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Foreign Beneficiaries Can Pose a Challenge for Estate Plans

Anna Mercer’s family was quite excited when she met and married Klaus Jergen.

After their joyous nuptials, the couple moved to Vienna, Austria, where Klaus was employed at a local school as a history teacher. Anna, a pastry chef, soon found employment at a local bäckerei or bakery, where she perfected the art of the Sachertorte and the Linzer torte. Eventually, the happy couple had three children, Marie, Simon, and Jonas.

When the youngest child reached school age, Anna and Klaus returned to the U.S. to introduce their children to their American relatives, including their grandparents, John and Angela Mercer. Sometime after the family had returned to Austria, John and Angela decided it was time to prepare an estate plan and provide a legacy for their children and grandchildren.

After much discussion, the couple decided to create a trust for their grandchildren, and divide the remainder of their assets among their two children, Anna and George. Their estate planning attorney quickly pointed out that the assistance of an international trusts and estates attorney may be required, because bequeathing assets to heirs who do not reside in the U. S. could raise complex tax and legal issues.

“Cross-border bequests are tricky, because you are not only dealing with U.S. law, but also the law of the country where the heirs reside,” the lawyer said. “There are taxes to be paid, treaties to be enforced, and laws that must be observed. It can be done, but it must be done correctly or your heirs could lose most of their inheritance through double taxation. The disposition of your estate will no longer be governed just by the laws of the United States.  It will also have to conform to the laws of Austria.”

“Once we take a look at all those laws and regulations, we can determine if there is a better and more tax advantageous method of accomplishing your goals.”

Whether an American citizen is married to a non-citizen or simply resides outside the U.S. (an expatriate), cross-border bequests are influenced by a myriad of laws, regulations, and treaties. It is necessary to study the legal and tax implications of succession and inheritance laws, as well as regulations regarding the gifting of assets and generation skipping transfers. Similarly, when an heir is not a U.S. citizen and resides in another country, certain strategies must be employed to ensure that the bequest can be made without any serious tax penalties.

Among the issues that may arise:

  • Point of taxation. The laws regarding estate planning in the U. S. are, with the exception of Louisiana, based on a common law system. However, many foreign countries have a civil law system. Traditionally, common law systems provide for more flexibility in estate planning, while civil law systems are very precise, leaving little room for discretionary acts or court interpretation. For example, in common law countries, the estate of the decedent is taxed prior to the distribution of bequests to heirs, and trusts are often used to bypass probate. If someone dies without a will in the U. S., state law governs the distribution of assets to heirs. Those outcomes change in civil law countries. Taxes are imposed on the heirs, not the decedent. In addition, civil law countries adhere to what is called a succession regime or forced heirship. The decedent has little say in how his or her assets are distributed upon death, it is already dictated by law. That scheme mimics U.S. intestate succession laws. Trusts are virtually non-existent in most civil law countries.


  • Residency status. The domicile of the testator and his or her heirs is key in a cross-border estate plan. A domicile is defined as “the country that a person treats as their permanent home, or lives in and has a substantial connection with.”  In effect, the person intends to stay at that location and will always return there. Domicile determines the rights of the testator, as well as the heirs, and most importantly, applicable law.


  • Tax treaties and foreign tax credits. The U.S. has tax treaties with a number of countries. Those treaties determine the tax consequences of the transfer of asset across borders and sometimes, eliminate the double taxation and discriminatory tax treatment of estates. Generally, the treaty controls which nation has the authority to assess taxes on an estate. Determining how a treaty is applied relies on two factors: the decedent’s domicile and the location of the decedent’s assets. Some treaties permit the country of the decedent’s domicile to tax all transfers of property in the estate. The other country is permitted only to tax real property and business property sited in its country. Then the domiciliary country typically provides tax credits for the taxes paid to the non-domiciliary country. Older treaties, however, impose more stringent rules, but provide for a greater range of tax credits. When no tax treaty exists, there is a greater potential for double taxation, but some tax credits may still be available to minimize that liability.

Generally, traditional estate planning tools, such as wills, trusts, life insurance, college savings plans, and gifting are available for non-resident beneficiaries. However, some financial instruments, such as life insurance or investment accounts, could have special instructions for foreign beneficiaries, and may require the completion of additional tax forms and registrations.

In any case, it is essential that complete information on foreign beneficiaries be included in an estate plan, including full names and locations of the beneficiary, his or her spouse and dependents, and their residency status within the country in which they are living.

Posted in Advance Directives, Asset Protection, Beneficiaries, Beneficiary Designation, Distribution of Assets, Estate Administration, Estate Planning, Inheritance, Tax Planning, Trust Administration, Trusts, Wills | Comments Off on Foreign Beneficiaries Can Pose a Challenge for Estate Plans

How to Avoid Conflict in Your Estate Plan – Part II

Preplanning avoids disputes over gifts and loans

After Marilyn Walker’s untimely death, her family solemnly gathered for the reading of her will.  According to her attorney, Marilyn divided her estate equally among her four children. Everything seemed cut and dried, until Marilyn’s eldest daughter, Kate, spoke up. “But what about that loan Mom made to Jimmy to start his business?  She invested most of her pension plan into his start-up, and although he promised to pay her back, he never did. Is that loan forgiven? Shouldn’t he be required to pay the loan back to the estate before he is permitted to inherit anything?”

“That was not a loan,” Jimmy replied, an angry frown crowding his face. “It was a gift. Mom said I could pay it back if and when I was able. Well, I haven’t been able. You’re just being greedy.”

“I agree with Kate,” said Marilyn’s other daughter, Anne. “Mom was worried that if Jimmy failed to repay that loan before she died, we would be left with nothing. I told her she should talk to an attorney to make sure the loan was repaid or was credited against Jimmy’s inheritance.”

The attorney slowly paged through Marilyn’s estate plan and pulled out a page with the heading, “Assets and Liabilities.”  He studied it. “Well, there is a notation on here. It says, ‘Jimmy’s loan.’ But there is not an amount or any information provided. And there is nothing in her will that indicates it should be counted against Jimmy’s share of Marilyn’s estate.”

The eldest son, John turned to Jimmy and said sternly, “Time to do the right thing, Jimmy. Either pay back the loan to the estate, or forgo any further inheritance. Though I have to say, I think it is pretty low to steal from a dead woman.”  Jimmy stood up, shook his fist at his siblings and stormed out of the attorney’s office.

“He can’t get away with that, can he?” Kate asked. “There is no way Mom intended for him to get the bulk of her estate.”

“While there is a difference between a gift and a loan, without further documentation, I am afraid Jimmy is under no obligation to repay the loan,” the attorney said. “How much was the loan for?”  Kate answered, “about half a million dollars.”

There is no way for the estate to recover anything without documentation. However, if you can find bank statements or a cancelled check, perhaps the executor can attempt to make a recovery if the probate court finds sufficient cause. But there is no guarantee.  “Mom is probably spinning in her grave right now,” said Anne. “I wish she had listened to me.”  “Forget about that, Anne,” said John, “but maybe there is a way to get the government involved.”

For estate planning purposes, there is a difference between a gift and a loan.  Gifts have some estate planning benefits.  They reduce the value of an estate, as well as the estate tax burden.

Under federal tax law, estate holders are permitted to give away up to $14,000 a year per person tax-free.  When a married couple makes a gift, the exclusion increases to $28,000 a year.  The gift can take any form, be it cash, an interest in property, or a business.  In addition, for gifts of high value assets, the exclusion may be spread out over five years.

There are some restrictions on gifting.  An estate holder is limited to giving away $5.49 million during their lifetime. Any gifting in excess of that amount will be subject to a federal gift tax of 40%.  California does not currently have a gift tax.   However, gifts of property located outside of the state, or gifts made to people who reside out of state, may be subject to the gift or income tax laws of those states.   Therefore, when making gifts that fall into those categories, it is important to consult with an attorney to minimize the tax implications.

Loans, on the other hand, are considered an asset for estate planning purposes. When properly documented, they are included in the total value of the estate.  Absent specific instructions from the testator about loan repayment, the executor may elect to call the loan in full at the time of the debt-holder’s death, and/or make arrangements for repayment, either through an installment plan or by subtracting the loan value from an heir’s share of the estate.

However, it is in the best interests of the testator, and his or her heirs, to fully document any loans that have an impact on the total value of the estate.  Such documentation should include a formal promissory note, which states the amount of the loan and the terms under which it must be repaid.  In addition, the testator’s wishes regarding loan repayment upon their death should also be spelled out in their estate plan. For example, a testator may wish to forgive the loan, apply the loan balance against an heir’s share of the estate, or seek repayment for the benefit of other heirs.

Similarly, any gifts made during a testator’s lifetime must be recorded for estate tax purposes.  When the total value of lifetime gifts exceeds $5.49 million, the excess will be subject to a federal gift tax.

The issue of whether money dispensed by a testator is a gift or loan is best decided when the money is received.  Clear documentation will not only avoid subsequent tax problems, it will also prevent discord among family members.  The most loving of families have been known to engage in furious, life-altering battles over inheritance.  With a little preplanning by the testator, those battles can be avoided.

Posted in Asset Protection, Baby Boomers, Beneficiaries, Beneficiary Designation, Distribution of Assets, Estate Administration, Estate Planning, Gifting, Inheritance, Probate, Probate Administration, Trust Administration, Trusts | Comments Off on How to Avoid Conflict in Your Estate Plan – Part II

Issues with Probate – Part III

Is Your Safe Deposit Box Accessible Upon Your Death?

Harry Williamson planned well for his death.  After consulting with his attorney, he prepared and executed a comprehensive estate plan, including a Last Will and Testament, a Living Trust, an Advance Healthcare Directive, a HIPAA release, and powers of attorney for healthcare and finances.

So when he died, family members expected everything to proceed smoothly. Instead they got chaos. It seemed no one could find his estate planning documents. Everyone knew he had a will, he had certainly talked about it often enough, but no one knew where it was. And they needed that will to determine Harry’s wishes concerning his funeral and burial.

His three daughters tore apart his house, looking for some clue as to where his will could be. They had all but given up until his eldest daughter, Elizabeth, found a singular key in a slipper tucked under his bed.  The key bore the name of the bank and a number.

Elizabeth brought the key to the bank and was told it would open a safety deposit box. However, Elizabeth would be required to provide proof of Harry’s death, as well as suitable identification, before she could use the key to open the box. In addition, Elizabeth was told she would not be permitted to remove anything from the box. However, the bank would gladly copy his will or trust documents, for a fee.

Under California law, a financial institution that holds a safe deposit box in the name of a deceased person, or deceased persons, may open the box for a third party if they possess a key and provide adequate identification and proof of their relationship to the decedent as well as a certified copy of the decedent’s death certificate.

The financial institution is required to:

  • Keep a record of the identity of the person accessing the safe deposit box.
  • Allow the authorized person to open the safe deposit box under the supervision of an officer or employee of the financial institution, and to conduct an inventory of the contents.
  • Photocopy all wills and trust instruments removed from the safe deposit box, and keep the photocopy in the safe deposit box until the contents of the box are removed by the personal representative of the estate or other legally authorized person. The financial institution may charge a reasonable fee for photocopying.
  • Permit the person given access to the box to remove the instructions for the disposition of the decedent’s remains, and, after a photocopy is made, to remove the will and trust documents.

Anyone given access to a decedent’s safe deposit box is required to deliver all wills found in the safe deposit box to the clerk of the superior court, and mail or deliver a copy to the person named in the will as executor or beneficiary. However, the contents of the box may not be removed until letters testamentary have been issued by the probate court. This means the family has to open a probate even if the decedent created a trust in order to avoid probate!

What could Harry have done differently? First, make it easy for his family to find the key. Also, either have one of his children listed as a signer or authorized user on the safe deposit box or arrange with the bank for the safe deposit box to be owned by his trust.

Posted in Asset Protection, Baby Boomers, Beneficiaries, Distribution of Assets, Estate Administration, Estate Planning, Finances, Inheritance, Probate, Probate Administration, Trust Administration, Trusts, Uncategorized | Comments Off on Issues with Probate – Part III

Issues with Probate – Part II

Disposing of Real Estate Using a Will Requires Legal Authority

When Minnie Wilson’s father died at the age of 96, she immediately listed his home for sale. Although her father’s estate had not yet been probated, Minnie knew she and her sister, Linda had inherited the house.  He stated that in his Last Will and Testament. Since neither sister wanted the home, Minnie thought she would help the process to sell it move right along.  Minnie had two kids in college and the proceeds from the sale would be useful in paying their tuition.

Unfortunately, even if Minnie managed to sell the home before her father’s estate was legally probated, the sale would be ruled invalid.  Under California law, only the executor of an estate has the legal authority to conduct real estate transactions and only the Probate Court can grant the authority to do so. It is also up to the court to determine how property sales will be conducted.

Even if Minnie were the sole beneficiary of her father’s Will, she has no legal claim to any assets until the estate is administered by the court-appointed executor and approved by the Probate Court.

Generally, when a California resident dies with a valid Will, an executor—nominated by the Will– petitions the Probate Court for what is called Letters Testamentary. This document appoints the executor and outlines the authority granted to the executor to dispose of real and personal property, including homes or vacant land, in the estate. The authority can be full or limited, and that designation impacts how and when real property can be sold.  Usually the letters are issued very early on in the probate process.

Not all real estate distributed by the Will must be sold. For example, a testator may grant certain heirs or beneficiaries the option to purchase real estate before listing it for public sale or instruct that the property be deeded to certain heirs or charities.  Real estate sales normally occur to satisfy creditors or other obligations, or to ensure an equitable distribution of the value of the property is made to multiple parties.

Full authority permits an executor to conduct all aspects of a real estate transaction without the supervision or approval of the court, including listing property for sale, accepting offers to purchase, granting options to purchase, securing title insurance, and transferring ownership to a purchaser.  Without the Letters Testamentary, however, a title company cannot issue title insurance. Without title insurance, the sale cannot take place. The grant of full authority to the executor not only makes the process of listing and selling real estate more efficient, it also ensures that the sale is legal and binding.

An executor with full authority may be required to post a surety bond, a form of insurance against inappropriate or fraudulent acts. However, all beneficiaries under the Will may waive the requirement for a bond.  An executor also has a fiduciary duty to all heirs to maximize an estate’s assets, requiring that real estate is sold at fair market value. In addition, an executor with full authority is required to provide 15 days written notice of an impending sale to all heirs or beneficiaries listed under the Will, as well as the court. That provides beneficiaries with the opportunity to object to terms of the sale.

When the Probate Court grants the executor only limited authority, the court supervises the disposition of the real estate and no sale may take place without court approval.  The sale actually takes place in the courtroom. This is a less efficient process, and may extend the time it takes to dispose of real estate in an estate.

In many cases, the extent of the executor’s authority is specified in the Will, and the grant of powers by the Probate Court is a formality.  In cases where the executor is not granted any powers by the Will, it falls to the court to set appropriate boundaries.  The court may, for example, grant full authority to only certain assets.

While it may appear that the grant of authority is an easy decision, it actually requires careful thought.  If a testator or maker of the Will does not fully trust the named executor, limited authority to dispose of real estate may be more appropriate. A limited grant of authority can be used to protect not only the assets in the estate, but also the rights of the beneficiaries.

California law specifically outlines the right and responsibilities of executors granted full or limited authority to dispose of real estate. It may be wise to review those provisions with an estate planning attorney to ensure your wishes concerning your assets will be followed.


Posted in Estate Administration, Estate Planning, Probate, Probate Administration, Real Estate, Trust Administration, Trusts, Wills | Comments Off on Issues with Probate – Part II

How to Avoid Conflict in Your Estate Plan – Part 1

Joint checking accounts are not always the answer.

At age 65, Louisa Willis was anxious to get all of her estate planning ducks in a row. Louisa decided to forgo the traditional methods of estate planning—a Will and Living Trust– and created a joint checking account, naming her son, Ben, as the co-owner. Louisa’s reasoning was simple.  By creating a joint account, Ben would have immediate access to her funds “in emergencies,” such as long-term care or upon her death, funeral expenses.  In addition, since Ben also owned the account, it would not be frozen upon her death and subject to administration by the probate court, so Louisa deposited $50,000 in the account, her life savings.

Unbeknownst to Louisa, Ben had a gambling problem. Since she did not actively monitor the account, considering it set-aside for emergencies, Louisa was not aware that her son was slowly draining the account to pay his gambling debts. One day on a whim, Louisa decided to “check in” on the account and learned the balance had dropped to $25. Since Ben was also named as a joint-owner of the account, Louisa had no recourse. Ben was legally entitled to withdraw the funds in the account, at any time and for any reason.  Her life savings had disappeared.

Let’s look at a different scenario.  Suppose Ben’s wife, Amelia, decided to file for divorce. In property settlement negotiations, Amelia sought access to the joint account. Although Ben argued that the account was not created for his support, but the support of his mother, the court ruled that 100 percent of the account value should be included in community property.  It was in his name, after all. Although Ben eventually received the account in the final division of property, the account’s value significantly impacted his share of assets received. In effect, Ben was penalized because of the joint account.

Another scenario: Ben began regularly depositing funds into the account, building up a sizable balance. However, upon reaching age 70, Louisa was diagnosed with Alzheimer’s Disease.  After a few years, Ben depleted Louisa’s initial contribution of $50,000, which was used to provide for her care. He then sought government assistance, arguing that the funds remaining in the account belonged to him, not Louisa, and should not be included in the valuation of assets required to determine if Louisa was eligible for government benefits.  The government disagreed, ruling that 100 percent of the funds in the account must be included in the calculation of available benefits.  As a result, Louisa was denied government assistance.

Sometimes, a “simple” method of estate planning becomes a nightmare. Creating a joint account with a child can give rise to several issues:

  • Risk. A joint account provides total access to all funds in the account, for any purpose. While it may be understood that the funds are to be used only for parental care, that does not make it so. There is no way to enforce or regulate the use of funds, nor to recoup funds expended improperly. The account is fair game for any and all addictions, as well as other nefarious purposes.  In addition, all of the funds in the account may be accessed by the creditors of either party, and 100 percent of the account value will be considered  in the calculation of any form of financial or public assistance.


  • Estate distribution. Technically, upon death, the balance of the checking account goes to the surviving party. However, if the estate holder has five children and only one is named on the account, there is no requirement that the surviving party share their bounty with the other heirs. While joint accounts may be established with each child, this requires a constant juggling act to ensure the distribution of wealth remains constant. That means if a parent creates a joint account with one child and places all of his or her life savings in that account, all other heirs may be left with nothing.


  • Unexpected circumstances. The purpose behind a joint account will fail if the child named as a co-owner predeceases the parent. Half of the account will not pass to the named child’s estate or his heirs, it will revert back to the parent. Unless other arrangements are made, the account will no longer remain out of reach of the probate court. No one has a claim to the joint account but the surviving owner. Without a Will, the remaining balance in the account will most likely be distributed via state intestate laws.

When an estate owner has only one heir and intends to leave all of his or her assets to that one individual, a joint account becomes a simple method of asset management and transfer of ownership upon death. In addition, under certain circumstances, access to limited funds upon incapacity or death may make sense. However, this option should be considered only in conjunction with a comprehensive estate plan. That is the best way to ensure an estate is protected, no matter what happens.

Posted in Asset Protection, Baby Boomers, Beneficiaries, Elder Abuse, Finances, Gifting, Inheritance, Power of Attorney, Uncategorized | Comments Off on How to Avoid Conflict in Your Estate Plan – Part 1

Issues With Probate – Part I

No Will? No Way!

Dying without a Will is a bit like playing Russian roulette. It leaves the distribution of your assets to chance.

A Last Will and Testament not only declares your final wishes as to the distribution of your property, it ensures that those wishes are carried out properly. Upon death, a Will is filed with the local probate court, and it is that court’s job to oversee the distribution of your assets as set forth in that document. When you die without a Will, however, the state determines how your assets will be distributed and that distribution is made by a preset formula. Your desires no longer matter.

A Will can provide instructions on many issues, including who should administer your estate (the executor), the designation of guardians for your children, desired funeral arrangements, provisions for the continued care of pets, and the pouring of specified assets into a trust. Matters involving the continued financial support of dependents or a spouse, education of dependents, payment of expenses related to costly medical care, distribution of a business or partnership interest, and spousal or dependents access to checking, savings or other financial accounts to pay essential living expenses, may also be included in a Will.

The goal of a Will is to ensure that your desires concerning your estate are followed as accurately as possible. That makes the appointment of an executor or administrator for your estate critical. An executor performs such tasks as inventorying assets, collecting information on outstanding debts and liabilities, paying debts and taxes, and ensuring that assets are distributed to heirs according to the stated wishes of the deceased. Usually, an estate holder appoints someone they trust to administer their estate. When there is no Will, the court may appoint someone you do not trust and may not know, to handle your estate.

Sadly, a recent study found that up to 92 percent of all adults under age 35 do not have a Will. That same study cited many reasons people avoid preparing a Will, including a belief that a spouse or children will automatically receive any assets left behind, or that a Will is an unnecessary inconvenience. Some claim Wills are too complicated to prepare or that estate planning costs too much. Still others claim the process is too time consuming.

When a California resident dies without a Will, the laws of intestate (without a Will) succession apply. State law, not the estate owner, determines who inherits the estate. For example, under California law, a spouse will receive all of the community property. But if other heirs exist, the spouse will be required to share in the distribution of separate or personal property. In addition, access to financial accounts titled only in the name of the deceased, such as checking and savings accounts, may be frozen until the estate goes through probate. Quite literally, a spouse and/or dependents could be deprived of any financial support, and face homelessness or bankruptcy.

If a resident is not married, the state has a preset formula for the distribution of property, again regardless of the estate owner’s actual desires. Long-term partners or significant others, even those who share a home with the deceased, have no claim on the deceased’s estate. Without a Will, they will receive nothing.

In California, three types of Wills are valid. The most traditional is a written Will prepared with the assistance of an attorney.  Prepared Wills are a clear and concise statement of an estate holder’s desires as to the disposition of property upon death. Because the signature of the testator (the maker of the Will) is witnessed by two independent parties, the document is immediately admissible into probate court.

California also accepts “fill in the blank” Wills, documents most often purchased at an office supply store. This type of Will requires the signature of two non-beneficiary witnesses. Unfortunately, Wills executed in this matter can have two deficits: An incomplete or inaccurate description of property or beneficiaries, and/or the failure to properly follow the legal requirements for executing a legal Will.

Finally, California also recognizes holographic or handwritten Wills, if they are signed and dated, and the handwriting can be proven to be that of the testator. In particular, the instructions regarding the disposition of the estate must be in the testator’s handwriting. The Will cannot be typed. It must be handwritten. This type of Will requires verification of the testator’s handwriting before it will be accepted by the probate court. Most common problems include the legibility of the handwriting, and the completeness of property descriptions and beneficiary designations.

There are three requirements for a valid Will in this state. First, it must be proved that the maker of the Will was of “sound mind” or had “legal capacity” to make a Will. Second, the document must bequeath at least some of the testator’s property to designated beneficiaries. And third, the document must be signed by the estate holder and if required, properly witnessed.

A Will permits you to express your intentions for the disposition of your property after death, and protect the rights of your family or heirs to your estate. It is a simple process, but a very necessary one.

Posted in Baby Boomers, Beneficiaries, Beneficiary Designation, Distribution of Assets, Estate Administration, Estate Planning, Estate Taxes, Inheritance, Probate, Probate Administration, Trust Administration, Trusts, Uncategorized, Wills | Comments Off on Issues With Probate – Part I

From Prince to Pauper?

What happens if you die without an estate plan?

If you’re the late rock star Prince, you lose half of your estate to state and federal estate taxes. It appears the government will be dancing to Prince’s “1999” all the way to the bank.According to news reports, when Prince died in April of 2016, he had no will and no other estate plan in place. As a result, almost $100 million of his estimated $200 million estate could wind up in the hands of the tax man. That’s because the estate will be subjected to a federal tax of 40 percent and a Minnesota estate tax of 16 percent. After the calculation has been completed, experts are predicting the tax burden will amount to approximately 50 percent of the total estate.

Clearly, dying without an estate plan can have devastating financial consequences. However, the consequences extend beyond the reduction of the value of the estate. Dying intestate also impacts how and to whom an estate is distributed. There is a very real likelihood that Prince’s estate may go to unintended beneficiaries and his intended beneficiaries may receive nothing.

For example, under California law, when a resident dies without a will or trust, the laws of intestate (without a will) succession apply. State law, not the estate owner, determines who inherits the estate.  A spouse receives all of the community property. But if other heirs exist, the spouse is required to share in the distribution of separate or personal property.  In addition, access to financial accounts titled only in the name of the deceased, such as checking and savings accounts, may be frozen until the estate goes through probate.  Quite literally, a spouse and/or dependents could be deprived of any financial support, and face homelessness or bankruptcy.

Prince left no surviving spouse behind, but a sister and five half-siblings have laid claim to his estate.  Even if Prince did not intend to bequeath equal portions of his estate to those relatives, his intent no longer matters.  Any business associates or friends he may have desired to benefit from his largesse will be left out in the cold.

Sadly, there are many estate planning strategies available that could have kept Prince’s estate intact and sheltered from excessive taxation. Those same strategies would also have ensured that Prince’s desires concerning the distribution of his estate be honored.  The best approach would have been to place Prince’s property, including copyrights and trademarks to songs and related items, in trust.  This approach has several benefits.

First, when property is transferred to a trust rather than a person, the value of the taxable estate is reduced. That means upon death, there is less to tax, resulting in a lower estate tax liability.  While the trust is required to pay tax upon earnings, and beneficiaries pay tax upon distributions, the assets themselves are not taxed.  In addition, the tax on earnings and distributions is much lower than an estate tax.

Second, a trust not only permits an estate holder to designate who will benefit from the income derived from assets placed in trust, it also permits the grantor to determine how, why, and when that income will be distributed.  This is useful when a grantor determines a potential beneficiary may lack the ability to appropriately manage finances or use any proceeds for bad pursuits, such as illegal drugs. In the alternative, a grantor may provide that trust income be used only for designated purposes, such as the payment of expenses for a college education or extraordinary medical expenses. In addition, distributions may be limited by age, financial and employment status, or used only to reward certain behaviors, such as philanthropy or an attending church.

Finally, a trust enables an estate holder to implement a vision for the future, beyond death. Say, for example, that Prince wanted to donate his writings and instruments to a museum or wanted the proceeds from the licensing of his music to be used for a specific purpose.  That vision can be specifically stated in a trust and the executor of that trust is bound to take designated steps to carry it out.

There are many types of trusts available and they can be used to accomplish a multitude of purposes.  Those purposes may include:

  • To provide for the continued support of dependents, such as spouses and children.
  • To donate assets or income from assets to specific causes or charities.
  • To protect the inheritance rights of heirs from prior marriages, or to permit children not related by blood from a blended family to inherit.
  • To protect assets from former spouses, family members, and creditors.
  • To provide multiple generations of heirs with support or assistance.
  • To remove an estate from probate.
  • To keep the details of an estate private.
  • To protect assets from excessive taxation upon the grantor’s passing.

Most people will not be subjected to the level of federal tax imposed on Prince’s estate.  Currently, estates valued at less than $5.45 million for individuals or $10.9 million for married couples are not taxed by the federal government. That does not, however, mean an estate plan is unnecessary. Some states do impose inheritance or estate taxes. In addition, prior to death, a testator can designate who benefits from their estate and how. Post-death, that option is no longer available.

Estate planning preserves wealth, as well as assets, ensuring that the only parties who benefit are your designated heirs. Why leave that to chance?

Posted in Asset Protection, Beneficiaries, Beneficiary Designation, Distribution of Assets, Estate Administration, Estate Planning, Estate Taxes, Finances, Gifting, Inheritance, Probate, Probate Administration, Tax Planning, Trust Administration, Trusts, Wills | Comments Off on From Prince to Pauper?

Death and Estate Taxes Don’t Take Holidays, Even for Celebrities

A carefully crafted estate plan may have avoided the multi-million dollar battle over Michael Jackson’s estate currently taking place in the U.S. Tax Court.

By disposing of his assets primarily by Will, his estate has been subjected to a myriad of red tape as well as the scrutiny of the Internal Revenue Service. Maybe, as his attorneys have argued, his estate had no value, justifying a simple Will. However, the IRS clearly feels otherwise. I would argue that much of the hoopla over estate taxes could have been avoided with proper planning.

In California, an estate can wind up in probate for two reasons, to settle a testator’s estate as set forth in a Will, or to determine the appropriate distribution of assets should someone die without a Will. Typically, an executor is appointed by Will or by the court. That person inventories and then values assets, and pays outstanding bills and obligations, such as taxes. Only then can the estate be distributed to heirs.

The valuation of an estate, however, becomes more difficult when a celebrity is involved. Under California’s Celebrities Rights Act, the publicity rights of a celebrity are property and can be bequeathed to designated beneficiaries. Publicity rights may consist of a deceased celebrity’s likeness, photos, voice, or works. After the celebrity’s death, his or her heirs are entitled to the proceeds generated from the use of those rights. Sometimes, a celebrity’s likeness may be used in advertising, while his or her works could be used in anything from a movie or theatre production to a musical performance by other artists.

Copyrights, trademarks, and patents—intellectual property, all have continuing value beyond death. For estate tax purposes, the value of those assets at the time of the owner’s death is critical. It could have a financial impact on the total value of an estate, as well as state and federal tax liability.

The dispute between the executors of Michael Jackson’s estate and the U.S. Internal Revenue Service (IRS) points to the difficulty of valuing a celebrity’s intellectual property rights. The executors claim that at the time of his death, Michael Jackson’s reputation was so damaged that the value of his intellectual property was $2,105. However, the IRS initially set the value at more than $434 million. It has since reduced that value to $161 million, but the tax implications are still pretty extreme.

The IRS is arguing that the impact of his death upon the value of the estate should also be considered. Jackson’s estate has benefited from a use of his image and works since his death. For example, Box Office Mojo reports that the documentary, This Is It, grossed more than $261 million worldwide, while Cirque du Soleil’s Michael Jackson ONE grossed more than $100 million just in 2013. There is no question licensing deals and royalties from the use of his music and his image since his death have been lucrative. However, the real question is whether those post-mortem earnings should be included in his estate for estate tax purposes.

Generally, the valuation of an estate occurs at the time of death. The IRS seems to be claiming that the licensing potential post-death actually existed at the time of Michael Jackson’s death and therefore, must also be included in the value of the estate.

The outcome of this case could have significant implications for the right of publicity for other celebrities. If the IRS is permitted to use post-death earnings as part of the estate valuation process, what will prevent them from pursuing existing high-earning celebrity estates? This could be one of those ‘once in a lifetime cases,’ as some legal experts claim, or it could strike a blow to those celebrity estates that through savvy marketing, found a way to increase the value of a celebrity’s intellectual property after death.

The Michael Jackson case makes it more important than ever for those whose estates may profit from their fame after death to plan ahead and get their ducks in a row. An estate planning attorney can craft a strategy for not only protecting intellectual property rights upon death, but also minimizing estate tax liability.

For example, placing intellectual property rights in a trust can minimize estate taxation, as well as ensure that any profits from those rights benefit intended heirs. The right kind of trust takes property out of the estate, which means it is not subjected to probate and is outside the reach of the IRS. Only the earnings distributed to the heirs are taxed, but as income, which is a better result than subjecting the entire amount to estate taxes.

It is a bit surprising that Jackson’s intellectual property was not placed in a trust for the benefit of his children. By subjecting those rights to probate and estate taxation, the value to his heirs will be substantially reduced.

Perhaps he thought he had more time to address his estate planning concerns and properly provide for his children after death. Unfortunately, as we all know, when death knocks on your door, it doesn’t ask whether you have an effective estate plan in place. Death has its own timetable and the only thing you can do is be prepared.


Posted in Asset Protection, Baby Boomers, Beneficiaries, Beneficiary Designation, Distribution of Assets, Estate Administration, Estate Planning, Estate Taxes, Finances, Gifting, Inheritance, Probate, Probate Administration, Trust Administration, Trusts, Wills | Comments Off on Death and Estate Taxes Don’t Take Holidays, Even for Celebrities

Worth Consideration: Corporate Trustees

A trustee of a trust must carry out the terms of the trust and safeguard trust assets for the beneficiaries’ benefit. A trustee can be one person, multiple people, or a corporate trustee such as a bank trust department or trust company with employees who help manage and grow the trust assets.  Whether or not you should appoint a corporate trustee depends on various factors including the type of trust you are establishing, the complexity of administration (including tax concerns), and family dynamics. Here are some general reasons why a corporate trustee is worth considering:

  • A Practical Trustee Choice
    A corporate trustee or co-trustee is a practical choice if you are elderly and have no one you can trust to take care of your financial affairs, have no children or other trusted relatives capable of serving as trustee (or you don’t want to burden them), or live far away from the person you would otherwise name as trustee.
  • Avoiding Arguments
    If you worry your estate plan may cause hostility among beneficiaries and family members, appointing a corporate trustee as trustee or co-trustee may be wise since a corporate trustee can be an unbiased trustee removed from family drama.
  • Experience
    Corporate trustees generally have more experience in managing trust assets then most individual trustees and, unlike family and friends who have their own busy lives, manage trusts professionally! Further, corporate trustees are motivated to help your assets grow and may be a better choice than an inexperienced or reckless relative.
  • Corporate Trustee as Co-Trustee
    One option is having a relative or corporate trustee work as co-trustees. This gives you the professional benefits of a corporate trustee and personal involvement of someone you know and love.
  • Keep Control
    Many people fear they will lose control if they appoint a corporate trustee. However, if the trust is properly drafted, you or your beneficiaries can change your corporate trustee at any time if you or they are unsatisfied.
  • Held to a Professional Standard
    A trust is a legally binding document. Although an individual trustee can be sued and removed by a court, a corporate trustee has a professional duty to follow the terms of your trust during your lifetime and after your death.
  • Bundled Services, One Fee
    Corporate trustees do charge a fee for their services. You will want to establish what fees a corporate trustee charges before engaging a corporate trustee. However, many corporate trustees include investment management, tax planning, and tax preparation services in their fees. Depending on the size and complexity of your trust, paying a corporate trustee may be well worth it.
  • Security of Assets
    Trust assets managed by a corporate trustee are fairly secure because corporate trustees are required to keep trust assets separate from all other bank or company assets and guarantee assets against fraud and theft. Trust assets cannot be loaned out by the bank, mixed with the corporate trustee’s own assets, or used to satisfy institutional creditors.

Questions to Ask A Potential Corporate Trustee:

If you can, talk to several corporate trustee candidates before selecting one. Ask the following questions:

  • How long has the trust department been in business?
  • How many trusts do they manage?
  • What is the minimum and average size of the trusts they manage?
  • How much experience does the trust department employees have managing trusts?
  • What are their fees for trust management? What services are included?

Remember, a corporate trustee is not right for everyone. If your trust is fairly simple, you may be fine being your own trustee or having a family member or friend you trust step in for you when you can no longer manage your own affairs. However, if your estate is more complicated or you doubt your relatives’ capabilities or intentions, you may wish to consult with Kirsten Howe and consider whether appointing a corporate trustee as trustee, co-trustee, or investment advisor is appropriate

Posted in Advance Directives, Asset Protection, Baby Boomers, Distribution of Assets, Estate Administration, Estate Planning, Finances, Trust Administration, Trust Bank Accounts, Trusts, Wills | Comments Off on Worth Consideration: Corporate Trustees

Don’t Neglect The Small Stufff

The most frequent fights upon the passing of a parent are not about the money, but about the objects that have sentimental value; your mother’s wedding ring, the family bible that has been passed down for generations, or your grandmother’s quilt.  These are objects that may have very little financial value, but are filled with meaning and memories, and are irreplaceable in the eyes of your family.

You can’t save your family from the grief and pain that comes with the death of a parent, but you can avoid fights and hurt feelings that can accompany the distribution of personal belongings by creating a Personal Property Memorandum.  This is a document in which you name the particular gifts you would like to give to specific people (the coin collection to your nephew, the antique dolls to your sister).

A Personal Property Memorandum is easy to create, and our firm provides each of our clients with one. The Memorandum is a template on which you list each piece of property you wish to distribute, and the person who is to receive the item.  Our firm also takes care to mention your Personal Property Memorandum in your trust, which ensures that your personal representative is aware of the memorandum and can carry out your wishes appropriately.

Don’t make the mistake that so often splits a family down the middle.  When you take care of the big documents in your estate plan, don’t neglect the small stuff.

Posted in Beneficiaries, Beneficiary Designation, Digital Assets, Distribution of Assets, Estate Planning, Trust Administration, Trusts | Comments Off on Don’t Neglect The Small Stufff