The Goralka Law Firm (of Sacramento, CA) writes about Revocable Living Trusts, Wills, Powers of Attorney, Living Wills, Healthcare Power of Attorney, Life Insurance Trusts, Family Limited Partnerships, Limited Liability Companies, Corporations, Charitable Trusts, Medi-Cal Planning, and Other Estate Planning and Tax Planning Strategies.
Martindale Hubbell recently awarded our Founder, John Goralka, with an AV rating. Martindale Hubbell is the oldest and most prestigious attorney rating service used by attorneys for 140 years to insure that another attorney is qualified to assist their clients. An AV rating is reserved for only a few of the very best attorneys who are "preeminently qualified". Such rating is reserved for only those few lawyers with the highest ethical and professional ability and excellence. The overall ratings are from 1.0 to 5.0. John was awarded a perfect 5.0 rating. The rating process includes confidential, anonymous ratings and comments from John's peers, other attorneys.
A Unique Asset Protection Alternative for the Business Owner.
California is not usually viewed as a debtor-friendly state, especially compared to Nevada. In fact, California has some of the worst laws for asset protection in the United States. The California Homestead exemption is a meager $50,000 for an individual, $75,000 for a couple and $150,000 for the elderly and handicapped. Life insurance is exempt only to $9,700 and most annuities have no meaningful protection in California.
However, there is a very unique and powerful alternative under California law. California Code of Civil Procedure Section 704.115 provides a complete exemption for the assets of "Private Retirement Plans" (PRP). A successful California business owner or professional (for example a physician with a medical practice) can set up a PRP where funds from the medical practice can be paid and held in trust for the physician's retirement. So long as the funds stay within the plan, the funds are protected from the physician's creditors. Even when the funds are withdrawn from the plan, the funds remain protected from creditors so long as the funds are kept separate and not commingled with other funds. This is a very unique and powerful advantage. The PRP can be set up on a totally discriminatory basis without providing benefits for any other employees. This PRP is very flexible but, has little statutory guidance regarding its creation or administration. The PRP is a complex legal structure that must be carefully crafted.
In the absence of statutory guidance, the California courts have focused on the need for a "plan". The key is to have a comprehensive plan for retirement and not simply allocate money indiscriminately into an account. There must be plan documents, a schedule or formula of payments made into the plan, a trustee or custodian to hold the funds in accordance with the plan documents and a schedule or formula of payments to be made upon retirement. Once the money is in the plan, it can be invested but not returned to the business owner.
There is no statutory limited on how much can be contributed. This provides a great deal of flexibility. However, the contribution must bear some actuarial relationship to how much and when funds will be paid at retirement.
California community property rules should not be overlooked for a married participant. The funds contributed would be community property unless the couple has a valid prenuptial agreement before marriage or a transmutation agreement after marriage provides that the funds are separate property. In the absence of such an agreement, the best practice may be to have the plan hold ½ of the funds for the benefit one spouse and ½ for the benefit of the other spouse.
The main benefit derived from the PRP is asset protection. Private retirement plans can be qualified to provide tax benefits, if so, the benefits then are required for other employees and tax penalties may apply for early withdrawals. The real flexibility comes from the non-qualified PRP which permits funds to be set aside for the business owner or professional without providing any benefits whatsoever to others.
Assume that you are 65 years old and make $400,000 per year. The plan might assume that you will retire at 75 and, at that point, you have a 12 year life expectancy. Inflation is 4% which makes the $400,000 almost $600,000. $5,650,000 would be required to fund that obligation. $3,820,000 would need to be in the plan to grow to $5,650,000 in 10 years. That means that the trustee of the private retirement trust can file a lien on the operating assets for $3,820,000 today. Contributions can be made into the plan to satisfy that obligations. The business or operating assets under the lien and the assets contributed to the plan will be better protected from lawsuits and creditors. You could even make a voluntary contribution of other assets such as the equity in your residence. The plan trustee can record a deed of trust on the residence which provides greater asset protection for the residence.
Private Retirement Plans are a very flexible way to obtain much greater asset protection under California law for valuable assets. The Private Retirement Plan or trust is a complex legal structure which warrants careful planning and a great deal of discussion. Call the Goralka Law Firm to explore whether the Private Retirement Plan is the asset protection tool to better protect your valuable assets.
On the first Tuesday of each month, at the beginning of our team meetings, our firm votes for Team Member of the Month for the previous month. Each member of the team casts their vote based upon three categories: 1) Contribution to the Team, 2) First Rate Attitude, and 3) Professional Appearance. We are very proud of our team and love to reward them for their hard work and dedication!
Kait is our winner for Team Member of The Month for the month of May.
Kait is our Legal Assistant at the Goralka Law Firm. Kait is originally from Chico and just moved to Sacramento in October. When Kait is not working, she is exploring Sacramento with her boyfriend, Marc and cuddling up with her kitty, Cheddar.
Here is what the team had to say about Kait:
Kait has been so helpful and kind to me while I have been training. I don't know what I would do without her at the moment.
Being new to the firm, I have been blown away by all the positive attitudes in the office. It's difficult to choose just one team member for the month, but I am in earshot of Kait and I am therefore privy to her side of her conversations with clients. Not only is she extremely empathetic and patient, but she is also genuinely interested in our clients' lives. She is a very valuable member of GLF as she most definitely has a first rate attitude and has assisted me greatly in being organized in preparation of client meetings and hearings. Thanks, Kait!
Kait is a multi-tasking machine who keeps our estate planning practice and our office running as smoothly as possible. She handles client relations masterfully, whether gently prodding clients into action, diffusing a difficult situation, or making sure that client needs are met.
Even as Kait works on her own work, she tries to make sure that John is up to speed with what he needs to do and that he has everything for his meetings. She picks up the slack where we need it and helps things run smoothly.
Kait is an essential asset to our team. She is extremely thorough, organized and genuine. She goes the extra mile to help any team member as well as the boss. She comes to work with a smile every day and conveys her kindness through every email, phone call and client interaction. We are so lucky to have her!
Welcome Melissa! Melissa is now a full-time team member at the Goralka Law Firm. We are excited to have her in the office full-time and a part of the Goralka Law Firm Family.
Melissa just graduated from California State University Chico with her Bachelors of Science degree in Nutrition and Food Communication, which she graduated with honors and received the Top Graduating Senior award in her major. She worked at The Center for Healthy Communities while she was attending her last semester of college and found her niche working in the administration department. Melissa may look familiar, she also worked at the Goralka Law Firm most weekends and during semester breaks throughout the school year. We learned quickly how detail oriented and hard-working she is for our Clients.
Now that Melissa is finished with school, she enjoys being outdoors and likes to camp, boat and hike. Melissa also enjoys cooking, reading and playing sports as much as possible.
We are excited to have Melissa at the Goralka Law Firm full-time!
If you only have ONE employee, this will affect you! Effective July 1, 2015, employers with at least one employee must pay 1 hour for every 30 hours worked, with caps, rollover rules, annual limits, and more!
Dejon Hart, a Regional Payroll Specialist, is joining us to give an update on the new sick time law, 2015 CA HR law changes, and information on the new ACA reporting requirements.
Learn how to complete the basic calculation and accrue required sick time, and determine how to use the rules to make this law work best for your business. Bring your administration staff who assists you with your HR to hear a high level overview of how to navigate the complexities of the ACA for 2016, and ensure you are up to date with new protected classes and more HR law changes for 2015.
Call 916-440-8036 or email firstname.lastname@example.org to sign up today.
Yesterday, I met with a Client whose parents had a trust prepared by another firm. Her dad died years ago and his trust included a formula clause that required funding a "B" or Bypass Trust on his death. My Client's mom just died and she is learning that the "B" Trust will result in additional capital gains income taxes of about $60,000 when the kids sell the stock held in the "B" Trust. We recently met another Client where the additional taxes were over $200,000 from the sale of the appreciated stock in the "B" Trust. Federal and California capital gains income tax can be as much as 1/3 or more of the amount received. These taxes on a "B" Trust may often be avoided if timely action is taken.
The income and estate tax worlds are now upside down. In 2013, the income tax and estate tax rates and rules were dramatically changed. Each person now has a $5.43 million exemption for estate tax purposes. This exemption is indexed to increase with inflation. In other words, a person can leave $5.43 million in assets to family or other heirs without paying any estate tax. The estate tax rate is now 40%. Fewer than 5% of all estates will be subject to estate tax under these rules. However, we all pay income tax. The combined federal and California income rates increased in 2013. The highest combined marginal income tax rates for California is 57%.
However, not too terribly long ago, the estate tax exemption was only $675,000. The estate tax rate has been 52% and even 55%. Estate planners were very concerned about minimizing estate tax. One of the tools most commonly used by estate planners is an "A-B" Trust or "ABC" Trust which utilizes a marital deduction formula. These formula provisions can have disastrous consequences for the surviving spouse and for the children or heirs.
Most marital formulas provide that the surviving spouse's one-half (1/2) community property interest and all of the surviving spouses separate property is allocated to the "A" Trust. The surviving spouse has unrestricted access to the income and principal of the "A" Trust. Upon the surviving spouse's death, the children or heirs receive a step-up or increase in income tax basis to prevent or minimize the capital gains tax liability.
The problem is that the deceased spouse's one-half (1/2) of the community property and all of the deceased spouse's separate property is allocated to the "B" Trust. The "B" Trust is irrevocable and most often significantly limits the surviving spouse's access to the deceased spouse's one-half (1/2) interest in the trust assets.
Upon the death of the first spouse, this causes a very difficult conversation with the surviving spouse when I need to explain that he or she no longer owns half of the assets that they think they own. The conversation gets worse as I explain that a separate tax identification number is needed for the "B" Trust and a separate tax return is also required for the "B" Trust. One-half (1/2) of all accounts and assets must be retitled into the "B" Trust which generates capital gains that may be taxed at the higher trust income tax rates. Finally, the children may not receive a step-up in income tax basis upon the death of the surviving spouse. As a result, the children or heirs may incur higher capital gains taxes when assets are sold after the death of the surviving spouse. All of these additional income taxes, complexity and restrictions upon the surviving spouse's use of the deceased spouse's one-half (1/2) of the community property occurs even though no estate tax is saved! A married couple with a trust created prior to 2013 should have that trust reviewed to be sure that a marital formula is not utilized.
An existing "B" or Bypass Trust can be modified to prevent this harsh result and the higher capital gains income taxes. However, you must act before the surviving spouse dies.
The Bypass Trust can be modified during the surviving spouse's life despite the fact that the Trust is otherwise irrevocable. To do so, all of the beneficiaries must agree to the changes. This may not be a problem if the beneficiaries all face a higher income tax.
The best alternative if you have sufficient time is to obtain a Court Order modifying the Trust to include the provisions needed to obtain a step-up in income basis to avoid the higher capital gains tax. A Court appearance is the safest and best way to obtain this result.
However, a Court appearance requires a petitioned notice to all interested persons and consents from the other heirs. A courtroom and hearing date in Sacramento is typically available 45 days after filing. Sometimes death may be imminent and that much time may not be available.
Another back up approach to consider may be to "decant" the Trust. Most of us think of decanting as being applicable to wine. Decanting wine is essentially pouring wine from one bottle to another and leaving sediment and impurities behind. (For wine, we also want wine to breathe, but that's another topic). To decant a Trust, we are pouring the assets from one Trust to another to leave behind unwanted provisions and include new provisions that may be desired. To be clear, decanting in California does not have the certainty of a Court Order. Decanting does not require the time elements of a judge and courtroom and may be a good back up course of action if health is an issue.
If you have an existing "B" Trust, call our office to see if that can be fixed to avoid higher capital gains income taxes. If your trust was created prior to 2013, or if you have an A/B marital formula in your living trust, call the Goralka Law Firm to see if this needs to be corrected. If you don't have a "B" Trust, but like wine consider attending our Wine Down Wednesday on June 17th at 5:30 PM at 4470 Duckhorn Drive, Sacramento, CA 95834. Hope to see you there!