FAQs

Business | Real Estate | Estate Planning & Administration

Business Questions

Q. What are the benefits of incorporating my business?
A. The principal reason to incorporate is to limit liability of the business owners. This can be done by creating a corporation or a limited liability company (LLC). It is not enough, however, to merely incorporate. The corporation or LLC must be operated as an entity independent of the owners, observe normal business amenities (such as conducting shareholder and director meetings) and carry sufficient insurance to cover the risks of its operations. It is also important to note that business owners will lose their limited liability as to obligations they assume or guarantee, such as bank loans or leases.

Q. How much will it cost to create a California corporation or limited liability company?
A. Creating a corporation or LLC requires both governmental and filing fees and legal fees. The governmental and filing fees are between $180 - $ 220. In addition, corporations and LLCs are assessed minimum franchise taxes of $800 per year by the state of California. Legal fees for a simple incorporation or LLC run between $1000 - $1500. If the owners desire a buy-sell agreement, the cost will increase by between $1000 - $2500, in the usual case.

Q. How quickly can I form a California corporation?
A. We can assist you in forming a California corporation in as few as two days, although there is a much higher filing fee for immediate formation. Typically, formation can be effected within 5 to 7 business days without significant additional cost. At the law firm of Aikenhead, Cipes & Supanich, our attorneys counsel entrepreneurs and existing enterprises in the formation and operation of business entities.

Q. How do I know when my business partner and I need a Buy-Sell Agreement?
A. Buy-Sell Agreements are advisable for any valuable business having more than one owner. Such an agreement should provide for the optional or mandatory buy-out of one owner (the Seller) by the others when the Seller dies, retires, or becomes incapacitated. The Agreement should set the purchase price and terms for the buy-out, as well as any restrictions on the Seller's competition with the business after the buy-out. Life insurance can also be used to fund a buy-sell agreement.

Q. Can a non-competition agreement be enforced in California?
A. In most cases a covenant not to compete cannot be enforced in California unless it is given in connection with the sale of an interest in a business in which the seller has sold and been paid for "good will", or is necessary for the protection of trade secrets. Good will is generally understood to be the tendency of the customers of a business to continue to patronize it, an intangible asset which is over and above the value of the tangible assets of a business.

Real Estate Questions

Q. Do I need a lawyer when I sell or buy a house?
A. In California, unlike many states, most purchases and sales of residential single family homes are negotiated and documented without either party being represented by legal counsel. While in most cases, neither party regrets this, there are many situations where consulting a lawyer will help a party avoid serious problems. A lawyer should review the real estate broker prepared offer and acceptance, especially when the broker represents both the buyer and the seller. A lawyer should review the preliminary title report, especially the exceptions to title. This type of limited involvement by a lawyer can help the party represented avoid significant loss and aggravation in what is, for most people, their biggest financial investment. At Aikenhead, Cipes & Supanich, we provide a full range of real estate law services to commercial and residential real estate owners and developers.

Q. Should my spouse and I hold title to real estate as joint tenants?
A. We generally recommend against two or more persons holding title to property as joint tenants, for several reasons. When one joint tenant dies, the surviving joint tenants succeed proportionally to the interest of the deceased joint tenant in the property they collectively owned. While this sounds like a convenient way for a husband and wife to avoid probate when one of them dies, it can lead to many problems. First, because joint tenancy property automatically passes to the surviving joint tenant, the interest in the property of the first joint tenant to die, will not pass as the joint tenant provides in his or her will or trust unless the named beneficiary and the surviving joint tenant are the same person. Also, if both joint tenants die in a common accident, there will need to be two probate proceedings (one for each joint tenant's half). Joint tenancy for community property is not desirable because it could, mistakenly, be treated as separate property and thus be deprived of a step up in tax basis on death for both halves. Accordingly, in most cases, community property should be held by a husband and wife as community property and not in joint tenancy. Note that under recent California legislation a husband and wife may now hold title to real property as community property with a right of survivorship. This method of holding title has the advantage of the survivorship feature of joint tenancy without jeopardizing the availability of the double step up in basis applicable to community property.

Q. Should my spouse and I hold title to investment real estate as individuals or through an entity, such as a corporation or LLC?
A. In order to limit liability for personal injuries suffered on the premises, we recommend that individuals form Subchapter S corporations or LLCs to hold investment real estate.

Estate Planning and Administration Questions

Q. What does probate cost?
A. The biggest component of the cost of probate is the fees payable to the personal representative of the estate (i.e., the executor or administrator) and that representative's attorney. In California, the personal representative and the representative's attorney are each entitled to a statutory fee based on the value of the estate. That fee is calculated as:

• 4% of the first $100,000 of value,
• 3% of the next $100,000,
• 2% of the next $800,000,
• 1% of the next $9,000,000 and
• 1/2% of the next $15,000,000.

For example, a $750,000 estate will generate a total of $36,000 in fees, $18,000 to the attorney and $18,000 to the representative. In many cases, a family member acting as the personal representative will waive or reduce his or her fee. In addition to these statutory fees, there are probate costs, including the filing fee ($465 to open the estate, $465 to close it, and $465 for most other petitions filed during administration – Los Angeles County fees as of 10-5-2017); publication costs (usually about $500); and the fees of the court-appointed appraiser of estate assets (called a Probate Referee), which are 0.1% of the value of the assets appraised (e.g., if the assets appraised are worth $750,000, the referee’s fee would be $750). Accordingly, the total cost for the probate of a $750,000 estate could be as much as $38,500.

Q. Will the property taxes on my house increase if I transfer it to a living trust?
A. The transfer of property to a revocable living trust will not cause a Proposition 13 increase in property taxes. The key to avoiding such problems is to properly prepare and submit a Preliminary Change of Ownership Form with the trust funding deed to the county recorder.

Q. If I have a living trust, do I still need a will?
A. Yes. It is important to have a "pour over" will under which any assets not transferred to the trust during your lifetime can pass to the trust through probate if necessary. The "pour over" will is a safety net to take care of overlooked assets and assets which, by their nature, cannot be transferred to a trust during your lifetime, such as claims for wrongful death.

Q. How do I assure that my life will not be prolonged by medical technology if I am terminally ill?
A. In California, the document by which a person protects against unwanted prolongation of the process of dying is called an Advance Health Care Directive (AHCD), also sometimes called a Power of Attorney for Health Care. In an AHCD a person:

(1) appoints a health care agent (who is usually a spouse or other family member) to make heath care decisions if the person is so incapacitated as to be unable to communicate and
(2) expresses his or her wishes about the use of medical technology to prolong life if the person cannot recover or is terminally ill.

Q. How much will it cost for my spouse and me to set up a living trust?
A. The typical estate plan that includes a living trust, also requires wills for both the husband and wife. We also recommend considering creation of Advance Health Care Directives and Powers of Attorney for Asset Management. An important component of creating a living trust is funding it with most of the settlors' assets. Depending on the complexity of the estate plan and the extent of trust funding assistance settlors need, the cost will generally run from $1,500 - $5,000.

Q. How large an estate do I have to have to worry about estate taxes?
A. There is currently no California estate or inheritance tax. Under current law, no federal estate tax is imposed on a taxable estate of $11,180,000 or less for persons dying in 2018. That figure is indexed for inflation and so should increase in future years. Lifetime gifts of the decedent in excess of the annual gift tax exclusion ($15,000 for gifts made during 2018, also indexed for inflation) are added back to the decedent’s estate to compute its size. Note that under current law the exemption will be reduced by 50% in 2026, so clients with substantial estates cannot rely on the current large exempt amount being in effect at their deaths.

Q. I have heard that the estate tax exemption is now "portable," meaning I can "inherit" my spouse’s exemption and use it and my own exemption to avoid estate tax at my own death. Does this mean I don’t have to do estate or tax planning any more?
A. In short, no. A recent development in estate tax law is this “portability” of the estate tax exemption. The surviving spouse can in fact “inherit” the unused exemption of the first deceased spouse. For example, if a couple had community property assets worth $15,000,000 at the first death, and the survivor inherited the entire $7,500,000 owned by the decedent, the survivor could, by filing an estate tax return, elect to “inherit” the deceased spouse’s $11,180,000 exemption. So, when the survivor died, he/she would have not only his/her own exemption ($11,180,000 under current law), but also the deceased spouse’s $11,180,000 exemption, which would be enough to shelter the entire $15,000,000 from tax. However, there are a number of reasons why the spouses should consider using a trust to hold the first decedent’s share of their assets, just as they would have done before portability was enacted, such as the control that the decedent maintains over his/her share of the assets by putting them in a trust that cannot be spent by the survivor without restriction or left to whomever the survivor chooses (such as a new spouse or children from a new marriage). There are other reasons that are beyond the scope of this brief FAQ entry, which we will be happy to discuss with you.

Q. What is the "step up in basis" on death?
A. Under current federal estate tax law, at death all of a decedent's property receives a new "stepped up" basis equal to its fair market value on the date of the decedent's death (or in some cases on a date which is six months thereafter). This means, for example, that if you inherit stock from your mother worth $1,000,000 at her death, which she bought for $100,000, then the basis of the stock in your hands is $1,000,000. If you sell it for that price, there will be no capital gain tax.

Q. If federal estate taxes are repealed or the exemption is set at such a high level that I will not have to pay any tax, will I still need to do estate and tax planning?
A. Yes. Wills and trusts will still be needed to assure that your property goes to those you wish to receive it. Trusts will still be needed to avoid costly and time-consuming probate proceedings. In the event of federal estate tax repeal, there will likely be only a limited ability for a step up in basis. This means that in many cases, a beneficiary will take property from a decedent with its original basis and, accordingly, will have greater potential liability for capital gains tax on sale of that property. In that case, your will and trust can direct how the benefits of any available step up in basis is to be allocated among your beneficiaries.

Q. I received a letter from a company saying it would help me collect unclaimed property from the State of California for a 20% commission. Is this a good deal?
A. No. This web site maintained by the California State Controller allows you to check for unclaimed property yourself and provides instructions on how to submit a proof of claim. There is no charge for dealing with the State Controller's office. So we suggest that you do it yourself and save your money.

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