The key word in “Estate Planning for Apartment Owners” is PLANNING.   When owners do not plan, or plan poorly, their heirs suffer financially from unnecessary taxes, wasted inheritances or losses to creditors and predators. [I use the latter term to refer to ex-spouses who may want to get their hands on the inheritance you meant for your children and grandchildren.] 

As stewards of the wealth you have worked so hard to acquire and build, it seems “sinful” to waste it by failing to plan well for your heirs.

This article will briefly illustrate just a few of the bad results we have seen when owners failed to plan well.  Sadly, failure to plan well results in unnecessary waste of wealth built over decades of hard work and sacrifice by prudent apartment owners.  

1st Sin – Failure to Have a Living Trust

In California, a living trust is the key document in a good estate plan, particularly for apartment owners.  A good living trust is the best way to give you, instead of the state of California, the ability to specify who gets your property, how they get it and when they get it.

A living trust also allows your heirs to avoid the high costs and delays of probate.  Probate fees can run nearly $50,000 on an estate of just $1 million, and such fees get calculated on the gross value of your estate, before deducting for liabilities. 

In a recent case, with about $1 million in assets, fees and costs will be about $50,000.  Sadly, the net value passed to heirs, after liabilities and costs will total less than the costs incurred in the probate.  Clearly, this is not the result the heirs’ father intended. 

2nd Sin – Failure to Have a Funded Living Trust

Just getting a Living Trust drafted does not protect you from probate.  You need to get your property titled in the trust for it to protect your heirs from probate.  Then, you need to keep your property in the trust. 

Recently, we represented the children of an owner who, over the years since he did his living trust, took almost all of the property out of the trust.  His heirs are going to lose more than $60,000 in otherwise unnecessary probate fees/costs, and need to wait nearly a year to get their inheritance. 

If you ever need to take property out of your trust (maybe to complete a refi), be sure you put it back.  Remember, however, if the property has more than four units, your loan terms may require lender consent to put it in the trust.  

3rd Sin – Failure to Trans-Mute Joint Tenancy to Community Property

Living in California comes with one nice tax advantage for married couples – Community Property.  When one spouse dies, both spouses’ interest in Community Property gets a step-up in basis. 

As a result, holding property as Community Property can save the survivor $100,000s, sometime millions, in capital gains taxes or taxes on ordinary income by resetting the income tax basis of the property.

But, being married does not automatically make all of your property Community Property.  In fact, the Tax Court has held that property titled in Joint Tenancy will not be treated as Community Property unless it is properly “transmuted” to Community Property.  And, just putting the Joint Tenancy property into a joint living trust will not constitute a transmutation under California law.

Fortunately, you can avoid this “sin” by going through the formalities under California law to do a transmutation, and can do so even after the property has been put in your living trust. 

4th Sin – The “Honey I Love You” Trust

Sometimes spouses think the nicest way to plan is to leave everything outright to the surviving spouse.  Unfortunately, this can produce any or all of the following “horrors.”

First, it risks loss of the property after the survivor dies to a new spouse or new spouse’s family.

Second, it reduces the amount of income property that can pass to your children without property tax reassessment, potentially costing your heirs up to $50,000 or more per year in unnecessary property taxes.

Third, it reduces the amount of property that can ultimately be passed to grandchildren free of Generation Skipping Transfer Taxes (after exemptions, this can add 40% to the death tax burden).

Good planning can make sure your spouse can use as much of your inheritance as you want, but protect from all of these horrors. 

5th Sin – Failure to Amend an Old A-B Trust

Most old estate plans, particularly those done before the American Taxpayer Relief Act (“ATRA”) became effective in 2013, mandated that an amount up to the estate tax exemption amount of a deceased spouse be put in a “B” Trust (often also referred to as a “Credit Shelter” “Exemption” or “Bypass” Trust).

The use of a “B” Trust made sense when exemptions were much lower than today and you were not allowed to leave your exemption to be used later by your spouse.  The exemption has grown from $161,000 in 1980 to $650,000 in 1999 and $5.45 million per person in 2016.

Now, with the higher exemptions in effect today, and the ability to use “portability” to leave your exemption to your spouse, the old “B” trust serves no purpose for most apartment owners.  While it will save them no estate taxes, it is likely to reduce step-ups in basis when the second spouse dies, costing heirs hundreds of thousands of dollars, or more, in unnecessary income taxes. 

6th Sin – Passing Property to Children Through An LLC Instead Of a Deed

Any owner can pass investment property with an assessed value of up to $1 million to his/her children exempt from property tax reassessment.  But, that same exemption generally does not apply when the property is owned in an LLC or other legal entity (an estate planning trust is not a “legal entity” for this purpose).

With inflation, that $1 million exemption can protect up to $5 million in value from reassessment per person, or $10 million per couple.  As a result, using an LLC to own and pass the property could cost your heirs as much as $100,000 per year in otherwise unnecessary property taxes.   

7th Sin – Failure to Protect Your Heirs From Creditors and Predators

Let me tell you a sad story.  Dad left his wealth outright to Daughter, since he trusted her to manage it prudently.  She got her inheritance, and promptly invested it jointly with her husband. 

Unfortunately, just a few months later, husband left her for another woman, and got to keep half the wealth Dad had left for Daughter, just when she needed it the most. We assume Dad rolled over in agony in his grave!             Most of our clients, when they understand this risk, draft their trusts in a way that protects the inheritance they leave for their children and grandchildren.  Usually, they structure the trust just to protect against creditors and predators (ex-spouses).  However, sometimes they also structure terms to protect the inheritance against imprudence – “Affluenza” or substance abuse by their heirs.  These protections become an extension of the loving care our clients provided during their lives for their descendants.

FOLLOW OUR MOTTO: “IF YOU FAIL TO PLAN WELL, PLAN TO FAIL” With good planning, you can avoid all of these Seven Deadly Sins, and do even more to enhance how well your inheritance benefits your heirs. 

If you are not sure that your estate plan both protects against all of these Seven Deadly Sins, and will fulfill YOUR goals for your heirs, please consult an estate planning attorney who focuses on integrated estate planning for Apartment (and other income property) Owners. 

Upcoming AOA Estate Planning Seminars

AOA will present Attorney Ziskin’s 2016 edition of “Estate Planning for Apartment Owners – Tips On How to Save Millions in Income and Property Taxes” in Northern California this May and in Southern California this June.  The 2016 edition adds segments on estate planning strategies that can reduce income tax liability when property is sold even during your life. Seminars are free and fill up fast.  To register click here or call (818) 988-9200 ext. 132

The June seminars are scheduled as follows: 

June 16 – Van Nuys

June 21 – Buena Park (jointly with Irvine Attorney Michael Wittick)

June 28 – San Diego (jointly with San Diego Attorney John C. Demas)

June 30 – Torrance 

Kenneth Ziskin is an estate planning attorney who focuses on integrated estate and tax planning for apartment owners.  He also assists owners’ families with probate and trust administration. He holds the coveted AV Preeminent peer reviewed rating for Ethical Standards and Legal Ability from Martindale-Hubbell, and a perfect 10 out of 10 rating from legal website AVVO.COM  

Ken lectures frequently to professional and apartment industry groups and has written numerous articles on tax planning and other legal topics.  He recently rewrote AOA’s Special Report “Holding Title to Your Property –A Matter of Life, Death and Taxes…”

Ken’s website at www.Family-Wealth-Strategies.com includes information about his estate planning process and reviews of his work by his clients. 

Ken offers free consultations for AOA members who want to understand the “hazards” lurking in their plans, and can be reached at (818) 988-0949.  

This article is general in nature and not intended as advice on which owners can rely.   The case study represents the application of existing law to situations we have seen in our office, but every situation is different and laws can change.  Your savings from focused planning may be higher or lower.  Please get advice from counsel you retain for your own planning.