Hanlen Chang – Page 5 – Global Estate Blog

Someone Just Died – What Now?

There are three scenarios upon the passing of an individual:

With a Trust;
With a Will;
No Trust or Will.

Whatever the scenario, there are additional post death administrative tasks to handle.

Passing With a Trust

The most efficient and secure succession setup and mechanism is to have a Trust.

One major benefit is that it bypasses the need for Probate Court (more specifically explained below).

Of importance is understanding that assets have to be transferred into Trust before death and out of Trust after death.

Equally important is the before and after tax planning and management of the assets.

Common Post Death Trust Administration tasks include:

Inventorying, valuing, and managing trust assets;
Satisfying or resolving debts (e.g. mortgages, utilities, credit cards, auto loans..etc.);
Filing Tax Returns (sometimes outsourced to a CPA);
Trust asset distribution (including sub-trust funding if applicable);
Collecting and distributing assets outside of Trust where applicable.

Another Trust advantage is when a beneficiary is a Non-Resident Foreigner, bypassing delays, verification, and tax withholding by financial institutions or third parties.

Passing With a Will or No Will

Probate Court is required if you pass with a Will or No Will (“Intestate) and there is an asset worth more than $150,000.00 for which there is otherwise no succession mechanism (e.g. beneficiary designations).

For assets below $150,000.00 those items can be collected by an out of court small estates procedure on behalf of the successors-in-interest.

The Schedule of Probate Fees is as follows:

• 4% of the first 100,000 of the gross value of the probate estate
• 3% of the next $100,000
• 2% of the next $800,000
• 1% of the next $9 million

Both the executor (individual nominated in the Will) or administrator (individual appointed by the court) and the attorney are entitled to this fee. Thus, the Probate Fees when multiplied by two (2) can become costly when compared to a Trust setup where the settlor (person establish the trust) gets to set the Trustee fee according to her or his preference.

The executor or administrator will essentially handle the same functions as the Trustee but under court supervision and approval.

Another consideration and possible drawback includes the time lag for completing the Probate process, which could be anywhere from 1 year to 3 years.

Disclaimer

Trust Funding – Overlooked At One’s Own Peril

As an Estate Planner I often answer questions about the Mechanics of Trust Funding:

Some important concepts include:

Only Assets owned by or related to the Trust are controlled by the Trust Terms;
Common Trust funding Assets include: Real Estate, Bank Accounts, Brokerages, Business Shares, Intellectual Property, and Personal Items;
Common Assets to Relate to Trust include: Retirement Accounts (Pension, 401(K), IRAs) and Life Insurance.
The Schedule of Trust Assets is an important Information Sheet (usually at the back of the Trust Instrument);
Without the Schedule, an asset could become lost due to the Trust Beneficiaries being unaware of its existence;
A General Note of Assignment is used to transfer miscellaneous house objects and personal effects to the Trust;
Real Estate is transferred by retitling the Deed into the name of the Trust and preparing Tax Forms.
Bank Accounts and Traditional Brokerages can be retitled into the name of the Trust;
Retirement Accounts, including IRAs, and Life Insurance, can rely on Beneficiary Designation. You can relate these to the Trust by naming the Trust as a beneficiary, often as a contingent beneficiary;
Beneficiary Designations may be inadequate as you cannot list or name a “Beneficiary Class”, i.e. a category of relatives, or your bloodline and heirs- at-law.

If an Asset is not owned or related to the Trust it will be handled outside of the Trust terms. Avoid having an Asset without a succession or inheritance mechanism. If no mechanism in place, it can be owned or related to the Trust, which avoids having to hire a lawyer to assist in its post death collection.

One often overlooked nuance is that you may want to relate tax deductions from the cost of the Tax Administration to taxable income. This means all taxable assets need to flow into the Trust directly (instead of listing an individual’s name in the beneficiary designation, meaning the income goes directly to the individual’s separate tax liability.)

Excess tax deductions from the Trust Administration, at its termination, can be carried over to the individual’s tax return and be claimed over time. This is not as ideal as direct offsets all within the trust.

Dislclaimer

Gift Tax: Advantage of Foreign Investment in U.S. Stocks and Bonds

One of the foreign investor’s favorite investments is U.S. real estate. However, from a tax planning perspective there are other asset categories to consider.

In the U.S. the “estate tax” refers to taxation upon death. The “gift tax” means transfer tax, and applies to gifts made while alive.

From a gift tax perspective, intangible assets such as U.S. stocks and bonds are a preferred asset.

In the U.S. the gift tax only applies to real property and tangible property. It does not apply to intangible property.

The advantage for a Non-Resident Alien (“NRA”) acquiring stocks and bonds is that it can be gifted to anyone, including other NRAs, family, or U.S. residents, all without incurring any U.S. tax liability. There may however still be a tax reporting requirement.

There is also an opportunity to avoid U.S. estate (“death”) taxation for the NRA. As long as the NRA investor holding the intangible property has advance notice and awareness of his or her failing health, he or she can gift the asset to the preferred recipient.

The NRA can also take precaution for a sudden or unexpected death. The most common solutions include life insurance and an Estate Plan, such as a Trust.

Disclaimer

San Francisco Bay Area Housing Supply to Remain Low For Foreseeable Future

If you were already discouraged by low housing inventory and supply in the San Francisco Bay Area, there is little reason to hope that it will improve for the foreseeable future.

Some factors include:

The two percent (2%) per annum Proposition 13 tax cap that encourages long term holding of California Real Estate;
New Federal Tax Law limiting mortgage deduction to $750,000, but grandfathering in pre-existing home owners $1,000,000 mortgage deduction;
New Federal Tax Law limiting State and Municipal real property tax deduction to $10,000 per year;
Rising Interest Rates making mortgage financing more expensive.

Other factors influencing selling v. holding include suitability as rental property and estate planning desire to pass on the real property “in kind” to your children who may inherit the pre-existing lower tax base.

In summation, why sell your home, if buying another home in the same area will significantly increase your financing costs and taxes.

Disclaimer

Benefits of Establishing a Business Entity Just Got Better

With the recent passage of the Tax Cuts and Jobs Act small business owners can now obtain a 20% deduction for the business income.

Common types of pass through entities include the Limited Liability Company, Subchapter “S” Corporation, and Professional Corporation.

Other considerations and advantages for establishing a business entity include:

Creditor and Liability Protection;
Declaring bankruptcy for the business;
Raising capital and debt financing;
More organized and efficient management and control for adding partners, members, shareholders, or interested parties;
Tax optionality and planning opportunities;
Credibility as legitimate and thriving business enterprise;
Privacy and Anonymity;
Dissolution and wind up of the business.

It is ill-advised to enter into an informal business arrangement with two or more members or interested parties, only to confront the inevitable complications regarding legal, regulatory, and tax compliance, profit sharing, management, and control.

Disclaimer