Estate Planning Lawyer for Marin County, CA

Attorney Codi M. Dada is a compassionate lawyer who makes legal processes simple. His laser focus on estate and trust law makes him uniquely qualified to design and implement your comprehensive estate planning strategy. We know that the legal landscape can be intimidating, and our priority is to demystify complex legal terminology and documentation. We personally work with you to understand your family structure, financial goals, and specific concerns, translating your vision into legally sound documents that minimize tax burdens and avoid the costly, time-consuming process of probate.

Comprehensive Tools for Asset Protection

Our estate planning services encompass a full spectrum of protective tools tailored to your individual needs in Marin County. This includes meticulously assisting with drafting wills and setting up revocable and irrevocable trusts. We utilize trusts to achieve critical goals such as sheltering assets from unnecessary taxation, creditors, or financial risks. We can also help with ensuring a smooth and immediate transfer of property and assets to your beneficiaries without court intervention.

Choosing Codi M. Dada Law Offices means gaining a dedicated legal partner committed to your peace of mind. Rest easy knowing your trust and legacy are in expert hands. We are here to provide the focused expertise needed to protect what matters most.

Ready to secure the future of your family and your assets? Contact Codi M. Dada Law Offices today to schedule a consultation with a trusted estate planning lawyer in Marin County, CA.

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Federal Estate Tax Avoidance Planning for Married Couples

1. All to Marital Share. Under this approach, the Trustee does not divide the deceased spouse’s estate into Marital and Non–Marital Shares; instead, the Trustee distributes everything to the Marital Share and the distribution passes estate tax–free to the surviving spouse due to the unlimited marital deduction. There is no mechanism to facilitate the use of the deceased spouse’s estate tax applicable exclusion amount. To accommodate any effective estate tax planning, the surviving spouse must rely on operation of the laws governing disclaimers to shift property to other beneficiaries and trigger the use of the deceased spouse’s estate tax exemption. This generally forecloses the spouse’s ability to receive any benefit later from the disclaimed property, so the survivor should only disclaim property that he or she does not need.
2. All to Marital Share, with any disclaimed amounts going to the Non–Marital Share. The most basic option with built–in estate tax planning is the Disclaimer option. Under this approach, the Trustee distributes all of the deceased spouse’s trust property to the Marital Share. If, and to the extent the surviving spouse exercises a qualified disclaimer as provided under Code Section 2518, the Trustee distributes the disclaimed property to the Non–Marital Share. The Trustee then either holds or distributes the Non–Marital Share in a Bypass (Credit Shelter) Trust or distributes the disclaimed property to the residuary beneficiaries. I.R.C. 2518(b)(4)(A) allows the disclaimed property to benefit the surviving spouse even though the spouse exercised the qualified disclaimer. The disclaimer method offers maximum discretion and flexibility to the surviving spouse for post–mortem estate planning. The spouse can choose to fund the Non–Marital Share in any appropriate amount depending on the estate tax law then in effect, the composition and value of the deceased spouse’s estate, and the surviving spouse’s financial needs and comfort level at the first spouse’s death.
3. Stated percentage or fraction to the Marital Share. This option is not available in the Simplified version of the trust. Here the fiduciary distributes a portion of the deceased spouse’s property to the Marital Share in the percent or fraction amount recited in the trust document. You might use this option when your client and his or her spouse have a pre–nuptial agreement in which they have determined the amount each will receive from the other’s estate.

1. Clayton Election. The “Clayton Election” is one of the five “formula” clauses for dividing assets between the Marital and Non–Marital Share. If you select this option, WealthDocx will populate the dialogue screen seeking additional drafting information.
2. Pecuniary Marital Formula. This option is not available in the Simplified version of the trust. The “Pecuniary Marital Formula” is one of the five “formula” clauses for dividing assets between the Marital and Non–Marital Share. If you select this option, WealthDocx will populate the dialogue screen seeking additional drafting information.
3. Fractional Marital Formula. The “Fractional Marital Formula” is one of the five “formula” clauses for dividing assets between the Marital and Non–Marital Share. If you select this option, WealthDocx will populate the dialogue screen seeking additional drafting information.
4. Pecuniary Credit Shelter Formula. This option is not available in the Simplified version of the trust. The “Pecuniary Credit Shelter Formula” is one of the five “formula” clauses for dividing assets between the Marital and Non–Marital Share. If you select this option, WealthDocx will populate the dialogue screen seeking additional drafting information.
5. Statutory Minimum to the Marital Share. This option is only available in the individual trust. The “Pecuniary Credit Shelter Formula” is one of the five “formula” clauses for dividing assets between the Marital and Non–Marital Share. Unlike the other formula provisions, however, this formula is not tax driven. If you select this option, WealthDocx will populate the dialogue screen seeking additional drafting information.
6. None to the Marital Share. This option is only available in the individual trust and is not available in the Simplified version of the trust. You will use this screen to disinherit the surviving spouse. If you select this option, WealthDocx will populate the dialogue screen seeking additional drafting information.

TAX CONSIDERATIONS IN MARITAL DEDUCTION PLANNING.

In a nutshell, the idea behind Marital Deduction tax planning is to take full advantage of both the marital deduction and the estate tax exclusion at the death of the first spouse in order to

1. Eliminate federal estate taxes at the first death, and
2. Reduce federal estate taxes at the death of the surviving spouse.

How does it work?

First, some preliminaries:

The Unlimited Marital Deduction. As a rule, the federal government favors transfers of property from a decedent to a surviving spouse. It does this through the unlimited estate tax marital deduction. But what has become an unlimited marital deduction did not start out that way.

Before the Economic Recovery Tax Act (ERTA) was enacted in 1981, the maximum value that a decedent could pass to a surviving spouse without incurring estate tax was limited to the greater of $250,000 or one-half of the decedent’s adjusted gross estate.

When ERTA became law in 1981, it removed all but a few limitations on the amount of the marital deduction. Death transfers from a spouse to a surviving spouse are entirely removed from the estate of the deceased spouse, provided that the transfer meets the requirements of the I.R.C. Generally, § 2056 establishes the requirements for transfers at death to a spouse who is a US citizen; § 2056A controls gifts to a spouse who is not a US citizen. Gifts structured under § 2056 pass free of the deceased spouse’s estate for later inclusion in the surviving spouse’s gross estate. By contrast, gifts to a noncitizen spouse do not pass into the survivor’s gross estate. Later distributions of principal are taxed in the deceased spouse’s estate, subject to that deceased spouse’s applicable exclusion amount and estate tax rate.

Because the marital deduction generally allows estate tax liability to be deferred until the second spouse’s death (except in the case of noncitizen survivors, discussed above), a marital deduction formula clause is often used to pass part of the estate of a deceased spouse to the surviving spouse in a manner that qualifies for the marital deduction, and to pass the rest of the deceased spouse’s property to a trust that does not qualify for the marital deduction. The value of the trust that does not qualify for the marital deduction will be applied against the deceased spouse’s estate tax applicable exclusion amount, ensuring efficient use of the couple’s estate tax planning opportunities.

For most estates, the optimum marital deduction is the smallest amount needed to eliminate estate taxes in the estate of the first spouse to die. (Because there may be taxable specific gifts made or significant assets not controlled by the trust, sometimes the estate tax cannot be eliminated. In those cases, the goal is to reduce the taxes to the lowest possible amount.) Thus, the value of the gift qualifying for the unlimited marital deduction should be reduced by the estate tax applicable exclusion amount available at the death of the first spouse to die.

The law creates one important category of spousal transfer that will not qualify for the unlimited marital deduction: The decedent’s estate cannot transfer the property to the decedent’s surviving spouse as a life estate or some other “terminable interest” and claim a deduction unless the transfer meets specific requirements. This is the infamous “terminable interest rule,” and it creates the greatest difficulty and complexity in understanding the marital deduction. Because of this rule, any interest passing to the spouse as a “terminable interest” – that is, an interest in which the surviving spouse’s interest would not vest for federal estate tax purposes – does not result in a marital deduction to the decedent spouse’s estate.

Two exceptions to the terminable interest rule exist that estate planners typically use in marital deduction planning:

Life estate coupled with a general power of appointment. Under this exception, the value of property transferred by a decedent to his or her surviving spouse in a specified manner will qualify for the marital deduction, but the surviving spouse’s estate will include the value of the property in the surviving spouse’s estate at his or her death. Five requirements exist for this exception:

1. All income from the trust must be payable to the surviving spouse at least annually for life;
2. The surviving spouse must have a general power of appointment to appoint the transferred property to him or herself or estate;
3. The surviving spouse can exercise the general power of appointment alone without limitation (although the grantor can limit the exercise of the power either during the spouse’s lifetime or at death);
4. No other person can have the power to appoint the property to anyone other than the surviving spouse; and
5. During the surviving spouse’s lifetime, no person other than the surviving spouse can be a beneficiary of the trust.

I.R.C. § 2056(b)(5).

Qualified Terminable Interest Property Election. Another exception is the qualified terminable interest property (or the “QTIP”) election. Under this exception, the decedent’s personal representative can make an election to treat property subject to a terminable interest as qualifying for the marital deduction. This election has the effect of requiring the surviving spouse’s estate to include the elected property in surviving spouse’s gross estate at his or her death. Other requirements for the election are

1. The surviving spouse must receive all income generated by the property at least annually for the surviving spouse’s life. 26 CFR § 20.2056(b)-7(d)(2) provides that the principals of 26 CFR § 20.2056(b)-5(f) apply in determining whether the surviving spouse is entitled for life to all of the income. 26 CFR § 20.2056(b)-5(f) provides that a trustee’s power to retain trust assets which consist substantially of unproductive property will not disqualify the interest if the applicable rules for the administration of the trust require, or permit the spouse to require, that the trustee either make the property productive or convert it within a reasonable time; and
2. No other person can appoint any part of the property to any other person other than the surviving spouse during the surviving spouse’s lifetime.

I.R.C. § 2056(b)(7).

If the distribution to the surviving spouse meets these requirements, the decedent’s estate obtains the marital deduction even though the ultimate beneficiary may be persons selected by the decedent (perhaps by specifically naming the remainder beneficiary(ies) of the marital trust). The decedent may also give the surviving spouse a limited power of appointment over the subject property, rather than a general power of appointment.

Generally, Section 2056 establishes the requirements for transfers at death to a spouse who is a U.S. citizen. Code Section 2056A disallows the marital deduction for transfers passing from the decedent to a non–citizen surviving spouse unless the property passes to the spouse in a “Qualified Domestic Trust” (QDOT). In addition to the usual requirements for spousal distributions under Section 2056, Section 2056A sets forth the definition of a QDOT. To qualify as a QDOT, the marital trust

1. Must have at least one trustee who is a U.S. citizen or domestic corporation, and
2. The trustee cannot make any distributions (other than income) to the surviving spouse unless the Trustee possesses the right to withhold special estate taxes imposed under Section 2056A.

I.R.C. § 2056A(a)(1).

The reason for this rule is to ensure that property passing to the surviving spouse under the marital deduction does not evade estate taxation in the United States if the surviving spouse returns to his or her country of citizenship.

(Note: Other exceptions to the terminable interest rule include transfer to a so–called estate trust (26 CFR § 20.2056(c)-2(b)(1)) and a charitable remainder trusts in which the surviving spouse is the only recipient. Planners use these techniques infrequently, so we have not included them as drafting options in Wealth Docx.)

The Estate Tax Applicable Exclusion Amount. Title 20 of the Internal Revenue Code imposes a tax on the value of property owned by a decedent. The tax levied by the U. S. government against a decedent’s estate is a tax on the decedent’s ability to transfer property. The Internal Revenue Code imposes estate taxes on a decedent’s taxable estate to the extent the size of the taxable estate exceeds the estate tax applicable exclusion amount. (To the extent the decedent has used the applicable exclusion amount against lifetime gifts, it is not available against the estate tax.) The exemptions from gift, estate, and generation–skipping transfer taxes track the following schedule:

Estate Tax Exclusions by Calendar Year

To the extent the decedent’s taxable estate exceeds the applicable exclusion amount shown in the preceding table, federal law imposes tax at the rates indicated below:

Estate Tax Rates by Calendar Year

The Marital Deduction Planning Theory. The most common approach to marital deduction planning takes advantage of both the unlimited marital deduction and the applicable exclusion amount to avoid taxes in the first decedent’s estate and reduce taxes in the estate of the surviving spouse. Under this approach, because the marital deduction generally allows deferral of estate tax liability until the second spouse’s death, the decedent uses a “marital deduction formula clause” to pass part of the estate to the surviving spouse in a manner that qualifies for the marital deduction. The balance passes to a trust for the surviving spouse that does not qualify for the marital deduction and, under the formula, does not exceed the applicable exclusion amount. These formulas tie the trust value that does not qualify for the marital deduction to the deceased spouse’s estate tax applicable exclusion amount, thus ensuring efficient use of the couple’s estate tax planning opportunities.

Example: Herbert Smith and his wife Wendy have a combined estate of $20 million (Herbert = $15 million. Mary = $5 million). Herbert dies this year with an applicable exclusion amount of $10 million. Wendy dies in 2026 with an applicable exemption amount of $5 million. Each leaves his or her estate to the other, and the balance to their children at the death of the surviving spouse.

Result: When Wendy dies, her estate will be worth $20 million. Since all of Herbert’s $15 million passed to Wendy under the marital deduction and portability was not elected for Herbert’s unused exemption, Wendy’s $5 million exemption amount will only protect $5 million of the $20 million in her estate. Applying a 40% estate tax rate, Wendy’s estate would owe $6 million in estate tax.

Example: Same as above, except Herbert’s trust contains an optimum marital formula funding a QTIP Trust and Bypass Trust. At Herbert’s death, $5 million passes to a QTIP Trust for Wendy’s benefit and $10 million funds a Bypass Trust for the benefit of Wendy and the children.

Result: When Wendy dies, her estate will be worth $10 million, consisting of her $5 million and the $5 million from the QTIP trust. Wendy’s $5 million exemption amount will protect $5 million of the $10 million in her estate. Applying a 40% estate tax rate, Wendy’s estate would owe $2 million in estate tax.

Under this example, the optimum marital deduction plan saves Herbert and Wendy’s heirs $4,000,000 in unnecessary taxes.

Note on State Estate Tax and the Effect of “Decoupling” For the estates of decedents dying before December 31, 2004, the Code allowed a dollar–for–dollar credit for any death tax actually paid to any state or the District of Columbia, because of any property included in the gross estate of the decedent. I.R.C. § 2011(a). The Code gradually phased out the state death tax credit and finally eliminated the credit for the estates of decedents dying after December 31, 2004. For decedents dying after December 31, 2004, the Code replaced the credit with an unlimited deduction for state death taxes actually paid. I.R.C. § 2058.

The elimination of the death tax credit caused substantial economic hardship for many so–called “pick–up” states, which had enjoyed a state estate tax regime by which the amount of state death tax liability to a decedent’s estate equaled the amount of the allowable federal tax credit. By collecting a tax otherwise covered by a credit extended by the federal government, pick–up states were able to collect tax revenues at the expense of the U. S. government without increasing the overall tax burden imposed against the decedent’s estate. The elimination of the state death tax credit has resulted in significant lost revenue for these states, and many states have “decoupled” from the federal estate tax structure in an effort to stem the loss of state death tax revenue.

As of this writing (June 2021), twelve states and the District of Columbia impose estates tax. Six states impose inheritance taxes. The American College of Trust and Estate Counsel maintains a State Death Tax Chart found at https://www.actec.org/resources/state-death-tax-chart/ that provides an overview of the estate tax laws of each state and the District of Columbia.

Clients and their planners must consider both state and federal estate tax exemptions and rules in designing estate plans with the most efficient death tax result. As we will see, added flexibility from a tax perspective often comes at the expense of administrative flexibility. This, however, is often a cost that clients are willing to pay, if they understand that the alternative is writing a bigger check to the Internal Revenue Service or their state’s treasury.