other points we covered in this segment of the broadcast include:

  • The assets of a living trust do not need to be probated, which avoids the potentially large administrative fee of probate.
  • Probate is a state law issue, like family law, rather than a matter of federal law, which covers issues such as immigration, national elections and, of course, taxes. Probate court procedures and administrative fees will vary by state.
  • The executor of a probated will is entitled to a fee equal to the fee paid to the probate court. (Whitney Houston designated her mother as the executor of her will.)

In this broadcast, we also discussed the revised “Fresh Start” initiative from the IRS, published on March 7, which is intended to provide some relief for many struggling taxpayers who are having difficulty paying their taxes on time, due to being unemployed for 30 days or more during the period covered by this initiative.

As always, we recommend you learn the specific details of any tax initiatives before you believe you qualify, as restrictions and limitations always exist, and you should consult with a professional tax adviser before you make important legal and financial decisions.

In that regard, the Internal Revenue Service has recently reformatted its website home page to help make finding the information you need, especially about filing your taxes, easier to find. You can quickly locate the most popular forms, topics, tools, and filing and payment methods right at the top of the page.

The IRS recognizes that their publications may not be the easiest to find or understand, so they have also expanded their communications to include social networking and video, such as this one about the Fresh Start program:

We briefly discussed the basic types of relief available in this new IRS initiative, which include penalty relief or possible penalty exemption, if you are self-employed.

If you are currently struggling to pay your taxes, be sure you know the facts about the Fresh Start initiative and other related “What Ifs” from the IRS before you act, because the consequences for errors can be significant.

The bottom line is that you must file your taxes, so you and the IRS know what you do or do not owe. Otherwise, the IRS will eventually file for you without any deductions due, based on the W-2 records they have.

Another hot topic we discussed on our broadcast is state residency for tax purposes. When the Facebook IPO takes place, many suddenly-wealthy stockholders, especially in our Silicon Valley area, will be seeking strategies to avoid paying the 9% to 10% California state income tax on their expanded assets.

The points we discussed included:

  • When determining residency, the California Franchise Tax Board looks at factors other than just your physical address, which may, for example, be located just across the border in Nevada, where there is no state income tax.
  • The factors considered include your behavior, such as where you spend a large portion of your time. If you move across the state border, but still work or go to school in California, you will probably be considered a resident by the Board.
  • Other behaviors Franchise Tax Board agents consider include where you go for haircuts and manicures, as well as doctor and veterinarian visits.
  • Franchise Tax Board agents also have access to Facebook and other social networking websites, so any mention of your activities posted on these sites becomes easily found evidence of your true lifestyle. Carefully consider your online activity if you are thinking about changing your legal residency for tax-avoidance purposes.
  • If you really do not want to be considered a California resident, the best solution is, to put it bluntly, move and don’t come back. If you intend to come back, you are still considered a resident.
  • If you must continue to work for a California-based employer, become a telecommuter exclusively, because visits back to the corporate office could be considered as a potential physical tie to the state.
  • If you have an LLC based in another state, you only need to pay taxes to California for the income earned in this state.

Go to Radio Show Podcast ArchiveAt the end of this broadcast, we also briefly discussed some tips about setting up an LLC. If you missed the original broadcast, you can listen to this show by directly streaming or downloading the MP3 file in our Radio Show Podcast Archive.

If you have questions or concerns about any of the topics mentioned above and would like a free consultation with Connie Yi, a California estate planning attorney, please contact us. We have four conveniently located offices around the Bay area: San Francisco, San Mateo, San Jose, and Pleasanton.

Posted in Asset Protection, California Trust Law, Estate Planning, Estate Tax, Family Law, Filing Your Tax Return, Income Tax, Probate, Radio Show: Wealth Preservation and You, Tax Law, Trust Administration, Trusts & Estates | Tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

Celebrity and High Net Worth Estates; Complex Family Structures; the Competency Issue

The recent passing of Whitney Houston and Davey Jones has put the topic of celebrity estates in the news.

Frequently, celebrities quickly obtain considerable wealth as a result of their achievements and the adulation bestowed on them. Sometimes, a beneficiary of wealth becomes a celebrity because of the money they have inherited.

In some cases of sudden wealth, the subsequent hectic lifestyle required to meet the demands of success prevent these individuals from devoting the time required to properly deal with their new financial status.

We are not sure yet of the exact details of Ms. Houston’s will, but at that point it seems as if  a will she created when she was pregnant leaves her entire estate to her only child, Bobbi Kristina Brown, who is now-19-years-old.

A recent article at, indicates a trust will manage the estate until Ms. Brown’s 30th birthday. The article also mentions that her will seems ironclad and the legal process involving it is moving forward quickly and uncontested.

In some cases, sudden wealth can be a burden for people who are not mature or capable enough to handle the responsibilities that come along with having a lot of money, so naturally we are glad to hear that a well-executed estate plan appears to be in place in this instance.

The size of Ms. Houston’s estate has not been determined, and given her many well-publicized trials and tribulations, it remains to be seen if Ms. Brown will actually be wealthy. Regardless, we are saddened at the tragic loss and sympathize with their entire family.

On our most-recent weekly radio show on KDOW 1220 AM, we discussed several other aspects of celebrity and other high-net-worth estates, which frequently involve complex family structures. If you missed this broadcast, you can listen to a podcast in our Radio Show Archive.

Of course, instant wealth is not limited to entertainers and athletes. These days, especially here in Silicon Valley, entrepreneurs and employees at technology companies that go public become millionaires over night. We expect that to be the case again soon when Facebook’s IPO takes place.

For anyone who may hit the jackpot when Facebook does officially go public, we suggest you create an estate plan as soon as possible and, if you are married, you should definitely include your spouse and immediate family members in the process, especially in a community property state like California, so there are no surprises that cause conflict when the plan is implemented.

What happens with your estate after you die will usually be much different that you envision when you write a will, so you need to carefully craft an estate plan with sufficient provisions to ensure that your wishes are met in the future.

Another issue we discussed on our most recent radio show is the competency of elderly individuals to make financial and estate planning decisions for themselves.

We often speak with an adult whose elderly parent wants to change a will and who questions that parent’s decision-making ability, especially if the change is suspected to negatively impact the child’s eventual share of the estate.

A high percentage of the death certificates we see these days are for people who were in the 90s, so obviously a lot of older people have the desire and right to adjust their estate plan based on the changes in the latter stages of their life, such as another marriage.

As we stated above, complex family structures are a prime cause of dissension in probate court, especially those involving children from a parent’s multiple relationships in or out of wedlock.

We cannot overstate that it is very important to spend sufficient time carefully considering how to properly structure your estate plan, and the appropriate provisions to include, before you actually write it, because your beneficiaries are going to spend a much longer time dealing with the after-affects of the plan than you will spend developing it.

In California, based on case law, a person does not need a lot of competency to be entitled to draft or revise a will. It may be difficult to prevent an elderly person from adjusting a will or an estate plan.

Steps do exist to have a person declared incompetent and in need of transferring their power of attorney to someone able to make good decisions on their behalf. To have someone declared incompetent, a qualified psychological examination is required.

Part of the examination will be to determine if a “brown-bag effect” – a combination of several medications that negatively affect a person’s memory or mental capacity – is hampering the person’s ability to perform routine tasks. Frequently, altering a medication regimen can help a person regain their previous levels of mental performance.

If an eldery person wants to make a minor change to will or estate plan, a competency evaluation may not be in order. It makes sense that an older person may want to alter their estate plan when major life events occur in a family, such as a marriage or birth of a baby, so it is should not be considered unusual for adjustments to be made to account for those events.

However, for intended major changes to a will by a very old person, a competency evaluation may be in order. The legal fees for a certified psychological evaluation can run from about $2,500 to over $25,000, depending on whether or not the physician will need to be available to testify in court.

Go to Radio Show Podcast ArchiveThe types of people who make good witnesses in a competency hearing include those who do not have a lot of contact with the older person, but who see them on a regular basis over a long period of time.

Accountants who prepares an elderly person’s taxes just once a year would be good witnesses, because they are trusted advisers who can see from a distance some distinct changes in well-established behaviors, such as when a person whose financial records have been very organized their whole life are now disorganized.

Local bank branch officers might also be good witnesses, because elderly people may frequently have conversations with them about their family situations, so the bankers may be able to shed some objective light on the behind-the-scenes family dynamics and finances.

We encourage a regular review of your estate plan, especially when major life events occur, so it should not be considered unusual when an older person wants to do that.

Naturally, an attorney has an obligation to serve a client’s needs – and the person who signs an official document, like a will, is considered the client.

We would like to believe that all attorneys would try to protect their older clients from making irrational estate planning decisions that do not seem to be in their own best interest or meet previously stated desires, but ultimately a person is entitled to change his or her mind and make an estate planning decision at any age, unless the state has declared otherwise.

If you have questions or concerns about any of the topics mentioned above and would like a free consultation with Connie Yi, a California estate planning attorney, please contact us. We have four conveniently located offices around the Bay area: San Francisco, San Mateo, San Jose, and Pleasanton.

Posted in Asset Protection, California Trust Law, Estate Planning, Estate Tax, Probate, Radio Show: Wealth Preservation and You, Trust Administration, Trusts & Estates | Leave a comment

Estate Planning for Special Assets: Family Business, Out of State Assets, Companion Animals, Trustee Duties

When we have previously discussed estate planning, we’ve primarily focused on situations that involve the basics of how to handle real estate or liquid assets like stocks and bonds, so your beneficiaries receive as much as possible of your estate and your Uncle Sam receives as little is legally possible.

We have also written a few times about “special assets,” such as overseas bank accounts and other offshore assets, which have prompted several aggressive Treasury Department initiatives in the last few years to collect back taxes.

Many types of special assets exist, each with its own unique set of circumstances that need to be considered in your estate plan. A few examples of special assets are a family business, out-of-state real estate, and your pets. We discussed these examples of special assets on our weekly radio and web broadcast on KDOW.

Though the IRS may not be scrutinizing other special assets as closely as they are offshore bank accounts these days, the agency is still very diligent in collecting the specific taxes that apply to all assets that fall outside the norm. Therefore, it is important to understand the nuances of properly accounting for these types of special assets when developing your estate plan.

A family business is a unique type of company when it comes to succession planning, not only because of the personal family dynamics that affect the organization, but also because of the different manner in which the government treats different types of business structures, such as a Family Limited Partnership (FLP) and a Limited Liability Corporation (LLC).

During the live radio and Web broadcast, we also spoke on the air with a listener who called in with a great question about the various possible options for setting up her family business. We mentioned that an asset protection trust has limited benefits in California, but may be appropriate if the assets can be moved.

Other points we mentioned to her are that an LLC can be appropriate for domestic asset protection, but there is an $800 set-up fee and a tax return must be filed annually, and that a main benefit of an FLP is that it provides a formal management structure to a family business.

Here are a few additional resources about family businesses:

Because a family business has so many unique characteristics and potential problems, we strongly suggest that families that do work together hire specific outside professionals to assist the business entity with related specific areas of the operation, to keep personal issues and business issues separated and to the ensure accuracy of the records and finances.

To facilitate a smooth transition from one generation to the next, succession planning is essential for a family business, because so many issues can exist between individuals whose roles and responsibilities are different within the business entity than they are within the family unit.

Certain types of professional practices, such as those of a dentist, an attorney, a farmer or a vineyard owner, can be considered a family business – each with its own unique issue regarding succession planning.

A dental practice may be the easiest of these special family businesses to transition to a new owner, because of the value of the equipment in the office, the existing customer base who continue to need dental care, and the existence of dental brokers to assist with finding a new dentist to purchase the practice.

Selling a legal practice is more difficult, because no physical assets exist and the needs of the client base are usually not constant. Certain specialty legal practices may be easier to sell, as well as as practices that may be involved in cases where large settlements may still be a possibility.

When it comes to succession planning, the owners of farms, ranches, and vineyards have the additional issue of trying to predict the future value of the land in relation to technological advances in each industry, the societal trends regarding food and beverage consumption, and potential real estate development in the region – all of which can have a big impact on the value of the property and the potential for it to support the current business format.

Go to Radio Show Podcast ArchiveIn regards to family business succession planning, it is very important to hire an experienced specialist to help you create a plan to pay any applicable inheritance taxes on your estate, so your heirs can afford to keep any properties in it.

If any of the properties in your estate are located outside of California, which has not had an inheritance tax since 1982, those out-of-state properties may be subject to another state’s estate tax laws, which can vary from the federal government’s current threshold of $5.12 million.

On this week’s radio show, we listed the various taxable thresholds for the states that still have inheritance taxes, so if you missed the original broadcast, you can listen to a podcast of this episode of Wealth Management and You with Connie Yi.

The final special asset we spoke about on the show was a companion animal trust, which we also wrote about in a previous article a few months ago: Plan For Your Pet’s Future With A Trust for Companion Animal.

We wrapped up this week’s edition of our show with a continuation of our discussion the previous week about the duties of a trustee. We mentioned quite a few additional points about both companion animals and trustee duties, which you can listen to in our podcast archive.

If you have questions about how to handle a special asset and would like a free consultation with Connie Yi, a California estate planning attorney, please contact us. We have four conveniently located offices around the Bay area: San Francisco, San Mateo, San Jose, and Pleasanton.

Posted in Asset Protection, Business Law, Estate Planning, Estate Tax, Partnerships, Radio Show: Wealth Preservation and You, Succession Planning, Trust Administration, Trusts & Estates | Tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

Community Property vs. Separate Property in California: Why the Facebook IPO Makes This Topic Relevant

It is fairly well-known that one of the primary reasons for divorce is a downturn in a married couple’s financial situation. The hardship of survival without enough money to pay your bills will put a strain on even the happiest marriages. A less-than-happy marriage stands even less chance of surviving tough economic times, especially if the couple was previously accustomed to a much higher standard of living.

On the other hand, it is not so well-known that sudden wealth can put an equal strain on a marriage and is also a major cause for divorce. In the Silicon Valley area, where our offices are located, we have seen the results of both financial boom and bust. Likewise, we have seen almost as many divorces due to sudden wealth as we have from sudden financial hardship.

We suspect that shortly after Palo Alto-based Facebook’s stock goes public, many Bay Area residents will suddenly be worth millions – on paper at least. This looming event, and the expected divorces as a result, brings us to the topic of the difference between community property and separate property in California, which we discussed this past Saturday afternoon on our weekly KDOW 1220 AM radio show and webcast.

California is one of ten states that recognize community property. In a nutshell, what that basically means for a married couple, or registered domestic partners, is that from the date of marriage to the date of legal separation, all income earned by either person becomes community property. Regardless of which partner earned the money, both partners “own” an equal 50% share of it.

The exceptions to what is community property in a marriage or partnership are known as separate property. The separate property exceptions include gifts from parents and inheritances, but those assets need to be handled properly to ensure they do not become community property through commingling and transmutation.

Clear lines of distinction need to be established between community property and separate property, so it is important to keep separate financial accounts and good records of all your transactions related to each set of property.

For example, if you are married and you inherit a house that you want to keep as your own separate property, put the property in your name only and pay any taxes or maintenance expenses for it from a separate bank account. Otherwise, expenses paid from a joint bank account indicates a willingness to share ownership of the property, which can (and probably will) be consider commingling and part of a transmutation process.

If a portion of a mortgage remains on the inherited property, be sure to also pay that from the separate bank account. In this example, a spouse or partner may be required to sign a document that indicates a willingness to disown any interest in the newly acquired property.

If one member of a couple owns some separate property, they can still file a joint tax return, but all of the facts and finances about the separate property need to be properly detailed and filed.

One of the most important aspects regarding ownership of real estate is how the title to the property is held. The primary issue is the concept of Joint Tenancy versus Tenancy in Common, which determines who owns the property when a legal partner dies.

If the property is held under a Joint Tenant title, the surviving partner gains full ownership automatically. The surviving partner will need to file an Affidavit of Death with the local Recorder’s office.

With a Tenancy in Common title, the heirs inherit the deceased partner’s percentage of the property. In a business partnership, the percentage of ownership can vary according to the terms of the title.

If Joint Tenancy or Tenancy in Common is not written in a title, then Tenancy in Common will be in effect. The transfer of property to survivors will need to occur in probate court, so, for example, the right of ownership can be determined for a surviving spouse and child whose names were listed on the title, but without a percentage of ownership indicated.

Go to Radio Show Podcast ArchiveIf you need to make a legal change to a title, we highly recommend that you avoid the serious problems that can occur, if it is done incorrectly. We suggest you hire a title company or an attorney. Our preference is to use a title company, because it can re-insure the new title.

During this past weeks’ radio show, we also discussed a few other issues related to the distribution of property to beneficiaries, as well as a few of the advantages and disadvantages of establishing a living trust to manage the distribution of an estate. You can download or stream a podcast of this show, which originally aired on February 11, from our Radio Show Podcasts archive.

If you have concerns about the status of your property titles and would like a free consultation with Connie Yi, a California Estate Planning Attorney, please contact us. We have four conveniently located offices around the Bay area: San Francisco, San Mateo, San Jose, and Pleasanton.

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What To Do With Your Underwater House: Options Include Loan Modification, HARP, Short Sale, Foreclosure

We have written before about the current situation across the country in which so many homeowners have mortgages that are underwater. The coming tsunami of foreclosures on distressed properties is bound to have an impact on the slowly recovering real estate market.

If you owe more on a mortgage than the real estate is currently worth on the open market, what can you do to try to avoid losing your property in a foreclosure procedure?

Because so many people are and will be affected by this problem, we spoke about this topic again on our weekly KDOW 1220 AM radio program, Wealth Preservation and You, in an episode called What To Do With Your Underwater House? If you missed this broadcast, you can listen to an MP3 podcast of it in our Radio Show Podcast archive.

A major factor in the collapse of the real estate market was that a few years ago many homeowners used the equity in their primary home to invest in a second property, back when “leveraging assets” was all the rage. When residential property values plummeted, those investors were left with two houses they could not sell.

In response to the collapse of the housing market, many property owners have tried to modify the terms of their mortgage, a strategy known as loan modification, in which the lending institution makes a permanent change in one or more of the terms of the loan, such as eliminating the overdue payments and/or lowering the monthly payments.

A loan modification is difficult to obtain, because several factors exists to determine if you are a good candidate and some of these are out of your control. These factors include your income level, the fair market value of your property, the loan amount, and – perhaps most importantly – who owns the note.

Unlike with previous generations of homeowners whose notes were often held by local banks, today’s mortgages are bundled into a package and sold, along with other loan notes of several types, much like a stock or other security.

The package that contains your loan might have a mix of loans of various levels of risk, from “liar” loans (secured without a statement of income to support its viability) to “A Paper” loans (homeowner has excellent credit), along with a security agreement attached to it that limits the percentage of a particular type of loan that can be modified — for example, only 10% of liars loans in a specific bundle can adjusted.

So, for example, if your loan modification application is received a day after an allowable maximum limit has been reached for that type of loan in the bundle that contains your note, your application will not be approved, regardless of the quality of all of your other eligibility factors.  Therefore, if you own distressed property, you should begin your research as soon as possible to find the best solution out of your underwater situation.

A good place to start your research is the Making Home Affordable (MHA) website, where you can learn about the various government initiatives available to help “struggling homeowners get mortgage relief through a variety of programs that aid in mortgage modifications, interest rate reductions, refinancing, deferred payment or transitioning out of your home while avoiding foreclosure.”

As part of your research, you can learn your current credit score from the three major agencies at, “the official site to help consumers to obtain their free credit report.”

We suggest you do not get your hopes up for a loan modification, if you really do not qualify. You will be better off using your time and energy on a viable solution, because in these tough times it is better to come to grips with the reality of your situation sooner rather than later.

To determine the current value of your property, you can use the FDIC’s Net Present Value Calculator. If the calculator determines you are not eligible for a loan modification, the next recommendation for your distressed property could be the HMA’s Home Affordable Refinance Program (HARP).

If you are current with your mortgage payments, but are struggling to keep your head above the water line, you may be eligible for HARP. If not, your next option might be a short sale, a topic we have discussed and written about frequently in the past few months.

Not all lending institutions will agree to a short sale, accepting less for the property than is currently owed on the mortgage, but in some cases that is a better solution for all parties than foreclosure.

Short selling was a strategy that many investors used at the beginning of the housing market downturn, with the help of a real estate agent, to unload distressed properties. However, that option became increasingly difficult as the lending institutions became overwhelmed with all of the short sale applications. As a result, many homes were lost when investors’ mortgages were instead foreclosed.

For more valuable information and insights about this situation, we recommend that you read Underwater Home: What Should You Do if You Owe More on Your Home than It’s Worth? by Brent T. White, a law professor at the University of Arizona.

Go to Radio Show Podcast ArchiveYou can also find, at online or retail bookstores, several other publications about short sales and foreclosures, which may also provide useful information regarding your current situation.

As we stated above, we fear that we will soon be hit by another big wave of foreclosures, as a result of balloon payments becoming due or too-high adjustable rates kicking in, as well as because so many of the government initiatives and other options have been exhausted from the over-abundance of distressed properties across the nation, especially here in California and a few other hard-hit regions.

If your home or other real estate property is underwater, or you think you may be headed in that direction, you should determine your legal rights and realistic options, as well as the financial  consequences and tax implications of the the choices you make.

If you disposed of an underwater property in 2011 and you have already received a Form 1099C for the cancellation of debt (COD), you may have a tax liability for the amount of the loan written off. For this type of transaction, we definitely recommend that you have a professional assist you with preparing your taxes for last year.  Form 1099A is the correct form if you abandoned a property.

The current COD legislation expires at the end of 2012, so that is another fact worth considering if you have tough decisions to make about your underwater property.

As always, we recommend you consult with a tax or legal professional to ensure you understand your options and the related ramifications of each. Create a strategy and a step-by-step plan to achieve your goal, so you can eliminate the stress caused by the property and then move on with your life accordingly.

If you would like a free consultation with Connie Yi, a California real estate attorney and a CPA, about your underwater home, please contact us. We have four conveniently located offices around the San Francisco Bay area.

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