California Estate Planning Newsletter

Welcome back to another enlightening dive into the world of estate planning, where we blend the seriousness of legal matters with a dash of humor and a sprinkle of common sense to help you protect your family.

This Halloween 🎃 edition will discuss the scariest event of the year: the Election and how it could affect the estate tax. Fitting the Halloween theme, we will also discuss the horror of titling your brokerage accounts incorrectly and how to protect your assets from the bad guys. And we will wrap with a harrowing rumination on the Giants and Dodgers.

The Election and the Estate Tax

The 2024 estate tax exemption amount is $13,610,000. It will increase again for inflation in 2025. (This is the amount each person can own at the time of death with no estate tax. There is no estate tax unless you have more than this amount.)

In 2010, Obama raised the estate tax exemption to $5,000,000, indexed for inflation.

In 2017, Trump doubled the estate tax exemption to $10,000,000, also indexed for inflation. However, Trump's exemption is scheduled to sunset at the end of 2025.

As a result, the president and the Congress elected in November will determine the fate of the estate tax.

There are three ways this could go:

1. Nothing changes and Trump's tax laws sunset at the end of 2025, and the 2026 estate tax exemption will default to approximately $7,000,000 ($5,000,000 indexed for inflation since 2011). Click here for a chart on how the estate tax exemption has changed over the years.

2. Congress and the new president make Trump's tax laws permanent and the estate tax exemption indexed for inflation rises to $14M - $15M.

3. Congress and the new president choose neither of these options and pass a new tax law.

The vast majority of Americans have net worth well below $7M per person or $14M per married couple. But for wealthy people, 2025 may be a very busy time for advanced estate planning. The one good thing about changes to the tax law is that we usually get plenty of runway before the new takes effect, which can give proactive people time to mitigate or take advantage of the new law.

How Not to Title Your Brokerage Accounts

If you are smart enough to have established a living trust, you should have titled your brokerage accounts in the name of your trust. BTW, I’m talking about non-qualified brokerage accounts, aka investment accounts - not retirement plans like IRAs and 401ks. Brokerage accounts should be titled in your living trust, not in your name or your spouse's name. If your brokerage accounts are titled in your living trust, the accounts will not go through probate, your successor trustee can manage the account for you if you become incapacitated, and the trust will provide a clear succession of beneficiaries.

Sometimes, especially if there is no living trust, the brokerage accounts for a married couple are titled as tenants in common. As a result, if the husband dies first, his assets must be distributed according to his will, and if he doesn’t have a will, then the state default intestacy rules kick in. And if his share of the brokerage account is more than the California probate threshold, currently $184,500, his wife will have to pay an attorney to file a spousal property petition to avoid probate. And even if his share of the account is less than the probate threshold, his wife will need to execute a Small Estate Declaration, which the financial institution may or may not accept without a fight. Tenancy in common for community property is not good.

We have a case where the brokerage account was titled in husband and wife’s names as tenants in common. Husband died two years ago, yet the big national bank won't give the wife access to her husband’s share of the account, even though she has given them a Small Estates Declaration. The bank is insisting that she go through probate. BTW the bank is wrong, the Small Estates Declaration is legally sufficient. So now there is a standoff. The wife has to decide whether to open a probate and get the document the bank needs or to continue to escalate the matter with the bank until she finds someone at the bank with half a brain who knows California probate law and accepts the Small Estate Declaration.

Sadly, three people have called us this year with a similar problem.

This would never have been a problem if :1) they had transferred the title of their brokerage account to their living trust, or 2) at the very least named themselves as owners in joint tenancy (not tenants in common). Joint tenancy would avoid this hassle at the first death. And if the surviving spouse doesn’t transfer title of the account to her living trust, the problem will start all over again for her children when she dies.

Large national banks can be difficult to work with. Don't put yourself in a position where you need them to be reasonable. Avoid the horror. If you are married, title your brokerage accounts in the name of your living trust. If you don’t have a living trust, get one. In the meantime, at least title the account in joint tenancy.

Asset Protection: the Basics

We’ve recently had several calls about asset protection, so I thought I’d write about this. Let me first say that our firm focuses on estate planning and trust administration. We are not an “Asset Protection” law firm. But to be honest, with rare exception, any firm that holds itself out as an asset protection law firm or specialist may be selling snake oil.

Asset protection planning is really a function of learning your options and using common sense. There are many things you can do to protect your assets. Some are basic and benign. Some are very complicated and disruptive. We will discuss the basic, which are usually enough for most people.

Basic Asset Protection Strategies

1. Umbrella Insurance

Umbrella insurance extends your liability coverage beyond your auto and homeowner policy limits. It’s inexpensive and you can get it through your auto and homeowner insurance company. This is a no-brainer.

2. Retirement Plans: 401ks Better Than IRAs

Retirement accounts are excellent vehicles for asset protection, but not all are created equal, especially in California.

401(k)s and ERISA Plans.

401(k)s and other plans governed by the Employee Retirement Income Security Act (ERISA) offer superior protection compared to Individual Retirement Accounts (IRAs). Here's why:

Federal Protection: ERISA plans are protected by federal law, which preempts state law and provides uniform protection across all states.

• Unlimited Protection: These plans are generally protected from creditors without any dollar limit.

• Bankruptcy Protection: ERISA plans are entirely exempt in bankruptcy proceedings.

IRAs: Limited Protection in California

While IRAs do offer some protection, it's more limited in California:

• State Law Protection: IRAs are protected under California state law, not federal law.

• Dollar Limit: Protection is limited to the amount necessary for support during retirement, which can be subjective and potentially challenged in court. This is a very subjective amount. Asset protection expert attorney Jay Adkisson who is not a snake oil salesman, estimates the amount to be $250,000.

• Bankruptcy Limitations: In bankruptcy, IRA protection is capped at $1,512,350 (as of 2024, adjusted periodically for inflation).

Don’t misinterpret this to think you have to move your IRA funds to a 401(k). IRAs offer a good level of protection, better than a straight brokerage account. But 401(k)s provide better protection. It’s only an issue if you are considering rolling your 401(k) into an IRA or if you are starting a new retirement plan for your business and can choose between the two.

3. California Homestead Exemption

California's homestead exemption protects a portion of your primary residence's equity from creditors:

• In 2021, a new law was enacted to significantly increase the homestead exemption. Under the new law, the exemption ranges from $300,000 to $600,000, indexed for inflation. Before 2021, the California homestead exemption was $75,000 for a single person and $175,000 for a married couple.

• 2024 Exemption. The 2024 homestead exemption is $349,720 to $699,426.

• The Homestead exemption is automatic. But if you want to tighten up the protection, you can record a Homestead Exemption. The Sacramento County Public Law Library has the form here.

4. LLC for Rental Property

If you own rental property in your name or in the name of your living trust, you will be personally liable for lawsuits related to the property. A robust landlord insurance policy is your first line of defense. Beyond that, you should consider transferring ownership of your property to a limited liability company (LLC).

An LLC creates a barrier between your assets and rental property lawsuits. If the plaintiff wins the case against you and your insurance coverage limits are insufficient to pay the damage award, his remedy is to place a lien on the LLC distributions. In most cases, he won't be able to go after the rental property and your personal assets.

However, there are caveats to using an LLC if you have a mortgage on your rental property. Your mortgage includes a “due on conveyence” clause. This means if you transfer title to an LLC without your lender’s consent, your lender could call the note and force you to pay it off. As a result, you may have to refinance. If you have a mortgage with a low interest rate, you would have to refinance with today’s higher rates. In reality, lenders will not know or care if you transfer title to an LLC, but you need to be aware of this risk. If you own the rental property outright, with no mortgage, then this is not an issue, and using an LLC for your rental property is a no brainer.

Beware of Fraudulent Conveyance

When we get calls about asset protection, it’s often from someone who has just been sued. And we have to tell them it’s too late. You cannot move your assets to place them out of reach from your creditor. Doing so is a fraudulent conveyance.

Fraudulent conveyance laws are designed to prevent debtors from transferring assets to avoid paying creditors. A debtor cannot transfer assets to prevent creditors from recovering their legitimate claim. This principle applies whether the creditor's claim is based on a judgment or other grounds. It can apply even if there is no claim, but the debtor has reason to know there will be a claim.

If you want to protect your assets, you must do it well before any claims are on your radar.

Dodgers and Giants

This is scary.

If you are a Dodger fan, congratulations you made the World Series. But in the dark recesses of your heart and mind, you fear your team is the 1990s Atlanta Braves, who dominated MLB for a decade but only won one World Series championship. Like the 1990s Braves, you have consistently had the best team in baseball for over a decade, but you only have one (covid asterisk*) World Series championship to show for it. And this year, you bought the best baseball player of all time. You better win. This is your time for fear and trembling.

For the Giants fans. Well, nothing could be more haunting than watching the Dodgers win a World Series.

Fingers crossed.