When it comes to estate planning in California, one size does not fit all. To start, the estate plan must take into account the specific values of the clients creating the estate plan and the maturity of those benefitting from it. This requires understanding each client’s background — their vocation, education, philosophies on saving and spending, their wealth, financial sophistication, and their personal views on work, gifts, inheritances and taxes. For the plan to truly work, the estate planning attorneys must also take into account the maturity and life experiences of the beneficiaries. Where an outright gift to a disciplined, hard-working, independent child may make sense, the same outright gift to a debt-burdened, motivationally-challenged child could spell disaster.
An “estate” means a “collection of assets.” Estate planning, in its narrowest sense, means planning for the management of that collection of assets over various stages of your life and beyond. While different solutions will work better for different individuals and families, many of the issues are similar:
- Who will manage your assets and make financial decisions if you become incapacitated;
- What safeguards can be put in place to minimize the chances of undue influence, fraud or embezzlement being exercised against you if you become impaired;
- How can you make certain that those dependent on you for support, continue to get that support during your incapacity;
- Who will make medical decisions for you during your incapacity;
- What can be done to make certain your wishes concerning life support are followed;
- How do you pass down your own investment philosophy to individuals inheriting your assets;
- Once you are gone, how can you protect a beneficiary against their own poor financial decisions;
- Can you leave a substantial inheritance to family members, without taking away their productiveness;
- How much is too much to leave someone;
- Can you create a plan, which gives beneficiaries financial incentives for reaching certain milestones, like graduating from college, receiving a master’s degree, reaching a certain salary from employment;
- Do you need to treat children or grandchildren exactly the same in terms of what they inherit;
- Should you skip a child that is already wealthy;
- Should you leave more to the child that needs it more;
- Can you make certain that the money left to the grandchildren is used first for education;
- How do you keep the loved ones from fighting with each other over their inheritance;
- Can you build into your estate plan provisions that penalize a family member for trying to get more than intended by you;
- How can you keep a disgruntled family member from impeding the administration of your estate;
- When disagreement is inevitable, can you provide an out-of-court way to resolve disputes, before the legal fees deplete the estate beyond repair;
- If more than one person will be in charge of your estate after your lifetime, how are decisions to be made if they disagree;
- Should you use a neutral third party, like a private professional fiduciary or bank, to administer your estate and avoid the potential for conflict between your loved ones;
- Is there an easy way for beneficiaries to get rid of professional fiduciaries who are not doing a good job.
- Can you create a trust for disabled loved ones, without jeopardizing their government benefits;
- What can be done to minimize the amount owed to the government in estate taxes;
- How can you protect a loved ones from future creditors or claims of professional malpractice;
- Can the assets be left in tack for multiple generations; and
- Is there a way to avoid the government take out taxes as assets pass from your children to your grandchildren.
Our estate planning attorneys are experts in understanding the issues most important to our clients and in designing estate plans that carry out our client’s objectives. We represent clients from all walks of life – doctors, engineers, entrepreneurs, business owners, architects, teachers, professional athletes, tradesman, CEOs, CFOs, accountants, real estate developers, agents, professional fiduciaries, trust companies, parents, spouses, domestic partners, grandparents and grandchildren.
Our estate planning practice is regional, drawing clients primarily from Los Angeles County and Orange County. Most reside in the beach cities – Manhattan Beach, Hermosa Beach, Redondo Beach, El Segundo, Palos Verdes Estates, Rancho Palos Verdes, Palos Verdes Peninsula, Rolling Hills, Rolling Hills Estates, Marina del Rey, Venice, Santa Monica, Huntington Beach, Newport Beach, Laguna Beach, Corona del Mar, Dana Point, and San Clemente. We also serve clients in the broader inland areas of both counties and throughout Southern California. While our office uses the latest technology, we still believe in the importance of face-to-face meetings with clients. We appreciate that, even in this day of technology, clients need reassurance during difficult times that is best delivered in person.
Our estate planning attorneys are consistently rated among the very best in Southern California, receiving recognition in Best Lawyers in America, Best Lawyers in Southern California, Southern California Super Lawyers, and Martindale. We are one of the few firms operating in the South Bay, beach cities, and South Orange County with board-certified specialists in estate planning, trust and probate law, by the California State Bar, Board of Legal Specialization.
We are not simply “planners”. Our attorneys have handled every facet of trust administration, probate administration, guardianship administration and conservatorship administration. We know exactly how to help the fiduciary administer the estate plan in the most effective and efficient manner. Experience matters. Having handled literally thousands of administrations, we carry our clients over the legal hurdles that follow the death of a loved one. It is our job to take the responsibilities off the fiduciaries’ shoulders and place them squarely on our own shoulders.
An estate plan may be as simple as completing the right beneficiary designation forms to retirement accounts or as complex as implementing grantor retained annuity trusts holding minority membership interests in family limited liability companies, which transition into generation-skipping trusts after the death of the grantor. A complicated plan does not always translate into a functional plan. Our estate planning attorneys believe that an estate plan only works if it is understandable to the client and their successors. Generally, all things being equal, simple is better, provided it accomplishes the client’s objectives.
Estate planning for an individual or family often evolves over time. The plan usually consists of certain foundational documents to start. Typically, these foundational documents include:
- Revocable Trust (also known as a living trust);
- Pour-Over Will;
- Durable Power of Attorney for Financial Matters;
- Limited Durable Power of Attorney for Additional Estate Planning;
- Advance Health Care Directive; and
- HIPAA Waiver.
If the individual’s net worth is less than $13,610,000 (or the couple’s net worth is less than $27,220,000), then these documents alone may be sufficient. The plan should be reviewed and updated every five years to make certain it is still sufficient as clients’ circumstances do change over time.
For individuals with a net worth far exceeding $13,610,000 or couples with a net worth far exceeding $25,840,000, there are a number of available techniques for reducing the estate tax bite. If the client’s assets are primarily in real estate, then a family limited liability company (“FLLC”) should be considered. The FLLC provides creditor protection and provides a convenient mechanism for managing all of the properties. Gifts of minority membership interests in the FLLC will generally receive substantial valuation discounts (i.e., lack of control and lack of marketability discounts) for gift tax purposes. This translates into more assets being passed down to the next generation with less gift tax.
As long as current interest rates remain low and property values somewhat depressed, the sale of the client’s valuable income property to an intentionally defective grantor trust (“IDGT”) may further the client’s tax objectives. First, the client (referred to as the grantor) can gift an undivided fractional interest in the property to the IDGT for the benefit of the younger generations. The gift is generally sheltered from any gift tax by virtue of the client’s $13,610,000 federal lifetime gift tax exemption. The rest of the property is then sold by the grantor to the IDGT in exchange for a promissory note secured by the property. The sale is done at market value, but includes a valuation discount since less than 100% of the property is being sold. The children or grandchildren are the beneficiaries of the IDGT and may also act as Trustees. The Trustees of the Trust use the rental income from the property to makes the monthly payments on the promissory note owed to the grantor. As long as the rents exceed the interest rate on the promissory note, the children are not out of pocket. Most importantly, all future appreciation in the property is outside of the estate of the donor/client, since the donor no longer owns an interest in the property. The donor/client’s estate is effectively “frozen” in value, since the donor/client owns only a promissory note with a fixed value.
If the clients want to keep their vacation home in the family for generations, then the use of a qualified personal residence trust (“QPRT”) may provide a mechanism for passing the property down to the next generation at a minimal gift tax value. QPRTs, like grantor retained annuity trusts (“GRATs”) and grantor retained unitrusts (“GRUTs”), is a government-approved method for making a split-interest gift. Effectively, the grantor transfers the residence to the QPRT, reserving the right to exclusive occupancy of the residence for a given number of years. This results in an immediate gift of the remainder interest in the residence to the other beneficiaries of the QPRT, generally the children or grandchildren. Because the children or grandchildren have to wait until expiration of the term of the grantor’s occupancy, before they own the entire residence, there is a substantial discount on the value of the gift to the remainder beneficiaries. In simple terms, the value of the gift of the remainder interest is the difference between the full value of the property and the value of the occupancy interest retained by the grantor. The longer that the remainder beneficiaries have to wait before receiving occupancy, the less is the gift tax value of the remainder interest.
If the clients’ estate does not have real estate holdings, but rather a large portfolio of marketable stock and bonds, then other options for passing wealth to younger generations may work better. Using the client’s $18,000 per year annual gift tax exclusion, a pattern of consistent annual gifts of cash can be established. When the client is married, the annual gift exclusion amount is effectively $36,000 in the aggregate. (This amount is completely separate from the $13,610,000 lifetime gift exemption.) If a large estate tax liability is anticipated on the death of the client, the recipients of the gift (referred to as the “donees”) can use the annual gift amount to purchase life insurance on the life of the client to provide a source of liquidity to pay the estate tax. Because the donees, and not the donor/client, are the owners and beneficiaries of the policy, the policy proceeds are not subject to estate tax on the death of the client. All the funds are available to pay the tax. If the client is concerned that some donees may not contribute their fair share toward the insurance premiums, then the annual exclusion gifts can be made directly to an irrevocable life insurance trust (“ILIT”), which owns the policy (for the benefit of the beneficiaries). The Trustee of the ILIT then pays the insurance premiums directly.
If the client doesn’t believe in life insurance, then the gifted funds can be invested in marketable securities. If designed correctly, those funds can be held in a generation-skipping trust (often referred to as GST Trust or Dynasty Trust) for the benefit of the children, as well as the grandchildren and great-grandchildren.
However, a complex estate plan does not necessarily mean it is better than a simple estate plan. The tax benefits of estate planning are important but should not overshadow the more important objectives of the client. The plan must first and foremost be understandable to the client and accomplish the non-tax objectives of getting the assets to the correct beneficiaries in the form that the beneficiaries can best benefit from them. All things being equal, simple is better than complex. As true experts, we do not “over plan,” but provide the client with only those documents essential to the plan. Creating an estate plan for a client that is more complex than needed is an actual disservice to the client.
A non-exhaustive list of the documents and estate planning options that our estate planning attorneys routinely implement are as follows:
- Revocable Trusts (also called living trusts);
- Powers of Attorney for Finances;
- Powers of Attorney for Gifting & Advanced Estate Planning;
- Advance Health Care Directives;
- HIPAA Waivers;
- Life Insurance Trusts;
- Education Trusts;
- Dynastic & Generation-Skipping Trusts;
- Grantor Retained Annuity Trusts;
- Grantor Retained Unitrusts;
- Intentionally Defective Grantor Trusts;
- Qualified Personal Residence Trusts;
- Charitable Remainder Trusts;
- Private Foundations;
- Self-Canceling Installment Notes;
- Private Annuities;
- Co-Ownership Agreements;
- Marital Property Agreements;
- Family Limited Partnerships; and
- Family Limited Liability Companies.