Estates of Mind

Uncertainty and what it means for you

2011-07-27T10:59:00.000-07:00

I have been receiving the same type of question from many clients lately. In each instance, the question centers around the activities of the government in spending more money than we have (and printing what it doesn't have!) and what that means for us on an ongoing basis. Every client of mine is aware of the current opportunity to use the five million dollar ($5,000,000.00) per person exemption to do advanced estate planning if the client's situation calls for it, but often in discussions the clients are nervous about whether this high exemption will continue to be in place for the rest of this year and next (currently set to reset to the one million dollar exemption level on 1/1/2013 unless congress acts to change the law before then). In upcoming blog posts we will be looking at some opportunities that high net worth individuals have by using the high exemption for this year, but my response to these clients who are nervous generally is always the same.

That response is that while the government has told us that we have the next two years to use this high exemption, I would not recommend that they wait until the end of 2012 to use the exemption if they need to do advanced planning. This is because it would be easy for the government to change the law for 2012 anytime before that calendar year starts (so think about a "compromise" at the end of this calendar year or anytime before then). If the government does change the exemption levels then people who would otherwise need to use the higher exemptions may not be able to do so if they wait until next year (especially since we do not know if any changes to these exemptions are on the table in any of these debt ceiling discussions). My recommendation to anyone reading this post is that you work with your existing planner NOW to determine if the exemption should be used this year in order to ensure that the planning can be done. When people allow the uncertainty to prevent them from doing the planning that they otherwise need to do, that leads to inaction and ultimately a poor or bad result for one's family. Do not let the media or the politicians convince you that it is sufficient to wait for "certainty" to happen. Create your own certainty by working with competent planners who can advise you on all of the issues that people are facing in today's world.

Teaching in the Fall

2011-07-27T10:45:00.000-07:00

I'll be teaching Federal Income Taxation in the Fall Semester at Trinity law School. For any students reading this, we'll be going through many of the fundamental code sections that are important in this practice area and focusing on statutory interpretation (as we'll probably spend more time in the Internal Revenue Code than in the casebook). If any Trinity Student has any questions about what will be covered in the class, I will be submitting the syllabus this week and I will be available to discuss if you have further questions.

Highlighted Charity for February 2011

2011-02-02T08:57:00.000-08:00

This month's featured charity is The Foundation for Hope and Innovation. Their website and other information can be found here:

They are a 501(c)(3) organization that was formed to do cancer research. They are passionate about doing everything that they can to fight this disease and do very good work. As their website states, their mission is:

http://www.foundationofhopeandinnovation.com

"The Foundation of Hope and Innovation is dedicated to cancer research. We strive to improve treatment outcomes of those affected by the disease as well as foster awareness in the medical community and the general public. We are committed to providing hope through innovative approaches that promise to extend the lives of cancer patients and keep them cancer free longer."

As with all of the charities that I highlight in this Blog, I find them to be doing important work for society that will impact all of us (whether we get cancer in the future or a loved one or friend). If you have any questions about what they do or want to find out more, check out their website set forth above.

2010 changes and how to plan in 2011 and 2012

2011-01-29T20:36:00.000-08:00

The dust has now settled on the 2010 Tax Legislation called "The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010" which was passed in December of 2010. This act was passed just a few weeks prior to the so called "sunset" of the Bush tax cuts and has generally extended those cuts for two more years (until December 31, 2012). No matter where you are at on the political spectrum, this act has created some interesting planning opportunities that may, or may not, exist at the end of 2012 (depending on the results of that election). My goal is to place my other ongoing series of posts on hold and spend some time unpacking this tax act. There is much that needs to be discussed from the act, and I will start discussing the major areas that clients are asking about and that they should be asking about.

In no particular order, some of the topics that are of interest to my clients are: the addition of an election for decedent's estates dying in 2010 (either keeping the unlimited estate transfer with no step up in tax basis or the five million dollar exemption with the step up in tax basis), portability of a deceased spouse's unused exemption amount, the extension of income tax dividend and capital gain rates, and much more.

I will be discussing many of those topics in individual blog posts, but at this time note that if you have an estate over five million dollars (for a single individual) or over ten million dollars (for a married couple), this two year period may give you an unparalleled planning opportunity (especially if the election in 2012 creates a balance of power in the government that does not support the five million dollar exemption). Many of my high net worth clients that have taxable estates over the ten million dollar level are really looking at using the full ten million dollar gift to fund life insurance strategies, private annuity strategies, installment sale strategies, and many others. If you have been waiting to discuss proper planning until a more permanent law is passed into effect, then you may want to reconsider for this next two year period.

If you have any questions about your current estate planning or about what techniques can really work in this environment for the next two years, do not hesitate to contact me at 949-788-1819 or Mark@Zieboldlaw.com.

Year End Planning

2010-11-21T15:18:00.000-08:00

Many clients have contacted me and asked about the most effective planning methods and techniques during this year where the "regular" estate, gift, and generation skipping tax rules will go back in effect next year (more on that below). With regard to each person's unique situation, different planning techniques may provide you or them with some extra benefit if done before the end of the year. In general, those include large lifetime gifts (as the tax rate on gifts over the million dollar lifetime gift credit) is 35% in this year, but reverts back to a maximum rate of 55% next year without any congressional action. Based on this, if you are a client who has been thinking about making large gifts and who does not mind paying gift taxes, then this is the year to make outright, large gifts. These types of gifts can be made to trusts as well, but based on the rules regarding generation skipping taxes, I am not recommending that you make large gifts to trusts that have beneficiaries who would trigger generation skipping taxes. The reason for this is that even though there is no GST tax this year, the GST tax will be assessed against distributions from trusts in the future if the gift that funded the trust was not exempt from this type of tax. Due to this change in the law that will occur on January 1, 2010, I am suggesting to clients that if they want to make large gifts to grandchildren or more remote heirs to avoid the GST tax in the future (and to take advantage of the lower gift tax rate this year), then the gifts should be outright. If the trust is set up to benefit the children of the Donor, then the large taxable gift can be made to a trust for that person's benefit, but the trust must be set up to be included in that beneficiary's estate if you do not want it to be subject to GST taxes in the future.

In general, planning techniques involving charitable gifting (outright gifts to charities, creation and funding of private foundations, public charities, etc.) all must be done before the end of the calendar year instead of the tax due date of April 15th next year. Based on this, if you are working with your CPA to determine if you need additional charitable deductions for this tax year, make sure that you work with your attorney to provide enough time to make these gifts prior to the end of the year. Even the formation of private foundations can be done prior to year end as they can be formed and funded (giving you the tax deduction) if the entity obtains its 501(c)(3) status within a close period of time of the formation of the entity (you must generally file the 1023 form within 27 months of formation if you want the operations of the entity to be tax exempt from the date of formation).

In addition to all of the above, Congress is going to modify the GRAT rules sometime next year, so if you would benefit from a two year GRAT, then that may be another planning technique to consider. Life Insurance is also another great option that people sometimes consider too late (based on developing health issues). The earlier you get a life insurance plan in place, the better your costs will be (and you will often be able to get more coverage).

If you have questions about what any of the above means, do not hesitate to contact me by phone or email and we can discuss your questions in greater detail.

New Firm and Services Offered

2010-11-05T08:25:00.001-07:00

It has been a while since I last posted on this blog, but that should change from this point forward as I have left my prior Firm and have opened up my own office. My new contact information is as follows:

Ziebold Law Group
9870 Research Drive, Suite 105
Irvine, CA 92618
949-788-1819 x 129 (phone)
949-788-1869 (fax)
Mark@Zieboldlaw.com

In addition to this, two others and myself are planning on offering Christian Fiduciary Services (Trustee services from a Christian Worldview) in the near future (outside of my law practice). Please update your contact information for me with the information above and have a great day.

Content on Avvo website

2010-06-30T09:34:00.001-07:00

I have started providing legal answers and legal guides on Avvo (www.avvo.com). Take a look at the following:

Next Asset Protection Society Meeting

2010-06-25T23:31:00.000-07:00

The next meeting of the Asset Protection Society in Orange County will be held on Tuesday, July 20, at 7:00 PM at our offices located at 3737 Birch Street, Suite 400, Newport Beach, California 92660. Todd Rustman of GR Capital Asset Management (www.gr-cam.com) will be speaking about absolute return investing and market alternatives in the current economic environment. He will also be highlighting several methods in these strategies to protect your investments from market downturns and other factors. If you would like to attend this meeting, please contact me to RSVP at mziebold@ferruzzo.com or call me at 949-608-6900.

Highlighted Charity for June

2010-06-10T13:42:00.000-07:00

From time to time I will highlight some of the charities that I learn about and/or work with in my practice. At this time, I want to highlight blood:water mission for the work that they are doing in Africa.

Blood:Water Mission is a grassroots organization that empowers communities to work together against the HIV/AIDS and water crisis. They work to provide clinics and clean water to communities in Africa, in order to combat the ongoing problem (instead of just dealing with the symptoms of the overall problem). You can see more about their organization and what they are doing on their website at:

www.bloodwatermission.com

I highly recommend what they are doing and will be supporting their ministry on an ongoing basis in the future.

State Certification

2010-06-03T22:37:00.000-07:00

The State Bar has approved my application and now I have received the certification as a specialist in Estate Planning, Trust, and Probate Law:

http://members.calbar.ca.gov/search/member_detail.aspx?x=227950

You can read more about the specialization designation here:

http://www.calbar.ca.gov/state/calbar/calbar_generic.jsp?cid=11584&id=9161

Many thanks to my Firm, Ferruzzo and Ferruzzo, who has supported me through the process of receiving this designation.

Next Asset Protection Society Meeting

2010-05-04T17:02:00.000-07:00

The next meeting of the Asset Protection Society in Orange County will be held on Tuesday, May 18, at 7:00 PM at our offices located at 3737 Birch Street, Suite 400, Newport Beach, California 92660. I will be speaking about the changes to the estate tax laws in 2010 and about effective planning techniques that will aid clients in 2010 or in later years. If you would like to attend this meeting, please contact me to RSVP at mziebold@ferruzzo.com.

Speaking at Signature Resources on 4/29

2010-04-13T09:38:00.000-07:00

I will be speaking at Signature Resources on Thursday, April 29, at 7:00 PM. There will be a time for wine tasting, Hors d'oeuveres, and an art display beginning at 6:00 PM. If you are interested in attending, please contact myself ( mziebold@ferruzzo.com or 949-608-6900 ) or the host, Wil Smith of Signature Resources (contact information below).

The topic for the evening will be Important Planning Issues for 2010 and Beyond.

Date: Thursday, April 29,2010
Time: Wine tasting, Art display and Hors d’oeuveres, 6:00 pm
Presentation, 7:00 pm
RSVP 949 794-0184 or wsmith@SRIFS.com

New Franchise Tax Board News Release

2010-04-13T09:34:00.000-07:00

It looks like California, even with the debt issues that it has, has decided to help people who have lost their homes with this release.

Beginning of Release:

April 13, 2010

Subject: California Enacts Mortgage Forgiveness Debt Relief

Sacramento –A new state law allows taxpayers to immediately exclude from their income the amount of mortgage debt on their home loan that has been forgiven by their lender. The law largely brings California statutes into conformity with current federal law. Previously, California conformed to federal debt relief only for 2007 and 2008, according to the Franchise Tax Board (FTB).

“California has been particularly hard hit by the housing crisis,” said State Controller and FTB Chair John Chiang. “This is a critical tax change that will help people in our state who already are suffering the loss of their homes.”

The new law, SB 401 (Wolk), allows most taxpayers to exclude canceled mortgage debt income of up to $500,000 on their principal residence. The limit is $250,000 for married/registered domestic partner (RDP) individuals filing separately. It applies to debt forgiveness in 2009 through 2012 resulting from a foreclosure, “short sale,” or loan modification of a taxpayer’s qualified personal residence.

Prior to the law’s passage, these amounts were taxable to California. If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount often is taxable. These amounts are generally reported on a 1099-C and are provided to both the taxpayer and the government. Debt forgiveness on other types of debt, such as a second home or business property, does not qualify for exclusion under the new law.

The law largely brings California into conformity with the federal Mortgage Forgiveness Debt Relief Act for discharges that occurred in tax years 2007 through 2012. However, California’s limits of qualifying principal residence indebtedness differ from federal limits.

Qualifying taxpayers who have already filed their 2009 tax returns should file Form 540X, Amended Individual Income Tax Return, to subtract the amount of debt relief from income. To expedite processing, write “Mortgage Debt Relief” in red across the top of the amended tax return. Taxpayers must attach a copy of their federal return, including Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), with their state tax return.

Like federal law, the new state law allows individuals and businesses to exempt energy grants that are provided in lieu of federal energy credits from their gross income and alternative minimum taxable income. It also conforms California law to many other federal provisions.

According to FTB estimates, approximately 100,000 people may benefit from mortgage debt relief for tax years 2009-2012. For more information, taxpayers are urged to visit FTB’s website at www.ftb.ca.gov.

End of Release.

Speaking at Signature Resources on 2/18

2010-01-22T14:16:00.000-08:00

I will be speaking at Signature Resources ( www.signatureresources.net ) on February 18, 2010, at 5:30 PM. The topic for this presentation is the changes to the estate tax laws, along with planning recommendations during this year that will benefit your estate no matter what changes ultimately occur in the future. If you are interested in attending this presentation, contact Wil Smith at Signature Resources at 949-794-1006 or wsmith@srifs.com . You may also contact me at mziebold@ferruzzo.com and I can give you additional information about the presentation.

The Next Business Killers Presentation on 2/18

2010-01-22T14:04:00.001-08:00

The next Business Killers presentation will be held on Thursday, February 18 from 11:30 AM to 1:00 PM. This presentation covers important topics for business owners that I regularly see in my practice. Some of these topics are buy/sell agreements, key person insurance, valuations of businesses, business succession planning, and many others. If you are interested in learning more, then you can read about the presentation here: ( http://www.businesskillers.com ). If I can answer any questions about these topics or if you would like to attend this presentation, feel free to email me at mziebold@ferruzzo.com.

Next Asset Protection Society Meeting on 3/16

2010-01-22T14:01:00.001-08:00

The next meeting of the Asset Protection Society in Orange County will be held on Tuesday, March 16, at 7:00 PM at our offices located at 3737 Birch Street, Suite 400, Newport Beach, California 92660. Our speakers will be Hilary Schneider and Marc Nelson of ESOP Corporate Resources and they will be speaking about various uses of ESOPs for employee compensation planning, asset protection, tax planning, and much more. If you would like to attend this meeting, please contact me to RSVP at mziebold@ferruzzo.com.

The Next Business Killers presentation on 1/21

2010-01-20T15:58:00.000-08:00

The next Business Killers presentation will be on January 21 from noon to 1:30. This presentation covers important topics for business owners that I regularly see in my practice. Some of these topics are buy/sell agreements, key person insurance, valuations of businesses, business succession planning, and many others. If you are interested in learning more, then you can read about the presentation here: ( http://www.businesskillers.com ). If I can answer any questions about these topics or if you would like to attend this presentation, feel free to email me at mziebold@ferruzzo.com.

Upcoming Asset Protection Society Meeting

2010-01-14T19:38:00.000-08:00

The next meeting of the Orange County chapter of the Asset Protection Society will occur on Tuesday, January 19 at 7:00 PM at our office in Newport Beach, California. The speaker will be Jason Forsyth of FFG Valuations. He will be speaking on a variety of topics including business valuations and discounts. If you would like to attend, feel free to contact me by phone or email to RSVP.

Changes to 2010 Estate Tax Law and Client/Advisor Teleconferences

2010-01-14T19:24:00.000-08:00

Most of the practitioners who work with me in the area of tax and estate planning would not have gambled on the estate tax being repealed in 2010. However, this is where we sit at this time with no guidance as to what Congress will do in the future. Ultimately, each and every client has to decide what they will do with the changes that have occurred (whether to amend their current planning or to wait until Congress acts). The problem is though that many clients do not understand what the issues are as the only thing that the news focuses on is the repeal of the actual estate tax. Unfortunately no one is talking about the negative aspects of the transfer tax law in 2010, and especially for our California clients there are new developments with the California Probate code which will require amendments to your existing plan as well. Based on the above, our Firm is hosting teleconferences for existing clients of the firm and for other professionals who are friends of the Firm. For those who would like to attend one of our teleconferences, call our Firm's general line (949-608-6900) and ask for Deanna who will provide you with the information.

The taxation of life insurance policies – part 1

2009-11-06T15:54:00.000-08:00

Many clients come into my office and indicate that they have life insurance coverage and that they were told by their insurance agent that they would be protected from all taxes by the life insurance death benefit. They are also told that they can access the cash value of their life insurance policies on an income tax free basis during their life for retirement, or other purposes (paying for children’s college expenses, medical needs, etc.). While all of these statements are generally correct, I often meet with people who have misunderstood their life insurance agent or who really do not understand the different ways that a life insurance policy can be subject to taxation. My goal in this multiple part series of posts is to identify some of the common misconceptions regarding the taxation of life insurance and educate you on what you should look for when you are reviewing your own planning to identify potential problems that need to be fixed.

Initially, we must deal with the income and estate taxation of the death benefit of the life insurance policy. Under section 101(a) of the Internal Revenue Code (26 USC §101(a)), the general rule is that, “gross income does not include amounts received (whether in a single sum or otherwise) under a life insurance contract, if such amounts are paid by reason of the death of the insured.” Based on this statute, the death benefit of life insurance is generally exempt from income taxation. We will see some situations in future posts where this may even be incorrect, but the general rule is that there are no income taxes payable due to the receipt of a death benefit under a life insurance policy.

Unfortunately for many people they do not understand that just because the proceeds are not subject to income taxation, this does not mean that they are not subject to some other tax that is set forth in the internal revenue code. If the owner of the policy is the insured under the policy and they continue to have the power to change the beneficiary of the policy throughout their lifetime, then the death benefit will still be income tax free when it pays out, but under section 2042 of the Internal Revenue Code the proceeds of the life insurance policy will be subject to estate taxes. This means that while income tax will be avoided, estate taxes will not.

To illustrate this, an example may be of some help. Let’s say a single individual has a 1.0 million estate and has a life insurance policy of 5.0 million dollars on him or herself. Let’s also say that this insured has one child who is the beneficiary of the life insurance policy. When this person dies, the death benefit of the insurance (the 5.0 million) is paid to the child who receives the death benefit income tax free. However, since the insured owned the policy and had the ability to change the beneficiary through his or her lifetime (what the Internal Revenue Code refers to as the “incidents of ownership”), that death benefit will be added to the decedent’s other property and be subject to estate taxes. Based on that, the gross estate for estate tax purposes will be 6.0 million. By doing a rough calculation of the estate taxes payable in 2009 on such an estate, we would take the 6.0 million, reduce it by the individual’s estate tax exemption (currently 3.5 million) and then take the net result (2.5 million) and multiply that by the highest marginal estate tax rate of 45%. This would mean that while the child received 5.0 million income tax free, 1.125 million would have to be paid for the taxes on the estate based on the inclusion of the death benefit in the taxable estate (and would be due within nine months of the date of death of the insured). This is a rough estimate which could change with other planning or variables, but it shows the initial issue that the owner of a life insurance policy should not always be the insured. In the next post we will look at some ways to deal with life insurance policies that are owned outright in your own name and some other planning techniques that can both keep the death benefit income tax free but also estate tax free. If you have any questions about this or anything else on this blog, do not hesitate to contact me at mziebold@ferruzzo.com.

Upcoming Asset Protection Society Meetings

2009-11-06T08:33:00.001-08:00

Many people have asked for the schedule for the next few APS meetings. Here are the dates, speakers and topics for the next three meetings. If you are interested in attending any of these meetings, feel free to contact me at mziebold@ferruzzo.com to RSVP.

Tuesday, November 24, at 7:00 PM – Todd Rustman will be presenting on principally protected investment vehicles for your clients with some time spent on current premium financed life insurance programs.

Tuesday, January 19, at 7:00 PM – Jason Forsyth of FFG Valuations will be presenting on valuation topics (exact topic TBD), but will at least go over the changes in valuations due to any changes that occur in the legislation that passes throughout the end of 2009.

Tuesday, March 16, at 7:00 PM – Hilary Schneider of ESOP Corporate Resources is going to be presenting on planning with ESOPs (Employee Stock Ownership Plan) for income tax planning, asset protection, and a wide range of other applications.

Next Asset Protection Society Meeting

2009-10-27T09:02:00.000-07:00

We have scheduled the next Orange County Asset Protection Society Meeting for Tuesday, November 24, at 7:00 PM in our office located at 3737 Birch, Suite 400, Newport Beach, CA 92660. Todd Rustman of GR Capital Asset Management (www.gr-cam.com) will be speaking on principally protected investment options for your clients and include a discussion on some of the current options involving premium financed life insurance. If you are looking for investment options for your clients who have suddenly become much more risk adverse in this economy, you will not want to miss this discussion. Non financial advisors will also be in attendance to discuss the asset protection characteristics of these planning structures and how to ensure that your client is as protected as he or she can be. Please RSVP by emailing me if you would like to attend and if you have any other questions do not hesitate to contact me to discuss. Any advisor, client, or other people may attend by RSVP'ing with me at mziebold@ferruzzo.com.

The Next Business Killers Presentation

2009-10-01T12:32:00.001-07:00

We had a wonderful turnout for the first Business Killers presentation and will be doing another one on November 12 from noon to 1:30. This presentation covers important topics for business owners that I regularly see in my practice. Some of these topics are buy/sell agreements, key person insurance, valuations of businesses, business succession planning, and many others. If you are interested in learning more, then you can read about the presentation here: ( http://www.businesskillers.com ). If I can answer any questions about these topics or if you would like to attend this presentation, feel free to email me at mziebold@ferruzzo.com. The next upcoming presentation will be held on Wednesday, September 30from noon to 1:30.

Next Asset Protection Society Meeting

2009-09-18T14:40:00.000-07:00

A reminder that the next meeting of the Asset Protection society in Orange County will be on Tuesday, September 22 at 7:00 PM. We have had an overwhelming response to this event and we have had to change the location of the event due to that response. We currently have over forty certified public accountants, financial advisors, insurance agents, attorneys and other advisors who will be attending this event. If you are interested in attending, we do have a few more spots open so contact me to RSVP.

The speaker will be David Shaver of Ferruzzo and Ferruzzo, LLP. David Shaver's bio can be found here: ( http://www.ferruzzo.com/staff/dshaver.asp ). David is the partner in the firm that handles all of our trust, estate, and fiduciary litigation and he will be speaking to the CPA's, Financial advisors, and any other advisor who regularly works with trustees and others who are in fiduciary roles such as these about common mistakes that people in these positions make that generate liability not only for the trust, estate, or other entity, but also for the person individually and possibly for the other advisors.

If you advise fiduciaries, trustees, executors, administrators, conservators, guardians, or anyone else who has these increased duties, then you will not want to miss this presentation. Individuals who are acting in these capacities for family members may also want to attend as there will be a time for questions and answers on what they should and should not be doing in these roles. If you are interested in attending, please feel free to contact me at mziebold@ferruzzo.com to RSVP for this event. IF YOU DO NOT KNOW OF THE NEW LOCATION OF THIS EVENT, CONTACT ME FOR THE NEW ADDRESS.

Premium Financed Life Insurance Programs

2009-09-18T14:16:00.000-07:00

A client recently asked me about his options for paying for life insurance. His agent told him that he should not own the policy as the death benefit would be included in his taxable estate, so he should have his children purchase the life insurance on his life and be the beneficiaries of the policy. His concern was over the method to transfer enough to the children to pay for the premiums without gift taxes. I told him that gift taxes in that context would be a concern but from an asset protection perspective he probably would not want the children to own the policy outright. If the death benefit paid out directly to them, then they would be open to lawsuits, transmuting the separate property gift to community property (and leaving it open to divorces), etc.

The conversation then turned to using an Irrevocable Life Insurance Trust (ILIT) but the same concerns arose regarding the gift tax consequences of funding the trust with enough assets to pay for the premiums on the life insurance. With the withdrawal notices that most estate planners draft into ILITs, the annual gift tax exclusion gifts can be used to place a certain level of assets into the trust, but otherwise (especially if a client has a small amount of heirs or beneficiaries) the gifts will be taxable or use up some of their lifetime gift tax exemption amount (currently 1.0 Million per person). We then had a discussion on premium financed life insurance and the client both enjoyed the idea and decided to move forward with implementing this strategy.

Premium Financed Life Insurance is a planning strategy that uses third party financing to pay for the premiums. Usually the Life Insurance Policy is used as the primary collateral and the lender will credit a portion of the cash value of the policy against the overall collateral requirement. Any shortfall in the collateral position must be made up by someone, either the trustee of the trust or the insured or a beneficiary. By borrowing the premiums, the Trustee can enter into a variety of strategies to fund the insurance policy, such as:

1) Using Equity Indexed Universal Life policies to attempt to grow the cash value faster than the loan.

2) Having the insured gift an amount of funds to the trust on an annual basis to cover the interest payments on the loan.

3) Do one of the above and enter into other advanced estate planning such as a rolling GRAT (Grantor Retained Annuity Trust) strategy to place other assets inside of the trust on a tax efficient basis.

4) One of the other various programs that are out in the marketplace today.

Some of the important issues to keep your eye on with regard to premium financed life insurance strategies is the management of the third party loan (ensuring that the LIBOR or other interest rate is kept as low as possible throughout the term of the loan), the growth of the policy (if using a cash value strategy), and the requirements to either pay interest or to manage those interest payments during the lifetime of the loan.

I have reviewed many of the premium financed life insurance programs that are out in the marketplace and have an opinion on the best strategies from the legal perspective (as I am not insurance licensed and do not share in any of the commissions paid on any of these insurance products). If it has ever been suggested that you enter into a premium financed life insurance program and it did not make sense to you or there was something about the program that you did not like, then you may have been told about some of the inferior programs that are out in the marketplace. I advise many clients about the proper use of life insurance in their comprehensive estate plans for the payment of taxes, replacement of income of a deceased spouse, for charitable gifting after death, or for other reasons. All of these can be met with a premium financed life insurance program if the plan makes sense for you and your situation. If you have questions about this or would like to talk further about what planning options are available for you, do not hesitate to contact me at mziebold@ferruzzo.com or 949-608-6900.

Business Killers Presentation

2009-08-15T21:54:00.000-07:00

For those of you who are business owners, you will not want to miss these upcoming presentations. I will be speaking at several upcoming events that will highlight many of the issues that face business owners in regard to current and future planning. The presentation is named "Business Killers" as it deals with several topics that I see in my practice quite often that are very important but often neglected such as buy/sell agreements, key person insurance, valuations of businesses, business succession planning, and many others. If you are interested in learning more, then you can read about the presentation here: ( http://www.businesskillers.com ). If I can answer any questions about these topics or if you would like to attend this presentation, feel free to email me at mziebold@ferruzzo.com. The next upcoming presentation will be held on Wednesday, September 30, from noon to 1:30.

Estate tax savings with a Trust under the current law

2009-08-15T21:44:00.000-07:00

The question regularly comes up as to why a married couple should create a trust that splits into one or more subtrusts on the death of the first individual. While this discussion can be a rather lengthy one, the answer is that the internal revenue code does not currently allow the first spouse's estate tax exemption amount to be added to the surviving spouse's exemption amount for purposes of calculating the estate tax liability of the estate. Therefore, if a family wants to use both spouse's estate tax exemptions, they must create one or more irrevocable trusts on the first individual's death to use that person's exemption, and then on the surviving spouse's death, they may use their exemption amount on the remaining property that is contained in their taxable estate. If a family does not have an estate that is greater than one spouse's estate tax exemption amount (currently 3.5 million per person), then a trust can be set up that gives the surviving spouse access to and absolute control over all of the assets held in the estate. However, if the estate is greater than 3.5 million, then the splitting of the trust into two or three trusts on the death of the first person is necessary to maximize the two exemptions that are available to them.

One other reason that will also be investigated in a future post is that if the trust does not split into different trusts, then the surviving spouse may change the disposition plan over all of the assets. This often occurs when the surviving spouse remarries and there may be other children or beneficiaries that become people to whom the survivor wants to distribute assets to. By setting up a trust that becomes partially irrevocable on the death of the first spouse, there is certainty that the deceased spouse's wishes will be fulfilled with at least half of the estate.

In summary, if you have an estate that is worth over 3.5 million in 2009, then you should consult with your attorney to determine if you have an appropriate level of tax planning built into your revocable trust. More will be written on this topic in the future as we see what changes to the estate tax law the Federal Government makes.

New Location for Next Month's Asset Protection Society Meeting

2009-08-14T15:06:00.001-07:00

For those of you who have contacted me about the next Asset Protection Society meeting, here is an update. We have had such a large response that we are going to change the location of the meeting. If you would like to attend and have not yet RSVP'd with me, please contact me to do so. I will then provide you with the new location and answer any questions that you may have.

Next Asset Protection Society Meeting

2009-07-31T21:04:00.000-07:00

The next meeting of the Asset Protection society in Orange County will be on Tuesday, September 22 at 7:00 PM. The speaker will be David Shaver of Ferruzzo and Ferruzzo, LLP. David Shaver's bio can be found here: ( http://www.ferruzzo.com/staff/dshaver.asp ). David is the partner in the firm that handles all of our trust, estate, and fiduciary litigation and he will be speaking to the CPA's, Financial advisors, and any other advisor who regularly works with trustees and others who are in fiduciary roles such as these about common mistakes that people in these positions make that generate liability not only for the trust, estate, or other entity, but also for the person individually and possibly for the other advisors.

If you advise fiduciaries, trustees, executors, administrators, conservators, guardians, or anyone else who has these increased duties, then you will not want to miss this presentation. Individuals who are acting in these capacities for family members may also want to attend as there will be a time for questions and answers on what they should and should not be doing in these roles. If you are interested in attending, please feel free to contact me at mziebold@ferruzzo.com to RSVP for this event.

Speaking at NBI Seminar in Irvine on December 9, 2009

2009-07-23T08:40:00.000-07:00

I have been asked to speak at a continuing education event on December 9, 2009, in Irvine, California on the Top Ten Estate Planning Techniques. This is held by National Business Institute (www.nbi-sems.com) and it should be a good event. I will be speaking on Charitable Giving and Grantor Retained Annuity Trusts. More information on this event will be published later as I am told where it will be held.

Other websites

2009-07-20T20:40:00.001-07:00

Some people have asked where they can find out more information about my background and other things about me. You can find more information on these websites:

http://www.ferruzzo.com/staff/mziebold.asp

http://www.linkedin.com/in/markziebold

http://www.avvo.com/attorneys/92660-ca-mark-ziebold-119392.html

http://twitter.com/markziebold

http://www.naymz.com/search/mark/ziebold/1800194

http://lawyers.justia.com/lawyer/mark-allen-ziebold-79731/

That should get you started if you are wondering if I would be a good fit to work with on your tax or estate planning matter.

3rd meeting of the Orange County chapter of the Asset Protection Society

2009-07-20T20:29:00.000-07:00

Tomorrow evening at my office we are hosting the third meeting of the Orange County Asset Protection Society chapter. If you are interested in attending or would like to find out more about our meetings feel free to contact me at mziebold@ferruzzo.com

Different uses for Life Insurance and Life Insurance Trusts

2009-06-05T15:39:00.000-07:00

I had an interesting discussion with a client the other day about using life insurance for different planning techniques that you would normally perform with a different planning vehicle. For example, many of my clients retain my Firm to create private foundations or public charities so that they can govern the use of those contributed funds and obtain an income tax deduction. Many people use private foundations to accomplish this but then later shut them down when they realize how many rules there are from the IRS and how they are limited in running the organization. This specific client decided that the deduction was not the main goal, but to create a vehicle that could be used for many years by family members to facilitate gifting to other charities.

Based on this idea, we started discussing how an Irrevocable Life Insurance Trust would fulfill these goals, and at the end of the discussion the client said that of the two options where he or his family would retain full control over the assets within the trust, he was leaning towards using an ILIT instead of a private foundation. If the drafting attorney spends some time developing appropriate trustee provisions and ways for other family members to get involved (as co-trustees or on an advisory committee), you can do much of the same things with the proceeds of the life insurance trust (just without the income tax deduction).

If a client decides to be extremely creative, in many situations I will recommend that they consider using a properly drafted ILIT to further those goals or to be the main vehicle to fulfill them. Think about using Life Insurance to create a foundation type organization that is not subject to the rules of private foundations (but not free from tax), planning for death taxes in the traditional ways, using cash value in an ILIT to purchase assets from an estate (best for rapidly appreciating assets), Using insurance to fund a Health and/or educational trust in a jurisdiction like Delaware with a long rule against perpetuities so that the funds will always be available for the purposes in which you set them up for.

The client left my office with a new understanding that insurance is not just for the protection of your family anymore, but it is also a very cost effective way of leaving a legacy for yourself or your family in one or more different ways.

California State Tax Treatment of Ponzi Schemes

2009-03-27T10:39:00.000-07:00

Today's release by the Franchise Tax Board:

Date: March 27, 2009

Subject: Franchise Tax Board News Release
tel 916.845.4800 | Public Affairs Office
cell 916.416.6931 | Brenda Voet
Brenda.Voet@ftb.ca.gov
For Immediate Release

03.27.2009

FTB Offers Tax Guidance for Ponzi Scheme Victims
Sacramento - The Franchise Tax Board (FTB) today offered guidance on theft-loss deductions for California taxpayers who had losses from investment schemes.

“Tax remedies are available for victims of Ponzi schemes,” said State Controller and FTB Chair John Chiang.

State and Federal law allow taxpayers to deduct some uncompensated losses on their tax returns. A recent IRS ruling, Revenue Ruling 2009-9, clarifies the treatment of losses from investment schemes, including the nature of such losses (theft losses), the amount of such losses to be allowed, and the year of deductibility. The IRS also plans to follow a new procedure, Revenue Procedure 2009-20, which provides an optional “safe-harbor” for determining the year in which the losses occurred and a simplified method of computing the amount of the loss. A “safe-harbor” allows taxpayers to avoid later IRS challenges.

California will follow this guidance, and FTB will accept the form provided in Appendix A to Revenue Procedure 2009-20for those taxpayers who choose to participate in the safe harbor provision for California purposes. However, a taxpayer that takes advantage of the safe harbor for federal purposes is not required to do so for California purposes.

State law differs from the Federal law in two key areas. In these areas, State law controls:

· Statute of limitations for filing a claim for refund.
· Deductibility of net operating loss (NOL) carryforwards or carrybacks. (NOL carryforwards are suspended for most taxpayers for 2008 and 2009. Carrybacks are allowable but only for NOLs attributable to 2011 or later.)

FTB will soon offer more detail on the differences in a FTB Taxpayer Notice. Interested taxpayers should check FTB’s website at ftb.ca.gov for updates.

It looks like California will also be giving tax relief to those who are victims of fraudulent Ponzi Schemes. I will update everyone once the Franchise Tax Board offers more details on their treatment.

Introduction to the Asset Protection Society

2009-03-26T22:20:00.000-07:00

For those of you who are looking for additional information on asset protection, let me suggest the following resource. The website for the Asset Protection Society is: www.assetprotectionsociety.org . Once a potential client takes the time to review the depth of material on the website, they generally come away with some information that they do not know before visitng the website. From asset protection statutes in the various states to ratings of local advisors who practice in this field, it is a great resource to both the individual and professional.

For Orange County, we are planning the second local Asset Protection Society meeting and details will soon be mentioned on this blog. If you are an individual who would like to hear more about these topics and discuss issues with advisors in a friendly setting, feel free to email me and I will give you information on the meeting.

Ponzi schemes and Federal Tax Treatment

2009-03-26T22:00:00.001-07:00

A client called me the other day and mentioned that he and his CPA were having some arguments over the tax treatment of a bad investment. After discussing the issue with the client, it came out that the client had been involved with a Ponzi Scheme and had lost all of his investment in the program. This is not the BIG Ponzi Scheme that came up recently with Bernard Madoff, but the end result was the same.

This topic will not apply to 99.9% of the readers out there, so I will not spend a lot of time on it. Note though that the CPA wanted to be conservative and treat the investment as a long term capital loss (limited to $3,000 deduction per year) and the client wanted to deduct it according to the tax rules regarding theft.

After doing a bit of research, the IRS has come out with two rulings this year to help taxpayers who have been subject to this type of scheme. Revenue Ruling 2009-9 deals with the exact question as to whether these are theft losses or capital losses and goes on to deal with questions such as what year are the deductions available, how is the value of the loss determined, what limits prevent a person from taking the whole amount as a deduction, and other aspects. The IRS also published Revenue Procedure 2009-20, which provides safe harbor treatment for those who were subject to such schemes and report the losses in a certain way. If you were one of the people who were affected by one of them, then you should speak to your CPA and show him or her these two IRS Rulings to ensure that you are able to properly treat the theft that occurred to you.

Registration of foreign business entities in California

2009-03-26T21:30:00.000-07:00

I often receive questions about forming limited liability companies, corporations, and limited partnerships in other states besides California. The reason being that California imposes a minimum $800 franchise fee and a gross receipts tax on limited liability companies. Furthermore, many jurisdictions such as Delaware, Nevada and others have preferential corporate codes that would apply to businesses formed in those states. With these facts, many people would say that they should form any and every business entity outside of the state, but California also has rules regarding when a foreign entity (a business entity formed in another state) has to register to do business in the state of California.

If a foreign entity is doing business in the state of California, then the entity is required to register with the California secretary of state. If that occurs, then the foreign entity will be subject to the California fees outlined above. Many people after hearing this explanation will expect that there is a straightforward answer as to what level of intrastate business creates this requirement, but the corporations code states that "Transact intrastate business" means to enter into repeated and successive transactions of business in this state, other than in
interstate or foreign commerce. Section 17001 of the California Corporations Code also states that simply being a member of an entity or a shareholder is not enough to subject the entity to the California taxes. Based on this, many people who believe that being a resident of the state of California is enough of a requirement to register their out of state businesses are incorrect. However, if you take the next step and try to determine what level requires you to register, then that requires a detailed facts and circumstances analysis that your corporate attorney and accountant will have to make in order to make that decision for you.

If you have a business formed in another state and you have had questions about registering the entity to do business in California, feel free to contact me to discuss. Many times a discussion with the individual's CPA will answer many of their questions, but it often requires ongoing discussions in order to save you from an unpleasant surprise from the state of California.

2nd Orange County Asset Protection Society Meeting

2009-03-17T11:30:00.000-07:00

The date for the second Orange County Asset Protection Society Meeting has been set. It will be on Tuesday, May 12, at 7:00 PM. The website for the Asset Protection Society is here: www.assetprotectionsociety.org . The members are both advisors and individuals who have a desire to learn about and implement various asset protection structures for protection. If you would be interested in attending or have questions about the meeting or the society, contact me to discuss.

First Asset Protection Society meeting in Orange County

2009-03-06T10:42:00.000-08:00

For any potential client or advisor who would be interested, we are having the first local meeting of the Asset Protection Society (http://www.assetprotectionsociety.org) in Orange County, California, on Tuesday, March 10, 2009, at 7:00 PM. The location will be at the Law Office of Ferruzzo and Ferruzzo, LLP, which is located at 3737 Birch, Suite 400, Newport Beach, CA 92660. The initial meeting will be to discuss options for having ongoing meetings in Orange County and many of the members of the asset protection society who are in this area have decided to attend. If you are not a member of the asset protection society but would be interested in meeting some of the advisors who are members of the society, please email me for more details and I will give you more information for the March 10 meeting.

H.R. 436

2009-03-06T10:09:00.000-08:00

A few advisors that I work with have asked me to give my opinion on one of the proposed bills in the House of Representatives (HR 436) and specifically on the proposed changes to transfer tax valuation rules contained in the bill.

You can find the proposed text of the bill here: http://www.opencongress.org/bill/111-h436/text

While the bill does propose changes to the estate tax exemption amount, the proposed changes to the valuation rules are on the minds of many advisors. If you look at the Bill, it states,

"In the case of the transfer of any interest in an entity other than an interest which is actively traded (within the meaning of section 1092)

(A) the value of any nonbusiness assets held by the entity shall be determined as if the transferor had transferred such assets directly to the transferee (and no valuation discount shall be allowed with respect to such nonbusiness assets), and

(B) the nonbusiness assets shall not be taken into account in determining the value of the interest in the entity."

The first item to consider is what is a transfer "in an entity" and second, the issue of eliminating valuation discounts. The first issue is explained simply by pointing to many different kinds of estate planning techniques that advisors have used in the past and are currently using today. These vehicles for transfer planning are generally called family limited partnerships, family limited liability companies, or some other type of business entity owned primarily by one member of a family who begins gifting or selling those interests to younger individuals in the same family.

The second issue is the lack of valuation discounts for these types of transfers. In the past, the value of the business interest that was transferred could be reduced under several theories. These theories are usually discounts for lack of marketability (as closely held business interests generally do not have a market in which they are bought and sold) and lack of control (as the interest that is transferred by gift or sale is usually a minority interest).

The good news is that this bill has not yet been passed in the House of Representatives, but it continues to gather support from Representatives across the country. The bad news is that if this bill passes, then many estate plans or planning techniques that have used a family entity (Limited Liability Company or Limited Partnership) may lose their effectiveness for transferring future interests. If this bill passes, it is unlikely that it would have any kind of retroactive effects upon transfers, but any future transfers would be subject to the bill itself.

Based on this, I am recommending to my current clients that have family entities to consider completing their gifts or transfers before this bill is passed into law, or if they are not comfortable or able to conclude these transfers at the present time, to understand that future estate planning will be needed to eliminate any additional estate taxes based on the elimination of these discounts. If you or any of your family members or friends have been using a family limited partnership or family limited liability company to transfer wealth, it is as important now as it ever has been to make sure all of the administrative requirements are fulfilled (proper valuations of the interests, gift tax returns filed on an annual basis, interest payments made on installment sale promissory notes to trusts for the benefit of family members, etc.) and to continue to speak to your advisors about this Bill to find out if it passes in the future.

If you have one of these kinds of entities and you are uncertain as to whether or not you have been handling the administrative aspects of the entity correctly, or if you have questions about this proposed bill or any other estate planning question, do not hesitate to contact me.

A Great Time to do Advanced Planning

2009-01-19T20:23:00.000-08:00

With the current economic slowdown and the very real losses that have been incurred in people's retirement and other investment accounts, many people feel that this is not a great time to do estate planning. Most of the people that I have spoken with are waiting to see what the new congress and president do once they are sworn in, and they are happy and content to sit by and watch what happens.

Unfortunately for many of them they are missing a great time to do some advanced planning. I have not had an opportunity to blog on many advanced estate planning techniques yet, but there are several that depend on several key federal interest rates. Two important rates for many advanced planning techniques are the applicable federal rate and the 7520 rate. Future blog posts will investigate both of those rates and how they are used for various planning techniques, but for January of 2009, the long term applicable federal rate compounded annually is 3.57% and the January 2009 7520 rate is 2.4%. These rates are very low and are used for various planning techniques such as installment sales to defective grantor trusts, Grantor Retained Annuity Trusts, and other techniques.

In addition to the above, the fair market value of businesses, real estate, and investments in general are extremely low. These lower fair market values, coupled with the low rates described above, have made it a very good time to do advanced planning if you are a candidate for business succession, or are a high net worth individual who wants to transfer as much of your estate to your heirs in a tax efficient manner as possible. If you have additional questions about these issues, feel free to contact me to discuss and I will be expanding upon these issues in future posts.

New Years Resolutions

2009-01-19T19:57:00.000-08:00

Believe it or not, but I had a New Year's resolution to blog more often. I've heard from a few people that the posts are helpful in thinking about what they should be planning for, and the idea was that I would try to write at least a post or two per week in the new year. Well, it is now January 19, and here is the first post of the new year. My point is not that we should be focused on any type of failure on a New Year's resolution, but from a planning perspective we often have the best of intentions and we often leave them incomplete thinking that we will have another day, another week, another month to finish them. While it is difficult for us to think about what would happen to our families if we do not plan for the worst, things do happen that show us how important it is to plan and complete the planning that must be completed.

One example is of a client of mine. This client came into my office at least six months ago and we discussed several things that he and his wife needed to do in order to clean up their existing planning that a prior attorney had drafted for them. The changes were mostly things like changing trustees (due to the fact that the people who were named as successor trustees had all moved out of the area and had lost contact with them), their health directives were missing the relatively new HIPAA authorizations, and they had no powers of attorney for asset management. However, the biggest portion of the clean up work was trust funding. Very few of their accounts were titled in the name of their trust and only one of their multiple real estate holdings were properly titled. We started working on these items and I had draft documents to them in a matter of weeks. Unfortunately life happened and the weeks turned into months and my messages, emails and phone calls were continually returned with excuses such as "we haven't read them yet, we need more time, life is really busy at the moment".

Then the holidays arrived and they asked me if we could set a meeting after New Years in order to finalize the drafts that they had had for six months. Unfortunately for the clients, the husband passed away over the holidays and we are now dealing with the ramifications of not completing the documents that they had had for over half of a year. When I tell this story to friends and colleagues they almost all ask about the age of the decedent. Would you be amazed if I told you he was in his mid fifties?

Based on this story I have convinced many people to finish their planning or to start if they have not given any of these issues proper attention. The goal that I have with this is that every reader should at least stop and consider what the status of their own planning is and what they need to do in order to finish it. If you haven't thought about your own planning or if you have planning that is less than complete, then make sure that you contact your estate planning attorney in order to finish it.

Trust Funding

2008-10-18T10:22:00.000-07:00

The biggest problem that I normally find with estate plans is that the super majority of plans that I review for potential clients (that were done by other law firms) are partially or completely unfunded. As noted in my prior post, a trust is only effective when property is held by the trustee for the benefit of the individuals selected by the settlor.

If no property is transferred, then the property will not pass according to the terms of the trust. You may have the most intricate disposition plan where the trustee is supposed to hold the property for one or more beneficiaries in a manner that took the attorney hours to draft, but if the property is not transferred to the trustee then it is nothing more than a piece of paper that has no legal effect.

Additionally, any property left outside of the trust will be subject to probate proceedings in California if the aggregate value of the property left outside of the trust is over $100,000. This creates a situation where a client paid for some estate planning that may be exactly what they wanted, but the probate still occurs with all of the problems highlighted in my other posts on the probate process in California. If it goes through probate the court will generally apply the intestate succession rules to determine who will receive the property (if no other will exists). This is also problematic as the intestacy statutes generally dispose of assets in a different manner than people do when they choose their own disposition plan.

One way to avoid this problem is to have a certain type of will called a pour over will. This type of will tells the court to place all of the assets into the trust that were left outside of the trust upon the death of the individual. This does not avoid the probate, but it will ensure that the assets pass according to the wishes of the decedent through the trust.

The best way to prevent this issue is to make sure that all real estate is transferred by a new deed to the trustee of the trust, make sure all checking/savings/regular investment accounts are changed from individual accounts to trust accounts, and that proper beneficiary designations are made on assets such as life insurance, 401(k) accounts, IRA's and similar assets with designated beneficiaries. Other assets such as closely held businesses and other unique assets should be discussed with the attorney to determine how to transfer them to the trust or ensure that they avoid the probate process entirely.

What is a Trust and why should I consider using one?

2008-09-23T20:41:00.000-07:00

Many of my clients have no idea about what a trust is when they first come into my office. Some of them have had an experience as a beneficiary of a trust and others have even been the trustee of a family member's trust, but when you ask them to explain the concept they generally have a difficult time doing that. For those of you who are looking for answers to the probate questions and issues that I have been blogging about, the first step in taking care of your family and avoiding probate is the revocable trust (sometimes called the Living Trust or the Family Trust).

A trust is simply an agreement between two people with an intended individual or list of beneficiaries. The individual who sets up the trust is called the Settlor (sometimes called the Grantor or Trustmaker by some attorneys) and that person gives legal title to one or more assets to one or more Trustee who holds and manages the assets for one or more specified beneficiaries. The Trustee is required to hold, manage, and administer the assets of the trust pursuant to the specific provisions that the Settlor sets up. For example, if I give a friend an investment account to hold for the benefit of my son and draft a document that instructs him to distribute all income from that property to my son on an annual basis and to distribute the principal to my son on the following schedule (one third of the principal when he reaches the age of 25, one half of the remaining principal when he reaches the age of 30, and the remaining principal when he reaches the age of 35), then I have created a trust. This is a very simple distribution plan and it can be as simple or as complex as you like. Several of my clients build in incentives for their children to work (matching W-2 or 1099 income on an annual basis), to avoid certain behaviors (allowing the trustee to withhold distributions if the child or beneficiary is abusing drugs), and other provisions to create a custom distribution plan that matches exactly what you want to accomplish.

After drafting the trust pursuant to a client's wishes, the next step is to fund the trust. This is as important of a step as the drafting of the trust and too often I review estate plans from other law firms and attorneys that are not properly funded. My next post will deal with this important step and discuss what happens when a trust is not funded at all or partially funded.

What happens when I do not have any estate planning documents in place? (Part 1)

2008-08-13T16:20:00.001-07:00

The following question is often asked to me: “If I don’t do any estate planning documents then what will happen to my assets when I pass away?" This question often arises when one becomes overwhelmed with the process of doing proper estate planning or they do not want to think about their own mortality. Sometimes these individuals pass away without doing any planning at all and any assets that do not pass automatically by operation of law (such as a named beneficiary on a life insurance contract, a surviving joint tenant on a deed, or a beneficiary by a number of other methods), will go through the probate process and be subject to some specific provisions of the California Probate Code.

This situation is generally called dying intestate and it occurs when someone passes away without providing instructions to the court in a properly executed or holographic will. Many people fail to understand that the surviving spouse may not receive all of the assets that go through the probate of the intestate estate (especially if the decedent had property that is characterized as separate property instead of community property) as separate property is treated differently than community property. This often occurs because in many marriages the husband or wife will hold certain property before marriage and instead of changing it to be community property they continue to hold it as separate property during the new marriage. Under these facts, the separate property does not pass completely to the surviving spouse. Unfortunately I have had more than one client come to me in this type of situation and there is nothing they can do to keep the property from passing directly to the children of the marriage, the children from a prior relationship, or to the decedent’s other family members. If a beneficiary is a minor as well (under the age of eighteen in California), then this can add the extra expense of a proceeding to appoint a guardian over the estate of the minor. This reason alone is why it is very important to not only have a will in place, but also to avoid the Court system entirely by doing proper trust planning.

I will be writing several posts on this topic regarding the intestate provisions of the California Probate Code. If you have questions about how your own estate would be distributed under these provisions, do not hesitate to contact me to discuss them.

Bonds and Independent Administration in California Probates

2008-08-10T23:57:00.000-07:00

In my last post on California Probates I went over several reasons why the probate system in California is not the preferred way to transfer wealth to your beneficiaries. Even with those shortcomings, many people choose not to do any planning during their lifetimes and they instead decide to either pay for a simple will that follows the statutory formalities or to do a holographic will (a will entirely in that person’s handwriting as authorized under section 6111 of the California Probate Code). The main reasons for this is that they either do not want to spend the money during their lifetimes or they feel that the problems with the probate system will be changed before they pass away. Either way, those people are continually looking for ways to improve their personal representative’s experience during the probate process. Here are a couple of issues for a person to consider when they are doing their simple will or a will in connection with a comprehensive estate plan.

First, as noted previously, many judges will honor a decedent’s request to waive bond if they explicitly indicate this in their will. The individual must waive bond for any of the named personal representatives to act. This will in many cases eliminate the need for the estate to spend thousands of dollars per year on an insurance policy that is not needed in many of the estates. Otherwise, if the bond is not waived, the court will generally require the bond and if the estate cannot pay for this cost, then assets will need to be sold in order to satisfy the payment. I have also seen a judge require a bond in a probate where the will explicitly waived bond. The reason in that specific case was that none of the named individuals in the will wanted to act, so they either had a different relative act in that capacity or a public fiduciary was appointed by the Court. Either way, the judge decided that the will only waived bond for those specific named individuals, so make sure that you name enough alternative personal representatives to make sure that one will act. Also, you will want to make the bond waiver language extremely broad if you want the Court to waive the bond.

Second, in California there is a section of the Probate Code beginning with section 10400 that is called the Independent Administration of Estates Act. This section allows a personal representative to do many things during the administration of the estate without going to court for approval on each individual action. At the end of the probate when the final petition is filed, the representative must disclose what actions were taken under these powers, but as long as the representative acts within the powers under these sections, the result is that the entire process takes much less time (especially in those counties where there is only one probate court that handles a great number of probate cases, such as Orange County). The probate code indicates that any personal representative can petition the court for these powers unless the will indicates that the estate may not be administered pursuant to these provisions (California Probate Code section 10404). However, my personal experience has shown that some judges will not allow these powers to be used unless the decedent gave express authority to administer the estate under these provisions in their testamentary will. The only potential downsides are that your personal representative can take actions under these provisions without immediate Court approval (so make sure you pick a trustworthy person for your personal representative!), and some judges will only allow these powers to be granted if the personal representative posts a bond, thereby allowing more flexibility but increasing the expenses to the estate (I haven’t experienced this in Orange County, only in Los Angeles County). Therefore, if you want your personal representative to have the most flexibility, your will should expressly authorize all of the listed personal representatives to act under the Independent Administration of Estates Act.

In closing, please note that if you are concerned about security over flexibility for your heirs then you may not want to waive bond and you may not want your personal representative to have the independent administration powers. In my experience with the estates that I have handled, the clients overwhelmingly want more flexibility than more security when they understand what the bond costs and how the independent administration can speed up the process. However, there are many situations where there are family conflicts and issues that parents can foresee between the beneficiaries. In these situations a bond and requiring the longer Court procedures may be the best option available. If you have further questions about how these decisions can affect your estate and your family, contact your attorney to discuss the matter or email me at zieboldlaw@gmail.com or mziebold@ferruzzo.com.

Starting with a new Firm

2008-08-05T18:30:00.001-07:00

Many of my readers have emailed me and asked why I have not posted over the last month. For those of you who do not know, I have accepted a job offer with the law firm of Ferruzzo and Ferruzzo in Newport Beach, California. I will continue to practice in the areas of Estate Planning, Probate, Taxation, Partnerships and Corporations with my main focus being on estate tax planning for the high net worth individual. My new contact information is as follows:

Ferruzzo and Ferruzzo, LLP
3737 Birch Street, Suite 400
Newport Beach, CA 92660
949-608-6900 (phone)
949-608-6994 (fax)
www.ferruzzo.com

Pro Bono Work

2008-07-15T11:53:00.000-07:00

It is interesting to ask an attorney what he or she thinks about doing Pro Bono work. From discussions with my colleagues and attorneys that I have met from the big firms, most people do not even consider doing pro bono work as they have billable hour requirements and other commitments in addition to family matters and the rest of life. This mindset often leads to attorneys having a reputation for being focused only on money or the bottom line and not what is wrong with society.

One of my practice areas involves forming and aiding in the ongoing operations of tax exempt organizations as defined in the Internal Revenue Code. I already work with a number of churches, ministries, and other charities in this regard and I am interested in helping those organizations that would greatly benefit from 501(c)(3) status but who are not able to retain an attorney to do this work. Based on this, if you are a church, ministry, charity, organization, or any other group that has struggled with this area of the law, feel free to contact me at zieboldlaw@gmail.com or mziebold@ferruzzo.com. We can then discuss your organization and determine if I would be able to help you based on my current workload and my other Pro Bono commitments.

The California Probate System and Why it Should be Avoided.

2008-06-27T14:39:00.000-07:00

Potential clients often ask questions about what the California probate process is and why they would want to avoid it. Simply stated, a probate is the Court proceeding where a decedent’s debts are settled and the remaining assets are distributed. If the deceased has no will, this distribution would be handled pursuant to the intestacy provisions of the probate code. If there is a will, the assets are distributed pursuant to those instructions. The good news is that there is a procedure under section 13100 and following of the California Probate Code that allows a person’s estate to avoid the probate process if it is under a certain amount. The bad news is that the limitation is $100,000, which means that the majority of estates in Orange County will go through this process. In these cases where the estate must go through the probate process, the family or heirs will mostly likely be left in a worse position than they would be if other planning had been done. The below reasons describe why it is ideal to do at least some basic estate planning if your California estate will be over $100,000.

The first consideration is the time involved to complete a probate. I do most of my probate work in Orange County where there is one probate court for the entire county (of over 3 million people). This means that your hearing will often be set at least six to eight weeks after the date you schedule it and occasionally longer if the court has a backlog of cases. In my experience, a simple probate generally takes more than a year to finish, and if there are multiple creditor issues, complex sales of estate assets, or fights involving the beneficiaries this estimated time may be extended to more than two years. In some other counties, such as Los Angeles, there are multiple courts that handle these proceedings and the time to complete the probate may not be as long.

The second issue is that everything in a probate is part of the public record. This means that anyone can go to the courthouse and find out the value of the assets involved, which beneficiary received those assets, and at a minimum the name and mailing address for those people. If you want to keep the contents of your estate and who inherited what confidential, the probate system must be circumvented.

Third, in many instances the court will require the personal representative of the estate to obtain a bond over the probate estate. A bond is an insurance policy that provides monetary compensation to the beneficiaries of an estate if the personal representative misappropriates the assets. Unfortunately, on a million dollar estate, they can cost several thousand dollars per year. If the Court orders a bond, it must be obtained and paid for by the estate. The good news with this is that you can waive this requirement in your will and in many instances the Court will honor your wishes. However, the bad news is that even in those instances where the will waives bond and all of the beneficiaries waive the requirement, the Court still has the authority to require one. I have personally represented an estate where all of the beneficiaries waived this requirement and the Judge in that probate proceeding decided that he wanted a bond in that case anyway. This ended up costing the estate over two thousand dollars per year during the probate.

Fourth, there are high costs involved in administering the probate itself. The Court filing fees in California are charged on a sliding scale based on the value of the assets within the estate. Then there are additional fees for the probate referee, who must value the assets in the estate for the court, fees to the attorney for the estate, and the fees to the personal representative. These fees are set by statute, so no attorney can charge more than this, and I am unaware of any attorney who will accept less to handle a probate.

California Probate Code section 10800 provides the compensation of the Personal Representative and section 10810 provides the compensation for the attorney. They mirror each other, so effectively what is paid to one person is paid to the other as well, unless one waives their right to compensation under that probate proceeding. The statute states that for “ordinary services," the estate will pay to each person the following:

4% of the first $100,000
3% of the next $100,000
2% of the next $800,000
1% of the next $9,000,000
.5% on the next $15,000,000
A reasonable amount determined by the Court for any amount over $25,000,000

As you can tell, on a simple million dollar probate (which could easily be just a personal residence in Orange County), the fees to be paid to the attorney and the personal representative for ordinary services are $23,000 each. This figure does not include any services that are not considered to be ordinary in nature, for which both are compensated over this amount. In this case, the total costs could be over $50,000 before the probate is complete. If the majority of the estate contains real estate or other illiquid property, the heirs are either forced come up with the money to pay these substantial fees or the estate assets will be sold through the process to pay the fees.

Based on the cost alone, it makes sense for most people in California to avoid probate. All of this can be avoided for a much more reasonable cost with some simple estate planning, such as the creation of a revocable trust.

What is Estate Planning and Why Should I Consider It?

2008-06-23T14:25:00.000-07:00

Most people that hear I do estate planning predictably respond, “I don’t have that many assets, and my family knows what I want when I die. I don’t need to do any estate planning.” Usually, these individuals have never had a major family conflict after the death of a love one and have never gone through the probate process in California. Once they experience one or the other, people generally find that the court proceedings leave the beneficiaries of an estate much worse off than they would have been with some basic planning. A well-known maxim is “if you are failing to plan then you are planning to fail.” Too often that saying comes true for families that do not take the time to do proper estate planning. Estate planning protects the assets you have worked hard for and protects your family from additional burden in a time of grief.

Once proper estate planning is completed, the client and his or her family will experience several benefits. Typically, estate planning will provide for the most efficient transfer of wealth, reducing the amount of time, fees, taxes, and burden that the family must endure. For most people in California, this planning is first focused on probate avoidance, as the probate process is long and expensive. Higher net worth clients in California and other states should also do estate and gift tax planning to ensure that their wealth passes to the chosen beneficiaries with the least amount of transfer taxes. For every estate plan, regardless of where a person lives, there will be many different considerations involving several areas of the law.

Depending on the family, these different statutes may apply: Probate Law, Trust Law, Corporations Law, Partnership Law, Federal and State Tax Law, Laws regarding Asset Protection, Bankruptcy Law, Property Law, and Family Law. A well-prepared plan should protect the client from the adverse consequences of any and all laws that could apply to them. This blog will deal with issues from all of these areas of law in the states where I am licensed (currently California, Nevada, and Arizona). I hope that you find some of the answers that you are looking for. If you have questions that are not answered in these posts, feel free to contact me at zieboldlaw@gmail.com and we can discuss your question in greater detail.