THE TRUTH.  The $2,000,000 applicable exclusion amount is the aggregate amount that a client can leave to all individuals on death without being subject to an estate tax.  Generally, all assets owned by the deceased client in excess of $2,000,000 are subject to an estate tax.  The main exceptions relate to assets left to charity (qualifying for the federal estate tax charitable deduction) and assets left to a deceased client’s spouse (qualifying for the federal estate tax marital deduction).

THE TRUTH. The annual gift tax exclusion allows a client to gift annually $12,000 in assets to as many separate beneficiaries as desired.  Example.  If the client has three children and two grandchildren, the client may make annual exclusion gifts of $12,000 to each of them (for a total of $60,000) without the gifts being considered as taxable gifts.

THE TRUTH. Although gifts to a single beneficiary in a single year in excess of $12,000 are considered taxable gifts, no gift tax is actually paid to the IRS until the client has made cumulative lifetime taxable gifts of $1,000,000.  The reason is that the government applies the first $1,000,000 of the client’s $2,000,000 applicable exclusion to taxable lifetime gifts to effectively pay the tax.  To the extent that the client’s applicable exclusion is applied to taxable lifetime gifts, there is less of the applicable exclusion available on death to shelter assets from the estate tax.

THE TRUTH. Generally, there is no income tax on life insurance death benefits.  However, if the deceased client owned the life insurance policy, then the death benefits will be part of the client’s estate and subject to estate taxes.  Estate taxes and income taxes are very different.

THE TRUTH. Like any other asset owned by the deceased client, IRAs and other retirement accounts are included in the deceased client’s estate and subject to an estate tax.  However, the income taxes on the retirement assets are not required to be paid until the beneficiary withdraws the asset from the IRA or other retirement account.

THE TRUTH. If the assets in the client’s estate are likely to appreciate significantly in value between the date of the proposed taxable gift and the date of death, the client can save the beneficiaries a considerable amount in estate taxes by making taxable gifts during lifetime.  Once the gifts are completed, all appreciation on the gifted assets is outside of the client’s estate.

THE TRUTH. Saving estate taxes is only one of several key components to estate planning.  CTA believes that the most important component in estate planning is making certain the client’s loved ones receive their inheritance in a way that benefits their lives and does not hinder their own personal development.

THE TRUTH. One of the goals of estate planning and estate tax planning is to minimize the estate taxes owed on death.   However, for the larger estates, some estate taxes will be owed even with careful estate planning.

THE TRUTH. Payments of tuition, books and registration directly to colleges and other educational institutions on behalf of a grandchild or other beneficiary are not subject to the $12,000 annual gift tax exclusion.  The amount of the gift may be unlimited, provided it is paid directly by the grandparent to the educational institution.

THE TRUTH. While the individual serving as trustee has considerable power over trust assets, the individual has even more responsibility and liability.  Because the California Probate Code imposes approximately 20 separate duties on the trustee, the trustee’s powers are limited.  Any trustee failing to meet his or her duties may be subject to personal liability.

THE TRUTH. In most cases, the trust assets must be divided into two (or three) separate trusts on the first death.  To do this, the trust assets must be valued.  Once the trust assets are properly valued and then divided, their segregation must usually be maintained through separate bank and brokerage accounts, separate accountings and separate tax returns.  Failing to divide the trust assets into two (or three) trusts on the first death may cause the beneficiaries to lose many of the estate tax benefits of the trust when the second spouse dies.

THE TRUTH. Very few tax preparers (or attorneys) are adequately qualified to prepare the federal estate tax return (IRS Form 706).  The estate tax return is unique in that it requires specific knowledge about federal estate taxes, gift taxes, generation-skipping transfer taxes and California property law.  While the typical tax preparer is an expert on personal income tax issues, their familiarity with the transfer taxes may be significantly less.  In some cases, your tax preparer or attorney may want to enlist the services of another attorney or CPA that is more knowledgeable as it relates to preparation of the estate tax return.   To determine if your existing tax preparer or attorney is the right one to prepare the estate tax return, we encourage you to ask the following questions:  (1) How many estate tax returns have you prepared in the last 5 years?  If the answer is “less than 10,” then you probably should use another attorney or CPA to handle the estate tax return.   (2) What estate tax preparation program does your office use?  If the answer is “we don’t use a program,” then you should probably use another attorney or CPA to handle the estate tax return.

THE TRUTH. When done correctly, the federal estate tax return is a very complex and comprehensive return.  The fees for preparing the estate tax return will probably range from $5,000 on the very low end to $30,000 on the high end.   The broad range in fees is generally a function of the number of assets, the difficulty in obtaining valuations, and the aggressiveness of the positions taken on the return in terms of: (1) number and magnitude of fractional interest discounts; (2) number and magnitude of deductions; and (3) research and explanation to support special positions likely to be questioned by the IRS.

duties on the trustee. The deceased client’s trust agreement may impose additional duties.  California case law expands each of the 20 duties into a variety of additional requirements. It is next to impossible for a layperson to carry out all of their fiduciary duties without the assistance of an experienced trust attorney.  While CTA hopes that you will consider using our office as your trust counsel, the most important thing is that you retain an experienced trust attorney.  For a listing of the most experienced trust attorneys in California, you can go to the website for the State Bar of California, Board of Legal Specialization.  The link is http://calbar.ca.gov/state/calbar/calbar_extend.jsp?cid=11584&id=9185.

There you can do a specialist search by county for all of the attorneys who are board certified as specialists in “estate planning.”  To obtain board certification in estate planning, an attorney must have practiced primarily in estate planning for five years, represented a broad number of estate planning clients, passed a difficult estate planning specialization exam, taken a minimum of 12 continuing education hours in estate planning each of the last three years and received positive evaluations from other experienced estate planning attorneys and probate judges.

have written fee agreements with their clients where the fees likely to be charged will exceed $1,000.  It is a virtual certainty that the legal fees associated with representing, advising and administering the trust on the first death will exceed $1,000.  Depending on the size of the trust estate and how tasks are divided between the attorney and CPA, the combined legal and accounting fees will normally be somewhere between $6,000 on the low end and $50,000 on the high end.  Generally, the legal fees are determined by the time spent by the attorney on your case and the hourly rate of the attorney performing the service.  In some cases, you may be able to request and receive a flat fee for the entire project or at least a relatively accurate estimate of what the total fees are likely to be.  Unlike a probate administration, there is no set percentage that the attorney is paid for a trust administration.  Request that the written fee agreement outline what the attorneys will assume responsibility for handling and what you (or your accountant) will assume responsibility for handling.

were paying the deceased client a pension, so they can stop the monthly payments.  Normally, SSA will require that you fax a death certificate.

deceased client’s representative by filing IRS Form 56.

attorney set up a meeting with you and the CPA (who you intend to use) to make certain everyone is “on the same page.”  This meeting should be done in person whenever possible.  Request at the end of the meeting that the attorney prepare a memo summarizing each one’s role in the administration and any other decisions that were made during the meeting.  If you do not have an existing CPA, ask the attorney for several referrals.  You will probably need a CPA with considerable experience handling trust income tax returns (IRS Form 1041 and FTB Form 541).

you and the financial advisor (who you intend to use) to make certain everyone is “on the same page.”  This meeting should be done in person whenever possible.  The CPA’s presence at the meeting would be preferable but not mandatory.  Request at the end of the meeting that the attorney prepare a memo summarizing each individual’s role in the administration and any other decisions that were made during the meeting.  If you do not have an existing financial advisor familiar with the Uniform Prudent Investor Rule required for investing trust funds, then ask your attorney and CPA for several referrals.  The ideal financial advisor referral should have many years experience dealing with high net worth clients.  Preferably, the referred financial advisor will have the designation of CIMA (i.e, Certified Investment Management Analyst) or CFA (i.e., Certified Financial Analyst), although these designations are not required.  Experience with trusts and the Uniform Prudent Investor Rule is the most important thing.

attorney (secondarily), create an investment policy statement (IPS) for the trust.  This will outline the reasons behind keeping, selling or purchasing investments, the investment objectives of the trust, the expected annual rate of return of trust investments and any other decisions impacting the investing of trust funds.  The IPS is your best protection against a lawsuit for negligent investing.

Keep Perfect Records.    As trustee, one of your duties is to maintain complete and accurate records for all

trust financial transactions.  California law requires generally that you provide a detailed accounting annually to each of the trust beneficiaries.  These accountings must balance to the penny and appear in a certain judicially-approved format.  In fact, to the extent that you cannot prove that you used trust funds for an appropriate purpose, you will be presumed under the law to have wrongfully taken them for yourself.   See Purdy v. Johnson (1917) 174 Cal. 521.  This means that you should generally do the following:

Periodic Meetings.  Meet with the attorney periodically to make certain you are still on track with

everything, even if you don’t feel that you need a meeting.  If you cannot meet in person, then do the meeting by phone.