The first post in the series defines the nature and role of a trustee, and the nature of the fiduciary relationship.
This post is our first installment of our "Trust Administration Blog Series." The purpose of this series is to assist those who have been, or may be called to either serve as a trustee or at least be a beneficiary of someone else's Trust. Either requires a strong understanding of trust administration principles: trustees need to ensure that they are handling their responsibilities well, and beneficiaries need to be empowered to represent their own rights and interests. We also seek to ensure that those who are creating their own estate plans understand what trustees and beneficiaries are going to be going through, which may factor greatly on who is selected to fill those roles, and in what manner they are to act.
The first post in the series defines the nature and role of a trustee, and the nature of the fiduciary relationship.
Notwithstanding the numerous issues that arise during the Estate Planning process, actually administering the Trust takes most of the time and attention of all the parties involved. Why should anyone care how a Trust functions upon the incapacitation or death of its creator? First of all, knowing what your trustees and beneficiaries are going to be going through may factor greatly on who you select to fill those roles, and in what manner they are to act. Second, more often than not, you may be called to either serve as a Trustee yourself, or at least be a beneficiary of someone else's Trust, which would require a strong understanding of Trust Administration principles. Trustees need to ensure that they are handling their responsibilities well, and beneficiaries need to be empowered to represent their own rights and interests.
Although Trust Administration is a huge part of our practice, we strongly feel in getting information to the public to be able to handle, or at least understand basic principles of Trust Administration. A strong overview of the subject will educate you as trustees and empower you as beneficiaries.
We're not even half-way through 2015, yet with the recent campaign announcements of Senators Ted Cruz, Rand Paul, Hillary Clinton, and now Marco Rubio, we are already deep into what promises to be a long and heated election season. Sure to top the list of discussed issues will be foreign policy in the Middle East, as well as health care and income taxation on the domestic agenda.
Regardless, and without fail, the Estate Tax always seems to float to the surface as a topic of discussion or rhetoric (depending how you look at it), and I figured I would take a minute to briefly touch on what the Estate Tax is, factually, and to also preemptively address some of the arguments, claims, and disputes made about the Estate Tax.
I just wanted to take a moment separate from working with you on your matter, or discussing our mutual clients, whichever our relationship dictates, to thank you for our relationship. Whether we have worked together in putting together your own estate plan, administered the estate of a loved one, discussed business succession strategies and issues, or discussed any of these with your own clients, I am grateful for you being a part of our family.
For us to further be of value to you (and others) in the future, it is essential that you rely on us as an ongoing critical strategic partner. Although such a relationship will be further solidified over time, it begins with a good understanding of all of the different areas we practice in and the different types of clients we serve, which we briefly address below. Please read these carefully and do an internal inventory of your own specific situation to see if we can be of further assistance. Even if the items discussed below do not seem to apply to you, take a moment to consider those family, friends, and colleagues that may be able to benefit from our services.
Just last week an appellate decision was handed down from California's Fourth District Court of Appeals that is creating a lot of conversation among the entire Southern California estate planning community. Many are familiar with the Heggstad Petition (Petition under CA Probate Code Section 850), but let me give a little background:
A Trust is an entity of sorts to which one's assets are transferred. When the creator of the Trust becomes incapacitated or deceased, the designated Successor Trustee takes over the administration of the Trust, and hence, all of the Trust assets (i.e., all of the assets that are properly transferred to the Trust). This concept of transferring assets to one's Trust ("funding the Trust") has always been a fly in the soup of attorneys and clients alike: not because of the difficulty of transferring such assets, but the dramatic consequences of not having assets properly funded. The opportunities created by the Heggstad case of 1993 have always been a popular fallback in situations where real estate was intended to be transferred into the Trust, but the title on such property did not reflect Trust ownership. Given the fact title on real estate is often changed during re-financing, not having the title correctly in the name of the Trust is a situation we encounter all too often. But as much as Heggstad is thought of as a savior to this predicament, it has a fly in its own soup...a problem that Ukkestad v. RBS Asset Finance remedies. The implications of Ukkestad completely change the opportunities available for Trust administrators to address this very common problem.
There are various types of Irrevocable Trusts, and each of them serve very distinct purposes. Going into the types and uses of Irrevocable Trusts is beyond the scope of this post. But before you read, it merits one last note (and forgive my repeating this), this post has to do with amending an Irrevocable Trust.
What about Revocable Trusts? Amending Revocable Trust is an extremely simple and straight forward process because the act and process of amending a trust is outlines in the Trust itself. In short, a Revocable Trust is made to be amended, and that kind of flexibility is essential to an estate plan where a Revocable Trust is at the core (this includes nearly all estate plans). For Irrevocable Trusts, the situation is quite a bit different. You see, one of the defining characteristics of an Irrevocable Trust is its lack of flexibility. It is this detachment of power from the creator of the Trust that asset protection, tax, and other benefits enter into the picture. So, for whatever specific purpose the trust was created, the lack of flexibility is essential to its purpose. And although on the face of them, it appears that Irrevocable Trusts would not be amendable, they in fact are. We just need to look to the California Probate Code for direction.
There is one part of the estate planning process that tends to act as a bottleneck more than any other, and that is figuring out how your estate should be distributed. On the one hand, we all want our children to be taken care of, educated, and provided for, but on the other hand, we are reluctant to drop a whole inheritance in their laps with the hope that they have the maturity and wisdom to make proper decisions. Most clients plan on leaving their estate to their children, or if none, then to nieces and nephews, or someone of a younger, more vulnerable generation.
When determining the distribution of a share of the Trust Estate to any beneficiary (primarily those about whom you have concerns regarding their ability to appreciate and properly manage their inheritance), there are three areas in which you should focus, and consequently three decisions that need to be made.
This post is the first in a series I am beginning on Questions I receive from clients, other professionals, etc. Rather than keeping these answers between me and the one asking the question, I hope that by sharing the information here, others will be able to benefit.
This first questions is a common one, and has to do with the fact that the Estate Tax Exclusion amount was so relatively low in the last decade, and is so relatively high right now, and thanks to the Fiscal Cliff "deal," will continue to be higher in perpetuity. A/B Trusts were a lot more popular when the Exclusion was low, because many clients felt like they were going to be subject to the estate tax. Now, as these estates are "maturing," the surviving spouse is typically faced with the decision on whether to comply with the trust provisions to divide the trust, even though it will unlikely provide much of a benefit. There is a short answer to this question, but there is a pretty big caveat, which has to do with the fact that some clients have always created AB Trusts, and will continue to do so for reasons other than tax planning. Rest assured however, all explanations are pretty simple.
What Happens to the Mortgage on a House When Someone Passes Away? Does a Beneficiary Need to Take it Over? Refinance?
This can be one of the scariest issues that come up in the administration of an estate. Regardless of whether an estate (or part of an estate) goes through probate, when a piece of real estate passes from a decedent to a beneficiary, the question remains: what will happen to the underlying mortgage? This can raise quite a bit of uncertainty where the beneficiary poses a significantly higher credit risk to the bank than the previous homeowner, who is on the mortgage.
What complicates the matter more, is the presence of a "due on sale" clause that nearly all mortgage contracts contain, which states that when the title of a property is transferred, the remaining balance on the mortgage is due in full. On its face, such language would require that upon any transfer of ownership (e.g., upon the death of the mortgagee), the balance of the loan is due on sale, regardless of the amount of liquidity of the estate. This lack of liquidity quite often results in the need to sell other assets to raise the necessary funds, or at last resort, to sell the underlying property. But in reality, the situation is not nearly as grim, and thanks little known law passed in 1982, there are a tremendous amount of protections for beneficiaries in these types of situations.
Back to Basics: The Difference Between a Will and a Trust and the Difference Between an Executor and a Trustee
The legal vernacular is quite confusing. I understand that. However, it is difficult at times for attorneys to take a step back and realize that quite a few of the terms we know and use everyday may be confusing to the general public. I place zero blame on the general public, but rather on the wordsmithing of lawyers everywhere. And we are all guilty; myself included. Some of the words and phrases used by attorneys are legally operative terms that have distinct legal consequences, whereas other terms are simply used interchangeably. Throw into the mix the fact that a word can evolve over time into a completely different word with the same meaning, and you have a general public that has every right to be a little unclear on a few things.
Probably the most common question I get from clients looking to do a basic estate plan is what is the difference between a Will and a Trust, and what is the difference between an Executor and a Trustee. Like most legal vocabulary questions, this is very common, and very simple to explain.
Even the glamour of celebrity is not exempt from poor decisions and unintended consequences. Although some may doubt how uniformly certain laws are applied to celebrities as opposed to the general public, it is a near certainty that estate administration laws procedures are extremely unforgiving, regardless of who you are. Without further ado, let's look into some of these situations, but especially, let us learn from them:
1. PRINCESS DIANA: "Do-It-Yourself" doesn't cut it. Although we are talking about the laws of a totally different country, Diana's strategy is employed all to often here in California. Rather than properly execute a formal estate plan, Princess Di wrote an unenforceable letter of intent, which dictated her wishes, but could not be considered by the court. Only formal estate plans and documents are legally recognized.
A revocable living trust is a vessel which is of very little utility unless something is placed inside. The living trust is a set of instructions and stipulations that generally refer to the ominous “Trust Estate” which essentially includes the client’s entire estate—so long as it is “placed into” the trust. The process of placing property into the name of the trust is referred to as “funding” the trust. Property not included or properly funded into the trust will not be subject to any of the terms, and will, in most situations, be subject to probate.
Given the fact that whether a trust is adequately funded is the most often-asked question among clients with estate plans in place, a general overview of the methods and of funding a trust is essential to any professional services provider.
Often times I am asked what happens if a certain individual is a designated beneficiary on a Will or Living Trust, but someone else is the named beneficiary on a bank account, IRA or 401(k), or even a life insurance policy. What muddies up the waters even more is that such accounts can also have a Living Trust listed as the owner of the account. How does all of this fit together? Who has priority of these types of accounts?
And in addition to the question of priority, is the question of administration: Do these accounts go through Probate? Are they subject to the standard rules and procedures of Trust Administration, or are they handled another way? I realize I am bringing up a lot of questions, but the answers are very simple.
It is no secret that plenty of taxes float around the ownership and transfer of real estate. It may seem that with all the various taxes, one cannot even sneeze without triggering some sort of tax or reassessment. Although these taxes abound, understanding the exemptions and exclusions can save plenty on taxes.
Before we jump into this, it is important to realize that entire classes are dedicated to the subject I am condensing into a simple blog post. There are plenty more tax considerations than what is addressed here, and there are a near-infinitely higher number of strategies to avoid these taxes as well. The scope of what we are covering here will encompass the most asked-about taxes in the most common scenarios. If you would like specific advice for your current situation, please contact us.
IRAs are not typically thought of as a wealth transfer device, but rather purely a retirement vehicle. With IRAs comprising most of one’s total net worth. Adding a secondary purpose to one’s IRA is something that needs to be considered. The Stretch IRA Trust begins with the concept of “stretching” one’s IRA.
After complying with certain provisions in the Internal Revenue Code, creators can continue to grow their IRA accounts and defer taxes for decades after death and thus, grow a modest retirement account into a fortune. However, based on the creator’s life expectancy, their beneficiaries will have to take a small taxable distribution each year, but the vast majority of the account grows without any IRS intervention.
We all remember the news...the world was going to end May 21, 2011. Harold Camping, the religious leader and head of Family Radio predicted that the Rapture was going to take place on that day...and that the world was essentially going to end. We all chuckled a little bit when we heard the "news," but this had a huge impact on some.
As someone who firmly believes in respecting believers of all religions, I just had a really hard time buying into this one. Maybe it was the numerological foundation in his prediction, maybe it was Camping's less-than-stellar track record on predicting the Rapture before, or maybe it was that I simply envisioned the end of days being a little different.
Is death really the end? Most people view the estate planning process as the medium through which you establish your wishes in regard to the distribution of your estate. Well for the 99%, that is typically the frame of mind we need to be in, and given a lack of serious complexity, that is totally fine.
However, there are so many missed opportunities for some individuals and families (...and I am not necessarily talking about just the wealthy) to perpetuate an income or revenue stream beyond the grave. Although for many people, this idea is of limited interest, we can all agree that looking at the annually-compiled list of some of the extreme examples of the high-earning deceased is downright fascinating.
Recall that the purpose of the probate process is to effectuate the transfer of a decedent’s assets while eliminating fraud in that transfer. The probate process is an extremely lengthy and costly process in order to accomplish this, but as so, the thinking behind Section 13100 is that some small estates aren't subject to such fraud.
California Probate Code Section 13100 states in part, ”…If the gross value of the decedent’s real and personal property in this state does not exceed one hundred thousand dollars ($150,000),…the successor of the decedent may, without…awaiting probate of a will [or probate without a will]…collect any particular item of property that is…due to the decedent, [or] receive any…tangible personal property of the decedent. Translated into English, that means that the California Probate process is not interested in “small” estates (estates with a fair market value of less than $150,000).
In February of this year, long time owner of the Los Angeles Lakers, Jerry Buss died at the age of 80 from kidney failure after a battle with cancer. Buss helmed of one of America's most high profile and successful sports franchises, winning 10 NBA championships. As the impacts of his planning are now beginning to come to an head, there are many lessons that can be learned from all of this, relating to business succession planning, and estate planning in general. As we go over a few things, realize we are not talking only to business owners of entities as successful (or as complicated) as the Lakers, but to all who have any sort of ongoing business interest they would like to see protected for subsequent generations.
In light of the unfortunate events of Hurricane Sandy, let us all take a minute to make sure we know where our estate planning documents are, and if we were required to leave our homes in an emergency, or if some sort of natural disaster were to befall us, where we would locate it and how we would keep it safe. There are a few very important things to consider when it comes to locating and maintaining the originals of trust documents or other estate planning documents, and some of these issues can be a little more complicated than one would think Consider the following:
NOT RECORDED: Estate planning documents are private, and although the deed transferring title of the house into the trust is recorded, no other documents usually are. So if any of these documents are lost, one cannot rely on the County Recorder's Office to produce a workable copy.
UPDATE: The Terms of Millionaire Copper Heiress Huguette Clark's Estate Plan Come To Light (It Pays To Be A Nurse!!)
Last month I wrote a post on the disputed fate of the estate of reclusive copper heiress Huguette Clark. What piqued my interest about the story was that she had outlived most of her extended family, and the only one's around at the time of her death were her accountant and lawyer, who pretty much had control of her entire estate. Combine that with the fact she was a total recluse owning millions and millions of dollars worth of property, but not living in most of it (her Santa Barbara estate on the bluffs remained unvisited by anyone from the family for nearly 50 years), and the story has all of the fixings of a good movie. Well, today the New York Post revealed a very interesting turn of events in this dramatic story.
Meet Huguette Clark...the wealthiest person you have never heard of, and to be more accurate, the wealthiest person NO ONE has ever really heard of.Ms. Clark passed away yesterday leaving an estate worth over (and this is not a typo): $500,000,000. She inherited the money from her copper mining magnate father, W.A. Clark.
But what makes this story interesting is not the size of her estate but how she spent the last three decades of her life. And it is that choice of lifestyle that makes this truly a fascinating story.
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