Estate Planning for the Recently Divorced: September 2013

Sunday, September 22, 2013

Gifts Under Your Will

We talked about general formalities of Wills, structures of Wills, and different components of Wills. We talked about capacities and other special problems. Let’s get into some of the technicalities of actually giving under your Will. Please be very clear, we are talking about under a Will, not to be confused with giving under a Trust, or intestate rights without a Will.

In older Estate Plans, or perhaps in books or movies, you might hear phrases such as “gift” or “devise”, which I have used in my blog, but also “bequest” or “legacy”. In the past a devise was a gift of land, and a legacy was a gift of money. From this point on I may use them interchangeably, but will try to use gift or devise, as those are the most common terms today.

Probate Code §21117 recognizes 6 classes of gifts or devises. There are reasons to be aware of these specific classifications, such as which carry interest with the gifts, or which are subject to abatement in order to satisfy expenses of the estate, or maybe accrue interst, or even gain income from the gift, but we will not review all of these at this time. Let’s start with some definitions under the Probate Code.

Specific Gifts – is the transfer of specifically identifiable property – examples could include, my car, my collection, or maybe my house located at 10 Elm Street. PC §21117(a). A specific gift carries with it any permissible income earned after death, less any attributable expenses, from the time of death until the close of administration of the estate. As taxes may be a huge expense and exposure, make sure to consult with a tax advisor, whether making the Estate Plan or when receiving such gifts.

General Gifts – is a transfer from the general assets of the transferor that does not give a specific property. PC §21117(b). An example of a general gift might be a certain amount of money, but it could also be general items like, “my stock in X corp.”, or “my farm animals”, or even “all my property”

General Pecuniary Gifts – is a pecuniary gift within the meaning of PC §21118. PC §21117 (d). This is a general gift of money. $10,000 to my friend Fred. This can also bear interest.

Demonstrative Gifts – is a general gift that specifies the fund or property from which the transfer is to be primarily made. Commonly, this could be a gift of $1000 form my Bank of America account, or $1000 from the sale of Ford Stock. PC §21117(c). This differs from other gifts, because if the source of funds no longer exists, unlike a specific gift, it could be satisfied from other sources.

Annuities – is a general pecuniary gift that is payable periodically. PC §21117 (e). An annuity must be a certain or knowable amount to be paid over time. A gift of $1000 per month, for life, is a classic annuity payment. This differs from a gift of income, proceeds or a percentage. The prime distinction is that an annuity is a fixed and knowable amount paid periodically, whereas the gift of income is contingent upon making income. An annuity may draw from an express source, or if that source proves inadequate, there may be rights to draw upon other assets in order to satisfy the annuity.

Residuary Gifts – is a transfer of property that remains after all the specific and general gifts have been satisfied. PC §21117 (f). This is the catch all. Whatever is left over after all the other gifts have been satisfied, can go by the residuary gift.

Next time we will talk about conditional devises, or gifts with strings attached. In the meantime, I hope you will review your Estate Plan with you're “A” Team, or at least begin to seek out an Estate Planning Attorney to start this process. Stay tuned for future blogs. However, if you have any questions, feel free to respond below, or if you are interested in learning more about an Estate Plan, Wills, Trusts, Advanced Healthcare Directives, or Divorce, Custody, Visitation, Child Support, Spousal Support, Property Division, Modifications, Remarriage, or Pre-Nuptial Agreements, please contact me at please contact me at fbegun@gmail.com, or through my other websites, www.fcbegun.com, or www.linkedin.com for Fred Begun.

Sunday, September 8, 2013

You Gave Up What?!? – The Disclaimer

When someone passes, let’s be honest, we mourn the loss, and then get in line with our hands out, to get what’s coming to us. While an Estate Plan can be created with certain right and benefits in mind, facts change, needs change and taxes change, such that it might be prudent to give up the gifts from a Will. This is done through a “Disclaimer”. In this day and age of a weird economy, this may sound silly, but there can be really good reasons. I plan on having a series of blogs just on tax and Estate Planning very soon from a contributing CPA. We are going to talk some tax issues here, so just roll with me. That said, let’s start with some mechanics of the process.

A Disclaimer is any document the declines, refuses, denounces or disclaims any interest that would otherwise be taken by a beneficiary. PC §265. These rights, procedures and formalities are all outlined in the Probate Code, but we will not walk through the technicalities here. Suffice it to be said that there are strict formalities that must be followed as to writing and timing of the Disclaimer. It should be noted that the Disclaimer must be done before the beneficiary receives any benefit from the gift to be disclaimed and may not direct the advancement or other recipient of the gift. Once done, a Disclaimer is finally binding on party passing up the gift.

Unless the creator of the gift provides for a specific disposition in the event of a Disclaimer, the interest Disclaimed shall descend or be distributed as if the Disclaimant predeceased. PC §282. As you may no doubt be thinking, how does this affect who gets what under the inheritance and representation discussion a few weeks ago in the “Come ‘n’ Get It” blog. Again, with a variety of complexities, the Probate Code address these permutations in various code sections, so please consult with an attorney before acting on any Disclaimer.

Back to the main question, why would anyone pass up a gift under a Will? Actually, there can be several good reasons, but the primary reason may be taxes. Every year, the Federal Estate Tax level changes, and the pertinent Exclusion can be significant. Congress couldn’t even get its act together in 2010, when the Estate Tax was 0. Other years, the Exclusion has been $10,000,000, meaning that there are no taxes on the first $10,000,000! I believe the current Exclusion is $5,000,000 but again consult with your CPA, and be aware of the variability of rates when you create your Estate Plan.

How would this work? An example, taken from the LexisNexis treatise, California Wills and Trusts, would be as follows:

Husband has an Estate of $3,000,000. Wife has nothing. Husband’s will leaves all of his Estate to Wife, but provides that any interest Wife may disclaim will be distributed to the trustee of a “Disclaimer Trust”. Wife will have the lifetime income interest in the trust. Husband and Wife’s children are the remainder beneficiaries. Husband dies in 2004 when the applicable Exclusion was $1,500,000. Wife was the surviving spouse. What should Wife do?

Normally, all of the $3,000,000 Estate could pass to Wife free of Estate Tax since all of the Estate could qualify for the Marital Deduction. However, on Wife’s death, all of her Estate would be subject to Estate Taxation. Assuming Wife dies in 2005, and the Estate of $3,000,000 is still intact, in 2005 the applicable Exclusion amount was $1,500,000. The Estate Tax was about 46%. Therefore, $1,500,000 of the $3,000,000 Estate is excluded, leaving $1,500,000 subject to tax at 46%, creating a tax bill of about $695,000!

However, by using the Disclaimer, Wife could make her Widow’s election to take her $1,500,000 and leave $1,500,000 in the Estate. Then Wife could Disclaim the remaining $1,500,000 at Husband’s death, which would pass into the Disclaimer Trust, which would pass free of taxes upon Wife’s death. Wife has the benefit of income from the Trust during her life and the family is saved from paying about $695,000 in Estate Taxes.

This one example of how a Disclaimer may save money in the overall Estate Plan. I touched on several different tax and planning concerns, Estate Taxes (Federal & State), Tax Exclusions, Marital Deductions as well as Elections and Disclaimers. These are all separate technical concepts. We have talked about Elections and Disclaimers. We have not talked about Estate Taxes (Federal & State), Tax Exclusions, Marital Deductions. These will be discussed in special blogs in the near future. Please be aware that each of these concerns and concepts will have different impact on each and every estate. Also, for smaller estates, they may be of no concern, which is why not everyone needs a complex Estate Plan. However, there are countless reasons to consult with an Estate Planning attorney to determine which of the many Estate Planning tools can be used by you, your family and friends in order to retain as much wealth as possible while sustaining your own financial health.

I hope you will review your Estate Plan with you're “A” Team, or at least begin to seek out an Estate Planning Attorney to start this process. Stay tuned for future blogs. However, if you have any questions, feel free to respond below, or if you are interested in learning more about an Estate Plan, Wills, Trusts, Advanced Healthcare Directives, or Divorce, Custody, Visitation, Child Support, Spousal Support, Property Division, Modifications, Remarriage, or Pre-Nuptial Agreements, please contact me at please contact me at fbegun@gmail.com, or through my other websites, www.fcbegun.com, or www.linkedin.com for Fred Begun.

Sunday, September 1, 2013

Married Persons Property Problems

While this blog is directed at Estate Planning for the Recently Divorced, we are creatures of habit. If you were married, you will probably marry again. Even so, you might be reading this blog while going through a divorce, or even if you are happily married, because I am trying to give everyone some good information. Under any of these situations, in California, we need to understand several property concepts, including: Separate Property, Community Property, Quasi-Community Property and how these may affect you ability to plan and give.

Let’s start with some definitions. Assuming you are single, and have never been married, then Separate Property is whatever you have. However, if you are or have been married, then you need to know that Separate Property of a married person includes all property owned by that person before marriage, all property acquired by that person during marriage by gift, bequest, devise or descent, and the rents, issues, and profits from any of the aforementioned property. Family Code §770. Community Property is all property, real or personal, wherever situated, acquired by a married person, during marriage, while domiciled in California. Family Code §760 and Probate Code §28. You may have noticed that Community Property had an added layer of time, status and location, that is, being married while in California. This distinction is important when understanding the third property type, Quasi-Community Property, which is all property, real or personal, wherever situated, acquired by either spouse, during marriage, while domiciled other than in California, which would have been considered community property if they had been domiciled in California OR in exchange for real or personal property, wherever situated, which would have been community property under the code. Family Code §125 and Probate Code §66. These classifications sound more difficult than they are, but are very much driven by actual facts of date, time, location and source of funds. This must be determined in order to decide if you have any power or control to include these in your Estate Plan.

Obviously, as a single person, never married, this is a non-issue. As a married person, you and your spouse should know and discuss these questions in developing either a single Estate Plan or compatible separate Estate Plans. As someone who was married and is now recently divorced or coming out of a divorce, you must be clear and careful that all property disposed of, allocated, or divided through the divorce has gone through this filter, and is properly re-titled so that you can make a clear Estate Plan.

So, what difference does property type make? A married person can have Separate Property. A married person may convey the Separate Property any way they want, and without consent from their spouse. FC §770(b). Equally, they have complete discretion and full testamentary power over their Separate Property. PC §6101. Additionally, a married person may “transmute” or convert their Separate Property into Community Property. FC §850. This can be a part of your Estate Planning process or equally a mistake if not fully understood.

As for Community Property, as well as Quasi-Community Property, both spouses have a present, existing and equal ownership interest during their marriage. FC §751. While both spouses are living, they each have an equal and undivided one-half interest in that property. However, while this is a joint interest in the property, upon the death of either spouse, one-half of that community property automatically belongs to the surviving spouse and the other half belongs to the deceased spouse and may be disposed of under the deceased spouse’s will. PC §100 and PC §6101. This is a critically important point, as the issue of taxes and basis value create the reasoning behind the Estate Plan to be discussed in future blogs.

So, while you have testamentary capacity over all of your non-transmuted Separate Property, as well as half of the Community and Quasi-Community Property, what happens if you try to Will-away more than your half? You trigger the Widow’s Election. If the first spouse to die tries to dispose of more than their Separate Property and their share of the Community and Quasi-Community Property, and in doing so adversely affects the surviving spouse’s property rights, then the surviving spouse is put into a situation where to they cannot simultaneously take under the will and take their share. It may sound unusual, but the surviving spouse is in an all or nothing situation. Take your automatic property rights or take through the will. There is no partial or picking and choosing. This is based upon old doctrines of law, which we won’t get into here.

What is the survivor to do? The surviving spouse, widow or widower, can consent to the excessive gifting, to the survivor or away from the survivor. The survivor may elect to take their right in property. This is the election, to agree or not to agree. The reasons and ramifications are too complex for this blog right now. Suffice it to say that there are control reasons, such as family business or property to move to the next generation, there may be control reasons to provide for management and income for a surviving spouse, and also issues of probate, tax and overall financial impacts. Rather than forcing this dilemma through a Will as the sole Estate Plan, similar and less stressful results may be accomplished through a more routine Trust mechanism.