Category: Protecting Wealth

Tips of the Trade: North to Alaska for an Ante-Mortem Probate.

INTRODUCTION—THE ANTE-MORTEM PROBATE

Nine states have enacted legislation expressly authorizing ante-mortem proceedings to validate a will, a trust, or both.1 The goal of an ante-mortem probate—the Holy Grail—is to obtain an order precluding post-death contests of the validated document, granting it “total invincibility.”2 Although validation proceedings do not result in any disposition of a decedent’s property at the time of the validation, they have become known as “ante-mortem probate” proceedings.”3

An ante-mortem probate to validate a will, a trust, or both, differs from a traditional post-mortem proceeding principally because the person creating the instrument is alive and available to testify about their wishes and demonstrate their capacity. The presence of this key witness should, the
argument goes, eliminate the all-too-familiar situation in which heirs and beneficiaries take advantage of death to make unfounded claims as to the validity of an instrument, usually based on incapacity and undue influence.

An example of the unreliable evidence presented postmortem appeared recently in Levin v. Winston-Levin,4 in which the trial court, “was, to say the least, not impressed with either side.”5 Each claimant lacked credibility and each painted herself as the one loved by the deceased settlor of the trust at issue, “while depicting [the settlor] as distanced from, and distrusting of the other….”6 If the settlor had been willing to attempt to validate his documents in advance, and if the trial could have been held while the settlor was alive, the settlor’s testimony could have improved the evidence and enhanced the reliability of the court’s determinations, even if it may have also caused or exacerbated family discord.

The viability of ante-mortem probate is not free from debate. On one hand, a proponent of ante-mortem probate argues that the procedure is “[a] progressive technique with tremendous potential for improving the estate planner’s ability to assure that a testator’s desires will be carried out upon
death….”7 On the other hand, an opponent of ante-mortem probate argues that the proceeding does not just exacerbate family conflict but, moreover, “[a]ll proposed versions of ante-mortem probate have practical, constitutional, and policy issues that cannot be overcome.”8 One of the constitutional issues that is difficult, if not impossible, to overcome is the need to notify potential heirs and beneficiaries of the proceedings as required by due process.9

A. Ante-Mortem Probate as a Lawyer’s Tool

1. Is Ante-Mortem Probate in California
Possible?

California has not expressly authorized ante-mortem validation of a will, and the authors are not aware of any statute or case that could be the basis for seeking ante-mortem validation of a will in California.

California does not have a statute expressly authorizing ante-mortem validation of a revocable trust. However, California’s statutes and cases suggest that a revocable trust can be validated before the settlor’s death. An ante-mortem trust validation is similar to a declaratory relief action, and California’s probate courts have jurisdiction to grant declaratory relief.10 While the settlor is competent, Probate Code sections 15800 and 17200, together, authorize the settlor or the trustee to petition the court regarding the validity of a revocable trust and its provisions.11 If a trust is irrevocable, a trustee or beneficiary could file such a petition.12

In Conservatorship of Irvine, the Court of Appeal granted a trustee’s petition to determine the validity of a trust amendment during the settlor’s lifetime.13 In Irvine, the court held that a trial court’s general jurisdiction under Probate Code section 17200 to determine the existence of a trust or a trust amendment was not limited to irrevocable trusts.14 In Drake v. Pinkham, the California Court of Appeal held that a beneficiary with knowledge that a settlor’s trust amendment impacting the beneficiary’s interests was executed when the settlor was allegedly incapacitated has standing to challenge the amendment while the settlor is alive and, indeed, a failure to challenge the amendment during the settlor’s lifetime may
bar a post-mortem contest.15

Given these cases and statutes, a California practitioner may be able to cobble together a proceeding that would provide the practitioner’s client with a probate court order confirming a revocable trust that could not be challenged by disgruntled heirs or beneficiaries post-mortem. However, the California path is anything but straight and narrow, and since other states have statutes that expressly authorize the practitioner and the client to grasp the Holy Grail of incontestability for a trust and/or a will, it is worthwhile to pay some attention to those statutes.

2. Ante-Mortem Probate in Other States

As noted above, nine different states have expressly authorized ante-mortem proceedings to validate trusts, wills, or both. This article focuses on the Alaska statute, because, as explained below, it is more expansive than some others, and because Alaska is not that far from California.

3. The Purpose of This Tip of the Trade Article

This article is not designed to argue the merits of antemortem probate. It is designed, rather, to alert California practitioners to the idea that they might be able to validate their clients’ estate plans (and preclude post-mortem contests) under California law or the laws of another state. While California lawyers may not rush to pursue ante-mortem probates, the possibility of doing so in an appropriate case is a valuable tool in the California practitioner’s kit.

B. The Ravet Case—The Sort of Case That Calls for Ante-Mortem Probate

Wealthy San Diego residents Shirley and Emanuel Ravet had three daughters and a son, Gary.16 Gary was a lawyer who “was a party to over 100 lawsuits—some of them filed by him and some filed against him.”17 One infamous case involved a dispute with his health club, Personalized Workout of La Jolla (“Workout”), over membership fees. Gary lost his suit and, in 2003, Workout was awarded $867.

Workout then sued Gary for malicious prosecution, and Gary lost big. The jury awarded Workout $383,654.18 While the malicious prosecution case was pending, Gary engaged in a series of asset transfers that involved his parents and his girlfriend. After Gary lost the resulting fraudulent transfer case, Forbes summarized the result: “Gary Ravet was able to turn the $867 dispute with Workout over the membership fees into an $883,654 judgment against himself, a $383,654 judgment against his mother Shirley and his father Emanuel’s estate, and a $633,654 judgment against his ex-girlfriend….Well done, Gary, well done.”19

After the Workout case concluded, and Gary’s father had died, Gary’s mother restated her trust. As might be expected, the Restatement favored Gary’s sisters. Gary was to receive $250,000 and his sisters were to share the residue.20

Mrs. Ravet’s Restatement named a Delaware institution as Co-Trustee with her. The Co-Trustees promptly filed a petition in the Delaware Chancery Court to validate the Restatement. On February 23, 2012, just two weeks after the Restatement was created, the Co-Trustees provided Gary notice by mail that he had 120 days to contest the trust in Delaware—Gary apparently ignored that first notice and many others.21 Gary filed a contest of the Restatement on July 26, 2012 “while his mother was still alive, and well beyond the 120-day period to contest the trust….”22 Gary did not serve his petition until, December 5, 2012, a few days after his mother had died.23 The Chancery Court determined that Gary’s contest was timebarred.24 The Delaware Supreme Court affirmed February 12, 2015.25

Twelve days after the order, on February 24, 2015, Gary was found guilty of forgery of a deed of trust he recorded in his attempt to avoid the Workout judgment, and the judge let him know that he faced up to four years in prison.26 The next day, Gary committed suicide.27

Cases like Gary Ravet’s do not come along every day, but it is wise for California lawyers to be aware that Delaware and other states offer the possibility of an ante-mortem validation proceeding when it is needed. Unfortunately, Gary’s suicide did not clear up all the questions in the case, including the million-dollar question: “would the Delaware decision have
withstood all possible challenges?”

C. Potential Use of Foreign-State Ante-Mortem Probate Laws by California Attorneys

At the American College of Trust and Estate Counsel (ACTEC) 2020 Annual Meeting, a panel discussed the various state ante-mortem probate statutes, suggesting that the statutes could be available for use by attorneys whose states had not adopted such statutes, as had been done in the Ravet case.28 The underlying theory is that, if the court exercises valid jurisdiction, under the Full Faith and Credit Clause, a judgment valid in one state is valid in another,29 so a judgment barring a post-death contest of a will or trust issued by one state should be valid and enforceable in all other states. Several states have, in essence, declared themselves open for the business of conducting ante-mortem probates. The Delaware statute provides that an ante-mortem proceeding can be initiated by a trustee or co-trustee doing business in Delaware. The Alaska statute is even more expansive. Under the Alaska statute, only an in-state trustee or co-trustee or the settlor (if a trustee or co-trustee is in Alaska) can petition to validate a living trust,30 but any “interested party” can commence an ante-mortem validation proceeding of a will, with no requirement that any person involved in the case must, be domiciled in, or a resident of, Alaska.31

D. Ante-Mortem Will Validation in Alaska32

In Alaska, “[a] testator, a person who is nominated in a will to serve as a personal representative, or, with the testator’s consent, an interested party, may petition the court to determine that a living person’s will is valid, subject only to subsequent revocation or modification.”33 Standing to bring the petition is not limited to residents of Alaska. Thus, it appears that a California testator can bring an ante-mortem petition in Alaska seeking to validate a will executed in California. The statute contemplates such a petition and specifically provides that, if the testator is not a resident of Alaska, venue is “any judicial district of this state.”34

The required contents of an ante-mortem petition to validate a will in Alaska are not surprising.

The petitioner must allege that a copy of the will is on file with the court together with the facts establishing that the will was executed properly.35 The petition must also state the names and addresses of “the testator’s spouse, the testator’s children, the testator’s heirs, the personal representatives nominated in the will, and the devisees under the will.”36 Minor heirs and devisees must be identified.37 (Since the identities of a person’s heirs are determined at death, this notice provision is problematic.) Notice of the hearing on the petition is generally 14-days’ notice by mail.38 The petitioner bears the burden of “establishing prim facie proof of the execution of the will….”39 “A person who opposes the petition has the burden of establishing the lack of testamentary intent, lack of capacity, undue influence, fraud, duress, mistake, or revocation.”40

At the conclusion of the proceeding, the court can determine the will to be valid and “make other findings of fact and conclusions of law that are appropriate under the circumstances.”41 If the court determines the will to be valid, “the will has full legal effect as the instrument of the disposition of the testator’s intent and shall be admitted to probate upon request.”42 The determination is binding on “[a] person, whether the person is known, unknown, born, or not born at the time of [the] proceeding.”43 If a guardian ad litem was appointed to represent minors or unborn persons, the minors or unknown persons are bound “even if, by the time of the testator’s death, the representing person has died or would no longer be able to represent the person represented in the proceeding….”44

If a testator desires to modify his or her will after the court validates it, the testator can do so.45 However, the modification is not protected by the original determination.46 The possibility that a validated document could later be changed, resulting in further litigation (either ante-mortem or post-mortem) suggests that an ante-mortem probate is best employed when the possibility of a later change appears minimal.

E. Ante-Mortem Trust Validation in Alaska

The procedures for the ante-mortem validation of a living trust in Alaska are similar to those for the ante-mortem validation of a will. The key difference is that a trust validation procedure can be filed in Alaska only if one of the trustees is a resident of Alaska or is a trust company or bank that does business in Alaska.47

F. Observations Regarding Ante-Mortem Proceedings

Any attempt to obtain an ante-mortem validation of a will or a trust in California, Alaska, or another state deserves detailed consideration and analysis. Some preliminary questions and observations follow.

What notice is required? Beneficiaries with interests as remote as future contingent interests are entitled to notice.48 Heirs may be entitled to notice.49 How can those beneficiaries be identified and noticed while the settlor is alive? If at the settlor’s death there is a person who ends up being an heir or a beneficiary but was not noticed, is the court’s validation effective at all? Or, is it effective only as to those who did receive notice? Must a guardian ad litem always be appointed?

Would it be possible to validate a pour-over will in Alaska without revealing the contents of the trust or trusts into which it will distribute its assets? What would be the effect of such a proceeding?

Since a trust defines a trustee’s legal relationship to property,50 must the property in the trust be disclosed in an ante-mortem proceeding to validate the trust? Or, are the assets of the trust irrelevant to a proceeding to determine its validity? How can a determination of validity be made without consideration of who is getting what? If a trust is validated and
property is later added to it, must the later transfer to the trust be re-validated?

What discovery of the settlor’s capacity will the trial court permit?

What discovery of the trust property will the trial court permit?

What steps must be taken to ensure that any judgment obtained in a foreign state will be recognized in California? Will the notice provided under the statute of a foreign state comply with the due process requirements of Roth v. Jelley?51

It would be prudent to take as many steps as possible to validate jurisdiction in the foreign state. For example, it would be a good idea for the petitioner in an ante-mortem will validation proceeding in Alaska to move to Alaska during the pendency of the proceeding (or to at least rent an apartment or open a bank account there) to ensure minimum contacts with Alaska, justifying jurisdiction under the Due Process Clause of the Fourteenth Amendment to the United States Constitution.52 Similarly, any co-trustee named in a foreign state should be more than a figurehead.

G. Conclusion

Lawyers need as many tools as possible to help their clients. California lawyers do not have their own express ante-morte probate statute but, in proper cases, they might consider making use of California’s cases and statutes which, together, may authorize ante-mortem trust validation. California lawyers might also consider making use of antemortem probate statutes that have been enacted in Alaska and in other states. Obviously, as with any strategic decision on behalf of a client, expected costs and benefits should be weighed prior to proceeding.

*Hughes & Pizzuto, APC, San Diego, California

  1. These states are North Dakota, Ohio, Arkansas, Alaska, New Hampshire, Delaware, North Carolina, Nevada, and South Dakota.
    See Beyer, Just Because You Are Still Alive Doesn’t Mean You Cannot Probate Your Will: Ante-Mortem Probate as the Ultimate Will Contest Prevention Technique (a paper presented at ACTEC 2020 Annual Meeting, March 7, 2020, Boca Raton, Florida, Seminar F).
    See also Akers, ACTEC 2020 Meeting Musings, pp. 37-38 (summarizing materials presented at ACTEC 2020 Annual Meeting) [hereinafter Beyer].
    Much of this article is based on material presented by Professor Beyer, Michael M. Gordon, and Sally H. Mulhern at the ACTEC 2020 annual meeting.
  2. Id. at p. 17.
  3. Id. at p. 1.
  4. Levin v. Winston-Levin (2019) 39 Cal.App.5th 1025.
  5. Id. at p. 1033.
  6. Ibid.
  7. Beyer, supra, at p. 1.
  8. Bradley, Antemortem Probate Is a Bad Idea: Why Antemortem Probate Will Not Work and Should Not Work (Jan. 27, 2016) p. 3 https://ssrn.com/abstract=2723433.
  9. Mullane v. Central Hanover Tr. Co. (1950) 339 U.S. 306; Roth v. Jelley (2020) 45 Cal.App.5th 655.
  10. Stewart v. Towse (1988) 203 Cal.App.3d 425, 429-430.
  11. Probate Code section 17200(a) provides that “[e]xcept as provided in Section 15800, a trustee or beneficiary of a trust may petition the court … concerning the internal affairs of the trust.” Probate Code sections 17200(b)(1)-(3) includes the following as proceedings concerning the internal affairs of a trust: “Determining questions of construction of a trust instrument,” “[d]etermining the existence or nonexistence of any power, privilege, duty or right,” and “[d]etermining the validity of a trust provision.” Probate Code section 15800 provides that while a trust is revocable, only the settlor has the rights afforded to beneficiaries under trust law, meaning that only the settlor or trustee could file a petition concerning the internal affairs of a trust pursuant to Probate Code section 17200.
  12. If the trust instrument in question is irrevocable, a trustee or a beneficiary could bring a petition under Probate Code section 17200, but presumably not the settlor (unless the settlor were a beneficiary under the irrevocable trust). See Prob. Code, section 17200(a).
  13. Conservatorship of Irvine (1995) 40 Cal.App.4th 1334, 1341-1343.
  14. Ibid.
  15. Drake v. Pinkham (2013) 217 Cal.App.4th 400. Among the difficulties that arise from the Drake v. Pinkham approach is that the settlor can sign a new trust while the contest of the first trust is pending. If this occurs, the first contest becomes moot. The process can be repeated over and over again, frustrating any attempt at finality.
  16. Adkisson, The $867 Dispute Becomes an $883,654 Judgment in Ravet (Jan. 22, 2014) Forbes Magazine https://www.forbes.com/sites/jayadkisson/2014/01/22/the-867-dispute-becomes-an-883654-judgment-in-ravet/#e9e70b0542d5 [hereinafter Adkission].
  17. Beyer, supra, at p. 7.
  18. Adkisson, supra.
  19. Ibid.
  20. Ibid.
  21. Matter of Restatement of Declaration of Trust Creating the Survivor’s Trust Created Under the Ravet Family Trust Dated Feb. 9, 2012, C.A. No. 7743-VCG, 2014 WL 2538887 (Del. Ch. June 4, 2014).
  22. Beyer, supra, at p. 62.
  23. Ibid.
  24. Letter Opinion, supra, at p. 1.
  25. Ravet v. The Northern Trust Company of Delaware and Barry C. Fitzpatrick, in Their Capacity as Co-Trustees, (Del. 2015).
  26. Beyer, supra, at p. 63. See also Davis, Ex-lawyer Convicted of Forgery, Bad Checks (Aug. 24, 2016) San Diego Union-Tribune
  27. Beyer, supra, at p. 63
  28. Beyer, supra.
  29. Ibid.
  30. Alaska Statutes, section 13.12.535.
  31. Alaska Statutes, section 13.12.530.
  32. The authors thank Jo A. Kuchle and Danielle Gardner, attorneys in Alaska, for providing insights into the Alaska procedures.
  33. Alaska Statutes, section 13.12.530.
  34. Alaska Statutes, section 13.12.540, subd. (a)(2).
  35. Alaska Statutes, section 13.12.545.
  36. Alaska Statutes, section 13.12.545, subd. (10).
  37. Alaska Statutes, section 13.12.545, subd. (11).
  38. Alaska Statutes, sections 13.12.565, 13.06.110.
  39. Alaska Statutes, section 13.12.570.
  40. Id.
  41. Alaska Statutes, section 13.12.555.
  42. Id.
  43. Alaska Statutes, section 13.12.560.
  44. Id.
  45. Alaska Statutes, section 13.12.575.
  46. Ibid.
  47. Alaska Statutes, sections 13.12.535, 13.12.590(1), 13.36.390(3).
  48. Roth v. Jelley, supra, 45 Cal.App.5th 655.
  49. Alaska Statutes, section 13.12.545(11).
  50. Moeller v. Super. Ct. (1997) 16 Cal.4th 1124, fn. 3.
  51. See Roth v. Jelley, supra, 45 Cal.App.5th 655 (holding that a beneficiary with a contingent future remainder interest in a trust was entitled to notice of a proceeding to modify that trust when his identity was known and his address could be determined).
  52. See Internat. Shoe Co. v. Washington (1945) 326 U.S. 310.

Authors

,
COVID-19

Executive Summary of the Stimulus Bills for COVID-19

The Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

Over the last two weeks, two bills have been passed by Congress and signed into law by President Trump, both of which are intended to provide individuals and businesses with financial relief from difficulties due to COVID-19.  These are the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).  Pursuant to these two Acts, the following relief is now available.

Mandatory Paid Leave

All employees, including full- and part-time employees, are entitled to two weeks of paid sick, family and/or medical leave (“Mandatory Paid Leave”), if they or a family member is adversely affected by COVID-19.  Some employers with fewer than 50 employees may be exempt from this requirement, but no detailed guidance has been released.

Provisions for Small Businesses

Tax Credits for Mandatory Paid Leave

An employer with fewer than 500 employees is entitled to a credit for 100% of Mandatory Paid Leave, up to certain limits.  The credit is applied against the employer portion of Social Security and Medicare tax (FICA), and any balance remaining after the FICA liability has been reduced to zero is refundable to the employer.

Small Business Administration (SBA) Loans

               Two loan programs have been initiated to help small businesses (those already deemed small businesses by the SBA, or that have fewer than 500 employees) cope with the COVID-19 crisis.  While each loan program has different qualification requirements, they are not mutually exclusive, and many businesses will qualify for both.

Economic Injury Disaster Loans (EIDL)

An EIDL will provide up to $2,000,000 of working capital for a business, with an interest rate of 3.75%, and a maximum term of 30 years.  A personal guarantee and collateral are required for loans in excess of $200,000, although a loan will not be denied solely because there is insufficient collateral to secure the entirety of the loan amount.  Currently, the requirement that a business be unable to obtain credit elsewhere is waived.

As part of the application process, a business can request a $10,000 grant (an “EIDL Grant”), which is to be paid within three days of the request, as an advance.  The grant does not have to be repaid and is not contingent upon qualification for the loan.  The EIDL Grant may be used for operating expenses for the business, including payroll expenses.

Paycheck Protection Program (PPP)

The PPP is aimed at providing employers with sufficient resources to maintain their workforce.  Sole proprietors and independent contractors are also eligible for the PPP.

The size of the loan available under the PPP is based on a calculation related to the average monthly “payroll costs” of the business.  The portion of the PPP loan proceeds used for payroll costs and a few other expenses within the eight-week period following the date on which the loan is funded may be forgiven.  The Department of the Treasury has indicated, however, that it anticipates that no more than 25% of the amount forgiven may be for non-payroll costs.  If the number of employees or certain reductions in salary are made within a certain time frame, the loan forgiveness may be reduced, unless the reductions are cured prior to June 30, 2020.  Any EIDL Grant received will reduce the amount of loan forgiveness available, dollar-for-dollar. 

The portion of the PPP Loan that is forgiven will not be includable by the taxpayer as gross income.

               For any amounts not forgiven, the interest rate may be no higher than 4.0%.  Guidance from the Department of the Treasury indicates that the interest rate may be as low as 1.00%, with a term of two years.  Payments on the loan will be deferred for six months, following the date of funding.  No personal guarantee or collateral is required for this loan, and no prepayment penalty may be charged in the event the loan is paid off by the business prior to its maturity date.

Loan Forbearance for SBA Loans Already in Place

The SBA will make the principal and interest payments due on any outstanding SBA Loans (other than PPP Loans) for a six-month period.  The borrower is not obligated to repay these amounts at any time.

Payroll Tax Credit

               Businesses that are either suspended due to a government order, or have suffered more than a 50% decline in gross receipts, may qualify for a credit against employer-paid social security tax and Medicare tax equal to 50% of each employee’s wages, including group health care plan expenses allocable to the employee (the “Payroll Tax Credit”).  The maximum credit per employee is $5,000.

Delay of Payment of Employer Payroll Taxes

Employers may defer payment of social security, Medicare and federal unemployment tax due between March 27, 2020 and January 1, 2021, such that 50% of the tax will be due on or before December 31, 2021, and the remaining amount must be paid no later than December 31, 2022.  A similar provision exists for those who are self-employed and pay self-employment tax.  The amount of tax that can be deferred is 50% of the total self-employment tax.  A business does not qualify for this deferral if it has received loan forgiveness under the PPP.

Net Operating Loss Carryback Provisions

Any net operating loss incurred from January 1, 2018, through December 31, 2020, may be carried back to each of the five years preceding the loss.  Carryforwards and carrybacks can be aggregated without limitation for any tax year beginning prior to January 1, 2021.

Delay of Business Loss Limitations to Tax Year 2021

Business losses had previously been limited for taxpayers beginning in year 2018, such that taxpayers could not offset non-business income in excess of $250,000.  The statute was amended to provide that the limitation on business losses does not apply for Tax Years 2018 through 2020, and will apply for Tax Year 2021. 

Provisions for Individuals

Expansion of Unemployment Relief

Unemployment income is increased $600/week by the federal government, to anyone who qualifies for “regular unemployment compensation.”  The additional unemployment income will come from the state, and either be advanced or reimbursed by the federal government.

Recovery Rebates

               Recovery rebates will be provided, either via direct deposit or check, to individuals that meet certain income thresholds.  The maximum rebate an individual will receive is $1,200 ($2,400 for married couples filing a joint return), plus $500 per child under age 17 that they claim as a dependent.  The rebates phase out at $99,000 for individuals, $136,500 for heads of household, and $198,000 for married couples filing joint tax returns.

Withdrawals from Retirement Accounts

               An individual may withdraw up to $100,000 from his or her retirement plan, without penalty, if the employee or the employee’s spouse or dependent is either diagnosed with, or is otherwise negatively affected by, COVID-19.  The withdrawals are eligible for some tax deferral and may be recontributed without regard to contribution limits within certain time frames.

Loans from a Qualified Employer Plan

               The amount that is available to be withdrawn as a loan from a qualified employer plan was increased from $50,000 to $100,000 for the 180-day period beginning on March 27, 2020 and ending on September 23, 2020.  Any loan payments for a loan from a qualified employer plan that are due prior to December 31, 2020 will be extended one year.

No Required Minimum Distributions in 2020

               No Required Minimum Distributions (RMDs) need to be withdrawn in 2020, including those for individuals with required beginning dates in 2019 (and for which payment was deferred until 2020).

               Finally, if a taxpayer must withdraw all of the assets of a retirement account over five years, and the five-year period includes 2020, this year will not count as a year in the calculation of when the account must be withdrawn in its entirety.  This effectively converts all currently active five-year withdrawal periods to six-year withdrawal periods.

Charitable Contributions

               Two modifications were made to the treatment of charitable contributions:

First, a $300 above-the-line deduction has been authorized for charitable contributions made by all taxpayers, including those who do not itemize their deductions, beginning in 2020.  This is not a temporary provision and is intended to apply to future years.  The contribution must be made in cash and cannot be made to a donor advised fund, supporting organization or certain private foundations. 

Second, for Tax Year 2020 only, taxpayers can take a deduction for a charitable contribution made in cash (and not to donor advised funds, supporting organization or certain private foundations) of up to 100% of their AGI for 2020.  The taxpayer must elect into this treatment.

If you have any questions, please contact Robert Pizzuto (rpizzuto@hplawsd.com), or Camille Perna (cperna@hplawsd.com).

Authors

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Inherited IRA

The Secure Act

The SECURE Act – Changes to Regulations for Distribution of Inherited IRAs

Effective January 1, 2020, the SECURE Act changes the requirements for distributions of retirement accounts.  The most significant change related to inherited IRAs is the elimination of the ‘stretch’ IRA.  Previously, beneficiaries of inherited IRAs could take minimum distributions based on the beneficiary’s life expectancy.  For younger beneficiaries, in particular, this allowed the beneficiary to take smaller required distributions, allowing more of the IRA to grow tax-deferred during his or her lifetime.  Now, under the SECURE Act, an inherited IRA must be distributed within 10 years of the account owner’s death, with some exceptions.  There are no required minimum annual distributions within the 10 years, so a beneficiary can decide to spread distributions out over the 10 years, or wait until the end of the 10 year period to distribute the entire account.

The new distribution rules apply to IRAs owned by decedents who die after January 1, 2020.  The previous rules still apply to the distribution of IRAs inherited from owners who died before January 1, 2020. 

There are some exceptions to the 10-year distribution requirement for certain beneficiaries.  Spouses, disabled persons, chronically ill persons, and beneficiaries who are less than 10 years younger than the account owner can still take minimum distributions based on the beneficiary’s life expectancy.  Minimum distributions to minor children are also still based on the child’s life expectancy, but only until the child reaches the age of majority, at which time the 10-year rule applies.             

In addition to the changes affecting beneficiary distributions, the SECURE Act also changes some of the rules for contributions and distributions to the account owner during his or her lifetime.  Under the prior rules, minimum distributions were required to begin in the year following the year the account owner turned age 70½.  Now, minimum distributions are not required until the account owner turns age 72.  There is also now no longer an age limitation on contributions to an IRA, meaning the account owner can continue to make contributions at any age provided the income requirements are met.

Author(s)

Planning for the Next Generation of Families

Plans for the Next Generation of Families

Hughes & Pizzuto attorney K.C. Thompson, in his 45th year of practicing law, has taken on another endeavor, Chairman of the Board of Trustees of San Diego’s Ronald McDonald House.  With the encouragement and support of Hughes & Pizzuto, K.C. is serving a two-year term as Chairman, working with the staff and Trustees of RMHC-San Diego to insure the sustainability and growth of this valuable facility, providing a “home away from home” for both the families in the 56 guest suites and the more than 12,000 annual day-use guests. 

Below is a recent article highlighting K.C. and his wife Linda’s involvement at Ronald McDonald House.

K.C. THOMPSON PLANS FOR THE NEXT GENERATION OF FAMILIES

Author(s)

San Diego Probate Law

Basics Of Administering A Probate

What Does “Probate” Mean?

Basically, a “probate” is a court proceeding that is needed to transfer assets when someone passes away with assets in their individual name outside of a trust of a value higher than $166,250, with no beneficiary designation, no surviving joint tenant or other disposition (such as pay on death).

A probate may be needed whether or not somebody has a will. There has been a lot of negative press about probate in the past; however, the process can be relatively pain-free.

How Do You Start A Probate?

The first step to start a probate is to file a Petition for Probate with the court in the County where the decedent lived (or where the decedent owned real property) to appoint someone as the personal representative. 

Mailed notice of the hearing on the Petition for Probate must be provided to relatives and to those who are named in the will, if there is one.  A notice must also be published in a local paper putting “the world” on notice that the estate is going to be probated.  

If there are no objections, and all procedural rules are followed, a personal representative will be appointed by the court.   The personal representative basically stands in the shoes of the decedent to collect the assets for eventual distribution to the heirs or beneficiaries. The personal representative nominated in a will is known as an “executor,” and if there is no will, as the personal representative is known as an “administrator.”    

The personal representative will marshal the assets and file an inventory with the court that describes the assets and their value.

Once the assets are marshaled, and reported to the court on an inventory, the personal representative needs to handle other procedural duties, such as notifying certain authorities of the death (including the Social Security Administration, the IRS and the Franchise Tax Board), paying the decedent’s debts, preparing the last tax return for the decedent and preserving the assets of the estate.  Sometimes it is necessary to sell assets during the probate, which may require court confirmation.

Another requirement for a personal representative is to give notice to the decedent’s creditors and invite them to file claims for decedent’s debts.  Once the time has passed for creditors to file a claim, and all debts and taxes have been paid, the personal representative can prepare a final petition for distribution. Normally, that petition will include a full accounting of all of the assets, receipts and expenses of the estate. The final petition is set for a hearing, and once the petition is approved, the personal representative can distribute the assets of the estate to those entitled. 

How Much Does A Probate Cost?

The fees for standard services of the personal representative and their attorney are set by statute and are based on a percentage of the value of the assets under management in the probate estate. The personal representative and the attorney are both entitled to the same statutory fee. If there are extraordinary services provided, which can include (but are not limited to) handling a tax audit, selling real estate, or engaging in any kind of litigation over the estate assets, the personal representative and attorney can request “extraordinary fees”, which must be approved by the court. No fees can be paid to the attorney or the personal representative without a court order and normally not until the end of the administration.

There are some out of pocket costs that need to be paid as part of a probate proceeding, including court filing fees, the fee for the probate referee who will appraise the assets, the cost of publication of the notice in the newspaper and certified copies of orders.  The personal representative can seek reimbursement of these costs in the final petition to distribute the estate. 

The fees and costs involved in a probate are not significantly different than those incurred in a trust administration, which is handled outside the courts.  

One of the benefits of having a probate is that creditors are limited in their time to file claims. Another benefit is that the court will release the personal representative of liability at the end of the administration.

If the decedent has a will, the assets will be distributed as set forth in that will. If there is no will, the assets will be distributed according to the laws of intestate succession as set forth in the Probate Code. The intestate succession rules provide that the assets go to one’s relatives in descending order of closeness of relation.  Despite popular myth, the assets do not “go to the state” if there is no will.  And, there is no increase in the amount of taxes that may be due if there is no will.

How Long Does A Probate Case Last?

The probate administration process can take anywhere between approximately six months to sometimes up to two years to complete, depending on a variety of circumstances. The length of time of the probate can be affected by creditor claims, issues with selling or collecting assets, fights among beneficiaries, or other matters that can be out of the control of the personal representative.

If you have been named as an executor of a will or if there is no will and you are the person with priority to act as an administrator of an estate, it is important for you to contact an attorney with experience in probate administration to ensure that you handle the administration properly. There can be many pitfalls and as administrator you are subject to personal liability. It is always best to consult with an expert in this area to ensure a smooth process.

For more information contact Hughes & Pizzuto – https://hplawsd.com/contact/

Author(s)

San Diego Real Estate Law Firm

What to Do With a Residence Upon Death

Dear Sophos

 I am acting as Trustee for my dear dead Aunt Betsy.  One of the Trust assets is her California residence.  What are some of my fiduciary duties and what should I be doing with the house?

 Little Johnny

 

Dear Little Johnny:

First, as Trustee, you have a general duty to secure the residence and to preserve its value.

Assuming that the house is not passing to a specific beneficiary, after the initial 120 Notice period, you should consider liquidating, selling, the house.

During the initial 120-day period of administration, I suggest that, at a minimum, you do the following:

  • Make a detailed inventory of the house content, by photos or video, remove and secure any personal property of substantial value and empty the refrigerator;
  • Have a Locksmith change all of the locks and give you the keys;
  • Have all mail forwarded to your address and stop any newspaper delivery
  • Install an inexpensive security system that will automatically contact the security company if there is a break-in;
  • Have the yard regularly maintained, as though someone was living in the residence;
  • Talk to the neighbors and leave your telephone number with them in the event of an emergency;
  • Install a timer on several lamps, set to go on and off at different times;
  • Find the homeowner’s insurance policy and contact the insurance agent to be certain that the coverage is adequate;
  • If appropriate, have a plumber “winterize” the house;
  • Timely pay the monthly utility bills and loan payment as well as any homeowner’s association fees or at least contact the vendors to explain the circumstance.
  • Obtain legal advice from an attorney experienced in the area of trust administration.

I hope that you find this advice helpful and good luck in your capacity as Trustee.

The Sophos

Author(s)


San Diego Tax Law Firm

What to Expect from an IRS Audit

What every taxpayer should know regarding types of IRS audits and common issues that can trigger audit.

An audit is an investigation into a tax return of an individual, business, estate or trust.  The IRS uses this process to determine if the information provided in the tax return is correct. This article discusses three types of audits and several common audit triggers.

Types of IRS Audits

Correspondence Audit

This is the most common type of audit and also the easiest in terms of what is required and the length of time involved.  Usually the IRS will send a request for supporting documentation to prove deductions, exemptions, proof of dependents, proof of charitable donations or other documentation to corroborate a specific part of the return.  This is the least stressful form of audit for the taxpayer and usually sending in the requested paperwork is enough to satisfy the IRS.   It is strongly advised that you seek the help of an experienced tax attorney to prepare your reply to the IRS correspondence audit and to ensure the documentation you send is exactly what is needed.  As long as a response is made within the timeframe and the documentation enclosed satisfies the proof needed by the IRS, the audit is complete.  This type of audit is most commonly utilized for individual tax returns, where there are perhaps one or two simple issues the IRS wants you to substantiate.

 Office Audit

An invitation to appear at an IRS office to conduct an office audit is a serious matter.  It is important you do not attend the office audit without your tax attorney.  Being asked to an office audit means the IRS is counting on the possibility that you owe additional taxes.  It is essential that you seek the advice of an experienced tax attorney to accompany you to the IRS office audit to protect your rights and to use their knowledge and experience to assist you in finding ways to reduce or eliminate any additional taxes.

Field Audit

A field audit is the most serious form of audit and involves an IRS Auditor coming to your place of business to thoroughly audit your records.  If the IRS finds that your business has inaccurately reported income and evaded paying the correct tax, the consequences could result in heavy penalties, additional taxes and possible prison time.  It is of utmost importance to engage the services of an experienced tax attorney to be present while the IRS auditor is at your place of business.

Below is a summary of common audit triggers

Large amount of charitable donations

The IRS looks closely at the receipts and proof of your charitable donations.  If your charitable donations are more than 3% of your income, the IRS will scrutinize your documentation.  Make sure you have receipts, cancelled checks, and appraisals for all donations to substantiate your claim for deductions.

Failing to report part of your income

The IRS already knows what is on your W-2 and 1099s in terms of income.  If you do not report your income accurately on your tax return, this will likely trigger an audit.  You will receive a W-2 from your full-time job, but may also receive 1099s for freelance work you do on the side, as well as other forms of miscellaneous income, in all cases you must report all of your income from all sources.

Large losses on Schedule C, or many years of losses on Schedule C

If you are self-employed, and report your income on a Schedule C, you will report either a profit or a loss.  If your return shows a very large business loss on a Schedule C, or if you have a history of several years of losses on your Schedule C, this will likely attract IRS attention.

The reason behind this is that the IRS likes to see a profit at least two out of five years to consider a business legitimate.  If there are five years of losses reported on a Schedule C, the IRS will likely audit to see if ‘hobby’ would be a better description.  This is important because taxpayers are required to report any income earned from a hobby, but tax payers generally cannot deduct losses.

For example, a Professional Photographer with his own business, clients, advertisements, portfolio etc., can claim as a business expense the purchase of a camera.  Whereas, a doctor who enjoys taking photographs during his weekend hikes cannot claim a new camera as a business expense.

Claiming too many business expenses

In addition to the business/hobby issue just discussed, reporting too many losses can also cause the IRS to question how your business is staying solvent.  If you report many personal expenses through your business without it being a true necessary business expense (in order for your net profit to decrease and therefore your tax liability to decrease) the IRS will scrutinize your records during an audit.

Random Selection

Unfortunately, even if you do everything right, there is always a small (less than 1%) chance that your return will be randomly selected for an audit.

In Conclusion

If you do receive an audit notice from the IRS, it does not need to be the start of a stressful and difficult time for you and your family, or your business.  You will likely benefit from an experienced tax attorney’s advice and direction with the protection of the attorney client privilege.

Author(s)


San Diego Real Estate Law Firm

To Buy or Not to Buy – Unwrapping Title Insurance

Title insurance is one of the great mysteries when buying or selling real property.

In California, rarely does someone purchase residential real property without title insurance included.  Almost as rarely does the Buyer know why title insurance is being purchased and what coverage the insurance provides.

Basic title insurance questions include: do I need title insurance; who pays the premium; and what does the insurance do for me?

The answer to the first two questions are simple . . . yes, Buyers in California need title insurance to be certain that they are buying property with marketable title and, generally, the Seller pays the premium for the Buyer’s title policy through escrow, based upon the selling price, and the Buyer pays the premium for Buyer’s lender’s title policy based upon the amount borrowed by the Buyer to purchase the property.

The simple answer to what does it do for you, is that Title insurance protects against losses due to defects in title.

But that answer is misleading because in California there are three different insurance coverage levels, depending on the type of residential title insurance policy that is purchased.

Based upon this chart, provided by Fidelity National Title chart, the best title insurance choice for a Buyer is the ALTA Homeowner’s Policy, as it provides the broadest coverage.

 

Coverage Item

CLTA Standard Coverage

ALTA Residential (Plain Language)

ALTA Homeowner’s Policy

Post Policy Forgery Protection

No

No

Yes

Enhanced Access Coverage

No

No

Yes

Building Permit Violations

No

No

Yes

Subdivision Map Act Coverage

No

No

Yes

Restrictive Covenant Violations

No

No

Yes

Mineral Extraction Coverage

No

No

Yes

Map Inconsistencies Coverage

No

No

Yes

Coverage Extended to Living Trusts

No

No

Yes

Enhanced Encroachment Coverage

No

No

Yes

Automatic Inflation Protection (5 years)

No

No

Yes

Helpful online article on Title Insurance

I recently came across this article which includes an example of why every Buyer should insist on and obtain an ALTA Homeowner’s Title insurance policy when purchasing residential real property.

Click here to read this article.

Author(s)


San Diego Tax Law Firm

Tax Season is Here – The Advantages of Hiring a Professional Tax Preparer

The Advantages of Hiring a Professional Tax Preparer

Even the words ‘Tax Season’ can be enough to give anyone a headache!  Fortunately, you do not need to face tax season alone.  Hiring a tax professional can be invaluable to you especially if your situation has recently changed or is complex.

Federal tax law is adjusted every year, making it difficult for an average taxpayer to keep up to date with all the changes, and to understand how to apply these changes to their own tax situation.

A professional tax preparer works hard to keep up to date with all adjustments to tax law, both federal and state, making it advantageous to the taxpayer to hire someone with such an accurate knowledge base.

Deductions and Credits

With extensive knowledge and experience, a professional tax preparer will be able to assist you in finding little known deductions or credits, that you may be unaware you qualify for.

Where you may be eligible for several deductions and/or credits, and yet only be allowed to use one, your tax preparer will have the knowledge to accurately calculate which deduction and/or credit would be the best choice to minimize your tax liability.

IRS Audit

Facing an IRS audit alone can be tremendously difficult and stressful.  If you are audited, it might be tempting to answer the IRS yourself. It is strongly recommended that even the initial response to an IRS audit inquiry come from a tax attorney.

You can communicate confidentially with a tax attorney before the response to the IRS is prepared to give you the best chance of a “no change” letter from the IRS at the conclusion of the audit.

Filing Status

Did you get married or divorced in the past year?  Did you have a child?  Adopt?  Or have you recently lost your spouse?  These changes in situation can dramatically change your filing status and exemptions, deductions and credits you may be entitled to.

If you are a widow(er) your status may change not only for the year in which you lost your spouse, but for a specific time period after.  Determining the best and most tax advantageous filing status takes special knowledge of tax law and time-sensitive dates.

Your professional tax preparer would be able to determine the best way forward.

Child in College?

Is your child in college?  Your tax preparer can assist you in determining how to claim your child under the age of 24, if they are still in full-time education.

Determining how to properly claim older children, especially if they have income either in the form of wages or investment income, requires in-depth knowledge of ever-changing tax law.

Real Estate

If you have bought or sold any real estate, or have invested in rental property, a tax professional can assist you to make the most of the credits and interest deductions available to you.

If your home or property has been affected by a fire, flood, earthquake or other natural disaster, your tax preparer can assist you to take advantage of relief provisions and elections with regard to replacement property and any gain or loss incurred.

Starting a New Business

Starting a new business is an exciting time for anyone, however there are tax implications that can be difficult to understand.  A tax preparer will help you navigate the complex world of business deductions, expenses, insurances, how to properly report your income, accurately calculate self-employment tax and paying estimated taxes.

If you have started a new business, large or small, it would be wise to seek professional tax advice and assistance in preparing your taxes to ensure accuracy and to take advantage of your tax preparer’s knowledge to utilize all allowable deductions and credits to minimize your tax liability.

Summary

Indeed, hiring a Professional Tax Preparer to prepare and file your taxes, will ease the stress and burden of tax season, and leave you with peace of mind and confidence in your financial future.

Author(s)


San Diego Estate Tax Law

A Look at History:  The Estate Tax Exemption Really Has Increased

In a post earlier this year, we discussed that Americans can now transfer more than $5 million dollars in assets through the estate tax system without incurring a tax, while at the same time permitting their beneficiaries to receive those assets with a new and usually higher “stepped-up” basis.

Addressing the concept gave rise to the question:  Given inflation over the years, is the estate tax exemption really higher than it has been historically?  In order to answer that, we created a table showing the estate tax exemption over time, comparing it to the current buying power of the exemption amount in 2015 dollars.

While the comparisons are not perfect because the tax laws have changed over the years, the chart illustrates that the current exemptions are, indeed, historically high.

Throughout most of the twentieth century, the buying power of the exemption amount hovered at around $500,000 measured in 2015 dollars. The exemption’s 2015 equivalent started creeping up in 1990, but did not reach the $5,000,000 range until 2011. (The basic outline of the gift and estate tax laws has been consistent since the early 1980s.)

As noted in the earlier post, the exemption amount has been historically-high for several years.  There are no signs that it will be reduced in the near future.  It is clearly time to consider free basis when making estate planning decisions.

Tax Year                               Estate Tax Exemption                          2015 Equivalent

1920                                          $50,000                                                     $585,805

1930                                          $100,000                                                  $1,406,000

1940                                          $40,000                                                     $562,000

1950                                          $60,000                                                     $584,000

1960                                          $60,000                                                     $476,000

1970                                          $60,000                                                     $363,000

1980                                          $161,000                                                  $459,000

1990                                          $600,000                                                $1,078,000

2000                                          $675,000                                                  $920,000

2001                                          $675,000                                                  $895,000

2002                                          $1,000,000                                             $1,305,000

2003                                          $1,000,000                                             $1,276,000

2004                                          $1,500,000                                             $1,864,000

2005                                          $1,500,000                                             $1,803,000

2006                                          $2,000,000                                             $2,329,000

2007                                          $2,000,000                                             $2,264,000

2008                                          $2,000,000                                             $2,180,000

2009                                          $3,500,000                                             $3,829,000

2010                                          Unlimited

2011                                          $5,000,000                                             $5,217,000

2012                                          $5,120,000                                             $5,234,000

2013                                          $5,250,000                                             $5,290,000

2014                                          $5,340,000                                             $5,295,000

2015                                          $5,430,000                                             $5,430,000

 

Author(s)