Because of the gross negligent inaction of Congress in 2009, there is temporarily no Estate Tax in 2010.  Those of us watching this issue would never imagined such a thing.  Throughout 2009 multiple bills were proposed in the House and the Senate, the latest simply extended 2009 law but none were ultimately debated nor passed.

Why is this so unthinkable? Because of the consequences!  How many people are terminating their existence for the benefit of their heirs?  Worse yet, how many 90 year old grandmothers are being discovered in the morning, deceased, with a pillow next to them?

According to existing law (no action by Congress necessary), the Estate Tax will return in 2011 at a 55% rate for all property valued in excess of $1 million.  Previously, the rate applied to all property value in excess of $3.5 million. What does that mean?  It means that a far greater amount of people will encounter the Estate Tax.  If a married couple executed a Living Trust and/or Will, their Estate Tax exemption will effectively double to $2 million at the second death. There is no Estate Tax for death transfers made to a spouse, if that spouse is a U.S. citizen.

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(a) The relationship of parent and child exists between a person and the person’s natural parents, regardless of the marital status of the natural parents.

(b) The relationship of parent and child exists between an adopted person and the person’s adopting parent or parents.

California Probate Code Section 6452 says that if a child is born out of wedlock, neither a natural parent nor a relative of that parent inherits from or through the child on the basis of the parent and child relationship between that parent and the child unless both of the following requirements are satisfied:

(a) The parent or a relative of the parent acknowledged the child.

(b) The parent or a relative of the parent contributed to the support or the care of the child.

“When a revocable trust or any portion of a revocable trust becomes irrevocable because of the death of one or more of the settlors of the trust, or because, by the express terms of the trust, the trust becomes irrevocable within one year of the death of a settlor because of a contingency related to the death of one or more of the settlors of the trust, the trustee shall provide a true and complete copy of the terms of the irrevocable trust, or irrevocable portion of the trust, to any beneficiary of the trust who requests it and to any heir of a deceased settlor who requests it.”

Here is an excerpt of her article:

“How to Avoid Probate Litigation

“Don’t do things that could cause serious legal consequences without first discussing them with legal or other advisors. Come in for a “check up” on a regular basis and be prepared to discuss every issue and concern. Follow through on necessary “homework” such as account titling and beneficiary designation matters (see above). Plan ahead for possible mental incapacity by having the appropriate documents in place. Make sure the persons appointed to fiduciary positions are completely trustworthy and responsible.

“If a nonstandard estate plan is being implemented, use stronger techniques (such as a funded living trust) and additional provisions (such as a “no contest” clause). Consider creating a “will wall”: a series of wills executed over a lengthy period of time, designed to make it undesirable for a relative who the client wishes to “cut out” (or treat less favorably) to contest the will, so that if the last will is successfully contested, the contestant will still have to contest the prior will, which, through advance planning, would have been prepared to provide even less generous gifts to the contestant than the last will (and so on).

“In discussions with family members, the client should explain the reasons for the plan being implemented, although the client will need to be careful to state the reasons in a way that is calm and rational (“incendiary” statements will only add fuel to the fire and could be detrimental in a will contest).

“Not all probate litigation can be prevented, of course, but a large portion of probate litigation can be prevented by good planning. Good planning is what estate planning is all about.”

The IRS Estate Tax page provides further information concerning the estate tax. Covered are topics including:

Frequently Asked Questions on Estate Taxes Gift TaxFrequently Asked Questions on Gift Taxes

Filing Estate and Gift Tax Returns

Forms and Publications – Estate and Gift Tax

Publication 950, Introduction to Estate and Gift Taxes

What’s New – Estate and Gift Tax

Once you have accounted for the Gross Estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your “Taxable Estate.” These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify.

After the net amount is computed, the value of lifetime taxable gifts (beginning with gifts made in 1977) is added to this number and the tax is computed. The tax is then reduced by the available unified credit. Presently, the amount of this credit reduces the computed tax so that only total taxable estates and lifetime gifts that exceed $1,000,000 will actually have to pay tax. In its current form, the estate tax only affects the wealthiest 2% of all Americans.

Most relatively simple estates (cash, publicly-traded securities, small amounts of other easily-valued assets, and no special deductions or elections, or jointly-held property) with a total value under $1,000,000 do not require the filing of an estate tax return. The amount was $1,500,000 in 2004 and 2005. For 2006 through 2008, the amount is raised to $2,000,000.

This new question applies retroactively to all transfers made by decedents filing the new Form 706. This question highlights the desirability of reporting sales of discounted interests in closely-held entities on a gift tax return. Eventually the IRS will learn about this transaction.

Recognize that the question only applies to transfers to trusts and not to transfers to individuals.

For decedents dying between 12/31/06 and 1/1/08, the new Form 706 (dated September 2007) makes several additional changes including the following: (a) The instructions on the reverse side of Schedule F lists detailed information that must be supplied to support any valuation discounts of assets listed on Schedule F; (b) any foreign account for which the decedent has an interest or signature authority must be disclosed (Part 4, new question 14); and (c) any private annuity being received by the decedent must be disclosed (Part 4, question 15).

Completing this form can be highly complex. If you need a referral to a qualified tax return preparer experienced with preparing Form 706, Mitchell A. Port can provide tax help.

Why is Probate to be avoided?  Well, first of all, it can be very expensive.  Legal and Executor fees and other costs have to be paid before your assets can be distributed to your heirs.  Normally, the basis for Probate compensation is based on the value of the property in your estate. If you own a residence or other real property, this means that Probate fees can be quite high.  Moreover, if you own property in other states, your heirs could face multiple Probates each one according to the laws of that state.  Another disadvantage of Probate is that it usually takes time to complete the court process — anywhere from 9 months to 2 or 3 years, but sometimes, much longer.  During this period of time, assets are typically frozen so that nothing can be distributed or sold without a court order and or Executor approval.  Distributions or family allowances are sometimes difficult to obtain.  Another disadvantage is that Probate is a public process so any “third party” can have access to the Probate records and see what property the decedent owned or who their creditors are.  This process can be an open invitation to heirs to contest the Will and can expose the heirs to unscrupulous solicitors.  In short, your family loses control because the Probate process determines how much it will cost, how long it will take and what information is made public.

From the foregoing, it is easy to understand why most knowledgeable people attempt to avoid the Probate process by setting up and putting in place a Living Trust.  A Living Trust is a legal document that is, hopefully, prepared by a competent attorney, that is similar to a Will that contains your instructions for what you want to happen to your property when you die.  However, unlike a Will, the Living Trust eliminates the Probate process because if your Living Trust is properly funded, the Trust (which you control) actually owns your property and continues on in spite of your death.  Accordingly, there is nothing for the courts to control when you die or become incapacitated.  The concept is relatively simple and most of the time it works to keep you and your family out of the courts.

However, a few years ago, I had some clients come in to me upon the death of their father thinking that the Probate process would be avoided because their father had purportedly set up a valid Living Trust.  They brought the Trust document to me for inspection and upon review I concluded that although the document was not a legal work of great art, it would probably suffice to get the job done and have the property divided equally among the three children as the father desired.  The father didn’t consider himself that wealthy, but he did own a residence free and clear in Southern California and had managed to save a few hundred thousand dollars because of his retirement and a few other investments.  The father had gone to some sort of a trust mill legal office that had advertised Living Trusts and Wills for a very nominal fee.  The children had encouraged their father to take care of his estate and to set up a Trust and had recommended that the father make an appointment with a competent attorney.  Unfortunately, in an effort to save a little money, the father had decided to utilize the services of the so-called legal shop advertizing the nominally priced Wills and Trusts.

Now comes the real bad part.  While it is true that the father had attempted to set up a Living Trust, what had not happened is that the Trust was not funded.  The legal shop who had prepared the Trust did not properly supervise the funding of the Trust — that is the re-titling of the father’s assets into the name of the Trust.  Moreover, there was no indication in writing of what the father intended to place into the Trust.

Accordingly, the wishes of the children and also the father to avoid Probate were thwarted because the Trust wasn’t properly funded.  Therefore, the children had to open up a Probate and go through the expense, inconvenience and time consumption of this sometimes complicated court process.  Moreover, the father’s ex-wife (not the mother of his children), then found out about the Probate and attempted to make a claim on the assets therein.  Fortunately, we were able to defeat her attack, but it cost money and additional time.

Well, what is the lesson to be learned?  First of all, make sure that when you do your Estate Planning, you employ a competent attorney who has experience and the necessary qualifications to draft the proper instruments and see to it that the Estate Planning structure is properly implemented.  Moreover, even many so called knowledgeable Estate Planning attorneys fail to make the extra effort necessary to properly fund the Trust.  Remember, that funding the Trust requires a re-titling of assets.  In the case of real estate, this means that deeds have to be drawn up, executed and recorded.  You need to change title on all your bank accounts, stock accounts and other investments.  Where appropriate, beneficiary designations on some assets like insurance need to be changed to your Trust so that the proceeds thereof can be distributed according to your Estate Plan.  Doing things right in the first place saves money, inconvenience and time later on.

Who gets to serve as the Administrator in a California probate proceeding? Depending on a person’s relation to the decedent, the California Probate Code provides that those in the following order of priority are the first ones to be appointed by the probate court:

(a) Surviving spouse or domestic partner.
(b) Children.
(c) Grandchildren.
(d) Other issue.
(e) Parents.
(f) Brothers and sisters.
(g) Issue of brothers and sisters.
(h) Grandparents.
(i) Issue of grandparents.
(j) Children of a predeceased spouse or domestic partner.
(k) Other issue of a predeceased spouse or domestic partner.
(l) Other next of kin.
(m) Parents of a predeceased spouse or domestic partner.
(n) Issue of parents of a predeceased spouse or domestic partner.
(o) Conservator or guardian of the estate acting in that capacity
at the time of death who has filed a first account and is not acting
as conservator or guardian for any other person.
(p) Public administrator.
(q) Creditors.
(r) Any other person.

The filing fee is based on the inventory value of the estate. The filing fee used to be calculated on the estimated value of the inventory and was paid at the time the petition for probate was filed. The filing fee schedule is set by Section 70650 of the California Government Code.

The fee structure that was replaced used to provide that when a probate case was opened:

The fee was $320.00 for estates or trusts under $250,000;the fee was $385.00 for estates or trusts of at least $250,000 and less $500,000;

the fee was $485.00 for estates or trusts of at least $500,000 and less than $750,000;

the fee was $635.00 for estates or trusts of at least $750,000 and less $1,000,000;

Etc….

Now, the fee to file a petition for probate is $320.00 and when the estate closes the estate then pays the applicable filing fee amount based on the actual final inventory prepared during the probate.

So if the estate’s inventoried value is $751,000, the total filing fee is $635.00 and since $320.00 has been paid when the petition was initially filed with the court, the estate will pay directly to the probate court an additional $315.00 before the court will order the estate closed.

Those who file the petition for probate no longer have to advance large sums of money as used to be the case. Now, only $320 is required and later when money is available because the estate is to be closed, any unpaid filing fee will be due from the estate.

California probate law says that if the person who died left property worth $100,000 or less, then the proper person may claim the property without using the probate court in Los Angeles County, Ventura County, Santa Barbara County, Orange County or any other county throughtout California.

Here is what the California Probate Code Sections say to avoid probate:

If the gross value of the decedent’s real and personal property in this state does not exceed one hundred thousand dollars ($100,000) and if 40 days have elapsed since the death of the decedent, the successor of the decedent may, without procuring letters of administration or awaiting probate of the will, do any of the following with respect to one or more particular items of property:

(a) Collect any particular item of property that is money due the decedent.(b) Receive any particular item of property that is tangible personal property of the decedent.

(c) Have any particular item of property that is evidence of a debt, obligation, interest, right, security, or chose in action belonging to the decedent transferred, whether or not secured by a
lien on real property.