San Diego Estate Planning Lawyer Blog

The estate tax-also known as the “death tax”-is often misunderstood. Despite its prominent place in the political debate over tax policies, the estate tax only affects a small number of estates each year. According to Internal Revenue Service records, there were 4,588 estate tax returns filed nationwide in 2011, including 806 estates in California. That represents an infinitesimal fraction of the estimated 233,000 annual deaths in the state.

Nonetheless, it’s still useful to understand when and how the estate tax applies. Unlike the federal income tax we’re all familiar with, the estate tax is a levy against the property of a deceased individual. The assessment is based on the gross estate of the decedent’s property as of the day of his or her death. (If the decedent’s property earned any income after death, a separate income tax return must be filed by the estate.) The executor or personal representative of the decedent’s estate is responsible for assessing the date-of-death value of all property and, if necessary, reporting it on the federal estate tax return.

Probate Estate vs. Gross Estate

Spouses receive a special exemption under federal estate tax law known as the marital deduction. When the first spouse dies, any portion of his or her estate that passes to the surviving spouse is not subject to estate tax. No tax is assessed until the second spouse dies.

The marital deduction does not apply, however, when the surviving spouse is not a U.S. citizen. Any property left to a non-citizen spouse is subject to the estate tax. For estates of persons who die in 2013, that’s a maximum tax rate of 40% on gross assets exceeding $5.25 million.

If either or both spouses are non-citizens, there are two options to avoid estate taxes upon the first spouse’s death. The non-citizen spouse can obtain U.S. citizenship, making him or her eligible for the marital deduction. Alternatively, the spouse that plans to leave property to a non-citizen spouse may create a qualified domestic trust (or QDOT) as part of his or her estate plan. If both citizens are non-spouses residing in the United States, each spouse may create a QDOT for the benefit of the other.

A last will and testament is not carved into stone. As you experience major life events, you will likely need to revise or update your will many times. If you get married, you’ll want to name your spouse as an executor or beneficiary. Conversely, if you get divorced (or you outlive your spouse) you may want to remove your former spouse from your will. You may have additional children after you sign your will or come into a specific item of property–even a business–that you wish to leave to a specific person not mentioned in your original will. All of these cases require a means of changing your existing will to reflect new circumstances.

The traditional method for amending a will is a codicil. This is a written amendment executed in much the same form as the original will. For instance, the “First Codicil to the Last Will and Testament of Mary Smith” might delete a specific bequest to a sister whom Mary is no longer on speaking terms with. Mary would sign a codicil noting the deletion while reaffirming all other provisions of her original will. And like the will, Mary must sign the codicil in the presence of two witnesses who can attest she has the capacity to execute such a document. The will and the codicil then effectively become one document.

In theory, Mary could execute as many codicils as she wanted, changing the terms of her will every year or even every month. But she can just as easily skip the codicil and sign a new will.

Charitable giving is a common feature of many estate plans. In addition to providing for family, individuals may wish to support their favorite charitable organizations or causes by making specific bequests in their will or trust. In some cases, a person may create a charitable lead trust or charitable remainder trust to ensure his or her generosity continues to yield benefits for years, even decades, after death. But whatever form you adopt for charitable giving after you’re gone, it’s important to make your intentions known in writing. Ambiguity over promised donations can lead to significant litigation.

The Difficulty of Proving Oral Promises to Give

Consider the case of Roland Arnall. The son of Eastern European Jews who fled Europe during the Second World War, Arnall built a fortune as the owner of Ameriquest, at one time the largest holder of sub-prime mortgages in the United States. Arnall’s estimated fortune was $1.5 billion, and his generous donations to the Republican Party led President George W. Bush to name him ambassador to the Netherlands in 2005.

In 1976 the Supreme Court of California recognized that contracts arising from non-marital domestic relationships are enforceable even if they don’t fall within the community property laws governing traditional marriage. This principle extends to cases where one unmarried partner promises to provide for the other in his or her estate plan. A “contract to make a will” is valid under a 2000 amendment to the California Probate Code, even if the agreement is only made orally, provided there is clear and convincing evidence of the deceased person’s intentions.

Note that contracts to make a will are not limited to domestic partners. For instance, a father might promise to leave part of his estate to a daughter if she moves in with him. If she does so and the father later dies without making a will, the daughter could pursue a breach of contract claim against his estate.

In a case where one unmarried partner dies without fulfilling an oral contract to make a will for the benefit of the other, the survivor may face resistance from the deceased person’s family, which can lead to costly litigation. The laws governing these types of cases are complicated in California, as demonstrated by a recent decision by the state’s court of appeals.

Estate planning is more than just signing a last will and testament. It entails making provision for all of your assets through various legal instruments. In many cases, isolated estate planning events take place over a period several years, even decades, so that different laws may be applicable to the disposition of certain assets. Failure to regularly update your plans can prove costly after your death.

Divorce, Remarriage and the Meaning of “Net Assets”

Last year a state appeals court in San Diego had to sort out one such mess. The case was not officially published, and so it out cannot be relied upon as a statement of the law. However, the discussion in the opinion is a helpful way to understand the legal issues at play.