San Diego Estate Planning Blog: Creating Legacies

From the desk of San Diego estate lawyer, Kristina Hess Haymes

San Diegans, you may have heard that the only foolproof way to avoid your loved ones having to pass through the time consuming (think 1.5 years if no contests and everything runs smoothly), public, and expensive San Diego Probate Court process is to set up a Living Trust.

This is correct, but ONLY if the Living Trust is “fully funded.”  A fully funded living trust means that all of the assets that can be owned (e.g. real estate including rental properties, bank accounts, stocks, bonds, brokerage accounts) are “owned” by the Trust.  The assets do not become “owned” by the Trust automatically!

Just because you list your assets on an attached “Schedule A” does not mean the assets are “owned” by the Trust.  You have to actually sign a deed transferring your real estate into your living trust.  You must sign new signature cards at the bank and re-title investment accounts in the name of your Trust.

And so what happens?

You set up a trust, perhaps your lawyer had you sign a deed putting your real estate into the Trust.

But then, a few years later, interest rates drop and so perhaps you refinance your home.  The mortgage lender requires you to take your home out of the trust in order to finance the loan on the property.

Bam!  You sign a deed transferring the home out of your trust and then you forget to put it back into the trust when the refinance is done.

So, what happens?

Maybe someone dies suddenly a few years later.  All of a sudden you have an unfunded trust.

The Living Trust that you set up to avoid probate court, must now go through a probate petition to put the house in the trust.

Granted this probate petition is less expensive and time consuming than a full blown Probate where there was no living trust, but it is still going to cause an additional expense, court involvement, time,  that could have been avoided.

Alternatively, perhaps you bought a rental property but did not list the rental property on your Schedule A and also did not put the rental property into the name of your Living Trust.

If you die, this house will have to go through the full probate process costing your heirs thousands and thousands of dollars.

We have seen this quite frequently.

So, yes, set up your living trust, but make sure your plan will work when the time comes by making sure your trust is fully funded and those assets are properly owned throughout time.

Make sure your plan will work when your loved one need it and your Trust doesn’t FAIL!

To your success,

Kristina Hess Haymes

San Diego Trust Attorney and

probate attorney

From the desk of San Diego Probate Attorney, Kristina Hess Haymes

Interest rates continue to be low…. in this environment, there are certain estate planning strategies that could work for you.

The federal government requires the use of certain interest rates to value various items used in estate planning, such as an income, annuity, or remainder interest in a trust. The government also has interest rates that a taxpayer may be deemed to use in connection with certain installment sales or intra-family loans. These rates are currently at or near historic lows, presenting several estate planning opportunities.

Low interest rates favor certain estate planning strategies over others. For example, low interest rates are beneficial for a grantor retained annuity trust (GRAT), a charitable lead annuity trust (CLAT), an installment sale, and a low-interest loan. On the other hand, low interest rates have a detrimental effect on a qualified personal residence trust (QPRT) or a charitable gift annuity. But interest rates have little or no effect on a charitable remainder unitrust (CRUT).

Grantor retained annuity trust (GRAT)

In a GRAT, you transfer property to a trust, but retain a right to annuity payments for a term of years. After the trust term ends, the remaining trust property passes to your beneficiaries, such as family members. The value of the gift of a remainder interest is discounted for gift tax purposes to reflect that it will be received in the future. Also, if you survive the trust term, the trust property is not included in your gross estate for estate tax purposes. If the rate of appreciation is greater than the IRS interest rate, more of the value of trust assets escapes gift and estate taxation. Consequently, the lower the IRS interest rate, the more effective this technique is.

Charitable lead annuity trust (CLAT)

In a CLAT, you transfer property to a trust, giving a charity the right to annuity payments for a term of years. After the trust term ends, the remaining trust property passes to your beneficiaries, such as family members. This trust is similar to a GRAT, except that you get a gift tax charitable deduction. Also, if structured so that you are taxed on trust income, you receive an up-front income tax charitable deduction for the gift of the annuity interest. The lower the IRS interest rate, the more effective this technique is.

Installment sale

You may also wish to consider an installment sale to family members. With an installment sale, you can generally defer the taxation of any gain on the property sold until the installment payments are received. However, if the family member resells the property within two years of your installment sale, any deferred gain will generally be accelerated. The two-year limit does not apply to stocks that are sold on an established securities market.

You are generally required to charge an adequate interest rate in return for the opportunity to pay in installments, or interest will be deemed to be charged for income tax and gift tax purposes. However, with the current low interest rates, your family members can effectively keep any earnings in excess of the interest they are required to pay you.

From the desk of San Diego estate attorney, Kristina R. Hess (Haymes)

Here we are on the eve of a new year.  I love this time of year.  I am particularly compelled by the newness of the new year.  I am drawn in by the endless possibilities, a time to begin again, start over, maybe even have a bit of a blank slate.  Leave behind anything painful or negative in the old year.

Truth be told, though, before we can fully leap into the new year with gusto, it is important to look back over 2012 and take an inventory.

I was running on my favorite Torrey Pines trail this morning, and a nice gentleman said to me, “Look at you!  Finishing 2012 strong!”  Indeed, let us finish 2012 strong!

My tendency is to brush the old away and move right into the new, shiny year with its endless possibilities.   Optimist that I am, I don’t ever doubt that the new year is going to be better than the last one!

As we look back over 2012, it is important to recognize all that you accomplished.  Perhaps you are like me and the tendency is to focus on all that is still yet to be done!  Perhaps your portfolio is not yet where you want it to be, your health, your wealth, your business, your relationships, there are probably areas of your lives that are still very much in process of becoming.  Perhaps you are still in the process of becoming who you want to be.  We are all works in progress after all.

But when we take the time to look back over the year, you may be amazed at how much progress you made!  This was a very encouraging and useful exercise for me.  As I looked back over the year in business, in my personal life,  in many areas I could find a sense of satisfaction and accomplishment.

It is with this awareness and gratitude that we can complete 2012 and finish strong.  Then, we can turn the page on the endless possibilities of the new year. Take the time to dream new dreams, write new plans, and continue to press on toward living a life by design.

Perhaps in 2012 you want to be more passionate and committed to:

1.  Building Wealth

2.  Grooming the Next Generation for Success

3.  Being healthy in mind, body and spirit

4.  Have satisfying loving relationships

5.  Making a contribution to the world

These are broad categories.  You will want to fill in the details that pertain to you.  But you get the idea.

As we close 2012, there were many who took advantage of the unique opportunity to make a lifetime gift while the credit was $5.12 million.  Many others began taking better advantage of the $13,000 tax free annual exclusion.

Yes, as of right now we are set to go to an estate tax credit of $1 million tomorrow!

A great strategy is to fund irrevocable trusts for children and grandchildren.  You give them the gift of asset protection and it provides a mechanism to manage and control the assets until they are distributed to the beneficiaries.

Finish 2012 strong and many blessings for health, wealth, and happiness in 2013.

Create Legacies that Last!

San Diego trust attorney,

Kristina R. Hess