Estate Tax in 2014

When a deal was reached to avert the fiscal cliff back in December 2012 (how time flies), the baseline for the estate tax was made permanent. Whereas before the estate tax was subject to periodic renewal, or repeal as in the case of 2010, the American Taxpayer Relief Act of 2012 ("ATRA") ushered in a permanent baseline estate tax amount.  This baseline amount, $5M in 2010 dollars, would be indexed to inflation for the upcoming years. The chart below shows how the estate tax has increased incrementally since 2010.

Of note, the ATRA is subject to amendment or repeal, but such would require an act of Congress and Presidential approval. Previously the estate tax needed re-authorization periodically because the law lacked the required number of votes to make the baseline amount permanent. This changed when the ATRA received enough votes to make it permanent in the U.S. Senate. This was welcome news to attorneys and clients because the estate tax is no longer, presumably, a moving target that is subject to the whimsical nature of politics.

Since the estate tax was pegged to inflation, the IRS has recently released the inflation adjusted figure for 2014. For decedents who pass away in the year 2014, the applicable exclusion amount will be $5.34M. In plain terms this means that if a decedent passes away in 2014 and their estate is equal to or less than $5.34M, no estate tax will be due. 

The decedent's estate includes basically any asset wherever located. In other words, pretty much everything you own, regardless of location, is valued for estate tax purposes. However, few estates are actually affected by the federal estate tax given that the applicable exclusion amount is quite large. Still, this post is only dedicated to the federal estate tax and each state is free to impose their own estate tax. For example, you may be reading this article and be domiciled in New York state (hat tip: Google Analytics), which does impose an estate tax. For reference, California does not impose an estate tax.

Year                   Amount Excluded         Maximum Tax Rate

2001                   $675,000                      55%

2002                   $1M                             50%

2003                   $1M                             49%

2004                   $1M                             48%

2005                   $1M                             47%

2006                   $2M                             46%

2007                   $2M                             45%

2008                   $2M                             45%

2009                   $3.5M                          45%

2010                   Repealed                      0%

2011                   $5M                             35%

2012                   $5.12M                        35%

2013                   $5.25M                        40%

2014                   $5.34M                        40%

Also of note is the fact that the annual exclusion amount for gift taxes will continue to be $14,000 for 2014 per the same IRS memorandum. This is the same figure that is used for 2013. 

In plain English, this $14,000 figure represents the maximum amount a person can gift to another person in the 2014 calendar year without having to deal with gift tax liability. This total does not include payment of tuition, payment of medical expenses, charitable donations and gifts between spouses as those are considered exempt gifts. 

Laches - Equitable Defense

Invariably a person will make a mistake and a claim will arise. Yes humans are not robots despite what Skynet, the Internet or some late-night informercial tells you. At that time, the claimant is expected to pursue their cause of action in a timely manner. If the litigant unreasonably delays in bringing suit, even though the statute of limitations has not run, they may be denied equitable relief.

The legal term for this affirmative defense is "laches." California case law requires that to prove laches, the defendant must demonstrate unreasonable delay on the part of the plaintiff, plus either prejudice to the defendant because of the delay or disregard by the plaintiff towards the defendant's conduct. Johnson v City of Loma Linda (2000) 24 C4th 61. The issue of laches has to be raised by the defendant, otherwise it is considered waived. Getz v Wallace (1965) 236 CA2d 212. Thus, the defendant cannot answer the suit and then raise the issue of laches later on. In other words, you use or lose it during the initial pleading stages.  

For reference, the statute of limitations is the window of time available to a litigant to assert their right, claim, etc. If the litigant does not assert their claim within the applicable time frame, typically the filing of a lawsuit, their claim is time-barred and is subject to dismissal by the defendant. For example, the statute of limitations for breach of a written contract is 4 years from the date of breach. CCP § 337. This means that the non-breaching party has 4 years from the date of breach to file a lawsuit against the breaching party.

It should be noted that the statute of limitations for various causes of action is not uniform. The statute of limitations for breach of a written contract is 4 years whereas the statute of limitations for breach of an oral contract is 2 years. CCP § 339. Hence, it is critical to know which cause of action is being plead.     

Also of note is the term "affirmative defense." An affirmative defense is where the defendant does not deny the plaintiff's allegations, but rather admits to such conduct but is nonetheless not liable for another reason, such as laches.  Thus even if the defendant conducted themselves in a wrongful way, laches might nonetheless save them if the plaintiff dithered in bringing suit.

Ultimately a plaintiff seeking equitable relief has a few hurdles to keep in mind. First, they need to file their claim within the applicable statute of limitations period. Second, they need to be aware of various equitable defenses such as laches. 

One Must be an Attorney to Adverstise as a Notario Publico

In order to become a California notary public one must basically take a notary educational course, pass the notary exam, pass a background check and obtain a notary bond. 

Conversely in Mexico, to become a notary public ("Notario Publico") one must be an attorney and pass a series of exams. Upon successful completion, the notary is given the keys to the city in which they practice. No not really. They are actually given a patent by the state government of Mexico in which they practice. 

Various documents in Mexico must be notarized, thereby an attorney will invariably be able to inspect certain documents. Such is not the case in California as there is no requirement that a notary be an attorney. Thus a notary in California, unless they are an attorney, cannot legally examine documents that are set to be notarized. The reason being is that since a notary is not a lawyer, they do not have the authority to engage in the practice of law, i.e. a law license. If the notary does engage in the practice of law, and is not an attorney, he or she exposes themselves to criminal liability. California law is specific in making it a crime to practice law without a license. Bus & P C § 6126. 

Tragically, many immigrants from Mexico have come to California and sought the services of a notary thinking that the notary is a lawyer. Almost always the notary will not be an attorney. Yet to the Mexican immigrant, they believe that the notary is really an attorney because of their cultural background. Hence, the Mexican immigrant can easily be lured into believing that the notary is a lawyer and will follow the advice they give them, which is typically erroneous or incomplete. 

In light of this, the California legislature passed the following bill (AB-1159 - creates Bus & P C § 6126.7):

It is a violation of subdivision (a) of Section 6126 for any person who is not an attorney to literally translate from English into another language, in any document, including an advertisement, stationery, letterhead, business card, or other comparable written material, any words or titles, including, but not limited to, “notary public,” “notary,” “licensed,” “attorney,” or “lawyer,” that imply that the person is an attorney. As provided in this subdivision, the literal translation of the phrase “notary public” into Spanish as “notario publico” or “notario,” is expressly prohibited.

So the next time you see the phrase “notario publico” on a sign, the person behind the sign must be an attorney or else they face financial consequences. Bus & P C § 6127.6 statute further reads:

(c) (1) In addition to any other remedies and penalties prescribed in this article, a person who violates this section shall be subject to a civil penalty not to exceed one thousand dollars ($1,000) per day for each violation, to be assessed and collected in a civil action brought by the State Bar.  

How long does probate take?

It is well-known that probate is a very long judicial process. The following are some of the required steps to be taken in probate, though the process for each estate is unique.

First a personal representative must be appointed by the court. Second, following appointment of the personal representative, they must inventory the decedent's assets and have them appraised. Third, the personal representative must satisfy all valid outstanding claims against the decedent's estate. Fourth, the personal representative must petition the probate court to terminate the probate proceeding, i.e. petition for final distribution. 

A natural question then is, how long should probate take?

Depending on which county, probate typically takes between 7-12 months to complete. One reason for the gap is because some courts have a clogged probate calendar so hearing dates are scheduled far in advance. In particular, I have heard from other attorneys that Los Angeles County has a lengthy waiting period when filing new probate cases. Furthermore, sometimes it is difficult to locate beneficiaries or assets. Without a distinguishing description, a beneficiary can easily become ostensibly "anonymous." For instance, if the beneficiary's name is John Brown, it might be cumbersome for the executor to ascertain which John Brown the testator was referencing in their will.

It should be noted that there is no accelerated probate process. At the very least, 6 months are taken up by 3 steps. First, a petition for probate is typically calendared at least 1 month in advance. Second, the window to file a creditor claim is 4 months months. Third, a petition to distribute the estate is typically calendared at least 1 month in advance as well. Thus the beneficiary of an estate has to wait at least half a year, whether they like it or not.

However, the California probate code imposes a deadline to either close the account or provide a status report once a personal representative has been appointed.

Probate Code § 12200 reads:

"The personal representative shall either petition for an order for final distribution of the estate or make a report of status of administration not later than the following times: 

(a) In an estate for which a federal estate tax return is not required, within one year after the date of issuance of letters.

(b) In an estate for which a federal estate tax return is required, within 18 months after the date of issuance of letters. 

Thus, a beneficiary does not have to wait an indefinite period of time without recourse. 

For example, in early 2013, Thomas writes a will and passes away on August 15, 2013. In the will, Thomas names his neighbor Enzo as the executor and bequeaths his entire estate, which consists of a $600,000 home in Campbell, CA and a $50,000 bank account, to his nephew Boris. Enzo applies to become the executor and is appointed such on November 1, 2013 by the probate court. Upon becoming executor on November 1, 2013, Enzo needs to either petition to close the estate or file a status report by November 1, 2014. The reason that Enzo is not given 18 months is because no estate tax is due for Thomas' estate. The estate tax threshold in 2013 is $5.25M, which Thomas' estate obviously falls below. Thereby 12 months, instead of 18 months, is used as the measuring window of time.   

Prop 13 - Split-roll real property taxes

 
Real property taxes in California are famously governed by Proposition 13. This landmark proposition was passed by California voters on June 1976 by a margin of 62.6-34 (3.4% of ballots were invalid or blank). Prop 13 limits the taxable rate to 1% of the assessed value and limits the increase in assessment to 2% per year.  Numerous clients have told me over the years that their home is "under Prop 13" when in reality every home is governed by Prop 13. My belief is that they owned their home back in 1978 when Prop 13 caused assessment values to be rolled back to 1975 values. To be clear, if you own any real property in California, the property taxes for such are subject to Prop 13. 

The following illustration depicts how Prop 13 works. Assume a person purchases a home for $100,000, the property taxes could not exceed $1,000 and the assessable value of the home could not exceed $102,000 for the next year. It should be noted that many other levies are listed on a property tax bill, e.g. school bonds, library bonds, etc.    

Similarly, property taxes for commercial property are enforced in the same manner. That is, commercial property is levied and assessed at the same rate as residential property. In numerous areas of the law residential real property and commercial real property is treated differently. For example, leases involving residential real property carry with them an implied warranty of habitability. There is no such warranty in terms of leasing commercial property. A more obvious example is zoning laws. The activities that may be conducted in or on residential real property is mainly limited to human occupancy or cottage industry. Whereas with commercial real property such is naturally zoned for commercial enterprise as opposed to personal living spaces. 

However, in terms of real property taxes, taxation is equally applied to residential and commercial real property. Thus, the owner of a strip mall with an assessed value of $2M will be taxed at the same rate and be subject to the same assessment increases as the owner of a $2M home.

In light of this, some California politicians have proposed to create a two-tier system, with residential real property taxed under one regime and commercial real property taxed under a different regime. "Split-roll" is a term used to describe this proposed system. For example, Assembly Bill 2492 (Ammiano) sought to modify the definition of when the sale of a commercial property results in a "change in ownership." Of note, when a "change in ownership" occurs, the subject real property is re-assessed. Since real property almost invariably appreciates over time, a change in ownership will result in a higher assessed value and corresponding higher real property tax assessment.

Various bills that would usher a split-roll real property tax system have been proposed, but none have passed so far. One principal reason why is because to tinker with Prop 13 requires a 2/3 majority in the state Senate and state Assembly, as it is a constitutional amendment.

Since revenue from increasing property taxes is in the tens of billions of dollars, there are numerous interested parties in favor of preservation or modification. Thereby the idea of a split-roll system will carry on for the foreseeable future.

Fiduciary Duties of a Trustee

In need of some tender loving care........

When a person becomes trustee, one of their duties is to safeguard and make productive trust property under the circumstances at hand. Prob C §§16006-16007. A trustee cannot generally stand by idly and watch trust property rot, decay or deteriorate. Yes, the law unsurprisingly does not look too kindly on the lethargic. A common scenario where this arises is when a son or daughter inherits the family home from their parents. 

Many baby-boomers are resistant to re-locating to a retirement home. The comforts of living in the same residence they have called home for decades compels them to stay typically. This results in a home that can be in need of maintenance and repair given that many baby-boomers are not equipped to handle some the rigors of home ownership, e.g. gardening, household repairs, etc. This is not an indictment of baby-boomers but rather an honest assessment given that they naturally have physical limitations. Ultimately, the children will inherit a home that is habitable but may need renovation and/or improvement.

I was reading the probate file of a case in Alameda County recently. The decedent owned a home in Oakland, CA but had no close relatives living near by. When the decedent passed away, there was nobody available to immediately occupy the home. Sadly, vandals, squatters and drug-users trickled into the home as it was unoccupied. 

Assuming that the decedent had created an income-producting trust for their grandkids, the trustee would have been entrusted with safeguarding the home. Prob C §16006 This would entail ejecting or removing any occupants that would qualify as trespassers, i.e. squatters and drug-users Furthermore, the trustee would need to ensure that proper safety precautions were in place. Thus, they would probably need to check to see that all outdoor lights worked, the door locks were properly functioning, etc. Furthermore, the trustee would also be entrusted with making the property productive. Prob C §§16007. Thus it would be prudent for the trustee to inspect the property for maintenance issues, e.g. inspection of the roof, plumbing, heating, water and electrical. Since a productive home only results from a functional home.    

Failure to fulfill these fiduciary duties, i.e. safeguard trust property and make it productive under the circumstances, can result in severe consequences for the trustee. First, the trustee can be removed from the office of trustee. Prob C § 16420(a)(5). Second, a court can compel the trustee to redress a breach of trust by payment of money or otherwise. Prob C § 16420(a)(3). Third, a court can compel the trustee to act or not act in a certain way, i.e. an injunction. Prob C § 16420(a)(1)-(2).