USA – CALIFORNIA Law and Practice Contributed by: Jennifer J. McCall, Matthew Perotti and Ashley E. Huh, Pillsbury Winthrop Shaw Pittman LLP
Real property located outside the decedent’s domicile is governed by the laws of the state where the property is located (the “situs”). This usually requires a separate proceeding called ancillary probate, which disposes of the out-of-state real property under the decedent’s will or, if none exists, the situs state’s intestacy laws. A valid will or living trust generally controls the disposi- tion of assets regardless of state succession statutes. Conflicts of Law Conflicts of law may arise regarding property char- acterisation, interpretation of a will or trust, or the exercise of a power of appointment. Courts typically apply an “interest analysis” or “significant interest” test, examining which state has the greatest interest in resolving the issue. Many of these potential conflicts can be addressed within the estate planning docu- ments themselves through a choice‑of‑law provision, which states which jurisdiction’s laws will govern interpretation of the document. Except where contrary to public policy or involving certain marital property issues (eg, community vs separate property), courts generally uphold such provisions. Donors may make annual exclusion gifts and certain qualified transfers for education and medical expens- es, which are excluded from gift tax when paid directly to the provider. In addition, lifetime gifts to trusts and the formation of family entities are common planning strategies. Each state has laws that allow individuals to create trusts and other legal entities, such as corporations, general and limited partnerships, and limited liability companies. Legal entities are generally required to register with the Secretary of State in any state where they conduct business. Most states do not require the registration of non‑charitable trusts; however, charitable trusts must be registered with the state’s Attorney General and must report their activity on a regular basis. 6. Lifetime Succession Planning Mechanisms 6.1 Common Planning Techniques
Family companies are almost always structured as legal entities, allowing the family to control the admin- istration of the company and the succession of owner- ship interests upon the death or divorce of its owners. Additionally, most legal entities offer significant credi- tor protection, shielding an owner’s personal assets from creditors of the entity. Family wealth succession is frequently carried out through one or more irrevocable trusts. A trust is a legally recognised arrangement between the person creating and transferring assets to the trust (known as the grantor, trustor, or settlor) and the person respon- sible for holding those assets (the trustee). The trus- tee holds legal title to the trust assets for the benefit of the beneficiaries, who are typically the grantor’s descendants. The trust is usually documented in a written agreement that outlines how the trustee must administer and manage the trust assets, as well as the terms and conditions under which trust assets may be distributed to beneficiaries. Certain states permit trusts to exist in perpetuity. If a trust is established in such a state and the grantor allocates their GST exemption to the trust, the trust may continue indefi- nitely under current US law without being subject to US transfer taxes (ie, gift, estate and GST tax). 6.2 Tax and Regulatory Constraints In the United States, the availability and attractiveness of common lifetime succession structures – such as gifts, trusts, and family entities – are significantly influ- enced by a combination of federal transfer‑tax rules and federal income‑tax characterisation rules. Key considerations include the following. The Federal Estate, Gift, and GST Framework As mentioned, lifetime planning is often centred around the unified federal estate and gift tax system, along with the parallel GST regime. The size of the federal exclusion plays a major role in determining how aggressively taxpayers pursue lifetime transfers. Federal Inclusion Rules Under Section 2036 Many planning structures must take Section 2036 into account, as lifetime transfers may be pulled back into the transferor’s estate if they retain certain enjoyment, rights, or control over the transferred property.
217 CHAMBERS.COM
Powered by FlippingBook