Sometimes we provide for gifts in our Will or other testamentary documents without thinking about the debt that is on the asset or what happens to it. This often comes up when someone wants to gift real estate to others, since real property tends to be purchased through financing.

Generally, we look to the express provisions of a deceased person's Will or Trust to determine his or her intent with respect to gifts that are made. California Probate Code Section 21102 provides as follows:

(a) The intention of the transferor as expressed in the instrument controls the legal effect of the dispositions made in the instrument.

(b) The rules of construction in this part apply where the intention of the transferor is not indicated by the instrument.

(c) Nothing in this section limits the use of extrinsic evidence, to the extent otherwise authorized by law, to determine the intention of the transferor.

In addition, where property is subject to a mortgage or debt, a specific gift of that property will be transferred and remain subject to that mortgage and debt, as provided in California Probate Code Section 21131, which states:

A specific gift passes the property transferred subject to any mortgage, deed of trust, or other lien existing at the date of death, without right of exoneration, regardless of a general directive to pay debts contained in the instrument.

To avoid this outcome, it is important for you to specify whether the debt on the property is to be paid off prior to the transfer, i.e., should the debt be "exonerated". Moreover, if your estate is not large enough to fully exonerate the debt, you may also need to think about which of your other gifts can be cut back and in what sequence they should abate.

When a person dies with excessive amounts of debt or there are lots of expenses related to the administration of his or her estate, certain gifts laid out in the deceased person's Will or Trust may need to be reduced. There's a specific sequence in which the gifts get cut back, and California Probate Code Section 21402 provides the sequence:

(a) Shares of beneficiaries abate in the following order:

(1) Property not disposed of by the instrument.

(2) Residuary gifts.

(3) General gifts to persons other than the transferor’s relatives.

(4) General gifts to the transferor’s relatives.

(5) Specific gifts to persons other than the transferor’s relatives.

(6) Specific gifts to the transferor’s relatives.

(b) For purposes of this section, a “relative” of the transferor is a person to whom property would pass from the transferor under Section 6401 or 6402 (intestate succession) if the transferor died intestate and there were no other person having priority.

For details on specific versus general gifts see this earlier blog post.

The abatement applies to debts, expenses, and the satisfaction of gifts from high to low priority; however, it does not apply by default to how estate taxes get apportioned.

Often a client may have grand ideas about giving gifts to certain family members and friends, without considering the fact that the assets they want to distribute at the time of their death may be insufficient to satisfy all of the gifts.

For example, a client may create his or her Will or Trust at a time when he or she is wealthy, but pass away at a time when much of the estate has been depleted for the client's care. It is therefore, important to consider the sequence in which the client may want gifts fulfilled to ensure that those that are most important to the client have the highest likelihood of being distributed to the chosen recipient.

Asset protection generally involves planning to make sure that creditors cannot reach your assets or that the creditors of your beneficiaries cannot reach the assets that you are leaving behind for them.

Although many people will use this as a buzzword to motivate people into estate planning, in my experience, these types of issues are usually very minimal or non-existent, and are more often than not, a marketing device. Moreover, many of the more complicated techniques are quite costly to implement, and too expensive for a typical client.

Finally, if you already have creditors, the options for protecting your assets may be severely limited.

Trust Provisions

One practical way to provide asset protection for your beneficiaries (for example, if you have a trust set up for your children), is to have the distributions to your beneficiary made at the discretion of an independent third party trustee. You could also incorporate a "spendthrift" provision in the beneficiary's trust to prevent him or her from transferring or borrowing against their beneficial interest in the trust.

Retirement Accounts

Some assets have inherent creditor protection. For example, retirement accounts such as 401ks and IRAs have creditor protection features that may cause them to be attractive for those who are worried about creditors. Not to mention, retirement plans generally have great tax savings benefits as well. There are, however, limits to how much one can contribute annually to retirement plans, and generally withdrawals from these accounts are limited until one reaches 59 1/2 years of age (with some exceptions).

Asset protection should be part of the conversation you have with an estate planning lawyer; however, it's only one aspect and should be put into the context of your overall family and financial situation.

Estate planning can become more complicated if you own assets outside of California or outside of the US. Among the considerations are the tax laws of those foreign jurisdictions, as well as the laws in those regions that may dictate how your assets are to be distributed after you pass away. For most, this is not a substantial problem to overcome, but it is important to be aware of the considerations.

Assets in other Jurisdictions

Other jurisdictions may not have the concept of a "trust" as we do here in California. Consequently, you may need to hire a lawyer in that particular country to understand how to appropriately plan your estate for property you may own in that country. Additionally, the laws in those countries may grant your family certain rights with respect to the property located in that country.

State Estate or Inheritance Taxes

California no longer has a "state estate tax", but other states still have such a tax. A "state estate tax" may also be referred to as an inheritance tax. Therefore, if you own property in states that have their own estate or inheritance tax, it's important to consult a lawyer in those states about how to plan appropriately.

International Tax Issues

It's important to remember that tax treatment between different countries can become even more complicated and may be affected by treaties put in place.

US tax laws are focused on making sure you are not avoiding taxes by shifting your property to other countries or by claiming property from other countries as gifts rather than income. Thus, even if you had a non-tax reason to move property to or from another country, it may have the unintended consequence of triggering tax laws.

If you own assets in multiple states and other countries, it's a good idea for you to consult with an estate planning lawyer to understand the potential issues you or your family may face.