San Diego Estate Planning Team

From the Desk of Kristina R. Hess, KR Hess Law, P.C., San Diego Living Trust, Estate Planning Attorney (Carmel Valley, Del Mar, Solana Beach, Rancho Santa Fe):

Serving all of San Diego County

A Team Approach is often the best way to tackle Estate Planning.  Estate planning often involves competing interests, goals, and objectives.  Sometimes accomplishing one purp0se will completely spoil another one.

Case in point:

(as usual this is fictitious and all names and circumstances have been changed)…

Sam and Sally live in Carlsbad and they have amassed quite a bit of real estate holdings over the years.  Years ago their estate planning lawyer in San Diego advised them to put their real estate properties into corporations.  So, they implemented an estate plan that included the creation of corporate entities to run their real estate holdings.

Fast forward 10, 15, 20, 30 years and Sam and Sally are now getting older and are in the sunset phase of life.  Their tax advisor noticed that due to depreciation and other tax planning activities, appreciation of the asset, and so on, that the real estate holdings have appreciated significantly over the years, and the basis in the property is now very low (and zero in some cases).

So, what does this mean for Sam and Sally?  Tax advisor advised that were Sam to die, then the properties which are owned by corporations would not benefit from the step-up in basis.  California being a community property state, one of the advantages is that when property is owned as community property (e.g. in your Living Trust as community property) then, when the husband or wife dies, the surviving spouse and even the children will receive a “step-up” in the basis in the property to the date of death.

(As you may know from previous blog posts, in 2010 there is no step-up in basis, but carry-over basis).  But, if the estate tax regime continues on the current path, then in 2011 step-up in basis will return.

So, if Sam and Sally purchased a piece of property for $250,000 30 years ago and the property is now worth $2 million dollars, there would be at least $1.75m in capital gains (more depending on the basis in the property).  The capital gains tax rate of 15-20% would be significant in this situation.

Tax advisor advised Sam and Sally at the death of Sam, the corporate assets (e.g. the real estate) is not entitled to a step-up in basis.  So, when Sam and Sally die there could be significant capital gains tax due on this asset.  If, however, the asset were held as community property in Sam and Sally’s revocable living trust, then, the children would be entitled to a step-up in basis in the property to the date of death (in this case $2m).  Which means that no capital gains tax would be due and if the property was sold in the future, the capital gains would be measured from date of death value ($2m).

Now, depending on the value of the property, the basis, etc. this could be a significant tax issue and potential for significant tax savings.

This issue can come in direct conflict with the reasons why a corporation was established in the first place.  Namely, asset protection.

Before a decision is made for tax reasons other factors should be considered.  Are there threats to the asset?  Could there be in the near future?  Are there other means of providing protection (e.g. insurance).

At the end of the day, the best approach is for Sam and Sally to discuss these items with a team of professionls:

1) Estate Planning Lawyer

2) Accountant (CPA), tax advisor (or tax lawyer)

3) Financial advisor

Sometimes if a large business is owned a business succession expert may also be included on the team.

Then all the professionals can work together and analyze the competing goals and interest and provide the clients with a comprehensive and thorough analysis of each decision and the pros and cons of each approach.   From this place of understanding and big picture analysis (including details of tax implications in dollars and cents), the clients can make an informed decision about the best course of action and which risks they are willing to assume.

At KR Hess Law, we enjoy working as a team with other professionals and coming up with the best possible solutions and most comprehensive analysis for our clients.

We look forward to serving as a part of your San Diego Estate Planning Team.

Call Kristina to discuss how we can put together a comprehensive Estate Plan in connection with your other advisors.

Create a legacy today!

Kristina Hess

San Diego Trust and Estate Lawyer