Estate Planning Thoughts To Begin the New Year

By: Burt Levitch

Date: January 1997

Your new year's resolution - and possibly the most thoughtful gift for your family and friends - can be a review of issues affecting your estate plan. Here is a group of fairly random, yet timely, topics for you to consider.

I.     Three-Year Reprieve from Excise Tax on IRA and Pension Distributions

Large pension and individual retirement accounts have long been subject to an "excess retirement accumulations tax" of 15 percent.  The tax - in addition to applicable income and estate taxes - may be imposed on distributions in excess of $160,000 per year and on large plan balances remaining at death. 

During 1997, 1998 and 1999, you may withdraw an unlimited amount of assets from your pension plan or IRA without incurring the 15 percent excise tax.  Of course, distributions constitute taxable income when received.  And IRA and pension assets remain subject to both estate and income taxes at death.

Congress granted this three-year excise tax moratorium only to the living; the 15 percent excise tax still applies to pension plan or IRA balances remaining at death.

A portion of your retirement interests already may be exempt from the excise tax if you filed a "grand-  father" election in the 1980's.  In any event, the first several hundred thousand dollars of plan assets remaining at death are generally sheltered from the excise tax.

If you have significant retirement plan assets, now may be a good time to review your beneficiary designation and to consider the tax treatment of your pension or IRA interests.  This is an unusually complicated area, and thinking has evolved considerably in recent years.  Many past decisions merit careful reconsideration. 

California Raises Probate Threshold to $100,000; Proper Funding of Living Trust Remains Important

A primary benefit of a living trust is the avoidance of probate, a lengthy and costly court proceeding often necessary to transfer title to assets following an owner's death.

Under prior law, you could maintain up to $60,000 of assets in your own name without needing a probate to transfer ownership at death.  On January 1, 1997, this amount increased to $100,000.

With this new threshold in mind, you should review your assets and make certain that a probate would not be required in the event of your death.

If you have a living trust, title to real estate, brokerage accounts and all other assets should be held in the name of your trust - except for your personal checking account and certain investments of relatively nominal value, as long as the total of assets outside your trust does not exceed $100,000.

Joint Tenancy - A Good Alternative ?

Joint tenancy is another method of holding title to property that can transfer ownership at death without a probate proceeding, but think three times before forming a joint tenancy for this purpose.

First, the creation of a joint tenancy may be a gift, with transfer tax consequences and loss of control that you may not intend.  Second, a probate proceeding may well be required upon the death of the surviving joint tenant, and your interest in the property may end up with beneficiaries not of your choosing.  Finally, joint tenancy ownership may deny married couples in California a step-up in basis to fair market value for the entire property on the death of the first spouse.

II.    Your Health Care Power -Has It Expired?

Many of you have signed a durable power of attorney for health care decisions.  This document grants a relative or friend the authority to make medical decisions on your behalf  if you are incapacitated.  It also may contain "living will" language, expressing the degree of care that you would want in the event of lingering illness.

Prior to 1992, California law limited the duration of health care powers to seven years.  Health care powers signed since then are effective indefinitely, but any such documents signed before 1992 may have expired (or may expire in the next two years).  Check your own health care power to verify that it remains in effect.

III.   Trustees:  Beware the Prudent Investor Act

Trustee investment decisions should be reconsidered in light of California's adoption of the Uniform Prudent Investor Act.

Until recently, trustees were generally expected to use "the care, skill, prudence and diligence... that a prudent person acting in a like capacity and familiar with such matters would use."

Now, the Act requires trustees to evaluate investment and management decisions "not in isolation, but in the context of the trust portfolio as a whole and as part of an overall investment strategy having risk and return objectives reasonably suited to the trust."

This new standard places an added burden on trustees to determine how the interests of present and future beneficiaries can be best served within the purposes and guidelines of a particular trust.  For instance, the duty of a trustee to treat income and remainder beneficiaries impartially will now require a reasonable effort to preserve the purchasing power of trust assets and not just maintain the current value of trust principal.  Asset diversification is more specifically emphasized under the terms of the Act as well.

If currently acting as a trustee, you should carefully review the propriety of your investment strategy and practices. 

IV.    Deduct Fair Market Value for Charitable Foundation Gifts - Until May 31, 1997

Congress has opened a temporary window of opportunity during which you can give certain appreciated assets to a private foundation and deduct the current, fair market value of the asset at the time of gift.  After May 31, 1997, the old rule returns, under which you may only deduct your original basis in property contributed to a private foundation.

If you have questions about these topics or any other aspect of your estate plan, please call Burt Levitch in our firm's Trusts and Estates Department, at (310) 858-7700.

Burt Levitch, head of our firm's Trusts and Estates Department, devotes his practice to estate planning and estate and trust administration. In addressing these issues, he helps clients consider the financial and emotional needs of family and friends while facing the constraints imposed by estate taxation and other applicable  laws.

Our Trusts and Estates Department offers a wide range of estate planning and probate services, geared toward providing an orderly transfer of wealth from one generation to another. We prepare wills, trusts and related documentation while furnishing sophisticated estate tax planning. We also provide counsel to executors and trustees on the administration of estates and trusts, and offer skilled representation in probate, trust and conservatorship proceedings and disputes.

Rosenfeld, Meyer & Susman was founded in 1957.  The firm's area of expertise include: Trusts and Estates, Litigation, Taxation, Corporate and Securities, Entertainment, Family Law, Labor and Employment Law, Insurance Coverage and Defense, Real Estate, and Employee Benefits.  

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