Property Tax Considerations in Estate Planning

Property taxes are an important, and often overlooked, consideration in estate planning and estate administration, particularly in the State of California. Many people focus on federal estate tax considerations, with perhaps some concern for gift, generation-skipping transfer and income tax consequences. It isn’t until a client receives a large property tax bill indicating that their property has been reassessed for property tax purposes that it becomes apparent that there is a problem.

How California Property Taxes Work

In California, annual property taxes are calculated as a percentage of a real property's assessed value. Assessors may increase a real property's assessed value by only 2% each year unless there is a “change in ownership”. This has worked in favor of property owners because historically, real property values have increased at a rate greater than 2% per year.

When a “change in ownership” occurs, it triggers a property tax reassessment, and allows the County Assessor to adjust the assessed value of the real property to the current fair market value. The “change in ownership” rules are very complex and confusing. Property owners often inadvertently trigger a reassessment, which can cause significant increases in property taxes each and every year thereafter. This is one reason why you should never attempt to transfer an interest in real estate without first consulting an attorney – such a transfer could lead to a significant increase in property taxes, not to mention other problems.

Beware of Property Tax Issues in Business Succession Planning

If you own a business and have real property titled in the name of your business, you must be even more careful. A transfer of even a small interest in a business, even 1%, can trigger a reassessment of all of the California real property owned by your business. In addition, if you fail to report an event triggering a change in ownership in a timely manner, you face substantial penalties from the State Board of Equalization.

Experienced Estate Planning Attorney in San Diego

Careful consideration should be given when choosing an estate planning attorney, because it is easy to overlook property tax and other issues. Hiring the least expensive attorney to do your estate plan could result in increased property taxes for as long as you own your property.

In next month’s blog entry we will take a close look at property tax issues that arise in probate and trust administration. If you have any questions regarding estate planning, contact the Casiano Law Firm for assistance.

How Much Will it Cost You to Die Without an Estate Plan?

Occasionally we will meet with a potential client who questions whether the cost of estate planning is really justified. The answer to that question involves consideration of several different factors, including planning for the possibility of future incapacity, tax considerations, and whether probate administration will be required. This blog entry will focus on the cost of probating an estate in California. Generally speaking, if a person dies with assets titled in their name, subject to some exceptions for a very small estate, probate administration will be required.

Probate refers to the process where the court oversees the administration of a deceased person’s estate. The purpose of probate administration is to ensure that any final bills and expenses of the decedent are paid, including any taxes owed, and any claims by creditors settled. Probate is a costly, time consuming process. Probate fees in California are high, and generally fall into three categories:

• Court costs, including court fees, publication fees, surety bond fees, probate referee fees, certification and recording fees;
  
• The personal representative’s fee (the fee paid to the administrator of the estate for his or her services); and the
  
• Attorney’s fee for his or her services
  

The fees paid to the personal representative and the attorney are set by law and computed upon the gross value of the estate as follows:

• 4% on the first $100,000
  
• 3% on the next $100,000
  
• 2% on the next $800,000
  
• 1% on the next $9,000,000
  
• ½% on the next $15,000,000
  
• “reasonable” compensation on the excess over $25,000,000
  

It is important to note that the gross value of the estate is based upon the full value of the assets of the estate, not taking into account any mortgages, debt or other loans or encumbrances on the asset. For example, the deceased may have a home with a value of $1,000,000 and a mortgage of $975,000. The fee to probate the home would be based on the full value of $1,000,000, not the $25,000 net value of the property ($1,000,000-$975,000).

As you can see, failing to create an estate plan can be costly in terms of probate administration fees. Planning in advance will allow your beneficiaries to avoid both the cost and time delay associated with probate. If you have any questions regarding estate planning or probate, contact the Casiano Law Firm for advice and assistance.

Estate Administration in 2011

The new tax law provides an option for the executor of an estate of a person who died in 2010 to select between the “repeal” regime of 2010 or the new “taxable” regime as it applies in 2011 and 2012. What exactly does this mean for an estate? The executor has a choice between (i) avoiding all estate taxes, regardless of the size of the estate, but receive only a limited stepped-up basis for capital gains tax purposes; or (ii) take an unlimited stepped up basis, but the decedent’s estate will be subject to estate tax to the extent it exceeds $5 million, excluding amounts passing to a surviving spouse or a charity.

For an estate less than the exemption amount of $5 million, or if the amount of the estate over the exemption passes to a trust for the surviving spouse, the executor will probably opt for the “taxable” regime in order to take advantage of the unlimited step up in basis. Even if the estate is significantly more than $5 million, if the excess amount is passing to the surviving spouse or in trust for the surviving spouse, there will be no estate tax owed due to the marital deduction; the estate tax will be deferred until the death of the surviving spouse.

However, if the surviving spouse’s estate is likely to be much higher than the $5 million new estate tax exemption, it makes sense to avoid the 35% estate tax under the taxable regime, even though it means the estate will only receive a limited stepped up basis. The larger the estate, the greater the incentive to elect for the repeal regime to avoid any estate taxes.

The new 2010 tax act makes significant changes to gift, estate, and generation-skipping transfer taxes which are complex and confusing. We will continue to analyze the 2010 tax act and share with you how it may impact your estate. Thanks for reading our blog. If you have any questions, or need assistance in an estate planning, probate or trust administration matter, contact the Casiano Law Firm.

Review Your Estate Plan in View of Recent Estate Tax Changes

After much uncertainty and speculation regarding the future of federal estate taxes, on December 6, 2010 President Obama announced a tentative deal had been reached with Republicans to extend the Bush area tax cuts. Effective January 1, 2011, estate taxes are once again in effect, but at an exemption of $5 million for an individual, or collectively $10 million for a married couple. The applicable estate tax rate is 35%. This exemption and estate tax rate will be in effect for two years.

Tax historians note that the new estate and gift tax rates are the most generous since 1931, and provide a unique, yet temporary window for the wealthy to utilize various gifting strategies to pass assets to their children without incurring gift, estate, or generation-skipping transfer tax. This tax break impacts a number of American families. According to the Federal Reserve Survey of Consumer Finances, in 2007, 5.4 American households had a net worth in excess of $2 million.

However, even Americans with no intention of making significant gifts have reason to be concerned about this recent estate tax change, and should have their existing estate planning documents reviewed in light of this change. Many trusts contain what are known as “formula clause” provisions, which tie the amount of a bequest to the applicable estate tax exemption. These clauses were designed to maximize the amount a couple could pass on tax-free. Unfortunately, the current exemption of $5 million is significantly different from that of past years, such as the $1.5 million exemption which was in effect in 2005. Thus, if a spouse dies in 2011 with a $3 million estate and unchanged formula clauses, the surviving spouse may be entitled to nothing outright because all of the assets would pass into a trust.

Over the next few months we will examine the recent tax change in more detail, including how this change could affect your estate plan, and the planning opportunities presented by this change. For a personalized consultation regarding your estate plan, contact the Casiano Law Firm.

Medi-Cal Planning: Special Needs Trusts

In last month’s blog entry we gave an overview of Medi-Cal planning and the factors one should consider when planning for Medi-Cal benefits. In this month’s blog entry we’ll cover Special Needs Trusts and how they can benefit a Medi-Cal recipient.

If the intended beneficiary of a trust is receiving Medi-Cal, SSI, or other governmental benefits, great care must be taken to structure the gift to the beneficiary in such a way that it does not disqualify the beneficiary from receiving continued assistance. Special Needs Trusts, which are sometimes called a “supplemental needs trust”, are trusts that are drafted carefully to ensure that a disabled beneficiary continues to be eligible for government benefits. In a Special Needs Trust, distributions from the trust are designed only to supplement, not supplant or replace, the benefits being received under the trust.

Special Needs Trusts require careful drafting. Distributions must be purely discretionary, with no obligation on the trustee to make mandatory payments to the beneficiary. Special Needs Trusts are often used to protect beneficiaries with permanent disabilities, such as Down’s syndrome, severe autism, or cerebral palsy. These trusts may also be used to shield funds recovered from personal injury litigation or workers’ compensation injuries from disqualifying the beneficiary from receiving Medi-Cal benefits.

The laws concerning Medi-Cal benefits are constantly changing, and it is important to seek the advice of an experienced elder law and estate planning attorney who is readily familiar with any developments in this area of law.

Thanks for reading our blog. If you have questions regarding Special Needs Trusts or would like to learn more about the advantages offered by this type of trust, contact the Casiano Law Firm.

Medi-Cal Planning-An Overview

In past blog entries we have discussed how estate planning documents such as trusts, durable financial powers of attorney and advance health care directives provide a plan in the event of future incapacity. At the Casiano Law Firm, we also focus on planning involving Medicare, Medi-Cal, Social Security, and supplemental and long-term care insurance policy issues as part of our comprehensive elder law representation. This month’s blog will focus on an overview of Medi-Cal planning.

What is Medi-Cal?

Medi-Cal is California’s version of the federal Medicaid program that provides additional health insurance for qualified individuals who are at least 65 years of age, blind, or disabled. Medi-Cal is often used to assist residents in skilled nursing facilities who have exhausted their Medicare skilled nursing home coverage. Medicare covers the first 20 days of skilled nursing home coverage, then requires a co-payment of $137.50 per day for days 21 through 100, conditioned on the patient showing improvement in his or her condition. After 100 days, the patient is converted to “private pay” status where the patient must pay the monthly expense, which averages about $6,300 per month. In contrast, Medi-Cal will continue to pay for skilled nursing home expenses indefinitely, regardless of whether or not the patient shows improvement.

Important Factors to Consider in Medi-Cal Planning

Medi-Cal planning requires a careful and thorough review of your assets, income, and estate planning documents to develop a plan tailored to your unique situation. A comprehensive Medi-Cal plan should consider three important factors:

• Eligibility planning for Medi-Cal benefits;
• Income planning to reduce or eliminate the monthly “share of cost” to be paid by the Medi-Cal beneficiary; and
• Estate recovery planning to reduce or eliminate the recovery of the amount of benefits paid out from the beneficiary’s estate.

Don’t Transfer or Give Away Assets

We are frequently asked by clients if they should simply give away their assets. Do not give away any assets or transfer title to your real property without first consulting with an experienced elder law attorney. Medi-Cal considers certain assets to be exempt for the purpose of determining eligibility, and a special petition or administrative hearing may be used to increase the standard eligibility limit, reduce or eliminate the co-payment, or eliminate Medi-Cal’s ability to recover for benefits paid out under some circumstances. Certain property transfers can have significant tax consequences, and improper transfers can result in the disqualification of a Medi-Cal beneficiary and a significant period of ineligibility for Medi-Cal benefits.

Consult an Experienced San Diego Elder Law Attorney

Medi-Cal regulations are frequently changing and this area of planning requires the assistance of experienced counsel familiar with both elder law and estate planning matters. If you have questions regarding Medi-Cal planning, contact the Casiano Law Firm for a free telephone consultation with an experienced San Diego elder law and estate planning attorney.