California Estate Tax and other Topics

The following are the most common search terms for 2012 that have yielded results for my blog. I thought I would write about this because readers might be curious as to what other people commonly research. The following terms are in order of most frequency.

1. California Estate Tax

This search term strikes me as odd because there is no California estate tax. Furthermore, California has not had an estate tax since 2004. In other words, people are looking for something that does not exist, e.g. Bigfoot, a unicorn, etc.

Unfortunately the amount of legal misinformation on the Internet is expansive. It should not come as a surprise then that people cannot be sure about what they read. Hence, they do some Internet research to see what is true and what is not.

2. Heggstad Petition

This might be the most common probate petition. 

Essentially, a Heggstad petition is where a successor trustee of a trust seeks a court order to transfer property, commonly a home, into the trust because the settlor, the person who originally wrote the trust, never formally did so when they were alive.

3. Small Estate Affidavit California

If a person's estate is small enough, less than $150,000 gross in 2012, a person may collect such assets through the use of an affidavit rather than formal probate.

The valuation amount was increased to $150,000 from $100,000 starting January 1, 2012.

A common erroneous perception of many clients I have spoken to is that real property may be transferred this way. Real property transfers require an abridged probate procedure.

4. California Estate Tax 2012

See # 1

5. California Inheritance Tax 2012

The term used for the at-death tax imposed by the government is called the "estate tax." The "inheritance tax" is presumably a more informal method of saying it. Of note, opponents of the estate tax like to use the term "death tax" when describing it. All three terms: (1) estate tax, (2) inheritance tax and (3) death tax have the same meaning.

6. California Small Estate Affidavit

This proves that not every mind thinks alike. Some Internet users like to lead with California while others like to trail with California.

7. California Inheritance Tax

See # 5

8. CUTMA

This is the acronym for "California Uniform Transfers to Minors Act." 

A CUTMA is a hybrid between a trust and a guardianship where a custodian has control over a minor's assets to utilize for the minor's benefit until they reach a certain, at most 25 in California.

9. Special Needs Trust California

A SNT is an irrevocable trust designed to maintain government resource eligibility for a disabled individual while simultaneously allowing the trustee access to trust funds to benefit the beneficiary, i.e. the disabled individual, for specific purposes.

This is a technical type of trust that requires much more planning and administration than a regular living trust.   

10. Inheritance Tax California

Apparently most people use the term "inheritance tax" when they think of the estate tax.

California Uniform Transfers to Minors Act (CUTMA)

One alternative to the creation of a trust for a child is to create a custodianship under the California Uniform Transfers to Minors Act (CUTMA) (Prob C §§3900-3925). The following are some questions that focus on this topic.

1. What is a CUTMA?

A CUTMA is a legal arrangement in which property is given by a donor to an adult, the custodian, who is entrusted with managing and expending the property for the beneficiary, who must be a minor, until the minor reaches age. When the minor reaches age 18, the custodian transfers all remaining property to the minor. Prob C §§3914(a), 3920.

For example, assume Donald gave $10,000 to Clarence to manage and expend for the benefit of Donald’s son, Bobby. At the time, Bobby was age 14. Clarence then used the money for various reasons to benefit Bobby. When Bobby turns 18, Clarence is obligated to transfer ownership of the remaining property, if any, to Bobby.

For reference, the generic term for this type of account is “UTMA.” “CUTMA” is used in California because a “C” is added to the beginning to denote its California origin. So whenever you see or hear the term “UTMA” this is basically the same arrangement as a “CUTMA” account. Many bankers are familiar with the term “UTMA.”

2. How do I set up a CUTMA account?

Large commercial banks are readily familiar with establishing a CUTMA account. If you look on the website of large commercial banks such as HSBC, Bank of America, CitiBank or Chase, each will have a description on how to set one up.

It is quite easy. If you can set up a checking account, you can set up a CUTMA account.

3. Am I limited by the type of property I can fund a CUTMA account with?

No, there are no longer any limits on the types of property that may be devised to a minor under CUTMA. See Prob C §§3901(f), 3909(a)(7).  

4. When can a CUTMA account be established?

A CUTMA account can be established during the lifetime of the donor or at the donor’s passing by specifying for the creation of such in the donor’s will.

5. Is a CUTMA account considered a taxable gift?

No, CUTMA gifts qualify for the annual gift tax exclusion under IRC §2503(b), which is $13,000 for 2011 and is adjusted annually for inflation. Rev Proc 2009-50, 2009-45 Int Rev Bull 617.

6. What are some advantages in creating a CUTMA account as opposed to a trust?

A CUTMA account is very ease to create. Banks are very familiar with the process, court-supervision is not required, bond is not required of the custodian and the custodian need not provide an accounting to the beneficiary.

7. What are some disadvantages in creating a CUTMA account as opposed to a trust?

Each CUTMA account may have only one beneficiary and one custodian. Prob C §3910. Hence, if a couple has multiple children, then a separate CUTMA account will need to be established for each child which can cause administrative headaches.

The custodian of the account cannot be instructed as to what investments he or she should make as in the case of a trust. Prob C §3914(a). In particular, the custodian is free to expend the money as they advisable and without the need to obtain court approval.

The beneficiary may incur adverse tax liability through the “kiddie tax” if their unearned income is too high. This results in the child being taxed at the parent’s income tax level rather than the child’s level.

Finally, CUTMA accounts are treated as the student's assets for financial aid purposes. 20 USC §1087vv(f).

8. What are some alternatives to a CUTMA account?

A donor could deliver proceeds to the child’s parents if the amount does not exceed $5,000 and the parent promises to use the proceeds for the child’s benefit. Prob C §§3400-3402.

If the donated property exceeds $5,000 and the child has no guardian of the estate, a court may authorize that the money be deposited in a blocked account or may authorize the purchase of a single-premium deferred annuity. Prob C §3413(a).

A donor could create a trust for the child’s benefit. This would be the most flexible option available since the trust could specify the trustee’s duties.

A court-supervised guardianship of the child’s estate could be established to handle the child’s property. Prob C § 1510.

Inheritance Rghts of Children

Individuals often wish to leave part of their estate to a child, whether it is their child, a niece, nephew, grandson, granddaughter, cousin, etc. 

This transfer of assets is not very complicated if the child is considered an adult, namely the child is at least 18 years of age. However, if the child is under the age of 18, he or she is considered a minor. Fam C §6500.

Consequently, in the eyes of the law, minors lack legal capacity in certain aspects. For example, minors cannot consent to their own medical treatment with certain exceptions nor can they contract or exercise the rights and powers of ownership over property. Fam C §§6920-6929; Fam C §§6700-6753. Furthermore children, specifically teenagers, are notoriously imprudent spenders of money and thereby the danger of a teenager squandering their inheritance after a few trips to the local mall is readily apparent.

In light of a child’s legal handicaps and propensity for wasteful spending, there are various options an individual can exercise to ensure that the child’s inheritance is secure.

1. Less than $5k

If the individual is not the mother or father of the child, they may deposit with the child’s parent up to $5,000 that will to be held for the child's benefit until he or she reaches the age of 18. Prob C §§3400-3402.

2. Over $5k

If the bequest is over $5,000, a court may authorize that the money be deposited in a blocked account or may authorize the purchase of a single-premium deferred annuity. Prob C §3413(a). Withdrawals may not be made from the blocked account except on court order and the balance must be paid to the minor at age 18. Prob C §§3300, 3413(a).

3. California Uniform Transfers to Minors Act (CUTMA)

An individual may establish a custodianship for the child’s benefit with a bank or brokerage firm through the California Uniform Transfers to Minors Act (CUTMA). Prob C §§3900-3925. Of particular significance, in a CUTMA account the individual can delay the child’s ability to access the money up to the age of 25. Prob C §3920.5.

4. Trust

An individual may establish a trust for the benefit of the child that can last for the entire child’s life if sufficiently funded. Please see prior postings on trusts on this blog and my website for further detail.

5. Guardianship

If no prior planning has been made for the child’s inheritance, a guardianship of the child’s estate may need to be established. In a guardianship, the court appoints a person to oversee and manage the child’s property. This is probably the worst arrangement because a guardianship requires the filing of an annual accounting with the court which is quite expensive. Prob C §1513.2.

6. College Savings Account

An individual may create an education savings account by either starting a college savings account (See Internal Revenue Code Section 529) or a Coverdell Education Savings Accounts (See Internal Revenue Code Section 530).