fbpx

Tag: tax

Posted on by admin

Introduction:

When crafting an estate plan in California, it’s crucial to address the multifaceted aspect of real estate ownership to ensure a seamless transition of assets. Real estate can often be the most significant component of an individual’s estate, and adequately addressing it is essential for comprehensive estate planning. Depending on when you purchased or acquired California real estate, there is a good chance that the property has appreciated in value, or is likely to appreciate in value. for this reason, when crafting your estate plan, your real estate portfolio requires additional thought that should not be overlooked. Sometimes it’s not always as straightforward as simply choosing a beneficiary to receive the property following your passing.

Fortunately, an experienced San Diego estate planning lawyer can assist you through this process.

 

When drafting your estate plan, here are ten pivotal questions to consider.

1. What Real Estate Do You Own and Who Do You Want to Receive Your Real Estate?

Evaluation:

Begin by taking stock of all your real estate assets. List each property, including primary residences, rental properties, vacation homes, and any undeveloped land. This foundational step is crucial for the subsequent planning stages.

Then list who your potential beneficiaries are and the relationship you have with them. How old are your beneficiaries? Are they related to you? 

2. How is My Real Estate Titled?

Ownership Structures:

Identify how each property is titled – whether individually, jointly, or through a business or trust. The title structure profoundly influences how the property is handled in estate planning and taxation.

Common ways to hold title in real estate can be:

  • Tenants in Common
  • Joint Tenants
  • Husband and Wife, as Community Property with Rights of Survivorship
  • Individual as sole and separate property
  • In a Trust
  • LLC

3. What is the Value of My Properties?

Appraisal:

Obtain current appraisals to know the market value. This valuation will play a significant role in tax planning and distribution to heirs.

4. What Are the Tax Implications?

Tax Liability:

Understand the potential tax liabilities, including property, capital gains, and estate taxes. California’s Proposition 19 has nuanced tax implications that should be understood and planned for.

5. How Should I Distribute My Real Estate?

Beneficiaries:

Decide how you wish to distribute each property. Consider the beneficiaries’ individual needs, preferences, and their ability to manage real estate.

  • Will my beneficiaries use the real property as their primary residence in the future?
  • Should I distribute the real estate into the names of my beneficiaries where there names will be on the deed upon my death?
  • Should I distribute the real estate in an Asset Protection Trust to my beneficiaries?

These questions are all incredibly important to consider for purposes of Prop 19 and transfer tax reassessment purposes.

6. Is there a mortgage on the property?

Who will assume your mortgage?:

Under the Garn-St Germain Depository Institutions Act of 1982, lenders cannot enforce the due-on-sale clause in certain situations, such as property transfers between family members upon death, during a divorce, or into a living trust.

7. How Can I Protect My Real Estate from Creditors?

Asset Protection:

Explore strategies to protect your properties from potential creditors’ claims, lawsuits, or other liabilities. Legal tools like LLCs or trusts can offer enhanced protection.

8. Is My Real Estate Suitable for a Trust?

Trust Incorporation:

Consider incorporating trusts to avoid probate, provide for privacy, manage tax implications, and ensure a structured distribution of assets.

Revocable Living Trusts are best for probate avoidance and privacy. You can build in estate tax and capital gains tax planning strategies within your Revocable Living Trust.

Who will be responsible for the expenses of the property, including taxes and upkeep, during the administration process?

9. How Does California Law Affect My Estate Plan?

Legal Landscape:

California has specific laws regarding real estate and estate planning. How do these laws impact your properties and your overall estate?

10. Should I Consult with a Professional?

Expert Guidance:

Consider seeking advice from an estate planning attorney, especially one well-versed in California’s complex legal and tax landscape, to ensure your estate plan is robust, compliant, and optimized for your specific circumstances.

Conclusion:

The intertwining of real estate and estate planning is intricate, necessitating thorough scrutiny and strategic planning. By addressing these ten questions, you embark on a journey of crafting an estate plan that not only stands the test of legal and financial scrutiny but also honors your legacy and provides for your heirs with foresight and diligence.

Call to Action:

Embarking on estate planning, especially where real estate is involved, requires nuanced insight. Reach out to our team of seasoned estate planning professionals at Peaceful Warrior Law in San Diego, California, to guide you through each step, ensuring peace of mind and a legacy preserved. Contact us today for a personalized consultation.

Posted on by admin

For California’s real estate owners, weaving through the intricacies of estate planning can be akin to navigating a labyrinth. However, with strategic planning, understanding of tax laws, and adept utilization of estate planning tools, property owners can ensure that their assets are not only protected but also serve as a legacy for generations. This article will explore the comprehensive steps, legal considerations, and practical examples to optimize estate planning for real estate owners in California.

California Homeowners Should have a Living Trust

Table of Contents

  1. DETAILED PLANNING WITH RELEVANT LAWS
    • Understanding Proposition 19
    • Navigating Federal Estate Tax Laws
  2. HOW A TRUST PROVIDES PROTECTION
    • Benefits of Establishing a Trust
    • Why a Revocable Living Trust is Usually Best
    • Other Types of Trusts That Provide Different Types of Protection
  3. EXAMPLES OF HOW COMPLEX ASSETS SUCH AS REAL ESTATE ARE INTEGRATED INTO INTO ESTATE PLANS 
    • Incorporating a Living Trust
  4. HOW DO YOU KNOW WHICH TYPE OF TRUST IS RIGHT FOR YOU?
    • Revocable Living Trust
    • Irrevocable Living Trust
    • Domestic Asset Protection Trust
    • Medicaid Asset Protection Trust

1. DETAILED ESTATE PLANNING WITH RELEVANT LAWS IN CALIFORNIA

A) Understanding Proposition 19

Under Proposition 19, effective February 16, 2021, California homeowners who are 55 or older, severely disabled, or victims of wildfires and natural disasters can transfer their property tax base to a new residence of any value anywhere in the state up to three times during their lifetime California Board of Equalization.

Prior to Proposition 19, homeowners would be able to pass down real property to their heirs and preserve their tax basis, wholly discouraging people to sell their family property and istead, opt to continue to pass it down from one generation to the next.

Example:

Let’s consider John, a 60-year-old long-term homeowner in San Francisco. His home, purchased two decades ago, has an assessed value of $500,000, although its current market value is $2 million. His annual property taxes are based on the assessed value, leading to substantial savings.

With Proposition 19 in effect, John has the option to purchase a new home in Los Angeles, valued at $2 million, without seeing a spike in his property taxes. He can transfer the $500,000 assessed value (adjusted for the difference in the market price of the two homes) to the new property, resulting in considerably lower property taxes than if the new home were taxed at its full market value.

B) Navigating Federal Estate Tax Laws

As of my knowledge cut-off in 2022, the federal estate tax exemption is at $11.7 million for individuals and $23.4 million for couples, indexed for inflation IRS.

Example:

If Sarah, a homeowner in San Diego, has an estate valued at $10 million, including her real estate, she won’t owe federal estate taxes upon her death, safeguarding her heirs from this financial burden.

2. HOW A TRUST PROVIDES PROTECTION FOR HOMEOWNERS IN CALIFORNIA

A) Benefits of Establishing a Trust

In California, establishing a trust can offer significant protection for homeowners by ensuring their property is managed according to their specific desires and providing a shield against probate proceedings upon death. By placing your home into a trust, you maintain control over the property during your lifetime while designating a successor trustee to manage the property upon your passing. This strategy not only facilitates a smoother and faster transfer of property to your designated beneficiaries but also helps protect the asset from public scrutiny and the often lengthy and costly probate process. Trusts can also offer a layer of privacy and may provide some protection against creditors, making them a wise consideration for anyone looking to safeguard their most valuable asset—their home.

There are many different types of trusts, but the type of trust that is the most foundational for all homeowners in California is the “Revocable Living Trust.”

B) Why A Revocable Living Trust is Usually the Best Option

A revocable living trust is a legal entity created to hold ownership of an individual’s assets during their lifetime and to specify how those assets are to be handled after their death. This type of trust is called “revocable” because it can be altered or completely revoked by the trustor (the person who creates the trust) at any point during their life, as long as they remain mentally competent. The trustor typically acts as the trustee, managing the trust’s assets, which might include real estate, bank accounts, and investments. Upon the trustor’s death, the trust becomes irrevocable, meaning it can no longer be changed, and the successor trustee then steps in to manage or distribute the assets according to the trust’s terms. This setup helps bypass the often lengthy and costly probate process, provides privacy since the trust details do not become part of the public record, and can offer more precise control over the distribution of assets to beneficiaries.

C) Other Types of Trusts That Provide Different Types of Protection

  • Irrevocable Trust

An irrevocable trust is a type of trust where the terms cannot be modified, amended, or terminated without the permission of the grantor’s named beneficiaries once it has been created. Unlike a revocable trust, the grantor, once they transfer assets into an irrevocable trust, effectively removes all of their ownership rights over those assets. This transfer is permanent, providing significant benefits such as protection from creditors and legal judgments, as well as potential tax advantages. Because the assets no longer belong to the grantor, they are not included in the grantor’s taxable estate, potentially reducing estate taxes. Irrevocable trusts are often used for asset protection, to provide for a beneficiary who shouldn’t directly inherit assets due to incapacity or irresponsibility, and for charitable estate planning.

  • Domestic Asset Protection Trust

A Domestic Asset Protection Trust (DAPT) is an irrevocable trust established under specific U.S. state laws to shield a grantor’s assets from creditors and legal claims. By transferring assets into a DAPT, the grantor relinquishes ownership but can still potentially benefit as a discretionary beneficiary, managed by an independent trustee. This structure ensures that the assets are generally inaccessible to creditors and not included in the grantor’s personal estate, providing significant protection while allowing the grantor some level of access to the trust’s benefits. DAPTs are particularly appealing to high-net-worth individuals seeking effective asset protection strategies.

  • Medicaid Asset Protection Trust

A Medicaid Asset Protection Trust (MAPT) is a type of irrevocable trust designed to protect an individual’s assets from being counted for Medicaid eligibility purposes. By placing assets into a MAPT, individuals can safeguard their wealth, ensuring it is not depleted by the costs of long-term healthcare, while potentially qualifying for Medicaid benefits. The trust must be properly structured and adhere to strict regulations, including a look-back period, typically five years, during which assets transferred into the trust may still be considered by Medicaid in determining eligibility. The grantor of the MAPT relinquishes control over the assets and cannot be the trustee, but they can designate who will receive the trust’s assets after their death. This setup allows the assets within the trust to be protected from both Medicaid recovery and other creditors, ensuring that the grantor’s legacy can be preserved for their beneficiaries.

3. EXAMPLES OF HOW COMPLEX ASSETS (SUCH AS REAL ESTATE) ARE INTEGRATED INTO ESTATE PLANS

A) Incorporating a Living Trust

Living trusts are pivotal for California property owners. They ensure that real estate and other assets are passed on seamlessly without going through probate, which can be a public, time-consuming, and expensive process.

Example:

Matthew, owning a beachfront property in Malibu, places it in a living trust. Upon his passing, the property is transferred to his daughter, Lisa, without undergoing probate, ensuring privacy and expediency.

B) Utilizing Gift Deeds

While gifting property can be an efficient method of asset transfer, it’s pivotal to understand the tax implications. The annual gift tax exclusion and lifetime gift and estate tax exemption play a crucial role IRS.

Example:

David gifts a condo in Sacramento to his son, Alex. Given the current annual gift tax exclusion, if the property’s value is within the allowable limits, there will be no immediate tax implications for either party.

4. HOW DO YOU KNOW WHICH TYPE OF TRUST IS RIGHT FOR YOU?

Choosing the right trust for a California homeowner who currently lacks an estate plan depends on their specific goals, financial situation, and needs for asset protection. Here’s a brief guide to help determine the most suitable type of trust:

  1. Revocable Living Trust: Ideal for homeowners who desire flexibility and control over their assets. This trust allows the grantor to retain control over the assets during their lifetime, including the ability to amend or revoke the trust. It helps avoid probate, provides privacy, and ensures that assets are distributed according to the grantor’s wishes upon their death. It’s a good fit if the primary concern is simplifying the administration of the estate rather than asset protection from creditors.
  2. Irrevocable Living Trust: Suitable for those who are willing to relinquish control over their assets for the benefit of asset protection and potential tax advantages. Once assets are transferred into this trust, the grantor cannot modify the trust without the beneficiaries’ consent. This trust offers stronger protection against creditors and can reduce estate taxes, making it a good choice for individuals with significant assets who are also concerned about future liabilities and estate tax implications.
  3. Domestic Asset Protection Trust (DAPT): Appropriate for individuals with substantial assets who seek to protect their wealth from potential future creditors while maintaining some beneficial interest in the trust. This type of trust is particularly effective in states that allow for DAPTs, providing strong creditor protection while allowing the grantor to remain a discretionary beneficiary.
  4. Medicaid Asset Protection Trust (MAPT): Best suited for individuals concerned about future medical costs and the possibility of depleting their estate through long-term care expenses. This trust protects assets from being counted for Medicaid eligibility, but it requires careful planning to comply with Medicaid’s look-back period and other eligibility criteria.

For a California homeowner starting an estate plan, a revocable living trust often serves as a foundational component due to its flexibility and the control it offers. However, if the homeowner is particularly concerned about protecting assets from creditors or ensuring Medicaid eligibility, considering an irrevocable trust, DAPT, or MAPT might be more appropriate. Each type of trust serves different purposes and comes with its own set of legal and financial considerations, so it’s essential to evaluate the homeowner’s individual circumstances and objectives thoroughly. Consulting with a specialized estate planning attorney can provide tailored advice and ensure that the chosen trust aligns with the homeowner’s overall estate planning goals.

Conclusion

Owning real estate in California presents both an opportunity and a responsibility. Through comprehensive estate planning infused with an intricate understanding of state and federal tax laws, property owners can turn potential complexities into streamlined, cost-effective processes that ensure asset preservation and legacy building.

Key Takeaways

  • Stay updated with the evolving tax landscape, including state-specific propositions and federal tax laws.
  • Incorporate specialized estate planning tools like living trusts to facilitate efficient asset transitions.
  • Regularly review and adapt your estate plan, considering the dynamic nature of the real estate market, tax laws, and individual asset portfolios.

It’s crucial to remember that estate planning is about more than just documents; it’s about informed decisions that shape your future and the future of your family. To take your financial organization to the next level and make the best choices for your loved ones. Click here to schedule a Family Wealth Planning Session™ with us. Mention this article, and you can access this valuable $750 session at no charge.

As always, we’re here to support you on your journey toward financial security and peace of mind. Financial planning is a dynamic process, and with the right strategies in place, you can confidently navigate the ever-changing financial landscape and achieve your long-term goals.

Posted on by admin

You’ve probably heard about the national debt ceiling and its recent extension, but you might wonder what it has to do with your everyday life as a family. While it may seem like a distant matter, the national debt ceiling extension can have a significant impact on your family’s financial well-being and future planning.

So What Exactly is the National Debt Ceiling Extension? 

The national debt ceiling is a legal limit set on the amount of money the government can borrow to finance its operations and meet its financial obligations domestically and around the globe. When the government reaches this limit, it cannot borrow more money unless Congress raises or extends the country’s debt ceiling. If the ceiling isn’t raised and the United States can’t pay back its debts, the country’s global creditworthiness is affected as well as financial security abroad and at home.

Congress raised the national debt ceiling on June 3, 2023, which means the United States will not default on its loans. This is good news, and yet the extension of the debt ceiling can still affect the economy and your family.

Here’s how the national debt ceiling extension can affect the economy, and your family, and what you can do to mitigate the impacts.

Access to Credit and Loans

You likely rely on credit and loans for various purposes, such as buying a home, financing education, or handling unexpected expenses. When the national debt ceiling is extended, it can create uncertainty in the financial markets, leading to higher interest rates and tighter lending conditions. This means that securing affordable credit and loans for major life milestones or managing financial emergencies may become more challenging.

One of the ways you can mitigate this impact could be to consider starting a business or a side hustle, so you can create multiple revenue streams instead of just being reliant on one, and leverage access to business credit, which can be more accessible and less expensive than using personal credit, even in tight lending markets.

Consumer Confidence and Spending Habits

Your family’s financial health may be closely tied to the state of the external economy. When there is uncertainty surrounding the national debt ceiling, coupled with high inflation, it can affect consumer confidence and spending habits. As people become concerned about the government’s ability to manage its debt, they may tighten their spending, leading to decreased demand for certain goods and services. This can have a direct impact on your job stability, income growth, and even your ability to save and invest for the future.

One way to mitigate this risk is to begin to separate the well-being of your family from the greater economy by creating your own local economy, wherever possible. If that feels far afield, consider ways that you can begin to generate income locally by making a product that friends and neighbors would want and need, or providing a side service within your local community.

If you decide to go this route, contact me at (858) 427-0539 to discuss options to create your side business in the most tax-advantaged and liability protected manner.

Government Programs and Support

Government programs and support play a crucial role in many families’ lives, especially during challenging times. However, when the national debt ceiling is extended, it can put pressure on government budgets, leading to potential cuts or delays in funding for essential programs and services. This may directly affect your access to healthcare, education, housing assistance, and other forms of support that your family relies on.

If you have a child or family member with special needs or an elderly family member you’re supporting, this may affect you even more. Now is the time to get into closer relationship with your nuclear and extended family, marshall all the family resources, and get into conversation around how you can use all the family resources to support all of the children and elders in the best way possible. If you need help speaking to your parents, or considering how best to ensure a lifetime of support for a child with special needs, give us a call at (858) 427-0539 and let’s strategize together.

Tax and Fiscal Policies

Changes in tax and fiscal policies, often influenced by the national debt, can have a significant impact on your family’s finances. As the government seeks ways to manage the national debt, it may consider adjustments to tax rates, deductions, or credits. These changes can directly affect your take-home income, savings, and overall financial planning. Understanding and adapting to these shifts is crucial for effectively managing your family’s budget and long-term wealth and legacy.

You can be fairly certain tax rates will go up to support the debt extension. And, the middle class, especially those who don’t know how to mitigate tax impacts with legal entity structuring, are likely to bear the burden. If you want to leverage the tax-advantaged strategies of the wealthy to keep more money in your local community, and in your family’s bank account, contact us at (858) 427-0539 to discuss options.

Ongoing Guidance for Your Family

We understand that managing your family’s financial and legal well-being can feel overwhelming, especially when it’s hard to know how changes in the law and the financial landscape will affect you. But remember, you don’t have to face these challenges alone. Our mission is to provide you with the support and guidance you need as you navigate changes in the law so you can build a life you love while protecting and preserving your wealth and legacy for the next generation.

While we aren’t financial advisors, we can connect you with a trusted network of professionals and work alongside your financial and tax advisors to make sure your estate plan coordinates with your overall financial plan and protects your family’s wishes and wealth no matter what the future brings.

Ready to protect your family’s wealth and preserve your assets and your story for generations to come? Call us at (858) 427-0539 to learn more.

This article is a service of Brittany Cohen, Personal Family Lawyer. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session, during which you’ll get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.

[email protected]

858-427-0539

Posted on by admin

Although the end of the year can be a hectic time, it’s also the deadline for your family to implement a number of key tax-savings strategies. By taking action now, you can significantly reduce your tax bill due in April, but with just a few weeks left in 2022, you better act fast.

While there are dozens of potential tax breaks you may qualify for, here are 4 of the leading moves you can make to save big on your 2022 tax return. However, there may be other opportunities for saving, so meet with us to make certain you haven’t missed a single one.

01 – Maximize retirement account contributions

By maximizing your contributions to tax-deferred retirement accounts, such as IRAs and 401(k)s, you can not only save for retirement, but also reduce your taxable income for 2022.

In 2022, you can contribute up to $6,000 to an IRA and up to $20,500 to a 401(k) if you’re under 50, and up to $7,000 to an IRA and $27,000 to a 401(k) for those 50 and older. If you don’t have the cash available to fund the maximum amount, try to contribute at least any amount that will be matched by your employer, since that’s basically free money, and you lose it if you don’t use it.

The ability to deduct your traditional IRA contributions from your taxes comes with certain limitations. These limitations are based on factors, such as whether or not you or your spouse is covered by a retirement plan at work and your adjusted gross income (AGI), so make sure you know how your family is affected by these limits when taking deductions. On the other hand, Roth IRA contributions are not tax deductible, since they’re made after taxes are taken out, but withdrawals from a Roth in retirement are tax-free.

Additionally, consider maxing out contributions to your Health Savings Account (HSA). Contributions to HSAs for 2022 are capped at $3,650 for individuals and $7,300 for families, with an additional catch-up contribution of $1,000 allowed for those age 55 and older.

You have until December 31, 2022 to contribute to a 401(k) plan and until April 18, 2023 to contribute to an IRA or HSA for the 2022 tax year.

02 – Defer income if you’ll make less next year

If you’re expecting to make significantly more income this year than in 2023, try to defer as much income into next year as possible. However, this strategy only makes sense if you’ll be in the same or a lower tax bracket next year.

This might mean asking your boss to delay paying a year-end bonus until after Jan. 1, 2023, or if you’re self-employed, waiting to invoice certain clients until the new year. On the other hand, if you think you’ll be in a higher tax bracket in 2023, you may want to do the opposite and accelerate income into 2022 to take advantage of a lower tax bracket.

Meet with us to find out what’s best for your situation.

03 – Use “loss harvesting” to offset capital gains

With the stock and crypto markets down this year, it can be the ideal time to use a strategy called “loss harvesting,” which means selling taxable investment assets, such as stocks, mutual funds, and bonds, at a loss to offset any capital gains you may have realized earlier in the year. Capital losses offset capital gains dollar for dollar.

If your losses exceed your gains, you can write off up to $3,000 of collective losses against other income. Any losses in excess of $3,000 can be carried over into the next year. In fact, you can carry over such losses year after year over your lifetime.

Note that the loss harvesting strategy does not apply to tax-advantaged accounts, such as 401(k)s, IRAs, and 529 plans. Additionally, the IRS “wash-sale” rule prohibits using this tax write-off for buying a “substantially identical” asset within a 30-day window before or after the sale that generated the loss.

Given the restrictions, you should always consult your CPA or financial advisor before employing loss harvesting to ensure it doesn’t backfire on you.

04 – Watch your required minimum distributions (RMDs)—or ensure your parents are watching theirs—if you or they are over age 72

If you have an employer-sponsored retirement plan, including a 401(k), 403(b), traditional IRA, SEP IRA, or SIMPLE IRA, you must start taking required minimum distributions (RMDs) by April 1st of the year that follows the year you turn 72. After that, annual withdrawals must be made by December 31st each year to avoid a serious penalty.

If you fail to take the proper RMD, you may face a 50% excise tax on the amount you should have withdrawn based on your age, life expectancy, and your account balance at the beginning of the year. If you do make a mistake, you may be able to avoid the penalty by requesting a waiver from the IRS. You can request a waiver if your failure to take the RMD is due to a reasonable error, and you take steps to make the required distribution. To request a waiver, submit Form 5329 to the IRS, with a statement explaining the error and the steps you’re taking to correct it.

Note that in 2022 the IRS updated its uniform lifetime table to calculate RMDs to account for longer life expectancies. As a result, your RMDs for this year may be slightly lower compared to previous years. To determine your RMD, refer to the IRS RMD worksheet, or use an RMD calculator.

Maximize Your 2022 Tax Savings

Implementing these—and other—year-end tax-saving strategies could save your family thousands of dollars on your 2022 tax bill. But if you don’t act soon, some of these opportunities may vanish for good, so meet with us today to schedule your appointment and lock in your savings

This article is a service of Brittany Cohen, Personal Family Lawyer. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session, during which you’ll get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge

[email protected]

858-427-0539