San Francisco Examiner - Tuesday, March 14, 1995


Planning is Key to Estate Taxes

IMAGINE $10 TRILLION "up for grabs!" That is the projected total value of estates from Americans who will die in the next 20 years. The question is, who will get that money: the IRS, probate lawyers or the inheritors? It all depends on estate planning.

If taxed at 37 percent, the minimum estate tax bracket, the amount the IRS could collect would be almost enough to pay off our national debt. Subject to probate, attorneys might well pocket between $150 billion and $200 billion in fees.

If you plan carefully, though, you are allowed to eliminate probate costs entirely and substantially reduce -- if not eliminate -- estate taxes.

Estate planning involves the use, conservation and disposition of property and wealth. This involves two elements:

Both elements can be enormously complex and often operate inversely. For instance, the goal of providing more for one's children or grandchildren and less for a surviving spouse may cause adverse estate tax consequences.

This column focuses on the nontax aspects of estate planning. Next week: how to minimize or eliminate estate taxes.

There are three main methods by which property is transferred at death:


A will contains written instructions that take effect at the death of the person signing it (the "testator"). A will covers all property owned by the testator. A state court proceeding ("probate") is initiated, and the provisions of the will are implemented under supervision of the probate court. An attorney is often needed to navigate through the complex procedures.

Both the estate tax and family estate planning objectives of the decedent can be accomplished with a will. Without a will, the probate court will distribute the estate as required under California law.

Revocable Living Trust

A revocable living trust (sometimes called an inter vivos trust) is a document that is revocable at any time by the person signing it ("grantor").

Living trusts have become quite popular to avoid probate. To avoid probate, the trust must be funded; this means that title to all assets which the grantor personally owns must be transferred to the trust -- real property is deeded to the trust; bank accounts are switched to the trust; and stocks, bonds, partnership interests and other holdings are assigned or transferred to the trust.

Note: The grantor is usually both the trustee and beneficiary of his or her trust during life.

Joint Tenancy

Joint tenancy (sometimes called "with rights of survivorship" or "WROS") is a method of holding title to property when two or more people own property together, but the final survivor of them will wind up with the entire property.

When a joint tenant dies, his or her interest goes automatically to the survivor(s); there is no probate, and a will or revocable living trust has absolutely no effect on joint tenancy property.

There may be adverse estate tax consequences to the joint tenant who dies first. The entire fair market value of the property will be part of the decedent's estate for estate tax purposes, unless surviving joint tenants can substantiate (through financial records) payments made toward the purchase or improvements of the jointly held property.

For instance, if surviving tenant(s) can prove he, she or they made a 30 percent contribution toward the combined purchase and improvement of the property, then 70 percent of the property will be included in the decedent's estate for estate tax purposes.

California Law: Community Property

Although not a method to transfer property, California's community property laws affect all married couples who reside in this state. In general, all earnings and assets acquired during a marriage belong equally to both spouses, regardless of who actually earned the income or purchased the asset. (Property acquired before or after marriage, or gifts and inheritances received by one spouse during a marriage, are generally the separate property of that spouse.)

Community property is not, strictly speaking, an option for transferring property at death, but has tax consequences that must be considered when planning an estate.

Upon the death of either spouse, the community property is split equally, and the surviving spouse receives his or her share of community property. The deceased spouse's 50 percent share of community property is part of his or her will or living trust. Community property cannot be held in joint tenancy.

Planning for Minor Children

Couples with children under 18 years of age need to plan their estates carefully, although the focus is usually on taking care of the children rather than saving estate taxes.

A family's major assets are usually life insurance and their family home. In case of the deaths of both parents, provisions for the guardian(s) for the children and trustee(s) for the property must be carefully considered. Although creating various trusts might minimize estate taxes, the distribution provisions should be for the care and support of the children.

Also, parents will want to think about: Should the trustee(s) conserve the trust for the college education of their children? At what ages should the children receive the trust principal and in what amounts? All at 21? Half at 25 and the remaining principal at 35? If the children die, who then receives the property -- the decedent's family, specified charities?

Changes are easy, crucial

As your financial or personal situation changes, you can easily change your will or revocable trust, or terminate a joint tenancy. If you have a will, you can create a revocable living trust for some or all of your assets, and vice versa.

Joint tenancy property can be converted into community property and vice versa. Doing nothing -- such as even writing a simple will -- in anticipation of change later on can be very detrimental. The key objective is to act now and adjust your estate plan when your situation changes.

We have all heard about bizarre accidents and illnesses that have tragic emotional and financial consequences for families. Protect your assets and your family. A carefully planned estate will cover a variety of remote contingencies, provide for the continuing personal and financial care of the decedent's spouse and family, and reduce or eliminate estate taxes.


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**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**