Category: Estate Planning

asset protection or estate planning

Asset Protection or Estate Planning?

Our Costa Mesa office often gets inquiries from people that have already been to a lawyer regarding their will or estate. Sometimes, they already have something in place, but want to review it. And, often as not, it turns out that their previous plan no longer works for their current situation. Although all estate plans should be reviewed regularly, some of the following concepts might help to understand how you should move forward with your own situation, whether you have a plan in place, or are looking to make a plan.

All estate plans have two goals: asset protection and estate planning. Depending on your particular situation and desires, one of these might be more important than the other, but all plans will take care of both concerns. The issue is that these goals are often at odds.

Asset protection is primarily about protecting your estate from taxes, so that the maximum value is passed on to your loved ones. In some cases, however, you can use similar techniques to protect your property from future creditors.

Estate planning is about moving your estate quickly and easily to the people you want it to go to. While a Will does direct your property to the right people, it will put your estate into Probate Court, which has some cost and some delay. In some cases, a lot of cost and a lot of delay.

In an ideal plan, your estate will pass automatically upon your death to the right people without court, taxes or costs. If your estate is $5 million ($10 million for married couples) or less, this is accomplished with a living trust.

But if your estate is larger than that, or you wish to protect some of your property from future creditors, more complicated tools will have to be used. Almost all of these tools involve giving away your property now, before you pass. Often, you will retain some interest or control over the property for a while, but with restrictions. Depending on the particular tool used, the property may pass from your hands at a predesignated time, or at your death. But, unlike a living trust, you cannot change your beneficiary and you will be limited in your use of the property.

These are the things to think about when you review or make your estate plan. A knowledgeable lawyer can help you design the best plan for you.

trust and estate planning attorney orange county

What is the difference between a will and a trust?

Planning for your death can be a daunting thought, but it’s a reality we all have to face and should prepare for. To ensure that your loved ones will get the support they need, its best to make an estate plan.

In the state of California, there are default rules in place to protect the deceased and his or her assets.  However, these are minimal protections based on traditional family relationships. There are many instances where a loved one would not be entitled to the deceased’s estate simply because he or she is not related by blood or the relationship has not been recognized by marriage or adoption.  Furthermore, these rules are enforced by the Probate Court, whose expenses come out of your property and which can take a significant amount of time to process your estate.

The purpose of a Will or a Trust is to remedy these shortcomings and direct your property exactly where you want it to go.  Both a will and a trust puts your wishes on paper, making it clear to the world that you have assets and you want them to go to specific places. Trusts also help save time and money for your loved ones by avoiding a tedious and lengthy probate process.

California Will

A will is a document that states your property and where you want it to go upon your death. If worded correctly and executed properly, it will trump any default rule.

A will takes effect at the time of death, but it is not automatic. The will must go through the probate process, which is the official proving of a will. This means that at the time of death, a probate court will review the will, determine if it is valid, identify the beneficiaries, and institute a process for disbursal of the assets.

If there are no substantial problems, the probate process takes a minimum of eight to twelve months. This includes the time is actually takes for a probate claim to be heard and also the waiting period for creditors to make a claim against the estate if any. However, between crowded courts, delays in filing, claims against the estate, and a myriad of other issues that may arise, the process could take much longer.  For example, one client’s father, because of poorly drawn legal documents unrelated to the will, is still going through the probate process 3 years after his death.

In California, not all estates need to go through the probate process. Under the California probate code, the law allows for simple estates valued less than $150,000 to avoid probate. However, given typical California home values, few estates that include the family home will qualify.  Qualifying estates must go through an application process.

In addition to the wait, the probate process is not free.  Probate costs depend on the size of the estate. Expenses range from $4,000 for the first $100,000 up to hundreds of thousands of dollars for large estates.  This cost is paid out of the estate itself.

California Trusts

A trust, like a will, is a legal instrument that identifies your assets and designates those assets to go to certain beneficiaries before and after your death. But unlike a will, a trust takes effect instantly at the time of death thereby avoiding probate all together.

With a trust, assets are placed in a fictitious entity (the “trust”). Technically, the trust will now hold legal title to all the assets placed in the trust.  However, the terms of the trust allow you and your loved ones to enjoy the benefit of those assets, with or without restrictions, as determined by the type of trust. Once a trust is created, a person called a “trustee” manages the trust according to the instructions placed in the trust. For example: “the income from my rental property shall benefit my daughter Alex for ten years after my death, then give her the property.” Upon death, the trustee is responsible for paying out the income of the rental property to the beneficiary while the trust remains the legal owner of the property until ten years pass, when the beneficiary will get full ownership of the property.

The most common trust, usually called a “living trust,” is a revocable, transparent trust.  Because it is revocable, you can revoke the trust at any time and get your property back.  “Transparent” means that the trust, although it has a legal existence, is not evident in your day to day life – it is set up so that you can use your money and property just as you had before the creation of the trust.

There are many other types of trusts, each of which provide different benefits and consequences. For example, irrevocable trusts transfer ownership and control of the asset during the lifetime thus making the giving of the asset a life-time gift instead of a gift after death and charitable trusts benefit charities and can sometimes help avoid estate taxes upon death. Speak to an attorney about the pros and cons of each trust and what would best make sense for you as each trust carries different tax and control consequences.

Although it sounds like a trust has every benefit over a will, there are some drawbacks.  First, a trust costs more to set up than a will.  The law is very generous as to what constitutes a will – a handwritten note with your signature is sometimes enough (although it is best not to dispose of your property without legal advice).  A trust, on the other hand, is a complicated legal document which could have serious consequences for you immediately if not written correctly.  Professionals will charge more for a trust than a will.  A trust must also be filed with the State and your property must be officially put inside the trust.  If you do not keep up with your trust, when you pass, there could be significant property that is not in the trust and will have to go through the probate process.

In a nutshell, both wills and trusts provide for your loved ones after your death. They both ensure that your assets go where you want them to go. However, with a will, probate is almost always necessary if the estate is large enough. The cost of creating a simple will is relatively low and generally, no transfers or additional paperwork is required to effectuate your last wishes. On the other hand, creating a trust can help avoid the costs and time of probate but will require more cost and effort in initial set up. Trust creation requires placing your assets into the trust meaning you will have to transfer legal title of real property and other such property into the trust and you have to keep up the trust after it is created. Additionally, both wills and trusts should be reviewed regularly and modified as your life needs and property change.

The information on this website is for general information purposes only. Nothing on this site should be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or viewing does not constitute an attorney-client relationship.  Please contact an attorney for your specific situation as all cases vary are require specialized attention.

rental real estate

Rental real estate and your taxes

One of the most common questions that people ask me is how renting out property affects their taxes.  The rules are actually quite complex, and you should definitely seek the advice of a professional, but here is a simple overview.

Generally speaking, renting out real estate is considered “passive income.”  This is the worst type of income to have (for tax purposes).  Passive income counts as regular income and is taxed at the higher rate, but the losses you can take are limited and provide no relief from taxes.  Unlike an “active” business, where losses can be deducted from your income, rental business simply sets those losses aside to be used later, and that later day never comes for all too many taxpayers.

The most important thing to remember about a rental is that, for tax purposes, they often lose money.  This is because you have to take a depreciation deduction on top of your other costs for the building or property.  On the one hand, that will mean your rental income is rarely taxed.  On the other hand, it means that your losses will not save you any tax dollars.

There is some good news.  People making less than $100,000 per year in other income can deduct up to $25,000 of passive losses.  Over that amount, the amount deductible phases out until it is $0 at $150,000 of income (for married couples).  What this means for you is that you should understand that your decision to buy a rental property should not be influenced by the idea that it will generate tax savings.

However, there is an important opportunity.  “Real estate professionals” do not have the passive activity loss limitations on real estate.  To qualify as such a professional for tax purposes, you have to spend at least 750 hours per year actively working on your rental business.  But that is not the only requirement.  If you believe you spend enough time on your rentals, you should ask your tax professional about the other requirements.  It could mean big savings.