On September 27, 2017, the Trump Administration, the House Committee on Ways and Means, and the Senate Committee on Finance released a long-awaited tax reform proposal, titled the Unified Framework for Fixing Our Broken Tax Code (the “United Framework”). Most notably, the United Framework proposes to completely repeal the estate and generation-skipping transfer tax while also lowering the income tax rates for businesses and individuals.
At the individual level, the United Framework proposes to:
For U.S. businesses, the United Framework proposes to:
To be sure, the proposals in the Framework are broad and in many cases, short on specifics. Ostensibly, this was done on intentionally to allow Congress the opportunity to work out the details.
Critics of the Unified Framework contend that the proposed changes benefit the wealthy to the detriment of lower-income taxpayers. In particular, they point to the fact that the proposed repeal of the estate tax and generation skipping transfer-tax benefits only the top 1% of Americans, while the proposed increase in the lowest income tax bracket from 10% to 12% negatively impacts the country’s poor. Another common criticism of the Unified Framework is that it is more or less silent on how to pay for all of the proposed tax cuts.
It remains to be seen how the proposals in the Unified Framework will be adopted by Congress. If enacted, the lower tax rates for businesses may create incentives for individuals to create new business entities to take advantage of the proposed tax cuts for businesses.
For now, Nabhan Law will continue to monitor the developments coming out of Washington closely.
Probate in California: An Overview
What is Probate?
Probate in California is the statutory system governing the management of a decedent’s estate according to the terms of the decedent’s will or if he or she died without a will, according to California’s default “laws of intestacy.”
Is Probate Always Necessary?
The short answer to this is no. If the decedent set up a living trust and funded the trust during his or her lifetime, in most cases probate will not be necessary. If the decedent died owning a joint bank account or real property in joint tenancy with another individual, the property passes to the surviving joint owner by operation of law without the need for probate. Also, if the estate is relatively small (under $150,000), or if the decedent was survived by a spouse claiming an interest in the property of the estate, there are certain legal “short cuts” that may be available to avoid having to go through probate.
The Basic Probate Process
Probate is a Marathon, not a Sprint. Typically, a probate administration can last anywhere from 6 months to one year. The process is initiated by someone filing a petition with the local probate court requesting the appointment of a “personal representative” to manage the estate. If the decedent died with a Will, this person is usually referred to as the “executor.” If the decedent died without a Will, or someone other than the executor named in the Will is appointed, the person is referred to as the “administrator.” Typically, the court has to approve any major actions by the personal representative, such as selling real estate or settling claims by creditors. However, if appropriate, the personal representative can request the authority to carry out such actions without the pre-approval of the court.
Once the petition is filed with the court, the court will schedule a hearing regarding the appointment of a personal representative. In the interim, the petitioner is required to give notice of the hearing and to provide a copy of the petition to all beneficiaries named in the Will (if applicable) and all legal heirs. The petitioner is also required to publish notice of the petition in a local newspaper of general circulation.
If appointed by the court, the personal representative will generally be required to post a probate bond and pay a bond premium. This is akin an insurance policy to protect the estate against any theft by the personal representative. The amount of the bond is determined based on the value of the estate and whether the personal representative has been granted independent management authority.
Once appointed, the personal representative begins the process of inventorying the assets of the estate and determining if there are any outstanding debts to be paid. Upon receiving notice of the probate, estate creditors have a period of 4 months in which to file a creditor’s claim against the estate. Once this 4 month period has elapsed, and any outstanding claims have been settled, theoretically the estate can closed and the assets distributed.
Once the estate is in a position to be closed, the personal representative petitions the court to approve his or her proposed final distribution of the estate. After payment of applicable administrative costs (discussed in further detail below), the estate is distributed according to the decedent’s Will or if there is no Will, according to California’s default laws of intestate succession. If distributed according to intestate succession, the estate is typically divided among the decedent’s close relatives, such as the decedent’s surviving spouse and children.
The Cost of Probate
Formal probate costs include attorney and estate representative fees, court filing fees, publication fees, probate referee fees and costs of maintaining and selling the estate’s real property, among others.
The compensation for the personal representative and his or her attorney is set by California law and is based on the gross value of the estate according the to following formula:
Gross Value of Estate Attorney Fees Personal Representative Fees
1st $100K 4% 4%
Next $100K 3% 3%
Next $800K 2% 2%
Next $9mil 1% 1%
Next $15mil 0.5% 0.5%
>$25mil Reasonable amount to be determined by the court.
Compensation to the personal representative and the personal representative’s attorney is paid at the end of the court proceeding.
Many young couples delay doing their estate planning, believing that it is something reserved for older or wealthier individuals. However, this common misconception can have disastrous consequences when one or both spouses die unexpectedly. In fact, the best time for a couple to do their estate planning is when they are young and of sound mind and body. Planning for the future is particularly important when there are young children involved.
While it may be the case that, as a young couple, you have relatively few assets, a good estate plan encompasses a lot more than just directing how your estate should be distributed after you die. A solid estate plan, at a minimum, should address these four things:
1. Nominate a guardian for minor children
If you have minor children, making sure that they are properly cared for in case you’re no longer around is likely a top priority. Nominating a guardian in your will is the best way to ensure that a responsible person will care for your children if you die unexpectedly. If you haven’t made your wishes clear in your will, the court would have to choose someone without any guidance from you. The common choice is usually a family member. But what if you really wouldn’t want certain family members to raise your children? Or what if you prefer that a close friend, who has a good relationship with your kids, be guardian instead? Unless you’ve planned ahead, the court would have no way of knowing your wishes.
When choosing the right person to act, some of the factors you may want to consider include:
Typically, it is best to nominate an individual who lives close to your children’s current home to avoid the possibility of having to uproot them. Studies have shown that children dealing with the unexpected loss of a parent fare best when they remain in a familiar environment surrounded by friends and family.
Religious and Political Beliefs
Because the guardian will essentially be stepping into your shoes, you likely will want to nominate someone who shares your same values and religious beliefs.
While it may be obvious, choosing a nominee that is financially stable and capable of supporting your children is critically important.
Willingness to Serve
Finally, before settling on a particular nominee, you should always speak with that person beforehand to make sure that they are willing and able to act as guardian.
2. Set out how your property should be managed until your children are older
If you’re like most parents, you probably want to exercise some degree of control over
when and how your children receive an inheritance. Without proper estate planning in
place, it is possible that your kids will receive an inheritance outright at age 18,
which is rarely a good idea. However, through the use of a living trust or testamentary trust, you can control when and how your children will receive an inheritance. You can even make distributions contingent upon your children reaching certain milestones, for example, when they attain a specific age, graduate from college, or get married.
3. Appoint a responsible person to manage the estate and/or trust
There are a number of matters that must be handled after you die, such as closing bank accounts, paying outstanding debts, and distributing assets to your surviving relatives or beneficiaries. All of your careful planning will be for not unless you appoint the right person or persons to tend to these tasks. Obviously, you will want to appoint someone who is responsible and trustworthy, such as a family member or close friend.
4. Designate someone to make financial and healthcare decisions for you when you are unable to do so
Proper estate planning should not only deal with what happens to your stuff after you die, but should also put in place a plan to take care of you if you become incapacitated while you’re still living. Through the use of a financial power of attorney and advance healthcare directive, you can designate a trusted individual to make financial and healthcare decisions on your behalf when you’re unable to do so for yourself. An advance healthcare directive also gives you the opportunity to give clear instructions with regard to your end of life wishes.
Although the tendency for many young couples may be to delay doing their estate planning until later on in life, the importance of planning as early as possible cannot be overstated.
Haroun Nabhan is an attorney in Pasadena, California, specializing in estate planning, probate, conservatorships and trust litigation.