Why Estate Planning Is Important

When a person dies without leaving a will, it is called intestacy. When one dies intestate, their estate enters probate, a legal process in which one’s property is identified, inventoried, and distributed to heirs. Probate is a “one-size-fits-all” system that does not account for one’s intentions for their property after death.

Probate takes an extremely long time. Heirs do not usually have the 12-18 months that the average probate takes to wait for the means to make mortgage payments or run the deceased person’s business. Additionally, probate is expensive. Probate executors and attorneys collect fees based on the gross value of the estate, which does not take into account mortgages or other debts owed.

Unfortunately, most sates’ intestacy laws discriminate against same-sex couples, considering those relationships invalid for purposes of distributing the estate of a deceased partner who dies without a will. Many same-sex partners will lose both personal property and real estate as a result of the probate system.

Further, unrelated couples lose out on many other protections afforded to married or registered couples. Anyone can become incapacitated without warning. Without properly executed legal documents, your best friend or partner may not be able to visit you in the hospital, let alone make healthcare and financial decisions on your behalf. Sometimes, the chosen or trusted decision maker is cut off from their loved one with no input in matters of medical care or funeral arrangements.

It should be a primary concern for single people and legally unrelated couples to retain these rights through estate planning, in order to protect their assets and establish security for their loved ones.

Estate Planning: Planning Ahead

Your estate is the collection of all your assets minus all of your liabilities. Whether this adds up to $100 or $100 million, your estate needs planning. Estate planning also covers what happens to you during your life, should you become unable to make your own decisions due to illness or accident. Planning ahead decreases the chances of the courts getting involved, saving your partner or friend unnecessary emotional and financial hardship. There are several ways to accomplish this.

Wills

Wills are documents where individuals – known as “testators” – identify who their property will be given to when they die. In a will, you can choose to leave your property to whomever you like, including your partner. Wills also allow you to name a guardian for your minor children upon your passing.

However, wills have disadvantages. For one, property conveyed through a will is subject to the probate process, which as stated earlier is costly and time-consuming. Secondly, wills can and are frequently contested by the family of the decedent, especially when all of decedent’s property is left to his or her partner. Finally, wills are public, which means that anyone can look up your will at the courthouse after you die and find out how you distributed your property.

Living Trust

A living trust allows for inexpensive and time-efficient transfer of assets upon death, without involvement in the probate system. Because title to your assets is owned by the living trust, there is no “estate” to probate you upon your death. Additionally, living trusts are private so no one except the beneficiaries may find out how you distributed your assets. Further, a living trust is less likely to be overturned by a court if it is challenged. This is because you put the living trust into place and lived with it during your lifetime, making it harder to challenge based on intent. Because your living trust takes effect the moment it is signed, you live with it for a while before anyone else assumes management of it. Financial institutions become accustomed to dealing with your living trust so when your partner (or whomever you appoint as your Successor Trustee) takes over for you as the Trustee of your trust, the transition is much easier. A living trust also allows you to plan for the management of your finances during incapacity.

Power of Attorney

A Power of Attorney document allows you to designate the person or persons whom you wish to control your finances in the event that you are incapacitated. This allows your designate a person to pay the bills, collect money that you are owed, access bank accounts, and communicate with companies or organizations that you may have business with. You may tailor your power of attorney to include as many or as few different transactions as you wish. The financial power of attorney can be durable, meaning that it goes into effect immediately, or springing, where it goes into effect only if you become legally incapacitated. Depending on your circumstances, you may need a power of attorney that contains provisions for dealing with retirement assets, such as IRA and 401(k) plans.

If you do not prepare a document relating to your durable power of attorney, someone will have to petition the court to be appointed as your agent. This petitioning process is time-consuming, expensive, and may be emotionally taxing for those involved, especially if there is conflict between your partner and a family member.

Advanced Health Care Directive

An advanced health care directive (AHCD) is similar to a power of attorney. In an ACHD, you appoint a person to be your agent in making health care decisions for you should you become incapacitated. Even if you are legal domestic partners, if may be beneficial to execute an AHCD to clarify your rights as some hospitals may be unfamiliar with the rights of domestic partners. Through an AHCD, you may avoid the problems associated with an estranged or unwanted blood relative taking control of your health and care decisions.

In an AHCD, you can designate the level of care that you would like in the event you become terminally ill and/or incapable of enjoying any quality of life. You can express whether you would like to be place on life support if there is no chance of recovery. An AHCD may also contain information regarding your preferences for organ donation, personal care, and living arrangements.

A good complement to an AHCD is a stand alone HIPAA Authorization Form. Because of HIPAA (Health Insurance Portability and Accountability Act), it is often difficult for loved ones to obtain information about your health and medical care. A HIPAA Authorization Form allows you to pre-designate the persons you want to give permission to speak with your doctor, other health care professionals, and insurance or Medicare providers.

Joint Tenancy

Owning assets in a joint tenancy may also ease the transition of transferring property to your partner. When a joint tenant dies, the other tenant automatically assumes ownership of the entire asset without probate. However, when the surviving joint tenant dies, the asset my be subject to probate if the surviving joint tenant dies intestate or passes their assets through only a will. This also eliminates any guarantee that the jointly owned property will go to your family or heirs. Because the property is completely owned by the surviving joint tenant, the deceased joint tenant has no control of what happens with the property after the death of the surviving joint tenant.

Additionally, property owned in joint tenancy is subject to the creditors and liabilities of each joint tenant. This means that even if you helped buy a house with your partner and are 50% owner of the house, you may lose the house altogether if your partner is the losing party in the lawsuit or has outstanding debts.

Next Steps

To get a head start on your estate planning, contact an attorney that practices trusts and estate law. If you wish to have your intentions honored at death and leave your property to someone other than how the state deems is best, having an estate plan is not just a matter of convenience, it is a matter of necessity.

To contact our office, please call (415) 693-0550 or email us at office [at] jkzllp.com.

What’s In A Name: Titling Real Estate for Same-Sex Couples

For most opposite sex couples, the question of their legal status in California or elsewhere is generally a simple one – they are either married or single*. Under the current legal framework in California, the answer is not as clear for same sex couples because there are four distinct legal statuses that a same sex couple may hold. Furthermore, if an opposite sex couple who is married and residing in California purchases real property, it is generally understood among titling professionals that the couple can hold title to the subject property as community property with right of survivorship, community or separate property, in joint tenancy, or as tenants in common. The four different statuses available to same sex couples inherently cause confusion, even among the most well-intentioned titling experts, which can be problematic because incorrectly titled real property can create adverse tax liabilities. However,  federally recognized spouses can usually change the nature of property from community property to separate property, or vice versa, without income tax consequences although there may be other significant implications.

Registered Domestic Partners

One of the most common statuses for California same sex couples is Registered Domestic Partners (RDPs). This applies to any couple who registered with the State of California on or after January 1, 2000 and who did not “opt out” of the RDP status before January 1, 2005 when AB 205, the California Domestic Partners Rights and Responsibilities Act of 2003, became effective, or who have not subsequently dissolved their relationship.

Pursuant to California Family Code Section 299.2, this title also applies to those same sex couples who entered into a legally recognized relationship in a foreign jurisdiction, whether elsewhere in the United States or in another country, that is “substantially equivalent” to a California domestic partnership. Such “substantially equivalent” relationships include the Civil Unions or Comprehensive Domestic Partnerships provided by state law in Connecticut, the District of Columbia, Oregon, Nevada, New Jersey, and Washington. The limited rights granted to same sex couples in states like Colorado, Hawaii, Maine, Maryland, and Wisconsin are not characterized as “substantially equivalent” and, as a result, a couple who has registered in one of those states but has not subsequently registered with the State of California would not be deemed RDPs under California law.

Married

Married includes all couples either married in California between June 16 and November 4, 2008 or since June 26, 2013. This title is also applicable to couples who were legally and validly married in a foreign jurisdiction, whether in the United States or in another country at any time.

Registered Domestic Partner and Married

Because California law allowed RDPs to marry without first dissolving the registered domestic partnership, many couples who had previously registered with the State as domestic partners subsequently married and, as a result, now hold both statuses. For purposes of property ownership and accumulation of community property, the earlier of the two dates controls.

Property Characterization

Once the actual legal status is determined, the second, and most significant, issue is to insure that the subject property is characterized properly as community property with right of survivorship, community property, separate property, joint tenancy, or tenancy in common, in the title documents. Because RDPs and married same sex couples are entitled to all of the same rights and subject to all of the same responsibilities as opposite sex married couples under California law, all couples with any of these legal statuses are subject to California’s community property regime. This means that there is a presumption that if such a couple acquires property during the tenure of their legally recognized relationship, the property is community property. However, the source of the down payment and the source of mortgage payments must also be taken into account. Only income acquired after the date of registration or marriage is community property (IRS Chief Council Advisory 2010210, May 28, 2010), and, as such, only real property acquired with community property funds is truly community property. Even real property acquired after the date of registration or marriage with previously owned assets, no matter the intent of the couple, will have a separate property interest that must be accounted for, unless there is a transmutation by the parties.

It is especially important that the intended ownership is properly identified on the original title because, although under California law, a transfer of real property between RDPs or same sex spouses does not constitute a change of ownership that would trigger a reassessment, RDPs and legally unrelated couples do not have use of the unlimited marital deduction, a federal right, and, as a result, they do not have the option of making unlimited transfers between themselves without the potential of those transfers being characterized as taxable transfers by the IRS. This means that if title is taken incorrectly in the original title and must later be corrected to reflect the intended ownership of the property, there is a chance that this latter change in ownership will have negative tax consequences for the affected couple if it is treated as a gift or a taxable event. Community property has a different tax treatment at death which can significantly benefit the survivor, however not all property should necessarily be title as community property. We recommend that you consult an attorney before changing title to property.

If property is incorrectly titled, it is also possible that the incorrect titling could lead to a situation where upon the death of one partner or spouse, the survivor could lose control over the decedent’s one-half of the property, which, when there are other family members involved, can ultimately result in the survivor’s being unable to retain ownership of the property.

Because so many families own real estate prior to marriage or domestic partnership, an analysis of title is necessary to insure that real property assets are titled correctly. The existing legal framework requires that the professionals involved with the transfer and titling of assets understand the issues, talk freely with their clients to insure that they have all of the necessary information to properly title an asset, and know what resources are available for both the professionals and their clients in the event that questions arise that cannot be answered by the titling professional or the client. Titling companies often refuse to give titling advice so it is up to the client to access the proper information.

In light of the current legal framework and the significant issues associated with titling, we recommend the following language for use in titling documents: For RDPs: “Jane Smith and Sally Jones, Registered Domestic Partners, as [community property with right of survivorship/community property/separate property/joint tenants/tenants in common]” For married same sex couples: “Jane Smith and Sally Jones, spouses (or wife and wife), as [community property with right of survivorship/community property/separate property/joint tenants/tenants in common]” For RDPs and married same sex couples: “Jane Smith and Sally Jones, spouses and Registered Domestic Partners, as [community property with right of survivorship/community property/separate property/joint tenants/tenants in common]” For unrelated same sex couples: “Jane Smith and Sally Jones, as [separate property/joint tenants/tenants in common]”

*California Family Code Section 297(b)(5)(B) permits opposite sex couples to register as domestic partners if at least one of the parties is at least 62 years old and eligible for Social Security benefits.

Upside Down Real Estate- What Are The Options?

By Yulissa Zulaica and Deb L. Kinney

In this ever changing economy, many never expected to find themselves in such a financial quagmire. Investing in real property has always been the ‘smart’ thing to do. For those who purchased homes in the last few years and paid premium prices, one may now wonder whether it was prudent to jump on that bandwagon.

Recently, many people have been losing their homes and other real property investments to foreclosure. There are many factors that have contributed to this, one of which is the adjustable rate mortgage (“ARM”) phenomena. Lenders got creative a few years back with the ARM, where initially a low, fixed interest rate was charged for a specific period of time during and only the interest was due. Once that specific period ended, the interest rate adjusted (usually upwards) causing mortgage payments to go up and become no longer affordable. Some banks even offered the choice to pay less than the interest due. The problem with this, however, is that the foregone interest is added to the outstanding principal balance which only further increases mortgage indebtedness and what is owed down the road. Thus, with values dropping at the same time many people found themselves owing more than the property was then worth- known as being “upside down” in the investment. So, while a $3,000 mortgage payment may have been affordable 3 years ago, the $4,500 payment now is not— and this amount does not even include property taxes.

Instead of lenders asking how much house can a borrower afford, they were funding whatever amount was asked for and not taking care to prequalify borrowers as had been done in the past. Even the lenders were susceptible to believing that the market would always continue to rise as it was doing just a short while ago.

To make matters worse, due to higher real estate prices at the time of purchase, property taxes are based on a value that is likely to be more than the property’s current fair market value. Given the high costs of real property in California, the taxes being paid may be higher than what needs to be paid. Under California law, the Assesor’s Office is required to annually enroll either the property’s base year value factored for inflation or its market value (whichever is less). In other words, if the market value falls below its assessed value, then the basis for property tax purposes would be reduced to the current fair market value. Although this is only a temporary reduction, it is important to know that this is an option available to all homeowners and it can help save a bit of money in these tough times. Property owners may contact the Assessor’s Office in the county in which the property is located to request an informal review of property values due to the decline in market value.

Many are now asking whether it makes sense to keep homes or real estate investment properties and what can be done to alleviate the financial burden that has befallen you. There are plenty of options to avoid foreclosure and as with all options there are potential tax and credit ramifications that need to be considered. Some alternatives to foreclosure include establishing a repayment plan or loan forbearance due to a lost job, and loan modification, which readjusts interest rates and lowers payments. If continuing to pay the mortgage is simply not an option, or is just not economically viable, then a short sale or deed in lieu of foreclosure are other options that should be considered.

Regardless of whether payments are current or not, there is still plenty of room for negotiation with lenders. And, although negotiating can be a long and drawn out process, it can eventually be worth the while.

Johnston, Kinney & Zulaica LLP is available to work on your behalf to find a solution that is best suited to your needs.

If you have any questions or would like to further discuss your particular situation, please feel free to call our office and schedule a complimentary consultation.