Incorporating in California is a smart thing to do, since you will be conducing business and business is always risky, no matter the industry. Are you signing leases, contracts, hiring employees, visitors are coming into your office. In this litigious society, you need to protect you and your family as much as possible.

This Yahoo story on how to Penalty Proof Your Tax Return is a good read.

As it stands now, if Congress does absolutely nothing, the estate tax will resurface again in 2011, and the exemption will be at the same level as it was back in 2002, $1 million.  This amount is far below the $3.5 million exemption in 2009.  It is widely believed that this will not happen, that something will be done before, but it is possible that we will see 2002-2003 level exemptions for estate tax purposes.

So what can you do? Obviously nobody in their right mind would try to time their date of passing, so for the most part you don’t do much.  If someone in your family does pass however, there are a lot of tax implications that must be examined by a tax professional.  CNN Money discusses the issues here.  If so you should speak with a financial/tax adviser so that you ensure you employ the best strategies for your estate, or that of your loved ones.

For 2009, this amount is $3.5 million, and the highest rate is 45%.  It was set to completely disappear next year, and revert back to $1 million in 2011.  Which means, if nothing is done, those with very sizeable estates who pass away next year are “lucky” in a sense that they hit the estate tax jackpot.

This scenario is highly unlikely as I’ve written before how President Obama plans to freeze the current exemption, $3.5 million.  With proper planning, this tax can be avoided by most families, as $3.5 million is a fair amount.

California is one of a few states who do not collect any type of death taxes, estate, inheritance or gift.  Since 2005, estates don’t even have to file an estate tax return with California, because the US phased out a credit that the states received from the Federal tax.

What surprises me is that California is in such a financial mess, yet we haven’t heard any talk of an estate tax resurrecting itself.  They’ve increased taxes wherever they can, to much opposition.  But the budget is so unbalanced how long before we  see talk of implementing an estate tax at a lower exemption amount to capture more assets?  I hope they’re not reading this, I don’t want them to get any ideas!

No that is not a typo.  In California there is an Unclaimed Property Law that allows the State of California to . Specifically Section 1514 of the Code of Civil Procedure states:

1514.  The contents of any safe deposit box or any other safekeeping repository, held in this state by a business association, escheat to this state if unclaimed by the owner for more than three years from the date on which the lease or rental period on the box or other repository expired, or from the date of termination of any agreement because of which the box or other repository was furnished  to the owner without cost, whichever last occurs.

It would appear that your contents would be safe as long as your lease doesn’t run out or the agreement with the bank isn’t terminated.  But this is not the case.  California’s State Controller has been aggressive in the past seizing assets of deposit boxes which have not had any activity within the past 3 years.  Even if no such termination occurred.  In one case a couple of years back, a lady stored her grandmother’s jewelry and a file of personal documents at her bank, thinking they would be safe.  Without giving her any notice and with no evidence she forgot about her stuff, the bank under the auspices ofthe State auctioned off the jewelry on Ebay for a fraction of the $80,000 value, and shredded everything else.  She did not find out for another 9 years.

The state was racking up $400 million a year doing this.  They were allowed to deposit these funds into a general account to use for various state expenses.  Now, if the rightful owner ever comes around they can claim the property.  There is a State Controlller’s page for information on unclaimed property.  Because of the publicicty and a class action lawsuit, new laws were put in place and the State Controller implemented some reforms.  They are attempting to increase their efforts in notifing owners of the imminent seizure of their assets, but it is still not perfect.  Even celebrities from London are owed money from the program.

While you can rightfully claim any value of property they seized, it is not always easy to place a dollar value on assets now lost forever.  The state is not in the business of storing mementos and stock certificats and jewelry.  In previous cases they sold jewelry for a fraction of the real value, and that was all you were allowed to recover.  Whether this practice has been eliminated is unclear. What is clear is that if you have a safe deposit box, check at least annually that your bank and the State have not decided on your behalf that you have abandoned it.

The two divorced in 1994.  Under the divorce decree, the ex-wife waived any rights she had in the plan.  However, the beneficiary designation form was never updated.  Kennedy wanted the assets under the plan, $402,000 to go to his daughter, but never updated the form (he did update the forms for a different plan).  The daughter, also executor of the estate, wanted the Plan administrator to distribute the assets to her, but they would not because the beneficiary designation form still listed the ex-wife.

The court noted that a qualified domestic relations order (QDRO) can override a beneficiary designation, but that a signed divorce decree cannot. Whether this decision by the court extends to other agreements is unclear, but what is clear is that the designation form carries significant weight, and should be updated regularly.

A thorough financial plan should include periodic review of these and other forms, and you should review these (as well as all other estate plan documents) whenever a significant life event occurs.

Probate is expensive, often difficult, and may take a long time.   California Probate Code Section 10810 sets out the maximum fee attorneys can charge for probating an estate.  This fee is:

Four percent on the first one hundred thousand dollars ($100,000).  Three percent on the next one hundred thousand dollars ($100,000).  Two percent on the next eight hundred thousand dollars ($800,000).  One percent on the next nine million dollars ($9,000,000).  One-half of 1 percent on the next fifteen million dollars ($15,000,000).  For all amounts above twenty-five million dollars ($25,000,000), a reasonable amount to be determined by the court.

What’s that all mean?

• $100,000 estate will pay a $4,000 fee
• $200,000/$7,000
• $300,000/$9,000
• $400,000/$11,000
• $500,000/$13,000
• $750,00/$18,000
• $1,000,000/$23,000

The first kicker to all of this (yes there is more than one kicker!) is, the fee is calculated without regards to any loans or liabilities on the assets.  If you are single and pass away owning a house worth $500,000 with a mortgage of $250,000, it does not matter.  The fee will be calculated on the $500,000 amount.  The second kicker? The executor and the attorney is each entitled to the full amount of the statutory fee.  So that $500,000 estate may be subject to a maximum of $26,000 in fees for the executor and attorney alone. Of course either party may waive that amount and accept a lower fee.  Or they may not.

There are several ways to avoid probate, establishing and funding a revocable living trust is one of them.  Also, estates of less than $100,000 may skip probate as long as no real estate is involved. If there is real estate, it must be valued at less than $20,000 – good luck with that in California.  You may also transfer property to a surviving spouse outside of probate, and there are certain assets which are not included in your estate which include retirement plans (IRA, 401(k), pensions), life insurance not payable to the estate, and any joint tenancy accounts.

There may be some unique exceptions where probate would be desirable, such as disputes between heirs whereby a Judge’s oversight and control may be needed.  In most cases however probate in California is a very onerous, public and costly process.

• If you have a surviving spouse or domestic partner, all community property and quasi-community property is given to that spouse/partner. 
• If you pass away with separate property then your spouse/partner receive 100% of separate property if you leave no children or children of your children, parent, brother, sister or children of deceased brothers and sisters. 
• This number drops to 50% if you only had one child (or children of one deceased child), or at least one parent, brother, sister or children of any of them
• This number drops further to 33% if you had more than one child, or one child and children of a deceased child, or children of two or more deceased children

That is just what your surviving spouse or domestic partner receives if you die without a will.  The rules that determine what your other heirs get, if anything, are even more complicated.  And if you have no heirs at all?   Your assets “escheat” to the state which means they get your assets.

The point is, if you have an estate of any decent size you will want to, at a minimum, do some basic planning that directs who gets your assets upon death.

I understand why you might want to invest in your employer’s stock.  You work there.  There is an emotional attachment to the well-being of the company you work for.  Of course you think the stock price will excel.  There is a good chance that your employer’s stock price has been beaten down with the stock market being down over 50% from its peak in 2007.  You know the share price should be higher, and you are sure it will rise again.

Company pride is an admirable thing and may be encouraged in other areas, but not when it comes to your retirement account.  You’ve heard of the term diverisification.  You can diversify your portfolio across stocks, strategies (value vs. growth), or across asset classes (stock, bonds, international). You can diversifty across sectors and even different money managers.  In this case you want to diversify against your employer.  Yes your employer.

While the major stock market indices are down around 50% or more, some individual stocks haven’t fared so well.  Employees at Lehman Brothers saw their company stock lose almost all of its value in a matter of weeks, days almost.   Some companies have had their shares battered down 80% – 90%.  Auto and financials were especially hit hard.

So it is not advisable to have a concentrated position in any one company, and the danger is exacerbated when that company also provides your paycheck.  If something catastrophic happens, such as a bankruptcy or total implosion, you could potentially lose your job and your retirement plan in one fell swoop.  It could devastate your personal finances.

I recommend taking no more than what the normal allocation to individual stocks are in your portfolio. But at the absolute maximum no more than 10%; 1-5% is more desirable.  If your company offers a match if you purchase company stock, that should also be taken into consideration.  If you have a high concentration now, check to see if you cannot diversify out of those shares without surrendering any matches that may not have vested yet.

Still, when the Chairman of the FDIC says that they may run out of money this year, there is cause for concern.  Indeed, if enough banks fail, the FDIC may run out of funds.  Now, I wouldn’t rush out and pull deposits out.  Save for a very serious meltdown still ahead, I think it unlikely we see an insolvent FDIC.  But you can never rule out the possibility.  But lets say your bank does fail, and the FDIC is almost out of money or close to it.  You might get your money back, but it may take a while if there is a long queue in front of you.  What if you need the money right away or had a big obligation due shortly?

For starters, I suggest at least keeping accounts at two different banks.  If possible, keep a few months worth of expenses in each account.  Also, inquire into the health of your bank.  Finally, for larger amounts a brokerage account may make more sense.  Short-term government funds are quite safe.  Assets at a brokerage are not subject to being “lent against” by the brokerage, meaning your assets are segregated and are not used as capital for the brokerage to make loans.  There is SIPC coverage and usually the broker will purchase additional insurance.