The John Wayne Problem and the Bing Crosby

The John Wayne Problem and the Bing Crosby Solution Presented by: W. Bailey Smith: Certified Specialist Estate Planning, Trusts and Probate

ABOUT YOUR PRESENTER ü Stanford Graduate ü University of California Hastings College of Law graduate ü Agent in Counter-Intelligence in U. S. Army ü Former Deputy District Attorney ü Certified as Specialist in Estate Planning, Trust and Probate Law by the California Board of Legal Specialization 2

6 QUESTIONS YOU WILL BE ABLE TO ANSWER 1. How does the Tax Cuts & Jobs Act (2018 -2025) affect my estate plan? 2. What are the six opportunities in California today? 3. What is a trust? 4. Why have a living trust? 5. How does a trust work? 6. How should you hold title to your assets? 3

TAX CUTS & JOBS ACT (2018 -2025) Quick Summary Income Range for Couples $0 -$10, 000 – estimated $10 benefit $50, 000 - $75, 000 – estimated $870 benefit $1, 000+ - estimated $69, 900 benefit Good News ü Increase in death & gift exemption amount from $5, 490, 000 to $11, 180, 000 ü Annual exclusion for gift has increased to $15, 000 ü Reduction in some tax rates ü Increase in standard deductions ü Ability to use 529 plans for K-12 qualified education costs up to $10, 000 ü Long-term capital gains rates remain the same as 2017 – no change 4

TAX CUTS & JOBS ACT (2018 -2025) Winners ü Parents of 1 or 2 children in private school ü People that do not itemize, do not have significant investment costs ü People with significant medical expenses (starting 1/1/17) ü High income earners ü Business owners with pass through income 5

TAX CUTS & JOBS ACT (2018 -2025) Warnings ü California (and many other states) do not conform to the new law ü More complexity and related cost to prepare California tax returns 6

AFTER THE 2018 TAX LAW, DO I NEED A TRUST? There are several reasons to use a Trust. Taxes are only one reason. If the tax free amount is $11, 180, 000, plus inflation and unlikely to change, we can ignore the tax benefits of a trust for most couples. However, the one thing we know about this new law is that it will change. So we need to continue trusts until the death taxes are dead for good. In fact, the new 2018 death and gift tax exemption amounts only continue until 2025. The exemption amounts then revert back to $5, 490, 000. 7

AFTER THE 2018 TAX LAW, DO I NEED A TRUST? Die in: Death Tax Free Amount Gift Tax Free Amount 1997 $600, 000 1998 $625, 000 1999 $650, 000 2000 $675, 000 2001 $675, 000 2002 $1, 000, 000 2003 $1, 000, 000 2004 $1, 500, 000 $1, 000 2005 $1, 500, 000 $1, 000 2006 $2, 000 $1, 000 2007 $2, 000 $1, 000 2008 $2, 000 $1, 000 2009 $3, 500, 000 $1, 000 2010 No tax if you died in 2010 2011 $5, 000, 000 2012 $5, 120, 000 (indexed for inflation) $5, 120, 000 2013 $5, 250, 000 (indexed for inflation) $5, 250, 000 2014 $5, 340, 000 (indexed for inflation) $5, 340, 000 2015 $5, 430, 000 (indexed for inflation) $5, 430, 000 2016 $5, 450, 000 (indexed for inflation) $5, 450, 000 2017 $5, 490, 000 (indexed for inflation) $5, 490, 000 $11, 180, 000 (indexed for inflation) $11, 180, 000 2018 -2025 8

JOHN WAYNE 9

Business Interests ü ü ü Death Taxes Accounting Fees Appraiser’s Fees Probate Fees Attorney’s Fees Executor’s Commissions Personal Property Real Estate Life Insurance Proper estate planning will get more to your family 10

STATUTORY PROBATE FEES ü The State of California has established a “minimum” cost of probate • See chart on next slide ü It’s rare to complete the probate process at such a low fee because of the following: • Sales of assets during probate • Preparation of death tax returns (Form 706) • Litigation expenses, etc. 11

STATUTORY PROBATE FEES Probate Assets Probate Fees Probate Assets $10, 000. 00 $20, 000. 00 $40, 000. 00 $60, 000. 00 $80, 000. 00 $100, 000. 00 $120, 000. 00 $140, 000. 00 $160, 000. 00 $180, 000. 00 $200, 000. 00 $225, 000. 00 $250, 000. 00 $275, 000. 00 $300, 000. 00 $325, 000. 00 $350, 000. 00 $375, 000. 00 $400, 000. 00 $425, 000. 00 $450, 000. 00 $475, 000. 00 $500, 000. 00 $525, 000. 00 $550, 000. 00 $575, 000. 00 $600, 000. 00 $625, 000. 00 $650, 000. 00 $800. 00 $1, 600. 00 $3, 200. 00 $4, 800. 00 $6, 400. 00 $8, 000. 00 $9, 200. 00 $10, 400. 00 $11, 600. 00 $12, 800. 00 $14, 000. 00 $15, 000. 00 $16, 000. 00 $17, 000. 00 $18, 000. 00 $19, 000. 00 $20, 000. 00 $21, 000. 00 $22, 000. 00 $23, 000. 00 $24, 000. 00 $25, 000. 00 $26, 000. 00 $27, 000. 00 $28, 000. 00 $29, 000. 00 $30, 000. 00 $31, 000. 00 $32, 000. 00 $675, 000. 00 $700, 000. 00 $725, 000. 00 $750, 000. 00 $775, 000. 00 $800, 000. 00 $825, 000. 00 $850, 000. 00 $875, 000. 00 $900, 000. 00 $925, 000. 00 $950, 000. 00 $975, 000. 00 $1, 100, 000. 00 $1, 200, 000. 00 $1, 300, 000. 00 $1, 400, 000. 00 $1, 500, 000. 00 $1, 600, 000. 00 $1, 700, 000. 00 $1, 800, 000. 00 $1, 900, 000. 00 $2, 500, 000. 00 $3, 500, 000. 00 $4, 000. 00 $5, 000. 00 12 Probate Fees $33, 000. 00 $34, 000. 00 $35, 000. 00 $36, 000. 00 $37, 000. 00 $38, 000. 00 $39, 000. 00 $40, 000. 00 $41, 000. 00 $42, 000. 00 $43, 000. 00 $44, 000. 00 $45, 000. 00 $46, 000. 00 $48, 000. 00 $50, 000. 00 $52, 000. 00 $54, 000. 00 $56, 000. 00 $58, 000. 00 $60, 000. 00 $62, 000. 00 $64, 000. 00 $66, 000. 00 $76, 000. 00 $86, 000. 00 $96, 000. 00 $106, 000. 00 $126, 000. 00

BING CROSBY 13

JOINT TENANCY IS AN INCOME TAX DISASTER An example: Suppose you bought stock in 2000 for $50, 000 and today it is worth $250, 000. If you sold this stock while you and your spouse were both alive, the difference between your cost ($50, 000) and your sale price ($250, 000) would be $200, 000. This $200, 000 would be subject to tax at long-term capital gains rates. If you held onto that stock until the death of one of you, the tax would depend on how you held title. 14

HOW THESE TITLES CAN PAY OFF ü Joint Tenants: If you held the title this way, then $100, 000 would be subject to long-term capital gains tax because only the decedent's half of the stock would get a stepped-up basis to the fair market value at death. ü Community Property: Nothing would be subject to capital gains tax rates because both halves would get a stepped-up basis to the fair market value at the date of death. ü Why this is important: Holding the title to appreciated assets as community property, not joint tenancy, will result in a lower income and capital gains tax. You can avoid probate by putting these assets into your living trust and evade the income tax disaster of joint tenancy by taking title to those assets in community property. In summary, joint tenancy is a death tax trap and an income tax disaster. Joint tenancy should be avoided in most estates. 15

GROUCHO MARX 16

MARILYN MONROE 17

WHAT TYPE OF ESTATE PLAN IS BEST FOR YOU? Type of Plan Taxes Saved? Probate Avoided? Guardianship Avoided? Conservatorship Avoided? 1. Interstate: No No 2. Holographic Will: No No 3. Simple, All-to-Your-Spouse Will: No No 4. Simple, Revocable Living Trust: No Yes Yes 5. Simple Trust and Disclaimer: Yes Yes 6. Standard, Revocable Living Trust: Yes Yes 7. Dynasty (Legacy) Trust: Yes Yes No Plan; No Will “Do-it-Yourself Special” “Mom and Pop” Will Probate avoidance only Probate avoidance and tax savings for three (3) generations 18

THE A-B-C TYPE TRUST ARRANGEMENT 19

TERI SCHIAVO 20

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ROY ROGERS 22

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“The most important aspect of your estate plan is how your assets will pass to your children to provide the maximum benefit. ” 24

WHAT IS THE BIGGEST LEGAL LOOPHOLE IN THE TAX LAW TODAY? ü Family Legacy Trust: Also known as the “Dynasty Trust” because it is intended to provide a source of funds for your family for generations to come. • Over time, the value of these funds is likely to increase substantially. ü As an example: An initial fund of $500, 000 at 7% interest would roughly grow to $1. 9 million after 20 years, $7. 5 million after 40 years and $29 million after 60 years. ü Due to its potential for growth, creating such a trust requires careful planning to address several important issues. 25

WHAT IS THE BIGGEST LEGAL LOOPHOLE IN THE TAX LAW TODAY? ü A Family Legacy Trust is commonly designed to provide flexibility for changing circumstances while also protecting trust assets from taxation and creditors. ü A Family Legacy Trust can be an irrevocable trust established to receive gifts made during your lifetime or even created upon your demise pursuant to the terms of your living trust. ü In either case, the underlying goal is similar, to enhance the benefits of the assets being passed to your heirs by placing them in the protective form of a continuing trust. 26

WHAT IS THE BIGGEST LEGAL LOOPHOLE IN THE TAX LAW TODAY? ü As Trustees your children will: ü Have control over trust property (this includes trust investments). ü Can receive income and use trust principal for their benefit. • Distributions of principal from the trust should be unnecessary because the children’s needs will be met by having the trust invest on their behalf. • For example, if a child wishes to purchase a home, the trust may purchase the home and allow the child to reside in it rent free. Using this approach will allow the investment to maintain its status as a protected trust asset. 27

WHAT IS THE BIGGEST LEGAL LOOPHOLE IN THE TAX LAW TODAY? ü When properly prepared, the trust will serve as a barrier to insulate assets it owns from the reach of outsiders. ü The trust property will be protected from the claims of the children's creditors, former spouses or other potential liability arising from lawsuits related to accidents and malpractice judgments. ü Similarly, the assets of the trust are exempt from additional future estate tax upon the death of a child. The general rule is that family wealth is taxed at the end of each generation. • This means that the assets parents leave to their children will be taxed as part of the children's estate when the children die. A way to avoid this double taxation is by using the Family Legacy Trust. 28

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SCHEDULE YOUR COMPLIMENTARY APPOINTMENT TODAY! W. Bailey Smith, Esq. bsmith@tldlaw. com www. yourtrustdr. com 2010 Main Street, Suite 1000 Irvine, CA 92614 (949) 756 -0684 3900 Kilroy Airport Way, Suite 240 Long Beach, CA 90806 (877) 923 -0971 32