Should My Children Inherit Equally?

It may be reasonable to leave different amount of money to children with different needs and abilities. Photo by Dorothea Lange.

My clients with more than one child sometimes puzzle over whether they should leave the same amount of money to each child.  This can be a hard decision because, even though parents love all of their children equally, our children have unequal needs and abilities.

Sometimes there is a good reason to leave one child more or less money than the others.  For instance, if you have previously given significant amounts of money to one of your children, it’s quite reasonable to reduce that child’s inheritance by the amount of that gift.  If one of your children has a disability which prevents them from working or has pursued a low-paying career that benefits society, you might reasonably choose to leave that child a larger portion of your estate.

What is not so reasonable is to leave a larger proportion of your estate to a child who is always short on money because they have not learned how to manage their finances.  Although your emotions might urge you to do everything you can to help this child, leaving them a larger proportion of your estate may not, in the long run, be the best choice.  If your child is currently unwise about managing money, leaving that child a larger bequest will not protect them, because it is likely to be spent just as unwisely.  Better to divide your estate equally between your children, to avoid creating resentment between them.  Then even when your spendthrift child has spent their bequest, they still have the benefit of their siblings’ advice and support.  You can also consider leaving your bequest for this child in a trust, with a responsible trustee to control the child’s access to those assets.

If you do decide to leave more money to one child, it’s important to avert feelings of resentment by acknowledging the love and respect you feel for your other children.  Consider leaving them specific sentimental gifts, which need not be of great monetary value.  Or write a separate letter to each of your children, recalling special times you have spent together and telling them how much they mean to you.  The most important thing is to prevent jealousy and help to maintain a good relationship between your children.  Especially when they are suffering from losing you, it will be better if your children can rely on each other for advice and support.

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Does Your Child Nead a Health Care Directive?

Laurie at her high school graduation

Children as young as eighteen are entitled to privacy of their health care information. If you want to be a part of your college-aged child's health care decisions, it is helpful for them to sign a HIPAA release.

There are a lot of things people do to help our children prepare for college.  Giving your child some good advice, buying the right-size sheets for those extra-long dorm beds, and arranging for the purchase of all of those books.   But what about arranging for your child’s health care?

Although he or she may still be “your baby” and covered by your health insurance, unless your child is under the age of 18 they are legally an adult.  This means that your college-aged child is legally in charge of their own health care decisions.  And your college-aged child has a right to the privacy of their health information, which prevents others — including you — from accessing your child’s that information.  So even if your child has a medical emergency, their doctor may have no responsibility to contact you and may even be legally prevented from doing so.

One good way to stay informed and maintain your involvement in your child’s health-care decisions is to have your child sign a HIPAA Release.  HIPAA, which stands for the Health Information Portability and Accountability Act, is a law that creates strict privacy protections for medical information.  By signing a HIPAA Release, your child gives their doctors permission to share health information with you.  This allows your child’s doctors to alert you when your child has a new medical condition.  It also gives the doctors permission to share diagnoses and discuss options for your child’s treatment.  For even more security, your child could also sign an Advance Health Care Directive.  This would make you your child’s health care decision-maker and obligate your child’s doctors to inform you and consult with you about your child’s health care.

To set up a HIPAA Release and an Advance Health Care Directive for your child, contact or see

Helping plan for your family’s future at every stage of your life.

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Who’s Afraid of Probate?

Facade of the old Santa Clara County Courthouse, where Wills used to be probated. Image by EugeneZelenko.

After reading my last blog post, a friend pointed out that you can only understand the benefits of a living trust if you know about the process of probate, and why you would want to avoid going through it.  Probate is the procedure by which a court determines that your Will is valid and then supervises the distribution of your assets to your heirs.  If you have no Will, the court determines your heirs-at-law and supervises the distribution of your assets to them.  Although this description makes probate seem rather innocuous, the reality is not quite as painless.

For example, probate is a public proceeding.  As a result, the terms of your will become part of the public record.  So anyone can find out that you left a precious family heirloom to your niece and not your daughter, that you left bequests to certain social and religious charities, or that you left more money to one son than the others.  Similarly, the accountings given by your executor also become part of the public record, so anyone can look up how much money you had in your savings account, how well you did with your stock portfolio, or how much money your business was making.  Of course, you’re no longer among the living, so this sort of disclosure will not affect you personally.  But there are many reasons why, for the sake of your loved ones, you might want to avoid exposing this information.

The other disadvantage to probate is its cost to your estate.  The court fees and appraisal fees and court fees for probating a typical estate may cost the estate – and therefore your heirs – $1,000 to $3,000.  And that does not include your attorney and executor fees.  The minimum amount of these fees, for probating a simple estate, is set by law as a certain percentage of the value of your estate.  (See Cal. Probate Code, Section 10810 et seq.) So for probating an estate valued at $100,000, your estate pays the attorney and the executor each at least $4,000.  For probating an estate valued at $500,000, your estate pays the attorney and the executor each $13,000.  For an estate valued at $900,000, your estate the attorney and the executor each $21,000.  Keep in mind that this is the minimum fee for probating a simple estate.  The attorney and the executor can request and be granted additional compensation for “extraordinary” services such as the sale of your home, resolving complicated tax issues, or defending a will contest.  And remember that the value of your estate is not discounted by certain debts that you owe.  For instance, if you have $200,000 of equity in your house, but the fair market price of the house is $900,000, the entire $900,000 is counted toward the value of your estate for the purposes of determining probate costs.  So a typical homeowner in Silicon Valley whose estate is not carefully planned could leave his or her heirs $25,000 or more in probate costs, without realizing it!

To avoid the costs and exposure of private information, many people avoid probate by jointly titling their assets with their heirs; by adding pay-on-death, transfer-on-death, or beneficiary designations on their accounts; or by giving away their assets while they are alive.  But each of these options has disadvantages and, depending on the circumstances, they can create significant negative consequences.  The safest way to avoid probate is by putting your assets in a living trust that includes instructions for your successor trustee to distribute your assets according to your wishes – outside of the probate process.  But is this overkill for your situation?

Anyone who tries to convince you there is a one-size-fits-all solution is not giving you good advice.  Consulting an estate planner is the most cost-effective way to get an answer tailored to your situation.

For more information about the costs of probate or for help structuring your estate to avoid probate contact or see

Helping plan for your family’s future at every stage of your life.

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Am I Too Young For a Trust?

A young couple and their baby sitting beside t...

Even young couples with long life expectancies may benefit from a living trust.

This post was prompted by a question a good friend asked me.  He is in his mid-30’s with a wife, two kids, a house, and a modest retirement account.  My friend asked me if it was true that for anyone who owns a house, it’s automatically worth it to have a living trust.  This sort of statement is generally repeated by estate planners and in the estate planning literature, but my friend’s question made me think little harder.  At that moment my friend seemed so young and I wondered if, in fact, he could be so young that a living trust wasn’t really worth the cost.   So I did some – very rough – calculations and came up with an answer that surprised me.

A Google search for median home values in Santa Clara and San Mateo Counties indicates that they are currently around $600,000 – $700,000.  (Remember that the cost of probate depends on the value of the house, not the amount of equity you have in the house.)  So, the cost of probating that median house would be about $34,500, including attorney and executor fees and court fees.  Even if we estimate that a living trusts costs $2,000 to set up, spending $2,000 to save $34,500 sounds like a pretty good deal, right?

But there is a time value associated with money.  My friend and his wife each still have a life expectancy of 49 more years.  They might not live that long, but then again they might live longer.  Should they spend $2,000 to create a living trust which may or may not save them on probate fees in the next 50 years?  From this perspective, setting up a living trust is a bit like buying an insurance policy.  We commonly pay several hundred dollars a year for insurance on our houses, even though we don’t really expect that they will burn to the ground or be swept away in a flood.  In contrast, even the youngest of us will certainly someday face death so, from that perspective, the cost of a living trust is more likely to have value than the cost of insuring our homes.

And, in comparison, a living trust may be a relatively cost-effective form of insurance.  Given my friend’s age and gender, a life insurance policy to cover the estimated $34,500 cost of probate could run him somewhere in the neighborhood of $300-$400 per year.  So if my friend lives for seven more years, a living trust would be less expensive than life insurance to cover the costs of probating the median home.  And, in the meantime, his trust would still provide for someone to manage money for his minor children if he and his wife were to die.  And the trust would still provide a way for someone to manage his assets for him if he were to be incapacitated by an accident or an illness.  And a trust could also save his heirs from having to go to court and wait for up to one year for the probate process to complete.

So where does that leave us on the answer to my original question, whether it’s worth it for a young couple to establish a living trust?  Like many questions in life, the answer is, “it depends.”  It depends on whether they have children or own a house.  It depends on their health and on the riskiness of their occupations and hobbies.  And it depends on the amount of their assets and their tolerance for risk.

For help deciding whether a living trust is worthwhile for you – or for help setting up your living trust – contact or see

Helping plan for your family’s future at every stage of your life.

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The Estate Tax Benefits of Living in California

There are some people in California who would grumble about the Federal estate tax, but all California residents should be thankful that the State of California phased out its State estate tax in 2005.  Unlike California, seventeen states and the District of Columbia impose their own estate taxes.

Many states impose their own estate and/or inheritance taxes.

And residents of most of these states end up paying state estate taxes even if they do not owe any federal estate tax, because almost all of these states have estate tax exemptions that are less than the $5 million federal exemption.  What’s more, ten states (Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Ohio, Oregon, Rhode Island, and Tennessee) and the District of Columbia have personal estate tax exemptions of $1 million or less.  For instance the state estate tax exemption in New Jersey is $675,000 and in Ohio it’s $338,333!

Five states – Indiana, Iowa, Kentucky, Nebraska, and Pennsylvania – do not impose estate taxes, but do tax inheritances by people living in that state.  Maryland, New Jersey, and Tennessee impose both estate and inheritance taxes.  If a California resident leaves a bequest to a resident of one of these states, some of the value of that bequest will likely end up going to the state in the form of inheritance tax.  However, depending on your situation, some careful planning may help your heirs avoid some or all of the inheritance tax.

If you have questions about the federal estate tax or state estate or inheritance taxes, contact Christl Denecke at or

Helping you plan for your family’s tomorrow at every stage of your life.

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Should Your Children Wait for Their Inheritance?

My sister and her baby.

There can be an extra emotional and tax benefit from giving assets to your children while you are still living.

Typically, our children are in the greatest financial need at the time they are raising a family.  But if we expect to see our grandchildren grow, the inheritance we plan to leave for our children won’t be available until after they need those assets most.  Given that people are living longer and longer, it doesn’t necessarily make sense to make our children wait to receive their inheritances.  There can be an emotional benefit – and a tax savings – from giving assets to your children while you’re still alive.

For example, after decades of work, my Grandfather began to receive some patent royalties.  Instead of putting those royalties into his own bank account, he put them into a trust dedicated to helping pay the college tuitions of his eight grandchildren.  One benefit of setting up this trust was that the value of his gift was not eroded by gift, estate, or generation skipping taxes, because gifts of tuition are not subject to those penalties.  In addition, even though my grandfather’s children were not direct beneficiaries of the trust, they greatly benefited from his gift because they were left with more of their income, during their prime working years, to spend on extras or put away toward retirement.  And while my grandfather was alive he had the pleasure and satisfaction of seeing his older grandchildren graduate with the college degrees that his funding had helped us to attain.

For more information about the benefits of passing assets to your heirs during your lifetime, contact or see

Helping you plan for your family’s tomorrow at every stage of your life.

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The Pitfalls of Portability

day in the life: lunch money

Image by emdot via Flickr

This year and next, a decedent can transfer his or her Personal Federal Estate Tax Exemption to his or her spouse.  This power to transfer, often referred to “spousal portability,” allows couples to protect a significantly larger chunk of their estates from Federal Estate Tax liability.

Although there is no guarantee that spousal portability is here to stay – it is currently scheduled to disappear at the end of 2012 – preserving spousal portability may turn out to be politically tenable.  For instance, President Obama’s February budget proposal would reduce the Personal Federal Estate Tax Exemption from $5 million to $3.5 million, but it would preserve spousal portability.  This proposed tax shelter, of $7 million, would still allow many couples to pass along their assets tax-free.  But, whether or not spousal portability will be available after 2012, couples should keep in mind that portability is not an automatic solution.

For instance, Spousal portability is only available couples the Federal Government considers to be married.  Thus, in California, spousal portability is not available to unmarried couples who are living together, no matter whether they have children or how long they’ve been together.  In addition, under DOMA, spousal portability is not available to the approximately 18,000 same-sex couples married in California or whose marriages are recognized by the State.  Spousal portability also does not apply to the 58,000 couples in California who are registered as domestic partners.

Couples who are eligible to use spousal portability should be cognizant of the fact that they must affirmatively choose portability in order to be able to use it.  The deceased spouse’s personal estate tax exemption can be transferred only if his or her executor elects to make that transfer.  To make this election, the executor must file a Federal Estate Tax return for the deceased spouse, even though he or she does not owe any estate taxes.  And the return must be submitted to the IRS within nine months of the death of the first spouse (although a six month extension is sometimes available).  If the executor does not file the return or misses the deadline, then portability disappears.

Another, more complicated aspect of spousal portability comes into play if the surviving spouse remarries.  Upon remarriage, the surviving spouse does not automatically lose the estate tax exemption from his or her first spouse.  But a surviving spouse gets keep only the exemption from the most recent spouse to die, regardless of the size of that exemption.  For example, lets say that Frank dies, leaving his $5 million exemption and his $10 million house to his wife, Samantha.  Their plan is that Samantha will eventually bequeath the house to their children and that, using both of their exemptions, no estate tax will be owed on the house.  Then, Samantha marries Neville, who has already used up all of his exemption by giving $5 million to his children.  If Samantha outlives Neville, she loses the $5 million exemption from Frank.  In that situation, Samantha’s estate would owe around $1.75 million in estate taxes on the value of the house and her executor would have to either sell the house or find another way to pay the taxes, before the remainder of Samantha’s estate can be transferred to her children.

The take-home lesson here is that spousal portability is a great estate planning tool for some couples, but it does take some thought and effort.  For more information about using spousal portability or to create an estate plan incorporating spousal portability, contact or see

Helping you plan for your family’s future at every stage of your life.

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What to Do With an Inheritance?

Family Portrait - Montreal 1963

Research indicates that the majority of the baby boom generation will receive some kind of inheritance.

With the economy the way it is these days, most baby boomers are not expecting to receive a windfall.  But investigations at the Center for Retirement Research at Boston College indicate that, as the parents of the sandwich generation pass away, around 70% of boomer households will receive inheritances.  These bequests might not be enough to buy your own private island.  But, with a little planning, they may be enough to help you pay off your mortgage or assure you a more comfortable retirement.  Here are a few ideas for how to best manage inheritances.

If you inherit an IRA from your parent or spouse, your best plan of action may be to leave the money in that account and take required minimum distributions based on your life expectancy.  The allows you to stretch out the withdrawal period and, hence, the tax benefits.  If you don’t need the money in the IRA, you might get an even greater benefit by disclaiming this part of your inheritance in favor of your children.  Because of your children’s longer life expectancy, passing the account to them could stretch out the payments even further, allowing the money in the account to grow, tax-free, for an even longer period of time.

Conversely, if you are not inheriting a retirement account, it might be wiser to spend your inheritance on living expenses instead of saving it.  For example, if you’re working and not contributing the maximum amount to your 401(k), using inherited money for day-to-day expenses might allow you to put more of your income into your retirement accounts.  Most private employees, age 50 and older, can contribute $22,000 of income per year to a 401(k) account and an additional $6,000 per year to an IRA.  Using some of your inheritance for living expenses now could allow an equivalent amount of your pretax salary to grow, tax-free, until your retirement.

Remember that, in California, an inheritance is the separate property of the spouse who received it.  In some instances, maintaining your inheritance as separate property can reduce the amount of estate or gift taxes ultimately paid when that inheritance is passed on to your children.  It can also shield the inherited assets from your spouse’s creditors and may help your spouse qualify for Medicare or Medi-Cal benefits.  To maintain the inheritance as separate property, don’t “co-mingle” it with community property assets by, for example, depositing it into a joint account or purchasing property in both your names.

Whenever you receive an inheritance, you should also check whether this extra money has put you into estate tax territory.  There is effectively no state estate tax in California and this year, U.S. citizens and residents can pass up to $5 million to their loved ones without  paying federal estate taxes.  But the federal estate tax exemption is currently in flux.  In 2013, this exemption is scheduled to be reduced to $1 million, which may cause a significant number of people in Silicon Valley to have a federal estate tax liability.

For help making an estate plan that accommodates your inheritance and minimizes the impact of estate taxes, contact or see

Helping you plan for your family’s future at every stage of your life.

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Transferring California Assets Through Joint Title

A 1636 Indian deed for Rhode Island signed by ...

Be careful how you transfer deed your property! A 1636 deed for Rhode Island from Narragansett Chief Canonicus to Roger Williams

Some of my clients have questions about transferring assets outside of probate by putting their heirs on the deed or title to property.  Although this may work for some clients in some situations, we need to be very careful about the transfer.  For instance, there is more than one way to jointly own property in California.  And the kind of joint title you create with your transfer will determine whether the transfer achieves your desired results.  Each of the four ways to jointly hold title in California comes with its own advantages and disadvantages.

Tenants in Common – Tenants in common each own separate shares of the asset, which can vary in size.  (E.g. I can own ¾ and my daughter can own ¼.)  Each each tenant’s share is subject to seizure by his or her creditors and each can bequeath their own share to whomever they choose through probate or a trust.  The cost-basis of each tenant’s share is determined individually so, when one tenant in common dies, there is no step-up in basis for the other co-tenants.

Community Property – Community property is one way California married couples and registered domestic partners can hold title to assets.*  Each spouse/partner owns an undivided, 50% interest in the community property.  While both spouses/partners are living, neither can sell or gift their half without the other’s consent and the entire asset is reachable by the creditors of either spouse/partner.  However, each spouse/partner can bequeath their half of the community property to whomever they choose and, upon the death of one spouse/partner, both shares of the community property receive a stepped-up basis.

Community Property with Right of Survivorship – In California, holding title as community property with right a survivorship is like holding community property except that when one spouse/partner dies, their half of the asset transfers automatically to the surviving spouse/partner.  The decedent’s share passes outside of probate, but it is still considered to be part of their taxable estate, and both shares of the property receive a stepped-up basis.

Joint Tenancy (a.k.a. Joint Tenancy with Right of Survivorship) – Joint Tenants each own equal, undivided shares of the joint tenancy asset but, unlike community property, there can be more than two tenants.  (E.g. Groucho, Harpo, Chico, and Zeppo can each own ¼.)   Joint tenants cannot sell their share without permission of the other joint tenants and the entire joint tenancy property may be reachable by the creditors of any one owner.  When one joint tenant dies, their share in the asset passes to the surviving joint tenants without going through probate or receiving a step-up in basis. The last surviving joint tenant has an unlimited interest in the property and can sell or bequeath the property to whomever they choose.

For help transferring title to your California property or transferring your assets outside of probate, contact me at or see

* There are nine community property states other than California: Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.  Alaska also allows couples to elect to hold property as community property.

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