How you hold title to your real property is critical. There are several options one can choose from, when deciding how title should be vested, with each option having its own serious legal and tax ramifications. When purchasing real property, the buyer(s) should consult with a trust and estates attorney at the beginning of the escrow process. The grant deed prepared during escrow, transferring ownership from the seller(s) to the buyer(s), should be reviewed by that attorney, prior to execution, to insure title is being vested properly. The individual facts and circumstances relating to the buyer(s) estate will dictate the appropriate way to vest title. If you have already purchased real property, without seeking legal advice, this issue may still be reviewed by a trusts and estates attorney. If necessary, title can be changed through a new deed, transferring ownership into the proper vesting of title.
Always consult an attorney in your area.
What is a Corporation?
- A corporation is a legal entity that is usually formed to create legal independence from the people who form the corporation. When correctly managed and operated, the shareholders owning the corporation should have “limited liability” which means that if the business fails or is sued, creditors cannot pursue the shareholders for personal liability. Therefore, the shareholders liability is limited to their investment.
- A corporation is managed by its Officers and Board of Directors, who are elected by the shareholders
- A corporation has perpetual life, meaning that the corporation can continue its operations beyond the lifetime of any of its shareholders
- A corporation is subject to “double” taxation because the corporation pays taxes on its income. In addition, the shareholders pay tax on any dividends or other income they receive from the corporation. This can be avoided by electing to become a S-Corporation to receive pass-through tax treatment. These tax issues should be addressed with a certified public accountant.
- Corporations can be formed for approved non-profit purposes to avoid tax liability
Formalities to Set-Up
- As an initial step, the corporation files Articles with the Secretary of State. The Articles of Incorporation give a basic framework for how the corporation will be run, the time of business it can engage in and the amount of stock it is authorized to issue.
- Contemporaneously or soon thereafter, the corporation prepares Bylaws which provide a more detailed set of procedures for meetings, shareholder rights and responsibilities and actions that can be taken by the Board of Directors and Officers.
- The initial Board of Directors will be appointed either in the Articles of Incorporation or by the incorporator
- Shares of the corporation should be issued
Maintaining Corporate Formalities
- In order to maintain the corporation properly, many corporate formalities need to be adhered to, including:
- Keeping corporate assets in separate accounts from personal assets, avoiding the commingling assets between the corporation and its stockholders, and maintaining minutes of annual meetings
- Conducting regular meetings by the shareholders and Board of Directors and keeping proper record of the minutes of those meetings
- Maintain records of the current shareholders and the stock certificates that have been issue
Estate (Taxes Imposed upon Decedent’s Estate)
Tax Rates Are Based on Valuation of Estate
You should periodically review the value of your estate with a Certified Public Account (CPA).
The Internal Revenue Service values your estate by adding together the value of all of your assets (i.e., residence and other real estate, cash accounts, investment accounts, business interests, personal property, such as jewelry, art, vehicles and boats, retirement accounts, life insurance) and subtracting the value of your liabilities (i.e., mortgages and other debt).
The maximum tax rate for 2011 and 2012 is 35%.
Exclusions from Tax
Each person who dies receives an individual exclusion from estate tax. The exclusion amount for 2012 is $5.12 million. Each dollar that exceeds this exclusion is taxed at a rate of 35%.
How Trusts Preserve the Estate Tax Exemption
- Unless Congress takes action, the tax exemption will return to $1.0 million per person and the maximum estate tax rate will be 55% in 2013. As you are likely aware, the federal tax exemption is expected to be revised before December 31, 2013, including the possibility of a retroactive change affecting the tax exemption for 2013.
- When the first spouse passes and leaves their entire estate to the surviving spouse, the federal government does not tax the estate due to the “unlimited marital deduction.” However, if the first spouses exemption is not properly preserved, when the second spouse passes the entire estate is subject to the estate tax and the surviving spouse is limited to their individual exclusion amount, currently $5.12 million.
- By creating a living trust with specific provisions to protect against the estate tax, married couples can preserve the estate tax exemption of the first-to-die and can go so far as to effectively double the estate tax exemption. Therefore, with a living trust, married couples can currently increase their federal estate tax exemption to $10.24 million.
- Other Benefits of Trustsa) Immediate transfer of administration of assets to Successor Trustee
b) Broad powers to act as authorized by the trust
c) Ability to put restrictions on gifts (i.e., age of beneficiary before outright distribution is made, amount of gifts to beneficiaries, etc.)
The material available on this website is intended for informational purposes in California only, and does not constitute legal or other professional advice. Reading this website or contacting Vergari & Associates does not constitute the forming of an attorney-client relationship, which can only be established by entering into a written retainer agreement. Always consult an attorney in your area.
Who is subject to Probate?
In California, a person who passes with a total of more than $150,000 in personal and real property or more than $50,000 in real property held in their individual name (not the name of a living trust) is subject to administration by the Probate Court. If the decedent has a will, the estate may still be subject to probate absent a trust.
- Example of assets included in the Probate Estate:Real estate, vehicles, checking and savings account, stocks, investment accounts, jewelry and other personal property
- Examples of assets excluded from the Probate Estate:Life Insurance, IRAs, 401(k) accounts, assets held in joint tenancy, and other assets that have a payable-on-death beneficiary
- Who decides distribution in Probate?
If there is a will, the terms of the will control how distribution is made.
If there is not a will, the rules of California’s intestacy laws are applied by the Judge in the Probate Court. Generally, the idea of the intestacy law is to distribute your estate how the government “thinks” you would want it distributed if you had prepared a will.
The intestacy laws provide that your estate be distributed to your spouse (if any) and your children (if any). If you are unmarried and have no children, your estate will be distributed to your parents. If your parents predecease you, then there is a specific set of rules that apply to determine your next of kin.
It is important to know that if the decedent died without a will, there are very few exceptions to the required distribution described above. If the decedent had an estranged spouse or a child he/she had not spoken to in 20 years, the spouse or child would still receive their full intestate share of the estate. The Judge in the Probate Court does not have discretion to pick and choose who “deserves” to receive the estate.Some of our clients come to us for our expertise in family law and/or estate planning. Others come to us for our professional reputation. All of our clients slay with us because they trust Vergari & Associates to protect them and their family.