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Protect Your Family from Hazardous Estate Planning! – by Kenneth Ziskin, Attorney

Posted on 01. Aug, 2018 by in all, Magazine Articles

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My wife, Hinda and I, have a mission – to protect the families of apartment owners from “HAZARDOUS” estate planning.  Through our seminars for AOA members, we have had the pleasure to meet with, and review the estate plans of, hundreds of wonderful apartment owners.

The “good news” has been how many of them planned ahead years ago and built living trust based estate plans to protect their families. But the “bad news” was that almost all of these old estate plans had major flaws that made them hazardous to family wealth and well being. How did this happen?  

We think there are three main reasons apartment owners have hazardous estate plans:

Protect Your Family from Hazardous Estate Planning! – by Kenneth Ziskin, Attorney

My wife, Hinda and I, have a mission – to protect the families of apartment owners from “HAZARDOUS” estate planning.  Through our seminars for AOA members, we have had the pleasure to meet with, and review the estate plans of, hundreds of wonderful apartment owners.

The “good news” has been how many of them planned ahead years ago and built living trust based estate plans to protect their families. But the “bad news” was that almost all of these old estate plans had major flaws that made them hazardous to family wealth and well being. How did this happen?

We think there are three main reasons apartment owners have hazardous estate plans:

  • Tax Changes:  Tax laws changed, most importantly in 2012 and 2017, but owners’ failed to update their estate plans.
  • Wealth Changes: Good purchases, careful spending and appreciation have turned small estates into significant estates (a great “problem” to have) which now justify sophisticated, customized planning.
  • Family Changes:  Client families can change with-out corresponding adjustment to apartment owners’ estate plans.
  • Lack of Customized Planning: Most estate plans were prepared by lawyers who did not do enough work for apartment owners to understand the special tax and non-tax issues such owners face.  In addition, to keep costs down for families with (then) modest net worth, most lawyers did not spend enough time customizing estate plans for the owners, leaving them with “one-size fits all” generic plans.

 Material Tax Changes

Nearly all of the old (and, sometimes, not so old) plans we review for apartment owners focused on avoiding probate and making sure that estate tax exemptions were optimized.

However, beginning in 2001, the estate tax law has changed dramatically, making avoidance of death taxes irrelevant for most apartment owners, and less important for even the wealthiest of them. At the same time, optimizing apartment owner estate plans to preserve low property tax assessed values, and maximize step-ups in basis at death to save income taxes, became more and more important.

First: The exclusion from estate and gift taxes grew from $600,000 in 1997 to $11.18 MILLION per person 2018!  So, a married couple can now pass more than $22 million to their heirs free of estate taxes.  BUT, the latest increase is scheduled to revert to about $6 million per person in 2026, so don’t count on having the larger exclusion unless you will die before 2026!!

Second: The estate and gift tax rate on wealth over the exclusion actually fell from 55% to 40%.

Third: The law now allows one spouse to leave his/her exemption to the other spouse (we call this “portability”), which can improve income tax consequences for their heirs.

Fourth: The top Federal income tax rates rose from 35% in 2003 to 40.8% in Obama’s second term (including the “Net Investment Income Tax”).

Fifth: Adding insult to injury, California increased its top rate from 9.3% to 13.3%.

Sixth: While property tax exemptions under Prop 13 did not change much, massive inflation in income property values made it important to preserve and maximize your ability to prevent reassessment when you die, but many plans actually create unnecessary reassessments.

All these factors mean that most apartment owners, even after fabulous increases in property values, no longer need to worry about estate and gift taxes.  Even those who still need to worry (we think this is about 20-30% of our owner clients) may discover, after careful analysis, that common strategies may cost heirs more in income taxes (especially after depreciation recapture) and property taxes than they save in estate taxes.

In our seminars for apartment owners (next scheduled for Van Nuys on Sept. 20 and Buena Park on Sept. 27), we show how “standard” planning cost the family (including the surviving spouse) of a couple with “only” a $7 million net worth nearly $2 million in additional tax liabilities!  That is a “HAZARD” which needs to be fixed.

 Changes in the Family

Many old plans were written at a time when owners’ children were still in school, or had not yet built their own families.  So, they gave little thought to how wealth should be left to maximize benefits both for adult children and for grandchildren. Rarely was any effort made to protect the inheritance for generations from creditors and predators (i.e., potential ex-spouses!).  And, owners did not have enough information to predict how well descendants would handle as much wealth as owners now expect to leave to heirs.

As a result, old planning did little to protect heirs from creditor claims, potential ex-spouses, and from their own lack of prudence. Old planning also often failed to protect wealth from loss resulting from remarriage of a surviving spouse or undue influence that might change planning that was originally done jointly to protect a surviving spouse and descendants. All of this can be fixed with sound planning.

 Changes in Wealth

Very few old estate plans anticipated leaving as much wealth as our clients now expect to have. In many cases, this much wealth could now, if not properly handled, change the life of heirs in a negative way, destroying incentives and motivations for heirs, and allow a lifetime of wealth accumulation to be dissipated in a very short time.  New levels of wealth now make it vitally important to protect inheritances from creditors, ex-spouses and imprudence.

 Lack of Customized Planning

Good estate plans need to be customized to meet your goals.  That requires your estate planning lawyer to spend enough time to help you understand your planning options, tease out your goals and desires, help you make important planning decisions and then take the time to draft customized documents to get results you want for your family. Very few lawyers have the experience to do this while focusing on the special needs ofCalifornia apartment owners.

Furthermore, even those who have the experience often price their services at a level that discourages them from spending enough time to do really sound planning and draft custom documents.  That may have made sense when apartment owner estates were relatively small, but it is now “penny wise and pound foolish.”

With the larger estates that apartment owners expect to have at life expectancy, good planning is now much more important than ever before.  Given the size of today’s estates, the benefits of good planning more than justify the fees for doing it.  Projected tax savings will usually exceed the cost of sound planning by 10 to 100 times.

“Hazards” We Commonly Find

While we do see some well written trusts, most of the time we see some combination of the following hazardous features (as well as others which appear less often) in trusts and related estate plans that we review.

  • Trusts for married couples that mandate funding of a credit shelter, bypass, exemption or “B” trust.  With “portability” of your estate tax exclusion between spouses, this “old style” planning no longer saves ANY estate taxes for most couples.  Additionally, it prevents getting a second increase in income tax basis when the surviving spouse passes, and can cost millions in unnecessary capital gains taxes for your surviving spouse and descendants, with no offsetting benefit.
  • Failure to properly document that jointly owned property, (even in the trust) qualifies as community property, so that both halves get a new, higher income tax basis when either spouse dies.
  • Failure to structure the trust so that the property tax exemption of the first spouse to die can be passed to children in an optimum way after the second spouse’s death.
  • Failure to structure property ownership in the trust to avoid reassessment even when the first spouse dies.
  • Failure to protect assets left for a surviving spouse from creditors.
  • Failure to protect the surviving spouse from undue influence that can redirect property away from your natural heirs.
  • Use of LLCs or partnerships to hold buildings in ways that cause unnecessary increases in property taxes on the first or second death.
  • Failure to provide enough flexibility in your trust regarding allocations of income and principal which can, in turn, lead to higher income taxes after your demise.

 Opportunities to Better Benefit Your Heirs

We take great pleasure when we can help clients figure out not only what they will leave to heirs, but how they will leave it in order to enhance the lives of their heirs.

In some cases, that means combining protection from creditors and predators, with provisions that will prevent heirs from misusing their inheritance before they develop enough maturity to manage it themselves.  None of our clients want their children or grandchildren to be “spoiled” by their inheritance, or to dissipate a substantial inheritance early in life and wind up impoverished in later years.

This means we spend real time discussing the goals apartment owners have for their family and wealth.  Then, we teach them about some of the ways they can fulfill such goals, often ways we learned from working with hundreds of other apartment owners.  Finally, we spend significant time doing custom drafting to reflect the decisions the owners made.  And, we follow that up with explanations of the drafting to make sure it reflects the owners’ desires.

Sometimes this includes provisions to encourage, or mandate, keeping some or all of the family real estate business together, either for a period of time, or permanently.

It can also include provisions that help pass values about hard work, accomplishment, thrift or even community service to your heirs.

In reality, the opportunities to benefit your heirs, protect them and pass values are limited only by your imagination.  We get great satisfaction from educating our owner clients about strategies that have worked for others, in order to help them refine their planning choices

 Opportunities to Enhance Benefits During Your Life

Although most estate planning revolves around benefits for your heirs, it also provides strategies to help you live a better life yourself. This can include strategies to enable you to sell property without paying capital gains taxes.   One of those strategies is the Capital Gains Bypass Trust (“CGBT”). Another is the “Accelerated Step-Up Strategy” that can give you a step-up in basis while you are alive.  These strategies, which we cover in our seminars, can free you to sell without unacceptable tax hits.

Make Your Estate Plan Work Well for Your Family

Making your estate plan work well begins with understanding the planning you have and your planning opportunities.  Generally, the first step begins by getting your plan reviewed by an experienced estate planning attorney who understands, and works regularly with, the problems and opportunities of apartment owners.

But the real key is good planning.  That is why my motto is: “IF YOU FAIL TO PLAN (WELL), PLAN TO FAIL”.

The tax environment, your wealth, and your family have probably changed a great deal since you completed your planning.  The odds are high that your existing plan does not reflect your current goals for your wealth, nor does it avoid tax risks that changes in the law and your situation have produced.

In order to prevent your estate plan from being a hazard to you and your family, get your estate planning reviewed now by a lawyer who will help you articulate your goals, and then put your goals first in any planning you want done.  You will get peace of mind, while your heirs will gain substantial benefits.

I would be glad to be the lawyer who helps you with this, but if you do not do it with me, find someone else who has enough experience and expertise to guide you through this process.

And, to get a better idea about these issues, attend our FREE AOA Seminar on Estate Planning for Apartment Owners in Van Nuys on September 20 and Buena Park on September 27.  Call the AOA for reservations at (800) 827-4262.

Kenneth Ziskin, an estate planning attorney, focuses on integrated estate planning for apartment owners to save income, property, gift and estate taxes.  He holds the coveted AV Preeminent peer reviewed rating for Ethical Standards and Legal Ability from Martindale-Hubbell, a perfect 10 out of 10 rating from legal website AVVO.Com, and is multiple winner of AVVO’s Client Choice Award.

See Ken’s website at www.ZiskinLaw.com.  Ken offers FREE CONSULTATIONS FOR AOA MEMBERS. You can call him at (818) 988-0949.  Ken meets with clients from his home office in Sherman Oaks, and in Torrance, Orange County, Oakland and San Jose.         This article (prepared in July of 2018) is general in nature and not intended as advice for clients.  Please get advice from counsel you retain for your own planning. 

Tax Changes:  Tax laws changed, most importantly in 2012 and 2017, but owners’ failed to update their estate plans.

  • Wealth Changes: Good purchases, careful spending and appreciation have turned small estates into significant estates (a great “problem” to have) which now justify sophisticated, customized planning.
  • Family Changes:  Client families can change with-out corresponding adjustment to apartment owners’ estate plans.
  • Lack of Customized Planning: Most estate plans were prepared by lawyers who did not do enough work for apartment owners to understand the special tax and non-tax issues such owners face.  In addition, to keep costs down for families with (then) modest net worth, most lawyers did not spend enough time customizing estate plans for the owners, leaving them with “one-size fits all” generic plans.

 Material Tax Changes

Nearly all of the old (and, sometimes, not so old) plans we review for apartment owners focused on avoiding probate and making sure that estate tax exemptions were optimized.

However, beginning in 2001, the estate tax law has changed dramatically, making avoidance of death taxes irrelevant for most apartment owners, and less important for even the wealthiest of them. At the same time, optimizing apartment owner estate plans to preserve low property tax assessed values, and maximize step-ups in basis at death to save income taxes, became more and more important.

First: The exclusion from estate and gift taxes grew from $600,000 in 1997 to $11.18 MILLION per person 2018!  So, a married couple can now pass more than $22 million to their heirs free of estate taxes.  BUT, the latest increase is scheduled to revert to about $6 million per person in 2026, so don’t count on having the larger exclusion unless you will die before 2026!!

Second: The estate and gift tax rate on wealth over the exclusion actually fell from 55% to 40%.

Third: The law now allows one spouse to leave his/her exemption to the other spouse (we call this “portability”), which can improve income tax consequences for their heirs.

Fourth: The top Federal income tax rates rose from 35% in 2003 to 40.8% in Obama’s second term (including the “Net Investment Income Tax”).

Fifth: Adding insult to injury,California increased its top rate from 9.3% to 13.3%.

Sixth: While property tax exemptions under Prop 13 did not change much, massive inflation in income property values made it important to preserve and maximize your ability to prevent reassessment when you die, but many plans actually create unnecessary reassessments.

All these factors mean that most apartment owners, even after fabulous increases in property values, no longer need to worry about estate and gift taxes.  Even those who still need to worry (we think this is about 20-30% of our owner clients) may discover, after careful analysis, that common strategies may cost heirs more in income taxes (especially after depreciation recapture) and property taxes than they save in estate taxes.

In our seminars for apartment owners (next scheduled for Van Nuys on Sept. 20 and Buena Park on Sept. 27), we show how “standard” planning cost the family (including the surviving spouse) of a couple with “only” a $7 million net worth nearly $2 million in additional tax liabilities!  That is a “HAZARD” which needs to be fixed.

 Changes in the Family

Many old plans were written at a time when owners’ children were still in school, or had not yet built their own families.  So, they gave little thought to how wealth should be left to maximize benefits both for adult children and for grandchildren. Rarely was any effort made to protect the inheritance for generations from creditors and predators (i.e., potential ex-spouses!).  And, owners did not have enough information to predict how well descendants would handle as much wealth as owners now expect to leave to heirs.

As a result, old planning did little to protect heirs from creditor claims, potential ex-spouses, and from their own lack of prudence. Old planning also often failed to protect wealth from loss resulting from remarriage of a surviving spouse or undue influence that might change planning that was originally done jointly to protect a surviving spouse and descendants. All of this can be fixed with sound planning.

 Changes in Wealth

Very few old estate plans anticipated leaving as much wealth as our clients now expect to have. In many cases, this much wealth could now, if not properly handled, change the life of heirs in a negative way, destroying incentives and motivations for heirs, and allow a lifetime of wealth accumulation to be dissipated in a very short time.  New levels of wealth now make it vitally important to protect inheritances from creditors, ex-spouses and imprudence.

 Lack of Customized Planning

Good estate plans need to be customized to meet your goals.  That requires your estate planning lawyer to spend enough time to help you understand your planning options, tease out your goals and desires, help you make important planning decisions and then take the time to draft customized documents to get results you want for your family. Very few lawyers have the experience to do this while focusing on the special needs ofCalifornia apartment owners.

Furthermore, even those who have the experience often price their services at a level that discourages them from spending enough time to do really sound planning and draft custom documents.  That may have made sense when apartment owner estates were relatively small, but it is now “penny wise and pound foolish.”

With the larger estates that apartment owners expect to have at life expectancy, good planning is now much more important than ever before.  Given the size of today’s estates, the benefits of good planning more than justify the fees for doing it.  Projected tax savings will usually exceed the cost of sound planning by 10 to 100 times.

“Hazards” We Commonly Find

While we do see some well written trusts, most of the time we see some combination of the following hazardous features (as well as others which appear less often) in trusts and related estate plans that we review.

  • Trusts for married couples that mandate funding of a credit shelter, bypass, exemption or “B” trust.  With “portability” of your estate tax exclusion between spouses, this “old style” planning no longer saves ANY estate taxes for most couples.  Additionally, it prevents getting a second increase in income tax basis when the surviving spouse passes, and can cost millions in unnecessary capital gains taxes for your surviving spouse and descendants, with no offsetting benefit.
  • Failure to properly document that jointly owned property, (even in the trust) qualifies as community property, so that both halves get a new, higher income tax basis when either spouse dies.
  • Failure to structure the trust so that the property tax exemption of the first spouse to die can be passed to children in an optimum way after the second spouse’s death.
  • Failure to structure property ownership in the trust to avoid reassessment even when the first spouse dies.
  • Failure to protect assets left for a surviving spouse from creditors.
  • Failure to protect the surviving spouse from undue influence that can redirect property away from your natural heirs.
  • Use of LLCs or partnerships to hold buildings in ways that cause unnecessary increases in property taxes on the first or second death.
  • Failure to provide enough flexibility in your trust regarding allocations of income and principal which can, in turn, lead to higher income taxes after your demise.

Opportunities to Better Benefit Your Heirs

We take great pleasure when we can help clients figure out not only what they will leave to heirs, but how they will leave it in order to enhance the lives of their heirs.

In some cases, that means combining protection from creditors and predators, with provisions that will prevent heirs from misusing their inheritance before they develop enough maturity to manage it themselves.  None of our clients want their children or grandchildren to be “spoiled” by their inheritance, or to dissipate a substantial inheritance early in life and wind up impoverished in later years.

This means we spend real time discussing the goals apartment owners have for their family and wealth.  Then, we teach them about some of the ways they can fulfill such goals, often ways we learned from working with hundreds of other apartment owners.  Finally, we spend significant time doing custom drafting to reflect the decisions the owners made.  And, we follow that up with explanations of the drafting to make sure it reflects the owners’ desires.

Sometimes this includes provisions to encourage, or mandate, keeping some or all of the family real estate business together, either for a period of time or permanently.

It can also include provisions that help pass values about hard work, accomplishment, thrift or even community service to your heirs.

In reality, the opportunities to benefit your heirs, protect them and pass values are limited only by your imagination.  We get great satisfaction from educating our owner clients about strategies that have worked for others, in order to help them refine their planning choices

Opportunities to Enhance Benefits During Your Life

Although most estate planning revolves around benefits for your heirs, it also provides strategies to help you live a better life yourself. This can include strategies to enable you to sell property without paying capital gains taxes.   One of those strategies is the Capital Gains Bypass Trust (“CGBT”). Another is the “Accelerated Step-Up Strategy” that can give you a step-up in basis while you are alive.  These strategies, which we cover in our seminars, can free you to sell without unacceptable tax hits.

Make Your Estate Plan Work Well for Your Family

Making your estate plan work well begins with understanding the planning you have and your planning opportunities.  Generally, the first step begins by getting your plan reviewed by an experienced estate planning attorney who understands and works regularly with, the problems and opportunities of apartment owners.

But the real key is good planning.  That is why my motto is: “IF YOU FAIL TO PLAN (WELL), PLAN TO FAIL”.

The tax environment, your wealth, and your family have probably changed a great deal since you completed your planning.  The odds are high that your existing plan does not reflect your current goals for your wealth, nor does it avoid tax risks that changes in the law and your situation have produced.

In order to prevent your estate plan from being a hazard to you and your family, get your estate planning reviewed now by a lawyer who will help you articulate your goals, and then put your goals first in any planning you want done.  You will get peace of mind, while your heirs will gain substantial benefits.

I would be glad to be the lawyer who helps you with this, but if you do not do it with me, find someone else who has enough experience and expertise to guide you through this process.

And, to get a better idea about these issues, attend our FREE AOA Seminar on Estate Planning for Apartment Owners in Van Nuys on September 20 and Buena Park on September 27.  Call the AOA for reservations at (800) 827-4262.

Kenneth Ziskin, an estate planning attorney, focuses on integrated estate planning for apartment owners to save income, property, gift and estate taxes.  He holds the coveted AV Preeminent peer reviewed rating for Ethical Standards and Legal Ability from Martindale-Hubbell, a perfect 10 out of 10 rating from legal website AVVO.Com, and is multiple winner of AVVO’s Client Choice Award.

See Ken’s website at www.ZiskinLaw.com.  Ken offers FREE CONSULTATIONS FOR AOA MEMBERS. You can call him at (818) 988-0949.  Ken meets with clients from his home office in Sherman Oaks, and in Torrance, Orange County, Oakland and San Jose. This article (prepared in July of 2018) is general in nature and not intended as advice for clients.  Please get advice from counsel you retain for your own planning. 

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