IT PAYS TO KNOW: You Can’t Take It with You

By JUDD MATSUNAGA, Esq.

An elderly Nisei woman came into my office the other day after the loss of her husband. “Who’s that with you?” I asked.

She looked up at me and replied, “Oh, I’m so upset that I’m just beside myself. My husband came home on hospice care a month prior to his death. He instructed me to go to the bank and withdraw our life savings in cash, put it in a suitcase and leave it in the attic. That way, when he dies he could take his money with him on his way up to heaven.”

When I asked her what happened, her face got sad and looking down she said, “After his death I went up to the attic to see if the suitcase was gone. But, the suitcase was still there.” With a big sigh she concluded, “I should have put it in the basement.”

Well, all of us know that we must leave our worldly wealth behind when we die. There’s even an American phrase, “You can’t take it with you” (which also became the title of an Academy Award Best Picture film in 1936). For most Americans, it means you might as well enjoy material things while you’re alive, as in “Go ahead and buy the fancier car; you can’t take it with you.”

But for the Japanese American Nisei, the phrase “You can’t take it with you” takes on a completely different meaning. I think it’s in their DNA. After going through some very hard times, e.g., the Depression, the war, internment camps, discrimination, etc., the Nisei became a generation of “savers.”

For many Nisei, the thought of spending money on frivolous things is unthinkable. (Not so for the Sansei, who never experienced the same hardships.) The Nisei’s hard work and many sacrifices have paid off. What I mean is that the Nisei community has accumulated a lot of wealth.

Back in the ’50s and ’60s, I don’t think you saw too many millionaire Issei around town. Today, there are millionaire Nisei all over the place. But these Nisei, the ones that are still around, are all getting up in age, i.e., late 80s to mid-90s. In other words, the greatest transfer of wealth in Japanese American history (from Nisei to Sansei) is taking place right now.

Now the “upper crust” of American families have learned about wealth succession planning from their parents through four, five or six generations of wealth. However, for the Japanese American families that have accumulated substantial wealth, this is the first opportunity to be involved in wealth succession planning.

For example, let’s look at former presidential hopeful Mitt Romney. His complex estate plan is a model of efficient wealth planning. With an estimated net worth of $250 million, Romney has a variety of trusts related to his business, Bain Capital, and his family that may allow him to escape the 40 percent estate tax rate on many of his assets valued above the current tax exemption of $5.43 million.

How? Romney removed assets from his estate through the use of irrevocable trusts that provide him with income while leaving most of his wealth and its appreciation to heirs estate tax-free after his and his wife’s deaths.

“But Judd, yes, we’re comfortable, but we don’t have that kind of money.” It doesn’t matter. If you calculate the value in your home, retirement accounts, life insurance, inheritance, cash accounts, appreciating investments, your cars and everything else you own, many Nisei families need to plan “for the children’s sake.”

In 2015, individuals are allowed an exemption from the federal estate tax for assets worth up to $5.43 million. And even if you don’t have $5.43 million, there’s no guarantee that after the 2016 presidential election that Congress won’t lower it — say to fund Social Security, Medicare and Medicaid.

So if you have $5.43 million and Congress lowers the federal estate tax exemption to $3.5 million, you just lost an opportunity to save taxes on nearly $2 million if you don’t do anything. At 40 percent estate tax rates, that’s $800,000 of your money that your kids have to hand over to the IRS — that’s enough to make your Issei parents turn over in their graves.

In other words, the rich and famous are using the current $5.43 million estate tax exemption (highest in history), and doing wealth transfer planning now. The Nisei need to do the same. “But Judd, what can I do?” Depending on your level of wealth and comfort level in giving assets away, there are several ways to eliminate or reduce estate taxes.

The purpose of this article (and a “Part II” follow-up article) is to share some estate planning secrets of the rich and famous. Let’s start with avoiding probate. Some of the Nisei families that own their own homes have set up revocable living trusts to avoid probate. But, many Nisei families that own their own homes have not.

Perhaps some Nisei families know they need to set up a living trust, but have been waiting for another “Nisei Week Special.” However, other Nisei families are under the mistaken belief that they do not need a trust. They might even have been told that they do not need a trust because “Trusts are for rich people.”

Not true. In California, if your estate is over $150,000, your family is heading to probate court without a living trust. That means if you own your home, you need a trust. “But Judd, I have a will, won’t that do?” If you own your home, absolutely not. A will has to be probated. A trust avoids probate.

“But Judd, I put my child on title to my house as a joint tenant. Won’t that avoid probate?” Yes, there is an automatic right of survivorship of a joint tenant. However, you created a huge tax problem for the child if he or she sells the home after your death. Now the child only gets a half “step-up in basis” upon your death. Ask your child if he wants to share his or her inheritance with the IRS. There’s a much better way.

“But Judd, won’t I lose control over my money if I put it in a living trust?” Again, absolutely not. You appoint yourself the “trustee” of your own trust. That way you still have full control over your money and other assets. Furthermore, you don’t even have to file a separate tax return with a revocable living trust — there is really no disadvantage.

There is only one legitimate reason why a California homeowner wouldn’t need a revocable living trust. Because of a catastrophic illness or disease that requires long-term care. If Medi-Cal pays for nursing home care, a revocable living trust will not protect the home from a California estate recovery claim. The good news is that there is another estate planning trust that will — commonly called a “Medi-Cal House Protection Trust.”

Bottom line, if you’re not rich but own your home, you need a trust. If you are fortunate to have accumulated wealth, there are three basic ways the rich and famous transfer wealth to their heirs: 1) If married, use both estate tax exemptions; 2) Remove assets from your estate before you die; and 3) Buy life insurance to pay any remaining estate taxes.

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Judd Matsunaga, Esq., is the founding partner of the Law Offices of Matsunaga & Associates, specializing in estate/Medi-Cal planning, probate, personal injury and real estate law. With offices in Torrance, Hollywood, Sherman Oaks, Pasadena and Fountain Valley, he can be reached at (800) 411-0546. Opinions expressed in this column are not necessarily those of The Rafu Shimpo.