Urgent Tax Alert for Apartment Owners with Larger Estates! Last Chance to Use Discounts to Save Estate and Gift Taxes? – By AOA Member and Estate Planning Attorney, Kenneth Ziskin

If you have, or expect to develop, a “taxable” estate (more than the estate and gift tax exclusion amounts which now protect nearly an $11 million estate for a married couple), newly Proposed IRS Regulations make it IMPERITIVE that you consider advanced estate tax planning NOW.  The new Proposed Regulations, released in August, are designed to take away the ability to use many discount strategies that can eliminate (or substantially reduce) estate and gift taxes for those of you who would otherwise face these taxes.   

To beat the adverse effect of these regulations, you MUST complete transfers to your heirs or specialized trusts before these Regulations are finalized (probably around year-end).  The loss of these discounts could cost a family with $16 million in property that does not do proper advanced planning now as much as $2 million in unnecessary estate and/or gift taxes.  The loss would be far more costly to larger estates. 

In August, the IRS finally published the Proposed Regulations it has threatened since May, 2015.  These Proposed Regulations were designed to limit the use of discounts in family (and maybe other) transactions that sophisticated clients and estate planners had used to reduce estate and gift tax exposure.  We have helped owners do dozens of transactions to take advantage of these discounts to save millions, and expect to do many more before the Proposed Regulations limit their use.

The BAD NEWS is that these Proposed Regulations will preclude the effective use of discounting strategies that advanced estate planners have employed to help clients save billions of dollars in estate and gift taxes over the past few decades. As a result, millions of dollars of value that apartment owners want to pass to family members and other heirs will, instead, be confiscated by the estate and gift tax system.

However, the VERY GOOD NEWS (but ONLY for those who plan in time) is that the IRS proposes that these Regulations become effective 30 days AFTER Final Regulations are published in the Federal Register.

Since the Proposed Regulations contemplate allowing for a 90-day comment period and a public hearing on December 1, 2016, it is virtually impossible for them to become final before the end of this calendar year.  If Hillary Clinton is elected, the IRS may not finalize the Proposed Regulations until early in her administration.  However, if Donald Trump is the winner in November, we expect the IRS may seek to finalize the Proposed Regulations before the end of the Obama administration.

The deferred effective date gives us time to review the Proposed Regulations carefully in order to better understand the impact they will have on transactions after the effective date, and gives you a short period of time to commence planning to “beat the regs.”  I got an advanced copy of the Proposed Regulations and have already scheduled to participate in a conference call with other advanced estate planning colleagues regarding the Proposed Regulations.

The best strategies for taking advantage of discounting strategies before the Proposed Regulations become final will usually involve putting property into carefully structured LLCs or limited partnerships (or to restructure such entities to maximize tax and non-tax benefits) as soon as possible.  Then, apartment owners will want to transfer interests in these entities to Family Security Trusts, Grantor Retained Annuity Trusts, other irrevocable trusts or family members a few months later, but before year-end.  To do this in the best way, owners need to begin the process as soon as practical.

NOTE:  Some of you may have created Family Limited Partnerships or LLCs and retained most of the ownership thereof in anticipation of getting the benefit of discounts when they are transferred after your death.  Much, or all, of this benefit will be lost if you die after these Proposed Regulations become final.   

The only way to avoid the additional taxes these Proposed Regulations are intended to impose is to make completed gifts or transfers of interests in these entities BEFORE the effective date of the regulations.  When done with care by an experienced estate planning attorney specializing in advanced strategies, these gifts and other transfers can be structured to provide substantial income to the original property owners during their life, preserve parent-child property tax reassessment exemptions, retain control for such members, keep the ability to get a step-up in basis at death, and still to maximize wealth transfer to your chose heirs.  But, to maximize the ability to use the discounts, you need to start planning very soon, and then you need to complete transfers of entity interests before the Proposed Regulations are finalized.  These Proposed Regulations mean I need to adjust my Family Wealth Strategies motto to “If you fail to plan WELL and SOON, plan to FAIL!” 

Ken Ziskin is a member of AOA and focuses his practice on integrated estate planning to save income, property, gift and estate taxes for owners of apartments and other income properties.  He has served as an Adjunct Professor of Law at USC, is rated AV Preeminent by Martindale-Hubbell and a perfect 10 out of 10 on legal website www.AVVO.COM.  For more information on the impact which the Proposed Regulations would have on your estate, or to begin the planning process to “beat” the Regulations, contact Ken Ziskin at 818-988-0949, or email him at KenZiskin@Gmail.com  You can see real client reviews of Ken’s services at www.avvo.com/attorneys/91423-ca-kenneth-ziskin-151823.html or on Ken’s website at www.ZiskinLaw.com

Reprinted with permission of AOA (Apartment Owners Association, Inc.) and the author.

UNDERSTANDING SUPPLEMENTAL PROPERTY TAXES

By  Patrick McGurk and Lawyers Title. Your support is important to me.  If you would like more information please call me 310 901 5380

SUPPLEMENTAL PROPERTY TAX DEFINED

The supplemental real property tax law came into effect in 1983 and  is part of an ambitious drive to aid California’s public school system. If you plan on purchasing or building a new home, this law will affect you. Supplemental property tax is a one-time tax which dates from the time you take ownership of your property or complete construction until the end of the tax year on June 30.

HOW WILL THE AMOUNT OF MY BILL BE DETERMINED?

There is a formula used to determine your tax bill. Supplemental property tax is based on the difference in assessed value of a home when purchased by the prior owner and the newly assessed value when purchased by you. If you are building a home, the supplemental property tax is based on the difference in value of the land before a home was constructed and the new property value after a home is built. The total supplemental assessment will be prorated, based on the number of months remaining until the end of the tax year, June 30.

WHEN AND HOW WILL I BE BILLED?

You will be advised of your supplemental assessment amount when your property is appraised during the lending process. You will then have an opportunity to discuss your valuation, apply for a Homeowner’s Exemption and possibly file an Assessment Appeal. Your County Controller/Tax Collector will then calculate your supplemental tax and mail a bill. The bill will be sent anywhere from 3 weeks to 6 months after close of escrow. A lien is put on the property for the supplemental taxes, so be sure to pay the taxes by the date noted on the supplemental tax bill.

WILL MY SUPPLEMENTAL TAXES BE PRORATED IN
ESCROW?

No, the supplemental tax is a one-time tax and is in effect from the actual date you take ownership of property, it will be billed to you by your County Controller/Tax Collector.

CAN I PAY MY SUPPLEMENTAL TAX BILL IN
INSTALLMENTS?

All supplemental taxes on the secured roll are payable in two equal installments. The taxes are due on the date the bill is mailed and are delinquent on specified dates, depending on the month the bill is mailed, as follows:

1) If the bill is mailed within the months of July through October, the first installment will become delinquent on December 10 of the same year. The second installment will become delinquent on April 10 of the next year.

2) If the bill is mailed within the months of November through June, the first installment will become delinquent on the last day of the month following the month in which the bill is mailed. The second installment will become delinquent on the last day of the fourth calendar month following the date the first installment is delinquent.

WILL MY SUPPLEMENTAL TAX BE PRORATED?

The supplemental tax becomes effective on the first day of the month following the month in which the change of ownership or completion of new construction actually occurred. The table of proration factors shown in the chart below is used to compute the supplemental
assessment on the current tax roll.

EXAMPLE:

The County Auditor finds the supplemental property taxes on your new home would be $1,000 for a full year. The change of ownership took place on September 15 with the effective date being October 1. The supplemental property taxes would be subject to a proration factor of .75 and the supplemental tax would be $750.

 

 

 

Bring Your Estate Plan “Up to Code” for the Holidays – by Kenneth Ziskin, Attorney

Reprinted with permission of the Apartment Owners Association of California, Inc. (AOA) 

All of our thoughts turn to family during the Holiday season even more than the rest of the year.  That makes this a great time to consider whether the Estate Plan you have for your family is still “up to code.”

No “inspector” will drop by unannounced to see if your Estate Plan remains up to date.  So, each apartment owner must take responsibility for him/her self to keep your Estate Plan current.

In this article, I will give you a few tips to help you know when you should have your Estate Plan reviewed and/or revised.  And, this kind of “code” checkup will probably not hurt near as much as having a visit from the building code inspector.

The reasons owners update or review their Estate Plans usually fall within one or more of the following five categories:

1. Get a refresher to better understand how your Estate Plan Works
2. Changes in the law, particularly tax law
3. Changes in your family situation
4. Changes in your wealth
5. Changes in your goals for how your wealth should pass and be used

The remainder of this article will expand a little on each of these categories which might motivate a review and/or update of your Estate Plan.

REASON #1 – Get a Refresher Course on How Your Plan Really Works

In our experience working with property owners, we find very few of them really understand how the elements of their Estate Plan actually work.

Sometimes we think that lack of understanding resulted from the failure of a prior lawyer to fully explain how the elements would work, or why they should work that way.  We frequently find clients whose prior lawyer never fully explained to them the choices they could make in their planning.  Other times, the Estate Plan may have been explained, but, with the passage of time, the property owner just does not remember how the plan works.

Either way, you and your heirs deserve a plan that is customized to meet your goals.  If you do not understand it, the odds are that it will not meet your goals well.

REASON # 2 – Changes in the Law Since You Last Revised Your Estate Plan

When “The American Taxpayer Relief Act of 2012” (“ATRA”) became effective in 2013, estate planning for most apartment owners turned upside down.

ATRA and California tax changes increased estate tax exemptions, made “portability” permanent so you could leave your exemption to your spouse, reduced estate tax rates and increased in income tax rates.  The result of these changes  made old A-B (or A-C-C) trust planning (which was implemented in most Estate Plans done before 2013) actuallyHAZARDOUS to the family wealth of most apartment owners by reducing the ability to get maximum step-ups in basis after death.

If your Estate Plan was not drafted with these changes in mind, you should review it with an attorney who understands the planning issues of apartment owners and the ways to maximize tax benefits under current law.

The fact remains that Estate Taxes, and to a large extent, income taxes, are “voluntary” under our legal system.  With good planning, they can often be reduced, or even eliminated.

REASON #3 – Changes in Your Family Situation

A well-drafted living trust adapts to most changes in your family situation. Still, if there has been a divorce, the birth or adoption of new children and grandchildren, a marriage or even a major change in the situation or maturity of your heirs, it pays to consider whether those changes would make you want to change your Estate Plan.

REASON #4 – Changes in Your Wealth

Appreciation in real estate has been a great thing for California apartment owners.  However, as a result, many now have much more wealth than they ever anticipated.  in some cases, that poses new tax problems that such owners may want to address in their Estate Plans.

In other cases, that newfound wealth presents planning opportunities never seriously considered before.

Either way, it suggests that owners reconsider whether or not their current Estate Plans remain suitable.

REASON #5 – Changes in Your Goals

As you get older and wiser, your goals for how your wealth should be used may change.

Perhaps you have realized that one or more of your children (or grandchildren) will have more, or less, need for a pro rata share of your wealth than the others.  Or, maybe one them has demonstrated a lack of skill or judgment in managing money that suggests you put some controls in place to protect the wealth you leave behind.

Maybe the combination of your children’s’ success and your desire to do good means you want to devote some of your wealth to philanthropy.   Perhaps you fear that this much wealth would infect them with “affluenza,” robbing your children of the motivation and satisfaction of making something of themselves.

And, in some cases, your income or estate tax burden has grown to the level that carefully planned philanthropy will enable you to pursue philanthropic goals at little or no cost to your heirs, while saving a lot of income taxes during your life.

Whenever your goals or your wealth change significantly, you should re-address your Estate Plan.  A good estate planning attorney will help you to articulate YOUR goals for your wealth, and then evaluate strategies that might help you achieve them.

“IF YOU FAIL TO PLAN WELL, PLAN TO FAIL”

Every family needs good Estate Planning.  And, as we age, our financial and family situation changes, along with our goals.

You should not view Estate Planning as a one-time event, but as a dynamic process.  Your wealth and your family are too important to let yourself be stuck with out of date planning that is no longer “UP TO CODE.”

The Holiday Season can be a great time to re-evaluate your planning, and maybe even get your adult children involved.  Some of the most satisfying planning we do often involves do planning sessions with parents and adult children (sometimes even adult grandchildren) to help our clients refine and meet family goals.

Kenneth Ziskin, an estate planning attorney, focuses on integrated planning for apartment owners.  He holds the coveted AV Preeminent peer reviewed rating for Ethical Standards and Legal Ability from Martindale-Hubbell.  Ken lectures frequently to AOA members and recently rewrote AOA’s Special Report “Holding Title to Your Property –A Matter of Life, Death and Taxes”. Ken’s website is www.Family-Wealth-Strategies.com   Ken offers free consultations for AOA members and can be reached at (818) 988-0949. 

This article is general in nature and not intended as advice for clients.  Please get advice from counsel you retain for your own planning.