Estate Planning Hits Close to Home

Estate planning deals with two of life’s major anxieties--money and death--which explains why many people avoid the subject until it’s too late.

Even the phrase may sound forbidding, or at least unfamiliar. And the topic doesn’t crop up much at cocktail parties or back-yard barbecues.

Estate planning is something you’re more likely to think about after a major illness strikes a family member, a friend dies or you watch a grandchild get married.

Basically, estate planning simply means deciding in advance who gets which of your assets after you die and under what circumstances.

Using the right estate planning tools, such as trusts or partnerships, you can even give away some of your wealth to family, friends or charity while you’re living. Some strategies offer tax breaks and income. Plus, these tools can save your heirs a lot of money.

Creating an estate plan takes a lot of serious thinking about your assets and what to do with them, but the effort can bring peace of mind and a great sense of accomplishment.

Estate planning is particularly important for people who have owned Southern California real estate--either their own home or rental property--for a considerable length of time.

The long-term appreciation, combined with a paid-off mortgage and other possessions (cars, jewelry, etc.), can push the value of their estate over the $600,000 lifetime exemption.

Federal taxes on assets exceeding that individual exemption range from 37% to 55%. (There are no estate taxes in California.) Congress has made periodic efforts to reduce the exemption, but no change is contemplated in the near future.

Without estate planning, legal experts point out, prospective heirs can be left with less than half of an estate’s gross value, the balance going to the federal government. And don’t forget all those debts that need to be settled after you die. The gross estate, the one you thought you were leaving, can drop dramatically without planning.

Many people think they’ve done enough planning. They’ll point to a will or a living trust as evidence of their efforts. But these devices, valuable as they are, should only be a starting point for longtime owners of valuable Southland real estate, according to estate planning experts.

Some legal experts are even urging individuals as young as 50 to take stock of their assets now, especially if they are wealthy.

Kathryn Ballsun of West Los Angeles, an estate planning attorney for 17 years, suggests that “it’s important to do something while you’re young, rather than get to a point where you’re desperate to make a decision that might be the wrong one.”

Attorney Ken Wolf of Marina del Rey even goes so far as to suggest that “everyone should have an estate plan, especially if they have real property. It’s important to look ahead.”

Century City estate planning attorney Jon J. Gallo sees the current depressed value of real estate as a “window of opportunity” for the next three years or so.

That’s because property put into one of two irrevocable trusts discussed in this series goes in at its fair market value at the time of the transfer. Future appreciation of the property will escape taxation when the owner dies. So why not transfer it into the trust now, while its value is depressed?

For people whose home or rental property is a big part of their assets, experts recommend three time-tested estate planning tools: the qualified personal residence trust (QPRT); the charitable remainder trust (CRT) and the family limited partnership (FLIP).

Despite changes in tax laws since 1986, including the most recent legislation, these devices still pass IRS scrutiny, estate planners say. Each offers different benefits and imposes different requirements, and each will be considered in detail in this series. One--or more--of the strategies might work for you.

Briefly, here’s what each of these estate planning tools does:

--The qualified personal residence trust (QPRT) removes your home from your estate by passing it to your children (or a friend) during your lifetime while still allowing you to live there, although you will eventually have to pay rent. If you live in a highly appreciated home and want to remove it from your estate now, this popular technique could be for you. And, if you own a vacation home, you can create a separate QPRT for it as well. See accompanying story, K1. --The charitable remainder trust (CRT) removes your home or rental property from your estate by allowing you to create a tax-exempt trust that offers you substantial tax breaks and income during your lifetime and distributes the remaining funds to the charity when you die.

Westwood residents Alan and Elaine Armer have accumulated $4.75-million worth of real estate during their 44-year marriage. With the guidance of an estate planning attorney, the Armers have created a CRT and have named Cal State Northridge’s Radio, Film and Television Department and to Jewish Big Brothers of Los Angeles as recipients of the trust proceeds when they die.

You’ll hear more about the CRT in Part 2 of this series, which will be published in the Real Estate section on May 22.

--The family limited partnership (FLIP) is a way of making gifts of real estate to children at deeply discounted prices. As long as the value of these gifts falls below the $600,000 lifetime exemption for each parent, the children will avoid gift taxes. A FLIP also serves to reduce the value of the estate when the parents die. The FLIP is the most sophisticated and expensive of estate planning techniques, and especially appropriate for families who own several pieces of real estate.

Albert Sakharoff and his wife, Micheline, came to Southern California almost 50 years to start their married life. Now the Sakharoffs, both 70, have assets estimated at $9 million--much of it in real estate--and they want to pass their wealth to their only daughter, as free from taxes as possible.

To accomplish this, the couple used an attorney to set up a FLIP, which you’ll more about in Part 3 of this series, which will be published on May 29.

Expert legal advice is essential to implement each of these estate planning strategies. They are much too complicated to tackle on your own. Even Berkeley’s Nolo Press, publisher of self-help legal books, suggests using an attorney for sophisticated estate planning.

Because the QPRT and CRT are irrevocable, care must be taken when making estate planning decisions. “People must realize what’s being gained and what’s being given up,” warned Edna R. S. Alvarez, a veteran Westside Los Angeles estate planning attorney.

She urges prospective clients to “look closely at family considerations, the irrevocability of the plan and the terms of the plan and not just at the potential tax savings.”

Which is why estate planning attorneys ask prospective clients: “Will you still be financially comfortable if you give this property away?” and “Will you be able to maintain your present lifestyle?”

Pasadena attorney William Johnstone advises: “Don’t talk about making gifts during your lifetime unless you’re talking about surplus assets.”

“I’m concerned about people giving away (property) and then having to look to the kids for help,” said veteran Beverly Hills estate planning attorney Ron Kabrins.

On the other hand, maybe you’ve been thinking about creating an estate plan and have finally decided to do it. Then this series is for you. The popular qualified personal residence trust (QPRT) is explained in the accompanying story.