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

Todays 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.)

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 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? Probates Purpose To pass Probate Estate Assets of a deceased person to the deceased persons 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? Im 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 mans 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