Author: Kevin Brown

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How California’s new “Proposition 19″ may impact your Estate Planning

California’s Proposition 19, billed as “The Property Tax Transfers, Exemptions, and Revenue for Wildfire Agencies and Counties Amendment,” takes effect on February 16, 2021. You may not know that Proposition 19 changed the law regarding how children can inherit their parents’ property. These changes may be significant, depending on your situation.

Previous Law – Proposition 58

Prior to Proposition 19, Proposition 58 allowed property taxes to be excluded from reassessment when transferred between parents and children:

• Transfer of a primary residence between parents and children was not subject to reassessment. no matter the fair market value of the home; and
• Transfers of property other than a primary residence between parents and children were subject to reassessment only on the amount above $1 million of assessed value (not fair market value). This amount could be doubled if both parents left “other” property to their children.

Key Changes

With the passage of Proposition 19, the new law restricts the parent to child exclusion as follows:

• Transfer of a primary residence between parent and child is not subject to reassessment if the child uses the property as his or her primary residence, but only up to $1 million of fair market value (child must file for the homeowner’s exemption within one (1) year of the transfer).
• Transfers of all other property between parents and children are subject to reassessment

Generally, Proposition 19 affects individuals who own vacation homes, rentals, or commercial property, and/or have a primary residence with a low base year value that the children would want to keep as a rental property and not a primary residence. In all such cases, the property will be reassessed to current fair market value on the death or transfer of title between parents and children.

The financial impact of this law may dramatically affect your loved ones. These reassessments could possibly add up to many thousands of dollars in tax obligations, which could then lead to decisions on items such as: rent increases to cover the additional tax burden; which child should receive the property and can he/she afford the higher taxation; asking children if they would be willing to move and change primary residence; keeping vacation properties that now have much higher taxes; and buy-or-hold strategies, etc.

What Can You Do?
There are some planning options to consider before the law takes effect in February, including:

• Gifting property directly to child
• Selling property directly to child
• Providing a life estate
• Gifting or selling property to an Intentionally Defective Grantor’s Trust (“IDGT)
• Transferring property Interest to an IDGT and creating an LLC
• Transferring property to an LLC and gifting or selling LLC interest to an IDGT

Further, if you choose to not make these changes prior to the new law, your estate planning may need to change to adjust to the cost implications of potentially higher property taxes. Taxation is always an important aspect of estate planning but now with Proposition 19 (and other possible federal law changes to come), it is likely to increase in significance compared to current law.

These strategies require careful consideration and legal advice. If you are interested in learning about one of these options, please call or email to set up a free fifteen (15) minute consultation with a Mortensen & Reinheimer, PC attorney to determine how Proposition 19 potentially affects your estate plan and your options going forward. Contact us before the new law takes effect!

Our Best Wishes for a Happy and Prosperous New Year!

About the author:
Tamsen R. Reinheimer, Attorney, is a Certified Specialist in Estate Planning, Trust & Probate Law (The State Bar of California Board of Legal Specialization). She has significant experience in all aspects of estate planning, trust administration, and probate. Contact Tamsen at tamsen@ocestateplanning.net.

“Wrap” Up Your Affairs:
2020 Year-End Estate Plan Review

We are all so eager for 2020 to conclude!  However, year-end is a terrific time to review previously completed estate plans or to finish one if the year has run away from you, as it has for so many of us this difficult year.

Evaluate & Adapt

Assets and family dynamics change over time. The holidays are a great time to evaluate and update any real property and gifts that you might have received throughout the year. The interactions and composition of many households have changed in 2020 because of the pandemic. Several of our clients have households that now accommodate the needs of adult children returning from college, an elderly family member, a spouse working from home, or young children attending school remotely. Some moved to be closer to family and others relocated to be further away from family!

Another issue to consider is estate planning laws that have changed in 2020 or will change in early 2021. For instance, the SECURE ACT significantly changed the laws for inherited IRAs (i.e., changes the timing of distributions from your 401(k) plans and Traditional IRAs to your beneficiary upon your death). California’s Proposition 19, which some say was constructed with multiple facets in order to pass, has key provisions that may impact property tax exclusions for inherited real property.

On the taxation side, the IRS has several new inflation adjustments for 2021.

It is important to monitor these types of changes and how they may affect your current estate planning documents, so it is critical to work with your accountant and attorney in this process.

Implement & Communicate

Your estate plan includes Healthcare and Financial powers of attorney (POAs). These are critical documents that are necessary to manage your affairs if you become sick or incapacitated. COVID-19 has forced many of us to reconsider whom to have as a Healthcare POA. For example, does it really make sense to have a sister who lives across the country act as your Healthcare POA? Perhaps, a trusted relative or friend that lives closer to you might be a more appropriate choice; especially given how skittish many of us are about the safety of travel during the pandemic.

Equally important is to make sure that your trusted loved ones know where your important documents are kept and your wishes should you become incapacitated or pass. Your documents should include names and contact information for your accountant, doctors, attorney and other key advisors. Also, make sure that passwords to your electronic accounts are known by your POAs. Be as specific as possible about your personal property bequests, as doing so will avoid jilted feelings, confusion, and unnecessary competition amongst your beneficiaries.

Other Considerations for 2021

The “small estate threshold” in California will remain at $166,250 for 2021. Estates above that amount will need to go through the probate process, if standard estate planning measures have not been enacted. The basic applicable exclusion amount (and generation-skipping tax exemption) in 2021 will be $11.7 million, up from $11.58 million. Married couples will potentially be able to shield a total of $23.4 million. The annual gift tax exclusion will remain at $15,000 for 2021, but the annual gift tax exclusion for a non-citizen spouse will increase to $159,000, up from $157,000 in 2020.

The basic salary deferral amount for a 401(k) and similar workplace plans remains flat at $19,500 for 2021, and the $6,500 catch-up amount if you are age 50 or older also remains the same. The amount you can contribute to an Individual Retirement Account (IRA) stays the same for 2021 at $6,000, with an additional $1,000 catch-up limit if you are age 50 or older.

Need Help?

We are all available to serve you with your estate planning, conservatorships and probate & litigation requirements. While several of our personnel are working remotely, our Irvine Office is available on an appointment basis, so please contact us with your questions.

All of us at Mortensen & Reinheimer, PC want to take this opportunity to wish each of you our warmest holiday greetings and best for a healthy 2021!

About the author:

W. Robert Price, Esq., is President of Mortensen & Reinheimer, PC.  He is a member of the American Bar Association, the Orange County Bar Association, and the Society of Chartered Property and Casualty Underwriters. He is a California licensed Fire & Casualty Broker-Agent, a California licensed Life & Health Insurance Agent, and has an MBA from Pepperdine University.  Contact Robert at wrobertpriceesq@yahoo.com.

{Editor’s note: Richard Warner, CPA and Deborah Dickson, CPA, CFF, MAFF recently published this article in “Orange County Lawyer” magazine, the official publication of the Orange County Bar Association,” excerpt below.}

Scenario: You successfully negotiated a settlement for your individual plaintiff client in the amount of $1,000,000 due to claims of emotional distress from non-physical injuries at work.  This total includes attorney fees of $400,000.  You call it a “win” and are certain that your client will be happy with the $600,000 net result – until you receive a phone call from the client, complaining that her CPA has informed her that she has to pay taxes on the entire $1,000,000 of proceeds, including your $400,000 fees, so her net after tax result is only $200,000!  Your client goes away unhappy and you wonder what went wrong.

CLICK HERE FOR PDF OF COMPLETE “ORANGE COUNTY LAWYER” ARTICLE

Why Have a Trust Protector?

A mother established a revocable living trust to leave her estate to her two adult children.  The mother felt naming one of the children as trustee would cause a rift in their relationship, so she sought a private professional fiduciary instead.  Many years later, the mother passed away.  The fiduciary accepted the trusteeship and began the trust administration process.  Eventually the children noticed significant issues with the trust administration and confronted the fiduciary.  However, the fiduciary was adamant about their decision-making as trustee and refused to cooperate with the children.  The children allowed the trust administration to continue as they did not want to exacerbate the situation.  To this day, the children feel betrayed and believe their mother’s last wishes were not fulfilled.

Unfortunately, we here at Mortensen & Reinheimer, PC see the above scenario all too often.  To avoid such issues, a safety measure that the mother could have included in her trust is called a “Trust Protector.”  Generally, a Trustor Protector is given significant power over your trust and provides oversight of certain decisions, as well as allowing for a degree of flexibility to the trust itself.

Key Responsibilities

An essential function of a Trust Protector appointment is to monitor the trustee and oversee performance.  Had the mother named a Trust Protector in the above case, the children’s allegations could have been independently and objectively investigated to determine whether the trust administration was being properly handled.  If not, the Trust Protector could remove the fiduciary and appoint a successor trustee.

Other powers of a Trust Protector may include:

• Resolve disputes between trustees (if there are co-trustees) or between beneficiaries and trustee(s)
• Consent to, direct or veto income and principal distributions
• Change the location of the trust
• Alter interests of beneficiaries
• Terminate a trust and have income and principal be distributed outright and free of trust to one or more beneficiaries
• Convert a limited power of appointment to a general power of appointment
• Create a general power of appointment in favor of a beneficiary
• Make changes to the trust or accommodate changing circumstances or laws

These powers can be eliminated or altered as well, so that the Trust Protector has limitations as desired by the trustor.

Who Can be Appointed?

The Trust Protector can be anyone; however, it is recommended that a neutral party be selected so that concerns and issues can be evaluated objectively.

Define Limits of Power

As good as it may seem to have a Trust Protector, problems can occur if the role is not clearly defined.  To avoid unexpected power struggles, the Settlor/Trustor should be clear in his or her trust documents as to what specific powers will be given to the Trust Protector and any limitations (as California has not codified the role).  It is also recommended that the Trust Protector clause include a path to removing and replacing the Trust Protector, as well as set forth guidelines as to their qualifications.

About the author:
Weily Yang is an attorney at Mortensen & Reinheimer, PC, an estate planning and probate firm in Irvine. Weily is a zealous advocate for individuals with special needs. His primary focus is special needs trusts and probate conservatorships together with estate planning, trust administration, and probate. He can be reached at weily@ocestateplanning.net.

by Deborah Dickson, CPA, CFF, MAFF, Managing Partner

For decades, plaintiffs and defendants alike have been motivated by having their day in court. This innate desire of human beings to prove themselves “right” has powered our justice system and made the legal profession one of the most demanding and rewarding. This has worked well until the Covid-19 pandemic hit and courtrooms across the nation began to close their doors.  At first, many professionals in litigation support thought, “It’s only a few weeks.”  Then, “It’s only a few months.”  Now, along with attorneys, we must pivot and embark on a journey to the new normal.

As courts begin to re-open, many are backlogged, and matters are being re-prioritized to ensure what the court considers critical cases are addressed. Trial resolution for “non-critical” matters has become a daunting uncertainty. As a result, for many litigators the new normal involves a greater focus on other forms of dispute resolution. Those attorneys who are skilled in negotiation and mediation can benefit from understanding the powerful role a forensic CPA can play in the resolution process.

The role of a forensic accountant is to transform complex financial data into calculations and a narrative that non-accountants can understand. Unlike lawyers, however, the rules governing the professional conduct of forensic CPAs forbid advocacy. Financial damages experts provide independent objective analysis, perform calculations, and report findings. This objectivity-based perspective allows the forensic accounting expert to offer impartial findings which enable both parties to more effectively resolve their differences and arrive at a resolution, often avoiding litigation in a courtroom setting. It is this independence, and the ability to clearly communicate damage calculations, that can make the forensic accountant a key player in dispute resolution.

{Reprinted with permission of the Orange County Business Journal, originally published in the  “Women in Law” supplement, August 31, 2020.}

CLICK HERE FOR PDF OF OCBJ ARTICLE

Breach of Fiduciary Duty:
What Every Beneficiary/Trustee Needs to Know

As you may or may not know, when a person is charged with making decisions for other people or managing other people’s assets (such as a trustee or agent under a power of attorney) that person owes a “fiduciary” duty to the person or persons on behalf of whom they are acting.

A “fiduciary” means a personal representative, trustee, guardian, conservator, attorney-in-fact under a power of attorney. Generally, a fiduciary has a duty to comply with the terms of the trust, will, powers of attorney, and/or advance health care directives, as well as other duties set forth by California law. However, beyond that, a fiduciary also owes a duty of utmost good faith when dealing with the property of another. In other words, a fiduciary is answerable to those persons of whom they are acting on behalf and may not otherwise make decisions that benefit the fiduciary over the person. A complete discussion on the various duties of a fiduciary and breach of duties would take up volumes, but it is important to know that anyone acting on behalf of another has both duties and limitations in their capacity as a fiduciary.

What is a Violation of Duty?

This article will focus primarily on breaches of duty by a trustee. A trustee is a fiduciary of the highest character whose duty demands the strictest integrity. A trustee “is bound to act in the highest good faith towards his beneficiary and may not obtain any advantage by the slightest misrepresentation. Concealment, threat, or adverse pressure of any kind is unlawful as long as the confidential relation exists,” and any violation of these duties constitutes a fraud against the beneficiaries.

A breach of trust is a violation by the trustee of any duty that the trustee owes a beneficiary. A breach of trust can take place intentionally (in bad faith), knowingly but in good faith, or negligently.

Typical Duties

General duties of a trustee include, but are not limited to:

• Duty of Loyalty. A trustee has a duty to always consider and act in the best interests of the trust and may not, by the slightest impropriety, seek an advantage from a beneficiary; place his/her own interests above those of the beneficiaries; use the office of trustee to unduly pressure beneficiaries to approve trustee acts; or make secret profits from the trust.
• No Self-Dealing. A trustee may not deal with themself in any transaction in their individual capacity. The fairness of the transaction and the trustee’s good faith are irrelevant. Self-dealing includes commingling trust assets with the trustee’s own, taking a loan from the trust, and/or personally dealing with unrelated third parties that compete with the trustee’s fiduciary duties to the beneficiary.
• Conflicting Personal Interests. A trustee must take caution to not put themselves in a position where their personal interest conflicts with the best interests of the trust. A trustee may be removed when there are irreconcilable conflicts between the trustee’s personal interests and those of the trust, or when there are conflicting duties, such as when a trustee is also an officer or director of a company owned by the trust.
• Duty of Impartiality. A trustee has a duty to deal impartially with all beneficiaries of a trust and must act impartially in investing and managing trust property, while at the same time considering the differing interests of the beneficiaries.
• Duty of Disclosure. It is a trustee’s duty to provide the beneficiaries with a complete copy of the trust and any amendments to the trust and to otherwise keep the beneficiaries reasonably informed of the trust and its administration. This duty includes a duty to fully disclose all material facts, as well as a full accounting of trustee activities, and to provide all documents in support of the trustee’s activities.
• Duty to Enforce or Defend Claims. A trustee has a general duty to take reasonable steps to enforce claims of the trust and to defend actions that may result in a loss to the trust, as well as a general duty to enforce claims against a predecessor trustee or a co-trustee.
• Duty to Complete Administration in a Reasonable Time. While a reasonable amount of time is expected before a trust is in a position to close and the trustee to make distributions to the beneficiaries, a trustee must complete the administration and make the distributions in a reasonable amount of time depending on the particular nature and complexity of the trust.

Remedies for Breach of Duties

If a trustee commits, or threatens to commit, a breach of trust, a beneficiary or co-trustee may commence a proceeding to:

• Compel or enjoin the trustee from breaching the trust
• Compel the trustee to compensate for a breach
• Remove the trustee
• Reduce or deny compensation to the trustee
• Disgorge profit of the trustee
• Surcharge the trustee

Be Informed

If you are a trustee/fiduciary, it may be your obligation to seek professional legal advice on matters related to your duties. If you are a beneficiary who suspects that a trustee/fiduciary is not doing their job, you may want to talk to someone to advise you of your rights. Mortensen & Reinheimer, PC is available to advise you no matter the circumstances.

About the author:
Noah B. Herbold, Attorney, is a Certified Specialist in Estate Planning, Trust & Probate Law (The State Bar of California Board of Legal Specialization). His primary focus is assisting clients with litigated matters such as: Trust Contests, Breach of Trust, Fiduciary Appointment and/or Removal, Asset Ownership, Beneficiary Rights, Determination of Heirship, Elder Financial Abuse, Property Disputes, and Conservatorships. Contact Noah at noah@ocestateplanning.net.

Special Needs Trusts:
What Every Parent or Guardian Must Know

Parents of special needs children face a wide array of challenges in their day-to-day lives. A key area that must be addressed, in preparing for the many uncertainties of life, is estate planning.  These critical questions cannot be ignored and should be addressed sooner than later:

• Who will take care of my child if I die tomorrow?
•  How will my child survive without me?
•  Will my child be financially stable once I die?
•  Will my child continue to receive government benefits if he or she inherits funds from a family relative?

Unfortunately, special needs children do face these issues when their parents have not adequately prepared and the results can be tragic.  As such, it is crucial to work with an experienced Special Needs attorney to effectively address these and other issues.

One way to relieve many of these concerns raised in the above questions is to establish a “Special Needs Trust.”  A Special Needs Trust is established to maintain disabled beneficiaries’ specific needs, lifestyles and/or future in the event the parent or guardian passes away.

With this particular Trust in place, parents can appoint an individual(s) as Trustee to manage their child’s finances. This will allow the children to maintain their specific needs and continue with their lifestyle. For that matter, the children’s future will be secured, offering the parents peace of mind, comfort, and hope.

Advantages

• Preserves the eligibility of the disabled beneficiary for “needs-based” government benefits, while critically simultaneously allowing for the beneficiary to benefit from trust distributions to supplement public benefits and address his or her special needs. Needs-based government benefits include:
  • Social Security Income (“SSI”)
  • Medi-Cal
  • In-Home Supportive Services (“IHSS”)
• Can be used to receive inheritance funds or proceeds from a settlement on behalf of the disabled person (to avoid disqualifying from government benefits).
• Assets in a Special Needs Trust cannot be reached by creditors.

Qualifications

• Person has a developmental disability
• Person is receiving or is eligible for government benefits (i.e., SSI, Medi-Cal, IHSS).
• Third party wants a clause added for the disabled person.

Special Needs Trust Funds

The money in a Special Needs Trust is generally used to pay for the person’s personal care, vacation, home furnishings, out-of-pocket medical/dental expenses, education, recreation, vehicle, physical rehabilitation, and other non-disqualifying assets.

Obtain Professional Guidance

This article is meant to provide a general overview of Special Needs Trusts; specific details should be considered, and it is important to discuss applicability to your specific situation.  If you are a parent of a special needs child and believe a Special Needs Trust may be what you need, please contact Mortensen & Reinheimer, PC at (714) 384-6053 or weily@ocestateplanning.net and schedule a consultation with one of our attorneys. We will provide you the proper guidance and advise accordingly throughout the process.

 

About the author:
Weily Yang is an attorney at Mortensen & Reinheimer, PC, an estate planning and probate firm in Irvine. Weily is a zealous advocate for individuals with special needs. His primary focus is special needs trusts and probate conservatorships together with estate planning, trust administration, and probate. He can be reached at weily@ocestateplanning.net.

Why Financial Elder Abuse is a Rising Crime – And What You Can Do About It

Financial elder abuse is defined in the Welfare and Institutions Code Section 15610.30 and is incurred when a person takes, secretes, appropriates, obtains, or retains real or personal property of an elder (65 or older) or dependent adult, or assists in doing so, for a wrongful purpose or with the intent to defraud. Such appropriation is found when the person knew or should have known that his/her conduct was likely to be harmful to the victim. This includes undue influence, gifts, and donative transfers such as a change to a will or trust.

Who are the Perpetrators?

Financial elder abuse is fast-becoming one of the biggest crimes against our elderly population. One of the reasons this lesser-known crime occurs so often unseen is because in most cases it is perpetrated by a member of the victim’s own family. Quite often, it is difficult to recognize financial elder abuse because we think of a perpetrator in the form of a contractor charging for unnecessary items, a phone scammer claiming you won the lottery, or a gardener who suddenly ends up the sole heir to your parents’ estate. To the contrary, the fact is that much of the time the perpetrator is a member of the victim’s own family. Often the victim will not report the abuse due to fear or embarrassment, which exacerbates the difficulty of detecting and ending the abuse.

The COVID-19 pandemic presents even more opportunity for perpetrators to take advantage of those vulnerable to abuse, especially if the perpetrator already resides with the victim. The elderly are especially vulnerable to infection from COVID-19 and are encouraged to stay inside and not to socialize in-person with others. This means less contact with friends/family who cannot come to visit in-person any longer, opting instead for phone calls. It is therefore easier for perpetrators to initiate and sustain the financial abuse for an extended period with less fear of apprehension.

Perpetrators often claim to be the “caregiver” while asserting that the victim continues to make all the decisions. However, upon further investigation, it may turn out that the perpetrator has control of the victims’ checkbook and ATM card, credit card, and online access to bank accounts under the guise that they are responsible for paying bills for the victim and running errands. The perpetrator may also have received “gifts” from the victim in the form of cash, vehicles, and sometimes houses and other more expensive items.

Signs of Elder Abuse

1. The victim no longer manages his or her own finances
2. Isolation from family/friends, such as monitored phone calls, and required scheduling of visits
3. Callers/visitors are consistently told that the victim is sleeping and cannot visit or talk
4. Relationships with the victim become estranged without explanation
5. Sudden changes to the victim’s estate plan to the exclusion of other close family members
6. Sudden changes in the appointment of financial decision-maker(s) for the victim
7. The perpetrator has a new car, takes trips, purchases luxury items, when he/she doesn’t otherwise have other income
8. The perpetrator receives gifts of money or property, especially when the gifts are not fairly-balanced between the other children or the victim cannot afford to make such gifts
9. The victim’s mood dramatically changes without explanation, such as depression or fear.

What Can You Do?

1. Ask questions of the victim and/or the perpetrator. And then ask more questions!
2. Contact Adult Protective Services to report the suspected abuse
3. Contact local law enforcement to conduct a welfare check on the victim

Can Anything Be Done After Death?

Yes. Even after the victim has passed away, family members may still pursue a claim of financial elder abuse against the perpetrator.  Contact Mortensen & Reinheimer, PC for a consultation regarding how you can recover the property and punish the perpetrator.

About the author:
Noah B. Herbold, Attorney, is a Certified Specialist in Estate Planning, Trust & Probate Law (The State Bar of California Board of Legal Specialization). His primary focus is assisting clients with litigated matters such as: Trust Contests, Breach of Trust, Fiduciary Appointment and/or Removal, Asset Ownership, Beneficiary Rights, Determination of Heirship, Elder Financial Abuse, Property Disputes, and Conservatorships. Contact Noah at noah@ocestateplanning.net.