1. JOY OF LAW AVOIDING LEGAL PROBLEMS IN LIFE AND BEYOND Professor Dagmar Halamka dmhalamka@gmail.com http://emeriti.usc.edu

2. 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

3. Today’s Topics Three Techniques of Estate Planning (May Utilize Several) Wills Trusts Ancillary Living Documents Pre-post nuptial agreements Separate property Durable power of attorney for financial matters (DPAFM) Advanced Health Care Directive

4. Co-ownership of Property

5. Co-ownership of Property (Cont.)

7. TENANCY IN COMMON JOINT TENANCY COMMUNITY PROPERTY

8. Community Property Basic Concept of Community Property: Assets accumulated while married and living in California by efforts of either husband or wife Each spouse has a 50% share, can dispose of to other No built-in right of survivorship

9. 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

10. 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

11. 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

12. Propositions 60 and 90 (cont) One Time Only Benefit

13. 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

14. Proposition 58 No real property tax reassessment in parent- child transfers or vice versa Caveat – could incur huge income tax consequences

15. 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.

16. 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

17. 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

18. 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)

19. Will It Fly? Formalities required Sign With at least two witnesses Exception: holographic (handwritten will) At least 18 years of age Testator must know relatives and extent of property owned

20. 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

21. 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

22. 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

23. Preservation Of Assets With Probate Avoiders No probate necessary if estate is under $150,000 (real property cannot exceed $20,000 value) No probate necessary if utilize probate avoider

24. Probate Avoiders (Cont.) All investments with named beneficiaries Life Insurance, Retirement Plans, Brokerage Accounts, IRA’s, Credit Unions Jointly held personal or real property (Does not avoid probate on death of second joint tenant) In TRUST FOR (poor man’s trust) Children, your name in trust for

25. Probate Avoiders (Cont.) Living trust and pour 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

26. 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)

27. 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

28. 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

29. 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 $5.45 million in 2016 for an individual A husband and wife can pass $10.9 million to beneficiaries estate tax-free and with no probate, saving for federal estate taxes and probate fees

30. Living Trust (Cont.) Very difficult to contest Minimizes emotional stress on your family Prevents unintentional disinheriting

31. 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

32. 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

33. 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

34. ADVANTAGES OF A REVOCABLE LIVING TRUST Avoid probate Other reason: Lifetime asset management

35. Living Trust Advantages Reduce/Eliminate Estate Taxes – With an A-B Living trust, you and your spouse can each use your $5.45 million federal estate tax exemption. This lets you pass on to your beneficiaries up to $10.9 million estate tax-free and with no probate. The highest estate tax is presently 40%. Provide for Surviving spouse – The surviving spouse has complete control over TRUST A. In addition, he/she can receive the income (and principle, if needed for certain living expenses) from TRUST B.

36. Living Trust Advantages (Cont.) Control For First To Die – After the first spouse dies and the common trust has been divided into Trust A and Trust B, no changes can be made to the provisions of TRUST B giving the first spouse to die complete control over who will eventually receive the assets in TRUST B. Estate Tax-Free Appreciation of Trust B – The assets placed in TRUST B are valued and taxed only when the first spouse dies. There will be no re-valuation or estate taxes paid on any appreciation of these assets later when the surviving spouse dies and the assets in Trust B are distributed to the beneficiaries.

37. Living Trust Advantages (Cont.) Protection Of Assets If Catastrophic Illness Strikes– In the event of catastrophic illness or injury of the surviving spouse, the trust can be written to protect the assets in TRUST B so only the assets in TRUST A will need to be “spent down” to qualify for valuable government assistance Does not affect the way you control or manage your assets Private Revocable (by agent?)

38. Who’s In Charge? Stay in Charge with Powers of Attorney

39. Two Questions You Need to Answer Who will speak for you? How do you get decisions you want?

40. Staying in Charge of Your Finances Durable Power of Attorney for Financial Matters (DPAFM)

41. Durability Called a Durable Power of Attorney for Financial Matters Must be durable to last beyond loss of capacity Must include required language

42. Required Language “This power of attorney shall not be affected by subsequent incapacity of the principal.” Or similar language

43. DPAFM Powers Need to be spelled out – Read carefully Create, amend or revoke trust Make gifts Gifts to agent Loans to agent Change survivorship interests Change beneficiaries

44. DPAFM Powers (Cont.) Still need DPAFM if you have Living Trust Living Trust applies only to trust assets Agent under DPAFM can be given power to amend/revoke Living Trust Avoids conservatorship ($3,000)

45. Many Duties, One Purpose Agent’s Purpose ─Protect Principal’s interests Agent’s Duties ─Acts only in Principal’s interest ─Keeps assets separate ─“Prudent person” test ─Keep records ─More… should have financial savvy Agent right to reasonable compensation

46. Advanced Health Care Directive California Probate Code section 4701 Provides right to name someone else to make health care decisions for you Provides right to give instructions about your health care - What you want so the agent can make decisions about your care informed by your personal values Permits you to express your wishes regarding donation of organs and the designation of your primary physician

47. Advanced Health Care Directive (Contd.) Unless you limit the authority of your agent, your agent may make all health care decisions for you Form has a place for you to limit the authority of your agent, if you wish

48. Advanced Health Care Directive (Contd.) Principal must be of sound mind and 18 years of age {YES, anyone 18 or older- Lamar example} Must be signed by two qualified witnesses or acknowledged by a notary public Signed and dated by Principal

49. Advanced Health Care Directive (Contd.) Give a copy of the signed and completed form to your physician and any health care agents you have Talk to the person you have named as agent to make certain that he or she understands your wishes and is willing to accept responsibility

50. Advanced Health Care Directive (Contd.) Store a copy in the glove compartment Register copy with the CA Secretary of State. Cost is $10.00 for inclusion in its database Private companies offering 24/7 world wide access to your Health Care Directive- Docubank

51. Choosing Your Agent Does this person share your views and values about life and medical decisions? Will this person ─Communicate well with you? ─Ask questions and get answers? ─Make choices you would make? ─Stand up for You? ─Be available? Agent must be at least age 18 and have legal capacity Co-agents?

52. What Does Your Agent (or successor agent) Do? Duties ─Makes decisions for you ─Follows your instructions and wishes ─Cannot make decisions you disagree in

53. Changing Your Mind Can revoke part or all ─Principal must have capacity Divorce or annulment

54. Factlets 1.Pensions earned in California are taxable in state of residence at time of receipt of pension 2.Internal Revenue Code Section 529 a)A plan operated by state or educational institution to promote saving for college (ex: child or grandchild or anyone) b)Earnings are NOT subject to Federal Tax and usually NO STATE TAX c)Withdrawals now include the cost of the purchase of any computer technology and internet access for beneficiary of account while in school 3.No 3 day rule

55. Factlets (Cont.) 4.Implied warranty of merchantability 5.Home deliveries 6.Landlord-Tenant Law 7.Take wine home from restaurant 8.Liability for serving alcohol

56. Factlets (Cont.) 9.Joint and several liability vs. joint liability 10.Renters insurance 11.Paid in full 12.Employee or independent contractor? 13.Extended warranty – buy or not?

57. Factlets (Cont.) 14. Good Samaritan Law 15. Easier to fight a traffic ticket 16. Sick leave- MANDATORY