“Does your plan protect you if you’re incapacitated? Is your plan “elder law friendly”? Is your plan tax wise?”

By James Ward

James Ward

I often have writing ideas in mind several weeks before the due date for this column, but I was recently scratching my head as to what to write — and then in walked two sisters with a huge problem.

Their mother owned a large apartment building and had no estate plan in place. They were all worried about the Prop. 19 changes to Prop. 13, and what that would mean for them, so they rushed off to an estate planning attorney in January to see what could be done.

Neither the sisters nor the mother felt comfortable that the attorney was the right one to use, but they decided to follow the plan set out by that attorney. Well, the daughters are able to keep the low Prop. 13 taxes, but they’ll now face a huge capital gains tax if the building is ever sold during their lifetimes, and they know that they’ll likely have to sell at some point.

Additionally, without the step up in basis at the death of their mother, they now have a tax basis of zero on the depreciated property, so they won’t be able to take any depreciation expense as a write-off against the rental income. It’s like a double whammy for them!

Yes, the sisters will likely save about $30,000 a year in property tax, but they’ll likely pay about $75,000 more per year in income tax due to the attorney’s poor advice, and then still potentially pay an additional $1,000,000 in capital gains tax that could have been avoided if the attorney had a better understanding of what could be done.

Sometimes things can be undone, and sometimes they can’t. Prop. 19 became effective Feb. 16, 2021, so it’s now the law and it’s too late for some decisions to be made.

Estate planning has many functions — especially if it’s proper estate planning done well. Does your plan protect you if you’re incapacitated? Is your plan “elder law friendly”? Is your plan tax wise? Are your assets in the trust?

Most people, if they own real estate or have investments, should have a living trust package in place to protect themselves and their heirs. It’s the prudent thing to do. But does your trust have the necessary elements? Is it up to date? Did you get the proper counseling from an experienced estate planning attorney as you set up your trust?

I recently had a call from a woman who is caring for her widowed stepmother who is ailing and now being treated for her third type of cancer. The stepmother has a trust, but neither her million-dollar home nor her million dollars plus of investments have been funded into the trust. Why not?

If you have a trust, knock the dust off of it and read it to see what it says. The same with your Power of Attorney and Advance Healthcare Directive. These documents are critical. Make sure you have them, make sure they contain what you want, and make sure you have the proper people in place to make the critical decisions for you.

If you aren’t sure how to interpret your documents, get an experienced estate planning and elder law attorney to review them with you.

Plan properly, and plan now.