Sound estate planning is not just about taxes, although that is often the “hazard” that motivates apartment owners to do, or update, their estate planning.  Instead, it is really about taking care of everyone you love and everything you own.  Of course, the tax component of good estate planning means there can be more wealth to take care of those you love.  And, it is true that you can take better care of them if there is more left for the family, with less lost to taxes.

Over the years, the HAZARDS you should worry about change as your family grows and matures, as the new laws get enacted, and as your wealth grows.  Plus, the planning process for most old estate plans did not include enough lawyer time educating you, so you could really make sure you knew what you were doing, and how the plan would work for your family.  

The time and experience to give you enough explanation of planning options to give you the opportunity and information to make sound planning choices for your family is the core of a good estate plan.  

Done well, estate planning helps to preserve a foundation of wealth that will support, protect and incentivize generations of your heirs.  At the same time, good planning can save taxes for you and your heirs, and protect you from some of the risks to you may face from age or ill health.

As my wife, Hinda, and I have focused our practice on estate planning for apartment owners, we have learned how much of their wealth was built from years of hard work, sacrifice and good investment.  Many of them sacrificed current spending for a future that has now begun to bear fruit (often, “bushels” of wealth).  

Thankfully, many of these owners also “invested” at least some time and money years ago to develop living trust based estate plans to protect their developing wealth from the risk of probate. So, most often, the planning these owners now need should focus on updating old estate plans to deal with: 

 

  • Changed circumstances (many times plans were done when children were minors, but now we can tailor a plan to how those children, or even their children, have or have not matured);
  • Changes in the law, particularly tax law;
  • Changes in wealth – most of our clients would never have believed they could amass as much wealth as they now have; and
  • Changes in their goals for a now more mature family and the ways such goals can be achieved.  

 

Much of the latter understanding comes from an interactive approach.  That approach requires time spent “teaching” clients about their options, time to help them understand the impact of different strategies and tactics, plus time to explain ways in which their planning has now become “HAZARDOUS TO FAMILY WEALTH.” 

[These hazards generally do not reflect defects at the time the plans were done, but instead  reflect mostly the impact of changes in tax law. However, a few hazards resulted from planning that was not sufficiently sensitive to risks you can protect against with good planning, either because the lawyer’s process did not include dealing with these risks or the owner did not have the wealth to justify paying for the extra time that good planning entailed.]  

Dealing with these HAZARDS, and balancing the goal of owners, also requires specialized legal experience to craft customized plans to meet each owner’s unique goals. So, with this in mind, let’s look at a few common tax and non-tax HAZARDS that often concern our apartment owner clients.

 

TAX HAZARDS

Estate Tax Hazards

We’ve never met an apartment owner who was not concerned about estate taxes. Fortunately, estate (and gift) tax exemptions have grown substantially.  (When I graduated law school, the exemption was $120,000! For 2020, it is $11,580,000 (nearly 100 times as large.)

Unfortunately, while the exemption is scheduled to grow roughly with inflation thru 2025, it will then be cut in half under current law.  See my article “Don’t Be a Grasshopper  -“Use it or Lose It” Regs to Cut Estate and Gift Tax Exemptions in Half after 2025” in AOA’s March magazine.

And, if a progressive like Sanders or Warren get elected (as I write this, Sanders appears to have taken the lead in Iowa and New Hampshire polls, but you will know real results by the time this is published), the exemption may shrink even more, or sooner or both, while progressives may want to raise estate and gift tax maximum rates (now 40%, down from 77% when I graduated).

Worse, if (or when?) the next recession leaves California with a budget deficit, its liberal legislature may join the 12 states and D.C that have their own estate tax.  Some of those have exemptions as low as $1 million and rates as high as 20%. Want to bet what rate and exemption level the Dems in Sacramento would pick when tax revenues get light?   One more bummer: unlike the “good ol’ days,” your family will get no credit for state death taxes against any federal estate tax.  

If you think your wealth will grow beyond $6 million ($12 million for married couples) by 2006, or you fear progressives in Washington or Sacramento will reduce exclusions/increase rates for death taxes, you need to plan soon to protect your family.

Many of the strategies that can protect your family take some meaningful time to ripen, and do not work well when done at the last minute before the law changes or the client passes.

Income Tax Hazards

Death currently can have one silver lining for your family:  Property included in your estate can get a new basis for income tax purposes.  This can allow your heirs to sell free of capital gain taxes, and to restart depreciation at the date of death value to shelter more rental income.

We call this a “step-up” on the assumption that your property will be worth more when you die than its then income tax basis.  But, it could adjust to less than current income tax basis, a “step-down” if the value at death is less than basis before death (usually not a problem for California owners).

Fortunately, there are techniques to get both estate tax benefits and step-ups in basis in certain cases, which we discuss with advanced planning clients.  Otherwise, you need to balance which benefit (estate tax or income tax) you think will work better for your goals. 

Furthermore, many older trust plans mandated that much, or most, of the estate of the first spouse to die must go into a trust, often called a “B” or “Bypass” or “Exemption” or “Credit Shelter” trust which stayed outside the estate of the survivor.  Property in these trusts generally cannot get a second “step-up” when a surviving spouse dies. 

While this mandate may have made sense when the estate tax exclusion was small, it can create an “Income Tax Hazard” with no corresponding estate tax saving given increased estate tax exclusions.  

I generally recommend amending old trusts to remove this antiquated mandate, and instead provide for the property to be left in a trust that would be eligible for the second step-up in basis.  

At the same time, since my crystal ball remains a bit cloudy, I draft flexibility for the surviving spouse to decide, after the first death, whether or not the estate tax savings from a “B” trust are worth the risk of estate taxes in the future.  This allows the survivor to make a more informed decision with knowledge of the legal and financial environment years, or decades, after I draft. 

 

Property Tax Hazards

If you have owned property for years, you likely pay property taxes on only a small percentage of today’s market value.  That gives you way more cash flow than you would have if the property is reassessed.  

Without careful planning, your heirs can face unnecessary “hazards” of reassessment,  Again, this is a balancing act. Since exclusions from reassessment are limited, in many cases it is better to optimize other tax savings than to just focus on reducing property tax reassessment.  Or, the best strategy may be to focus on reassessment risks regarding some property, and saving other taxes regarding other property.

Moreover, recently proposed initiatives threated  to limit the ability to pass low property tax values to children and trusts for children.  

 

NON-TAX HAZARDS

New Spouse Hazards

Most clients want their property to stay in the family.  However, if you leave property outright to your spouse, you expose it to the “New Spouse Hazard.”  This is the risk that your surviving spouse may remarry (or just have a close relationship) and decide to leave that property to a new spouse, or the children of a new spouse.  Or, your surviving spouse could be influenced, as he or she gets less and less competent with age, by a caregiver to give or leave your property to the caregiver instead of your children and grandchildren.

 

Ex-Spouse Hazards

Similarly, when you leave property outright to one of your children or grandchildren, it faces the “Ex-Spouse Hazard” that your child/grandchild will handle it in a way that makes it community or joint property with his or her spouse.  While many of us love our sons-in-law and daughters-in-law, if they divorce our children, most of us do not want the ex to take any of the property we worked so hard to accumulate for our families.  

 

Imprudence Hazards

When you leave property outright to an immature beneficiary, the risk rises that the beneficiary spends so much that nothing is left for their retirement or old age, or that they invest poorly.  

 

Disincentive Hazards

Similarly, few of our clients want to create a generation of “Trust Fund Babies” who have no incentive to be productive members of society.  Most of our clients worked hard for decades, and were rewarded with more than financial wealth – it added to their sense of self-worth and accomplishment.  

These clients want their wealth to provide similar non-financial, rewards for their heirs, for generations.  Leaving substantial property to them outright just might deprive them of the incentive to achieve anything on their own.

 

Using Modern Estate Planning to Avoid These Hazards

Modern estate planning allows you to address each of these “HAZARDS” by keeping property in trust for generations.  At the same time, you can balance how much protection to provide against giving discretion to your beneficiaries. Achieving this balance in a way you like then becomes the key to achieving your goals for your planning.  

Of course, getting to that balance takes time.  Time for you and time for your attorney to help you understand your options.  It often requires time as well for significant custom drafting, or to combine various strategies.  

But, the end result can be millions in tax savings for your heirs, over generations.  

And, this kind of thoughtful, careful and intentional planning can also protect your heirs from non-tax HAZARDS and enhance the contribution your wealth makes to their well-being, both financial and non-financial. Maybe as importantly, it can provide these protections for generations, even as it gets harder for subsequent generations to build wealth in the future.  My Motto:  “IF YOU FAIL TO PLAN WELL NOW, PLAN TO FAIL”.

Experience shows that owners of apartments and other income properties care about planning for the future.  Most of them have sacrificed a lot for decades to build wealth. But, planning for them involves special challenges for a planning professional.  These challenges include the need for sensitivity to the desires of each family, awareness of multiple strategies that have worked (or sometimes not worked), for other apartment owners, and knowledge of how strategies integrate with the tax environment.  

In short, it requires your attorney to really specialize in representing apartment owners. Unfortunately, changes in the tax laws, and HAZARDS that some estate planners often ignore, or just do not take time to explore with such owners, leave many of their older (or current) plans exposed to serious financial and non-financial HAZARDS.

    

AOA’s FREE Seminars Can Help You Learn More

AOA will present my free seminars in May on “Estate Planning for Apartment Owners.” While the exact dates may change, these seminars are tentatively scheduled for at 10 A.M: 

 

  • Buena Park – Tuesday, May 19th  – Holiday Inn Buena Park
  • Van Nuys – Thursday, May 21st  – AOA Main Office
  • Torrance – Thursday, May 28th  – Holiday Inn Los Angeles Gateway – Torrance 

 

At the seminars, I will help apartment owners understand the principles behind modern estate planning as it applies to apartment and other income property owners, and show them strategies that could save millions of dollars in taxes and avoid NON-TAX HAZARDS to family wealth.

Advance reservations are required.  For reservations, call AOA at 800-827-4262 or sign up online at www.aoausa.com. 

 

Kenneth Ziskin, an estate planning attorney, focuses on integrated estate planning for apartment owners to save income, property, gift and estate taxes.  He also provides trust and probate administration assistance after the death of a loved one. 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 plans to expand on this topic at the AOA Trade Shows in Long Beach on April 29th. Check with AOA for the exact times. Ken also offers FREE CONSULTATIONS FOR AOA MEMBERS in appropriate cases.  Call him at (818) 988-0949. This article is general in nature and not intended as advice for clients. Please get advice from counsel you retain for your own planning.  Drafted in January, 2020.