The 2006 version of Form 706 asks if decedent ever transferred an interest in a closely held entity to certain trusts that are in existence at the decedent’s death. (Part 4, Question 12e). Be careful in looking for technical ways to avoid this question. One way around the question would be to terminate the trusts before the client’s death. But that is not practical in many situations. If the planner is “too clever,” the IRS may say the planner is being misleading and allege a Circular 230 violation. Even if the planner could avoid the current question, the IRS can change the form in the future in reaction to clever plans to avoid the question.

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.

Most of us have heard that Probate is something to be avoided.  Simply put, Probate is the legal process by the means of which the court system oversees the administration of your estate when you die.  It supervises the payments of your debts and makes sure that your assets are distributed according to your Will, if you have one, or, if you don’t, then according to the law of intestate succession of the particular state in which you reside.

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.

To begin a probate in California, someone files a petition for probate so as to be appointed either as the executor or as the administrator. In California the word “Executor” is used when there is a Will and the word “Administrator” is used when the someone dies without a Will.

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 initial filing fee paid to the California Superior Court to open a probate and file a petition for probate  is $320.00 for California probate matters.

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.