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The 2018 Tax Bill and what it Means for Estate Planning

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BACKGROUND: There can be many reasons why you need a trust – but here are 2 of the most common.

The first reason is to avoid probate. Probate is a court process that occurs after you die when you don’t have a trust, when your home, bank accounts, and all other assets will be held by the State until your family coughs up a lot of money to get them back.  This is also a very long, frustrating process.  You can read more about probate on our site.  To avoid probate, you create a trust (not a will!) to make sure everything goes to your loved ones.  Probate is for anyone who owns a home in California or if you don’t own a home, if your (non-probatable) assets are above $150,000.

The second reason to create a trust is to avoid the federal estate tax.  While probate is run by the State you live in, the federal estate tax is Uncle Sam’s way of getting your money too after you die.  The federal estate tax is a 40% tax that is assessed on families who have wealth above a certain amount called an “exemption amount.”  The exemption amount changes annually and depends if you are married and if you are citizen.  Last year (in 2017), the exemption amount for a citizen was $5.49 million.  Think of the exemption number like a coupon.  It means after you die, whoever is holding onto your coupon can have up to that coupon value, but anything over is taxed at 40%.  So if you are married and both citizens, that’s $5.49×2 = $10.98 million in coupons before the 40% tax hits your family.  To put it another way, a married couple could have died in 2017 and still leave to their children up to $10.98 million in assets, without their children paying for the estate tax.  For some families who were planning on leaving their children above this amount, they needed to set up a special kind of trust to avoid the imposition of the 40% federal estate tax.

If you fell into any 1 of these 2 categories, you needed a trust. But there were 2 mistakes people often made.

First, they heard about these very large numbers ($5.49 million or $10.98 million), and they thought, “I don’t need a trust because I’m not that rich.” That may be true (they would not need a special trust to avoid the estate tax), but they would still need a living trust to avoid probate.

The second mistake people made was they thought they could avoid probate by creating a will.  I will never get tired of educating people that a will by itself does not avoid probate. You need a trust.

NEW LAW:  You may have heard that Washington passed a new tax law this year (2018).  While there are major changes to income and business taxation that affect several of our clients, one of the big changes was also to the federal estate tax exemption amounts.  To be more specific, if you die in the year 2018, and if you are a citizen, you now have a coupon value of $11.2 million. For a married citizen couple, that is $22.4 million in coupons that you can pass to your loved ones before they are required to pay the 40% estate tax.  The catch of course is that in 2026, the new coupon values are set to expire, which means they will revert back to 2012 plus inflation (in the neighborhood of $5.6 million).

What does this mean?

  1. Nothing changed for probate purposes. You still need a trust to avoid probate. If you own a home, or any other assets over $150,000, you need to do your trust as soon as possible. If you don’t, it’s your loved ones who will suffer and pay in costs about 15% of the value of your home as fees in probate.
  2. If you are around the $10 million threshold, now is a good time to take advantage of lifetime giving to your heirs. This is the best time to transfer wealth among generations. If you wait too long, and the amounts expire, you will exposing yourself to estate tax again.
  3. If you created your trust before 2013, get rid of your A-B trust!  These were common trusts when the coupon values were low. But because they are so high right now, you need to update your trust. If you don’t, once one spouse passes away, the surviving spouse loses control over 50% of the assets guaranteed (plus, 50% of the assets lose a full step-up in basis).
  4. If you are not a U.S. resident, the coupon value is only $60,000!  If you die with more than this amount, whoever inherits your estate must pay a 40% tax on the difference.

Make your mission in 2018 to get your estate plan done. Let us know when you want to get started.

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Lalit Kundani is a trusted estate planning and business attorney with over a decade of experience advising thousands of clients and families throughout California. He has been a trusted advisor to members of law enforcement, business owners, judges, government officials, and even other attorneys. After co-founding the firm in 2015, Lalit was twice named as one of the top 100 lawyers in the nation by “The National Advocates” in the area of estate planning and trust formations. That same year, he was selected by “Super Lawyers” as a Rising Star, a recognition given to only the top 2.5% of attorneys in California. Since then, he has been recognized the past four consecutive years by the “American Institute of Family Law Attorneys” as a Top 10 lawyer for his work in estate planning, and he has received AVVO’s highest rating for estate planning attorneys in Orange County, including the Clients Choice Award. In 2018, his estate planning colleagues named Lalit as a Super Lawyer in the State of California, an accolade reserved for only the top 5% of attorneys in any field of law. Lalit graduated summa cum laude from UCLA with departmental highest honors, and is a law graduate of UC Berkeley School of Law (Boalt Hall), one of the top-ten law schools in the nation. While at Boalt Hall, Lalit served as a law clerk to the Honorable Richard A. Paez on the 9th Circuit U.S. Court of Appeals and received the William Lloyd Prosser Prize in Financial Analysis and Highest Honors in Estate Planning. He also served as President of Boalt Hall’s national trial teams. After graduating law school, Lalit was an associate at the law firm of Stroock & Stroock & Lavan LLP, an Am Law 100 firm and one of the oldest Wall Street-based firms in the country. In 2006, Lalit was appointed as Deputy District Attorney of Los Angeles County. In 2012, he joined Panish, Shea & Boyle, one of the top five plaintiff firms in the nation, where he served as a trial lawyer on high-profile catastrophic injury cases. Lalit is a recognized leader in the estate planning legal community. He is regularly invited to speak at seminars designed to educate attorneys, financial planners, accountants, real estate agents, and business owners on new developments related to Estate Planning, Guardianship, Tax Strategies, and Asset Protection. He has presented to companies like Google, Universal, Mass Mutual, he has taught courses on estate planning and entity structures at universities like USC, and he serves on the Board of Advisors to Cal State Fullerton’s Planned Giving Advisory Council (PGAC). He is a frequent contributor to the “Huffington Post” and has appeared as a legal commentator on local radio stations in Los Angeles. He is a member of Wealth Counsel, one of the largest and most respected estate planning legal groups in the nation. Lalit is a proud father and husband and resides in Orange County.

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