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Focus on Estate Planning & Charitable Giving


We have heard on TV that it is a problem if we die without a will because the State of California will determine how our estate will be distributed. My wife and I have 3 children, all of which are ours, no previous marriages, etc. Could you explain this?


First some definitions as a background for your question:

California is a community property state. Unless property is a spouse's separate property or the spouses agree to the contrary all real property in California and all personal property, wherever located, that a person acquires during marriage, while living in California is community property. Separate property on the other hand is any property owned by either spouse before marriage or acquired thereafter by gift or inheritance. Each spouse has the power to give 1/2 of the community property and his or her separate property to whomever the spouse wants. In the absence of a will the separate property and 1/2 of the community property will pass according to the laws of intestate succession (meaning that the decedent has died without a will). Quasi community property in general includes all personal property, wherever located and all real property located in California that was acquired by a decedent while living outside California that would have been community property had the decedent been living in California when the property was acquired.

With that background, as to community property the intestate share of the surviving spouse is the one-half of the community property that belongs to the decedent. Likewise as to quasi community property the intestate share of the surviving spouse is the one-half of the quasi-community property that belongs to the decedent.

As to your separate property since you have 3 children if you or your wife pass on before the other one then the surviving spouse will only be entitled to 1/3 of the decedent's separate property and the children will get the other 2/3. You can see quickly that in this type of situation you and your wife may want some other distribution made to the surviving spouse that is more than 1/3 of the separate property of the decedent spouse.

Your case is relatively straightforward. But take the recent case of Estate of McCrary where the decedent was not survived by a spouse, children, parents or grandparents. Here the decedent was survived by the heirs of four maternal cousins and the heirs of 14 deceased paternal cousins. Without going into all the details the court had to decide the distribution of the estate according to the Probate Code which some of the heirs said was contrary to what the decedent would have wanted. Even though this case is a little unusual it still illustrates that point quite well that if each of us doesn't take responsibility for how we want our estate to be distributed the Court is going to do it for us which may not be what we would have wanted.


Therefore, what are the main advantages of estate planning?


In estate planning, general information is gathered about your personal and financial matters. You have to decide what your objectives are. Recommendations are made as to what may work best for you. Prudent planning also requires consideration of assets not subject to being distributed by will or trust. Examples would be life insurance, retirement plans, and employee death benefits.

The estate planning process also includes recommendations as to what mechanisms are appropriate for the estate plan; just a will; a will and a trust; leaving some of the estate to charity to minimize taxes and to support a favorite cause in the community, etc. Many times a person feels that their estate is very straightforward and all they want is a simple will. However, unless the whole picture is carefully analyzed there may be significant probate costs and estate taxes that could have been avoided.


What is a qualified personal residence trust or a personal residence grantor retained income trust?


A person may transfer his or her home to the trust retaining the right to live in it for a set period of time. When the time is up, the home transfers to others such as family members. Gift taxes are paid during life upon the transfer, saving potential estate taxes had the residence been transferred through the estate at death.


Would we get additional tax benefits if we transferred the house to a charity of our choice as our children do not really want to live in our house anyway?


Yes. The charitable deduction is allowed when a donor gives the remainder interest to charity but retains a life estate for himself/herself. Household furnishings are generally not included. The remainder interest should be in the residence not the proceeds from the sale thereof. The remainder value is determined using the value of the land and improvements but must be reduced by the value of the life use of the property by the donor. The remainder value must also be discounted to reflect straight-line depreciation of the improvements during the life use. It also is preferable not to have any debt on the property. The charitable remainder should be the whole property, not just part of the property. If the donors are going to live in the property until they pass on, it is necessary for them to maintain the condition of the property.

In summary, there are income and gift tax charitable deduction equal to the full fair market value, if the property has been held for more than 12 months and subject to a reduction for potential depreciation recapture; no gift tax. No capital gains on appreciation. The gift reduces the taxable estate for estate tax purposes. Because a gift is being made of appreciated property, the income tax deduction is limited to 30% of the adjusted gross income of the donor.


My wife and I are in our 40's and several years ago started a Silicon Valley high-tech company. The company has done well to date and the value of the stock has increased. As a result, we have been able to invest in a broad range of stocks and bonds including municipal bonds. We also have a good income from our company. We want to give something back to our community and also assist a local charity that was a big help in caring for my wife's mother. What would be a good option for us to consider?


In your case, a charitable lead grantor trust might be worth considering. This is the opposite of the charitable remainder trust. With a charitable lead grantor trust, the charity gets the benefit right now but the donor gets the principal back after a specified number of years. The charitable lead trust concept involves the creation of a trust which will make its initial payments to charity for a term of years and then come back to you after the specified number of years. Therefore, the charity gets the lead trust and you get the remainder interest - just the opposite of the charitable remainder trust. Again, like the charitable remainder trust discussed in the above referenced article there are two basic types - the annuity trust and the unitrust.

With an annuity trust, payment to the charitable beneficiary is for a number of years or for a life or lives in being at the creation of the trust. With a unitrust, payment is a fixed percentage of the net fair market value of the trust assets determined annually.

In the grantor lead trust it is particularly helpful for someone like yourselves who have a high income currently. You would be able to get an income tax deduction at the beginning of the charitable lead trust for the value of the charitable lead trust as long as the charitable lead trust is considered to be owned by you for income tax purposes. There are some limitations as to how much you can deduct in one year but the amounts that can't be deducted on one year can be carried over to subsequent years up to 5 years (see your CPA for details pertaining to your individual situation). You would, however, be taxed on the income paid to the charity. This arrangement works best where the donor is in a significantly higher tax bracket in the year of the gift than in the later years of the trust.

However, you mentioned that some of your portfolio is invested in municipal bonds. There is the possibility that the lead trust could be funded with tax exempt municipal bonds and you could get a charitable income tax deduction when setting up the charitable lead trust as explained above, and then you would not be taxed on the income going to charity, at least, as far as the income from the municipal bonds. This result would only work if the bonds were for a California entity and you live in California as far as the California income tax.

Again, you need to discuss your particular situation with your CPA as to income tax implications as well as estate and gift tax ramifications, if any.


I am in my late 60's and my wife passed away several years ago. I have money in a retirement plan from my employer. I was thinking about leaving these funds to my son, but it also was the family's plan for a number of years to benefit a local charity that we have worked with. My concern is that my son would probably have to pay income taxes on the retirement plan since the plan was funded with tax exempt income. Can you give me some suggestions, which might benefit the charity as well as my son?


Many donors like yourself have a strong charitable intent but are giving the wrong assets to the wrong parties. They set up their estate plan with retirement plans going to their family and give a bequest on which income tax has already been paid to a charity. They are not aware that their heirs will have to pay income tax on the funds that are in the retirement plans, assuming the money was put into those funds on a tax deferred basis. If the individual intends to make a charitable bequest, the gift should be made with assets such as retirement plan assets since a tax-exempt charity will not have to pay income taxes. Then give the income tax free assets to family subject of course to possible estate and gift tax implications, which you will need to review with your CPA.

Retirement plan assets with a beneficiary designation are not governed by a will or trust instrument; instead, the beneficiary designation form determines these transfers. These forms must be carefully drafted to meet the donor's estate planning objectives.

As a general rule, your son will be better off if the retirement plan asset is used for a charitable bequest because in most cases it will increase the portion of the inheritance that they will receive that is free from income taxes.

Another possibility would be setting up a Testamentary Charitable Remainder Trust as a planning option. The assets remaining in the Retirement Plan at your passing would be distributed under this option in a lump sum to a Testamentary Charitable Remainder Trust for your son with benefits from the Trust to be paid to your son over his lifetime. The Charitable Remainder Trust could be established at the time of your passing by virtue of your will or living trust. Your estate would be entitled to a deduction against the estate tax from the establishment of the Charitable Remainder Trust.

The major tax benefit from the Testamentary Charitable Remainder Trust is that it eliminates any payment of income taxes at the time of the distribution to the Charitable Remainder Trust. However, the payment of the income taxes would not be eliminated permanently; the payment would be deferred over the lifetime of your son, which would allow your son and your designated charity to realize the benefit from the deferral of these income taxes. Again, check with your CPA on the implication of all of these taxes in your particular case.


We would like to make a charitable gift but we really cannot afford to give up annual income that we are currently receiving from money we have invested. Can you suggest any other alternative for us? We just assumed that our only alternative was to make a gift through the estate plan, which is already in effect.


There are special provisions in the Internal Revenue Code which allow donors to make a charitable gift while retaining the right to income. You might characterize these gifts as Life Income Gifts. These would include charitable remainder trusts (annuity trusts and unitrusts), pooled income gifts, and charitable gift annuities. The various elements of these gift vehicles vary but in general they provide:

  • Reduction or elimination of capital gains tax if the gift is in the form of an appreciated asset, such as stock that was bought at a low price and has now increased substantially.
  • An immediate federal income tax deduction in most cases for at least a portion of the value of the gift.
  • Income for life to the person or persons (such as married partners) who made the donation or their beneficiaries.
  • The remainder or what is left then would go to the nonprofit of your choice.
  • Basically, a charitable remainder annuity trust is a life income plan which pays a fixed amount to a named beneficiary for life or other beneficiaries not to exceed 20 years with certain exceptions. The fixed dollar amount cannot be less than 5% or more than 50% and the income payments are mandatory and will be paid out of trust principal if trust income is sufficient. The present value of the charitable remainder trust must be at least 10% that will go to charity. No additional contributions can be made to a charitable remainder annuity trust once it is set up.
  • The unitrust has many similar features to the annuity trust but there are important differences. One of the major differences is the method of determining the annual income to the beneficiaries. The unitrust is required to pay at least 5% annually but not more than 50% of the fair market value of the trust; however, the payment does not remain fixed. It is recalculated each year based on the unitrust's asset value as of a specific day each year, in many cases January 1. The reevaluation each year results in a different payment each year, raising or lowering the payment as the value of the unitrust changes over time. Unlike a charitable remainder annuity trust, additional contributions can be made to a charitable remainder unitrust, once it is set up.
  • The standard form of the unitrust pays the designated income from income available in the trust and from principal when there is not enough income.
  • A variation, which may be selected, is to limit income payments to the actual income earned or the stated rate whichever is less. In this variation principal will not be used or diminished to make up a deficit in the funds available from income to pay a stipulated rate.
  • Another variation is the net income with make-up provision, which uses excess income in one year to make up for deficits in the account in previous years.
  • In a pooled income fund an individual's gift to the charity along with other similar gifts from other donors is invested by the charity who many times act as the trustee. In return the trustee agrees to pay an income to the donor or their beneficiary for their lifetime. An important feature of the pooled income fund is the "pooling" together of gifts of many donors, thereby spreading the costs of administration to everyone in the "pool". Generally speaking less money is needed to participate in such a fund than a charitable remainder trust.
  • In a charitable gift annuity the amount of the annuity payment is typically based on the ages of the beneficiary. The number of beneficiaries is generally limited to two. There will be an actual agreement between the charity and the donor and the contract will require the payment of fixed income. The annuity trust can make the payment required only to the extent of the trust assets. If the trust assets are gone, the annuity ends.

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