Distribution from an Estate or Trust

When one party gifts property to another, it is typically a quick process. For instance, a father says to his son, "the car is yours, here are the keys to your dream car, a 1996 Suzuki X-90." The father then hands the keys to his son and the son drives off in his fabulous 1996 Suzuki X-90. Or, a mother says to her daughter, "here is your grant aunt's antique Omega constellation watch which I inherited decades ago and now the watch is yours" and then hands her the watch.

However, enforcing a future gift can be a complicated endeavor. A recent unpublished appellate opinion focused on a daughter attempting to enforce a gift her father had allegedly promised her that would take effect upon his passing.

"Appellant Kelley Dupree claims her father gifted her a piece of real property during his lifetime but held the legal title for her benefit. Almost three years after her father died, appellant filed a petition seeking an order directing his estate to transfer legal title to her. The probate court sustained the demurrer of respondents David Yoder, William Yoder, and Tracey Leachman (respondents) without leave to amend, finding appellant's claim was time-barred by Code of Civil Procedure section 366.3, which sets a one-year statute of limitations for claims seeking distribution from an estate based on a promise or agreement by a decedent."

"Section 366.3 provides that a claim arising from "a promise or agreement with a decedent [for] distribution from an estate or trust" must be brought "within one year after the date of death." (§ 366.3, subd. (a).) The issue in this appeal is whether section 366.3 bars appellant's petition to convey title to property held by the decedent at the time of his death because appellant failed to bring that petition within one year of the decedent's death."

"In light of the facts alleged, this case presents a relatively straightforward question of statutory interpretation: Is a petition to enforce a promise to convey legal title upon death a claim for a distribution from an estate or trust within the meaning of section 366.3? We conclude that it is."

The appellate court upheld the trial court's decision.

The rationale for imposing a 1-year deadline to bring a claim against an estate or trust for a distribution is to ensure the orderly administration of estates. For example, assume the decedent's house was sold during probate. Years later, a party brings a claim against the estate, alleging that the decedent promised him the home upon his death for being his caretaker at the end of his life. During this period, the house has been sold multiple times. If the claimant were successful, multiple transactions would need be unwound in a very messy process.  

Estate of Yoder, Shasta County Superior Court case #29522

Gift, Loan or Advancement

One common issue I have seen arise in estate administration matters is whether a pre-death payment by a parent to a child was a gift, a loan or an advancement. 

In the case of a gift, the child would clearly not have to pay back the parent for the gift or have their potential inheritance reduced.

In the case of a loan, the child would need to repay the principal to their parent plus some amount of interest. A loan might or might not affect a child's inheritance.

In the case of an advancement, the parent's trust or will should specify that this pre-death payment is a credit against the child's future inheritance.  

Invariably, the recipient of the pre-death payment will argue that it was a gift.

Conversely, the non-recipients of the pre-death payment, i.e. almost always the other children, will argue that it was a loan, or at worse an advancement.

A recent unpublished appellate decision focused on this issue, i.e. was a pre-death payment from a parent to a child a gift or a loan.

"Patricia passed away in February 2016, leaving a will. Eight years before her death, Patricia transferred $600,000 to Dana. Plaintiffs sought a ruling that Patricia lent the money to Dana and that she was required to pay it back to the estate. Dana asserted the money was a gift."

"The court filed its SOD on June 6, 2019. It included a description of the transaction and the evidence on which it relied about the nature of the transaction and Patricia's intent. The court confirmed its oral pronouncement at the May 10 hearing that Patricia gifted the $600,000 when she transferred it to Dana in 2008. The court in its SOD considered each of the six factors necessary for a gift and found each was proven by clear and convincing evidence. In so doing, the court noted there was conflicting evidence on the issue of whether the $600,000 transfer was a gift or a loan. The court nonetheless found Patricia's intent in 2008 at the time of transfer was to make a gift to Dana. The court denied the petition and awarded costs to Dana."

The trial court's ruling was upheld by the appellate court. It found, based upon the evidence, that the parent intended to make a gift of $600,000 to her daughter in 2008.

Estate of Walsh, San Diego County Superior Court case # 37-2017-00016491-PR-PW-CT.

Advancement or Gift

Parents commonly gift money to their children. This can take the form of an allowance when they are young, a graduation gift when a teenager or a wedding gift when an adult.

A question that arises occasionally in this context is whether the gift is really a gift or is the "gift" an advancement of the child's inheritance. A recent published appellate decision touched upon this issue.

Sachs v. Sachs (2020) ___ Cal.App.5th ___

"David L. Sachs had two children, Benita and Avram. David established a trust in 1980 when Benita was 20 years old and Avram was 12. The trust provided for small distributions to other beneficiaries, but most of the trust corpus would be distributed to Benita and Avram equally on David's death. David was the original trustee. 

In 1989 David began to keep track of money distributed to his children on papers he referred to as the "Permanent Record." When a child asked for money, David would tell the child that the distribution would be reflected on the Permanent Record. 

In June 2013 David began to experience cognitive problems due to a stroke. He hired Ronda Landrum as his bookkeeper to help manage his finances. At David's instruction Landrum continued to make distributions to Avram and Benita. Landrum said David was adamant that she keep a record of the distributions. After a distribution was made David would often confirm that the distribution was on the list. Landrum kept a list for each child in the form of an electronic spreadsheet. David told Landrum on more than one occasion that keeping the list was important so that payments made to his children could be deducted from their respective inheritances. 

In October 2013 David resigned as trustee and Benita became the successor trustee. Following her appointment, she found the Permanent Record among her father's papers. The record consists of a separate file for each child. The entries were made entirely in David's handwriting. The papers list the dates and the amounts distributed beginning when each child attained age 30. The entries were not all made with the same pen, and the papers were of different types and ages."

The appellate court held that

"Probate Code section 21135 provides that transfers of property to a person during the transferor's lifetime will be treated as an at death transfer to the person under certain conditions. All of these conditions require a writing. Here we decide that the transferor's record of amounts he periodically distributed to his children is a writing that satisfies the requirements of section 21135."

Community Property and Separate Property in a Will

Renoir's Bal du moulin de la Galette -
Musée d'Orsay - Paris, France

 

A person cannot give away more than they own. In other words, you cannot write a check that cannot be cashed. In terms of marital property, known as community property in California, at-death transfers are no different.

When a decedent is married prior to passing, his or her estate is divided into community and separate property portions. In short, community property is basically property acquired during marriage that was the result of marital labor such as wages from a job. Separate property is basically any property acquired before marriage and any property that was obtained via gift or inheritance. 

For example, Homer and Whitney were married when Homer passed away tragically in a hot air balloon accident in 2013. Homer's estate consisted solely of a $100k bank account which he used to deposit his paychecks and Renoir's Bal du moulin de la Galette which he received as a gift from his late uber-wealthy uncle. Suffice to say, Homer was a simple man. The bank account would be considered Homer's community property whereas the Renoir would be considered Homer's separate property.

In terms of distributing assets at death, California law says that the decedent's will may dispose of up to 1/2 of the community property and all of their separate property. Prob C §§100(a), 6101. 

From the above example, Homer is entitled to devise $50k to whomever he sees fits. Although in nearly every case, the deceased spouse will name the surviving spouse as their beneficiary. In regards to the separate property, Homer can bestow upon any lucky recipient the Renoir. Even if Homer devised the Renoir to somebody other than Whitney, she would not have the ability to contest the devise.   

In relationships where the spouses are on their first marriage, issues of devising more than the permissible share of the community property are seldom found. One would be very hard-pressed to find an example where the deceased spouse devised his or her share of the community property to somebody other than the surviving spouse. The rationale being is that if you died married, then you probably loved your spouse and thus wanted them to be the beneficiary of your estate. Call me crazy.

Conversely in blended relationships, i.e. marriages involving a second or third marriage, disposing of community property can be more problematic as the concern is that if the surviving spouse is named the beneficiary, the deceased spouse's estate might trickle down to a step-child as opposed to a biological child. The reason for this is because once a spouse dies, the community estate ends (Obviously the surviving spouse can re-marry but just go with me on this). The surviving spouse is then free to leave their estate to anybody. 

For instance, assume Homer had a child from a prior relationship, Sampson. Whitney despised Sampson and Whitney wrote her will which devised her estate to her brother Bill. Naturally Homer would want his estate to end up with Sampson instead of Bill. Hence, Homer writes his will to leave his portion of the community property, namely 1/2, to Sampson out of concern that Sampson will not receive anything when Whitney dies. 

Gift Causa Mortis

Hollywood often portrays the decrepit man, sitting in his deathbed, dictating to close confidants his last thoughts as his life slowly fades away. If this person makes a gift during this time, it is a "gift causa mortis." A key aspect of this gift is that it is considered revoked "if the giver recovers from the illness or escapes from the peril." Prob C § 5702. 

For example, Pops Winter was of the ripe old age of 85. He resided in Campbell, CA and lived in a California ranch home. One day Mr. Winter, known as old man Winter to the neighbors, was gardening in his backyard. His grandson, Shecky Winter was mowing the back lawn while Mr. Winter was tending to the rose bushes. Shecky, a loveable clutz of the highest order, proceeded to lose control of the lawn mower causing it to crash into Mr. Winter. The blades of the lawn mower eviscerated the lower body of Mr. Winter. Shecky, aghast that he had caused this tragedy, rushed to the aid of his grandfather. 

Mr. Winter had always worn an Omega watch which he had received for years of service with the city council of Campbell. Mr. Winter knew that Shecky was a likeable grandson who had been befallen by unfortunate brakes in his life. Having pity for his grandson and knowing that his life on earth was close to extinguishing, he took off his watch and handed it to Shecky, telling him to "take and enjoy it." Surprised by the generous gesture, Shecky accepted the gift and thanked his grandfather profusely. Shecky had usually worn cheap imitation watches, he often was hoodwinked into believing that the "Rolex" he purchased from the guy in the Wal-Mart parking lot was genuine. Upon seeing the accident, a neighbor called 911 and Mr. Winter was rushed to the local hospital. Due to the wonders of modern science, Mr. Winter miraculously recovered from his seemingly mortal injuries. 

Since Mr. Winter had recovered from the ostensibly fatal injury, the gift to Shecky, his Omega watch, was revoked. Thus, Mr. Winter was within his legal rights to request the return of the watch from Shecky. However, Mr. Winter declined to do so because the author wants to have a happy ending to this hypothetical. 

Annual Gift Tax Exclusion Amount for 2013

"Gift" is the painting's title

For the past couple of years the annual gift tax exclusion amount was $13,000. This meant that a person could gift up to $13,000 to another person without (a) having to file a gift tax return and utilizing a portion of their lifetime gift tax exemption amount or (b) filing a gift tax return and paying the gift tax in order to avoid a loss of a portion of their lifetime gift tax exemption amount. Of note, the gift tax applies to any type of property transfer, personal, real, intangible, etc. IRC §2511(a) Thus, the transfer of stock, a home or a musical copyright would count as a gift if certain conditions were met.

In October, the IRS announced that the annual gift tax exclusion amount for 2013 would be $14,000. The reason for the increase is to reflect inflation. In prior years, inflation did not merit an increase in the exclusion amount.

There is no California gift tax. Hence, the increase only affects the federal gift tax.

It should be noted that certain items are not subject to gift tax regardless of the size of the gift. For example, gifts made to charity, payment of medical expenses, payment of school tuition and intra-spousal gifts are all considered exempt from the gift tax. This means that a person could pay the entire tuition costs for a student attending McGeorge School of Law for Spring 2013, $21,486, and not have to worry about any gift tax liability or ramifications. I use McGeorge as a reference because I went to school there.

As of this writing, there has been no legislation affecting the estate and gift tax regime for 2013. For both of these items, the exclusion amount for 2012 is $5.12M. If no legislation is passed, the estate and gift tax will revert back to $1M exclusion limits for each. Still, the last time the estate and gift tax was addressed occurred in December 2010 in a lame duck session of Congress. Hence, just because it is the 11th hour, it does not mean that nothing will be enacted. 

So while the annual gift tax exclusion amount for 2013 has been addressed, the more important lifetime exclusion amounts for both gifts and estates remain a mystery. Ultimately, something will occur in the next month or so. Either the estate and gift tax will be amended to increase the lifetime exemption amount or nothing will happen and each will revert back to $1M. An optimist would say that at least some resolution will be reached shortly.

Foreign Inheritance Tax?

PD-1923

The United States, as famously stated, is a nation of immigrants. Naturally then, many U.S. persons have close relatives that reside abroad. For example, I have many close relatives living in Iran, namely Tehran and Shahmirzad, from my father's side of the family. Invariably, relatives residing abroad will unfortunately reach a demise at some point in time. It might then be possible for a U.S. person to be the beneficiary of that foreign relative's estate. A common question that is raised when a person inherits money from a foreign estate is, "do I have to pay taxes for inherited assets from a foreign source?"

The answer to this question is no, a U.S. person does not have tax liability in regards to assets inherited from a foreign estate. However, there are reporting requirements when certain thresholds are met. 

For example, assume John Quimby is a U.S. citizen residing in Los Altos, CA, my hometown. John has a wealthy aunt that lives in Australia and maintains citizenship there. The aunt does not have a green card or any association with the U.S. The aunt pens a will and names John the sole beneficiary of her estate, which consists solely of $101,000 in a bank account. John's aunt later passes away when she is ambushed by an angry flock of seagulls at Bell's Beach. The aunt's executor eventually wires to John the $101,000 when the estate is closed. John will not have to pay the U.S. government taxes for this inherited amount. However, John will have to file with the IRS Form 3520 because the amount received from the foreign estate exceeds $100,000.

One rationale for imposing no tax on inherited assets is that the decedent presumably already paid taxes on their estate. If the U.S. government imposed a tax on a foreign inheritance, this would arguably constitute double taxation which some find objectionable.

Another rationale for imposing no tax is that this policy facilitates the in-flow of capital to the U.S. By not imposing a tax, this encourages foreigners to name a U.S. person the beneficiary of their estate because the foreigner knows that a portion of the inheritance will not end up in the government's coffers but rather will entirely end up in the beneficiary's hands.

What is important to remember is that Form 3520 relates to an inheritance. If a U.S. person receives money as a result of investment or services, this would not be considered a gift. Rather it would be considered foreign taxable income. Regardless, it should not be difficult to distinguish between inheritance and income.

There is no California equivalent to IRS Form 3520. Thus, all that is required of a foreign estate beneficiary is to file with the IRS.

Finally, if you receive an email from a supposed Nigerian prince informing you that you are the beneficiary of an astronomical amount of money, it might just be a scam. Call me crazy.

Estate and Gift Tax: Clawback

The future of the estate and gift tax is muddled to put it mildly. If no legislation is enacted before the close of the year, the estate and gift tax exemption limits for 2013 will revert back to the $1M threshold. For this year, 2012, the current estate and gift tax limit is $5.12M. In case you are curious as to the $120,000 part of the figure, when the estate tax was modified in 2010, it set the limit at $5M for 2011 and pegged it to inflation for 2012.

The estate and gift tax system are linked together so as to prevent somebody from giving away their entire estate before they die. This is known as the unified credit. If a person uses up a portion of their gift tax exemption, assuming they decline to pay the gift tax, this lowers the amount of their estate tax exemption. If a person never uses any of their lifetime gift tax exemption their full estate tax exemption remains intact.

Due to the rather large estate and gift tax exemption for 2012, $5.12M, this intrigues many an affluent parent, uncle, grandparent, etc. who wish to take advantage of the current scheme and gift a substantial amount of property to a lucky soul or souls tax-free. However, due to potential fluctuations in the estate and gift tax system, this attractive option is not as clear-cut as it appears. The following example illustrates this point.

Assume Mary Magnanimous is a wealthy widow worth $4.12M living in San Francisco, CA. She decides to gift $3.12M in cash to her neighbor James Joyce in 2012. Fast forward to January 2013 and Mary passes away with an estate worth $1M. According to the estate and gift tax regime, lifetime gifts are added to the value of a decedent's estate. This is where the term "clawback" comes from. In other words, gifts made during the decedent's life are brought back into equation when valuing the decedent's estate. The problem for 2013 is what happens to a person like Mary Magnanimous who decides to gift an amount in excess of $1M, will the gift be subject to clawback or is the gift not subject to clawback? In other words, when Mary passes away in 2013, will her estate be valued at $1M or will it be valued at $4.12M. The former figure represents Mary's estate value excluding her $3.12M gift in 2012 whereas the latter represents Mary's estate value including her $3.12M gift in 2012.

The application or non-application of clawback is enormous. If clawback is applied, her estate would be subject to a 35% estate tax on the amount above $1M, namely $3.12M, which results in a tax of $1.092M owed to everybody's friend, the IRS. Conversely, if clawback is not applied,  Mary's estate tax would be $0 because her estate of $1M would not exceed the exemption amount, $1M.    

Unfortunately, there is no definitive answer as to whether clawback will occur or not. I have read online that clawback will occur automatically. This is simply not true. Don't believe everything you read on the Internet! More importantly though, the current law does not directly address the clawback issue. 

We just have to wait and see what happens to the estate and gift tax system for 2013. The very likely scenario is that a lame-duck session of Congress will take up the issue in December. That is what happened in 2010 when the estate and gift tax was set to revert back to $1M in 2011 as well.

Child's Bank Account

Many people, armed with good intentions, often add their child to their bank account. As said by a relative of mine, "mom just wanted to make sure that if something happened to her, we would have access to her account to pay her bills." 

This type of do-it-yourself estate planning is ill-advised for at least 3 reasons:

1. Creditor attachment

If the child were to have a judgment rendered against them, the bank account may be subject to levy, i.e. they take your money away. While the probate code says that the ownership interests in a joint tenancy bank are initially allocated in proportion to contribution, whereby the parent can argue that the child supplied no funds. Prob C § 5301. The parent will nonetheless have to prove that the child supplied nothing to account. Thus, the parent might have to hire legal counsel to show that all funds can be traced to them instead of the child to avoid attachment.

2. No duty to account

In a curious court ruling, Lee v. Yang (2003) 111 CA4th 481, the court held that an account owner who withdraws more than that owner's share of account contributions has no duty to account to the other owner. Thus the child could virtually drain the account of everything and not have to account to the parent. Of note, a current bill in the California legislature would reverse this court ruling. Still, for the time being, the child could freely withdraw the entire balance of the account and not have to reimburse the parent for the withdrawn funds.

3. Gift taxes

Each person is allowed to gift to another, subject to limited exceptions, $13,000 per year. If you have a bank account worth $50,000 for instance and you add your child's name to the account, you arguably have gifted more than the allotted $13,000 to the child because the child may withdrawal the entire balance. In turn, you have to file a gift tax return, IRS Form 709, or pay the gift tax. Either way, a gift tax return will have to be filed. 

What can a parent do then?

For starters, a parent should not add their child's name to the account. 

The ideal solution is to transfer the account into a trust.  If the parent ever becomes incapacitated, the child can become the trustee and manage the account on behalf of the parent subject to various fiduciary duties. These duties are not imposed on the child when they are simply a co-owner of the account.

An alternative is to name the child the pay-on-death beneficiary. When the parent passes away, the child will merely have to show the bank (1) a death certificate and (2) some form of identification, e.g. a driver's license, to inherit it. The one drawback with a P.O.D. is that the child could not access the funds while the parent is alive. A P.O.D. is only effective at death. Hence, if the parent ever becomes incapacitated, the child could not gain access to the funds at that point unlike a trust.

Death Taxes

When a person passes away, there are numerous taxes associated with the transfer of the decedent's assets. The following are examples of these transfer taxes.

Estate Tax

The Estate Tax is a tax levied on a decedent's estate when the estate's amount exceeds the applicable exclusion amount. For example, the current exclusion amount in 2011 is $5M. Thus, if a single person were to pass away next week and their estate was worth $10M, their estate would be, generally speaking, subject to the Estate Tax. The Estate Tax's top rate for 2011 is 35%.

The future of the Estate Tax is under considerable debate at the moment. The applicable exclusion amount is set to revert back to 2003 levels, $1M, if no action is taken for the year 2013, the $5M exclusion expires after 2012. It is likely that the Estate Tax will be revisited sometime in late 2012 because Congress has a habit of waiting until the last moment to resolve anything.

Gift Tax

The Gift Tax is a tax levied on the transfer of property between parties absent consideration. For example, if Donald gave the keys to his Ferrari to his friend Doug out of the blue and said "the car is yours to keep" and Doug then hastily sped off in the Ferrari, such would constitute a gift. The reason being is that there was an (1) intent to make a gift, Donald was not asking for anything in return, (2) delivery of the gift, Donald gave his keys to Doug and (3) receipt of the gift, Doug drove off with the car.

The Gift and Estate Tax are linked together to prevent a person from giving away their estate before they die in order to avoid the Estate Tax. Thereby, giving away large gifts over one's lifetime can reduce the amount of the Estate Tax available to that person on their death. So before you decide to give away all of your possessions on your death bed to avoid the taxman, remember the preceding sentences.

The current amount a person can give away before they incur Gift Tax is $5M. Again, this figure is under considerable debate as well because the figure has been tinkered with many times over the past couple of years.

Generation Skipping Transfer Tax

The GST Tax is designed to address the situation where a person transfers property to a "skip person" that avoids the application of the Gift and Estate Tax. This "skip person" is almost always a grandchild. Hence, the law typically arises when a grandparent transfers property to a grandchild. For example, a grandparent might create a trust that distributes income derived from the trust to the child and the grandchild, and upon the child's death, the principal will be distributed to the grandchild.

The GST Tax uses the same applicable exclusion amount as the Estate Tax, $5M in 2011. 

The GST Tax is largely irrelevant for the vast majorities of individuals because not many people have millions of dollars earmarked for a grandchild's inheritance through a trust.

Property Taxes (Prop 13)

If the decedent's estate owned real property, then property taxes will need to be addressed. Prop 13, the California constitutional amendment that governs property taxes, says that each piece of real property can be assessed a 1% levy and each year the property's assessed value can be at most raised 2% from the previous year. However, before you tell me that I am uninformed because your property tax bill is clearly greater than 1% of the assessed value, please remember that cities and counties are allowed to tack on various fees for infrastructure projects and pension obligations. 

Estate Planning Fees

A common question from a homeowner who is interested in writing a revocable trust, is what are the costs and obligations, other than attorney fees, involved with the process? The following are
some topics raised by that question.
 
Property taxes
 
Whenever there is a “change in ownership”, the property taxes for that particular parcel of land will be re-assessed to its current the fair market value. Rev & T C §60. For example, if Bobby purchased from Sam a home for $500,000 in San Jose in 2007, Bobby’s property taxes would be based off of that $500,000 figure. Now assume that Bobby had purchased the property for $40,000 from Sam in 1979. In 2011, Bobby decides he wants to write a trust to avoid probate. However, Bobby is hesitant to write a trust and fund it with his home. He is worried that the Santa Clara County Assessor will try to re-assess his property taxes to its 2011 fair market value and in turn raise his property taxes. Fortunately for Bobby, California law is very specific in saying that a home transfer to a revocable trust is not considered a “change in ownership.” Rev & T C § 62(d)(2). Thus, the fear of re-assessment for property taxes when funding a revocable trust with a home is unwarranted.

Documentary transfer tax

In the case of a real property transaction, the transfer of a home from seller to buyer for example, there is the inclusion of a fee known as the documentary transfer tax. Rev & T C § 11911. The deed, the document which denotes the identity of the seller and buyer, must show the amount of the documentary transfer tax due. Rev & T C §11932. For reference, the tax rate is $0.55 per $500 of value (0.11 percent) sold. Rev & T C §11911.

Since a trust needs to be properly funded, whereby a trust transfer deed will need to be drafted, the documentary transfer tax becomes an issue, albeit only superficially. The reason for the superficiality is that California law states that a transfer of a home to a revocable trust is exempt from the fee imposed by the documentary transfer tax because there is no consideration tendered. Rev & T C §11930. Therefore, the documentary transfer tax is not an issue when a homeowner funds his or her trust when their home.
 
Income tax returns
 
Most revocable trusts are known as “Grantor Trusts” in IRS language. IRC §§671, 676. This means during the time that the trust is revocable, the settlor, the person who wrote the revocable
trust, is not required to file an additional tax return for the revocable trust. Hence, the creation of a revocable trust will not result in the settlor having to file more paperwork with the IRS and
California Franchise Tax Board.
 
Gift taxes
 
The inapplicability of gift tax in regards to creating a revocable trust bears mentioning to erase any confusion. There is no gift tax if you transfer property from yourself to a revocable trust that you created. A revocable trust is not a separate legal entity. Goldberg v. Frye (1990) 217 CA3d 1258. Hence, if you transfer property to your revocable trust it would be as if you handed an item from
your left-hand to your right-hand. Thus, there is no gift tax in the revocable trust creation equation because there is no third-party involved.
 
Recording Fees
 
Once a person has executed a trust transfer deed, it needs to be recorded in order to give proper notice to third-parties that the buyer is now the owner of the property. However, whereas there are exemptions with the previously mentioned fees and taxes, there is no such exemption for recording a deed. Each county has their own schedule of fees to record a document. For example, to record a deed in Santa Clara County, it is $15 for the first page and $3 for each additional page. The deed may be presented personally to the clerk-recorder or you can mail it in.
 
Notary Fees
 
It should be mentioned that a notarized signature is not required to execute a revocable trust. In that, there is no California law that says that a signature has to be notarized when executing a revocable trust. However, out of custom, a signature is notarized when executing a revocable trust.

A California notary may charge up $10 per signature when executing a revocable trust. Govt C § 8211. Often times, the attorney drafting the trust doubles as a notary and the fee is waived.

Gift Tax Law

In a previous post, I discussed the Estate Tax and the nuances behind it. Another one of the transfer taxes is Gift Tax. Here are some questions commonly posed in regards to Gift Tax. 

1. What is Gift Tax 

The Gift Tax is a transfer tax imposed by law where a person, the donor, gives the recipient, the donee, an item of property free of consideration. In IRS speak, Gift Tax is imposed on lifetime transfers of property for less than adequate and full consideration in money or money's worth. IRC §§2501(a), 2512(b). For example, if I gave my 325i BMW to my cousin Bob for free, this would constitute a gift and Gift Tax would follow. 

2. What gifts are always excluded from Gift Tax? 

Contributions made for the following items, regardless of the contribution amount, are exempt from Gift Tax: medical expenses, educational expenses, charitable donations and gifts between spouses who are U.S. citizens. IRC §§2503(e); 2522(a); 2523(a). 

3. Who pays Gift Tax? 

Surprisingly the donor pays Gift Tax rather than the donee. IRC §2502(c); Treas Reg §25.2511-2(a). For instance, if Donald gave Hugo a $20,000 Rolex watch as a gift, then Donald would be liable for paying Gift Tax. 

4. What is the annual exclusion amount? 

The annual exclusion amount represents the figure at which a donor may avoid Gift Tax liability if they gift property for less than or equal to the annual exclusion amount.

In case you are wondering, the annual exclusion amount for 2011 is $13,000. IRC §2503(b). Spouses can gift up to $26,000 to one individual because California is a community property state.

The annual exclusion amount is also not cumulative. Thus, if a donor uses less than their annual exclusion amount for one year, they cannot transfer the surplus to the next.  For example, if Donald gave Hugo $10,000 in 2011, he could not give Hugo $16,000 (assuming the annual exclusion amount stays the same) in 2012. 

5. How does Gift Tax harmonize with estate planning? 

In light of the annual exclusion amount, some clients utilize Crummey Trusts for their children while other clients create irrevocable life insurance trusts (“ILITs”). 

6. What prompted Gift Tax? 

The Gift Tax was enacted by the federal government to prevent a person from giving away all of their property to avoid the Estate Tax. Since the Estate Tax is imposed only at death, a person could presumably drain their estate through gifting over time to prevent its application. Not surprisingly, the federal government closed this loophole in 1932 when it instituted Gift Tax. 

7. What is the Gift Tax rate? 

The Gift Tax rate starts at 18% and caps out at 35%. IRC §2502(a)(2). 

8. What is the legal definition of a gift? 

The following link explains this well. 

9. Is there a federal Gift Tax? 

Yes, there is a federal Gift Tax. All that is mentioned in this post relates to the federal Gift Tax. 

10. Is there a California Gift Tax? 

No, the State of California does not impose Gift Tax. The California Gift Tax was repealed by the California electorate via ballot proposition on June 8, 1982. Rev & T C §§13301-14302. 

11. Is inheritance considered a gift? 

Inheritance is not considered a gift in the strict legal sense. While in substance inheritance is very much like a gift in that you did nothing to earn the property, inheritance is subject to the Estate Tax not the Gift Tax. 

12. Who can I give gifts to? 

Anybody is eligible to receive a gift on your behalf. Furthermore, there is no limit on the number of donees that a donor may benefit. For example, if a donor had $130,000, he or she could gift $13,000 to ten different individuals absent Gift Tax liability. 

13. Is extending a loan to a relative a gift? 

Yes, provided you extend to the borrower-relative a below market interest rate. Federal law stipulates the minimum interest rates that must be used between a lender (you) and a borrower (relative) and lays out the income and Gift Tax consequences if the loan incorporates an interest rate below the required minimum rate of interest. IRC §7872. 

14. Can I gift services? 

No, Gift Tax applies to the transfer of property, not to services. 

15. How do you value gifts? 

A gift is valued at its “fair market value” as of the date of the gift. IRC §2512(a). Fair market value is defined as "the price at which such property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts." Treas Reg §25.2512-1. 

What is a Gift

In the spirit of Christmas, I thought it would be appropriate to legally define a “gift.” Yes, there is a legal definition to a gift. Consequently, a gift is a transfer of property that is made voluntarily and without consideration. The following elements are necessary for a valid gift U.S. v Alcaraz-Garcia (9th Cir 1996) 79 F3d 769; 13 Witkin, Summary of California Law, Personal Property §124 (10th ed 2005)):

1. There must be an intent on the part of a donor having capacity to contract to make an unconditional gift;

2. The donor's intent must be to make a present gift of the property (if the intention is to make a future transfer, there is no gift);

3. There must be an actual or symbolic delivery of the gift, i.e., the donor must relinquish control of the property; and

4. The donee must accept the gift.

For example, if I wrapped up my favorite burgundy sweater in a box, presented it to my friend Dan on Christmas day and Dan accepted the sweater, this transaction would qualify as a “gift” in legal terms. Since there was intent on my part to gift the sweater to Dan because I wrapped it up in a package, I delivered the sweater to Dan by presenting it to him in a box and Dan accepted the gift when I presented it to him.