May 2021 Update
Chapter 1: Overview of Estate Planning Practice
For revised sample initial client letters and questionnaires, see §§1.62–1.67.
Chapter 3: Property Transfer Obstacles
Effective February 16, 2021, Proposition 19 substantially alters the parent-child and grandparent-grandchild exclusion by (1) limiting the exclusion to the transfer of a principal residence or family farm, (2) requiring that the transferee also use the property as a principal residence, and (3) exempting only up to the residence’s assessed value plus $1 million (adjusted for inflation beginning 2023). See §3.26.
Chapter 4: Additional Property Transfer Obstacles for Married Persons and Registered Domestic Partners
Effective January 1, 2021, funds held in a §529 Account established through California’s Golden State Scholarshare program are exempt from creditor claims, subject to specified limits. CCP §§703.140(b)(12), 704.105; SB 898 (Stats 2020, ch 81). See §4.26.
A general disinheritance clause may be effective in precluding recovery by unknown children under Prob C §21622. Rallo v O’Brian (2020) 52 CA5th 997 (trial court properly considered disinheritance clause intended to exclude “any other person who claims to be a descendant or heir of mine under any circumstances” in denying putative children’s Prob C §21622 claims). See §4.31.
The California Supreme Court held in In re Brace (2020) 9 C5th 903, that the community property presumption applies to a dispute between one or both spouses and a bankruptcy trustee, and the community property presumption prevailed over the record title presumption because Fam C §2581 does not limit the community property presumption. See also In re Brace (9th Cir 2020) 979 F3d 1228 (court did not clearly err in finding oral transmutation ineffective under California law and did not prevent trustee from fully administering property acquired with community funds on or after January 1, 1975; however, matter remanded to determine when another property was acquired for purposes of applying community property presumption). See §§4.41, 4.48.
A transmutation agreement that fails to satisfy the statutory requirements of Fam C §852 is only voidable and not void. Accordingly, a third party who is not a successor in interest does not have standing to challenge the validity of such agreement. See Safarian v Govgassian (2020) 47 CA5th 1053, discussed in §§4.42, 4.45.
Chapter 5: Wills
Although there is a preference for “an interpretation that will prevent intestacy … , no policy underlying [Prob C §21122] supports a rule that would ignore the testator’s intent and unjustly enrich those who would inherit as a result of a mistake.” Wilkin v Nelson (2020) 45 CA5th 802 (applying Estate of Duke (2015) 61 C4th 871; equitable reformation of pourover will was proper when there was substantial evidence of decedent’s intent that trust hold only their separate property). See §5.3A.
For a recent case finding sufficient evidence to establish ademption by satisfaction under Prob C §21135(a), see Sachs v Sachs (2020) 44 CA5th 59, discussed in §5.33.
A general disinheritance clause (e.g., excluding “any of my heirs who may be living at the date of my death”) is sufficient to disinherit both children born or adopted after the will was executed (described in Prob C §21620) and those then-living but unknown to the testator when the will was executed (described in Prob C §21622). Rallo v O’Brian (2020) 52 CA5th 997 (disinheritance clause precluded purported omitted children’s argument that they were excluded “solely” because testator was unaware of their birth, as required under Prob C §21622). See §5.50.
Chapter 6: Revocable Trusts
A trust revocation procedure as set forth in a trust is not exclusive unless the trust document explicitly states that it is the exclusive method. See Cundall v Mitchell-Clyde (2020) 51 CA5th 571, discussed in §6.68.
Chapter 7: Nonprobate and Nontrust Transfers at Death
The California State Legislature amended Prob C §5600(c) to extend the sunset date of the revocable transfer on death deed statutes until January 1, 2022. Stats 2020, ch 238 (SB 1305). The provisions were extended by another year to ensure sufficient time for the legislature to fully consider the California Law Revision Commission’s recommendation to extend the use of the revocable TOD deed, with several significant amendments, for another 10 years. See §7.31A.
Chapter 8: Noncharitable Inter Vivos (Lifetime) Gifts
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 (Pub L 166–94, 133 Stat 2534) repeals the change in the kiddie tax rules under the Tax Cuts and Jobs Act of 2017 (Pub L 115–97, 131 Stat 2054) and reverts the tax to its pre-2018 rules: The tax will be based on the parent’s marginal tax rate instead of the rate for trusts and estates. See §§8.22, 8.25–8.26.
Chapter 9: Powers of Appointment
A surviving spouse’s dual role as trustee and holder of power of appointment permitted the spouse to allocate trust assets to themselves, even if the allocation effectively divested contingent beneficiaries; the holder of the general power of appointment acts in a nonfiduciary capacity. Tubbs v Berkowitz (2020) 47 CA5th 548. See §§9.5, 9.37.
In Estate of Eimers (2020) 49 CA5th 97, the court held that a holographic will could not be reformed to add a specific reference to a power of appointment to clarify the decedent’s intent to give away their trust shares, when the creating trust instrument expressly required such specific reference to devise the shares. See §9.39.
Chapter 10: Estate and Gift Taxes
Revised sample estate and gift tax calculations. See §10.11.
In Estate of Howard V. Moore, TC Memo 2020–40, transfer of part-ownership of farms to a family limited partnership lacked substantial nontax purpose and failed to qualify as a bona fide sale for adequate and full consideration because the decedent retained possession or enjoyment of the farms. See §10.19.
When a grantor derives “substantial present economic benefit from property, she retains the enjoyment of the property for purposes of [IRC §2036(a)(1)].” Badgley v U.S. (9th Cir 2020) 957 F3d 969, 977 (Treas Reg §20.2036–1(c)(2) applies to value GRAT whose grantor died 3 months before termination of 15-year GRAT). See §10.16.
Chapter 13: Taxing Income of Estates and Trusts
Charitable contribution deductions under both IRC §§170 and 642(c) are non-miscellaneous itemized deductions under IRC §§63(d) and 67(b)(4) and retain such character in the hands of the beneficiary. See Treas Reg §1.642(h)–2 (85 Fed Reg 66219 (Oct. 19, 2020)) (effective for taxable years beginning after October 19, 2020, but taxpayers may elect to apply it to taxable years beginning after December 31, 2017), discussed in §§13.15, 13.17.
Because capital losses are above-the-line deductions and therefore not miscellaneous deductions, they will not be subject to the 2 percent floor (or be nondeductible in tax years through 2025). TD 9918, 85 Fed Reg 66219 (Oct. 19, 2020). See §13.25.
On November 10, 2020, Legislative Proposal C was presented at the California Franchise Tax Board’s Stakeholders Meeting. If passed, it would subject all income of an “Incomplete Gift Non-Grantor Trust” after January 1, 2020, established by a California settlor who is still a California resident, to California taxation. See §13.161.
Trusts are to be taxed on the entire amount of trust income derived from California sources, without regard to whether the fiduciaries are California residents. Steuer v Franchise Tax Bd. (2020) 51 CA5th 417 (aka “Paula Trust” case). See §13.163.
Table of regular California income tax rates applicable to estates and trusts has been updated to reflect 2021 figures. See §13.168.
Chapter 15: California Real Property Tax
The purchase of co-beneficiary sibling’s interests in the property, after ownership had already passed from the decedent-parent to the siblings, constituted a nonexempt sibling-to-sibling transfer, rather than an exempt parent-child transfer. Bohnett v County of Santa Barbara (Jan. 19, 2020, B303520) 2021 Cal App Lexis 47. See §§15.14, 15.16–15.17.
Approved on November 3, 2020, and effective February 16, 2021, Proposition 19 imposes significant limitations on the parent-child exclusion by (1) eliminating the exclusion for nonprincipal residence property altogether, (2) requiring that the transferee also uses the property as the principal residence, and (3) sheltering only up to $1 million of increased value from the assessed value. See §§15.4, 15.14–15.19.
Proposition 19 also modifies base-year transfer rules to provide that an owner of a primary residence who is over 55 years of age, severely disabled, or a victim of a wildfire or natural disaster may transfer the base-year value of the primary residence to a replacement primary residence located anywhere in the state that is purchased or newly constructed within 2 years of the sale of the original residence. Cal Const art XIIIA, §2.1(b) (effective Apr. 1, 2021). See §15.23.
Chapter 16: Basic International and Noncitizen Transactions
Revised discussion of the substantial presence test for treating an alien as a resident for income tax purposes, including a new example of its application. See §16.9.
Revised discussion of the medical condition exception—including special expanded relief for certain nonresident aliens stranded in the United States due to COVID-19 travel restrictions (Rev Proc 2020–20, 2020–20 Int Rev Bull 801)—and the closer connection exception to the substantial presence test. See §16.9A.
New discussion of special rules applying to persons residing in U.S. possessions (Puerto Rico, Guam, American Samoa, the Northern Mariana Islands, and the U.S. Virgin Islands) for determining domicile for estate and gift tax purposes. See §16.15A.
Revised discussion of the IRS’s treatment of a Liechtenstein Stiftung or an Anstalt like a trust, despite the fact that they are legal separate entities that own their property, similar to a partnership or corporation. See §16.49.
Chapter 17A: Family Investment Companies
For revised examples of a leveraged, intentionally defective grantor GST-exempt dynasty trust and a charitable lead annuity trust (CLAT), see §§17A.24–17A.25.
Chapter 18: Business Entity Valuation Planning Strategies
In Estate of Streightoff v Commissioner (5th Cir 2020) 954 F3d 713, decedent’s lifetime transfer of 88.99 percent interest in a limited partnership was treated as a transfer of limited partnership interests, not assignee interests. See §18.3.
For a recent case finding that there was no legitimate and significant nontax reason for creating the business entity for purposes of the bona fide sale exception under IRC §2036(a), see Estate of Howard V. Moore, TC Memo 2020–40, discussed in §§18.37A–18.37B.
Formula gifts should be carefully drafted, as courts will hold taxpayers to the language in their documents. See Estate of Nelson, TC Memo 2020-81, discussed in §18.37E.
Chapter 21: Employee Benefits and IRAs
For a new Practice Tip addressing surviving spouse’s best options to avoid early distribution penalty on inheriting the IRA before age 59 ½, see §21.25.
Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (Pub L 116–136, 134 Stat 281) and Pub L 116–260, 134 Stat 1182 (Dec. 27, 2020), qualified disaster-related or COVID-19-related distributions from retirement plans up to $100,000 are permitted without being subject to the 10 percent penalty. See §21.25.
The CARES Act temporarily waived required minimum distributions for the 2020 calendar year, among other provisions relaxing the use of retirement plan funds (e.g., permitting qualified COVID-19-related distributions and loans). See IRC §401(a)(9)(I). See §21.31.
The IRS has updated the life expectancy tables used to determine required minimum distributions, effective for distribution years 2022 and beyond. See §21.31.
Chapter 21A: IRC §529 Accounts and Coverdell Education Savings Accounts
For tax years beginning after December 31, 2020, IRC §222 (deduction for qualified tuition and related expenses) is repealed. However, phaseout limits on the lifetime learning credit are increased under IRC §25A to equal those for the American opportunity credit. See §21A.2.
Effective January 1, 2021, funds held in a §529 Account established through California’s Golden State Scholarshare program are exempt from creditor claims—absolutely for amounts contributed more than 2 years before filing the debtor’s bankruptcy petition and, for amounts contributed within 2 years of filing, up to the annual gift exclusion under IRC §2503(b) each year. CCP §§703.140(b)(12), 704.105; SB 898 (Stats 2020, ch 81). See §21A.43.
The IRS issued final regulations implementing the ABLE Act on November 19, 2020. Treas Reg §§1.529a–0—1.529a–8. See §21A.58.
Chapter 22: Executive Compensation and Stock Options
Revised discussion of the tax consequences of receiving capital interest or profits interest in an LLC or partnership for services. See §§22.31–22.32.
Chapter 23: Charitable Giving
For tax years beginning in 2020 and 2021 only, a limited deduction of $300, or $600 for married individuals filing jointly, for gifts made in cash to public charities, excluding supporting organizations and donor-advised funds, is available to non-itemizers. See IRC §170(p) (as amended by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (Pub L 116–136) and Pub L 116–260, 134 Stat 1182 (Dec. 27, 2020) in response to the COVID-19 pandemic). See §23.3.
For an example of a nondeductible partial interest under IRC §170(f)(3), see Mann v U.S. (4th Cir 2021) 984 F3d 317, discussed in §§23.17, 23.51.
For tax years 2020 and 2021, the CARES Act increases the limits on contributions of food inventory to which IRC §170(e)(3)(C)(ii)(I)–(II) applies, from 15 percent to 25 percent. See §23.24.
For tax years 2020 and 2021, the CARES Act and Pub L 116–260 temporarily remove the 60 percent limitation for cash gifts by individuals to IRC §170(b)(1)(A) organizations, except to supporting organizations and donor-advised funds. See §23.37.
Chapter 25: Valuation Freeze Techniques
For a recent case holding that GRAT property was properly included in the settlor’s gross estate on the settlor’s death during the term of the retained annuity interest, see Badgley v U.S. (9th Cir 2020) 957 F3d 969, discussed in §§25.32, 25.38.
Chapter 25A: Intrafamily Loans and Sales
Revised discussion of the valuation of intrafamily notes for transfer tax purposes. See §25A.9.
Revised discussion of estate tax value of promissory note. See §25A.24.
Revised discussion of tax consequences of using inadequate stated interest, including new sample calculations for determining imputed interest and original issue discounts. See §§25A.50–25A.52.
Chapter 25B: Self-Cancelling Installment Notes (SCINs)
For new section discussing credit shelter trust bail-outs, see §25B.11.
Chapter 26: Asset Protection Considerations
Effective January 1, 2021, California’s homestead exemption is the greater of $300,000 or the countywide median sale price of a single-family home in the calendar year prior to the year in which the debtor claims the exemption, but not to exceed $600,000. CCP §704.730 (amounts to be adjusted annually for inflation beginning January 1, 2022). The homestead amount applies whether the homestead is claimed in a recorded declaration (CCP §§704.950(c), 704.960(a)) or by asserting the statutory exemption (see CCP §704.720(b)). See AB 1885 (Stats 2020, ch 94) (eliminating previous tiered system of homestead exemptions), discussed in §26.42.
Property acquired on or after January 1, 1975, with community funds, but held in joint tenancy, is presumptively community property for bankruptcy purposes. In re Brace (2020) 9 C5th 903. See §26.46.
Effective January 1, 2021, funds held in a California §529 Account are exempt from creditor claims, subject to specified limits. CCP §§703.140(b)(12), 704.105; SB 898 (Stats 2020, ch 81). See §21A.43.
Chapter 31: Disposition of Human Remains
The right to a decedent’s stored reproductive material, including whether it can be used for posthumous conception, is governed by the decedent’s intent. Absent affirmative evidence to the contrary, there is a presumption against the intent for posthumous use. Robertson v Saadat (2020) 48 CA5th 630. See §31.1.