Good parents, caring parents, wanting to leave the best for their children through a Living Trust or an inheritance through their business entity may be causing problems for them inadvertently. The following article explains how their children are receiving hidden ticking time bombs that explode on the death of the last parent. Until then, there are strategies to diffuse these time bombs that cast shrapnel of taxes and expenses connected to Court proceedings. Where are these time
bombs located?
1. Living/Family Trusts
2. Deeds
3. Bank Accounts
4. IRAs
5. Life Insurance Policies
6. LLCs, corporations, partnerships
What are we looking for?
1. Specificity in the inheriting of real property in the Living Trust;
2. Correct deed ownership;
3. Bank Accounts in the title of the Living Trust;
4. IRAs specifying correct beneficiaries;
5. Life Insurance policies with updated beneficiaries;
6. Proper percentages of ownership interest in the business entity.
1. Living/Family Trust: If you are leaving a piece of real property, including the home, to a child or grandchild, say so. The Living Trust should be drafted to specify the property to the specially named child or give such child a first option to purchase the property. Detailed provisions should also be included regarding financial arrangements should a child need to borrow money to arrange for the purchase. This is necessary to insure there is no property tax reassessment based on the Parent-Child Exclusion. Time Bomb: Property Tax Reassessment.
2. Deeds: Deeds should be closely reviewed to properly identify the Trustee and the Trust name. Also, to make sure that the real property is properly titled to the Living/Family Trust on purchase or refinance of the property. Time Bomb: Probate.
Additionally, we want to avoid a child’s name on the parents’ deed to the home or other real property unless the child actually has a financial interest in the property. Even then, it may become advantageous to remove the child’s name so the child inherits 100% of the property. Time Bomb: Capital Gains Tax.
3. Bank Accounts: Bank accounts in the name of an individual rather than the Living Trust can create money problems for the heirs. Typically, there are credit card debts, last illness expenses, mortgages, car payments to be made. If these accounts are not titled in the name of the Living Trust, the banks will freeze the accounts awaiting on a Court Order. If the accounts are less than $150,000 accumulated together, we can obtain release of the funds with a §13100 Declaration after 40 days. If more than $150,000, you are headed to Big P — not Philadelphia. Time Bomb: Probate.
4. IRAs: So, no beneficiary is designated or a minor beneficiary is designated as the beneficiary. It is a losing situation either way. What about a child with creditor problems? Not good. These IRAs are going to go through legal proceedings, either Probate, Guardianship or Creditor Claim Judgments. Any of these proceedings is going to cost the IRA funds dearly. A strategy to asset protect the IRA funds for the beneficiary is an IRA Trust. This advanced planning Trust allows for the protection of the IRA funds and insures the funds are used to benefit the beneficiary only. As a result, it avoids the Time Bombs: Probate, Guardianship for Minors and Creditor Judgments.
5. Life Insurance: If there are minors designated as beneficiaries, same problems as with IRAs — Guardianship proceedings and held until the minor reaches age 18. At that time, the child receives all of the remaining funds. If there is no claim filed by a beneficiary, the insurance company usually retains the proceeds and ultimately uses them for their own investments. Time Bomb: Guardianship, Loss of Proceeds.
6. Business Entities (LLC, Corporations, Partnerships): If there is a change of control of ownership at anytime within the entity, the Assessor’s office considers this a transfer of ownership for real property owned therein. The problem is that there will be a reassessment of property tax owned by the entity. But what about the Parent-Child Exclusion from reassessment if a child inherits the parent’s interest in the entity? California law says the exclusion does not apply to entities and there will be a reassessment. Time Bomb: Property Tax Reassessment.
Action: Call the office for a review of your existing Estate Plan and utilize strategies to avoid these Ticking Time Bombs. That clock-hand continues to move — every second.