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San Jose Santa Clara Milpitas Estate Planning Business Law Attorney Blog
Thursday, June 03, 2010 3 Tips to Make an IRA Last Longer
Forbes.com recently published a really helpful article that summarizes the ways that those who inherit an IRA, or who are thinking about leaving one to their heirs, can make the best strategic use of that money.
Here's the top three in my opinion:
1) If you inherit an IRA, take out only the required minimum distribution, which is calculated based on your life expectancy. (If you're a surviving spouse, you don't have to start withdrawals until you're 701/2, but everyone else has to start taking money out the year after the owner has died, in most cases).
2) If you have an IRA, DO NOT name your 'estate' as the beneficiary. This will trigger the five-year rule, which means your heirs will have to take out all of the money within 5 years, and pay income tax on those withdrawals (if the account is an IRA, Roth IRA's are different).
3) Beneficiaries of inherited ROTH IRA's still have to take required minimum distributions, just like those from regular IRA's, starting a year after the death of the owner, but they don't have to pay income tax on those withdrawals. Because the owner of a ROTH IRA does not have to take any money out of those accounts during their lifetime, this can be a way of leaving more money to your heirs than a traditional IRA.
Thursday, June 03, 2010 10 Tips to Maintain Limited Corporate Liability
1. File timely annual reports with the Secretary of State.
2. Operate using the proper name of the company. If the company uses a fictitious name (a “d/b/a” name), be sure that it is registered with the proper authorities, such as the Secretary of State and county registries.
3. Be sure that the company’s clients, customers, vendors and other third parties know that they’re dealing with the company, and not you personally, in contracts, on invoices, etc.
4. When signing a contract on behalf of the company, be sure that the small print doesn’t hold you personally liable, and be sure to indicate that you’re signing not personally, but as an officer, manager, partner, etc.
5. Don’t mix business and personal finances. Don’t pay personal expenses from the company’s account. Document all payments from you to the company as capital contributions or loans, and from the company to you as compensation, dividends, etc.
6. Be sure that your company’s auto insurance covers to cover potential liability when your employees use their personal vehicles for your business purposes.
7. Be sure that company retirement plans and other benefits plans are properly maintained and that all required IRS and Department of Labor filings for these plans are made on time.
8. Have the company’s CPA send an letter to the company’s attorney each year letting the attorney know what tax-related items should be documented in the company records for tax purposes, including, for example, owners’ salary and bonuses, loans to owners, capital contributions, major sales and purchases of capital assets, etc.
9. Hold annual meetings and document the company’s major activities for the year in the minutes of the meeting.
10. If equipment and real estate are owned separately from the operating business (as they should be, when practical), be sure that arm’s-length leases are in place.
Thursday, June 03, 2010 Causes of Estate Litigation (fighting between the kids)
Mixing family members and money does not always lead to love and happiness. While the work we do is frequently challenging and often rewarding, protecting our clients, our colleagues and ourselves from unnecessary litigation remains a high priority. In many cases, litigation can be avoided with some basic precautionary measures.
This issue of The Wealth Counselor explores some of the most common reasons trusts and estates end up in litigation, and some measures the planning team can take to help prevent it.
When litigation ensues regarding an estate plan, it can take two forms. It may be a challenge to an estate plan document, such as whether a will should be admitted to probate. It may also have to do with the administration of an estate, such as who will serve as Executor.
Challenges to the Plan
Challenges to estate planning documents frequently occur when children (and sometimes spouses) are not treated equally as beneficiaries, and especially if someone feels they were not treated "fairly" (a very subjective determination). It is not necessary for someone to be disinherited for litigation to ensue.
Lack of Capacity
That a trustmaker or testator lacked the mental capacity to make a will or create a trust is a common complaint.
Definitions of capacity vary from state to state but, generally speaking, the testator needs to have the ability to understand at the time of making his or her will generally what assets he or she owns, the dispositive provisions of the will, and the testator's relationship with those who will benefit from the will.
Every adult who has not been judicially determined incapacitated is presumed to have capacity. Therefore, the burden to prove incapacity is on the contestant. Mere feebleness of the body or mental weakness does not rebut the presumption of competence. Also, the moment at which testamentary capacity is to be tested is the moment of the execution of the document.
Because of these assumptions and requirements, voiding a will on the grounds of testamentary capacity is difficult. However, the prudent course is to take steps to protect yourself and your client as much as possible.
Planning Tip:Know the statutes and/or case law in your state. If there is a concern, have a medical doctor or psychology expert evaluate the client just before signing his or her estate planning documents.
Fraud, Duress and Undue Influence
Fraud, duress and undue influence commonly shortened to simply "undue influence," is statistically the most frequent basis for blocking probate of a will or enforcement of a trust. It can also result in partial invalidity if the remainder of the document is not invalid for other reasons. Simply stated, it is the substitution of another person's will for that of the testator or trustmaker.
A frequent scenario in such cases is this: A family member or caretaker brings in an elderly client, stays with the client during the planning meeting, may even pay for the attorney's or other professional's services, and becomes the main beneficiary or heir. The beneficiary may or may not be related to the client.
When a court makes a determination of whether undue influence has been exercised, it considers a variety of factors, including whether the transaction took place at an appropriate time and in an appropriate setting, and whether the testator was pressured into acting quickly or discouraged from seeking advice from others. Courts also consider the relationship between the parties and the "fairness" of the transaction.
Planning Tip:If you suspect a client is being subjected to undue influence, meeting with the client alone may help to determine the client's capacity, understanding of the events, and even fear of some person in their life.
Revocation of a Will
A third common attack is that the document at issue has been revoked. A testator may completely revoke a will by intentionally destroying it. Complete or partial revocation may also be done by a writing executed under the same formalities of a will or executing a new will.
There is a presumption that a will was revoked if it was in the possession of the testator and cannot be located upon his/her death. The burden is on the proponent of the will to establish otherwise.
Partial revocation may be desirable, especially in cases of undue influence when only certain provisions of the will might be affected by the person(s) who stand to benefit from the undue influence, and other provisions pertaining to innocent beneficiaries are unaffected.
Planning Tip:Many practitioners mistakenly assume that, in case of the invalidity of the last document, the prior document is automatically revived, but this may be rebutted by evidence to the contrary. If the subsequent will shows a radical departure from the prior plan, the drafting attorney should explain in the document itself the reason for the departure. If a will is being revoked by a written instrument, include an explanation of the purposes for the revocation and that the testator would prefer intestacy over the revival of the prior will.
Prenuptial and Postnuptial Agreements
These, if valid, can affect the surviving spouse's elective share or intestate share of an estate, rights to homestead, exempt property, family allowance and preference on appointment as personal representative of an intestate estate. Prenuptial and postnuptial agreements are often challenged when a marriage ends by death or divorce.
Planning Tip:Creating a valid prenuptial or postnuptial agreement requires care. In some states fair disclosure of assets is required for both prenuptial and postnuptial agreements. It is more likely to be upheld if each party has their own lawyer.
Matters Affecting Administration
Creditors' Claims
Litigated matters in an estate may relate to creditors' claims. Some of the grounds include that the claim may be challenged as not valid or coming too late. So, too, an objection to a claim may be challenged as coming too late.
Removal of Personal Representative
Again, there will be variations in state probate laws but, in general, a personal representative may be removed for various causes, which may include:
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physical or mental incapacity;
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failure to comply with a court order;
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failure to account for sale or real property or to produce the estate assets for inspection;
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wasting or other maladministration of the estate;
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failure to give bond or security;
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conviction of a felony;
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conflicting or adverse interests against the estate;
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revocation of probate of a will in which he/she is named as personal representative;
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lack of present ability to qualify for appointment.
Simple disagreement between beneficiaries and the personal representative is not likely to support removal.
Planning Tip:Because a court is bound to follow the statutory preference of who should serve as personal representative (absent that person's proven unfitness), the client must act to prevent that person serving.
Removal of Trustee
The general rule is a court can remove a trustee only for incapacity or on a clear showing of abuse or wrongdoing in the actual administration of the trust. It is not enough to show that there is a potential for mismanagement or conflict of interest by the trustee; the party seeking removal must allege and prove actual conduct by the trustee amounting to a breach of trust. However, the court should allow for removal for unfitness when the likelihood of harm to the trust can be demonstrated, such as from habitual substance abuse or lack of ability.
Where there is hostility and disharmony between co-trustees that impedes administration of the trust and unnecessarily depletes the trust's assets, a court can remove the trustee determined to be the cause of the disharmony.
Planning Tip:Removal of a trustee may be authorized by the trust document itself. Clients should include such a removal clause if they want certain persons (possibly beneficiaries) to have the power of removal without the necessity of going to court. To avoid later concerns by third parties regarding the successor trustee's legitimacy or challenge by the removed trustee, the removal should be accomplished in strict accordance with any procedural requirements contained in the trust document.
Breach of Fiduciary Duty
A trustee, whether a professional or a family member, has certain fiduciary responsibilities under the law, including:
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To follow the instructions in the trust document.
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To not mix trust assets with his/her own. Bank accounts and investments must be kept separate.
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To not use trust assets for his/her own benefit.
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The trustee or executor must treat all beneficiaries the same. One beneficiary cannot be favored over another unless the will or trust says otherwise.
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To invest trust or estate assets in a prudent (conservative) manner, in a way that will result in reasonable growth with minimum risk.
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To keep accurate records, file tax returns, and report to the beneficiaries as the law or the trust requires.
Planning Tip:A family member who takes on the responsibility of being an executor or trustee must be educated about these fiduciary responsibilities, estate or trust administration and the terms of the will or trust itself. Rarely is a family member fully qualified to act as sole trustee.
Avoiding Litigation
Exploring litigation risks and how to minimize them creates an excellent opportunity to suggest and put together a qualified team of advisors who can ensure proper trust administration. However, even professionals are at risk when helping administer a trust for the beneficiaries. Here are some areas of concern:
Understanding the Terms of the Trust
The risk of litigation may be reduced by making sure all parties to the trust understand what the trust says: who will receive distributions from the trust, how much they will receive and when they will receive it; the fact that debts and taxes will need to be paid, how much they will be, and when they must be paid; who the trustee(s) and successor trustee(s) are, their responsibilities, and how they are to be compensated; what services from professionals will be secured and how they will be compensated; etc.
Administrative Issues of an Established Trust
At the incapacity or death of the grantor, there are many administrative tasks, issues and decisions to face. Frequently, the grantor's accounting records are not up to date, especially if the person was ill or losing mental capacity. Bills may be past due and tax returns may not have been filed. The trustee may need to be brought up to speed quickly and, if a family member, may not be emotionally ready to do so.
If the grantor has died, there may be several trusts with their own administrative needs depending on the family and financial situation. For example, there may be blended families; younger and older children; irrevocable trusts for tax planning; charitable planning; provisions for a surviving spouse; IRAs, 401(k)s, and annuities; life insurance; etc. Also, a well-intentioned but uninformed or unsuitable trustee may make costly mistakes without careful oversight and instruction by a professional who understands the required accounting.
Distribution Standards and Decisions
When drafting a trust that will give the trustee discretion in providing for a beneficiary, the estate planner will often use the accepted standards of "health, education, maintenance and support." Generally these are interpreted to mean that a beneficiary can receive distributions that will maintain his or her accustomed standard of living. But does that mean providing unlimited funds to maintain that standard of living at the risk of depleting the trust assets? If the beneficiary is receiving income from other sources, should that income be taken into consideration? If the trust does not provide more explicit instructions, the trustee can be put in an awkward situation, pitted between the beneficiary who is to receive the support and other beneficiaries who are expecting to receive the trust assets after the supported beneficiary dies.
Balancing the Interests of Income Beneficiaries vs. Remainder Beneficiaries
Many ongoing trusts give one beneficiary (typically, a surviving spouse) the right to receive all of the income from the trust. After this beneficiary dies, another beneficiary (often an adult child or children) will be entitled to receive the trust principal. This can frequently lead to conflicts between the income beneficiary, who wants as much income as possible, and the remainder beneficiary, who wants the principal to grow as much as possible. The trustee and the investment advisor will need to work together carefully to create as much balance as possible to provide for both.
Suitability of Investments
Each beneficiary of the trust may have different risk tolerance levels. Some may want to be more aggressive, others more cautious. Some may want the trust to invest in their business or buy them a house. Remember, the trustee, working with the investment advisor, is responsible for handling the trust assets in a prudent (conservative) manner for the benefit of all beneficiaries, not just one particular beneficiary.
Insurance Reviews
Regular reviews of the amount of life insurance and policies are a must. The amount of insurance may need to be adjusted up or down. If the individual is in good health, a different policy may be more suitable. Should irrevocable life insurance trusts own the policies? Is there a desire to establish trusts for grandchildren, charitable causes, or a special needs child? There are many valuable uses for life insurance in estate planning and, if done properly, the proceeds will be free of estate taxes, income taxes, and probate fees.
Planning Tip:Professionals who work with trusts often forget that a trust document and its administration are foreign to the family members. Hopefully, the more they understand them and the resulting benefits, the more likely you will ease any frustration and avoid a court battle. Periodic updates and open communication to all involved parties, including other members of the advisory team, are essential.
Conclusion
Not all trust and estate litigation can be avoided or is, in fact, bad. There are times when it is necessary to protect the innocent or wronged. What you want to do is to protect yourself, your clients, and your colleagues from unnecessary and avoidable litigation, and there are steps you can take to do that. All members of the advisory team need to be familiar with and understand legal issues that may arise in probate and trust administration. Don't assume the family has any correct information about either of these subjects. Do what you do in a professional, ethical and conscientious manner. And communicate often and well to all involved.
Tuesday, June 01, 2010 Taxes on Investment Income will almost Triple
Currently the maximum federal tax rate for qualified dividends and long-term capital gains is 15%. This is great for people like Warren Buffett, who live off of investment income. However, these low tax rates for wealthier investors will soon be a thing of the past.
Unless legislation is passed to continue the current rates for qualified dividends, next year all dividends will be taxed at ordinary income rates. The top rate for ordinary income, currently 35%, goes up to 39.6% in 2011. Then, in 2013, the 3.8% investment income surcharge kicks in, making the total maximum rate 43.4%.
The long-term capital gains rate will increase to 20% next year, and the surcharge beginning in 2013 will mean the top rate will be 23.8%.
These hefty tax increases will trigger a greater interest in tax deferral strategies such as cash value life insurance and tax-deferred annuities, and may motivate more intra-family income shifting strategies such as limited liability companies. Wednesday, May 05, 2010 The Power of Advance Health Care Directives
A recent study in the New England Journal of Medicine found that one in four elder adults need someone else to make decisions for them at the end of their lives.
"The results illustrate the value of people making their wishes known in a living will and designating someone to make treatment decisions for them, the researchers said," The Associated Press reports. "In the study, those who spelled out their preferences in living wills usually got the treatment they wanted. Only a few wanted heroic measures to prolong their lives.
As summarized in the LA Times: Those who requested limited care at the end of their lives received it most of the time. The study used data from the long-running Health and Retirement Study, which surveys adults ages 51 and older nationwide. In analyzing data from people ages 60 and older who died between 2000 and 2006, researchers found that of the 398 incapacitated people who had used a living will to request limited care at the end of life, almost 83% received it.
Wednesday, April 29, 2009 Obama vows to continue Estate Tax
President Obama and congressional leaders plan to move soon to block the estate tax from disappearing in 2010, suggesting the levy might outlive the "Death Tax Repeal" movement that has tried mightily to kill it.
The Democratic stance on the estate tax contrasts with Mr. Obama's reluctance to press forward with his campaign pledge to raise income-tax rates on top earners, which he worries could have an adverse economic impact during a recession.
But Democrats are determined to act quickly to prevent the estate tax's scheduled repeal. Elimination of the levy on big inheritances was approved by Congress under President George W. Bush in 2001, with rollbacks phased in slowly and its full elimination slated to take effect next year.
The Senate Finance Committee will move within weeks on legislation to reverse that law, and Mr. Obama is expected to detail his estate-tax preservation proposal in his budget next month, congressional tax writers said.
Under the Obama plan detailed during the campaign, the estate tax would be locked in permanently at the rate and exemption levels that took effect this year. That would exempt estates of $3.5 million -- $7 million for couples -- from any taxation. The value of estates above that would be taxed at 45%. If the tax were returned to Clinton-era levels, it would exclude $1 million from taxation with the rest taxed at 55%.
In making their case for the restoration, Democrats contend that such a large additional tax break for the rich shouldn't go into force halfway through Mr. Obama's proposed economic-recovery package. They argue that the deficit is already in record territory, while their plan wouldn't have any impact on the economy since it would merely keep the estate-tax rate at its current level. Mr. Obama and his party also say that the affluent already have benefited handsomely from the Bush tax cuts.
They also reason that if they don't act now, it will be politically harder to go ahead with their plan to resurrect the estate tax once it has disappeared.
For small-business groups, farmers' associations and the affluent families that created and bankrolled the "Death Tax" repeal effort, the emerging Democratic plan marks a stark defeat.
Advocates of killing off the tax say the emerging Obama policy is the wrong medicine for the recession, arguing the levy is economically burdensome like the income tax. Bill Rys, tax counsel for the National Federation of Independent Business, said small businesses struggling with falling sales and layoffs shouldn't have to devote resources to estate planning.
Saturday, April 25, 2009 Nick & Noah This is my oldest son Noah and my younger brother Nick. Nick lives in NYC. He took Noah to get a haircut right before my sister's (Rachel) wedding in September 2008. Saturday, April 25, 2009 WealthCounsel Nor-Cal ForumYesterday I met with some fellow WealthCounsel attorneys in Palo Alto to discuss advanced Wealth Transfer options for our clients. WealthCounsel is a collaborative organization of more than 1,000 law firms, WealthCounsel’s practice-building resources help attorneys efficiently draft sophisticated estate plans; gain competence through collegiality with other members; and learn new strategies to increase revenue opportunities. Friday, April 24, 2009 How to choose between California S-Corp and LLCSo you decided that you would like to protect your personal assets from that new or existing business you operate. But now you cannot decide between a corporation (most likely an S Corporation for smaller businesses) or a limited liability company.
Of course, once you choose a form of entity your work is not finished, as strict formalities are required and compliance is crucial to preserve any protection the entity provides. But the following advantages and disadvantages should help you decide. As always, you may want to consult an attorney to decide which factors are more important for your particular situation.
S Corporation Advantages
Shareholders enjoy limited liability. Ownership interests are freely transferable (subject to S Corporation restrictions). Existence unaffected by the death of shareholders or transfer of shares. Centralized management. Pass through tax treatment (as opposed to double taxation of C Corporations) Losses are available on the shareholders' personal income tax returns and can offset other income (subject to the "at risk" and passive loss rules).
Disadvantages: Formalities are required for organization and operation, more so than LLC Qualification is required for doing business in other states. Regular reporting is required. Strict qualification rules must be met on a continuing basis, which among other things limit the number and types of shareholders. The distribution of property by an S corporation to its shareholders is generally a taxable event for income tax purposes. Transfers of shares may be subject so securities regulations.
Limited Liability Company Advantages
Members enjoy limited liability. More flexible than S Corporations No limitation on the number or types of members. Centralized management is available if an LLC is manager managed. Assuming LLC is taxed as a partnership, pass through taxation. Losses are available on the members' personal income tax returns and can offset other income (subject to the "at risk" and passive loss rules). Special allocations may be made for income tax purposes. Disproportionate distributions may be made to members.
Disadvantages: Formalities are required however they are less onerous than S Corporations Regular reporting is required. Termination results from the death, disability, or withdrawal of a member under the laws of some states. Interests are not freely transferable. Business profits are taxed as income to the individual members and, as a result, may be subject to self-employment tax as well as income tax. Transfer of interests may be subject to securities law regulation. Friday, April 24, 2009 What happens if you die without an Estate Plan?The state you are living in determines how your estate is to be distributed and your estate is in the hands of the probate court.
Probate is the legal process through which the court sees that, when you die, your debts are paid and your assets are distributed according to your will. If you do not have a valid will, your assets are distributed according your state’s law, which can be an expensive process. Legal/executor fees and other costs must be paid before your assets can be fully distributed to your heirs. If you own property in other states, your family could face multiple probates, each one according to the laws in that state.
It takes time, usually nine months to two years, but often longer. During part of this time, assets are usually frozen so an accurate inventory can be taken. Nothing can be distributed or sold without court and/or executor approval. If your family needs money to live on, they must request a living allowance, which may be denied.
Your family has no privacy. Probate is a public process, meaning any “interested party” can see all of your assets as well as your debts. The process “invites” disgruntled heirs to contest your will and can expose your family to unscrupulous solicitors. Your family has no control while the probate process determines how much it will cost, how long it will take, and what information is made public. If your estate includes kids, then you’ve really got to get a plan. Otherwise, the court will decide who will raise them if something happens to both parents. | |
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The Sowards Law Firm prepares LLCs, corporate documents, wills, living trusts and complete estate plans for clients throughout California, including clients located in and around Alameda, Benicia, Berkeley, Campbell, Capitola, Concord, Dublin, Hayward, Livermore, Mountain View, Napa, Novato, Oakland, Palo Alto, Petaluma, Pleasanton, Point Reyes, Redwood City, Richmond, Salinas, San Carlos, San Francisco, San Jose, San Leandro, San Rafael, San Ramon, Santa Clara, Santa Cruz, Santa Rosa, South San Francisco, Sunnyvale, Union City and Vallejo.
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