In November of 2020, Proposition 19 was approved by California voters. While there are several benefits to this new property tax law, there is also a potential detrimental impact to homeowners who are counting on the protected property tax benefits of Proposition 13 and Proposition 58 which exempts most parent/child transfers from reassessment.

The Impact
The advertising was simple; eligible homeowners would have the ability to transfer their tax basis anywhere within the State and to a property of greater value. Additionally, the increased revenue or net savings resulting from the ballot measure would benefit wildfire agencies and impacted counties! A win/win scenario until you take into consideration where the extra revenue might come from.

Mainly overlooked by voters who were enticed by the previously mentioned selling points, there is a less publicized component of Proposition 19 to be aware of now that it has been signed into law. As a result of Proposition 19, we have lost the parent/child exemption from reassessment for all transfers between parents and children, save one. A parent is allowed to transfer their owner-occupied residence to their child and avoid reassessment provided the child uses that same home as their primary residence. The moment that a child ceases occupancy, the home is reassessed. Further, only the first $1 million of the assessed value is excluded from reassessment. All other transfers will cause a reassessment and thus an increase in property taxes. Family farms have a small exception as well, but that is not discussed herein.

Given the above, if your estate planning strategy was to pass along a property to your child upon your death and the exemption isn’t met, the impact of this new law is that your child will be forced to pay higher taxes based on the newly reassessed property value going forward. As an example, if your property that you purchased in 1980 had an annual tax bill of say $1200 based upon the protected 1980 assessed value provided under Proposition 13, that bill might increase tenfold or more when the property is reassessed upon your passing depending upon what the new assessed property value is.

When to Act
Proposition 19 becomes law effective February 16 of this year. Given the compressed timeframe available to take action, any planning strategy that involves re-deeding of a property needs to take place at least one business week ahead of that date to ensure that the recording is completed in a timely manner. Time is of essence to ensure that you are not locked into a tax situation that you have no control over.

Next Steps
The estate planning legal community has been mulling over potential mitigation strategies for the past six weeks or so as the reality of the tax impact of Proposition 19 has set in and more guidance has become available from the Board of Equalization. There are options ranging from simple to complex depending upon your goals. If this is a concern, please contact us to help you determine how to achieve your goals.

 “I don’t understand why hiring an attorney is so expensive.” This is a common statement uttered when faced with the initial sticker shock of having legal work performed. While it is definitely a valid concern, it’s also worth noting that the cost of legal work is relative. In this article we’ll look at the cost of probating an estate.

What is probate?

West’s Encyclopedia of American Law defines probate as “the process of proving a will is valid and thereafter administering the estate of a dead person according to the terms of the will.”

The “process” depends upon what state the person that passed away primarily resided in. The person who passed away is referred to as a “Decedent”. We’ll be using that term in this article moving forward. Many states adhere to a standardized process known as the Uniform Probate Code or UPC but California being California, is one of the states that has its own process. It’s worth noting that if the person in question owned property in multiple states, probating of those assets will fall under each respective state’s rules and multiple probate proceedings would likely follow. If that is a possible scenario in your future, please do yourself a favor and consider strategies such as creating and funding a trust, in order to avoid probate. This strategy will save you unneeded time and headaches in the future. In the meantime, let’s just focus on California probate rules.

The first question to answer is does the Decedent have assets subject to the probate process? If the asset has properly designated a beneficiary with the institution holding the asset, that asset will generally pass to the beneficiary without probate and without court involvement (exceptions to this are distributions to minor children and predeceased beneficiaries).

If there are assets subject to the probate process, is the gross value (regardless of any loans on the property) of those assets less than $166,250? If yes, they will avoid a formal probate process. The rules for this simplified process are different for different assets, for example, real property in particular has a more formalized process than tangible personal property.

Next, does the Decedent have a will? If a will cannot be located, then the Decedent’s property will be distributed pursuant to the “intestate succession” rules established in the California Probate Code. (Quick note – “intestate” means that a Decedent does not have a will, “testate” means the Decedent does have a will. Now go study for that bar exam, you understand legal language!) Intestate succession laws are why I always say “If you don’t have an estate plan, the state of California has one for you.” When you create your own estate plan, whether that be a will or a trust, you are choosing to opt out of the State’s estate plan of intestate succession.

At the 10,000 foot level, assuming the Decedent is intestate and has no will, the distribution of his/her property will play out differently based upon three different scenarios (attorney disclaimer – these are simplified examples to which there are always potential exceptions; do not rely solely on them to determine a course of action):

1. Decedent is married: Community property subject to intestate succession will first distribute to the Decedent’s spouse and the Decedent’s sole and separate property will be divided in a specified process among the Decedent’s spouse and children.
2. Decedent does not have a spouse: Property would go to the Decedent’s children. It is important to note that any distribution to minor children will likely require appointment of a guardian by the court, even if there is a surviving parent, and the property would be received by the children at age 18; not always an ideal situation.    
3. Decedent does not have a spouse or children: Property would go to his/her parents, then brothers and sisters, then nieces and nephews. It goes down the line of relatives from there.

Assuming that a will for the Decedent is located, the next question to ask is if the will is valid or not? Elements that would invalidate a will include: it was created under fraud or undue influence, it’s been altered such that its provisions have been revoked, it wasn’t witnessed properly, or the testator was legally incompetent at the time the will was created. The validity of the will is determined by the probate court after it has been submitted for filing. We’ll get to that step next.

So far so good? It’s time to head off to the courthouse! The person responsible for the disbursement of the Decedent’s assets (we’ll call this new person who would typically be related to the Decedent the “personal representative” just for simplicity sake but they could also be referred to as the “administrator” when the isn’t a will, or an “executor” when there is a will) will need to file with the probate clerk the Decedents original will (and codicils if there are any) and a petition to admit the will to probate and to grant Letters Testamentary (with a will) or Administration (without a will). Letters Testamentary or Administration is a document that the probate court will provide authorizing the appointed Personal Representative to take control of the Decedent’s estate.

We’ve simply completed a filing of the will with the probate court in the county where the Decedent resided with a request of said court to be given control of assets. Sounds fairly easy right? It actually can be if all of the rules, timelines, and notifications are followed. As an example: when a will is filed with the court, notification must be provided to persons having interest in the probate (i.e. – relatives of the Decedent) so that they can ensure that they are properly entitled to receive their share of the assets if appropriate or that they have the ability to contest the will if they have proper standing to do so.

However, this is just the beginning, the Personal Representative of the estate must follow very strict rules throughout the administration of the estate, or face economic or criminal repercussions if they do not. These steps include creditor notification, inventory and appraisal of all assets, requests for court approval for certain actions taken during the process, notices of proposed action, and an accounting of all transactions taken in the probate process, to name a few. The process generally lasts 9 months to a year. I have seen some probates finish in as little as 5 months and as long as 4 years. It is not a simple process to go through due to the potential for error and this is where it is cheap insurance to retain the assistance of an attorney to help navigate the ins and outs of the process.

Pricing Probate

When it comes to probating an estate, there are a number of costs associated with doing so: Probate fees – Aside from the court filing fees (a minimum of $870), newspaper publishing (at least $300), inventory and appraisal costs to a court appointed Probate Referee (one-tenth of 1% of the assets valued plus costs), there are also attorney (if one is being utilized to facilitate the probate process) and personal representative fees that will be owed. California Probate Code dictates the fees that are due in a probate process. The fee for the attorney and the personal representative in California is a percentage of the estate’s gross value. There are online calculators that you can play with to see what that fee might actually cost you but as an example, if we have a house worth $650,000 (regardless of whether there is a mortgage or not), the probate fee paid to the attorney AND the personal representative would be $32,000, with each party receiving $16,000 each. This fee is calculated as follows: 4% of the 1st $100,000 ($4,000), 3% of the 2nd $100,000 ($3,000), and 2% on the remaining $450,000 ($9,000). Adding the $4,000, $3,000, and $9,000 brings the total to $16,000. So yes, probating an estate is an expensive proposition that could have been financially mitigated by having a fully funded trust in effect upon death but sometimes that option isn’t available.

A Note on Privacy

Since a will is lodged into the court as a matter of public record, ANYONE can go request a copy of the will from the local courthouse to see who the beneficiaries are. Additionally, since the probate process is managed through the courts, a majority of the information from the probate case is available to the general public. This includes a detailed inventory of all assets of the estate, names and addresses of all beneficiaries, a listing of who you owed money to at your death, and the values of each of the assets in the estate. By contrast, when a Decedent’s assets are distributed through a trust, the process is private. Only the beneficiaries and certain interested parties are privy to the contents of the trust and the assets that it contains.

In summary, what are some of the key takeaways from this article?

1. Probate is expensive – avoid it if at all possible!
2. Inform yourself of notification timelines and adhere to them before attempting to probate the estate – this will save you from making mistakes down the road.
3. Follow court orders related to the probated estate – they are in place for a reason!
4. If you don’t have a will, you’re going to be subject to probate. If you only have a will, you’re still going to be subject to probate. The best way to avoid probate and maintain control of your assets, even after you die, is through a fully funded trust.

While visiting family at the hospital recently, I noticed a PowerPoint slide deck scrolling on a hospital screen discussing when completing a POLST form would be appropriate. Being the process nerd that I am, I thought that it might be appropriate to highlight a few things related to POLST as it fits into the overall portfolio of advance health care planning.

Advance Health Care Planning

If you are at least 18 years of age, you should have an Advance Health Care Directive. While it’s probably not as high on an average 18-year old’s priority list as playing Fortnite, it is critical for you to have in case you are seriously sick, injured, or worse. A key component of your Directive is designating someone (you should also include alternates) to act on your behalf should you be unable to do so. A few examples of what this person will have the ability to do is select or discharge health care providers, consent to treatment on your behalf, and make anatomical gifts if appropriate. And while it might be a family member that you choose to act in this capacity, it doesn’t have to be. I have a friend who didn’t select their sibling to make decisions on their behalf because said sibling isn’t exactly good at making critical decisions under duress. And that is perfectly acceptable. The important thing is that you talk to your designee to ensure that they are both comfortable with performing the duties within their role and that they are the appropriate person to do so. The remainder of the Directive allows you communicate your desires on organ donation, treatment options allowable to keep you alive (commonly referred to as “End-Of-Life” decisions), designate preference for burial or cremation, and optionally indicate who your primary physician is. Lastly, as with any critical document, it’s important to periodically review the contents of your Advance Health Care Directive to ensure that it still reflects your desires and values. While the Advance Health Care Directive allows your designees to act on your behalf, it may not give them the ability to share your medical information with the appropriate people as might be needed for proper treatment. So, what does?

Endorsed by Congress in 1996, The Health Insurance Portability and Accountability Act (HIPAA) is intended to protect your confidential medical information from being released, used, or disclosed by others without prior authorization to do so. In addition to the typical “covered entity” such as your health care provider, you can appoint specific authorized recipients to receive your health care information. This document is referred to as a HIPAA Authorization. The authorized recipients are typically the same individuals that are identified within your Advance Health Care Directive. You can however authorize additional individuals as necessary. As an example, my friend wants their sister to receive medical information via the HIPAA but as mentioned above does not want the sister making potentially life altering decisions that would be given to her in the Advance Health Care Directive. The significant point being made here is that your Advance Directive, HIPAA Authorization, and Health Care Power of Attorney (we’ll talk about that next) documents are all independent of each other but designed to work together.

Rounding out the Triple Crown of Advance Health Care Planning is your Health Care Power of Attorney. This document allows you to name individuals to act on your behalf as your Health Care Agent. These individuals should be the same as identified in your Advance Health Care Directive lest conflicts on medical treatment decisions arise by having different people named in each form. So how is it different than the Advance Directive? Where the Advance Directive is geared more for making acute care and end of life decisions, the Health Care Power of Attorney is designed to make decisions for long term care such as at nursing home or hospice care within your personal residence. All three of the aforementioned documents should be executed simultaneously and reviewed periodically.

This was supposed to be a quick blog on POLST and I spent a whole page not even talking about it. Let’s change that!

Physicians Orders for Life Sustaining Treatment (POLST)

A POLST form is a medical order signed by your physician. Medical personnel performing treatment on you are legally obligated to follow its directions. This is a document that you would complete when you are medically frail but still able to make decisions on your own and are ready to put medical treatment plans into action as a result of a prognosis where the terminal outcome is expected to be within a short period of time. Copies of this form may be kept by your physician, your chosen hospital, with you, or all the above. The bottom line with a POLST is that it can and should work in conjunction with your Advance Health Care Directive but is a legally enforceable document to guarantee that actions your desire (remember that they must be signed off on by your physician) are taken. A POLST is not required (often the Advance Health Care Directive is all that is needed to care for your wellbeing) but is just another tool to have in your health care planning toolbox. Specifically, in situations where there may be discretion on treatment options that your Directive may not cover.

While for the young of age or young of heart these documents are not exactly as exciting to contemplate as what game you’re going to play next on your PlayStation, they are important. So, put down your game controller and pick up your phone and give us a call or e-mail should you have further questions on this topic or need assistance.

While shopping for work supplies recently at Office Depot, I noticed that the latest version of Quicken WillMaker Plus 2019 with a digital Living Trust (the terms Living Trust and Revocable Trust are often used interchangeably but refer to same instrument) included for free was only $78.99! It made me question why I chose to go to law school in the first place when the obvious replacement for a portion of the work that I do on a daily basis can be done from the convenience of your own home at a fraction of what most of us attorneys charge for a comprehensive plan. But is purchasing “do it yourself” software to entrust your family’s financial wellbeing really such a wise decision?

Let’s start by answering a level setting question; What’s the difference between a Will and a Living Trust? A Will is a legal document that allows you to specify how your assets and personal belongings will be distributed upon your death. The “upon your death” aspect is important in that a Will does not become active until you pass away. The reason that is important is because there are no legal protections in place should you become incapacitated, in any way, to make financial decisions. The person that would make the financial decisions on your behalf is a court appointed conservator.

What happens to the administration of your Will when you pass away? The probate court within the county that you reside in oversees the disbursement of your assets according to the provisions laid out within your Will while also ensuring that your debts have been paid off. A Will is taken through the probate process in that it’s overseen by the appropriate court during a very public process. If privacy for you and your family is a concern, a Will may not be the way to solely go. Finally, another note of concern is that the administration of a Will is also expensive in that your executor and the probate attorney will get a percentage of your assets for the administration of it.

A Living Trust is the foundation of your estate plan. It allows you to keep your instructions and financial affairs private and ensures that your instructions are carried out efficiently without unnecessary judicial involvement. It allows you to transfer assets such as your property into the trust while you are alive which can have tax benefits for your surviving designees. A Living Trust is sometimes described as being similar to a purse; you own the purse and all of the belongings within it so the purse is really just the vessel to hold all of your specified belongings in one safe place. While you’re alive, you can add and remove your items from that purse as much as you’d like. The purse only gets sealed up upon your death.

For the best of both worlds, a complete estate plan will contain both a Living Trust and a Will so anything that you don’t transfer directly to your trust during the course of your life will be transferred into it upon your death. It also includes a Power of Attorney to enable someone that you assign authority to (known as your “agent”) to make financial decisions for matters outside of your trust on your behalf if you become physically unable to do so yourself (filing taxes, dealing with social security concerns, or even caring for your pets are just a few examples), a health care directive that gives persons that you designate to gain access to your protected health information as well as to make medical decisions on your behalf, memorial instructions that honor your wishes on how to handle your memorial or cremation services, and nomination of guardianship for minor children (guardianship concerns should be addressed in both your Will for when you pass away and within the Power of Attorney in case you become incapacitated and need others to care for your children.  

 

 

Looking at all of the information provided so far, it seems obvious that a Living Trust is the optimal solution for your family’s security, would you still hop into the car and drive down to Office Depot? Not just yet…

Here are a few items that are often not addressed with a conventional do it yourself program that a qualified attorney can help guide and navigate you through:

1. Recording deeds – With a Living Trust, you will place title of your property into the trust. This is an area where an incorrectly recorded deed will not only cloud the property title but can have tax ramifications in the future and can be overlooked by the recorder’s office as well. I spend a fair amount of time in and out of court cleaning up do it yourself deeds.

2. The “Potato Salad clause” – When you pass away, your assets go to those you designate. In this case let’s say it’s your son Fred. What about if you and Fred pass away at the same time from eating a bad batch of potato salad while at a family picnic? Who’s going to be next in line for you? An attorney can make this level of succession planning as simple or complex as you see fit to meet your needs.

3. Blended families – Let’s face it, more and more families that finally get around to the estate planning stage in life might be on their second or more marriages with children from previous relationships entering the equation. This can lead to creative division of assets upon the passing of either one or both spouses. Add the aforementioned potato salad to the mix and now estate planning becomes quite fun for me but not so much for others. A side note on this item is that a qualified attorney can offer up different solutions to various family contingency scenarios based upon experience gained from development of previous plans.

4. Incentive clauses – Worried that your 20 year old son John is going to go out and buy that new Corvette ZR-1 he’s been eyeing immediately after receiving his inheritance check? The good news for you is that your Trust can contain incentive provisions that will provide little Johnny with portions of his inheritance when he hits certain age brackets (such as a portion at 25 years old and the rest at 40 for example), graduates from college, or desires to use the money to purchase a new home. The point being is that you get to set the distribution parameters.

These are just a few simple examples. Your attorney will more than likely have many more items for you to address that may not be done with an off the shelf plan.

It should be noted that there are times when a Will is sufficient for estate distribution due to asset size or family situation. However, a Will alone is never a solid plan. A consultation with a qualified estate planning specialist will help determine the appropriate plan for you.

Last and most importantly: An error or oversight in your Will or Living Trust will likely not get caught at the time of completion which means it’ll lie in wait for your loved ones until it’s potentially too late to correct. This is not the type of gift that keeps on giving (or doesn’t keep on giving) that you’d like for them to have to deal with. The number one reason why you should go to an attorney for this level of planning is the peace of mind that comes from knowing that it was done right by a professional that specializes in these types of things.

By now you’ve hopefully realized the importance of having a trust to protect your assets from the costly and ugly mess known as probate. If not, give us a call and we’ll happily talk to you about the benefits of having a trust. But once one has been established, an often-overlooked question is: how is my homeowners insurance impacted if my trust “owns” my house but the insurance names me as the beneficiary?

Once title to your home has been transferred to your trust, you will need to name the trust as a payee to your homeowner insurance. The reason being is that when the trust is established and you sign a deed transferring your home to your trust, ownership of the home is held by the trust and not by you as the individual. Your insurance policy will only pay for claims by those named within the policy and if your trust isn’t named, whatever it owns (the property) will not be covered.  Warning bells should be going off for you after reading the previous statement!  From an insurance standpoint, the trust owns whatever is specified within the deed for the property while you and your family as the people living at said property own all the personal effects contained within.  More on that below.   

Since your home has been placed in the trust, why not just name your trust as the only payee of your homeowners’ insurance you might ask. We discussed how that option works if the structure is damaged due to a flood or a fire as the insurance will pay the trust out for the repairs to the dwelling. But what about the personal items that might be damaged? While many trusts contain provisions for personal property, they generally don’t have all of your personal items such as that new 70″ 4k TV that you had to have for the Avenger’s movie viewing party or juniors’ favorite pair of running shoes. So, if the trust is named as the only beneficiary, personal effects are not typically covered. Another consideration to account for is what if the TV crashes down onto one of your guests while watching the movie and injures him or her? Guess who is liable for covering the cost of the injury? If you said Marvel Comics or the trust, you’d be wrong! Unfortunately, the homeowner’s insurance will only cover the trust and whatever items have been identified within it. The person that actually owns the TV (you) would be personally liable for the injury.

We just outlined why having only the trust named in your homeowner insurance is not the best option while not including the trust can be disastrous. Recognizing that both of those options are only partial solutions at best, what should you do?

The best way to incorporate your trust into your existing homeowners’ insurance is to name the trust as an “additional insured” party. This way the property can continue to be contained within the trust which will both provide tax benefits as well as protect it from probate.

You should work with your attorney as well as your insurance provider now rather than later to ensure that you, your assets, and your loved ones are adequately protected!