Posts tagged tax
Can you deduct legal fees for estate planning on your income taxes?

While estate planning fees generally are not deductible on your income tax returns, they may be deductible or partially deductible for the following reasons:

  1. If the fee is considered a business expense.
  2. If the fee is an expense for the production or collection of income, for the management, conservation, or maintenance of property held for the production of income, or in connection with the determination, collection, or refund of any tax.

Under item 2 above, you may be able to deduct a portion of the legal fees if they relate to tax planning.

If this applies to you, the lawyer you are working with may be able to estimate the portion of your legal fees that relate to tax planning. It is also a good idea to discuss this with your accountant to determine what is appropriate in your specific situation. For some of you, tax planning may be one of the most important aspects of your estate plan, so it doesn't hurt to ask!

What is a Revocable Living Trust? (A Brief Overview)

One of the most common estate planning documents in California is the Revocable Living Trust. You can think of a Revocable Living Trust kind of like a container to hold your assets while you're alive. This container is governed by a set of specific instructions that you lay out in the document that creates the trust, and tells others how the assets inside the trust are to be used for your benefit while you're alive and how the assets are to be distributed after you pass away. Depending on your marital status, there will be different ways to create a trust.

Single Person

If you're single, or not married and not in a registered domestic partnership, you will most likely have a revocable living trust that holds all of your own assets. Also, any assets that use a beneficiary designation, such as life insurance policies or retirement accounts will likely have the trust named as its primary beneficiary so that the proceeds from those assets can be distributed in accordance with the revocable living trust provisions.

Married Persons

If you're married, it is likely that you and your spouse will create a single joint revocable living trust that holds both of your assets--whether it is community property or the separate property of both spouses. Occasionally, couples will create 2 or more revocable living trusts--one to hold the couple's community property, one to hold one spouse's separate property, and perhaps one more to hold the other spouse's separate property. The specific combination will depend on factors such as:

  1. Whether and/or the amount of separate property that each spouse has.
  2. The value of the assets that the spouses' own overall.
  3. The similarity or disparity in how each spouse wants to distribute his or her assets.
  4. Other personal factors such as each spouse's belief in the other's ability to handle financial affairs.

Day-to-Day Life Remains the Same

So long as you (and your spouse, if you have a joint living trust) are alive and fully functioning, there's no practical change to how you handle your financial affairs once the trust is set up. Because revocable trusts can be amended, changed, or revoked by you, they do not provide any immediate benefit for tax or creditor purposes (though this is not necessarily the case after you pass away). If a trust is revocable and amendable, then:

  1. Transferring assets to the trust does not cause any adverse tax consequences.
  2. Income taxes as a result of rent, dividends, capital gains or losses are treated the same as it was prior to creating the trust. 
  3. The trust assets will be included as part of your estate.
  4. There is no reassessment of your real estate for real property taxes (a huge benefit for long-time residents in counties where the property tax bases tend to be much lower than the fair market values of the property, such as in Los Angeles County).

Schedule of Assets

In most trust documents, there's a separate schedule which lists all of the assets that you own and is supposed to be contained within the trust. This is helpful for at least a few purposes.

First, if you die and haven't otherwise kept a good record of the property that you own, this schedule can be useful to your successor Trustee, who can use the list to track down your assets.

Second, if you forgot to re-title those assets in the name of your trust, it could serve as the basis for a "Heggstad" petition, which is a special procedure to transfer those assets to your trust without the need to go through a full probate process.

So there you have it, a few basics of a revocable living trust. 


How can estate planning help reduce costs and taxes?

Without proper estate planning, your eventual incapacity or death can result in a number of expenses and possible taxes that could otherwise be minimized. Here's a rundown of some of the common ones that come up:


One of the primary reasons that California residents create an estate plan is to avoid the time and expense of probate. Often through a simple vehicle such as a revocable living trust, you can develop a uniform plan that can eliminate the cost, publicity, time, and intrusiveness of a probate proceeding.

Real Property Taxes

California residents enjoy the benefit of "Proposition 58" which is a law that relates to transfers of real property from parent(s) to child(ren). Under this law parents are able to transfer their personal residence and up to $1,000,000 in assessed real property (during life or at death) to their children without having the transferred real estate be reassessed for real property tax purposes. In simple terms, children are able to pay the same low property taxes that their parents paid. Without proper planning, however, parents may be unwittingly giving up this benefit.

Estate Taxes

As of the date of this writing, the estate tax exemption amount (in simple terms, the amount of assets you can transfer to others without incurring estate tax) is just north of $11 million dollars. As a result, few people currently face this issue. However, this exemption amount is scheduled to go back down to approximately $5.5 million on January 1, 2026, which could bring many more people into taxable territory. Certain estate planning techniques can be used to defer the payment of estate taxes.

Income Taxes

Where appropriate, a competent estate planning lawyer will undoubtedly explain possible income tax consequences as well. For example, use of retirement assets to fund charitable gifts or an explanation of the "cost-basis" adjustment of your assets at the time of death, are both important considerations that you should know about. In addition, some types of trust structures may require ongoing income tax filings (and the expenses associated with tax preparation) that you should know about.

Generation Skipping Transfer Tax

A different type of tax exists for special types of transfers that "skip" a generation. For clients with large estates (generally those that will face estate tax) this is often an important topic to visit.

Legal Fees

Although not a "tax" in the traditional sense, it bears noting that when an individual dies without an estate plan, it can often throw families into disarray and cause them to engage a lawyer who then must sift through all of the decedent's information to figure out who gets what and what types of liabilities existed. Proper estate planning can allow families to minimize the legal process after your death since there will be a set of instructions on how exactly your estate is to be managed and/or distributed. Moreover, if you've worked with a lawyer, he or she most likely has a sense for the types of assets that you own and can often be a guide in the post-death administration process.

Many people fear the cost of establishing an estate plan, but when faced with the multitude of possible expenses of not having an estate plan, generally, the question is "can you afford not to have an estate plan?"