Choosing Trustees for Irrevocable Trust

Irrevocable trusts are created in two ways:

1.  A revocable trust becomes irrevocable after the grantor has died.

2.  An irrevocable trust is established while the grantor is living to save estate taxes (by removing assets from the grantor's estate) and/or for asset protection or Medicaid planning.

 

While a grantor may technically be allowed to serve as the trustee of an irrevocable trust he/she creates, it is not a good idea at best. 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.

 

Often there is someone the grantor knows who the grantor suggests to be the trustee. Typical choices are the grantor's spouse, sibling, child, or friend. Any of these may be an acceptable choice from a legal perspective, but may be a poor choice for other reasons.  Client trustee appointments will frequently be made with little consideration of the qualifications the trustee should have. Likewise, those who agree to be trustees typically have no idea what they are getting into. Non-professional trustees often are overworked, underpaid, unappreciated, find they are dealing with unhappy and unappreciative beneficiaries, and may even wind up being sued by the beneficiaries.

Non-Tax Considerations for Selecting a Trustee

·         Judgment: Clients typically want their trustee to make the same decisions they would. Someone who shares the grantor's values, virtues, spending habits and faith is more likely to do this. Also, consider whether the trustee candidate will be aware of his own capabilities and weaknesses. If the trustee candidate does not have accounting or investment experience, would he/she have the judgment to admit this and engage an appropriate qualified professional?  

·         Availability/Location: Does this trustee candidate have the time required to be a trustee? Will he/she be available when needed or will work and/or family demands leave too little time for trust responsibilities? Where does the candidate live? If the trustee lives in a place different than the trust situs, different laws may apply. Is living near the beneficiary important?

·         Longevity: How long will the trustee be needed? Many grantors are most comfortable with friends who share their values and have gained wisdom from life experiences, but someone near the grantor's age may not live long enough to fulfill the job. A trust established for the grantor's child will likely need a trustee for many years to come. Thus, for trusts that may last a long time, a corporate trustee is often the preferred choice.

·         Impartiality: The trustee must be capable of being impartial among the beneficiaries. This is especially difficult to do if the trustee is one of several beneficiaries. Corporate trustees, because they can be impartial, are often chosen to prevent a sibling or relative from being placed in an uncomfortable (and often unfair) position.

·         Interpersonal Skills: The trustee needs to be able to communicate well and effectively to the beneficiaries and to professionals who may be involved with the trust. Some people may be good record keepers or investors, but lousy at diplomacy or feel intimidated or even be offended if a beneficiary gets an attorney. A good trustee will need to be able to work calmly and well with all involved.

·         Attention to Detail: Does the trustee understand the serious duties that come with the job and is he/she willing to be accountable for his/her actions? Fiduciaries are often thought by the beneficiaries to be guilty until proven innocent. While it may not happen, the trustee should assume he/she will be sued at some point and keep meticulous records as a ready defense. A trustee who expects to be sued will be much better prepared than one who doesn't think it will happen and, as a result, does not take the record keeping requirement seriously.

·         Investment Experience: While it is helpful to have investment experience, the trustee can certainly get by without it, as long as he/she recognizes this is an area for which to secure professional help. Also, if the trustee lives in a place different than the trust situs, different investment laws may apply, making it especially prudent or even essential to seek professional assistance.

·         Fees: The non-professional trustee rarely discusses fees with the beneficiaries. Often, family members and friends will not charge a fee for their services out of a sense of family duty or respect for the grantor. But trustees should be paid and, more often than not, an unpaid trustee will eventually come to that conclusion or fail to diligently carry out his duties. From the outset, a trustee should keep close track of time and expenses so that a reasonable fee can be substantiated. Generally, a reasonable fee is what a corporate trustee would charge, so thinking that a non-corporate trustee will do the same necessary work for less is false economy.

·         Insurance: Anyone serving as a trustee needs to have plenty of insurance (errors and omissions or liability). Some of the laws that govern trustees are absolute standards, so a trustee needs to have adequate insurance for protection in the event of a mistake or an innocent error. The amount of insurance needed can depend on the degree to which a trustee is indemnified. However, legal defense costs in trustee litigation can be very large and are typically borne by the insurer.

·         Indemnification: This often comes up when family members or friends are serving as trustee. Grantors want to indemnify family members and their friends; they do not want them to be sued. It is possible to reduce or eliminate the prudent investor rule for such trustees. However, indemnification is a two-edged sword because it may result in the non-professional trustee not taking the job seriously.

 

Tax Considerations

 

·         Estate Tax:  If a purpose of the trust is to remove assets from the grantor's estate, the grantor cannot have any role in determining who gets distributions or when they occur. However, the grantor can have the power to remove and replace the trustee or to control the investments of the trust. Neither of those will cause estate tax inclusion providing the grantor cannot appoint a trustee who is related or subordinate to the grantor (as would be a brother, employee or someone else who will capitulate to the grantor's wishes). Interestingly, there is no problem appointing, at the inception of the trust, an initial or successor trustee who is related or subordinate to the grantor.

·         Income Tax:  A non-adverse trustee having certain powers may trigger grantor trust rules and cause the grantor to be taxed on the trust's income. In some instances the client may not want the tax to come back to the grantor and instead want a trust that is a separate tax-paying entity for which the income that is distributed to the beneficiaries is to be taxed to the beneficiaries.  Because the trustee’s identity may affect state income tax as well, you may be able to shift the trust situs to a state with a lower income tax rate.  Depending on the trust assets, this could be important as some investments (such as oil and gas) may be taxed significantly higher in some states than in others.

 

Beneficiary Removal and Replacement of Trustee

 

This is an area that is customizable for each trust and can help maintain some downstream flexibility. Some grantors may not want the beneficiaries to be able to remove the trustee, especially if the grantor is aware of family quarreling. But if the corporate or individual trustee knows it cannot be replaced there is little need for responsiveness or careful attention to investments. Because there does need to be a way to have the trustee removed if things should deteriorate, the document can include that the trustee can only be removed for cause as determined by the court. On the other end, spendthrifts may want to "trustee shop" until they find one that will do whatever they want, so there will need to be some restraints on when a trustee can be replaced.

 

Team Approach

 

There are times when a team can do a better job than a single trustee. Having more than one trustee, even with different duties and responsibilities, can work well for many situations. The trust can benefit from assigning the trustees specific duties based on their strengths and experience. Of course, the fewer people who are involved, the less complicated the administration. Also, disagreements will have to be worked out. If there are two trustees or any even number, deadlocks are possible. With an odd number, a simple majority would be needed. If an agreement cannot be reached, the court can be allowed to intervene as a last resort.

Also, family member trustees can work with professionals as paid advisors instead of as trustees. This would allow the advisors to provide valuable input and insight into both the grantor's desires and the personalities of the beneficiaries, without being so exposed to possible lawsuits.

      

Conclusion

   

A competent trustee is as important to the success of a trust as its being well-drafted. Naming a favorite family member as trustee may not be the smartest (or kindest) thing the grantor can do. As experienced professionals who have seen the consequences of unwise choices for trustee, we must counsel our clients with their and their beneficiaries' best interests in mind.

Disclaimer: The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.

This information on this site is designed to provide a general overview with regard to the subject matter covered and may not be state specific. The authors, publisher and host are not providing legal, accounting, tax or other specific advice to your situation.

Copyright © 2011 Alvis Frantz and Associates.

The Holidays are Approaching: What are your Estate Planning Resolutions?

Maybe you’ve been thinking about getting your affairs in order for a while or maybe you’re just starting to look into it. Perhaps you recently experienced a milestone event such as a new marriage, home purchase, or child birth, and are realizing you want to protect what is dearest to you. Or perhaps you recently lost a loved one and are feeling some perspective. In any case, procrastination should not get in the way of securing your family’s future by creating an estate plan.

Make this holiday season the time you resolve to do something!

1. If you have young children it is imperative that you have a will in place that provides them with suitable  guardians should a worst case scenario come to pass. You might also want to set up a trust for them to handle any assets you would want to support them and so that you can control how their inheritance is managed even after they turn 18. Parents: don’t let another day go by without having a solid backup plan for your children’s future!

2. If you have an older estate plan but have since gotten married, divorced, or had a child, you should revisit your plan with an estate planning attorney. A new marriage or birth of a child may make your old plan invalid and subject to contest. Additionally, the old any previously existing wills and a new addition to your family is not necessarily covered under an old plan.

3. If you have a loved one who is getting on in years and may one day be a candidate for assisted living, don’t wait to act until your options are limited. Medicaid has a five-year look back period on asset transfers. The  best time to plan for the high cost of elder services is well before they are actually needed. This year, make the elders in your life a priority!

4. If you have lost a spouse during this past year, having an attorney review your estate plan and ensure that the trust administration procedures have been properly followed is very important. 

The upcoming Holidays and New Year is a great time to think about the people who are important in your life. Contact Amy Alvis at Alvis Frantz and Associates today to discuss how you can best provide for them

though many new years.

The information provided is for informational purposes only and not for the purpose of providing

legal advice. You should contact an attorney to obtain advice with respect to your particular issue

or problem. 

(925) 516-1617
WWW.ALVISFRANTZLAW.COM

WHAT DOES YOUR TITLE SAY ABOUT YOU?

Question: My husband and I hold title to our home as husband and wife as community property. Does that mean if he dies, I will automatically own that property?

Answer: The answer is not always an absolute “yes” to this question.

There are various ways people can hold title to assets. Often, how people hold title on their property, such as real estate and bank accounts, may be the only estate planning they have done. Unfortunately, it may NOT always be what their estate planning wishes are. Additionally, if people have done a trust and/or a will, how they hold title to some of their assets may completely conflict and sometime even override what their trust or will provides.

For example, let’s say you and your husband bought your home last year and took title as “husband and wife, as community property”. It was your mutual intent that when one of you dies, the other will own the home 100% and without any court involvement. Now, if you and your husband have no will or trust or if your will or trust provides that all your community property shall pass to the surviving spouse, then the answer to the question would be “yes”.

But now let’s say your husband has a will which provides that upon his death, all of his estate (this includes his separate property and his 50% interest in the community property) is to be shared equally between you and his two children from his first marriage. In this scenario, when your husband dies, you would NOT inherit his entire share of the home, but would have to split it (along with the rest of his estate) with his two children. The reason is that in 2001, California adopted a new form of title “community property with right of survivorship”. This is different than the form of title “community property”. When someone holds title as “community property” it provides a person the ability to bequeath their ownership interest in their community property assets to someone other than a surviving spouse through wills or trust. When you hold title as “community property with right of survivorship”, you cannot. The surviving spouse becomes the sole surviving owner of all community property under this form of title, regardless of what wills or trusts may provide. This is similar to joint tenancy where the surviving joint tenant becomes sole owner upon death.

So what does the form of title say about you and your estate plan? To find out more and call 925-516-1617 to schedule a consultation at ALVIS FRANTZ AND ASSOCIATES, where your legal challenges just got easier!

Disclaimer: The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.

This information on this site is designed to provide a general overview with regard to the subject matter covered and may not be state specific. The authors, publisher and host are not providing legal, accounting, tax or other specific advice to your situation.

Copyright © 2011 Alvis Frantz and Associates.

When a spouse dies

So today I have to go to court for a hearing to appoint my client as administrator of his wife's estate. Why? Because they had no plannin other than joint tenancy and the wife had received a large inheritance before death that was never deposited into thei joint account. This was therefore her separate property and therefore does not just pass outright to her husband. Now we need to open a probate and the money will be shared by husband and their two kids.

What are you waiting for?

When I meet with a client for the first times, one of the very first questions I ask them is why they wanted to meet with me and why are they coming in for estate planning now.  I constantly hear people tell me they have been putting it off and putting it off and putting it off.  But what is it that finally brings them in.  It's typically one of four reasons:


• Travel.
• Hospitalization or terminal medical diagnosis
• Change in family status (marriage, divorce, death, birth of a child)
Many of the reasons that cause people to stop procrastinating and get things in order is when they are forced to face their own mortality.  For many, once we begin to come to terms with the inevitable, we begin taking those steps to prepare and protect our loved ones. 

Without some "push" we can easily find an excuse to put this on the "to do" list but never get it done.  Here are some common excuses:

• I/We don't have time
• I/We can't get all the paperwork together
• I/We don't have the money
• I/We need help from a family member and that person is just too busy
• I/We don't have much and therefore don't need anything
• Don't know anyone who I would want to have raise my kids if something happens to us
• Don't have the money, and for many superstitious people....
• If we do it (write a will, buy life insurance, etc.) something bad will happen to us

What I always find though is that once people do get it done, they always feel so much more secure and confident.  The answer to many of these questions lies in one of a few answers....

• Time:  It may take a few hours now, but it will take your loved one years later if you don't
• A small investment now will same your estates tens of thousands later
• Everyone need some planning - unless you want someone else to make your decisions for you.... like the State and a Judge.
• If you don't pick someone to raise your children if you can't, the State and a Judge will decide for you.
• If you do it or don't do it.... we are all going to die someday.  Being prepared will only make it easier for your loved ones to grieve since there will be a lot less hassle.

If you can't focus on estate planning right now, set a timeline.  Don't wait until you are rushed, scarred or after it's too late.  Create a savings plan for it if money is your issue (don't skimp though... you get what you pay for).  The next time something gives you that big "push", jump on it, call us, I am sure you will feel so much better when it's done. 

It's always a good feeling when a big probate matter finally finishes

4 Tips to Reduce the Potential for Will and Trust Disputes:

Advise your beneficiaries of your distribution plans, especially when children are being treated unequally. Will contests and litigation arise from disappointed feelings of entitlement. Telling the children ahead of time what their shares will be may avoid a later dispute. (Although it could cause family problems now though so be careful. Sometime writing a “family love letter” to your children to be read after your death, explaining why you set up the distribution plan the way you did may help as well. This will vary from family to family.

Use a Trust - not just a Will. Since trusts can be funded and operate during lifetime, it is difficult to contest on the grounds that the individual was unaware of its terms. When the Trustor of the trust dies, there is no need to begin a court proceeding to "prove" the validity of the trust, like there is for a will.

Use Disinheritance Or No Contest Clause.  The goal here is to prevent beneficiaries from causing a legal dispute after someone dies. A lot of trust and estate litigation is not about the validity of the document, but about how it is to be interpreted or how it is being managed. In order to reduce this type of litigation, a disinheritance clause can cause a forfeiture of a beneficiary's interest if such a challenge is made. The entire estate plan must be consistent with this clause.

Use Mediation or Arbitration Provisions in your plan. Arbitration or mediation cannot be used with respect to the challenge of a document's validity unless the parties agree to it. Using a disinheritance clause to cause forfeiture if the parties will not participate can be used. This could stop claims that are filed only to harass other beneficiaries or to delay distributions to others. Another approach would be having the parties enter into a contract agreeing to arbitration before the transfer.

Disclaimer: The information provided is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to your particular issue or problem. Use of this information or any related information does not create an attorney-client relationship between ALVIS FRANTZ AND ASSOCIATES. The opinions expressed at or through this site are the opinions of the individual authors and does not reflect the opinions of any firm or attorney.

DIY Trusts and Wills - Why they are not the best option

One of the risks inherent in opting for a do-it-yourself estate plan is that, without the help of an experienced attorney, you can’t spot any missing pieces of the puzzle.

One such puzzle piece is what is called the residuary clause, which is an extremely important part of any will or trust and may be missing in a do it yourself estate plan.  A residuary clause gives instructions as to what should happen to property that is not specifically left to someone in other clauses of your will or trust. 

For example, if your will or trust states that your home, furniture and cars will go to your spouse, and that your jewelry will go to your daughter, but there is no specific mention as to who will get your boat, your holdhold items, your collectibles and even a bank account, then your residuary clause will control what happens to that property.

In addition, the residuary clause will control what happens to property that you leave to someone but that person dies before you and before you update your will or trust.  For instance, if you left your art collection to your niece but she dies before you, then your residuary clause would control who would ultimately inherit the property.

So what happens if you don't have a residuary clause? Any property not left to a specific person or charity would have to be probated and then divided among your heirs at law in the manner provided by the Probate Code of California. The drawbacks to this obviously is the time and expense added to the probate process, and of course, the fact that you and the state of California might not have the same ideas about who should ultimately receive your property.

Working with an experienced estate planning attorney can help ensure that your property makes its way into the hands of its intended recipients.   Call us at  925-516-1617 to see if you are property protected.

Unmarried Couples – What they need to know to protect themselves and their estates:

There are many unique issues facing unmarried couples. Just because two people chose not to marry, or may not have the legal right to marry, does not mean they are without options to protect each other with their estate planning.

As California does not recognize common law marriage nor same sex marriages, these couples do not have the same protections as legally married couples. Their partner is not considered a “next of kin” when it comes to health care, they are not a legal “heir” under the probate code, and there could be issues regarding child custody rights. Therefore, it is very important for couples to understand what their legal status as a couple is and what legal implications that may have on them.

One way cohabitating couples can protect themselves is through agreements such as Domestic Partnership or Cohabitation Agreements which act like a Prenuptial Agreement (but without the “nuptial” part). These documents clarify ownership of co-owned property, use of property, handling of debts, etc. Additionally, Wills, Trusts, Powers of Attorney, and Advance Directives are other extremely important estate planning documents that will allow couples to name who will manage their financial affairs and health care when they are no longer able to, and how their estate will be distributed after death. Children bring up a whole set of other issues, since custody and parenting rights can’t be contracted. As a result, nominations of guardianship in Wills are incredibly important.

Remember, estate plans aren’t for you; they’re for the people who depend on you. So if the law doesn’t provide you protection for each other, you need to create it through agreements and estate planning documents.

Disclaimer: The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.

A Gift Isn't Always A Gift

If you as a parent give a substantial amount of money to one of your children, it is important for the parents to decide how they want to treat that money.  First, if you decide it is a loan, it is important to have a proper promissory note drawn up and terms of payment.  It is also important to determine what will happen if the loan is not repaid.  For example, do you want the loan to be forgiven if you die, or should the unpaid balance be deducted from that child's inheritance.

But what if you decide to treat the amount as a gift.  If you have more than one child, it is very important to understand and document how you want to address this gift.   If the other siblings discover a gift  was made to one of them but not all of them, it could create some resentment or fighting after both of the parents have  passed away.

When making a gift to a child, you need to decide if this is an outright gift with no bearing on future inheritance, or rather, do you want the gift to be considered an "advance" of future inheritance.  In this case, the gifted amount would be deducted from that child's share of their inheritance at the time they are to receive their inheritance.

So in simple terms,  if you chose to treat the amount given as a "gift", you will need to do one of the following (depending on your wishes):
1) Intend to provide disproportionate amounts to your children through gift and inheritance
2) Gift equalizing amounts to all siblings (be sure to understand any tax implication of your gifting)
3) Consider the gift an advance on inheritance.

Whichever option you choose, you should be sure to document, document, document - either with an update to your will and/or trust, in other writing, or through documented action.  If you don't, there will most likely be a a great deal of fighting and frustration among your children after you have passed away.

Disclaimer: The information provided is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to your particular issue or problem. Use of this information or any related information does not create an attorney-client relationship. The opinions expressed at or through this site are the opinions of the individual authors and does not reflect the opinions of any firm or attorney.

Happy New Year! Happy New Tax Law?

Well, the year of waiting to find out what would become of the Estate Tax is finally answered, or is it? A better statement would be that the answer will be temporarily postponed for another two years but in the meantime… here’s a tax law to hold you over and to even cause you additional planning questions.


Last year was there was no federal estate tax law in effect. Now, the new tax law (effective 1.1.11) provides two options to the surviving heirs of individuals who died last year. They can either follow the 2010 rules – no federal estate tax, or follow the new 2011 tax rules which provide individuals with a $5 Million dollar exemption.

If you chose the new 2011 rules you can pay estate tax (35%) of a taxable estate over the $5 million exemption and your heirs get a “stepped up basis” of all such inherited property. “Stepped up” means that the cost basis of any property you inherit is determined by the value of that property at the date of death of the previous owner. This is important for capital gains tax savings when the property is later sold.

Alternatively, if chose to follow the 2010 tax rules, you will not pay any estate tax regardless of the size of your estate and the estate will be subject to a modified “carryover basis” rules. When you inherit property under this option, the cost basis of the property stays the same as it was for the previous owner. (Typically the price they paid plus capital improvements). When you sell the inherited property, your capital gains tax will be based on the older and typically lower cost basis.

The carryover however, is modified in that an heir can still step up the first $1.3 million of an inheritance, and a surviving spouse can take another $3 million. Anything in excess of these amounts would be fully carried over at the original cost basis.

So for anyone administering a large estate for a 2010 death, many options are available and careful consideration needs to be made with your tax advisor to determine which tax rules will be more beneficial to your estate. And the lingering question, what will happen if you die in 2013 when we may potentially be facing another period of uncertainty

Disclaimer: The information provided is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to your particular issue or problem.