APPLYING TIME LIMITATIONS FOR TRUST CONTESTS
When it comes to heading-off potential lawsuits, one of the most powerful weapons in a trustee’s arsenal is the “notification by the trustee.” By sending this notice to beneficiaries and heirs, the trustee can cut the time-frame for filing a trust contest down to a mere 120 days. Because of this, a solid understanding of the procedural issues involved with the notification is critical for both the trustee and potential contestants.
In handling a trust contest, it is important to recognize that procedural issues in probate cases are governed by both the Probate Code and the Code of Civil Procedure. This can lead to somewhat complicated—and not always obvious—consequences. What’s more, guidance from the courts regarding the overlap of these two codes is minimal. However, there are two fairly recent opinions specifically discussing procedural issues involving the 120-day statute of limitations triggered by a trustee’s notice. From these cases, we learn that a trust contest is “brought” at the time it is filed (not when it is served) and that the 120-day window is not extended simply because the notice is sent by mail.
With a typical revocable trust, the trust becomes irrevocable when the settlor dies. The trustee then has sixty days to give notice to the beneficiaries and heirs that the trust is now irrevocable. The Probate Code also requires the trustee to include the following information: (1) the identity of the settlor and date the trust was signed; (2) the trustee’s contact information; (3) the “principal place of administration” of the trust (usually the trustee’s residential or business address); (4) that the recipient is entitled to a copy of the trust; and (5) any additional information the trust requires the trustee to include. Finally, since the trust is now irrevocable because of the settlor’s death, the notice must also include the following warning (in its own paragraph and in not less than 10-point boldface font):
“You may not bring an action to contest the trust more than 120 days from the date this notification by the trustee is served upon you or 60 days from the date on which a copy of the terms of the trust is mailed or personally delivered to you during that 120-day period, whichever is later.”
What it Means to “Bring an Action”
The Court of Appeals issued a decision clarifying what it means to “bring an action” to contest a trust in Straley v. Gamble III, 217 Cal. App. 4th 533 (2d Dist. 2013). In its published decision, the court interpreted this language in the Probate Code using (in part) the Code of Civil Procedure.
In Straley, a son filed a petition asking the probate court to determine whether the distribution provisions of his mother’s trust had been completely changed by virtue of a document purportedly signed by his mother shortly before her death. If valid, the entire trust estate would go to the son. The trustee had served the settlor’s son with the required notification and the son filed his petition within the 120-day window; however, the petition was not served on the trustee until several weeks later (187 days after the notification was sent).
The Court of Appeals decided that the settlor’s son did “bring an action” within the 120-day window. In reaching its decision, the court disagreed with the trustee’s argument that in order to “bring an action” a petition must be filed and served within the 120-day window. In support of its position, the court looked at the Code of Civil Procedure, which says that “[a]n action is commenced . . . when the complaint is filed.” The court also pointed out that, in civil actions, the statute of limitations stops running once the complaint is filed—not when it is served. So even though the Probate Code does not use the word “filed,” the Court of Appeals ruled that the requirement to “bring an action” within the 120-day window only requires that the petition be filed within that 120-day window.
Does the Code of Civil Procedure Extend the 120-day Window when the Notice is sent by Mail?
A few months later, another opinion dealing with the notification by the trustee and the 120-day window was issued in Bridgeman v. Allen, 219 Cal. App. 4th 288 (4th Dist. 2013). Here, the court decided whether the 120-day window for bringing a trust contest is extended where the notification by the trustee is sent by mail.
In this case, a son filed a petition to determine the validity of a trust amendment. The son first tried to file his petition 129 days after the notification was sent to him but his petition was rejected by the court. He ultimately filed the petition a few days later, 133 days after the notice was sent. Because it was filed outside of the 120-day window, the petition was dismissed.
On appeal, the settlor’s son argued that the 120-day window was extended ten days because of a rule contained in the Code of Civil Procedure. Under the Code of Civil Procedure, when a document is sent by mail, any duty to file a response is extended ten calendar days if either the place of mailing or the place of address is outside the State of California. This extension, though, only applies in the absence of a more specific statute. Because the settlor’s son lived outside California, he argued that his window for filing a petition was extended by ten calendar days—placing his first attempt to file his petition within the 120-day window.
The Court of Appeals, in reaching its decision, first looked at the procedural requirements of the Probate Code. The chapter of the Probate Code dealing with notice requirements states, “When the notice or other paper is deposited in the mail, mailing is complete and the period of notice is not extended.” The court highlighted the fact that the extension of time for filing outlined in the Code of Civil Procedure only applies in the absence of other rules. Because of this, the court ruled the 120-day window is not extended simply because the notification by the trustee is sent by mail.
You Can’t Take Gold Stars to the Bank
When it comes to sending the required notification, a trustee needs to be proactive and serve the notice on all beneficiaries and heirs as soon as possible. Likewise, counsel for would-be contestants need to find out early on whether a notification by the trustee has been served and, if so, when the 120-day window closes.
Finally, while the relationship between the Probate Code and Code of Civil Procedure may offer many opportunities for creative arguments for individuals hit with the harsh reality of the 120-day statute of limitations, it is important to recognize that the Courts of Appeal have shown a reluctance to either enlarge or restrict the rights of litigants when it comes to enforcing the 120-day rule.
WHAT ARE TRUST AMENDMENTS AND RESTATEMENTS?
Contribution By Julie Garber
A Trust Amendment is a legal document that changes specific provisions of a Revocable Living Trust but leaves all of the other provisions unchanged, while an Amendment and Restatement of Trust completely replaces and supersedes all of the provisions of the original Revocable Living Trust.
Understanding the Basics of Revocable Living Trusts
Before discussing when Trust Amendments or full Amendments and Restatements are required, you’ll need to understand what a Revocable Living Trust is – a legal contract between the Trust maker and Trustee that can be changed at any time and requires the Trustee to oversee the management of property transferred into the trust by the Trust maker for the benefit of the Beneficiary of the trust.
The key to a Revocable Living Trust is the fact that it’s revocable – meaning that at any time while the Trust maker is alive and competent the Trust maker can change, modify, update, or completely revoke the provisions of the trust agreement. Since this is the case, the name of the legal document that’s required to change, modify, or update the trust agreement is called a Trust Amendment and the legal document that’s required to revoke the trust agreement is called a Trust Revocation.
Contrast a Trust Amendment with a Trust Amendment and Restatement, which is a type of trust amendment that completely supersedes the terms of the original trust agreement. The name and date of your trust will stay the same (for more on this, see below), but each and every provision of the original agreement will be replaced by the terms of the restatement.
When Are Trust Amendments vs. Restatements Required?
While there aren’t really any written rules as to when an Amendment instead of a full Amendment and Restatement is required, the general rule is that if the changes that the Trust maker wants to make are minimal – adding or deleting specific bequests, changing who will serve as Successor Trustee, updating a beneficiary’s or Successor Trustee’s legal name due to marriage or divorce – then a simple Trust Amendment will cover these types of changes.
On the other hand, if the changes that the Trust maker wants to make are significant – adding a new spouse as a beneficiary, completely cutting out a beneficiary, changing from distributions to family members to distributions to charity or vice versa – then a complete Amendment and Restatement should be considered.
What if you’ve made a series of three or four simple Trust Amendments over the past 10-15 years and you want to make another change? Then consider consolidating all of your changes into a complete Amendment and Restatement – this will prove to be helpful to your Successor Trustee who will have a single document to follow instead of piecing together the provisions of four or five separate documents.
The Legalities of Trust Amendments
If you’re considering making a change to your Revocable Living Trust, don’t simply mark up your trust agreement and stick it back in the drawer. Why? Because a Trust Amendment must be signed with the same formalities as the original trust agreement, so your handwritten changes will, depending on applicable state law, either void the trust agreement or be ignored. Instead, ask your estate planning attorney to prepare the Trust Amendment for you so that it will be legally valid and binding on all of your beneficiaries.
Will the Name of Your Trust Change if You Amend or Restate It?
The answer is No – the nice thing about doing a Trust Amendment or an Amendment and Restatement is that the original name and date of your Revocable Living Trust will remain the same. That way, all of the hard work you put into funding your Revocable Living Trust under the original trust name and date won’t need to be undone.
In the administration of an irrevocable trust, situations can arise that were beyond the anticipation of the trustor. Therefore, a trustee may want to “decant” a trust by transferring funds from one trust to another with preferable terms. The trustee may be unsure, however, as to when the trustee is authorized to decant the trust. “A trustee’s powers include those specified in the trust instrument, those conferred by statute, and those needed to satisfy the reasonable person and prudent investor standards of care in managing the trust.” The first source of such authority therefore would be the trust instrument itself, but the source of authority to decant a trust is less clear when the trust instrument is silent or ambiguous with respect to decanting.
The second potential source of authority is statutory authorization. At least 15 states have statutes explicitly authorizing some form of decanting when certain conditions are satisfied, and several more states are considering legislation on the topic. However, California does not have a statute clearly authorizing a trustee to decant trusts nor does the state legislature appear to be currently considering such a bill.
The third potential source of authority would be the trustee’s duty “to satisfy the reasonable person and prudent investor standards of care in managing a trust.” However, except in cases of clearly faulty trust instruments, there may not be a robust demonstration that decanting to obtain preferable terms would be necessary to maintain the reasonable person and prudent investor standards of care in managing a trust.
A trustee’s ability to decant may, however, be established by common law. For example, in In re Estate of Spencer, 232 N.W.2d 491, 493 (Iowa 1975), Ms. Spencer left some of her estate in trust for the benefit of her children with a non-general power of appointment granted to her husband as trustee. Upon his death, the husband appointed the trust property in further trust rather than allowing the trust property to pass outright to Ms. Spencer’s children. Id. at 494. The Iowa Supreme Court held that such an exercise of the power of appointment was valid because the trust instrument did not clearly manifest a contrary intent. Id. There is a line of somewhat old but still valid case law from other jurisdictions holding that a trustee with a non-general power of appointment is allowed to appoint in further trust. See, e.g., In re Estate of Mayer, 672 N.Y.S.2d 998, 1000 n.2 (Sur. Ct. 1998) (“[T]he powers of a trustee whose discretion is unlimited to appoint in further trust had been judicially recognized in other jurisdictions.”).
The subtle nexus supporting the common-law ability of trustees to decant is that a trust that gives discretion to the trustee to invade principal or pay income or principal to or among the designated beneficiaries essentially grants the trustee a non-general power of appointment. Restatement (Second) of Prop.: Donative Transfers § 11.1 cmt. d (1986) (“The discretion given to the trustee gives the trustee the power to designate beneficial interests in the trust property. . .. Consequently, the trustee holding a discretionary power has a power of appointment as defined in this section.”); (using “discretion” essentially interchangeably with “special power to appoint” in granting trustees with discretion over distribution, but not specifically a power to appoint, the authority to decant by appointing in further trust). While it may be more common to reference a trustee’s discretion over distribution as distinct from a power of appointment, functionally they perform substantially equivalent roles, although a trustee is subject to a fiduciary duty in making distributions to which a beneficiary who holds a non-general power of appointment may not be subject. A broader body of case law and the Restatements support the more general proposition that the holder of a non-general power of appointment may appoint in further trust, and it was this foundation that provided the grounds for extending the authority to a trustee with discretion over distribution to distribute in further trust. E.g., Nat’l State Bank of Newark v. Morrison, 9 N.J. Super. 552, 559 (Sup. Ct. 1950) (“If, but only if, the donor does not manifest a contrary intent, the donee of a special power can effectively appoint interests to trustees for the benefit of objects.”) (internal alterations omitted) (quoting Restatement (First) of Property § 358); Restatement (Third) of Trusts § 10 cmt. f (2003) (“[T]he donee can effectively appoint the property subject to the power, or any portions of or interests in that property, in trust for the benefit of permissible appointees (the ‘objects’) of the power unless the terms of the trust or other disposition that created the power of appointment clearly manifest the creator’s (the ‘donor’s’) contrary intention.”); Restatement (Second) of Prop.: Donative Transfers § 12.2 (1986) (“The scope of the donee’s authority as to appointees and the time and manner of appointment is unlimited except to the extent the donor effectively manifests an intent to impose limits.”).
The common-law ability of a trustee to decant therefore relies on two prerequisites: (1) there is no clear manifestation of intent to disallow decanting, and (2) the trustee has some discretion over distribution. With respect to the first requirement, the intent of the trustor is a dispositive consideration and clear manifestations of intent to disallow appointments in further trust cannot be overcome. Thomas v. Gustafson, 45 Cal. Rptr. 3d 639, 643 (Ct. App. 2006) (“[The] extent of trustee’s discretion [is] defined by settlor’s intention.”) (citing In re Miller’s Estate, 230 Cal. App. 2d 888, 908-09 (Dist. Ct. App. 1964)); see, e.g., Union & New Haven Trust Co. v. Taylor, 50 A.2d 158, 170 (Conn. 1946) (holding that an appointment in further trust that distributed only income for the life of the beneficiaries was not valid where the original trust directed that the principal “be paid over”); In re Bracken’s Estate, 11 Pa. D. & C.2d 521, 523 (Orphans’ Ct. 1956) (holding an appointment in further trust invalid when the trust directed that the trust property “be paid over absolutely”). However, in these instances disallowing appointment in further trust, the intent of the trustor was explicit and clear that the trust property needed to be distributed outright. Accordingly, silence and possibly even ambiguous language in the trust instrument might still allow for decanting, if such a construction is consistent with the ascertainable intent of the trustor.
With respect to the second requirement for a common-law ability to decant, in those cases allowing a trustee to appoint in further trust, the trustee had relatively broad discretion in the distribution of principal or income. See, e.g., Phipps v. Palm Beach Trust Co., 142 Fla. 782, 783-83 (1940) (“[A]n individual and a corporate trustee clothed with absolute power to administer a trust estate in the interest of designated beneficiaries [may] create a second trust estate.”) (emphasis added). Likewise, of the states that have codified the ability to decant, approximately half require that the trustee must have the power to invade principal and the clear majority of the rest explicitly require at least that the trustee has the discretion to distribute principal or income. Accordingly, decanting of California trusts should only be considered by trustees that have relatively broad discretion in the distribution of at least trust income, if not principal.
A trustee may be able to work around uncertainty by transferring jurisdictions, if the trust has requisite ties to a state with more favorable decanting statutes. Several of the states with explicit decanting statutes provide that those statutes apply to trusts that have their governing jurisdiction transferred to that state. A trustee of a California trust may petition a court to transfer the place of administration to another state pursuant to CA Probate Code Sections 17401-04. Transferring jurisdictions might be the preferred option for trustees with relatively less management authority as granted by the trust instrument.
Ideally California would one day consider a statute that explicitly allows decanting and clearly delineates the requirements that would apply. Until then, a trustee evaluating whether to decant an irrevocable trust can consider the authority for doing so, the tax implications, and applicable perpetuities provisions. A trustee will also need to consider several other safeguards before decanting, including but not limited to: providing notice, seeking court approval, and possibly waiting to decant until there is a current need to distribute. Alternatively, a trustee seeking the certainty provided by decanting statutes may investigate whether it is possible to transfer jurisdictions to take advantage of another state’s statutory grant of the power.
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A will provides clear, legally binding instructions about what happens with your money and possessions after you die. Simply telling relatives what you want to happen isn’t enough. Without a valid will or living trust, your state’s laws determine where your property goes after you die by way of a probate proceeding.
A living trust (or revocable living trust) helps your survivors avoid probate, the court process used to pay debts, and distribute property to heirs. Some living trusts reduce taxes or protect financial privacy.
A living will (or advance medical directive) tells your family what to do if you’re incapacitated or terminally ill. This is the document you need if you don’t want to be kept on life support.
With a durable power of attorney, you can appoint somebody you trust to take care of your financial affairs when you can’t. Because my mother granted me power of attorney, I’m now able to pay her bills, cancel unused credit cards and more. Without, the family would be powerless.
Life insurance is important if anyone (such as your spouse or children) depends on your income. For most, term life insurance is best. How much? There’s no hard and fast rule, but your policy should provide enough for your survivors to cover immediate expenses and meet financial goals.
Though often overlooked, disability insurance is also vital. You’re far more likely to become disabled than to die prematurely, and the loss of income is just as real. If you and your family need your salary to live on, you should have disability insurance.
Lastly, it’s vital to have a master document with all the information your family will need to take care of your affairs. This should include account locations, numbers and passwords; a list of emergency contacts; final arrangements; and so on. Estate planning isn’t over once you create the initial documents. When you experience any major life change–you get married or divorced, have children, move to another state or change careers–review your estate documents to be sure they’re still valid and reflect your intentions.
Those of us who own businesses, corporations, and commercial or residential investment real estate assets are often reluctant to sell because of capital gains taxes associated with the sale. But what other choice do we have other than a property exchange directed by a Qualified Intermediary? Is there another way to deal with the capital gains tax deficits that so many investors experience when they sell their real estate assets? The answer may lie in the Deferred Sales Trust.
This capital gains tax deferral tool could save you thousands of dollars, and at the same time, you would then have the opportunity to potentially make a profit on the money you would have paid to Uncle Sam in the year of the sale. Obviously, this strategy is gaining popularity among those who have highly appreciated assets that are marked for sale. You, too, can potentially take advantage of this program once you understand how it works.
The process starts when a property owner sells their property to a trust owned by a third-party company. The trust sells the property or stock. Next, the trust “pays” you. The payment isn’t in cash, but with a payment contract called an “installment contract.” The contract promises to make payments to you over an agreed period of time. There are zero taxes to the trust on the sale since the trust “purchased” the property from you for what it sold it for. The payment is made with an installment contract which makes payments to you over an agreed period.
The options on when and how payments can be made are flexible. You may have other income and don’t need the payments right away. The tax code doesn’t require payment of the capital gains until you start receiving installment payments. The capital gains tax is paid to the IRS with an “installment plan” since only that portion of capital gains is due in proportion to the number of years established in the term of the installment agreement.
The Deferred Sales Trust has the potential to generate more money over the long run than a direct and taxed sale.
Why and How to Transfer Your Assets To Your Revocable Living Trust
These days many people choose a revocable living trust instead of relying on a will or joint ownership in their estate plan. They like the cost and time savings, plus the added control over assets that a living trust can provide.
For example, when properly prepared, a living trust can avoid the public, costly and time-consuming court processes at death (probate) and incapacity (conservatorship or guardianship). It can let you provide for your spouse without disinheriting your children, which can be important in second marriages. It can save estate taxes. And it can protect inheritances for children and grandchildren from the courts, creditors, spouses, divorce proceedings, and irresponsible spending.
Still, many people make a big mistake that sends their assets right into the court system: they don’t fund their trusts.
What is “funding” my trust?
Funding your trust is the process of transferring your assets from you to your trust. To do this, you physically change the titles of your assets from your individual name (or joint names, if married) to the name of your trust. You will also change most beneficiary designations to your trust.
Who controls the assets in my trust?
The trustee you name will control the assets in your trust. Most likely, you have named yourself as trustee, so you will still have complete control. One of the key benefits of a revocable living trust is that you can continue to buy and sell assets just as you do now. You can also remove assets from your living trust should you ever decide to do so.
Why is funding my trust so important?
If you have signed your living trust document but haven’t changed titles and beneficiary designations, you will not avoid probate. Your living trust can only control the assets you put into it. You may have a great trust, but until you fund it (transfer your assets to it by changing titles), it doesn’t control anything. If your goal in having a living trust is to avoid probate at death and court intervention at incapacity, then you must fund it now, while you are able to do so.
What happens if I forget to transfer an asset?
Along with your trust, your attorney will prepare a “pour over will” that acts like a safety net. When you die, the will “catches” any forgotten asset and sends it to your trust. The asset will probably go through probate first, but then it can be distributed according to the instructions in your trust. Who is responsible for funding my trust?
You are ultimately responsible for making sure all of your appropriate assets are transferred to your trust.
Won’t my attorney do this?
Typically, you will transfer some assets and your attorney will handle some. Most attorneys will transfer your real estate, then provide you with instructions and sample letters for your other assets. Ideally, your attorney should review each asset with you, explain the procedure, and help you decide who will be responsible for transferring each asset. Once you understand the process, you may decide to transfer many of your assets yourself and save on legal fees.
How difficult is the funding process?
It’s not difficult, but it will take some time. Because living trusts are now so widely used, you should meet with little or no resistance when transferring your assets. For some assets, a short assignment document will be used. Others will require written instructions from you. Most can be handled by mail or telephone.
Some institutions will want to see proof that your trust exists. To satisfy them, your attorney will prepare what is often called a certificate of trust. This is a shortened version of your trust that verifies your trust’s existence, explains the powers given to the trustee and identifies the trustees, but it does not reveal any information about your assets, your beneficiaries and their inheritances.
While the process isn’t difficult, it’s easy to get sidetracked or procrastinate. Just make funding your trust a priority and keep going until you’re finished. Make a list of your assets, their values and locations, then start with the most valuable ones and work your way down. Remember why you are doing this, and look forward to the peace of mind you’ll have when the funding of your trust is complete.
Which assets should I put in my trust?
The general idea is that all of your assets should be in your trust. However, as we’ll explain, there are a few assets you may not want in, or that cannot be put into, your trust. Also, your attorney may have a valid reason (like avoiding a potential lawsuit) for leaving a certain asset out of your trust.
Generally, assets you want in your trust include real estate, bank/saving accounts, investments, business interests and notes payable to you. You will also want to change most beneficiary designations to your trust so those assets will flow into your trust and be part of your overall plan. IRAs, retirement plans and other exceptions are addressed later.
Will putting real estate in my trust cause any inconveniences?
In most cases, you will notice little difference. You may even find it easy to transfer real estate you own to your living trust, and to purchase new real estate in the name of your trust. Refinancing may not be as easy. Some lending institutions require you to conduct the business in your personal name and then transfer the property to your trust. While this can be annoying, it is a minor inconvenience that is easily satisfied.
Because your living trust is revocable, transferring real estate to your trust should not disturb your current mortgage in any way. Even if the mortgage contains a “due on sale or transfer” clause, re titling the property in the name of your trust should not activate the clause. There should be no effect on your property taxes because the transfer does not cause your property to be reappraised.
Also, having your home in your trust will have no effect on you being able to use the capital gains tax exemption when you sell it.
Also, having your trust as the owner on your homeowner, liability and title insurance may make it easier for a successor trustee to conduct business for you. Check with your agent.
What about out-of-state property?
If you own property in another state, transferring it to your living trust will prevent a conservatorship and/or probate in that state. Your attorney can contact a title company or an attorney in that state to handle the transfer for you.
What about contaminated property?
Property that has been contaminated (for example, from a gas station with underground tanks or by a printing facility that used chemicals) can be placed in your living trust, but the trustee can be held personally responsible for any clean up. If you are your own trustee, this is a moot point because, as the owner, you are already responsible. But if cleanup is not complete by the time your successor trustee steps in, your successor and, ultimately, your beneficiaries can also be liable. If you suspect this may apply to you, tell your attorney before you transfer the property to your trust.
What about community property status?
Community property status can be continued inside your living trust. Also, if you live in a community property state, your attorney may suggest that any jointly-owned assets, especially real estate, be re titled as community property before they are put in your living trust. This can reduce capital gains tax if the asset is sold after one spouse dies.
Should I put my life insurance in my trust?
That depends on the size of your estate. Federal estate taxes must be paid if the net value of your estate when you die is more than the amount exempt at that time. Some states have their own estate/inheritance tax, and it is possible your estate could be exempt from federal tax but have to pay state tax.
Your taxable estate includes benefits from life insurance policies you can borrow against, assign or cancel, or for which you can revoke an assignment, or name or change a beneficiary.
If your estate will not have to pay estate taxes, naming your living trust as owner and beneficiary of the policies will give your trustee maximum control over them and the proceeds. If your estate will be subject to estate taxes, it would be better to set up an irrevocable life insurance trust and have it own the policies for you. This will remove the value of the insurance from your estate, reduce estate taxes and let you leave more to your loved ones.
There are some restrictions on transferring existing policies to an irrevocable life insurance trust. If you die within three years of the transfer date, the IRS will consider the transfer invalid and the insurance will be back in your estate. There may also be a gift tax. These restrictions, however, do not apply to new policies purchased by the trustee of this trust. If you have a sizeable estate, your attorney will be able to advise you on this and other ways to reduce estate taxes.
Should my trust own my car?
Unless the car is valuable and substantially increases your estate, you will probably not want it in your trust. The reason is if you are at fault in an auto accident and the injured party sees that your car is owned by a trust, he or she may think “deep pockets” and be more likely to sue you.
All states allow a small number of assets to transfer outside of probate; the value of your car may be within this limit. Some states let you name a beneficiary; in some, cars do not even go through probate. Your attorney will know the laws and procedures in your state and will be able to advise you.
What about my IRA and other tax-deferred plans?
Do not change the ownership of these to your living trust. You can name your trust as the beneficiary, but be sure to consider all your options, which could include your spouse; children, grandchildren or other individuals; a trust; a charity; or a combination of these. Whom you name as beneficiary will determine the amount of tax-deferred growth that can continue on this money after you die.
Most married couples name their spouse as beneficiary because 1) the money will be available to provide for the surviving spouse and 2) the spousal rollover option can provide for many more years of tax-deferred growth. (After you die, your spouse can “roll over” your tax-deferred account into his/her own IRA and name a new beneficiary, preferably someone much younger, as your children and/or grandchildren would be.) A non-spouse beneficiary can also inherit a tax-deferred plan and roll it into an IRA to continue the tax-deferred growth, but only a spouse can name additional beneficiaries.
Of course, any time you name an individual as beneficiary, you lose control. After you die, the beneficiary can do whatever he or she wants with this money, including cashing out the account and destroying your carefully made plans for long-term, tax-deferred growth. The money could also be available to creditors, spouses and ex-spouses, and there is the risk of court interference at incapacity.
Naming a trust as beneficiary will give you maximum control because the distributions will be paid not to an individual, but into a trust that contains your written instructions stating who will receive this money and when. After you die, distributions will be based on the life expectancy of the oldest beneficiary of the trust. You can also set up separate trusts for each beneficiary so that each one’s life expectancy can be used.
The rules for these plans have recently been made simpler, but it is still easy to make a costly mistake. Because there is often a lot of money at risk, be sure to get expert advice.
Are there any assets I should not put in my trust?
If you live in a non-community property state and have owned an asset jointly with your spouse since before 1976, transferring the asset to your living trust could cause your surviving spouse to pay more in capital gains tax if he or she decides to sell the asset after you die.
If the asset is your personal residence, this would not be an issue unless the gain is more than $500,000. But it could be a problem for other assets like farm land, commercial real estate or stocks. If you think this might apply to your situation, be sure to check with your tax advisor or attorney before you change the title to your trust.
Other assets that should probably not be transferred to your trust are incentive stock options, Section 1244 stock and professional corporations. If you are unsure whether or not to transfer an asset to your trust, check with your attorney.
What about property that doesn’t have a title?
Personal property (artwork, clothing, jewelry, cameras, sporting equipment, books and other household goods) typically does not have a formal title. Your attorney will prepare an assignment to transfer these items to your trust.
What if I buy new assets after I Fund my trust?
Find out if you can take the title initially as trustee of your trust. If not, transfer the title right away. If you’re not sure how to transfer it, contact your attorney for instructions.
|Funding Your Living Trust|
|Assets You Probably Want in Your Living Trust
Assets You May Not Want in Your Living Trust
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CAN A LIVING TRUST BE A MEMBER OF AN LLC?
An LLC, or limited liability company, is a company that enjoys the same limited liability status as a corporation along with increased flexibility in management and taxation. A living trust is an arrangement whereby a person known as a grantor entrusts a trustee to manage assets on behalf of the grantor’s beneficiary while the grantor is still alive. In many cases, these two vehicles can be used together to accomplish particular purposes.
Living Trusts: Legal Status
The legal status of a living trust depends on whether it is revocable or irrevocable, a distinction that is normally written into the trust document that creates the trust. If the trust is revocable, the grantor can terminate the trust at any time and regain ownership of the property. A revocable trust is treated as an appendage of the grantor – for example, creditors can seize the trust’s assets to satisfy the grantor’s debts and the grantor must pay tax on the trust’s income. If a trust is irrevocable, the grantor cannot easily terminate the trust. Its assets are usually protected from the grantor’s creditors and it must file its own tax return.
State trust statutes authorize trustees, on behalf of a trust, to exercise legal ownership rights over nearly any asset an individual can own. Since an ownership interest in an LLC is an asset, a living trust may become a member of an LLC. Since all states now recognize single-member LLCs, a living trust can even serve as an LLC’s only member. In this way, an individual can own a business through the twin vehicles of a living trust and an LLC.
Combining a trust with an LLC allows you to run a business and take advantage of the flexibility of a trust at the same time. By holding your LLC membership interest in trust, your trustee can provide for your beneficiaries long after you die, but will be restricted to the terms of the trust document that you drafted. Payments to your beneficiaries can continue after you die, which gives your beneficiaries a de facto share of the LLC business. If the trust is irrevocable when you die, it will not be counted as part of your estate for estate tax purposes. Neither your creditors nor your beneficiaries’ creditors can touch either LLC assets or trust assets until they are distributed out of the trust.
Many real estate owners prefer to title their real estate in the name of an LLC owned by a living trust. This arrangement has an added benefit: You can provide in your trust instrument that your beneficiaries are allowed to live on the property indefinitely, even though it is owned by the trust. Their right to live on the property may arise either immediately or upon your death, and can continue indefinitely.
“GRATS” FOR ESTATE PLANNING
A Grantor Retained Annuity Trust (GRAT) is a popular “freeze” technique used by estate planners to protect client’s estates from high-growth assets. In a properly structured GRAT, an individual grantor (usually a parent or grandparent) transfers assets into an irrevocable trust and receives annuity payments from the trust for a specified term. This technique has been especially prevalent over the past few years, due to continued low interest rates.
Properly structured, GRATs can provide a valuable tool for shifting “excess” estate growth from a grantor to beneficiaries. Like most planning vehicles, GRATs contain some level of risk, and estate planners must have a firm understanding of the dos—and don’ts—of structuring these irrevocable trusts.
Crucial to implementing a GRAT strategy is understanding the advantages and limitations of GRATs, identifying assets that are optimal for inclusion in a GRAT, determining optimal term, and utilizing various techniques within the GRAT structure. Planners must avoid the inherent tax traps that could result in disadvantageous estate, gift or income tax consequences.
PROBATE “SHORTCUTS” IN CA
California offers some probate shortcuts for surviving spouses and for “small estates.” These procedures make it easier for survivors to transfer property left by a person who has died. You may be able to transfer a large amount of property using simplified probate procedures or without any probate court proceedings at all — by using an affidavit. And that saves time, money, and hassle.
Here are the ways you can skip or speed up probate. (If the affidavit procedure is used, there’s no need to use the simplified probate procedure.)
*Using a Spousal Property Petition
Assets inherited by the surviving spouse or registered domestic partner can be transferred with a streamlined procedure, called a Spousal (or Domestic Partner) Property Petition. The petition must be submitted to the probate court for approval, but the process is simple and much faster than regular probate. There is no limit on the value of property that can be transferred this way.
*Claiming Property With a Simple Affidavit
California has a procedure that allows inheritors to skip probate altogether when the value of all the assets left behind is less than a certain amount. All an inheritor has to do is prepare a short document, stating that he or she is entitled to a certain asset. This document, signed under oath, is called an affidavit. When the person or institution holding the property — for example, a bank where the deceased person had an account — gets the affidavit and a copy of the death certificate, it releases the asset.
The out-of-court affidavit procedure is available in California if:
- The value of the estate is no more than $150,000, as calculated using exclusions listed in “Simplified Court Procedures,” below. There is a 40-day waiting period. Cal. Prob. Code §§ 13050, 13100 and following.
- The estate contains real estate up to $50,000 in value. There is a six-month waiting period. Cal. Prob. Code §§ 13200 to 13208.
*Simplified Probate Procedures
California has a simplified probate process for small estates. To use it, an executor files a written request with the local probate court asking to use the simplified procedure. The court may authorize the executor to distribute the assets without having to jump through the hoops of regular probate.
You can use the simplified small estate process in California if the estate has a value up to $150,000. Excluded from calculating value: real estate outside California; joint tenancy property; property that goes outright to a surviving spouse; life insurance, death benefits, and other assets not subject to probate that pass to named beneficiaries; multiple-party accounts and payable-on-death accounts; any registered manufactured or mobile home; any numbered vessel; registered motor vehicles; salary up to $15,000; amounts due decedent for services in the armed forces; property held in trust, including a living trust.
THE TOP 10 REASONS WHY YOU NEED AN ESTATE PLAN—Under Any Circumstances
Many people often assume that they don’t have an “estate” worth planning or that their families will take care of everything when the need arises. On the contrary, everyone, regardless of their net worth, requires comprehensive estate planning in order to ensure that their wishes are executed and their families are adequately provided for. As unpleasant as it is to consider, death is inevitable, and some of us may become incapacitated. We have the choice of either ignoring this inevitability, or accepting it and taking the necessary steps to protect our loved ones and ourselves. Without an estate plan, the government and the courts decide who will inherit your assets, who will become the guardian of your minor children and who will make health care and financial decisions on your behalf in the event of your incapacity, without regard to your wishes. The statutes are designed to accomplish what the government thinks your estate plan should be and rarely matches your own vision for the disposition of your assets. Simply, if you want control over these important decisions, you need an estate plan.
1: Designating Beneficiaries of your Estate. Many individuals have not considered who will inherit their assets if they do not have a Will. If an individual dies without a Will or “intestate”, the courts will take control of the individual’s estate and distribute his or her assets according to the intestacy laws of the state in which the individual resides at the time of his or her death. In other words, the government becomes an individual’s estate planner when he or she dies intestate, through statutes which provide for the administration and distribution of the individual’s estate. A client may be surprised to learn that his or her spouse, parents, children and/or siblings will share in the inheritance under New York law, depending upon the relatives that survive the client. Very often, those who ultimately share in a decedent’s inheritance under the intestacy laws are not the same people who would have otherwise inherited the property had the individual died with a Will.
2: Appointing Guardians and Trustees for Minor Children. Clients with minor children should execute Wills in order to name guardians for their children. When appointing the physical custodian of a minor child, clients should also designate the trustee to manage the child’s inheritance. Without a Will, the court would appoint a Guardian for an individual’s minor children. The court may not name a person who the decedent would want to take responsibility for his or her children or feel would make decisions in the best interests of the children. Having a court-appointed Guardian can also result in complications in estate management. For instance, any money used to pay for your children’s education, clothing and living costs would require prior approval of the court, even if your spouse is appointed Guardian. Furthermore, law requires annual accountings of income and expenses to the court, and investment of the funds by the Guardian will be limited to choices approved by the court. If the Guardianship lasts for any significant length of time, the investment limitations imposed by the court may prevent the children’s funds from growing at an acceptable rate.
3: Appointing a Health Care Agent. Clients need to consider both who will make medical decisions in the event the client is incapacitated and whether the client wishes to remain on life support. Without a health care proxy, New York state law dictates who the decision maker will be.
4: Appointing Agents and Trustees to Manage Assets in the Event of Incapacity. In addition to considering who will manage and benefit from their assets after death, clients need to have a succession plan in the event of the client’s incapacity. This may take the form of a durable power of attorney, trust planning or a combination thereof. Clients with businesses may want to name different people for purposes of running their company and managing their personal assets.
5: Protecting a Beneficiary from Himself or Herself. A trust is an ideal tool for a beneficiary who is too young or does not have the proper investment skills to manage his or her inheritance. First, it can be used to name a person or institution as the investment trustee until the beneficiary is capable. Second, a trust can be used to distribute funds over time to protect assets from a beneficiary’s own misjudgment or spendthrift tendencies. Third, the trust can be used to provide supplemental benefits to a beneficiary with special needs, without disqualifying the beneficiary from government support.
6: Protecting Beneficiaries from Creditors and Divorcing Spouses. An irrevocable trust established by a third party either during lifetime or after death can provide asset protection. Clients who do not have any planning documents or whose documents distribute outright to their beneficiaries are foregoing the creditor and divorce protection that could otherwise be given to their beneficiaries. By providing in the Will or trust document that the assets are maintained in continuing trust (rather than making mandatory distributions of income or principal at certain ages), the trust assets can be protected from the beneficiary’s creditors or divorcing spouses.
7: Appointing an Executor. Under a Will, a client may designate an Executor who is responsible, upon the client’s death, for taking inventory of his or her property; preserving the estate; paying creditors, administrative expenses and any death taxes; and disposing of the remainder of the client’s property among his or her beneficiaries. Since the Executor is entitled to a fee, most people prefer to select someone they know and trust to oversee the administration of their estate, rather than having the court appoint an Executor of its choice.
8: Minimizing Estate, Gift and Income Taxes. Through appropriate tax planning, clients may prevent some or all of their assets from being subject to estate tax upon their death. This will allow more of a client’s estate to be passed on to his or her loved ones, and less to be lost to taxes. Without a Will, an individual’s estate will not have the benefit of any tax planning to minimize the often confiscatory effects of federal and state death taxes and income taxes.
9: Supporting a charity. A client may gift, during life or at death, money, securities or other property to charities or other worthwhile causes, while at the same time obtaining substantial income and estate tax benefits.
10: Avoiding probate. A client’s estate can be designed to avoid probate through the use of beneficiary designations and a revocable trust. Probate can be a costly and time consuming court proceeding and can often be avoided by establishing and funding a revocable trust during a client’s life. While a revocable trust is not always recommended over a Will, it may be appropriate in certain circumstances. For instance, the revocable trust is especially important for individuals who own real property in multiple states because, if the property is titled in the individual’s name, ancillary probate proceedings are required in each state. A revocable trust outlines the client’s beneficiaries and provides asset management succession (in the form of a successor trustee in the event the client becomes incapacitated). A revocable trust can also be drafted to provide for the creditor and divorce protection noted above for a client’s beneficiaries upon the client’s death.
THE IRREVOCABLE LIVING TRUST SUMMARY YOU SHOULD UNDERSTAND
Contribution by Betsy Simmons Hannibal:
Irrevocable trusts generally cannot be terminated after they are finalized. This sets them apart from revocable trusts which can be terminated, at least until they become irrevocable at the death of the trust maker (the grantor). When talking about trusts, the term “living” means that the trust goes into effect during the grantor’s life. So, generally an irrevocable living trust is a trust that 1) goes into effect during the grantor’s life and 2) cannot be revoked.
Irrevocable Trust Terminology Generally:
These terms can get confusing; here is a breakdown:
|Revocable trust||A trust that can be revoked.|
|Revocable living trust||A trust that can be revoked and that takes effect during the life of the grantor. Becomes irrevocable at the death of the grantor. Usually made to avoid probate.|
|Irrevocable trust||A trust that cannot be revoked.|
|Irrevocable living trust||A trust that cannot be revoked and that takes effect during the life of the grantor. Usually made to transfer wealth, protect assets, or reduce taxes.|
|Testamentary trust||A trust created during the life of the grantor, but that takes effect at the grantor’s death. Usually made as part of a will – for example, a child’s trust made to name a trustee for property left to a minor.|
Types of Irrevocable Trusts
There are dozens and dozens of types of irrevocable trusts made for different purposes. The two most common reasons to make an irrevocable trust are 1) to reduce taxes, and 2) to protect property.
Irrevocable Trusts to Reduce Taxes
Grantors most often use irrevocable trusts to avoid or reduce taxes. For example:
- Bypass Trusts – A trust used by spouses to reduce estate taxes when the second spouse dies. When the first spouse dies, the bulk of his or her property goes into the trust. The surviving spouse can use trust property (and income from trust property), but he or she never owns it. So when the surviving spouse dies, that property is not included in his or her estate.
- QTIP Trusts – A trust used by couples to postpone the payment of estate taxes until the second spouse dies.
- QDOT Trusts – Like QTIP trusts, but used when one spouse is a noncitizen.
- Charitable Trusts – A trust designed to reduce income and estate taxes through gifts to charity. Three types of charitable trusts are:
- charitable remainder trusts – You put property in a trust, name a charity to be the final beneficiary, and then name someone else to receive income from the trust for a set amount of time.
- charitable lead trusts — You put property in a trust, name a charity to receive income from the trust for a set amount of time, and then name someone else as a final beneficiary.
- pooled income trust – You pool your money with other trust makers and receive trust income for a set time. For pooled charitable trusts, a charity is the trustee and the final beneficiary.
- Generation-Skipping Trusts – These trusts are designed to reduce estate taxes for wealthy families. The final beneficiary is a grandchild or group of grandchildren. The child is usually an income beneficiary, but never owns the property, so that the trust property is not subject to estate tax when the child dies. This type of trust is subject to a generation skipping transfer tax.
- Life Insurance Trusts – These trusts reduce estate taxes by removing the proceeds of life insurance from a taxable estate. Instead, the trust owns the insurance policy. The beneficiary of the policy can be anyone, but the trustee must be someone other than the previous owner of the policy. The grantor cannot have any control over the policy once the trust is made, and the trust must exist for at least three years before the grantor’s death.
- Grantor-Retained Interest Trusts (GRATs, GRUTs, GRITs, and QPRTs) – These trusts also reduce estate taxes by removing property from a taxable estate. The trust maker puts property into the irrevocable trust and names final beneficiaries, but retains some interest in the trust for a set amount of time. That interest might be a fixed annuity from the trust (GRAT), a variable annuity (GRUT), trust income (GRIT), or the right to live in the trust property, a home (QPRT). When that set time period is over, the final beneficiaries own the property outright, and the IRS will value the gift at the time of the creation of the trust. The grantor must outlive the terms of the trust, or no savings will be created.
Irrevocable Trusts for Protecting Property
Irrevocable trusts can also be used to meet other goals, such as to protect assets from being squandered or to protect the assets of a person with a disability.
Spendthrift Trusts — Spendthrift trusts allow you to protect (and control) gifts that you give to those who may not be able to manage the money themselves. You put property into a trust, and the trustee (which can be you) doles out money to the beneficiary according to the terms of the trust. The beneficiary cannot access trust property on his or her own, so it is protected from the beneficiary’s creditors – at least until payments are made directly to the beneficiary.
Special needs trusts— A special needs trusts provides financial support for a person with special needs, without affecting his or her qualifications for government benefits. Property is put into a trust for the benefit of a person with special needs, often by a parent or other relative. The terms of the trust allow the trustee to use trust funds to buy certain things for the beneficiary, but because the beneficiary never owns trust property it is not considered to be an asset when he or she applies for government benefits.
SHOULD YOU OWN LIFE INSURANCE ON YOURSELF?
By Mark Powell
Most people put “buy more life insurance” on the very bottom of the things that excite me list. But if you’ve realized that life insurance is often the most cost effective answer to several very important problems, you have probably also heard talk of an irrevocable life insurance trust.
What is an ILIT? And why would you need one?
Life insurance proceeds are not taxable as income, but if you’re not careful about ownership of the policy, the proceeds are subject to the estate tax, which means 40 cents out of every dollar might be lost. The key to keeping life insurance proceeds safe from the estate tax is pretty simple – you should not own the policies on your own life. If you’re the owner of a policy and the insured person under the policy, the proceeds will be part of your taxable estate. An ILIT (pronounced EYE-let) are viewed to some as a time-tested and IRS approved way to split these factors up – and protect the proceeds from the estate tax.
Here’s the basic idea.
Suppose I plan to buy $1 million in life insurance on myself to make sure my kids have money for college if I die while they’re young. If I buy the policy myself, then the proceeds are at risk because I’ll own a policy that insures my life. The $1 million in proceeds will be part of my taxable estate, and if the value of all of my assets exceeds my exclusion amount (currently $5,430,000), then the life insurance proceeds will be subject to the estate tax.
Instead of buying the policy myself, I can create an irrevocable trust that will buy the policy. When the proceeds get paid out, the insurance proceeds won’t be part of my estate because I made sure that I wasn’t the owner and the insured. When I die, the proceeds will be paid into the trust, which will include my instructions to make sure my kids graduate from college.
There are a few features of an ILIT to be very careful about.
First, I will designate someone to manage the trust (called the trustee). I cannot be the trustee. If I am, the tax laws will treat the proceeds as mine despite the trust. My spouse should not be the trustee because the IRS looks at spouses as one unit; and if my spouse owns the policy as trustee, it’s the same as if I own the policy. My kids are too young to be the trustee, and even if they were old enough to have that job, the rules say that I effectively control the policy because my kids are very likely to follow my instructions. This means that I need to name someone more independent to be the trustee of my ILIT. Siblings, close friends and my trusted advisors are the best bet.
Second, if I pay the premium on the policy from my own funds, the laws treat the proceeds as mine despite the trust. The most common solution is to make gifts to the trust and let the trustee use the funds to pay the premium. We’ve already seen that the rules ignore my ILIT if I have too much control over the trust. If the trustee is required to pay the premiums using money I give for that purpose, doesn’t that also seem suspicious? It does! To make this work, I need to give the money to the trustee, and then the beneficiaries of the trust (my kids) need a chance to take the money out. If they leave the money in the trust, then the trustee can pay the premiums without any risk. This withdrawal right is crucial.
So why doesn’t everyone have an ILIT?
In many circumstances, the person buying the policy names his or her spouse as the primary beneficiary of the insurance. Continuing my example, if I buy $1 million in coverage to provide for my kids, it’s pretty likely that I’ll tell the insurance company to pay the proceeds to my spouse, who will in turn take care of my kids. Any asset that I leave to my spouse is protected from the estate tax by the marital deduction. So why even consider an ILIT? Remember that in estate planning, you’re always playing the What If game. What if my spouse dies before me? Who will the insurance company pay? What if my spouse remarries and gives all the money to the charming pool boy or curvy personal trainer? When you’re playing the What If game, a trust should always be considered because it could deal with all sorts of possibilities.
Another common way to address these issues is cross-owning policies. Husband owns the policy on wife’s life, and wife owns the one on husband’s life. This avoids the fundamental issue (having the insured own the policy on his or her life). But it doesn’t address the What Ifs.
Finally, an ILIT requires annual attention. Records must be kept to document the withdrawal rights, and actions by the trustee should be reduced to writings and kept for the term of the trust. If the premium exceeds $14,000 a year, then gifting money to the ILIT might mean that an attorney or an accountant needs to file a gift tax return every year.
ILITs can be tricky to design and cumbersome to administer. If you’re buying a term insurance policy, you should weigh the burdens of having an ILIT against the likelihood that the policy will still be in place at your death. Permanent insurance policies aimed at paying estate tax probably should be held in an ILIT. But an ILIT may not make sense for policies meant to address lifetime goals (such as paying off a mortgage or paying for college).
All insurance analysis and insight provided represents a courtesy extended to you for educational purpose and you should not rely on this information as the primary basis of your insurance planning decisions. We are not lincensed insurance professionals. You should consult qualified licensed insurance professionals regarding your specific situation
IMPORTANT DISTINCTIONS IN “TYPES” OF TRUSTS
The chief advantages of trusts are:
- Put conditions on how and when your assets are distributed after you die;
- Reduce estate and gift taxes;
- Distribute assets to heirs efficiently without the cost, delay and publicity of probate court. Probate can cost between 5% to 7% of your estate;
- Better protect your assets from creditors and lawsuits;
- Name a successor trustee, who not only manages your trust after you die, but is empowered, should you so choose to manage the trust assets if you become unable to do so.
Trusts are flexible, varied and complex. Each type has advantages and disadvantages, which you should discuss thoroughly with your estate-planning attorney before setting one up.
A basic trust plan should include the trust setup, a living will, trust declaration, trust certification, property inventory, and a health care proxy. You/your estate, will pay fees to amend the trust if it’s revocable and to administer the trust after you die.
Assets you want protected by the trust must be re-titled in the name of the trust. Anything that is not so titled when you die will potentially have to be probated and may not go to the heir you intended, but rather to one the probate court directs.
A trust in which you want to put the majority of your assets, known as a revocable living trust, also must have to have a “pour-over will” to cover any of your holdings that might be outside of your trust if you die unexpectedly. A pour-over will essentially directs that any assets outside of the trust at the time of your death be put into the trust so they can go to the heirs you choose and avoid probate directives. Certain criteria for such a procedure must be satisfied.
It is important to remember that trusts can consist of special paragraphs that refer to the “kind” or “type” of trust they denote. This sometimes confuses people who expect the totality of a trust to be different merely because it contains designated paragraphs that address particular issues concerning a particular estate. Many different “types” of trusts also contain language that are common in almost all trust documents. Make sure you consult with an estate planning attorney to crystallize your goals when forming your estate plan. In any event, below are listed some of the more widely-used “types” of living trusts:
- Credit-Shelter Trust (Bypass Trust):
With a credit-shelter trust (also called a bypass or family trust), you write a will bequeathing an amount to the trust up to the estate-tax exemption. Then you pass the rest of your estate to your spouse tax-free. You also specify how you want the trust to be used — for example, you may stipulate that income from the trust after you die goes to your spouse and that when he or she dies, the principal will be distributed tax-free among your children.
Since your spouse is also entitled to an estate-tax exemption, the two of you can effectively double (or more than double) that portion of your kids’ inheritance that is shielded from estate taxes by using this strategy.
And there’s an added bonus: Once money is placed in a bypass trust it is forever free of estate tax, even if it grows. So if your surviving spouse invests it wisely, he or she may add to your children’s inheritance.
Of course, you can pass an amount equal to the estate-tax exemption directly to your kids when you die, but the reason for a bypass trust is to protect your spouse financially in the event he or she has need for income from the trust or in the event you think your children will squander their inheritance before the surviving parent dies.
- Generation-Skipping Trust (Dynasty Trust):
A generation-skipping trust (also called a dynasty trust) allows you to transfer a substantial amount of money tax-free to beneficiaries who are at least two generations your junior — typically your grandchildren.
You may specify that your children may receive income from the trust and even use its principal for almost anything that would benefit your grand kids, including health care, housing or tuition bills.
Beware, however. If you leave more than the exemption amount, the bequest will be subject to a generation-skipping transfer tax. This tax is separate from estate taxes, and is designed to stop wealthy seniors from funneling all their money to their grandchildren.
- Qualified Personal Residence Trust (QPRT):
A qualified personal residence trust (QPRT) can remove the value of your home or vacation dwelling from your estate and is particularly useful if your home is likely to appreciate in value.
A QPRT lets you give your home as a gift — most commonly to your children — while you keep control of it for a period that you stipulate, say 10 years. You may continue to live in the home and maintain full control of it during that time.
In valuing the gift, the IRS assumes your home is worth less than its present-day value since your kids won’t take possession of it for several years. (The longer the term of the trust, the less the value of the gift.)
Here’s the catch: If you don’t outlive the trust, the full market value of your house at the time of your death will be counted in your estate. In order for the trust to be valid, you must outlive it, and then either move out of your home or pay your children fair market rent to continue living there. While that may not seem ideal, the upside is that the rent you pay will only reduce your estate further.
- Irrevocable Life Insurance Trust (ILIT):
An irrevocable life insurance trust (ILIT) can remove your life insurance from your taxable estate, help pay estate costs, and provide your heirs with cash for a variety of purposes. To remove the policy from your estate, you surrender ownership rights, which means you may no longer borrow against it or change beneficiaries. In return, the proceeds from the policy may be used to pay any estate costs after you die and provide your beneficiaries with tax-free income.
This type of trust can be useful in cases where you leave heirs an illiquid asset such as a business. The business might take a while to sell, and in the meantime your heirs will have to pay operating expenses. If they don’t have cash on hand, they might have to have a fire sale just to meet the bills. However, the proceeds from an ILIT can help tide them over.
- Qualified Terminable Interest Property Trust (QTIP):
If you’re part of a family where there have been divorces, remarriages and stepchildren, you may want to direct your assets to particular relatives through a qualified terminable interest property (QTIP) trust.
Your surviving spouse will receive income from the trust, and the beneficiaries you specify will get the principal or remainder after your spouse dies. People typically use QTIP trusts to ensure that a fair portion of their wealth ultimately passes to their own children and not someone else’s.
Money in a QTIP trust, unlike that in a bypass trust, is treated as part of the surviving spouse’s estate and may be subject to estate tax. That’s why you should create a bypass trust first, which shelters assets up to the estate-tax exemption, and then, if you have assets left over, you can put it in a QTIP.
- Special Needs Trust (SNT):
This trust is created for just what it denotes: the special needs of a beneficiary who may be disabled or who may require an educational safety net of sorts.
A critical step in establishing a special needs trust (SNT) is determining how to fund the trust. Taxpayers may use a number of assets, including even IRAs, to fund a SNT. There are, however, a number of critical issues that estate planners must navigate to ensure that the trust is structured to preserve public benefits and to provide for the special needs beneficiary in a tax-efficient manner.
The key to successfully drafting an SNT funded by retirement accounts is to make sure the trust document is drafted to base the retirement distributions on the life of the beneficiary. Also critical is ensuring that any remainder beneficiaries of the SNT do not trigger any accelerated distribution rules, which could have negative income tax consequences. Planners must be mindful of the conduit rules when designating additional beneficiaries of the trust.
DISTINCTIONS BETWEEN LIFE ESTATE AND RIGHT OF OCCUPANCY–WHAT ARE THEY?
contribution by: Alan Weinfeld
Many trusts provide that a surviving spouse or another beneficiary has the right to live in a residence rent free for the remainder of his or her life. This type of provision is particularly common in a second marriage when the settlor (the person creating the trust) comes into the marriage with a home that is separate property and wants the surviving spouse to live there before the property passes to the settlor’s children or other heirs as remainder beneficiaries.
Many practitioners believe that this type of arrangement grants the beneficiary a life estate in the home, but it does not. The provision creates what is called a right of occupancy. (See Le Breton v. Cook, 107 Cal. 410, 419 (1895).) Because California case law is sparse on rights of occupancy, courts have struggled in discerning them from life estates. (See Peterson v. Wells Fargo Bank, N.A., 236 Cal. App. 4th 844, 849 (2015) (provision stating that “Decedent’s wife may reside in the Premises rent free for her lifetime …” deemed a life estate, and not a right of occupancy).) However, case law does make clear that those rights of occupancy are different from life estates. (See Le Breton, 107 Cal. at 419; Robbins v. Bueno, 262 Cal. App. 2d 79, 82 (1968); Dandini v. Johnson, 193 Cal. App. 2d 815, 820 (1961).)
Unlike a life estate, a right of occupancy does not grant the holder any kind of estate or title to the subject property. During the period of the right of occupancy, title is held by the trustee of the trust. A right of occupancy is personal to the holder, and thus it generally cannot be sold or transferred-especially if the trust has a spendthrift provision, which prohibits the beneficiary from transferring his or her interest. (See Le Breton, 107 Cal. at 419; see also Cal. Prob. Code §§ 15300-15301.)
A right of occupancy generally grants the holder an exclusive right to possess the property, although in certain situations if the trust provision is not sufficiently clear and unambiguous, a court could find otherwise. (Compare Robbins, 262 Cal. App. 2d at 82 (right of occupancy has many of the attributes of a life estate, including the entitlement “to … exclusive possession for life”) with Dandini, 193 Cal. App. 2d at 818-820 (right of occupancy was not exclusive because instrument was ambiguous and uncertain, did not “expressly reserve a right to exclusive possession,” and extrinsic evidence established that grantor did not intend to provide exclusive right).)
Unless a right-of-occupancy provision is sufficiently specific to address each of the parties’ obligations and a number of common situations, disputes are likely to arise among the trustee, the remainder beneficiaries, and the person who holds the right of occupancy.
Payment of expenses. One frequent dispute concerns money-specifically, determining who is responsible for the different types of expenses associated with the residence. Unless the terms of the trust are crystal clear on this issue, parties may bicker over who must pay for utilities, property taxes, insurance, homeowner association fees, maintenance, and repairs. The remainder beneficiaries will claim that because the right-of-occupancy holder is receiving the benefit of living in the residence rent free, he or she should shoulder these expenses. The right-of-occupancy holder may have a different view: that his or her rights are similar to those of a lessee of an apartment, who is not typically responsible for these expenses.
In contrast to life estates, no clear authority exists for rights of occupancy dictating who is responsible for these expenses when the trust instrument is silent on the issue. (See Cal. Civ. Code § 840; In re Toler’s Estate, 174 Cal. App. 2d 764, 772 (1959) (life estate tenant is responsible for upkeep and repairs, taxes, other annual charges and “just proportion of extraordinary assessments,” unless instrument provides otherwise); see also Boggs v. Boggs, 63 Cal. App. 2d 576, 580 (1944) (life estate tenant responsible for mortgage interest).)
Arguments can be made on both sides of the issue as to whether the life estate authorities apply to rights of occupancy or whether those rights are sufficiently different from a life estate to justify a different rule. On the one hand, a right of occupancy typically has many of the attributes of a life estate, including the right to exclusive, undisturbed possession of the property for life and the right to the fruits of the property. (See Robbins, 262 Cal. App. 2d at 82.) However, a life estate tenant can sell and profit from his or her interest, and some would contend that such a life estate tenant should have more responsibility for expenses than a mere right-of-occupancy holder, who generally cannot sell the interest. (Compare Musson v. Fuller, 57 Cal. App. 2d 5, 7 (1943) (life estate interest could be sold) with Le Breton, 107 Cal. at 419 & Cal. Prob. Code §§ 15300-15301 (right of occupancy is “personal” and cannot be transferred when trust has spendthrift provision).)
Failure to occupy: The right-of-occupancy holder is, of course, not obligated to live in the home. He or she may already own another residence or want to live close to family elsewhere. Or, the right-of-occupancy holder may initially live in the subject residence but later become debilitated and move to a long-term care facility.
In these situations, the remainder beneficiaries may express frustration to the trustee that a valuable trust asset is being wasted, and that the trust could generate income by renting out the property. Even so, unless the right-of-occupancy provision delineates what happens if the residence is not used, the trustee may be hesitant to take action for fear of violating the right-of-occupancy provision. (See In re Charters’ Estate, 46 Cal. 2d 227, 237-238 (1956) (trustee violated right-of-occupancy provision by selling residence during time period that right-of-occupancy holders had vacated residence); see also In re Estate of Reynolds, 836 N.Y.S. 2d 97, 98 (N.Y. App. Div. 2007) (right of occupancy not forfeited based on holder’s “temporary, albeit extensive, stay in Tennessee”).)
California law is not clear whether the trustee can rent out the residence when the right-of-occupancy holder fails to use it. In one case, the California Supreme Court suggested that the trustee could have rented out the home “when the duration of [the right of occupancy holders’] absences justified such rental” by making “reasonable arrangements” with the right-of-occupancy holders. (In re Charters’ Estate, 46 Cal. 2d at 237.) However, in an earlier case the court indicated that the trustees “could not rent [the property] during the life of the occupant.” (Le Breton, 107 Cal. at 419.)
When the terms of the trust fail to address the issue, these conflicting statements may give rise to difficult decision making in the event of a dispute; they all but guarantee that a prudent trustee will have to expend trust resources to petition the court for instructions on how to proceed. (See Cal. Prob. Code § 17200.)
Other occupants. The right-of-occupancy holder may not want to occupy the residence alone, instead preferring to have others (perhaps a spouse, child, parent, or even a boyfriend or girlfriend) live there as well. If the right-of-occupancy holder was the settlor’s second spouse, the settlor’s children from the first marriage may be angry that their stepparent has a new partner living in their parent’s home. The children may well demand that the trustee evict the other person(s) living in the residence, or at least collect rent from that person. One case suggests that it is the right of the occupancy holder, and not the trustee, to collect any rent from others living in the residence. (See Robbins, 262 Cal. App. 2d at 82.) However, the law is not clear on whether the trustee can actually preclude others from living in the residence. This issue likely will turn on the precise language used in the trust instrument.
Right to sell: Because a right of occupancy does not provide the certainty of title granted by a life estate, it is normally subject to all of the other terms of the trust, which may grant the trustee considerable discretion to sell trust assets. And unless the mortgage on the residence is fully paid, there could be a dispute regarding who is responsible for paying it off, particularly if the trust was not funded with sufficient liquid assets to pay the mortgage in full.
If trust assets are not available to pay the mortgage, the remainder beneficiaries and the trustee likely will claim that the residence must be sold to avoid being lost in foreclosure. Though such a scenario is entirely plausible, the right-of-occupancy holder will no doubt point to legal authority stating that the residence cannot be sold in this situation. (See 60 CAL. JUR. 3D. Trusts § 192, p. 275 (2013); Wood v. Am. Nat’l Bank, 125 Cal. App. 248, 253-254 (1932); In re Charters’ Estate, 46 Cal. 2d at 238; 3 SCOTT AND ASCHER ON TRUSTS, § 22.214.171.124, p. 1307 (5th ed. 2007).)
The resolution of this issue likely will depend on the specificity of the trust regarding the sale of the home. If the right-of-occupancy provision specifically provides that the property may be sold, a court will probably allow the sale. If the trust document does not state whether the property can be sold, and has only a general provision regarding the sale of trust assets, the court will be less likely to allow that to happen.
If the court allows a sale, it will likely order the trustee to provide the right-of-occupancy holder with a replacement residence. (See In re Charters’ Estate, 46 Cal. 2d at 233, 238.) If, however, the trust has minimal liquid assets available, the right-of-occupancy holder could well wind up with a far inferior place to live, or worse, without any place to live. Needless to say, the settlor probably did not intend for that to occur.
To avoid this problem, the trustee might consider selling the property subject to the right of occupancy. That is precisely what the California Supreme Court suggested in Le Breton, cited above. (See 107 Cal. at 420.) Of course, it is more difficult to find a buyer willing to purchase what is essentially a future interest in the property, and the sale of that interest would generate far less revenue than if the trustee sold the property free and clear.
DO I HAVE THE RIGHT TO SEE A WILL?
When someone dies, all of the individual’s assets including cash, bank accounts, real estate, automobiles, jewelry, electronics, clothes, and any other personal possession becomes part of that person’s estate. Someone who dies with a will is referred to by courts as having “died testate.” Someone who dies without a will dies intestate, and the distribution of his estate is governed by the state’s intestate succession laws.
If a loved one has died, you may have the right to be involved in the proceedings and see the will. There are two different avenues for gaining access to the will:
1. Receive a copy of the will from the estate’s executor
If you are named in the will, the estate’s executor should provide you with a copy. If a copy has not been provided, ask the executor for one.
2. Access the probate court’s public records
Wills in probate are considered public record and are open to read. Visit the probate court in the county the individual died.
If the will has not been probated — and so isn’t yet in the public record — and you know that someone has a copy of the will but won’t show you, you can file a motion in probate court to compel the individual to turn over the will. You only have standing to file this motion if you are an interested person, however.
An interested person is someone who is named in the will or would inherit from the estate under the state’s intestate succession laws. The latter category is generally limited to spouses, children, and parents of the deceased.
WHAT EXACTLY IS A “LIVING WILL”?
In 1990, the U.S. Supreme Court recognized a patient’s right to refuse life-sustaining treatment, including food and water, as long as that wish is expressed in a valid, written document that complies with applicable state law. Today, most states have living will statutes, and others allow patients to control, through an advanced health care directive, the care they’ll receive if rendered incompetent.
What we call a “living will” is technically not a will, but a legal document expressing an individual’s medical treatment preferences in the event they become unconsciousness or otherwise unable to communicate. Accordingly, then, a living will is a person’s statement to health care providers dictating the types of life-prolonging treatment he or she would not want to receive if confronted with a life-threatening condition making them incapable of communicating desired medical treatment. If someone does not want to be kept on artificial life-support, they can state this in their living will. California living wills law is encoded in the Natural Death Act, which outlines the legal requirements for a valid living will, rules for revocation, and other provisions. Often, individuals named as health care agents in a durable power of attorney rely on living wills when making important decisions on behalf of the patient.
The purpose of a living will is to make important health care decisions at a time when a person is still competent to make them. It was created to spare a person who is incompetent and near death any unwanted suffering, medical treatment, and health care expenses. To create a valid living will, a person must be a competent adult.
The living will, or a third person if named in the living will, speaks for the will’s creator in the event that he or she faces a terminal condition, or is rendered unconscious, and is unlikely ever to regain consciousness. Appointing a person to make health care decisions can be useful because it allows for advocacy on the patient’s behalf, which may enable the patient and physician to get past disagreements over the meaning of language fixed in a living will. A physician who refuses to respect the will must transfer the patient to another physician or hospital that will honor the document. Living wills exempt physicians who follow them from civil or criminal liability as long as the care directives comply with reasonable medical standards. The laws on living wills, however, do not allow civil or criminal remedies for a health care provider’s refusal to end life-sustaining treatment. It is therefore important to draft the document with care.
Whether to make a living will is a personal decision, much like becoming an organ donor. The decision requires contemplating imminent death or permanent unconsciousness, conditions it may be hard for us to imagine. Yet the impact of such a condition on our loved ones is something we may better be able to picture. The emotional and financial costs of being kept alive when there is no real chance of recovery can be severe. Avoiding depletion of an estate that could be passed to loved ones was, and is, a primary reason for the creation of living wills. The living will is just one form of planning for the end of life. It supplements a regular will, which becomes effective at death.
In a sense, a living will is insurance against the frustration of the regular will, as it serves to prevent the will’s creator from being sustained on the brink of death as the assets that would otherwise pass through the will are drained on medical expenses. To fully protect yourself, and to ensure that the property and real estate you have worked a lifetime to acquire serve the purposes you intend, it is best to prepare a living will and an estate plan to be followed after death. To make sure that your full intent is accurately conveyed, it is wise to have a qualified attorney draft your living will.
If you become unable to direct your own medical care because of illness, an accident, or advanced age, the right legal documents are your lifeline. When you don’t write down your wishes about the kinds of medical treatment you want and name someone you trust to oversee your care, these important matters can be placed in the hands of estranged family members, doctors, or sometimes even judges, who may know very little about what you would prefer.
What are health care forms called in California?
There are two basic kinds of health care documents that everyone should make. First, you’ll need a document naming a trusted person to direct your health care if you are unable to do so yourself. This document is commonly called a durable power of attorney for health care.
Second, you should make a document setting out the types of medical treatment you would or would not like to receive in certain situations. This document is often known as a living will.
In California, these two documents are combined into a single form called an advance health care directive.
Who makes health care decisions for me in California?
In California, the person you name to make decisions for you is called your agent. Most people name a spouse, partner, relative, or close friend as their agent. Under California law, your agent may not be:
• your treating health care provider
• an employee of your treating health care provider, unless the individual is your registered domestic partner or is related to you by blood, marriage or adoption — or you and the employee both work for your treating health care provider
• an operator or employee of a community care facility, unless the individual is your registered domestic partner or is related to you by blood, marriage or adoption — or you and the employee both work at the community care facility
• an operator or employee of a residential care facility for the elderly, unless the individual is your registered domestic partner or is related to you by blood, marriage or adoption — or you and the employee both work at the residential care facility.
When choosing your agent, the most crucial criteria are trustworthiness and dependability. You might also want to choose someone you think will be good at asserting your health care wishes if others argue against them — that is, someone who is persistent or calm under pressure.
While you need not name someone who lives in California, the person you name should at least be willing and able to travel to your bedside if necessary.
SMALL ESTATES IN CALIFORNIA
There are many ways to avoid probate in California, and using the small estates law is one of them. Estates of decedents that do not exceed $150,000 do not need to be probated in California. An affidavit or declaration signed under penalty of perjury at least 40 days after the death can be used to collect the assets for the beneficiaries or heirs of the estate. No documents are required to be filed with the Superior Court if the small estates law (California Probate Code Sections 13100 to 13116) is used.
The following assets are included in the $150,000 limit: Bank accounts, brokerage accounts, stock, bonds, mutual funds, other investments, real property valued at up to $50,000, and similar assets that the decedent owned in his or her name only, except for the following:
1. Joint tenancy assets.
2. Trust assets.
3. IRAs, 401K accounts, and similar pension accounts.
4. Life insurance.
5. Death benefits.
6. Registered vehicles.
7. Pay from service with the armed forces.
8. Salary from any source not paid before date of death up to $15,000.
9. Pay on death (POD) accounts.
10.Accounts with a named beneficiary.
When is the value of the assets determined?
At the date of death, even if the affidavit or declaration is signed years later. When can the small estates law be used? When at least 40 days have elapsed since the date of death. The affidavit or declaration cannot be signed before the 40-day period ends. The new limit of $150,000 applies to all estates, regardless when the decedent died, provided the affidavit was signed after Jan. 1, 2012.
Who can use the small estates law?
Beneficiaries and heirs of the estate, trustees of the decedent’s trust, and fiduciaries, among others.
What has to be done to collect the assets?
An affidavit or declaration must be signed under penalty of perjury. The affidavit or declaration must include the information described in California Probate Code section 13101. The affidavit or declaration is then given to the institution that holds the assets, and the assets are transferred to the person who signed the affidavit or declaration. Creditors of the decedent are paid from the assets, and the remaining assets are transferred to the beneficiaries or heirs.
When should the small estates law not be used?
This law should not be used for estates with substantial indebtedness that might exceed the value of the assets. Estates that are insolvent or close to insolvency should be probated instead to take advantage of Probate Code provisions that determine which creditors will be paid from the estate, and how much. Probate should also be used in situations in which the beneficiaries or heirs do not agree on how the assets should be distributed.
Although Probate Code section 13200 allows real property valued up to $50,000 to be transferred with a small estates affidavit, title companies might be reluctant to accept the affidavit when determining whether to issue title insurance. A probate might be necessary to avoid this problem.
California does offer some probate shortcuts for surviving spouses and for “small estates.” These procedures make it easier for survivors to transfer property left by a person who has died. You may be able to transfer a large amount of property using simplified probate procedures or without any probate court proceedings at all — by using an affidavit. And that saves time, money, and hassle.
Here are the ways you can skip or speed up probate. (If the affidavit procedure is used, there’s no need to use the simplified probate procedure.)
1.Using a Spousal Property Petition
Assets inherited by the surviving spouse or registered domestic partner can be transferred with a streamlined procedure, called a Spousal (or Domestic Partner) Property Petition. The petition must be submitted to the probate court for approval, but the process is simple and much faster than regular probate. There is no limit on the value of property that can be transferred this way.
2. Claiming Property with a Simple Affidavit
California has a procedure that allows inheritors to skip probate altogether when the value of all the assets left behind is less than a certain amount. All an inheritor has to do is prepare a short document, stating that he or she is entitled to a certain asset. This document, signed under oath, is called an affidavit. When the person or institution holding the property — for example, a bank where the deceased person had an account — gets the affidavit and a copy of the death certificate, it releases the asset.
The out-of-court affidavit procedure is available in California if:
A. The value of the estate is no more than $150,000, as calculated using exclusions listed in “Simplified Court Procedures,” below. There is a 40-day waiting period. or
B. The estate contains real estate up to $50,000 in value. There is a six-month waiting period.
3. Simplified Probate Procedures
California has a simplified probate process for small estates. To use it, an executor files a written request with the local probate court asking to use the simplified procedure. The court may authorize the executor to distribute the assets without having to jump through the hoops of regular probate.
You can use the simplified small estate process in California if the estate has a value up to $150,000. Excluded from calculating value: real estate outside California; joint tenancy property; property that goes outright to a surviving spouse; life insurance, death benefits, and other assets not subject to probate that pass to named beneficiaries; multiple-party accounts and payable-on-death accounts; any registered manufactured or mobile home; any numbered vessel; registered motor vehicles; salary up to $15,000; amounts due decedent for services in the armed forces; property held in trust, including a living trust.
EXECUTOR DUTIES AND PROBATE PROCEDURE
Although the procedure varies from state to state, generally the executor named in the will must bring the original will to the probate court in the county in which the deceased lived, along with a certified copy of the death certificate. The executor submits a probate petition and pays any required fees. The court then formally appoints the executor and issues letters testamentary, which allows the executor to begin estate administration.
Executor Duties: The executor has many duties and responsibilities. These include putting a notice to the deceased’s creditors in the local paper, notifying the beneficiaries of the individual’s death and the probate proceeding and hiring any necessary professionals. These might include an attorney, accountant and appraiser. She must collect and identify all of the assets owned solely by the deceased, establishing the fair-market value of each at the time of death. These assets constitute the estate.
The executor must pay the deceased’s creditors out of the estate assets, as well as any ongoing bills such as property taxes on a house. She must also file the deceased’s final income taxes, paying any taxes due from the estate account, as well as filing and paying any estate taxes. Complications The more complicated the estate, the longer it might take the executor to distribute the assets. Complications can arise if the will is challenged. Usually, any challenger has a limited period in which to file a challenge with the court. If the deceased did not keep good records, it could take time for the executor to track down all the estate’s assets. If the deceased owed back taxes, the IRS and associated penalties come into the mix. Distributing Assets
When the executor has paid off the debts, filed the taxes and sold any property needed to pay bills, he can submit a final estate accounting to the probate court. Once the probate court approves the accounting, he can distribute assets to you and other beneficiaries according to the terms of the will. The executor, who might also be an heir and family member, should keep beneficiaries up-to-date on the probate status. If a significant amount of time passes, and there has been no distribution, you can file a request for accounting with the court. If you think the executor is not performing his duties, you can petition the court for executor replacement if you’re an “interested party” a beneficiary named in the will.
(Affidavit for Transfer of Personal Property worth $150,000 or Less)
If you have the legal right to inherit personal property, like money in a bank account or stocks, and the entire estate is worth $150,000 or less, you may not have to go to court. There is a simplified process you can use to transfer the property to your name. But this process is not for real property, like a house.
Figuring out if the estate is worth $150,000 or less
To calculate the value of the estate:
- All real and personal property.
- All life insurance or retirement benefits that will be paid to the estate (but not any insurance or retirement benefits designated to be paid to some other person).
Do not include:
- Cars, boats or mobile homes.
- Real property outside of California.
- Property held in trust, including a living trust.
- Real or personal property that the person who died owned with someone else (joint tenancy).
- Property (community, quasi-community, or separate) that passed directly to the surviving spouse or domestic partner.
- Life insurance, death benefits or other assets not subject to probate that pass directly to the beneficiaries.
- Unpaid salary or other compensation up to $5,000 owed to the person who died.
- The debts or mortgages of the person who died. (You are not allowed to subtract the debts of the person who died.)
- Bank accounts that are owned by multiple persons, including the person who died.
For a complete list, see CA Probate Code Section 13050.
Figuring Out if You Have the Legal Right to Inherit the Property
You can use the affidavit process if you have the legal right to inherit property from the person who died.
You must be a beneficiary in the person’s will or an heir if the person died without a will. Other people may qualify too, like the guardian or conservator of the estate. For a complete list, see CA Probate Code Section 13051.
It can be very complicated to figure out if you have the legal right to inherit the property. If there is no valid will, the law says how to determine if someone is a legal “heir” by looking at the type of property, the relationship between all the persons claiming to be heirs, and other issues. If you are not sure if you qualify to inherit the property in question, you MUST talk to a lawyer.
Using the Affidavit to Transfer Personal Property
Once you know the value of the property is $150,000 or less and you personally qualify to use the affidavit process, follow these instructions. But keep in mind you must wait at least 40 days after the person dies to transfer the personal property. And, remember, you cannot use this affidavit process to transfer real property like land or buildings.
To use to Affidavit process:
- Fill out the Affidavit.
Many banks and other institutions have their own affidavit. So, check with them first and ask for one. Your court may also have this form or a sample you can use to guide you.
- You can list all assets in 1 affidavit. Or you can do one affidavit for each asset.
- Attach (to the affidavit):
- A certified copy of the death certificate of the person who died.
- Proof that the person who died owned the property (like a bank passbook, storage receipt, stock certificate).
- Proof of your identity (like a driver’s license or passport)
- An Inventory and Appraisal (Form DE-160) of all real property owned by the decedent in California. You will need to get this form signed by a probate referee. If there is no real property, then you do not need this form.
- Have the affidavit notarized.
Legally, you are not required to have the affidavit notarized BUT many institutions will ask you to, so it is a good idea to notarize it before you try to use it to transfer the property.
- If there are other people entitled to inherit the property, they MUST also sign the affidavit.
This shows you all agree that the property listed on your affidavit can be transferred to you.
- To have the property transferred to you, give the affidavit to the person, company, or bank that has the property now.
NOTE: Make sure the case is not already in probate court. If it is, you cannot use the affidavit process unless the personal representative of the estate agrees in writing to let you do so.
CA NOW RECOGNIZES TORTIOUS INTERFERENCE WITH INHERITANCE
California’s Fourth Appellate District recently recognized the tort of intentional interference with an expected inheritance (IIEI), joining the majority of other states in recognizing the tort of IIEI as a valid cause of action. In addition to expanding California’s tort causes of action to include IIEI, the court outlined the components of an IIEI claim.
In addition to expanding California’s tort causes of action to include IIEI, the court outlined the components of an IIEI claim.
In the case, Beckwith v. Dahl, plaintiff Brent Beckwith accused his partner’s sister of lying to him about her intention to prepare a living trust, so as to delay the matter until after a risky surgery in order to inherit the entire estate.
Beckwith and his partner, Marc Christian MacGinnis, were in a long-term, committed relationship for almost 10 years. MacGinnis had an estranged relationship with his sister, Susan Dahl, but she was his only living family.
(MacGinnis was famous for his own headline-grabbing litigation, reports Metropolitan News-Enterprise. He won an intentional infliction of emotional distress suit against Rock Hudson’s estate based on his claim that he was the actor’s former lover, and Hudson knowingly concealed that he had AIDS during their relationship.)
During their relationship, MacGinnis showed Beckwith a will he had saved on his computer. The will stated that upon MacGinnis’s death, his estate was to be divided equally between Beckwith and Dahl. MacGinnis never printed or signed the will.
In 2009, while MacGinnis was in the hospital awaiting surgery to repair holes in his lungs, he asked Beckwith to locate and print the will so he could sign it. Beckwith couldn’t find the original will, so he created a new will with essentially the same terms using forms downloaded from the Internet.
Before Beckwith presented the will to MacGinnis, he called Dahl to tell her about the will and e-mailed her a copy. Later that night, Dahl responded to Beckwith’s email suggesting that a trust would be a better way to distribute MacGinnis’s assets, and offering to talk to attorney friends about setting up a trust. MacGinnis died, intestate, before that became possible, and Dahl inherited the entire estate as his only surviving family member.
The court decided that it was “officially time” to recognize tortious interference with inheritance, and noted that most states require the following elements in an IIEI claim:
1. An expectation of receiving an inheritance
2. Intentional interference with that expectancy by a third party
3. The interference was independently wrongful or tortious
4. There was a reasonable certainty that, but for the interference, the plaintiff would have received the inheritance
The court concluded that Beckwith’s complaint alleged sufficient facts to support a claim for deceit, but insufficient facts stated to allege IIEI. Given the unique circumstances of this case, the court remanded the matter to give Beckwith an opportunity to amend his complaint to allege the facts necessary to support an IIEI claim.CAN YOU BE TAXED ON GIFTED PROPERTY?
When you gift property to an irrevocable trust, you should not retain control of the property, but rather you should give control away to the trustee of irrevocable trust. If the IRS finds out you still control the trust they could include the assets in the estate that “gifted” it.
While a grantor may technically be allowed to serve as the trustee of an irrevocable trust he creates under certain specific scenarios, it is not always good idea. That is because if the grantor has any discretion with trust asset distributions, it could lead to inclusion of the trust assets in his estate for tax, Medicaid and other purposes, which could frustrate the trust’s objectives.
Tax Implications for Beneficiaries:
The fact you receive money from an irrevocable trust isn’t sufficient to determine whether you are responsible for reporting the payments on your state and federal tax returns. Instead, it depends on the terms of the trust. If the grantor requires all trust income distributed to beneficiaries, you will be responsible for paying tax on your share, regardless of when you receive the money. On the other hand, if the money you receive represents a portion of the trust principal, or income the trust has already paid taxes on, you receive the distribution without any tax consequences.
Trust Tax Implications:
An irrevocable trust is treated as a separate taxpayer and must file a federal income tax return on Form 1041 each year. The trustee is responsible for reporting all income the trust earns, even if the terms of the trust require beneficiaries to receive all of that income. However, if the trustee has no obligation to distribute earnings to beneficiaries and accumulates income within the trust, he/she must pay tax on those earnings using money from the trust. Then, when the trust distributes income to you and other beneficiaries, the trustee reports those earnings on the 1041 but takes a deduction, known as an income distribution deduction, for all payments to beneficiaries. This is done so that income tax is paid only once by beneficiaries. Remember, depending upon the TYPE if Irrevocable Trust you have, you may lose its asset protection quality if not properly administered.
Many people believe that having an estate plan simply means drafting a will or a trust. However, there is much more to include in your estate plan in order to make certain all of your assets are transferred seamlessly to your heirs upon your death. A successful estate plan also includes provisions to make sure your family members can access or control your assets should you become disabled.
Here is a list of items every estate plan should include:
- Durable power of attorney
- Beneficiary designations
- Letter of intent
- Healthcare power of attorney
- Guardianship designations
- Wills and Trusts
A trust should be one of the main aspects of every estate plan, even if you don’t have substantial assets. Wills only help to ensure that property is passed according to an individual’s wishes (if drafted according to state laws). Wills do NOT avoid the need for probate. Trusts are private and avoid probate when unchallenged, and some trusts help limit estate taxes and legal challenges. However, simply having a will and/or a trust isn’t enough. The wording of the document is critically important.
A will or trust should be written in a manner that is consistent with the way you’ve bequeathed the assets that pass outside of the will. For example, if you’ve already named your sister as a beneficiary on a retirement account or insurance policy (assets that typically pass outside of a will to a named beneficiary), you wouldn’t necessarily want to bequeath the same asset to a second cousin in the will or trust.
If you’ve looked into creating a revocable living trust to avoid probate, you may have heard of a “pour-over will.” This kind of will is often used with a living trust. Under the terms of a pour-over will, all property that passes through the will at your death is transferred to (poured into) your trust. Then it’s distributed to the trust beneficiaries you named while you were alive. Why have a will that does nothing but transfer property to your trust? (For that matter, why do you need a will at all if you’re using a living trust to leave your property?) The answer is that many estate planners think it’s a good idea to have all your assets covered by the terms of just one document, the trust document. This arrangement offers several advantages.
Simplicity. When everything is controlled by just one document, the trust, it makes it clear who gets what. It’s also easier for the executor and trustee who are in charge of wrapping up your estate after your death.
Completeness. You’re not going to transfer everything you own into your living trust. (No one does.) A pour-over will takes care of assets that you don’t get around to transferring to the trust before your death.
Privacy. Trusts, unlike wills, are private; they don’t become public records after your death, available to anyone who wants to look at them. This keeps the details of who inherits your property more private. (Michael Jackson was just one celebrity who left a will that simply poured all his property into his trust. Reporters and the curious rushed to read the will once it was filed with the court, but learned nothing about who was to inherit.)
- Durable Power Of Attorney(s)
It’s important to draft a durable power of attorney (POA) so that an agent or a person you assign will act on your behalf in the event of your disability. Absent a power of attorney, a court may be left to decide what happens to your assets (if you are found to be mentally incompetent). The court’s decision may not be what you wanted.
This document can give your agent the power to transact real estate, enter into financial transactions and make other legal decisions literally as if he or she was you. This type of POA is revocable by the principal at a time of his or her choosing, typically a time when the principal is deemed to be physically able, deemed mentally competent, or upon death. In many families, it makes sense for spouses to set up reciprocal powers of attorney. However, in some cases it might make more sense to have another family member, friend or trusted advisor who is more financially savvy act as the agent.
- Beneficiary Designations
A number of your possessions can pass to your heirs without being placed in a will or trust (a 401(k) plan for example). This is why it is important to maintain a beneficiary (and a contingent beneficiary) on such an account. In fact, all retirement accounts and insurance plans should contain a beneficiary and a contingent beneficiary because they too typically pass outside of a will or trust. If you don’t name a beneficiary or if the beneficiary is deceased or unable to serve, a court could be left to decide the fate of your funds. And frankly, a judge that is unaware of your situation, beliefs and intent is unlikely to make the same decision that you would have made.
Note: Make certain that all beneficiaries you name are over the age of 21, and are mentally competent. If you don’t, a court may end up getting involved in the matter.
- Letter of Intent
A letter of intent is simply a document left by you to your executor or to a beneficiary. The purpose is to define what you want done with a particular asset after your death or incapacitation. In addition, some letters of intent also provide for the details of the funeral or other special requests. While such a document is not typically valid in the eyes of the law, it helps inform a probate judge of your intentions and may help in the distribution of your assets if the will or trust is deemed invalid for some reason.
- Healthcare Power of Attorney
By drafting a healthcare power of attorney, you can designate another individual (typically a spouse or family member) to make important healthcare decisions on your behalf in the event of incapacity. If you are considering executing such a document, you should pick someone who you trust, who shares your views and who would likely recommend a course of action that you would agree with. After all, this person could literally have your life in his or her hands. Finally, several successor agents should also be identified, in case your initial pick is unavailable or unable to act at the time needed.
- Guardianship Designations
While many wills or trusts incorporate this clause, some “form” wills don’t. If you have kids or are considering having children, picking a guardian is incredibly important and sometimes overlooked. Make sure the individual or couple you choose shares your views, is financially sound and is genuinely willing to raise children. As with all designations, a backup or contingent individual/family member should be named as well. Absent these designations, a court could become involved and could rule that your children live with a family member that you wouldn’t have approved of. In extreme cases, the court could mandate that your children become wards of the state.
There is more to estate planning than deciding how to dividing up your assets when you die. It’s also about making certain that your family members and other beneficiaries are provided for, and have access to your assets upon your temporary or permanent incapacity. BE AWARE: many of the pre-packaged will kits found online don’t cover the full depth of estate planning. It’s important to plan for all contingencies.
Generally speaking, each spouse may give away up to 50% of the couple’s community property, 100% of their separate property and 0% of the other spouse’s separate property. At first blush, the relationship between community property and estate planning is critically important because a person cannot give away something which they do not own. However, most couples usually leave their entire estate to the surviving spouse and then to their children. Thus, this blunts the importance of understanding the nuances of community property law. The cases in which community property plays a large role in estate planning involves blended families. Since a blended family might have children from multiple marriages, it is unlikely that a spouse would want to leave anything to a non-biological child. Consequently, the spouses would need to ascertain each asset’s community or separate property status in order to properly distribute their estate.
Community property can be either real property (farm land, raw land, land improved with buildings, a condominium, a townhouse, a single family dwelling, etc.) or personal property (bank accounts, investment accounts, life insurance, furniture, artwork, paintings, partnership interests, etc.) that is owned by a married couple living in California (either a heterosexual couple or one of the more than 18,000 same sex married couples in California) or a couple who have registered with the California Secretary of State as domestic partners (Registered Domestic Partners (RDPs) may be either a same sex couple or a heterosexual couple).
In general, community property is any real property that is located in California or any personal property—regardless of where such personal property is located—that is acquired by either member of the couple during the term of the couple’s marriage or registered domestic partnership, EXCEPT that community property does not include any real property or personal property that either member of the couple acquires from an inheritance or as a gift from a third person or specific property that is the subject of a prenuptial or post-nuptial agreement, if the spouses have entered into such an agreement. (Property that a member of the couple acquires by gift or inheritance is the separate property of that person.)
In addition, the ownership interest that each spouse or registered domestic partner has in the couple’s community property is (1) present (i.e., the ownership interest exists NOW and not at some point in the future); and (2) equal in value (or in percentage) to the ownership interest in the couple’s community property that is held by the other spouse or registered domestic partner.
Community Property Includes Employment Earnings of either member of the Couple, Items Acquired with such Earnings, and Appreciation in Value of Such Items. And, Community property includes all of the employment earnings of either or both member(s) of the couple, including all pre-tax earnings that are deposited into the retirement plans owned by either or both member(s) of the couple. Community property includes all of the items purchased or acquired with such employment earnings. Finally, community property also includes all of the appreciation that accrues over time to the items that were purchased or acquired with such employment earnings.
Example #1: Husband and Wife live in California. During their marriage, Wife purchases shares of Google common stock using her employment earnings that she earned during her marriage and while living in California. The shares of Google stock become the community property of both Husband and Wife.
Example #2: Husband and Wife live in California. During their marriage, Husband’s mother dies. Husband inherits his mother’s home from her estate. The home is Husband’s separate property and Wife has no ownership interest in the home when Husband inherits it.
Example #3: Husband and Wife live in California. Prior to their marriage, Wife owned her own home. There was a mortgage on the home. After their marriage, Husband and Wife move into and live in Wife’s home. Wife did not add Husband’s name to the legal title of Wife’s home. Husband and Wife use their earnings to pay down the mortgage on Wife’s home. Under these facts, part of Wife’s home is owned solely by Wife as her separate property and part of Wife’s home is owned by Husband and Wife as their community property. How much of Wife’s home is the community property of Husband and Wife? The answer is complicated and depends on a number of factors, including but not limited to (1) the value of Wife’s home when Husband and Wife married, (2) the value of the mortgage that was paid down after Husband and Wife married, and (3) the appreciation that has accrued to the Wife’s home since Husband and Wife married.
PARENTAL ESTATE PLANNING
One of the fringe benefits of being a successful entrepreneur is that you can afford to be generous to your kids. Giving them an extra card on your American Express account, taking them on a Caribbean vacation and paying for an Ivy League education can all be done without breaking the bank.
But when it comes to transferring real wealth to their children, many entrepreneurial parents never get around to it. They’re just too busy running their businesses to think about planning for an event–their death–that might be decades away. That can have devastating tax consequences if they die before they put an estate plan in place.
Michael Schwartz, a New York City certified financial planner and a managing director of Pioneer Financial, recalls a client in his late 40s who owned a thriving manufacturing business and dropped dead of a heart attack, leaving a wife and three young kids. After his death, the IRS valued the business at $6 million, far more than the $1.5 million the business owner had told his financial adviser he thought it was worth. Because the manufacturer hadn’t gotten around to moving his life insurance policy into a trust for his kids, the policy was considered part of the couple’s taxable estate. By signing a single piece of paper, the manufacturer could have spared his kids from paying federal estate taxes of as much as 45 percent on $3 million in insurance proceeds.
“A successful entrepreneur is so wrapped up in his business that his personal affairs often get neglected,” Schwartz says. “With a little planning, he could have easily transferred that money to his heirs tax-free.”
The key to gifting assets to your kids, Schwartz says, is to “remove as much of the future growth and the future taxable assets from your estate” as you can while you’re still alive. This means sheltering the assets that you believe will appreciate most–real estate, stocks, bonds, mutual funds, shares in a family limited partnership and, of course, your business. By transferring a minority interest in your business to a trust for your children early on, for example, you can take advantage of favorable tax treatment that lets you value that minority stake at a deep discount.
Here are some other strategies that both Schwartz and I recommend:
- Make annual gifts. Under current IRS rules, you and your spouse can give each of your children as much as $13,000 a year tax-free ($26,000 total). Any gifts that you make to your kids while you’re alive count towards the “unified credit” that eliminates federal estate tax on the first $3.5 million of your assets when you die.
- Make sure your assets are titled correctly. Holding assets in your own name can trigger unwanted tax consequences when you die. Re-titling real estate and other assets so that they’re wholly or partially owned by a trust for your children is a fairly simple process that can be done without triggering capital gains taxes, Schwartz says.
- Update your Trust. Client remarries and neglects to update her trust: After she died, her second husband and her son from her first marriage ended up in a nasty fight over her $500,000 life insurance policy.How can you avoid problems like these? While the principles of estate planning sound straightforward, putting a good estate plan in place requires close coordination among you, your financial planner, your attorney, and your accountant. Estate planning will require an investment of time and money, but it may very well be the best investment you ever make.
DO YOU KNOW HOW TO FUND YOUR LIVING TRUST?
- FUNDING PERSONAL PROPERTY INTO A REVOCABLE LIVING TRUST
Whether personal property is funded into a trust is primarily a matter of intent. With every comprehensive estate plan that we do, we include an “Assignment of Personal Property,” which explicitly states that all personal property is thereby intended to be funded into the trust. This document is signed and notarized and effectively binds all of a client’s personal property to the terms of the trust. Occasionally, clients will express a desire to use their estate plan to ensure that a specific item of personal property be bequeathed to a certain beneficiary (i.e., a wedding ring left to the oldest daughter, etc. In such a case, a specific sub-share will be carved out of the general trust estate with the applicable provisions, but the act of funding the trust with such property does not change. In sum, a specific written declaration making the assignment of all personal property to the trust is the most effective way to fund personal, non-titled property into a trust.
- FUNDING BANK / INVESTMENT ACCOUNTS (NON-QUALIFIED RETIREMENT PLANS) INTO A REVOCABLE LIVING TRUST
Funding a bank account into a trust is as easy as going into the local branch office of your bank and requesting a change to the name on the account. This is a very common transaction for nearly all banks, and as so, it is a pretty painless thing to do. Most banks allow holders of accounts held in the name of their trust to transact business in the exact same manner as they would with an account that is in their name as an individual. This means most of the procedures one deals with on a daily basis (i.e., signing checks, using a debit card, transferring funds from one account to another) do not change in the least bit; although technically the name on the account would be, “John Doe, Trustee of the Doe Family Trust Dated January 1, 2008,” one would only need to sign checks, “John Doe,” and using a debit card or transferring funds would be the same as if the account was held individually.
- FUNDING QUALIFIED RETIREMENT PLANS INTO A REVOCABLE LIVING TRUST
Qualified retirement accounts involve any tax-advantaged investment. The most common Qualified Retirement Accounts are 401(k)s, IRAs, Roth IRAs, 403(b)s, etc. For a married couple, the first consideration in transferring qualified retirement plans is to explore the option of rolling-over such plans to a surviving spouse-thus preserving the tax-preferred status of the investment. There are estate planning techniques involving “stretching out” one’s IRA, but that is beyond the scope of this guide. Consequently, if congruent with the creator’s wishes, the spouse should be the primary beneficiary to allow continued tax deferred growth. This is most likely the situation since the spouse’s consent is required to name anyone else as a beneficiary on a qualified retirement account that is funded with community property funds. Naming the trust as the secondary beneficiary will allow the contents of the qualified retirement account to be distributed per the terms of the trust.
- FUNDING REAL PROPERTY INTO A REVOCABLE LIVING TRUST
Title on the property needs to reflect ownership in the trust by naming the creator, as trustee of the named trust, as the owner. This is most commonly effectuated by the preparation of a grant deed transferring the property from the creator as an individual to the creator as trustee of the trust. The grant deed needs to be signed, notarized, and recorded like any other transfer of property. In California, a form referred to as a “Preliminary Change of Ownership” is also required. Both the grant deed and the PCOR are produced and completed as part of most comprehensive estate planning packages. It is important to note that although most transfers of property result in a reassessment of that property transferred for property tax purposes, any transfer of real estate into one’s own revocable living trust does not result in such reassessment. Other forms of real estate ownership such as a co-op, LLC share, etc. are transferred in the same way as a business (see below).
- FUNDING BUSINESS INTERESTS INTO A REVOCABLE LIVING TRUST
All owned shares, units, or business interests need to be named as owned by the trust. This can be done by simply endorsing the actual paper shares of the entity, or by performing a stock assignment (a service Citadel provides). Any property or other value owned by the company or entity is automatically “funded” into the trust by the simple fact that the owning entity is funded into the trust. In any regard, there are many more advanced methods of transferring a business to successive owners / beneficiaries, and although funding it into the trust should be done immediately, a separate discussion regarding business succession planning is needed.
GENERALLY, DOES THE BENEFICIARY OF AN ESTATE HAVE ANY RIGHTS?
The answer to whether or not the beneficiary of an estate has any say in the management of that estate depends on the document under which the beneficiary is to acquire rights in the decedent’s property. The say of a beneficiary in the management of trust property will also be different before and after the death of the settler of a trust. Depending on the particular situation and the document under which the rights in property are to be acquired, the beneficiary of an estate may have a large or small amount of say in how property is managed. Many rights in property, such as those acquired by will, do not vest until the decedent actually passes away, whereas property rights acquired via an irrevocable trust vest at the time the trust is funded, which may occur long before death in some instances. The following will provide a brief overview of some of the rights a beneficiary may have.
Although the passing of a loved one is an emotionally challenging time, consultation with a trust and estate planning expert should always be the first step in determining your rights as a beneficiary. As a beneficiary, you may have a say in how estate property is managed or distributed. Consultation with an expert estate planning attorney should be accomplished as soon as is reasonably possible, but always before any property is sold or transferred. An estate planning expert can provide critical tax-saving advice and help assure the rights of beneficiaries are properly protected.
Does a Beneficiary Have Rights in Property Acquired by Will?
Upon the death of a testator, a beneficiary inherits all of the rights in inherited property as held by the decedent. A beneficiary who receives property outright from a will has the only say in how the property may be used. In general, if a beneficiary is to acquire property by will, that beneficiary has no say in the property until the testator passes away. The beneficiary does not have a vested right in the property until the testator passes because the testator is free to change his or her will at any time before death and there is no right to an inheritance except in extremely rare circumstances such as for the care of a minor child. Disinherited beneficiaries who believe a loved one changed their will because of the improper influence of another may be able to challenge their disinheritance through a will contest, but only if the disinheritance was the result of undue influence or the decedents own insanity at the time the will was changed.
Does a Beneficiary Have Rights in Property Acquired by Trust?
There are two major forms of trusts used in estate planning. The form of trust used will have an effect on the say of an estate beneficiary in the management of the trust property. A revocable living trust is commonly used in estate planning to avoid the costs and delay of probate upon the death of the settler. During the life of the settler, property is placed in the name of the trust, but the settler is free to remove property from the trust anytime before their death. Because of the revocable nature of most living trusts, the beneficiaries do not have vested rights in the property until the settler passes away and therefore a beneficiary has no say in how the property is used during the life of the settler. Upon the death of the settler, the trust becomes irrevocable and the rights of the beneficiaries vest. In the case of an irrevocable trust, the rights of the beneficiary vest upon the creation and funding of the trust. This may occur long before the death of the settler, but these trusts are less commonly used, because the settler loses his or her ability to dispose of the property during their life. In either case, the beneficiary of an irrevocable trust may have a say in the management of the trust property.
The trust instrument itself often controls the say of a beneficiary in the management of trust property, but all beneficiaries have some rights under state trust laws. Although the beneficiary of a trust may request that the trustee manage property in a certain way, trustees have a fiduciary duty to preserve the trust as instructed by the settler. Mismanagement of trust funds, even at the request of a beneficiary may be considered a breach of fiduciary duty and subject a trustee to liability, especially in the case of multiple beneficiaries. There are certain rights guaranteed to trust beneficiaries under state law:
- The right to be informed of the existence of a trust and your beneficial rights under that trust upon it becoming irrevocable.
- The rights to be informed of the property composing the trust and to inspect the trust instrument upon it becoming irrevocable.
- The right to a periodic accounting of trust assets. Most states required at least a bi-annual accounting.
- Periodic Accounting
- The trustee must usually provide an accounting to the beneficiaries at least one time every year. Circumstances may require more frequent notices, however, such as if a new trustee takes over. The trustee must deliver one final accounting notice after all of the instructions within the trust have been carried out. An accounting is not required if the trust beneficiaries waive their right to receive a periodic accounting, or if the trust document expressly states that the trustee is not required to provide accounting. A beneficiary who waives her right to receive an accounting is free to change her mind at any time.
- Contents of Accounting
- An accounting must satisfy a number of legal requirements. The accounting must notify the beneficiaries of any expenses incurred by the trust and any property distributed by the trustee. The notice must also inform the beneficiaries about the extent of the property still held in trust, and the nature of any obligations the trustee is required to pay. If the trustee received compensation for acting as the trustee, the accounting must also include this. If the trustee hired someone to help with the trust, such as an attorney or accountant, the accounting must provide the beneficiaries with the names of those persons and how much money the trustee has paid them from the trust funds. Each accounting must include language informing the beneficiaries that they have the right to ask a court to review the accountings. Finally, the accounting must inform the beneficiaries that they have only three years to sue the trustee if they think the trustee is acting improperly.Limited Time to Challenge Trust
- If a trust beneficiary wants to challenge the legal sufficiency of a trust in court, the beneficiary has only a limited time to do so. A beneficiary has only 120 days after receiving the notice from the trustee about the trust. If the beneficiary received a copy of the trust document from the trustee, the beneficiary has only 60 days from the day when the trustee mailed or personally delivered the copy to the trustee.
Different options are available, but all parties must be in sync
Estate planning tools and property & casualty (P&C) coverages frequently cross paths; however, there’s often a distinct disconnect among the client, the P&C advisor and the estate-planning attorney in this area. This is a troublesome concern.
For instance, there are frequent changes in laws and practices occurring in the world of estate planning, and some of these can have a direct impact on one’s property and casualty insurance. One of special note is the use of QUALIFIED PERSONAL RESIDENCE TRUSTS (QPRTs), other forms of trusts and limited liability companies (LLCs) as vehicles to reduce one’s tax liability and/or provide other legal protection of assets. In those situations in which placing someone’s home in a trust can be financially attractive, the question is how to address the insurance side of the equation to coincide with this type of ownership? An additional, perhaps bigger, concern is establishing who’s making the inquiry and changes to the insurance policies, and how is this being done?
Use of QPRT
Suppose your clients, Mr. and Mrs. Smith, use a QPRT to transfer ownership of their residence from the “owner” (the Smiths) to a trust. Do the Smiths continue to have an insurable interest and right to proceeds after this has been done? I believe, based on the clear and expressed purpose of the trust, that the answer is “no.” The bigger problem created is whether a carrier will respond to a claim against, or on behalf of, the Smiths themselves, if the insurable interest is now in the hands of the trust and not them? Unfortunately, this may be a great excuse for some insurers to deny a claim. As it states early on in your client’s homeowner’s policy, the insured must have an insurable interest to benefit from the policy.
What needs to be done in this situation?
There are two possible courses of action, one, perhaps, more challenging (from the insurance side) than the other:
1) List the QPRT as the only “named insured” without mention or inclusion of Mr. and Mrs. Smith (creating separation between the trust and the individuals, which may be deemed desirable for tax reasons, but problematically, also eliminates any coverage for the individuals themselves); or
2) Add the trust as an “additional insured,” which may be slightly more limiting in coverage, but can be done without removing the individuals themselves from insurance protection.
The first approach is a bit more challenging for most insurers, as listing the QPRT as the sole named insured gives it worldwide liability coverage (possibly capturing exposures the insurer neither wants nor intends to cover), whereas the only interest the QPRT has here is in the actual property or premises itself. The conflict begins when some attorneys are adamant about eliminating any trail or sign that the former owners still live in the residence or have interest in the property.
Creating a Separation
How do you create this separation? The ideal answer (if achievable with one’s insurer) is:
1) Place homeowner’s coverage showing the QPRT as the sole named insured. If the “owners” still live at the residence, they need to secure separate coverage, in their own name, for their personal property, liability and umbrella exposures.
I recommend that the owners purchase a renter’s insurance policy to cover personal property, including valuables and personal liability. Some insurers will write an umbrella policy as well on the same policy, or it may have to be provided separately.
2) In some cases, change the mailing address to a P.O. Box, instead of a listed physical premises. Although this may seem a bit extreme, attorneys have requested it in the past, and it may create the perception, at least, of a certain level of desirable separation.
3) As a follow up to #2, advise the client to change mailing addresses on other types of mail as well.
The second option of adding the QPRT as an additional insured is more common and easier for insurers. Simply add the name of the trust to the former owners’ existing homeowner’s coverage:
1) Adding the QPRT as an “additional insured” will give the QPRT coverage for its property interest in the home and provide liability protection for the QPRT for that location only. The key is to ask for both property AND liability coverage.
2) Add the QPRT to the umbrella policy to ensure continuity of higher limits of premises liability for its specific interest.
What are other considerations when a trust is formed and added for coverage?
In many cases, the original owner(s) of the home will continue to live there, and specific terms and guidelines of the trust agreement may specify that the tenant(s) will pay rent to the trust as landlord. When this occurs, it’s possible that insurers (that are less familiar with or exposed to the trust formation process) will begin to look at this as a commercial risk, rather than as a personal one, or they may simply not have the appetite, experience or comfort for continuing to insure this kind of risk.
This leads to the importance of carrier selection, if this type of risk and situation exists; as it’s imperative the insurer understands and is willing to insure this type of ownership. Unfortunately, some insurers, particularly smaller regional ones or national direct writers more suited for and used to less affluent mainstream America accounts, don’t have the aptitude or underwriting abilities and forms to do this correctly, or at all.
One of the principal reasons why things hit a snag during trust formation from the insurance standpoint is simply due to incorrect carrier selection and employment. In other words, the carrier, and even worse, the agent representing the insurer, doesn’t understand the exposure and, ultimately, may not be equipped to offer the best contract and terms for the client. Only a select few insurers do this correctly.
Get Parties in Sync
In summary, everyone needs to be on the same page, and this type of ownership change must be properly addressed and structured. The components and alternatives to successfully accomplish this are vital, and all parties must be in sync… client, attorney, insurer and agent. If any of these parties isn’t on board or doesn’t understand how this needs to be addressed and done, the results could be catastrophic.
HOW TO AVOID PROBATE IN CA
Simplistically, probate is required when there is no other mechanism provided by law for transferring ownership of a decedent’s assets from the decedent to decedent’s intended beneficiaries. The probate process is generally completed when title to the asset is changed into the name of the intended beneficiary through the court’s final order for distribution. The probate process can be thought of as simply the last option for transferring title from the decedent to the intended beneficiaries, when no other options work. (See California Probate Code §7001)
The legal mechanisms available for transferring ownership of an asset outside of probate (i.e., avoiding probate) in California can generally be summarized as follows:
- By operation of law, including by right of survivorship and the Multi-Party Account Laws.
- By contract including beneficiary designation;
- By trust; and
- By summary probate procedure.
BY OPERATION OF LAW:
The California Probate Code contains the California Multi-Party Account Laws (Probate Code §§ 5100 – 5401). These rules generally determine who owns the funds within a bank account, although the contract establishing the account (usually the signature card) can vary the rules. These Multi-Party Account Laws provide generally that, upon the death of one of the individuals listed on the account, the funds in the account are owned by the remaining individuals. The decedent’s share of the funds passes by the terms of the contract (i.e., signature card) and if unspecified by contract, then by operation of law (the Multi-Party Account Laws) to the surviving individuals. The transfer of title is accomplished by providing a death certificate to the financial institution holding the account. The financial institution in turn generally opens a new account in the name of the surviving individual. The decedent’s will does not control the distribution of the funds, and no probate is required.
By right of survivorship: The California Civil Code allows real property owners to designate who will succeed to their property on death through the manner in which title to the asset is taken. Specifically, two individuals can hold title to an asset in “joint tenancy,” which by definition includes the term “right of survivorship.” (See California Civil Code §683) Spouses may also hold property as community property with right of survivorship. (See Civil Code §682.1) Unlike joint tenancy, which by definition always includes the right of survivorship, community property without the specific designation “by right of survivorship,” does not pass by survivorship but is controlled by the decedent’s will. With right of survivorship, on the death of one joint tenant or spouse, the asset is owned entirely by the surviving joint tenant or spouse. The transfer of title is accomplished generally through the recording of a death certificate and affidavit concerning the death with the county recorder’s office where the property is located. The right of survivorship characteristic under the Civil Code applies to both real property and personal property, but not to bank accounts, which are governed under the Probate Code’s Multi-Party Account Laws. The decedent’s will does not control the distribution of the asset and no probate is required
BY BENEFICIARY DESIGNATION:
The California Probate Code contains the Nonprobate Transfer Rules, which are found in California Probate Code §§ 5000 – 5705. The rules provide a broad endorsement to transfers on death by way of beneficiary designation. This encompasses most typically the standard life insurance beneficiary designations and retirement account beneficiary designations. On the death of the insured or the employee (i.e., the owner), the funds in the account pass to the individual that the owner designated on a beneficiary designation form filed with the financial institution (i.e., insurance company or employer). The Nonprobate Transfer Rules also endorse the transfer of death of securities through specific registration as “TOD” (transfer on death) or “POD” (pay on death). On the death of the owner of the security, the security passes to the beneficiary named on the instrument (or named on account) as the payee. This transfer is accomplished by providing a death certificate (and other documentation) to the transfer agent for the security. The decedent’s will does not control the distribution, and no probate is required.
BY TRUST AGREEMENT:
Assets held in trust have universally escaped the probate process. Initially, at common law, trusts required three parties, a settlor who established the trust, a trustee who manages the trust, and a beneficiary who receives the benefit of the trust. Under this arrangement, legal title is held by the trustee, as opposed to the settlor or beneficiary. To be valid, the settlor has to convey property to the trustee during the settlor’s lifetime. The trustee is considered the legal owner of the property. Since the settlor or beneficiary is not the legal owner, the death of the settlor or beneficiary does not affect the ability of the trustee to hold or transfer legal title, and thus no probate is required. Over time, the common law requirements for a third party trustee have largely vanished, with the settlor often acting as the initial trustee. Nonetheless, the probate avoidance feature has continued to be recognized and is codified in the California Nonprobate Transfer Rules. (See California Probate Code §5000(a))
BY SUMMARY PROBATE PROCEDURE:
The California Probate Code contains certain summary probate procedures, which effectuate the transfer of the asset by the decedent’s will without the need for a full probate. Transfer by summary probate procedure is generally much quicker and less costly than a conventional probate, even when some court action is required. The types of estates, which may be transferred pursuant to one of the summary probate procedures, include estates:
- with personal property not exceeding $100,000 in aggregate value. (See California Probate Code §§ 13100 – 13116) Transfer occurs by way of an affidavit (referred to generally as a small estate affidavit or 13100 affidavit), signed by the beneficiary under the decedent’s will and presented to the financial institution. No court filing is required.
- with real estate of less than $20,000. (See Probate Code §§13200 – 13210) Transfer occurs by appraisal and an affidavit (referred to generally as a small estate affidavit for real property or a 13200 affidavit) executed by the beneficiary and filed with the court. No court hearing is required.
- with real estate of less than $100,000. (See Probate Code §§13150- 13158) Transfer occurs by appraisal and a separate petition (referred to generally as a petition for succession to real property or a 13150 petition) executed by the beneficiary and filed with the court. A court hearing is required.
- where the asset (regardless of type) passes under the will or by intestate succession to the surviving spouse. (see California Probate Code §§13500 – 13660) The transfer occurs by way of a separate petition (generally referred to as a spousal property petition) executed by the beneficiary and filed with court. A court hearing is required.
TRUSTEE STANDARD OF CARE
Trustee standard of care also is a constantly evolving area of law. Generally, Courts construe the trustee’s standard to be very high. Initially, the beneficiary does have the right, in most, but not necessarily all circumstances, to demand that the trustee disclose trust-related information. At that point, if the beneficiary believes that an impropriety has occurred, the beneficiary must, to the extent possible, expressly state the nature of the dispute or impropriety. The Courts are not uniform in determining the extent to which the beneficiary must initially present, if at all, evidence of the trustee’s alleged wrongdoing. Assuming that the beneficiary has stated a potentially valid claim, it is then the burden of the trustee to refute that claim with sufficient evidence. Assuming that the trustee can present sufficient evidence tending to refute the claimed impropriety, the beneficiary will want to present evidence establishing trustee wrongdoing.
The general standard of trustee care is stated in Cal. Probate Code §16040. The trustee should administer the trust with the reasonable care, skill, and caution that a prudent person would under the current circumstances to accomplish the purposes of the trust as determined from the trust wording. A trustee who has special skills is required to use those skills.
Generally, the trustee should not delegate responsibilities that the trustee can reasonably be expected to perform. However, in practice it is not uncommon for trustees to delegate certain responsibilities, and, by statute, in appropriate circumstances a trustee can delegate specific duties. Some of the responsibilities that might be delegated are investment, tax, legal and accounting in nature. The trustee must prudently select which agents to use, and must oversee those agents.
Confidentiality, self-interest, and impartiality: A trustee has a duty of confidentiality. The trustee has a general duty, but not in all circumstances, not to disclose to a third person information about the trust and the beneficiaries. However, the trustee might need to disclose certain information to properly administer the trust. More important, a trustee must not put his or her interests above those of the trust or the beneficiaries, and should avoid conflicts of interest with the trust and the beneficiaries. This can be a difficult area because it is absolutely permissible and common for a trustee also to be one of several beneficiaries. Although not a legal requirement, it has been my experience that a trustee should try to avoid even the appearance of self-dealing, or that he or she has placed his or her interests above those of the trust or beneficiaries. If potential conflicts exist, often disputes can be avoided by obtaining prior beneficiary or Court approval of the action to be taken. The trustee should act impartially between the competing interests of the various beneficiaries. Unless the trust specifies otherwise, the trustee should not favor a particular beneficiary or class of beneficiaries.
A trust will typically contain provisions that give the trustee discretionary powers, that is, the power to use his or her own judgment in specific circumstances. The amount of discretion is strictly construed from the language in the trust document and the intent of the trustor. Be cautious, however—even if the trust provides sole, absolute or uncontrolled discretion, Courts still require the trustee to act within the fiduciary standards and not in bad faith or in disregard of the purposes of the trust. In other words, if the issue of a trustee’s discretion is presented to the Court, the Judge will make a determination based on his or her own evaluation. Unless limited by the terms of the trust, the trustee also has other statutory powers. You should review the powers and limitations specified in the trust document, and also the powers listed at Probate Code §§16200-16249.
Some trusts have co-trustees, that is, a trust that has two or more people acting as trustees at the same time. Unless the trust provides otherwise, co-trustees must act unanimously. However, the trust can allocate powers unequally between co-trustees. And, in limited circumstances if a co-trustee is unavailable, the remaining co-trustees may act. If the co-trustees are stalemated on a decision, one or more of the co-trustees can file a Court petition for instructions. A co-trustee can be liable for a breach of duty by a co-trustee.
Investments and management
The trustee has the duty to invest trust property for the benefit of the beneficiaries, subject to restrictions or limitations stated in the trust. The trustee’s investment powers are provided by the terms of the trust. If not derived from the trust, the investment powers are also derived by statute, case law and the factual circumstances. Generally, the trustee has the duty to make trust assets economically productive.
The trustee is subject to the Uniform Prudent Investor Act, unless the trust provides for a greater or lesser standard of care. A trustee must invest and manage the trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. The trustee must exercise reasonable care, skill, and caution. A trustee’s investment and management decisions relating to individual assets and courses of action are evaluated in the context of the trust’s portfolio as a whole and as a part of an overall investment strategy reasonably suited to the trust’s risk and return objectives. Unless the trust states otherwise, the trustee has a duty to invest trust property, preserve it, and make it productive.
The trustee must consider the interests and needs of all beneficiaries, income and remainder, when making investment decisions. The beneficiaries may have conflicting interests. When two or more income beneficiaries have different personal income tax brackets, generally the trustee should strike a balance between them when determining how much to invest in certain assets. However, the trustee might be allowed to prefer one class of beneficiaries over another if the trust terms direct—this can be a difficult area and cause litigation concerns.
Accountings and information
The general rule is that the trustee is required to keep the beneficiaries reasonably informed about the trust and its administration. However, there are important exceptions. Upon reasonable request by a beneficiary, the trustee must provide the beneficiary with a report of the information relating to the assets, liabilities, receipts, and disbursements of the trust, the acts of the trustee, and the particular terms of the trust that are relevant to the beneficiary’s interest.
Probate Code §16062 requires the trustee to provide an accounting at least annually, at termination of the trust, and upon a change of trustee to each beneficiary to whom current distribution of income or principal is authorized. However, the accounting or information might not be required if waived by the terms of the trust or the beneficiary, or the trust in question is revocable. The trustee must maintain proper accounts. Accounting requirements are beyond the scope of this discussion—for example, generally, the records might be required to differentiate between potentially confusing accounting aspects such as income and principal allocations.
HOW MARITAL TRUSTS WORK—ARE YOU IN NEED OF ONE?
Most marriage-oriented trusts postpone payment of estate taxes until both spouses in a marriage have died. A marital deduction trust allows you to put property in trust with your spouse as the beneficiary. Upon your death, your spouse has the right to use the property in the trust.
No matter how valuable the property in the trust is even if it exceeds that year’s federal estate tax exemption amount, your spouse won’t owe any federal estate taxes. When your spouse dies, any leftover amount transfers to the beneficiaries that your spouse determined.
One of the more popular uses for all trusts is to buy time on paying any applicable estate taxes until both spouses have died, or to skip over your spouse for purposes of transferring property but still your spouse the right to income from a trust. QTIP trusts and bypass trusts enable you to tailor your trust arrangements with your personal needs.
How do QTIP trusts compare to marital deduction trusts?
If you die first but want to determine who receives the trust property after your spouse dies, consider using a Qualified Terminable Interest Property trust, commonly known by its acronym as the QTIP trust. A QTIP trust operates much the same as a marital deduction trust, with one important exception: You, not your spouse, specify who receives the remaining property in the trust after your spouse dies.
When should you consider using a marital deduction trust instead of a QTIP, or vice versa? Consider the following: Suppose that you and your spouse were only married once (to each other); you have a happy, contented marriage; and both your children act like they stepped out of a 1950s or early 1960s TV show, such as Ozzie and Harriett or Leave It to Beaver. You both want the other provided for no matter who dies first and want to set up some type of trust to delay or diminish federal estate taxes, but then after the second spouse dies, you both want the remainder to go to your children.
In this case, either a QTIP trust or a marital deduction trust probably works equally as well, because you both agree (at least for now) about how you eventually want to distribute the remaining property in your estates.
If you set up a marital deduction trust and you die first, your spouse can later designate your two children as equal beneficiaries of the property left in the trust. Or, perhaps one of your two children makes millions of dollars in business or in the stock market; your spouse can decide to leave the entire leftover estate to the other child who wasn’t quite so fortunate or skilled. Whatever the rationale, a marital deduction trust allows the beneficiary-designation to be delayed as long as possible.
Now consider the following, however. You and your current spouse are each on your second marriage, and you each have children from your first marriage. You and your spouse’s first-marriage children (to put it delicately) don’t quite see eye to eye. The word “freeloaders” comes to mind every time you hear their names, but your spouse thinks of those first-marriage offspring as “my angels.”
Regardless of your cool relationship with your spouse’s children, you and your spouse have a happy marriage, and you want to provide for your spouse if you die first. And, because you both are fairly well off financially, a marriage-oriented trust makes sense to delay estate tax impacts.
But do you want your spouse to decide what happens with any leftovers from your estate upon his or her death, as would be the case in a marital deduction trust? Probably not.
A QTIP trust enables you to designate what happens to leftovers. After all, this estate is yours, and for all intents and purposes you are just “loaning” it to your second spouse for the duration of his or her life if you die first. Afterwards, you want the leftovers to go to your children, or your favorite charity — anyone but your spouse’s children from that first marriage, which is what may happen if you leave the decision up to your spouse by using a marital deduction trust.
How do bypass trusts work?
Married couples can also shelter property from estate taxes by using a bypass trust, which in effect bypasses the surviving spouse. Suppose that you die before your spouse does but instead of either a QTIP trust or marital deduction trust, you’ve set up a bypass trust.
Instead of the property being held in trust for your spouse (as in a QTIP or marital deduction trust), the property in a bypass trust “bypasses” your spouse (thus the reason for the often-used term) to someone else, such as your child, for whom the property is held in trust.
However, unlike the relatively simple process of giving property to your child as a gift or leaving your child property in your will, your spouse can still benefit from the property under a bypass trust. Although the property is held in trust for the ultimate benefit of your child, your spouse (while living) can have the benefit of the trust assets.
Because your spouse never takes possession of the property in a bypass trust, he or she never is considered to be the property owner and therefore never has to include the property in his or her estate — and possibly be subject to estate taxes on the property.
An incredible number of rules apply to bypass trusts and, specifically, the estate tax consequences. The IRS has all kinds of restrictions. To determine the exact amounts you want to use to fund a bypass trust, consider the exemption amounts, your estate’s value, the value of your spouse’s estate, and other factors.
FINANCIAL ELDER ABUSE ON THE RISE–YOU NEED AN INCAPACITY PLAN
ESTATE ELDER ABUSE IS ON THE RISE
California is one of the few states with strong estate elder abuse laws. Offenders can be fined or sent to prison for defrauding older adults.
Many other states require the elderly to cooperate in prosecuting fraud, including making a statement. The elderly person has to leave home and go to court, and if there’s a conviction, the person usually doesn’t even get a harsh sentence, even though the elder’s entire life savings can be wiped out. Having a well-organized estate plan does not necessarily prevent intra-family scheming. See more at link below.
HAVING AN INCAPACITY PLAN IN PLACE IS CRUCIAL TO YOUR OVERALL ESTATE PLAN
A California court awarded Kerri Kasem temporary durable power of attorney and health care directive and has ordered Jean Kasem to surrender Casey Kasem’s passport to the daughter. The California judge also ordered that Casey Kasem can’t travel anywhere without a court order until a doctor clears him.
DISCLAMER: The information provided by WFB Legal Consulting, Inc. in this newsletter is disseminated for educational purposes only, and is not to be construed as legal advice. Do not take any action, postpone any action, or decline to take any proposed action based on this information without first engaging the representation of a licensed attorney at law in your State of residence.
ESTATE PLANNING: POWER OF APPOINTMENT APPLICATION
Denis Behan created a Trust in 1994, and into he placed his personal residence. Denis made his four children the beneficiaries of the Behan Trust, and three of the children (but not the fourth, Philip) were also made Trustees.
Each of Denis’ children were given a 1/4th interest in the Trust, subject to the Spendthrift Provision which protected those interests from a child’s creditors.
Critically, each child was given a withdrawal right, embodied in the following paragraph:
In addition, the Trustees shall pay to or for the benefit of such child all or so much of the principal and accrued income of such share as such child may specifically demand in writing from the Trustees so long as such child is not incapacitated at time of demand.
Each child could, through their Will and upon their death, also appoint their share of the Behan Trust assets to whomever they designated.
Four years later, in 1998, Denis passed. Apparently, the Behan Trust percolated along without difficulty for the next 14 years.
Then, Philip J. Behan filed for Chapter 7 bankruptcy on June 6, 2012.
The only significant asset listed by Philip in his bankruptcy schedules was a Power of Appointment that he had in the Behan Trust created by his father. Philip asserted that he had no control over the Trust or its assets, and that the Trust had a Spendthrift Provision that protected his interest from creditors.
Philip claimed that the Power of Appointment held little or no value, and at any rate the value was within the amounts of his creditor exemptions allowed by local law.
Asset protection planners have long looked for the Holy Grail of Trusts, meaning a trust that would lawfully allow a beneficiary to control and use the trust assets, while keeping those assets from the reach of the beneficiary’s creditors.
The first attempt was the Foreign Asset Protection Trust (“FAPT”), which seemed to reach this result simply because the Trust’s assets were outside the U.S. and beyond the reach of creditors. But then, courts started throwing the settlor-beneficiaries in jail until the assets were returned back to with the U.S. so they would be available for creditors. This doesn’t always happen, but it happens enough as to make FAPTs suspect as an asset protection planning tool, and not just a few asset protection planners have abandoned their use in all but very limited circumstances.
The second attempt was the Domestic Asset Protection Trust (“DAPT”), which attempted to rely on favorable state law to reach the same result that FAPTs were supposed to reach. However, this has so far proven to fail if the settlor-beneficiary is not resident in a state that has adopted DAPT laws. But worse, in 2005, Congress amended Bankruptcy Code 548(e) to create a 10-year Statute of Limitations for challenges to “self-settled trusts and similar devices” and which law was aimed specifically at DAPTs. It is frankly a wonder that anybody with more than a minimal knowledge of creditor-debtor law now uses DAPTs at all — though of course the trust companies market them quite shamelessly to the unwary without revealing these trusts’ very serious flaws.
Which brings us to present day, and the third attempt to create the Holy Grail of Trusts, being the so-called “Special Power of Appointment Trusts”, or “SPA Trusts” for short. The idea here is that the settlor of the trust is not, repeat not, given anything like a beneficial interest in the trust, i.e., is not made a beneficiary of the trust.
However, and here is the catch, the creator of the trust (know as the “settlor”, or somebody so close to the settlor that they are effectively the settlor’s nominee, is given a Special Power of Attorney that at some later date they can exercise the Power of Attorney and give the themselves a share (or all) of the trust’s assets.
In estate planning parlance, the SPA Trust essentially creates a “springing beneficiary”, i.e., somebody who was not a beneficiary when the trust was created, but then later becomes a beneficiary at some future date, presumably when the settlor has no creditors hovering about who might try to snatch up trust assets.
Which brings us back to the Bankruptcy Court’s opinion in Behan, because the Court essentially held that such Powers of Appointment can be used by a Chapter 7 Court-Appointed Trustee (“C7T”), to access the beneficiary’s share of the trust assets, even if a Spendthrift Clause says otherwise.
Another way to look at this is that Courts are looking past the language in trust documents, and seeing what might actually occur. If at some point, a debtor-beneficiary might get access to trust assets, then the Courts are basically treating that possibility as if it has already occurred — by letting the C7T exercise whatever powers the debtor has to bring that result about.
The C7T took the position that the Spendthrift clause was unenforceable, because Philip had the right to demand his share of the Behan Trust assets at any time — and the Trustee had no discretion to refuse Philip’s request. Moreover, because Philip had a Power of Appointment over his share of the Behan Trust assets, the C7T argued that this amounted to control over Philip’s share such that the assets became part of his bankruptcy estate, and thus available to his creditors.
Philip, of course, disagreed. Philip argued that the Power of Appointment did not override the Spendthrift Clause, and at any rate the value of the Power of Appointment was nothing like the value of his share of the assets, but some much, much lower number — so low, Philip argued, that it was within his personal property exemption under Massachusetts law.
The Bankruptcy Court agreed with the C7T. The fly in Philip’s ointment was the Power of Appointment. Because Philip had a Power of Appointment by which he could direct where his share of the Behan Trust asset would go, that Power of Appointment became an asset of Philip’s bankruptcy estate and thus ended up being held by the C7T, who could exercise the Power of Appointment for the benefit of Philip’ s creditors.
After a long and very technical discussion of how the Power of Appointment caused Philip’s share of the Behan Trust to end up in his estate, the Court concluded:
In the present case, the Trust document unequivocally confers on the beneficiaries the right to demand their share of the principal and accrued income provided that “such child … specifically demand in writing from the Trustees … [their share] … [and] … so long as such child is not incapacitated at the time of demand.” The power of appointment, although not exercised, defeats the spendthrift provision set forth in the Trust. As a property interest, the [C7T] is authorized to exercise the power of appointment for the benefit of the Debtor’s bankruptcy estate, subject to this Court’s determination of the [C7T]‘s Objection to the Debtor’s amended claim of exemption in the power of appointment.
We’ll have to see in future cases involving more modern trusts how this plays out, but the Behan opinion certainly sounds a warning horn that all may not be well in Power of Appointment land.
ESTATE PLANNING—NOT A ONE-TIME DEAL
A very logical and important article follows below:
Many believe that setting up an estate plan is all there is to estate planning. This is incorrect, and potentially disastrous. Estate plans need to be updated if certain life changes occur, and if there are no life changes, every three to four years. By leaving an estate plan stagnant, trustors put themselves and their beneficiaries at a major disadvantage.
Here are 7 main reasons to review and update your Estate Plan regularly
1. Moving to a New State Or Purchasing Property in a New State
State laws are different and updating an estate plan to reflect the purchase of property in that state could offer tax advantages.
2. Purchase or Sale of a Business
When a business is purchased, a trustor needs to make accommodations for succession, death or disability. When a business is sold, the plan needs to be updated to reflect that.
3. Change in Beneficiary Circumstances
Sometimes, a beneficiary or fiduciary may need to be removed due to mitigating circumstances such as death, change in health or mental capacity, finances or other personal reasons.
4. Birth or Adoption
Most estate plans automatically update to accommodate new additions to the family and provide for all children equally. Any variations to equal shares must be made through a revision.
If any of the designated beneficiaries or fiduciaries has died, it is in the best interest of the trustor to change the estate plan accordingly. Not updating the estate plan on the death of a beneficiary could result in a prolonged and costly execution of the trustor’s wishes.
6. Marital Status
A new marriage creates a whole new set of tax planning opportunities which would be lost if the estate is left as is. Conversely, it is very important to update estate plans after a divorce to remove a former spouse as a beneficiary and to change designees to life insurance and retirement plans.
Another important reason to regularly review estate plans is to take advantage of the changes in tax laws. For example, the US estate tax is currently 40%. However, there is an estate tax exemption of $5.34million (double for married couples). Ten years ago, the exemption was $675,000 (double for married couples). If an estate plan was set up ten years ago and ignored, the trustor could be at risk of missing out on the changes to the tax laws.
TRUSTEE OR NOT TO TRUSTEE–TAKE CAREFUL AIM WHEN CREATING AN ESTATE PLAN
Typically, a trustee will have control over assets for many years when chosen to serve either as part of your initial estate plan, or as a successor trustee. Therefore, important decisions need to be made after considering important factors that go into the equation. Accordingly, make sure you and your attorney give sufficient attention to this important fiduciary role. See some pivotal points to consider outlined in the full article contained in this month’s BBS Newsletter, or at the following link: http://www.financial-planning.com/blogs/selecting-a-trustee-how-financial-advisors-can-help-clients-2689352-1.html
ESTATE AND FINANCIAL PLANNING “PLANNING”–it’s more than just “PASSING THE BUCK”
So much of proper estate planning involves more than just “who gets your estate when you pass.” After you’ve worked a lifetime, accumulating assets along the way, planning now can help you avoid losing your house and emptying your bank account in the event of a disabling illness or sudden death. And yes, planning now also will help in the smooth transfer of your estate to the special people in your life.
Estate planning involves much, much more than writing a Last Will and Testament. Many consider transferring ownership of assets to a “Living Trust,” which they or a designated trustee control during the person’s lifetime. A “Living Trust” is different from a “Living Will,” which only expresses your wishes about being kept alive if you’ become terminally ill or seriously injured. This is, in part, why I have always stressed a trust “package” comprising a comprehensive portfolio covering all contingencies in combination with your overall estate goals.
Since the approach taken will depend on your personal situation, consult with your lawyer and other appropriate expert in the financial planning area. Above all, be wary of “free” estate planning seminars whose business is to merely sell legal and financial services even if your personal situation does not necessarily justify it.
Some things to consider in your financial/estate planning:
- Select the best type of estate/financial plan such as a “living trust” and “last will and testament”
- Determine your cash flow and the value of your assets. It is very difficult to develop a financial plan if you do not know how much income you will receive now and in the future.
- Calculate your net worth. In addition to your regular income and expenses, identify your assets and liabilities in your overall calculation.
- Always anticipate changes, such as illness, inflation, retirement, etc. These changes could affect your financial status.
- Medical services and long-term care costs are important considerations in end-of-life care planning. Although there is often no easy or simple way to determine how to meet these future needs, it is important to learn what kind of financial assistance you may be able to receive under your health insurance plan, disability insurance plan and Medicare/Medicaid Benefits (Social Security Administration).
- Make sure you have selected an objective trustee who is capable of moving forward with your estate and financial plan requests, and who will stand tall against any challenges brought by beneficiaries.
- Avoid surprise costs and let your family know your wishes by planning funeral arrangements specifically within your trust package.
- Make sure your trust contains a “no-contest” clause to avert any challenges by beneficiaries wherever possible.
Remember, in the end, planning an estate is no different than planning any other type of activity or project. 1) Plot out the goals you want to meet; 2) Secure the pieces you will need to accomplish those goals i.e., pick a trustee and successor trustees and secure health plans/funeral arrangements, etc. AND, 3) Hire and meet with a Lawyer for Business—not the internet.
The term revocable trust means just that– the trust cannot be revoked or, in other words, terminated in a way that would change its terms and conditions concerning both the assets in the trust as well is the beneficiaries’ position. My clients are always advised of two critical things when the notion of an irrevocable trust is being considered: what is it you want to accomplish in creating a revocable trust; and are you prepared to give up the ownership of your assets in exchange for whatever benefits you might otherwise not receive? Clearly, a lot of people focus on giving their assets away in order to protect them. Sounds like a great plan however this must be done in a legitimate fashion in order to avoid claims of fraudulent transfer. However, there are other reasons that crop up subsequent to the completion of the trust which invites second thoughts.
An individual’s or family’s need to modify an irrevocable trust arises fairly often as hindsight may reveal that an irrevocable trust is defective in some key aspect. This defect may have been caused by a change in circumstances, legislative changes such as ATRA, or an error in drafting.
There are several ways in which an irrevocable trust can be fixed. Decanting is only one option among many that may be used to fix a broken or obsolete trust. Estate planning counsel must be proficient at recognizing which techniques may apply to a particular set of facts and then implementing those techniques.
A trustee may want to “decant” a trust by transferring funds from one trust to another with preferable terms. The trustee may be unsure, however, as to when the trustee is authorized to decant the trust. “A trustee’s powers include those specified in the trust instrument, those conferred by statute, and those needed to satisfy the reasonable person and prudent investor standards of care in managing the trust.”
Below is a fine article on this subject, the full presentation of which can be found here: http://www.lexisnexis.com/legalnewsroom/estate-elder/b/estate-elder-blog/archive/2012/09/06/morrison-amp-foerster-llp-decanting-a-california-trust.aspx
WHY DO PEOPLE NOT SEEK LEGAL ADVICE WHEN CONSIDERING AN ESTATE PLAN?
Most people cannot accept and plan for the fact of their own deaths. Insurers, for example call death insurance “life insurance” and agents are careful to emit the word “death” from their discussions with clients. As Freud once wrote, “Our own death is indeed unimaginable, and whenever we make the attempt to imagine it we can perceive that we really survive as spectators. Hence, at bottom no one believes in his or her own death, or to put the same thing in another way, in the unconscious every one of us is convinced of his own immortality.”
Modernly, another reason is the cost involved. It seems like a big deal to go to a lawyer and of course many people arrange to transfer their property at death by way of joint tendency, payable on death designations, life insurance policies, pension plans, etc. The notion of creating a revocable trust and avoiding probate is less important than buying a big screen television. The distribution of probate property of the person who dies without a trust, or even with a will, that the that does not make a complete disposition of his or her state, is governed by statute in each state. If a will is so poorly crafted, for example, that it disposes of only part of the probate estate, then the result is partial intestacy.
Generally speaking, the law of the state where the decedent was domiciled at death covers the disposition of personal property, and the law of the state where the decedent’s real property is located governs the disposition of real property. In some way, the psychological notion that the state and the law will manifest in the end what is best for an individual, provides a false sense of confidence that everything will take care of itself at time of death. Of course, nothing could be further from the truth. A lack of privacy, cost, and the time lag involved in distributing an estate through probate, rears its ugly head immediately upon death.
Dare I say, yet another reason is pure selfishness. Many people simply don’t care what happens to their estate or what their descendants might have to put up with after they are gone. This notion is more prevalent than you would think. Not only does this type of a belief system affect a person’s descendants as ability to access the estate proceeds as described above, it prohibits seeing the big picture in terms of combining an effective estate plan with the protection of one’s assets. While generally speaking, an irrevocable trust will provide asset protection, a revocable trust generally will not, although it can house a business that affords asset protection, while allowing the passage of that business to descendants without unnecessary cost in a timely manner, free from an invasion of privacy.
It would be prudent, therefore, at this point to clear up any misconceived notions about what a trust actually is. Generally speaking, it is a device whereby a trustee manages property who is a fiduciary for one or more beneficiaries. The trustee holds legal title to the property and, in the usual trust, can hold or sell the trust property and replace it with property sought to be more desirable. The beneficiaries hold equitable title and are entitled to payments from the trust income and sometimes from the trust corpus as well. Many times, the trust is to end on the death of the settlor– the creator of the trust. Property is then distributed at the settlor’s death without probate and without a court order, directly to the beneficiaries. The terms of the revocable trust may call for distribution of the trust assets as stated, at the time of the settlor’s death, or in some instances, after his death.
It is rather ironic that a generation after the will began to lose its dominance because of the public’s seeming desire to avoid probate, the revocable trust has replaced it as a document with almost all the same attributes as a will but without the necessity of probate. Nevertheless, people still in many cases, avoid lawyers and the expense which a trust entails. The real irony, however, is convincing an individual that he can be his own worst enemy. We tend to invest in the things that we want rather than the things that we need. Everyone needs a trust if they want to avoid having their estate shared by the state. However, if you choose to go the inexpensive route and avoid seeing a lawyer for business who can create your estate plan, and rather wish to take probate head-on, or simply tackle the process by using a do-it-yourself website– then go for the big screen TV. At least the TV will provide you with entertainment prior to passing without a trust.
THE BLOODLINE TRUST: ESTATE PLANNING ADVANTAGES
A Bloodline Trust makes available very interesting tax benefits and also protects assets if children get divorced. Some highlights are as follows:
1. Asset exemption from the Federal Estate Tax: assets will pass down through generations using a Bloodline Trust. In this way, double or triple taxation issues are eliminated. For example, when you pass, your assets are included in your “taxable estate” and therefore subject to federal estate taxes. Federal estate tax applies if the value of your estate exceeds $5.25M. In other estate plans, not only are those assets subject to estate tax at your death, but when your children pass, any remaining assets will be subject to the estate tax a second time when your children leave the assets to their children (your grandchildren). Subsequently, those same assets, or a portion thereof, will be taxed a third time if passed down to your great-grandchildren. A Bloodline Trust, eradicates double or triple taxation issues.
2. If children get divorced after you have passed, their inheritances can be protected from spouses. In a traditional estate plan, if you leave a child an inheritance and that child later divorces, the ex-spouse will usually receive a portion of the inheritance. The assets will be “marital” in nature and therefore part of the “community” in effect, leaving them open to attack for distribution in a divorce. Furthermore, any income earned on assets kept by a child could be ordered to be paid to an ex-spouse either in the nature of child support or even alimony. Not with a Bloodline Trust.
3. If financial difficulties ensue, inheritances are securely protected from potential creditors. In other forms of estate planning, an inheritance may be seized by creditors. Not with a Bloodline Trust, however.
Essentially the trust operates in this manner: after you and your spouse die, instead of each child receiving a share of your estate the child’s share is put into a separate trust for his or her benefit. The child to be trustee of his or her own trust or you may choose a third party to be the trustee, such as a financial or investment institution. The trustee may then invest trust assets and may purchase assets on behalf of the trust for child’s benefit. Should your child be the trustee, withdrawal of assets from the trust can be made for “health, education, maintenance, and support”. Should a financial or personal dilemma arise in the manner discussed above, your child may simply resign as trustee or even appoint a co-Trustee to serve the trust. At that juncture, the Bloodline Trust insulation provisions take hold.
NOT LEGAL OR TAX ADVICE. Everything posted here is for educational purposes only, and is not to be construed as legal advice or tax advice. Do not take any action, postpone any action, or decline to take any proposed action based on this information without first engaging the representation of a qualified attorney and/or tax accountant or CPA. Nothing posted on social media or on any website shall be construed in any way as legal advice. Furthermore, I am not your attorney. Therefore no communications here are covered by the attorney-client or attorney-work product privileges.
BEST ASSET PROTECTION IN ESTATE PLANNING–FAMILY SAVINGS TRUST
The Family Savings Trust differs from a Living Trust that is often used to avoid probate and pass property upon the death of a spouse. Unlike the Living Trust which provides no asset protection benefits, the FST can be designed to accomplish both asset protection and traditional estate planning goals – some of which can be quite sophisticated. Although Congress is likely to make substantial changes in the current estate tax law, those that might be subject to an estate tax can use the FST for a variety of advanced tax planning techniques.
Planning for High Risk Specialties
Physicians at the higher end of the liability scale – practicing in high risk specialties or in businesses with higher than usual lawsuit potential – may choose to add language to the Family Savings Trust which allows the FST to obtain certain “offshore advantages” at some later point. For example, under normal circumstances, the trust exists and is governed by whatever domestic law we choose. But, if circumstances warrant, and strategy dictates, we can convert all or a portion of the trust or its’ assets into a foreign entity – usually an LLC or a trust – for enhanced asset protection and estate planning. The feature is not necessary for everyone but for those who are attractive lawsuit targets, the “offshore” capability can be a valuable additional feature.
The Family Savings Trust is a popular and effective vehicle for accomplishing a variety of asset protection and estate planning goals within a single structure with limited filing and maintenance requirements. Since every legal strategy should be analyzed fully in light of a client’s unique circumstances, you should make sure to discuss your asset protection planning with your attorney and tax advisors so that your particular planning needs are considered in adequate detail.
IMPORTANT FACTS AND FALLACIES OF PRENUPTIAL AGREEMENTS
Prenups can to be, broken and/or circumvented. Consider other options to avoid a circumvented prenup. I recommend an irrevocable trust as one of the most efficient way to separate assets from marital assets. Here are some things you need to know:
1. Avoid planting the seed of distrust Before the Wedding Day:
The biggest problem with a prenuptial agreement is that the parties must specify all of the assets they own as well as the property they want to keep as separate during the marriage and thus retain ownership of in the event of a divorce. It must be agreed upon and signed by both parties. The formalities that make a prenuptial agreement legally binding in the event of a divorce are one of its most glaring disadvantages. Many people find it difficult to discuss the subject of maintaining ownership of separate property with the person they are about to marry. Talking about divorce at all while planning a marriage is a sticky situation at best. The alternative is an irrevocable trust. An irrevocable trust is a legal document just like a prenup, but the advantage over a prenuptial agreement is that the trust does not require the involvement of your new husband or wife. Placing your assets in an irrevocable trust takes the assets out of your name and places them into the trust. However, the assets placed in an irrevocable trust never become part of the marital estate, so they are never at risk in the event of the marriage ending in a divorce. The “trust” as a separate entity must do something “wrong” in order to be sued.
2. Asset Protection from Legal Challenges
Challenging a prenuptial agreement successfully in a divorce proceeding is much easier than people realize. Challenging the validity of a properly drafted, implemented, and funded irrevocable trust, however, in a divorce situation is just the opposite; there is nothing stronger. Court calendars are filled with court cases of divorces in all 50 states in which individuals who readily agreed to the terms of a prenuptial agreement, challenged the prenup’s validity many years after signing it and have often times been successful.
3. Protect Assets from Prying Eyes
The creation and funding of an irrevocable trust is completed in private without having to disclose what you own to your spouse. This is in striking contrast to prenuptial agreements that have been invalidated because of a failure to disclose every asset – even if it was an honest mistake. The Court of Appeals of California has already ruled that a prenuptial agreement was unconscionable because a husband did not adequately disclose the full extent of his assets.
4. Estate Planning Tool
Irrevocable trust’s offer you a vehicle for controlling and protecting assets while you are living as well as during the post-death distribution of the assets that you worked hard all of your life to acquire. A prenuptial agreement does not survive death and does not allow for the distribution of your assets. This means that your spouse will probably get all of your assets and then may distribute them as he or she pleases, including distributing none to your children from a prior marriage. An irrevocable trust insures that one’s assets will be distributed to the pre-chosen people in life or in death.
5. Creditor, Medicaid, Probate, and Estate Tax Issue Planning
A properly drafted, implemented, and funded irrevocable trust helps you to increase your privacy, avoid lawsuits, avoid the costs of the nursing home, and avoids the delays as well as expenses associated with probate. Transferring your assets to an irrevocable trust reduces the size of your estate used to calculate your Medicaid eligibility as well as to reduce potential estate taxes. The prenup achieves none of these goals because it is only designed for the purpose of splitting assets in the event of a divorce, not death.
In conclusion, most clients with assets to protect, who weigh all of the options after finding out the facts, risks, and uncomfortable conversations, tend to choose an irrevocable trust over a prenuptial agreement for the BEST ASSET PROTECTION available.
Contribution to this article from LinkedIn source asset protection group.
THE BENEFITS OF “BLOODLINE TRUSTS”
One of the most interesting topics in my estate planning toolbox is the Bloodline Trust. A Bloodline Trust is a vehicle for leaving your children their inheritances with many benefits over a traditional estate plan:
- Assets are protected from divorce. In a traditional estate plan, if you leave a child an inheritance and that child later divorces, the ex-spouse will likely receive a portion of the inherited assets. This is because in real life, inheritances are almost always mixed with “marital assets”, which leaves them open to equitable distribution in a divorce. In addition, any income earned on the assets that your child does retain may end up being paid to the ex-spouse in the form of alimony or child support. Use of a Bloodline Trust can eliminate all of these negative consequences.
- Assets are protected from financial calamity. In a traditional estate plan, if you leave a child an inheritance and the child later gets into financial trouble, those assets may be seized by creditors. With a Bloodline Trust, however, those assets can be protected.
- Assets are protected from double (or triple) taxation. When you pass away, your assets are included in your “taxable estate” and as such are subject to federal estate taxes. Federal estate tax applies if the value exceeds $5.25M (adjusted each year for inflation).] With a traditional estate plan, not only are those assets subject to estate tax at your death, but when your children die, any remaining assets will be subject to estate tax a second time when they pass down to your grandchildren, and potentially a third time if any assets pass down to great-grandchildren. With a Bloodline Trust, this double or triple taxation can be eliminated completely.
The mechanics of these trusts are as follows:
Upon your death (or the death of both you and your spouse, if married), your assets are split among your children in a manner that you decide in your Will. But instead of each child receiving his or her share outright, each child’s share is put into a separate trust for his or her benefit.
You can allow your child to be trustee of his or her own trust if you so desire, or you may choose a third party trustee like a bank or trust company.
Regardless of who is trustee, the trustee may invest trust assets. The trustee may also purchase assets in the name of the trust for use of your child. If your child is trustee, he or she may also withdraw assets from the trust for his or her “health, education, maintenance, and support”.
If a divorce or other financial trouble is on the horizon, at that point your child resigns as trustee or appoints a co-Trustee to serve. That’s when the protection “kicks in”.
These trusts have become increasingly common as parents seek to protect their children from both divorce and double taxation.
TAX ADVICE DISCLAIMER: Any tax advice contained in this communication (including attachments) was not intended or written to be used, and it cannot be used, by you for the purpose of (1) avoiding any penalty that may be imposed by the Internal Revenue Service or (2) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
LEGAL DISCLAMER: Everything posted here is for educational purposes only, and is not to be construed as legal advice. Do not take any action, postpone any action, or decline to take any proposed action based on this information without first engaging the representation of me or another qualified attorney.
See more interesting commentary regarding Bloodline Trusts at the link below.
THE PRACTICAL AND PURPOSEFUL USE OF DYNASTY TRUSTS
Many times I hear clients say that all they want is a simple will. On numerous occasions an estate planning attorney has to either take the position of defending why a simple will not work explaining to their clients why much more is required. In fact, sometimes clients complain that trusts are too complicated for them to understand as part of an overall estate plan. Because of the fact that the current estate exemption is now $5,250,000 for a single person and $10,500,000 for a married couple, this attitude has become even more popular. Because clients tend to feel they are not exposed to estate taxes, many no longer are inclined to believe there is a need for a living trust.
Nevertheless, it must always be cognizant in the mind of the estate planner that while saving taxes is a sound objective, it is only one of several things that can be accomplished through the proper use of a living trust. The overall resistance to a trust can certainly be explained by the fact that clients feel that a will is simple and inexpensive. However a will fails to ensure that the intended beneficiaries of the estate will actually be able to enjoy and use the property as may have been intended by the decedent. Creditors, a former spouse, less than reputable investment advisors, as well as the United States government, can all reach the estate. Frankly, it is naïve to believe that a living trust is not a viable alternative.
Other critiques of a living trust encompass the accusation that control is surrendered to outsiders; that they are more expensive; and that they sometimes require continuous administration, while only relevant to preserve the estates of outlandishly wealthy people. Nevertheless, without question, the trust is almost always the better way to achieve whatever goals a client desires.
For example, Dynasty Trusts permit inter-and multi-generational wealth management and are more effective than the standard living trust. Clients who have a net worth well below the current tax exemption even benefit from these types of trusts. Dynasty trusts can, in theory, last forever. Assets in dynasty trusts can grow and be protected from your descendants’ creditors, former spouses, and their own wasteful habits. Dynasty Trusts can also avoid estate taxes saving large sums of money over the years.
An old legal principle, called the “rule against perpetuities,” used to prohibit trusts that could potentially last forever. Still, even with this rule, trusts could last a long time. To oversimplify, the rule stated that a trust couldn’t last more than 21 years after the death of a potential beneficiary who was alive when the trust was created. Some states (California, for example) have adopted a different, simpler version of the rule, which allows a trust to last about 90 years. (This is called the Uniform Statutory Rule Against Perpetuities.)
About half the states have done away with the rule against perpetuities altogether, clearing the way for Dynasty Trusts. Some—Delaware and Florida, for example—go further, luring trust-makers with tax breaks and flexibility, including strong protection if beneficiaries divorce or get into debt. Financial institutions in these states benefit handsomely from the sizeable fees they charge to manage Dynasty Trust assets.
The biggest advantage of a Dynasty Trust is that it can save your descendants a significant amount of money in estate taxes. The assets you put in the trust (plus any increase in their value over the years) are subject to the federal gift/estate tax just once, when you transfer them to the trust. They are not taxed again, even though multiple generations benefit from them.
By contrast, if you simply left a very large amount of money to your children (without a trust), it would be subject to the estate tax. And whatever they left to their children would be taxed again. If you tried to avoid one of those “tax events” by leaving assets directly to your grandchildren, the federal generation-skipping transfer tax could apply. (Though keep in mind that only very large estates, worth more than several million dollars, are subject to the federal estate or the generation-skipping transfer tax.)
For example, say you and your spouse leave $10 million to your daughter. If her inheritance grew, over 30 years, to $30 million, it would be subject to the estate tax at her death—and if federal estate tax rates and exemptions in effect then were about what they are in 2014 ($5.34 million exemption, 40% top rate), almost $9 million would go to pay estate tax. That amount wouldn’t be owed if the money were in a carefully drafted Dynasty Trust—it would stay in the trust, where it could be invested and keep growing.
Simply stated, the typical goals of any client are as follows:
1. Management control: the handing over of the control of assets to descendants’ subject to their abilities, maturity level and value similarity to that of the client. Such control encompasses both investment and business opportunities.
2. Enjoyment of trust assets: typically clients enjoy the assets of their estate until death with the idea that primary beneficiaries will eventually use those assets prior to younger generation beneficiaries. In the case of real property for example, this means the use of a specific premises. In the case of intangibles, this typically requires some distribution of the income or principal while retaining the rest of the asset until it is needed.
3. Flexibility: this entails the ability to change the structure of the trust in conjunction with changing circumstances. The special needs of certain beneficiaries as well as the change in tax laws potentially, are factors to be considered.
4. Protection: protection of the beneficiaries from creditors as a result of inherited wealth, as well as the protection from divorcing or divorced spouses, label the Dynasty Trust as an excellent choice.
5. Taxes: obviously reducing any burden in both estate and income taxes, at the federal, state and local levels, is critical so that the inherited wealth is not unduly diminished.
6. Simplicity: in order to make sure that the wishes of the decedent is attained without the need for ongoing expensive consultations with either an estate planning attorney or a trustee, is optimal. Otherwise the client and beneficiaries become overwhelmed and frustrated with the process.
Therefore, consider a Dynasty Trust in order to best attain the above-referenced goals by speaking to WFB Legal Consulting or visiting www.protectyourestate365.com.
WAYS TO AVOID PROBATE: POD ACCOUNTS
If you plan carefully, your estate may not have to go through the process of probate. Probate can drag on for years, and can easily cost your family thousands of dollars — money that would otherwise have gone to them.
These various ways to avoid probate offer simple and effective methods for skipping the probate process so that property goes directly to the intended beneficiaries. Some examples follow.
- Setting up payable-on-death accounts
- Naming beneficiaries for retirement accounts, vehicles, real estate, and stocks and bonds
- Holding property in joint ownership, and alternatives to joint ownership
- Using a living trust to avoid probate
- Making gifts of property and money
The first of the enumerated methods listed above, payable-upon-death accounts (POD’s), is very straightforward yet often ignored, and is summarized in greater detail here:
Payable-on-death bank accounts offer one of the easiest ways to keep money—even large sums of it—out of probate. All you need to do is properly notify your bank of whom you want to inherit the money in the account or certificate of deposit. The bank and the beneficiary you name will do the rest, bypassing probate court entirely. It’s that simple.
This kind of account has been called the “poor man’s trust.” The description is apt (if sexist) because a payable-on-death account does accomplish for a bank account—for free—exactly the same result as would an expensive, lawyer-drawn trust.
As long as you are alive, the person you named to inherit the money in a payable-on-death (P.O.D.) account has no rights to it. If you need the money, or just change your mind about leaving it to the beneficiary you named, you can spend the money, name a different beneficiary, or close the account.
• They’re easy to create.
• There’s no limit on how much money you can leave this way.
• Designating a beneficiary for a bank account costs nothing.
• It’s easy for the beneficiary to claim the money after the original owner dies.
• You can’t name an alternate beneficiary.
Payable-on-Death Account or “Totten Trust”?
Payable-on-death accounts go by different names in different states—and sometimes in the same state. Your bank, for example, may respond to your request for a payable-on-death account by handing you a form that authorizes the creation of something called a “Totten trust.” Payable-on-death bank accounts are also sometimes called tentative trusts, informal trusts, or revocable bank account trusts.
“Totten trusts” are really just payable-on-death accounts. The name comes from an old New York case (Re Totten), which was the first case to rule (in 1904) that someone could open a bank account as “trustee” for another person who had no rights to the money until the depositor died. Other courts had balked at this, objecting that such an account was tantamount to a will, which had to fulfill detailed legal requirements to be valid. The Totten court called the account a “tentative” (revocable) trust.
After this decision, courts in many other states adopted the idea of Totten trusts. Later, state legislatures enacted statutes authorizing payable-on-death accounts, specifically addressing many of the questions that had sprung up about Totten trusts. For example, some statutes state exactly how you can change a payable-on-death designation.
Banks, savings and loans, and credit unions all offer payable-on-death accounts. They don’t charge any extra fees for keeping your money this way. You can add a payable-on-death designation to any kind of new or existing account: checking, savings, or certificate of deposit.
Setting up a payable-on-death bank account is simple. When you open the account and fill out the bank’s forms, just list the beneficiary on the signature card. The bank may also ask you for some other information, such as the beneficiary’s address and birth date. (For example, the current address of each beneficiary is required by law in a few states.) The beneficiary of a payable-on-death account, who is commonly referred to as a “P.O.D. payee,” doesn’t have to sign anything.
Example: Joyce wants to leave her two nieces some money. She opens a savings account at a local bank, deposits $10,000 in it, and names her two nieces as payable-on-death beneficiaries. After Joyce’s death ten years later, they claim the money in the account—including the interest paid by the bank—without going through probate.
If you choose an account that has restrictions on withdrawals—for example, a 24-month certificate of deposit—the early withdrawal penalty will probably be waived if you die before the period is up.
If you’ve considered changing a solely owned bank account to a joint account with the person you want to inherit the money after your death, you may be better off by simply naming the person as the P.O.D. beneficiary instead. There are several advantages.
If you added another person’s name to yours on the account, he or she would immediately have the right to withdraw money from the account. And if she got behind on her debts, a creditor could come after her share of the account.
Example: Matthew, an elderly widower, goes down to his bank and makes his daughter, Doris, the payable-on-death beneficiary of his checking account. Doris (and her creditors) will have no access to the money during Matthew’s life, but after his death she’ll be able to get the funds in the account quickly and easily.
Don’t create a joint account just to avoid probate. If you want to leave money to someone at your death—but not give it away now—stick to a P.O.D. account. It will accomplish your goal simply and easily. Don’t set up a joint account with the understanding that the other person will withdraw money only after you die. This is a common mistake, and it often creates confusion and family fights.
Adding a P.O.D. Designation to a Joint Account: P.O.D. accounts can be very useful for couples who have joint bank accounts.
Accounts with a Right of Survivorship
Most joint accounts come with what’s called the “right of survivorship,” meaning that when one co-owner dies, the other will automatically be the sole owner of the account. So when the first owner dies, the funds in the account belong to the survivor—without probate. If you add a P.O.D. designation, it takes effect only when the second owner dies. Then, whatever is in the account goes to the P.O.D. beneficiary you named.
Example: Virginia and Percy keep a joint checking account with several thousand dollars in it. They hold this account as joint tenants with right of survivorship. They decide to name their sons, who are both adults, as P.O.D. beneficiaries. After both Virginia and Percy have died, the bank will release whatever is left in the account to the sons, in equal shares.
It’s important for both spouses (and other co-owners) to realize that designating a P.O.D. beneficiary for a joint account doesn’t lock in the surviving spouse after one spouse dies. The survivor is free to change the beneficiary or close the account, shutting out the beneficiary who was named back when both spouses were still alive.
Example: Howard and Marge name Elaine, Howard’s daughter from a previous marriage, as the P.O.D. payee of their joint savings account. Howard dies first, and in the years that follow relations between Marge and Elaine deteriorate. Marge decides to remove Elaine as P.O.D. beneficiary and instead name her nephew, Max. When Marge dies, Elaine doesn’t inherit any of the money in the account—even though she’s firmly convinced that her father intended her to.
Adding a P.O.D. beneficiary to a joint account not only avoids probate, but allows you to plan for the unlikely event that both persons die simultaneously.
Example: June and Horace have a joint savings account. They name their daughter, Virginia, as the payable-on-death beneficiary. When June and Horace are killed in an accident, Virginia inherits the money in the account without probate.
Accounts with No Right of Survivorship
Some kinds of joint accounts cannot be turned into payable-on-death accounts. Unless your joint account provides that when one owner dies, the other automatically becomes the sole owner, don’t try to name a P.O.D. payee for the account.
Two common situations where this advice applies are:
• Your state law requires you to request the right of survivorship in writing when you open the account, and you didn’t make the proper request. In that case, the account is not a joint tenancy account; it’s what is known as a “tenancy in common” account, which means that you can leave your share to anyone you choose.
• You and your spouse live in a community property state and own a community property account together. Such accounts don’t carry the right of survivorship; each spouse has the right to leave his or her half-interest to someone else.
Don’t use a P.O.D. designation for a joint account that doesn’t have the right of survivorship. In other words, don’t try to arrange things so that a P.O.D. payee inherits just your share of a co-owned bank account at your death. It’s far more reliable and less confusing to establish a separate account and name a P.O.D. payee for it.
There are few restrictions on whom you can name as a P.O.D. beneficiary. But there are some issues you should think about as you make your choices.
Extra FDIC Coverage for Beneficiaries
Payable-on-death accounts get extra coverage from the Federal Deposit Insurance Corporation.
The general rule is that the FDIC insures each person’s accounts at a financial institution up to $250,000. But to calculate the amount of FDIC insurance coverage on an account with P.O.D. beneficiaries, you multiply the number of beneficiaries by $250,000.
For example, if you have an account and name your son as the P.O.D. beneficiary, your insurance coverage is $250,000, just as it would be if you had no P.O.D. beneficiary. But if you name your son and your daughter as P.O.D. beneficiaries, the account is immediately insured up to 2 × $250,000, or $500,000.
It’s perfectly fine to name a minor—that is, a child younger than 18 years old—as a P.O.D. payee. If the account is worth more than a few thousand dollars, however, you should think about what might happen if that beneficiary were still a child at your death. You will probably want to arrange for an adult to manage the money for the child.
If you don’t, and a minor child inherits money from a payable-on-death account, one of three things will happen:
• If state law allows it, the money, no matter how much, can simply be given to the beneficiary’s parents (or to the beneficiary, if he or she is married). The parents hold the money for the benefit of the child.
• If the amount is relatively small—generally, a few thousand dollars, depending on state law and bank custom—the bank will probably turn it over to the child or the child’s parents.
• If the amount is larger, the parents will probably have to go to court and ask to be appointed guardians of the money. (If the parents aren’t alive, a guardian will probably already have been appointed and supervised by the court.)
Fortunately, court involvement, which can be expensive, intrusive, and time-consuming, can be easily avoided. You can choose someone now, and give that person authority to manage the money, without court supervision, in case the child is still younger than 18 at your death. The logical choice, usually, is one of the child’s parents.
The easiest way to do this, in most states, is to name an adult to serve as “custodian” of the money. Custodians are authorized under a law called the Uniform Transfers to Minors Act (UTMA), which has been adopted by every state except South Carolina and Vermont.
All you need to do is name the custodian as the P.O.D. payee of the account and make it clear that the custodian is to act on the child’s behalf. That gives the custodian the legal responsibility to manage and use the money for the benefit of the child. Then, when the child reaches adulthood, the custodian turns over what’s left to the beneficiary. Most, but not all, UTMA states set 21 as the age when the custodianship ends. (The ages are listed below.)
Example: Alice wants to make her grandson, Tyler, the P.O.D. payee of a bank account. But Tyler is just nine years old. So Alice decides to name Tyler’s mother, Susan, as custodian of the money in the account. On the bank’s form, Alice puts, in the space for the P.O.D. payee, “Susan Irving, as custodian for Tyler Irving under the Florida Uniform Transfers to Minors Act.” If Tyler is not yet 21 when his grandmother dies, Susan will be legally in charge of the money until Tyler’s 21st birthday.
|Age at Which an UTMA Custodianship Ends|
|Alabama 21||Missouri 21|
|Alaska 18 to 25*||Montana 21|
|Arizona 21||Nebraska 21|
|Arkansas 18 to 21*||Nevada 18 to 25*|
|California 18 to 25*||New Hampshire 21|
|New Jersey 18 to 21*|
|Connecticut 21||New Mexico 21|
|Delaware 21||New York 21|
|District of Columbia 18 to 21*||North Carolina 18 to 21*|
|Florida 21||North Dakota 21|
|Georgia 21||Ohio 21|
|Hawaii 21||Oklahoma 18 to 21*|
|Idaho 21||Oregon 21 to 25*|
|Illinois 21||Pennsylvania 21 to 25*|
|Indiana 21||Rhode Island 21|
|Iowa 21||South Dakota 18|
|Kansas 21||Tennessee 21 to 25*|
|Kentucky 18||Texas 21|
|Louisiana 18||Utah 21|
|Maine 18 to 21*||Virginia 18 to 21*|
|Maryland 21||Washington 21 or 25*|
|Massachusetts 21||West Virginia 21|
|Michigan 18 to 21*||Wisconsin 21|
|Minnesota 21||Wyoming 21|
|*The person who sets up the custodianship can designate the age, within these limits, at which the custodianship ends and the beneficiary inherits the money outright.|
If You Don’t Live in an UTMA State
Even if you live in South Carolina or Vermont—the only states that haven’t adopted the UTMA—you may still be able to enjoy the law’s benefits. The law is written so that you can appoint a custodian if any of the following is true:
• The custodian lives in a state that has adopted the law.
• The minor lives in a state that has adopted the law.
• The bank account (the “custodial property,” in the terms of the statute) is located in a state that has adopted the law.
Example 1: Christopher is a resident of South Carolina. His grandson, however, lives in California, which has adopted the UTMA. Christopher can appoint a custodian for his grandson under the California Uniform Transfers to Minors Act. As long as the boy is a resident of California when the transfer takes place, the transfer is valid under the UTMA.
Example 2: Eunice, a Vermonter, keeps an account in a New Hampshire bank. She can use the New Hampshire UTMA to appoint a custodian for her granddaughter. On the bank forms, she can name “Esther Stanhope, as custodian for Michelle Stanhope under the New Hampshire Uniform Transfers to Minors Act.”
You may well want to name more than one person to inherit the money in a bank account—for example, your three children or two good friends. That’s no problem; you just name all the beneficiaries on the bank’s form. Each will inherit an equal share of the money in the account unless you specify otherwise.
Be careful when setting up unequal shares. In a few states—Florida, for example—you cannot change the equal-shares rule. If you’re concerned about this issue, check your state’s law or open a separate account for each beneficiary.
It’s important to realize that you can’t name an alternate payee—that is, someone to inherit the money if your first choice doesn’t outlive you. In other words, if you list three payees on a bank’s form, the bank won’t consider your list to be a ranking in order of preference. For example, some bank forms provide three spaces for beneficiaries’ names. It’s not uncommon for people to assume that beneficiary #1 will get all the money, and that if he isn’t alive at your death, then #2 will inherit it, and so on. But that’s not the way it works. All the beneficiaries you name will share the money in the account.
If one of the beneficiaries dies before you do, all the money will go to the surviving beneficiaries. So if you leave an account to your three children, and one of them dies before you do, the other two will inherit the funds. Depending on your family situation, this result may be fine with you—or it may not. If it’s not what you want, you should name new P.O.D. payees after a beneficiary dies.
Example: Miranda names her sons, Brad and Eric, as P.O.D. beneficiaries of her bank account. Eric dies before Miranda does, leaving two children of his own. Unless Miranda changes her bank account papers to include the grandchildren as P.O.D. beneficiaries, they will not inherit their father’s share. Instead, all the money in the account will belong to Brad when Miranda dies.
Also give some thought to the kind of asset you’re leaving. Naming more than one P.O.D. beneficiary to inherit a bank account isn’t generally a problem, because the money can easily be divided. If you are adding a P.O.D. designation to a brokerage account, things can be more complicated. If the account owns one large asset—for example, a bond—then it will have to be sold, and the proceeds divided among all the beneficiaries. That can be done, but the sale proceeds may need to be reported to just one Social Security number, which the beneficiaries may not want. These problems can be time-consuming and costly, negating any probate-avoidance benefit.
It’s unlikely, but your state’s law may restrict your ability to name an institution, such as a school, church, or other charity, as the beneficiary of a P.O.D. account. Delaware law, for example, requires the beneficiary to be “a natural person.” Oklahoma doesn’t allow for-profit entities such as corporations or limited liability companies to be P.O.D. beneficiaries; beneficiaries must be individuals, trusts, or tax-exempt nonprofits.
Such a requirement can frustrate attempts to leave money as you wish. For example, under previous Georgia state law, a charitable corporation could not be the P.O.D. beneficiary of a bank account or certificates of deposit. State statute, the court ruled, required P.O.D. beneficiaries to be “persons,” and the definition of a person did not include corporations. Georgia amended its law in 2011 to allow charities to be beneficiaries.
Your Spouse’s Rights
You may not have complete freedom to dispose of the funds in a bank account—even if it’s in your name—as you wish. Your spouse or partner (if you’ve entered into a registered domestic partnership or civil union) may have rights, too. It depends on your state’s law.
|Community Property States||Non-Community
Arizona New Mexico
California TexasIdaho Washington
All other states
*Only if spouses sign a community property agreement.
You can’t shortchange creditors or family. If you don’t leave enough other assets to pay your debts and taxes or to support your spouse and minor children temporarily, a P.O.D. bank account may be subject to the claims of creditors or your family after your death. If there is any probate proceeding, your executor can demand that a P.O.D. beneficiary turn over some or all of the funds so that creditors can be paid.
If you specifically pledged the account as collateral for a debt, the creditor is entitled to (and doubtless will) claim repayment directly from the funds in the account. The P.O.D. payee gets whatever, if anything is left.
Spouses’ Rights in Community Property States
If you live in a community property state, your spouse (or your registered domestic partner) probably already owns half of whatever you have in a bank account, even if the account is in your name only. If you contributed money you earned while married, that money and the interest earned on it is “community property,” and your spouse is legally entitled to half.
There are a few exceptions to this rule: Your money is yours to do with as you please if you and your spouse have signed a valid agreement to keep all your property separate. And your spouse does not have any right to your separate property—money you deposited before you were married, or money that you alone inherited or received as a gift—unless that money has been mixed with community property in a bank account and is impossible to separate.
If the money in your account is community property, and you want to name someone other than your spouse as the P.O.D. beneficiary for the whole account, it’s a good idea to get your spouse’s written consent. Otherwise, your spouse could assert a claim to half of the money in the account at your death, leaving the beneficiary you named with only half.
Spouses’ Rights in Non-Community Property States
If you leave money in a P.O.D. bank account to someone other than your spouse, make sure your spouse doesn’t object to your overall estate plan.
In almost all non-community property states (all states except the ones listed above), surviving spouses who are unhappy with what the deceased spouse left them can claim a certain percentage of the deceased spouse’s property. This is called the spouse’s “elective share” or “statutory share,” and in most states it amounts to about a third of what the spouse owned. It’s a fairly rare occurrence, however, for a spouse to go to court over this, because most spouses inherit more than their statutory share.
The funds in a P.O.D. account may be subject to a spouse’s claim—
or they may not, depending on state law. Some states consider such accounts outside the surviving spouse’s reach.
It’s an infrequent practice these days, but some couples make legally binding agreements to leave property to each other. They sign a contract that requires them in turn to sign wills leaving all their assets (or part of them) to each other. These contracts have been ruled to take precedence over a payable-on-death designation on a bank account. In other words, the P.O.D. designation gets wiped out by the contract.
Example: Scott and Terry sign a contract in which each promises to make a will leaving all their assets to the other. Later, Scott adds a payable-on-death designation to his savings account, naming his brother as the beneficiary. If Scott dies first, Terry has a legal right to the funds in the account.
If a Beneficiary Dies Before You Do
People usually choose people younger than themselves to inherit their money and property, fully expecting them to outlive their elders. But sometimes this natural course of events is disrupted. If someone you have named as a P.O.D. beneficiary dies before you do, you should change the necessary paperwork at the bank to put a new beneficiary in place.
If you named more than one payee, and one or more of them dies before you do, the funds in the account will go to the survivor(s) at your death. If, however, none of the P.O.D. payees you named is alive at your death, the bank will release the funds in the account to your executor, who will be responsible for seeing that the money is distributed under the terms of your will or state law. The money will probably have to go through probate, unless your estate is small enough to qualify for special, simpler procedures.
If you want to name alternate beneficiaries, don’t rely on a P.O.D. account. Banks generally don’t allow you to name an alternate P.O.D. payee—that is, someone who would inherit the money if none of your primary beneficiaries outlived you. Your will, if you make one (and you should, for reasons like this) functions as a backup in this case, as explained below. But that doesn’t avoid probate. If you want to name a back-up beneficiary and be sure of avoiding probate, you’ll probably want to use a living trust.
Depending on state law, however, the bank may be able to release the money directly to your legal heirs—the close relatives who are entitled to inherit from you if you don’t leave a will. In that case, the money won’t have to go through probate.
If the money goes to your executor, it will be distributed under the terms of your will, even though you most likely didn’t even mention this account in your will. That’s because most wills contain what is called a “residuary clause,” which names a beneficiary to inherit everything that’s not specifically mentioned in the will. The person you named to inherit this “residuary” property would receive this money.
Example: Mark names his brother as the P.O.D. beneficiary of his savings account. But his brother dies, and Mark, confined to a nursing home, isn’t able to change the paperwork at the bank to name a new payee. Mark does, however, have a will that contains a residuary clause, naming his daughter Madeline as residuary beneficiary. When Mark dies, and the will is probated, the money in the account goes to her, along with everything else that Mark didn’t specifically leave to another beneficiary.
If You Change Your Mind
Families change; relationships change. At some point you may decide that you don’t want to leave money to a P.O.D. payee you’ve named, or a beneficiary may die before you do. You’re free to change the P.O.D. arrangement, but you must meticulously follow the procedures for making changes. The law books, sadly, are full of cases brought by relatives fighting over the bank accounts of their deceased loved ones who didn’t pay enough attention to these simple rules.
How to Change a P.O.D. Designation
There are two easy and foolproof ways to make a change to a P.O.D. account:
• Withdraw the money in the account, or
• Go to the bank and change the paperwork. Fill out, sign, and deliver to the bank a new account registration card that names a different beneficiary or removes the P.O.D. designation altogether.
To ensure that your wishes are followed after your death, dot the i’s and cross the t’s when it comes to following the bank’s procedures. A change in beneficiary isn’t effective unless you fulfill the bank’s requirements, whatever they are. Almost all banks require something in writing—a phone call isn’t good enough. And to be effective, in most places your written instructions must be received by the bank before your death.
That doesn’t sound difficult, but it’s not all that unusual to find problems. In one case, after a woman’s death a new signature card, in a stamped envelope, was found on her desk. Relatives sued over the money. The court ruled that the change was not effective because the new signature card was ambiguous and because the bank had not received it before her death.
Contradictory Will Provisions
Trying to change a P.O.D. designation in your will by leaving the account to someone else is almost certain to cause problems after your death. At best, it will spawn confusion; at worst, disagreements or even a lawsuit.
About half the states say, flat out, that a P.O.D. designation cannot be overridden or changed in a will. In these states, a will provision that purports to name a new beneficiary for a P.O.D. account will simply have no effect.
Example: Kimberly names her niece, Patricia, as the P.O.D. beneficiary of her bank account. After they have a falling-out, Kimberly writes her will, and in it leaves the funds in the account to her friend Charles. At Kimberly’s death, Patricia is still legally entitled to collect the money.
Some other states do allow you to revoke a payable-on-death designation in your will if you specifically identify the account and the beneficiary. An attempt to wipe out several accounts with a general statement won’t work. In one case, a South Dakota woman wrote in her will that “I hereby intentionally revoke any joint tenancies or trust arrangements commonly called ‘Totten trusts’ [another name for P.O.D. accounts] by this will.” After her death, a court ruled that even this language wasn’t specific enough; state law requires every P.O.D. account to be individually changed or revoked.
Never rely on your will to change a payable-on-death account. Instead, deal directly with the bank, which, after all, will be in charge of the money after your death.
Property Settlement Agreements at Divorce
A property settlement agreement, even though it’s approved by a court when a couple divorces, may not revoke a payable-on-death designation.
For example, when a New York couple divorced, the property settlement agreement gave the husband “any and all bank accounts, held jointly or otherwise.” Some of those accounts named the wife as payable-on-death beneficiary; when the husband died, she inherited the money. The court ruled that because the settlement agreement had not named the accounts specifically, it had not met New York’s statutory requirements for the revocation of a Totten trust account.
Similarly, when an Arizona couple divorced, their property settlement agreement gave the husband some bank CDs for which he had named the wife as the payable-on-death payee. But the husband never went to the bank and removed the wife as the P.O.D. payee. When he died, a court ruled that the ex-wife was entitled to the money, because the settlement agreement had no effect on the contract between the husband and the bank.
Claiming the Money
After your death, all a P.O.D. beneficiary needs to do to claim the money is show the bank a certified copy of the death certificate and proof of his or her identity. If the account was a joint account to begin with, the bank will need to see the death certificates of all the original owners. The bank records will show that the beneficiary is entitled to whatever money is in the account.
State laws authorize banks to release the money in payable-on-death accounts when they’re shown this proof of the account holder’s death; they don’t need probate court approval. Legally, the money automatically belongs to the beneficiaries when the original account owner dies. It’s not part of the probate estate and isn’t under the executor’s control.
Beneficiaries may, however, encounter some delays when they go to claim the money:
• Tax clearances. Like other bank accounts, a payable-on-death account may be temporarily frozen at your death, if your state levies estate taxes. The bank will release the money to your beneficiaries when the state is satisfied that your estate has ample funds to pay the taxes.
• Waiting periods. There may be a short waiting period before the money can be claimed. Vermont, for example, doesn’t allow a bank to release funds to P.O.D. beneficiaries until 90 days after the death of the account owner.
When you set up a P.O.D. account, ask the bank what the P.O.D. payee will need to do to claim the money after your death. Then make sure the payee knows what to expect.
THE SCOOP AND SCOPE OF POWERS OF ATTORNEY:
A power of attorney is a legal document appointing another to act in the maker’s place when the maker is unable to take action personally. The maker is called the principal and the person authorized to act on the principal’s behalf is called the agent or attorney-in-fact. All powers of attorney terminate on the death of the principal. A principal may also revoke the power of attorney at any time as long as he or she is competent. A successor agent may be named in the power of attorney to prevent it from lapsing if the first named agent dies or is unable to serve.
There are various types of powers of attorney; they can be either general, durable or limited. Some states have also adopted a statutory power of attorney. A general power of attorney grants the agent broad powers to act in regard to the principal’s assets and property while the principal is alive and not incapacitated. A durable power of attorney will remain effective even if the principal becomes incapacitated. A special or limited power of attorney restricts the agent’s action to a particular purpose in order to handle specific matters when the principal is unavailable or unable to do so. A statutory power of attorney copies the language in a state statute which includes an example of a form that may be used. State laws vary, but the states that have adopted a statutory form of power of attorney typically allow for other language to be used as long as it complies with the state law. A power of attorney may be created for a limited time period and/or specific purpose, such as a Health Care Power of Attorney, Power of Attorney for Care and Custody of Children, Power of Attorney for Real Estate matters and Power of Attorney for the Sale of a Motor Vehicle.
By creating a power of attorney, the agent may sign documents, make decisions, and take necessary actions when the principal is unable to do so. While a power of attorney may be created in anticipation of a future need, such as military deployment, it also allows another to manage the principal’s affairs when unexpected events occur, such as an accident, illness or unplanned absence. Without a power of attorney, a spouse, parent or other interested party must petition the appropriate court to be appointed as guardian or conservator of the incapacitated person, which can be a time-consuming and expensive process.
Power of attorney requirements vary by state, but typically are signed by the principal and need to be witnessed and/or acknowledged before a notary public. Usually, powers of attorney do not need to be recorded. However, powers of attorney dealing with the sale and purchase of real estate must be recorded. In order to revoke, cancel, or end a power of attorney before it expires, the principal must sign a revocation of power of attorney and give a copy of the revocation to any person who might have or will possibly deal with the agent. Giving a copy of the revocation to people the former attorney-in-fact dealt with is to avoid an apparent authority situation.
A person has apparent authority as an agent when the principal, by his words or conduct (e.g., having granted power of attorney to former attorney-in-fact), leads a third person to reasonably believe that the person/agent has the authority that the agent appears to have, and the third person relies on this appearance of authority. The question of apparent authority is probably the most litigated question in agency law.
If a principal revokes a power of attorney that is recorded in the real estate records of a county, a revocation of that power of attorney should also be recorded in the real estate records.
Please remember that the agent under a Power of Attorney is under a high legal duty to act in the interest of the grantor/principal. This legal duty is called a “fiduciary duty.” It is a duty of loyalty that arises out of a special relationship of trust and confidence that is supposed to exist between the grantor and his agent. It is like the duty between lawyer and client. As a practical matter, when you give someone a Power of Attorney, you’re taking a risk that you may lose your assets to your agent. Powers of Attorney don’t usually contain provisions requiring the agent to give you a periodic accounting of your financial affairs. The agent under a Power of Attorney cannot make decisions after your death, as can the trustee of a living trust.
Powers of Attorney do not have to be recorded with the county in which you reside. However, if your agent has to handle a real estate transaction for you the Power of Attorney will need to be recorded at the time of the transaction. Banking transactions and stock transactions ordinarily do not require recordation. Nevertheless, it may be prudent to forewarn an institution that you have such a power by providing them a copy of the document before its required use.
Also remember you can specify the ending date in your Power of Attorney. If you don’t, it ends when you become disabled if it is not durable. If it is durable, it ends when you die. A Power of Attorney which is durable may survive your disability, but it is not immortal. When you die, it dies. Your agent, upon your death, will lose all power to make decisions for you concerning who is to receive your assets. Do not rely upon a Power of Attorney in place of a living trust.
ESTATE COMPOSITION RELATING TO LIFE INSURANCE PROCEEDS
Right to Receive Insurance Policy Dividends
In Private Letter Ruling 201328030 (released July 12, 2013), the Internal Revenue Service addressed the following question: Does a decedent, at death, possess an incident of ownership in life insurance policies insuring his life, such that the insurance proceeds are includible in his gross estate under Internal Revenue Code Section 2042? The IRS said, “No.” The ruling involved an examination of facts similar to those set forth below:
Terms of Related Divorce Agreement
The decedent and his spouse filed for divorce and executed a property settlement agreement (the Agreement) covering all marital and separate property. Pursuant to the terms of the Agreement, the decedent was to maintain life insurance policies on his life, for the sole benefit of his former spouse. Under the Agreement, the decedent was to pay all premiums and dues, but couldn’t borrow against the policies. The policies’ dividends however belonged exclusively to the decedent.
When the decedent and his former spouse divorced, the court incorporated the Agreement into the divorce judgment, ordering that all property be distributed according to the Agreement’s terms. When the decedent died, his former spouse received the policies’ proceeds. On the decedent’s estate tax return (Form 706), his executor included the policies’ proceeds in the decedent’s gross estate. The IRS said this inclusion was incorrect. Here’s the IRS’ rationale.
Incidents of Ownership and Estate Inclusion
Under IRS Section 2042, the value of a gross estate shall include the value of all property to the extent of the amount received by all beneficiaries under policies on a decedent’s life, with respect to which a decedent possessed any “incidents of ownership” at the time of his death.
“Incidents of ownership” refers to the right of an insured or his estate to economic benefits of an insurance policy (Treasury Regulations Section 20.2042-(1)(c)(2)). It includes a power to change a beneficiary; surrender and cancel the policy; pledge the policy as security and dispose of the policy and its proceeds. Previously, a Tax Court had already held that a right to dividends, which may be applied against a premium due, is nothing more than “a reduction in the amount of premiums paid rather than a right to the income of the policy.”
In this instance therefore, according to the terms of the Agreement, the decedent agreed to maintain life insurance policies for his former spouse’s sole benefit. The IRS found that the policies’ dividends “belonged” to the decedent “in a technical legal sense,” but the “mere right” to those dividends, by itself, wasn’t an incident of ownership rising to the level that would cause the value of the insurance proceeds to be included in the decedent’s gross estate under IRS Section 2042(2).
This is an interesting result to consider when dealing with insurance beneficiaries….as well as when an impending divorce may be on the horizon.
ESTATE ASSET PROTECTION PLANNING: TESTAMENTARY AND LIVING TRUSTS
I thought it important to provide a basic background on revocable living trusts and how they might interact with the business owner’s intention of passing both his/her personal and business assets to beneficiaries of his/her choosing.
Simply put, trusts that are created after an individual dies by a provision in the individual’s will are called testamentary trusts. Trusts, however, that are created during an individual’s lifetime and hold title to property are referred to as” inter vivos trusts.” Inter vivos trusts are also commonly called living trusts and revocable living trusts. Inter vivos is Latin for “living.”
The primary difference between testamentary trusts and living trusts is the time at which these trusts are created. A living trust is drafted and executed during an individual’s lifetime. The individual is referred to as the “grantor,” “creator,” or” trustor.” The testamentary trust, on the other hand, is created at the death of an individual through a provision in that individual’s will. Testamentary trusts do not hold title to property until the creator or grantor dies. Be advised that wills that create testamentary trusts are ineffective for probate avoidance and disability planning. It is not recommended that they be used in a majority of estate planning applications simply because they contain no living benefits. This disadvantages of using a will to create a testamentary trust are as follows:
- Your will does not hold title to property and thus contains no systematic provisions for asset distribution to you in the event of your disability. There is no trustee, conservator or guardian either. There is no one to step in to manage assets for you during your lifetime should you become incapacitated.
- Assets may be titled so that they pass outside the provisions of your will, such as assets held in joint tenancy with the right of survivorship, or assets that passed by a contract.
- Assets that pass by will are subject to the expense and inconvenience of probate proceedings and thus can be costly to the estate, and thus the beneficiaries, who may be in a position to inherit valuable business assets.
- Wills can provide for the creation of trusts at the death of the maker, however, quite often the trusts may not be funded properly because assets may pass outside the provisions of the will. NOTE: Interestingly, however, some business owners may find this advantageous rather than disadvantages, should he/she wish a business asset to specifically go to a named third-party by way of contract.
Alternatively, there are advantages to using a revocable living trust, some of which are as follows:
- Revocable living trusts hold title to assets before death.
- Revocable living trusts provide a center for management when they are funded by holding title to your property. A trustee can be named as can a guardian or conservator to act on your behalf during your lifetime.
- Business assets held or titled to your trust are not subject to the expensive cost and inconvenience of probate.
- Revocable living trusts can be split into additional trusts such as marital and family trusts, and the grantor can make certain that these additional trusts are funded under the terms of the living trust. In this way, major tax advantages can be realized should the estate be valued currently at $5.2 million or more at time of death– a distinct possibility if a profitable business asset is contained within the trust.
While revocable living trusts do not themselves insulate assets from the protection of lawsuits, the creation of a viable business entity which does provide asset protection, can be placed in the trust in order to obtain all of the other advantages cited herein above, while retaining its asset protection capability. In order to obtain ironclad asset protection, it is recommended that the estate planning principles surrounding an irrevocable living trusts be employed– a concept I will discuss in my next issue of Bottled Business Sense.
BEST ASSET PROTECTION SERVICES GROUP: WFB Legal Consulting, Inc.
*Please be advised that this communication is for general public informational use only and does not establish an attorney-client relationship. For more information, please contact WFB Legal Consulting, Inc.—a BEST ASSET PROTECTION Services Group at (949) 413-6535.
Below is a brief recap of relevant estate planning guidelines. Please see an Estate Planning attorney at WFBLC, Inc. for a plan tailored to your particular business and family needs.
Highlights of a bill Congress passed Tuesday aimed at averting wide tax increases and budget cuts scheduled to take effect with the New Year. The measure would raise taxes by about $600 billion over 10 years compared with tax policies that were due to expire at midnight Monday. It would also delay for two months across-the-board cuts to the budgets of the Pentagon and numerous domestic agencies.
—Income tax rates: Extends decade-old tax cuts on incomes up to $400,000 for individuals, $450,000 for couples. Earnings above those amounts would be taxed at a rate of 39.6 percent, up from the current 35 percent. Extends Clinton-era caps on itemized deductions and the phase-out of the personal exemption for individuals making more than $250,000 and couples earning more than $300,000.
—Estate tax: Estates would be taxed at a top rate of 40 percent, with the first $5 million in value exempted for individual estates and $10 million for family estates. In 2012, such estates were subject to a top rate of 35 percent.
—Capital gains, dividends: Taxes on capital gains and dividend income exceeding $400,000 for individuals and $450,000 for families would increase from 15 percent to 20 percent.
—Alternative minimum tax: Permanently addresses the alternative minimum tax and indexes it for inflation to prevent nearly 30 million middle- and upper-middle-income taxpayers from being hit with higher tax bills averaging almost $3,000. The tax was originally designed to ensure that the wealthy did not avoid owing taxes by using loopholes.
—Other tax changes: Extends for five years Obama-sought expansions of the child tax credit, the earned income tax credit, and an up-to-$2,500 tax credit for college tuition. Also extends for one year accelerated “bonus” depreciation of business investments in new property and equipment, a tax credit for research and development costs and a tax credit for renewable energy such as wind-generated electricity.
—Unemployment benefits: Extends jobless benefits for the long-term unemployed for one year.
—Cuts in Medicare reimbursements to doctors: Blocks a 27 percent cut in Medicare payments to doctors for one year. The cut is the product of an obsolete 1997 budget formula.
—Social Security payroll tax cut: Allows a 2-percentage-point cut in the payroll tax first enacted two years ago to lapse, which restores the payroll tax to 6.2 percent.
—Across-the-board cuts: Delays for two months $109 billion worth of across-the-board spending cuts set to start striking the Pentagon and domestic agencies this week. Cost of $24 billion is divided between spending cuts and new revenues from rule changes on converting traditional individual retirement accounts into Roth IRAs.
BEST ASSET PROTECTION SERVICES GROUP: WFB Legal Consulting, Inc.
*Please be advised that this communication is for general public informational use only and does not establish an attorney-client relationship. For more information, please contact WFB Legal Consulting, Inc.—a BEST ASSET PROTECTION Services Group at (949) 413-6535.