JOY OF LAW AVOIDING LEGAL PROBLEMS IN LIFE AND BEYOND Dagmar Halamka

JOY OF LAW

AVOIDING LEGAL PROBLEMS IN LIFE AND BEYOND

Dagmar Halamka

Today’s Topics

• Co-ownership of property via deed• No reassessment of real property taxes upon sale or

transfer of primary residence (proposition 60 and 90) if…

• No reassessment of real property tax in parent-child transfers or vice versa, transfers to trust (funding)

• Exclusion of income tax of $500,000 capital gains• Preservation of assets with various strategies• Wills• Probate• Probate avoiders• Living trust and pour over will• Living trust advantages• Homework assignments

Co-ownership of Property

Co-ownership of Property (Cont.)

Co-ownership of Property (Cont.)

Co-ownership of Property (Cont.)

TENANCY IN COMMON

JOINT TENANCY

COMMUNITY PROPERTY

Community Property

Basic Concept of Community Property:

• Assets accumulated while married and living in California

• Each spouse has a 50% share, can dispose of to other

• No built-in right of survivorship

Separate Property

Separate Property Examples:

• Inheritance or gifts received by one spouse • Assets owned on wedding date

• To preserve Separate Property status, must keep the asset separate

• Separate can become Community Property by commingling

Propositions 60 and 90

No actual reassessment of real property tax upon sale or transfer of primary residence

• May buy or construct a new home of equal or lesser value than your existing home and retain that property tax base value for the new property

Propositions 60 and 90 (cont)

If husband or wife is 55 or older

• Must buy or complete construction of your replacement home within two years of the sale of the original property

Propositions 60 and 90 (cont)

One Time Only Benefit

Propositions 60 and 90 (Cont.)

• Proposition 60 applies L.A. County to L.A County

• Proposition 90 applies if LA County to…• Alameda County• Orange County• San Mateo County• Ventura County• San Diego County• Santa Clara County• El Dorado County

Proposition 58

Proposition 58

No real property tax reassessment in parent-child transfers or vice versa

• Caveat – could incur huge income tax consequences

Internal Revenue Code

Exclusion from income tax of $500,000 capital gains for sale of residence for a husband and wife ($250,000 if single) effective May 7, 1997.

Internal Revenue Code (Cont.)Example:

• Purchase price of home is $300,000 and the present sale price is $810,000• (Presume no improvement)

• Husband and wife exclude from tax $500,000 using capital gain exclusion

• Tax at capital gains rates at 15% for profit

Internal Revenue Code (Cont.)

Example continued:

• Capital gains tax rate (15%) on net profit - basis of $300,000 purchase price + $500,000 exclusion = $800,000

• Sale price of $810,000 - $800,000 = gain of $10,000

Preservation of Assets with Various Strategies

Estate Planning

• Wills (ticket to probate court)• Probate fees are $22,700 for a $500,000

estate• Primary residence values at gross value for

probate fees (no deduction for mortgage)

Will It Fly?

Formalities required

• Sign

• With at least two witnesses• Exception: holographic (handwritten will)

• At least 18

• Testator must know relatives and extent of property owned

About Wills

A NAMING Document

• Names the persons who receive Probate Estate Assets

• Names an executor and a guardian

Applies to Probate Estate Assets

• Not to assets with Probate Avoiders

What Is Probate?

• Probate’s Purpose• To pass “Probate Estate Assets” of a deceased person

to the deceased person’s heirs

• Court procedure required

• Court approves “executor” to “settle the estate” under court supervision

More About Probate

• Concerns raised about probate:• Private matters in public proceeding• Time (approximately 15 months)• Cost• Possible proceedings in multiple states

• One approach: What do I care? I’m gone

Preservation Of Assets With Probate Avoiders

• No probate necessary if estate is under $100,000

• No probate necessary if utilize probate avoider

Probate Avoiders (Cont.)

• All investments with named beneficiaries

• Jointly held personal or real property • (Does not avoid probate on death of second

joint tenant)

• In TRUST FOR (poor man’s trust)

Probate Avoiders (Cont.)

• Living trust and poor over will (a.k.a. revocable trust, a.k.a. family trust)

• Should review every 3-5 years (with expert) or any significant change of circumstances

About Living Trusts

• Also a NAMING document

• It names who receives trust assets• It names a trustee and successor

trustees

• Person creating living trust is called the settlor (or grantor or trustor)

About Living Trusts (Cont.)

• Trustors maintains control during capacity

• Husband and wife can be trustors and trustees

• No reassessment of real property upon transfer to trust

Living Trust• Avoids all probate and related costs – both

financial and emotional

• Completely flexible – can be changed or cancelled at any time

• Lets you keep control, even at incompetency and after your death

• Provides effective pre-nuptial protection

• Avoids problems of joint ownership

Living Trust (Cont.)

• Prevents a conservatorship at physical or mental incapacity

• Preserves privacy – completely confidential

• Can reduce or eliminate estate taxes• Federal estate tax exemption was $5.34 million in

2014 for an individual

• A husband and wife can pass $10.68 million to beneficiaries estate tax-free and with no probate, saving for federal estate taxes and probate fees

Living Trust (Cont.)

• Very difficult to contest

• Minimizes emotional stress on your family

• Prevents unintentional disinheriting

Living Trust (Cont.)

• Allows quick redistribution of assets to beneficiaries

• Distribution to minor grandchildren

• Protects minor children from court-imposed guardianships

• Distribution to spendthrift beneficiaries in trust (i.e. $500 a month)

• Can protect beneficiaries with special needs

Living Trust (Cont.)

• Inexpensive, easy to set up and maintain

• Professional asset management with corporate trustee

• Successor trustee will manage financial affairs if you are unable to do so

Once I Have a Living Trust, What Do I Do With It?

• Funding

• Transferring title to assets• Examples: real estate deed, bank

account, stock• Assets acquired after create living trust

• Warning: Refinancing home

Continued… for Seminar Part B