Estate Planning

Monday, March 28, 2011

Estate Planning Basics

Wednesday, November 17, 2010

What is a Special Needs Trust?

Providing support for people with disabilities requires special estate planning. If you have a disabled child, relative or friend, there is some essential information you should have regarding special or supplemental needs trusts. A special needs trust is a legal document that is created for a person who, because of physical or mental disability, or chronic or acquired illness, at under age 65, is receiving federal and state government benefits for medical care and daily living needs, such as Supplemental Security Income (SSI.) 

An individual who qualifies for SSI is limited to countable resources in the amount of $2,000. In the event that a recipient of SSI receives an inheritance directly from a parent or another, which bumps up their assets over $2,000, they will be disqualified from receiving SSI benefits. As such, special or supplemental needs trusts have become the preferred method to provide a source of funds, such as those that are inherited or received from litigation recovery, without disqualifying the beneficiary from receiving these government benefits. The trust funds are used for supplemental care, over and above what the government benefits provide. 

There are three main types of special needs trusts: the first-party trust, the third-party trust, and the pooled trust. All three name the person with special needs as the beneficiary. A “first-party” special needs trust holds assets that belong to the person with special needs, such as an accident settlement. A “third-party” special needs trust holds funds belonging to other people, such as a parent or grandparent, who want to help the person with special needs. A pooled trust holds funds from many different beneficiaries with special needs.

Special or supplemental needs trusts are designed to provide for comforts and luxuries that could not be paid for by public assistance funds. Appropriate legal and financial planning can ensure that your loved one with special needs will have an opportunity to enjoy a better life than that provided solely by government assistance. The drafting of special or supplemental needs trusts is a specialty, and only attorneys who have significant experience in these types of trusts should be engaged. 

Wednesday, November 17, 2010

Pay Close Attention to Beneficiary Designations

An often overlooked, but critical decision in estate planning is the completion and determination of your beneficiaries. This includes assets such as retirement plans, IRAs, life insurance policies, and annuities. 

One of the pitfalls in estate planning is not completing these forms properly, which has an adverse effect on your plan. Assets that have beneficiary forms are normally contracts, and a company is obligated to pay the funds to a beneficiary at the death of the owner of the account. These assets pass directly to your beneficiary, and not by your will, not to a trust, and perhaps not to the intended beneficiary of the account if you haven’t designated that person correctly.

For example, you may be single and have a minor child who is selected as your beneficiary. This basically means that your child has a right to receive the assets. However, since they are a minor, they are not able to collect the assets upon your death, and the insurance company may require a formal guardianship or conservatorship proceeding within the Probate Court. This process could be expensive, time consuming, and public. 

In addition, the guardian will have to account annually to the court, based on the requirements of that particular court system, and the annual accountings are also public and often expensive to produce and file. To further complicate the issue, once your child turns 18, they are no longer deemed to be a minor, and they have the right to receive all of the assets in a lump sum. It is likely that you prefer to have those funds held by a trustee, invested, managed, and distributed at other times, such as possibly one-half at twenty-five and one-half at thirty, or for upon graduation from college.

There are larger and more significant problems though when a beneficiary of a retirement plan is not completed properly. While life insurance is normally not income taxable, (although it may be included in the estate for estate tax purposes,) most retirement plans are assets that have been tax-deferred but are not tax-free. This means that your beneficiary will be receiving those assets outright and also be subject to income taxes. There are several retirement plan options where your beneficiary may make an election to either have the funds distributed over a period of years, within a five-year waiting period, or in a lump sum. There may also be a means of having those taxes minimized and stretched out over a period of years that will allow more funds to be invested, rather than having the tax paid initially and your beneficiary receiving a significantly smaller amount of assets. 

An additional significant problem comes in when you’re divorced, whether you’re remarried or not, and the initial beneficiary of your plan or policy is your divorced spouse. Since this is a contract, many state laws and courts have taken the position that those assets will pass to the ex-spouse even though that is clearly not the intention set forth in a separation agreement or judgment of the court. 

Therefore, whenever there is a life cycle change such as a birth, death, divorce, adoption, etc., all beneficiary forms should be reviewed to be sure that the beneficiary is stated correctly. Also, if you have created a trust, and that trust is no longer in existence, this may affect your overall estate plan and how your assets are distributed. Likewise, it is important to be sure that all existing beneficiary forms are coordinated with any new trust or will. 

Tuesday, November 16, 2010

Pay Close Attention to Beneficiary Designations

An often overlooked, but critical decision in estate planning is the completion and determination of your beneficiaries. This includes assets such as retirement plans, IRAs, life insurance policies, and annuities. 

One of the pitfalls in estate planning is not completing these forms properly, which has an adverse effect on your plan. Assets that have beneficiary forms are normally contracts, and a company is obligated to pay the funds to a beneficiary at the death of the owner of the account. These assets pass directly to your beneficiary, and not by your will, not to a trust, and perhaps not to the intended beneficiary of the account if you haven’t designated that person correctly.

For example, you may be single and have a minor child who is selected as your beneficiary. This basically means that your child has a right to receive the assets. However, since they are a minor, they are not able to collect the assets upon your death, and the insurance company may require a formal guardianship or conservatorship proceeding within the Probate Court. This process could be expensive, time consuming, and public. 

In addition, the guardian will have to account annually to the court, based on the requirements of that particular court system, and the annual accountings are also public and often expensive to produce and file. To further complicate the issue, once your child turns 18, they are no longer deemed to be a minor, and they have the right to receive all of the assets in a lump sum. It is likely that you prefer to have those funds held by a trustee, invested, managed, and distributed at other times, such as possibly one-half at twenty-five and one-half at thirty, or for upon graduation from college.

There are larger and more significant problems though when a beneficiary of a retirement plan is not completed properly. While life insurance is normally not income taxable, (although it may be included in the estate for estate tax purposes,) most retirement plans are assets that have been tax-deferred but are not tax-free. This means that your beneficiary will be receiving those assets outright and also be subject to income taxes. There are several retirement plan options where your beneficiary may make an election to either have the funds distributed over a period of years, within a five-year waiting period, or in a lump sum. There may also be a means of having those taxes minimized and stretched out over a period of years that will allow more funds to be invested, rather than having the tax paid initially and your beneficiary receiving a significantly smaller amount of assets. 

An additional significant problem comes in when you’re divorced, whether you’re remarried or not, and the initial beneficiary of your plan or policy is your divorced spouse. Since this is a contract, many state laws and courts have taken the position that those assets will pass to the ex-spouse even though that is clearly not the intention set forth in a separation agreement or judgment of the court. 

Therefore, whenever there is a life cycle change such as a birth, death, divorce, adoption, etc., all beneficiary forms should be reviewed to be sure that the beneficiary is stated correctly. Also, if you have created a trust, and that trust is no longer in existence, this may affect your overall estate plan and how your assets are distributed. Likewise, it is important to be sure that all existing beneficiary forms are coordinated with any new trust or will. 

Tuesday, November 16, 2010

What You Need to know about Long Term Care Insurance

At one time, long-term care insurance was only suggested to individuals who were 60-years of age or older. However, baby boomers who are approaching this age may also consider the coverage, as they may have medical conditions in the future that will not allow them to obtain it.

Long-term care insurance (LTCI) is available only when a person is insurable, as determined by an insurance company. Once a catastrophic illness has stricken you, you probably are not going to be insurable any longer. In addition, the sooner you buy long-term care insurance the lower your premiums will be, although you will pay for the policy for a longer period of time.

Although there are many considerations that should be made in determining whether or not you should have long-term care insurance, there are at least four major issues to consider.

1) Determine the amount needed

Ensure that once earned income is terminated and you are retired, there will be sufficient income and assets available to pay for the insurance. This type of insurance is needed more in later years than younger ones, so you must be able to afford the premiums later in life. If you have to drop it then, you will have basically wasted your money. If this concerns you, you may check into a policy where you pay more in early years, what is known as short pay, and then it is considered in-force but paid up. 

2) Time your purchase

Don't wait too long to purchase your policy, but also do your due diligence in determining the type of policy and amount necessary to suit your needs. You may decide that you can self-insure a portion of long-term care but don’t wish to pay 100% out-of-pocket. You may determine that a specific dollar/day benefit is necessary, and then you can afford to pay any amount in excess of that. You may also determine that you want an inflation rider so that as the cost of care increases, the amount of the coverage also increases. 
In addition, you should consider the length of coverage, such as three-years, five-years, or lifetime.

Naturally, the more coverage you purchase, the greater the premiums will be. In the event that you have other benefits that will pay for some of the cost of your care, such as Social Security benefits, private pension, veteran’s benefits, etc., you may purchase reduced coverage to fill any anticipated gap. 
When looking at the policy, it is important to consider where you want to retire. For instance, if you’re living in a state where the cost of long-term care is only $5,000 a month, but you’re considering moving to a retirement community or state where the cost of care is double that amount, may be necessary to purchase more coverage.

3) Tax considerations

What tax benefits are available from the policy? You should consider whether the long-term care insurance policy is a taxed favored plan, whereby you gain a deduction for a portion of the premium paid on an annual basis. However, if you don’t itemize your tax return, or if the premium is not significant enough to allow you to itemize with the excess of 7.5% of your adjusted gross income being allowed as a deduction, then perhaps a tax favored plan is not appropriate. 

If you own a business, you should also consider using company funds to purchase your coverage and pay the premiums, as this provides significant tax benefits to a business owner. Your accountant should be considered as a resource to guide this decision. 

4) Peace of mind

Similar to purchasing life or homeowner’s insurance, this policy is also one that will hopefully not be used. However, a significant piece of mind comes when you don’t have to worry about giving away assets and transferring your house to your children, since your long-term care coverage will insure your risk of being institutionalized or requiring care at home. 

Naturally, there are lots of bells and whistles with long-term care insurance, such as the potential to earn a return of premium, whether upon the death of one policy-holder, the spouse may not have to pay premiums in the future, or whether there is some return of premium you die under a certain age, etc. 

Since not all policies are the same, you most compare apples to apples and make sure you understand the definitions and requirements for payment of care when claimed. As always, your financial advisor and other estate planning team members should be involved in the process of selecting your long-term care insurance.

Tuesday, November 16, 2010

The Purpose of the Living Trust

There is always a lot of discussion regarding the need or desire to have a living trust. It should be noted that there are many different types of trusts, the principal differences being revocable versus irrevocable. 

In a revocable trust, the person who creates it, the settlor or grantor, has the ability to receive all assets during their lifetime, and there is normally no tax benefit during lifetime nor any protection from long term care expenses. 

In an irrevocable trust, the grantor gives up control or ownership of some or all of the assets, and therefore; there is going to be an intended benefit to the creator of the trust for tax as well as asset protection purposes. 

The trade off is that giving up control and ownership of the asset may permit benefits for purposes mentioned, whereas the revocable trust will provide for no protection of assets. Also, it should be noted that in some states, the creation of an irrevocable trust for yourself does not reduce creditor protection in the event that you are sued, as long as the you are the primary beneficiary of the trust. 

One of the benefits of both a revocable and irrevocable trust is that the assets are placed in the trust during lifetime, and this produces a net benefit of avoiding probate. Probate avoidance is important, as it will expedite the administration and settlement of your estate, keep all assets and terms of the trust private, as well as minimize fees and court costs in the process of settling the estate. 

The terms of the trust are normally similar to that of a will. There will be distribution made to or for the benefit of your spouse, children, and grandchildren. If desired, distribution may be held by the trustee for the benefit of your children and grandchildren, with specific amounts or percentages of the assets being distributed at various ages or dates subsequent to the your death. Also, in the event that any beneficiary may be disabled, the fund may be held in a special needs trust, or supplemental needs trust, so that the benefits that the person is receiving from any governmental source will not be reduced or eliminated, but the funds in the trust may be available to or for the benefit of the beneficiary. 

The living trust becomes effective the day it is signed, as opposed to a Will which becomes “alive” only upon the death of the creator. Funding the trust is important, as the assets in the trust at the date of death or date of disability will avoid any probate process, but if not, then the assets in the person’s name alone need to be transferred into the trust at death, which will require a probate process. 

Therefore, if you have a trust, you should utilize it and fund it during your lifetime. Normally, you are your own initial trustee, so there is no accountability, filing fees, or requirement that any other individual or entity is aware of the investments and trust provisions. The trustee, normally the settlor, will turn over control to a successor trustee upon disability or death. Often, the person who creates a trust no longer wishes to manage the funds themselves or pay their own bills, and they delegate the authority to an individual or corporate trustee, who will then attend to all financial responsibilities so that the creator may enjoy life, travel, and not be restricted in the administration of the trust itself. 

Living trusts are wonderful opportunities to avoid the probate process, but in some instances, it is not necessary, as the only assets that pass through probate are those assets in a person’s name alone. Therefore, there may be alternatives that are simpler and less expensive, such as transfer on death, joint ownership, and beneficiary designations, which will allow your assets to pass directly to other individuals or charities upon death. However, the trust may need to be maintained, in some cases, so that the beneficiaries do not receive funds outright, but rather, they are held, managed, and maintained for the benefit of the beneficiaries, but not necessarily in equal shares. 

Tuesday, November 16, 2010

Disclaiming an Inheritance?

Although it is counterintuitive, one or more of your beneficiaries may wish to decline part or all of the inheritance left to them. Refusing to receive an inheritance is often referred to as “disclaiming” it. Under federal law, a beneficiary has the legal right to disclaim or refuse all or any part of a gift. In the event that a beneficiary disclaims property, an alternate or residual beneficiary will inherit the property. 

There are a few common reasons why a beneficiary may desire to disclaim an inheritance. The most common one is to reduce their individual or family’s overall estate tax burden. Alternatively, some beneficiaries may wish that the property will pass to needier, contingent beneficiaries. 

Disclaimers may also reduce or eliminate estate and gift taxes because any property disclaimed by a beneficiary is construed have never been legally owned by that person. As such, the property cannot be included in the beneficiary’s taxable estate upon death. Similarly, the person who disclaims a gift is not assessed a gift tax because the he never owned it.

Disclaimers are particularly useful when a primary beneficiary already has a large estate, and receipt of the property may add significantly to his or her taxable estate. However, if the alternate beneficiary has much less wealth, then the overall estate tax most likely will be reduced.

Disclaiming property is an important decision that could have significant tax implications on an estate. A meeting with an experienced estate planning attorney to discuss the situation and potential options most often proves extremely helpful.

Tuesday, November 16, 2010

If I have a Will, will my Estate go through Probate?

Many people believe that having a Will means that their estate will not have to be probated when they pass away, and this is inaccurate.

A Will is a document that, in part, gives instructions as to how you want your assets distributed upon your death. The assets in your probate estate are those that are held in your name alone and do not have a designated beneficiary. 

Therefore, whether or not probate is needed is not based upon whether or not you had a Will, but rather upon how your assets are owned. If you leave probate assets, then in order for your Will to “speak,” a probate estate must be opened. If all the assets held in your name are jointly owned with a right of survivorship, or have named beneficiaries, then there is no need for probate.

Tuesday, November 16, 2010

What if You Don't Want Your EX to be Your Child's Guardian

As an estate planning attorney, I am often confronted with a single parent who doesn’t want the other parent to obtain custody of their joint child(ren) upon my client’s death. Generally, unless there is good cause, one parent will usually not succeed in appointing someone other than the co-parent to be guardian.

Good cause may be found if the other parent has legally abandoned the child(ren) or is unfit as a parent. In the event that the other parent seeks custody upon your death, it is typically quite difficult to prove that parent is unfit absent significant issues such as alcohol or chemical abuse, a history of violent tendencies, or mental illness. As such, if you wish to name someone other than your co-parent as guardian for your child(ren,) you may wish to inform that person that this may lead to a custody contest.

I suggest that my clients not only insert language within their Will explaining their choice as guardian and also explaining why the other parent is a poor choice, but I also suggest preparing a letter in their own handwriting with similar language that shall be attached to the Will. 

If you do not wish for your child(ren’s) other parent to gain custody, it is wise to discuss the matter with an experienced attorney that specializes in estate planning.

Tuesday, November 16, 2010

What Happens if I die without a Will?

Dying without a will is called dying '"intestate."  Actually, some surveys show that a majority of people die without a will!  What happens is that your estate will go to your immediate family, but state law determines who gets what. In California, if you had no spouse and no children, your estate would go first to your parents, if they survived you, and if not, to your brothers and sisters. Your heirs will also need to open a probate proceeding and petition to be named administrator or personal representative (the person with legal authority to settle the estate).

Tuesday, November 16, 2010

Where Do I File My Living Trust?

SHORT ANSWER - NOT AT THE COURT, JUST SOMEWHERE SAFE.  During your lifetime your trust just lives in a fireproof safe, or a safe deposit box, or somewhere safe where people will be able to find it, if they need to. After one, or both of you, die, then a copy of the trust will get sent to the county so that names can be changed on your house's title, and sometimes financial institutions and banks will also want to see it--just to make sure that 1) it exists and 2) the successor trustee is clearly identified in the document. So, keep it safe and let your family and successor trustees know how to find it.

Tuesday, November 16, 2010

How to Get a Loan on Trust Property (Personal Home)

To Get a Refi on a Trust Property: Go ahead and let the bank know you'd like the new loan. They will do a title search on the house and they'll discover that it's legally owned by your trust.  If they care, and some lenders don't, they'll tell you to take the house out of the trust to do the new loan. Ask them if they'll do that--most of the time they're happy to do this because it's a simple thing to record a deed transferring the house from the trust back to you and your wife as individuals, and they want to sell the new loan. If they won't do it, ask the person who put the house into the trust in the first place (probably a lawyer) to take it out for you. Then, after you get the new loan, make sure to put the house back into the trust. This is just like what you had to do to get the house out of the trust: this time you'll record a deed transferring the house from you as individuals to you as trustees of the trust. Again, the lender will usually do this for you at the end of the transaction, but make sure to check to make sure that they follow through. 

Tuesday, November 16, 2010

How to Avoid Probate

There are several ways to avoid probate. Normally, assets in your name alone are the only assets that pass through probate. Therefore, if assets are held jointly, have a named beneficiary, or otherwise qualify to avoid probate, the assets will pass to the surviving joint owner or beneficiary, and these will not pass through probate. 

Of course, there are always issues that may cause an asset to be probated even though it may be held jointly with another person. In this type of situation, when you create your Will you may specifically state within the document that although assets are in joint names, they may be jointly held for convenience, but the assets are supposed to pass pursuant to the terms of your will to the beneficiaries designated in their respective percentages. Therefore, the rebuttal of the presumption that joint ownership may be specified by the Testator should be included specifically within your will, but only if the language is clear that the specific asset, or all assets are to pass pursuant to the will and not to the surviving joint owner or beneficiary. In most of these cases, there is significant disagreement within the parties, and court action is needed to resolve the outstanding conflict. 

There are several ways to easily avoid probate. The first is to have the ownership of the account be specific, that it is jointly held with rights of survivorship to be provided to the survivors as between the co-owners of the account. In this method, you create a true joint ownership, for instance with children. In the event that any one of your children predecease you, then you would get a portion of your assets back, and their assets would not be probated, thus, they will not pass to the surviving child’s spouse and/or children. It must be remembered that when these types of account are created, any one of the joint owners may be able to withdraw all of the funds from the account at any time, and in the event that any one of the joint owners is sued, his or her share of the account may be attachable or reachable by their creditors and possibly their former spouse, if the asset is not otherwise protected.

Another way of protecting assets is to name a beneficiary on your life insurance, 401K plan, IRA, etc. Doing so allows you to designate the beneficiaries and the shares of the assets they are receiving.

Another option is to create what is known as a TOD or POD account. These stand for “Transfer on Death” and “Payable on Death.” The TOD option is normally used with securities, stocks, bonds, or a brokerage account. Here you have total control over the account during your lifetime, but upon death, the assets pass directly to the beneficiaries in the shares and percentages that you designate. There may also be a significant portion left to charity, friends, or other relatives, and you may change beneficiaries or percentages in the future. 

The POD, or Payable on Death, is normally used with bank accounts, i.e., savings, checking, money market, CDs, etc. Similar to the TOD account, the POD names beneficiaries and the proportions to allocate funds. It is important to be sure that the terms of your Will and Trust, if any, are coordinated with the beneficiary designations to insure that your intentions are secured. In many cases you may also have your account owned by you and payable to your trust. However, not all financial institutions and states allow this type of transaction. If available though, this is an excellent way to maintain your assets and make sure they pass through your trust, but also do not pass through the probate process.
 

Thursday, June 03, 2010

Causes of Estate Litigation (fighting between the kids)

Mixing family members and money does not always lead to love and happiness. While the work we do is frequently challenging and often rewarding, protecting our clients, our colleagues and ourselves from unnecessary litigation remains a high priority. In many cases, litigation can be avoided with some basic precautionary measures.

This issue of The Wealth Counselor explores some of the most common reasons trusts and estates end up in litigation, and some measures the planning team can take to help prevent it.

When litigation ensues regarding an estate plan, it can take two forms. It may be a challenge to an estate plan document, such as whether a will should be admitted to probate. It may also have to do with the administration of an estate, such as who will serve as Executor.

Challenges to the Plan
Challenges to estate planning documents frequently occur when children (and sometimes spouses) are not treated equally as beneficiaries, and especially if someone feels they were not treated "fairly" (a very subjective determination). It is not necessary for someone to be disinherited for litigation to ensue.

Lack of Capacity
That a trustmaker or testator lacked the mental capacity to make a will or create a trust is a common complaint.

Definitions of capacity vary from state to state but, generally speaking, the testator needs to have the ability to understand at the time of making his or her will generally what assets he or she owns, the dispositive provisions of the will, and the testator's relationship with those who will benefit from the will.

Every adult who has not been judicially determined incapacitated is presumed to have capacity. Therefore, the burden to prove incapacity is on the contestant. Mere feebleness of the body or mental weakness does not rebut the presumption of competence. Also, the moment at which testamentary capacity is to be tested is the moment of the execution of the document.

Because of these assumptions and requirements, voiding a will on the grounds of testamentary capacity is difficult. However, the prudent course is to take steps to protect yourself and your client as much as possible.

Planning Tip:Know the statutes and/or case law in your state. If there is a concern, have a medical doctor or psychology expert evaluate the client just before signing his or her estate planning documents.

Fraud, Duress and Undue Influence
Fraud, duress and undue influence commonly shortened to simply "undue influence," is statistically the most frequent basis for blocking probate of a will or enforcement of a trust. It can also result in partial invalidity if the remainder of the document is not invalid for other reasons. Simply stated, it is the substitution of another person's will for that of the testator or trustmaker.

A frequent scenario in such cases is this: A family member or caretaker brings in an elderly client, stays with the client during the planning meeting, may even pay for the attorney's or other professional's services, and becomes the main beneficiary or heir. The beneficiary may or may not be related to the client.

When a court makes a determination of whether undue influence has been exercised, it considers a variety of factors, including whether the transaction took place at an appropriate time and in an appropriate setting, and whether the testator was pressured into acting quickly or discouraged from seeking advice from others. Courts also consider the relationship between the parties and the "fairness" of the transaction.

Planning Tip:If you suspect a client is being subjected to undue influence, meeting with the client alone may help to determine the client's capacity, understanding of the events, and even fear of some person in their life.

Revocation of a Will
A third common attack is that the document at issue has been revoked. A testator may completely revoke a will by intentionally destroying it. Complete or partial revocation may also be done by a writing executed under the same formalities of a will or executing a new will.

There is a presumption that a will was revoked if it was in the possession of the testator and cannot be located upon his/her death. The burden is on the proponent of the will to establish otherwise.

Partial revocation may be desirable, especially in cases of undue influence when only certain provisions of the will might be affected by the person(s) who stand to benefit from the undue influence, and other provisions pertaining to innocent beneficiaries are unaffected.

Planning Tip:Many practitioners mistakenly assume that, in case of the invalidity of the last document, the prior document is automatically revived, but this may be rebutted by evidence to the contrary. If the subsequent will shows a radical departure from the prior plan, the drafting attorney should explain in the document itself the reason for the departure. If a will is being revoked by a written instrument, include an explanation of the purposes for the revocation and that the testator would prefer intestacy over the revival of the prior will.

Prenuptial and Postnuptial Agreements
These, if valid, can affect the surviving spouse's elective share or intestate share of an estate, rights to homestead, exempt property, family allowance and preference on appointment as personal representative of an intestate estate. Prenuptial and postnuptial agreements are often challenged when a marriage ends by death or divorce.

Planning Tip:Creating a valid prenuptial or postnuptial agreement requires care. In some states fair disclosure of assets is required for both prenuptial and postnuptial agreements. It is more likely to be upheld if each party has their own lawyer.

Matters Affecting Administration
Creditors' Claims
Litigated matters in an estate may relate to creditors' claims. Some of the grounds include that the claim may be challenged as not valid or coming too late. So, too, an objection to a claim may be challenged as coming too late.

Removal of Personal Representative
Again, there will be variations in state probate laws but, in general, a personal representative may be removed for various causes, which may include:

• physical or mental incapacity;
• failure to comply with a court order;
• failure to account for sale or real property or to produce the estate assets for inspection;
• wasting or other maladministration of the estate;
• failure to give bond or security;
• conviction of a felony;
• conflicting or adverse interests against the estate;
• revocation of probate of a will in which he/she is named as personal representative;
• lack of present ability to qualify for appointment.

Simple disagreement between beneficiaries and the personal representative is not likely to support removal.

Planning Tip:Because a court is bound to follow the statutory preference of who should serve as personal representative (absent that person's proven unfitness), the client must act to prevent that person serving.

Removal of Trustee
The general rule is a court can remove a trustee only for incapacity or on a clear showing of abuse or wrongdoing in the actual administration of the trust. It is not enough to show that there is a potential for mismanagement or conflict of interest by the trustee; the party seeking removal must allege and prove actual conduct by the trustee amounting to a breach of trust. However, the court should allow for removal for unfitness when the likelihood of harm to the trust can be demonstrated, such as from habitual substance abuse or lack of ability.

Where there is hostility and disharmony between co-trustees that impedes administration of the trust and unnecessarily depletes the trust's assets, a court can remove the trustee determined to be the cause of the disharmony.

Planning Tip:Removal of a trustee may be authorized by the trust document itself. Clients should include such a removal clause if they want certain persons (possibly beneficiaries) to have the power of removal without the necessity of going to court. To avoid later concerns by third parties regarding the successor trustee's legitimacy or challenge by the removed trustee, the removal should be accomplished in strict accordance with any procedural requirements contained in the trust document.

Breach of Fiduciary Duty
A trustee, whether a professional or a family member, has certain fiduciary responsibilities under the law, including:

• To follow the instructions in the trust document.
• To not mix trust assets with his/her own. Bank accounts and investments must be kept separate.
• To not use trust assets for his/her own benefit.
• The trustee or executor must treat all beneficiaries the same. One beneficiary cannot be favored over another unless the will or trust says otherwise.
• To invest trust or estate assets in a prudent (conservative) manner, in a way that will result in reasonable growth with minimum risk.
• To keep accurate records, file tax returns, and report to the beneficiaries as the law or the trust requires.

Planning Tip:A family member who takes on the responsibility of being an executor or trustee must be educated about these fiduciary responsibilities, estate or trust administration and the terms of the will or trust itself. Rarely is a family member fully qualified to act as sole trustee.

Avoiding Litigation
Exploring litigation risks and how to minimize them creates an excellent opportunity to suggest and put together a qualified team of advisors who can ensure proper trust administration. However, even professionals are at risk when helping administer a trust for the beneficiaries. Here are some areas of concern:

Understanding the Terms of the Trust
The risk of litigation may be reduced by making sure all parties to the trust understand what the trust says: who will receive distributions from the trust, how much they will receive and when they will receive it; the fact that debts and taxes will need to be paid, how much they will be, and when they must be paid; who the trustee(s) and successor trustee(s) are, their responsibilities, and how they are to be compensated; what services from professionals will be secured and how they will be compensated; etc.

Administrative Issues of an Established Trust
At the incapacity or death of the grantor, there are many administrative tasks, issues and decisions to face. Frequently, the grantor's accounting records are not up to date, especially if the person was ill or losing mental capacity. Bills may be past due and tax returns may not have been filed. The trustee may need to be brought up to speed quickly and, if a family member, may not be emotionally ready to do so.

If the grantor has died, there may be several trusts with their own administrative needs depending on the family and financial situation. For example, there may be blended families; younger and older children; irrevocable trusts for tax planning; charitable planning; provisions for a surviving spouse; IRAs, 401(k)s, and annuities; life insurance; etc. Also, a well-intentioned but uninformed or unsuitable trustee may make costly mistakes without careful oversight and instruction by a professional who understands the required accounting.

Distribution Standards and Decisions
When drafting a trust that will give the trustee discretion in providing for a beneficiary, the estate planner will often use the accepted standards of "health, education, maintenance and support." Generally these are interpreted to mean that a beneficiary can receive distributions that will maintain his or her accustomed standard of living. But does that mean providing unlimited funds to maintain that standard of living at the risk of depleting the trust assets? If the beneficiary is receiving income from other sources, should that income be taken into consideration? If the trust does not provide more explicit instructions, the trustee can be put in an awkward situation, pitted between the beneficiary who is to receive the support and other beneficiaries who are expecting to receive the trust assets after the supported beneficiary dies.

Balancing the Interests of Income Beneficiaries vs. Remainder Beneficiaries
Many ongoing trusts give one beneficiary (typically, a surviving spouse) the right to receive all of the income from the trust. After this beneficiary dies, another beneficiary (often an adult child or children) will be entitled to receive the trust principal. This can frequently lead to conflicts between the income beneficiary, who wants as much income as possible, and the remainder beneficiary, who wants the principal to grow as much as possible. The trustee and the investment advisor will need to work together carefully to create as much balance as possible to provide for both.

Suitability of Investments
Each beneficiary of the trust may have different risk tolerance levels. Some may want to be more aggressive, others more cautious. Some may want the trust to invest in their business or buy them a house. Remember, the trustee, working with the investment advisor, is responsible for handling the trust assets in a prudent (conservative) manner for the benefit of all beneficiaries, not just one particular beneficiary.

Insurance Reviews
Regular reviews of the amount of life insurance and policies are a must. The amount of insurance may need to be adjusted up or down. If the individual is in good health, a different policy may be more suitable. Should irrevocable life insurance trusts own the policies? Is there a desire to establish trusts for grandchildren, charitable causes, or a special needs child? There are many valuable uses for life insurance in estate planning and, if done properly, the proceeds will be free of estate taxes, income taxes, and probate fees.

Planning Tip:Professionals who work with trusts often forget that a trust document and its administration are foreign to the family members. Hopefully, the more they understand them and the resulting benefits, the more likely you will ease any frustration and avoid a court battle. Periodic updates and open communication to all involved parties, including other members of the advisory team, are essential.

Conclusion
Not all trust and estate litigation can be avoided or is, in fact, bad. There are times when it is necessary to protect the innocent or wronged. What you want to do is to protect yourself, your clients, and your colleagues from unnecessary and avoidable litigation, and there are steps you can take to do that. All members of the advisory team need to be familiar with and understand legal issues that may arise in probate and trust administration. Don't assume the family has any correct information about either of these subjects. Do what you do in a professional, ethical and conscientious manner. And communicate often and well to all involved.

 

Thursday, June 03, 2010

3 Tips to Make an IRA Last Longer

3 Tips to Make an IRA last longer

Tuesday, June 01, 2010

Taxes on Investment Income will almost Triple

Taxes on Investment Income will nearly Triple for Some

Currently the maximum federal tax rate for qualified dividends and long-term capital gains is 15%.  This is great for people like Warren Buffett, who live off of investment income.  However, these low tax rates for wealthier investors will soon be a thing of the past.

Unless legislation is passed to continue the current rates for qualified dividends, next year all dividends will be taxed at ordinary income rates.  The top rate for ordinary income, currently 35%, goes up to 39.6% in 2011.  Then, in 2013, the 3.8% investment income surcharge kicks in, making the total maximum rate 43.4%.

The long-term capital gains rate will increase to 20% next year, and the surcharge beginning in 2013 will mean the top rate will be 23.8%.

These hefty tax increases will trigger a greater interest in tax deferral strategies such as cash value life insurance and tax-deferred annuities, and may motivate more intra-family income shifting strategies such as limited liability companies.

Wednesday, May 05, 2010

The Power of Advance Health Care Directives

Wednesday, April 29, 2009

Obama vows to continue Estate Tax

President Obama and congressional leaders plan to move soon to block the estate tax from disappearing in 2010, suggesting the levy might outlive the "Death Tax Repeal" movement that has tried mightily to kill it.

The Democratic stance on the estate tax contrasts with Mr. Obama's reluctance to press forward with his campaign pledge to raise income-tax rates on top earners, which he worries could have an adverse economic impact during a recession.

But Democrats are determined to act quickly to prevent the estate tax's scheduled repeal. Elimination of the levy on big inheritances was approved by Congress under President George W. Bush in 2001, with rollbacks phased in slowly and its full elimination slated to take effect next year.

The Senate Finance Committee will move within weeks on legislation to reverse that law, and Mr. Obama is expected to detail his estate-tax preservation proposal in his budget next month, congressional tax writers said.

Under the Obama plan detailed during the campaign, the estate tax would be locked in permanently at the rate and exemption levels that took effect this year. That would exempt estates of $3.5 million -- $7 million for couples -- from any taxation. The value of estates above that would be taxed at 45%. If the tax were returned to Clinton-era levels, it would exclude $1 million from taxation with the rest taxed at 55%.

In making their case for the restoration, Democrats contend that such a large additional tax break for the rich shouldn't go into force halfway through Mr. Obama's proposed economic-recovery package. They argue that the deficit is already in record territory, while their plan wouldn't have any impact on the economy since it would merely keep the estate-tax rate at its current level. Mr. Obama and his party also say that the affluent already have benefited handsomely from the Bush tax cuts.

They also reason that if they don't act now, it will be politically harder to go ahead with their plan to resurrect the estate tax once it has disappeared.

For small-business groups, farmers' associations and the affluent families that created and bankrolled the "Death Tax" repeal effort, the emerging Democratic plan marks a stark defeat.

Advocates of killing off the tax say the emerging Obama policy is the wrong medicine for the recession, arguing the levy is economically burdensome like the income tax. Bill Rys, tax counsel for the National Federation of Independent Business, said small businesses struggling with falling sales and layoffs shouldn't have to devote resources to estate planning.

Friday, April 24, 2009

What happens if you die without an Estate Plan?

The state you are living in determines how your estate is to be distributed and your estate is in the hands of the probate court.

Probate is the legal process through which the court sees that, when you die, your debts are paid and your assets are distributed according to your will. If you do not have a valid will, your assets are distributed according your state’s law, which can be an expensive process. Legal/executor fees and other costs must be paid before your assets can be fully distributed to your heirs.  If you own property in other states, your family could face multiple probates, each one according to the laws in that state.

It takes time, usually nine months to two years, but often longer. During part of this time, assets are usually frozen so an accurate inventory can be taken. Nothing can be distributed or sold without court and/or executor approval. If your family needs money to live on, they must request a living allowance, which may be denied.

Your family has no privacy. Probate is a public process, meaning any “interested party” can see all of your assets as well as your debts. The process “invites” disgruntled heirs to contest your will and can expose your family to unscrupulous solicitors. Your family has no control while the probate process determines how much it will cost, how long it will take, and what information is made public. If your estate includes kids, then you’ve really got to get a plan. Otherwise, the court will decide who will raise them if something happens to both parents.

Wednesday, April 22, 2009

Death of Freddie Mac CFO may be suicide

If your loved one commits suicide can the family still collect on life insurance? Most insurance companies have a suicide clause, which states that they will NOT pay if you commit suicide within two years of getting your policy.

Life insurance is regulated by the various states, not by the federal government. It is deemed to be contrary to public interest to encourage suicide by making insurance proceeds available to those who see no way out of their financial difficulties. So insurance companies usually prohibit claims when suicide is the cause of death... they consider that the contract is void and refund premiums to the owner of the policy (who usually died along with the insured).

Insurance companies' actuarial tables, upon which they base their premiums, exclude suicides, so to expect companies to pay up for suicide prevents them from pricing policies correctly, and allows the public to avoid paying higher prices because of such selfish acts. State insurance law limits the period of this exclusion, so that if a person was sufficiently rational when they took out the policy, they are not penalized if later on they become despondent.

Usually, this suicide exclusion allows insurance companies to void contracts if suicide occurs within two years of the policy date. It's considered that this will sufficiently discourage someone from initiating a policy with the intent to later commit suicide. The rare person who can maintain their determination to die can in fact deliver money upon their death to their beneficiaries.

Monday, April 20, 2009

The Living Trust

The Living Trust

Did you know the living trust is rooted in English law upon which our legal system was founded.  We have the constitutional right to create a Living Trust for our heirs.  Is one of the most versatile estate preservation tools available.

It can:

1) avoid the high cost and lengthy process of probate

2) upon death, allow quick distribution of trust assets to your family

3) preserve your estate from unnecessary federal estate tax

4) provide for the support and education of minor children, or grandchildren

5) insure you retain maximum control over your property and estate

6) avoid conservatorship or guardianship if you become incompetent

7) maintain the continued privacy of your affairs

8) can be changed by you at any time Is far more than a series of documents. It is the foundation of a comprehensive estate preservation program, designed to transfer your assets to your beneficiaries with minimum anxiety, cost, or complication.

Call us to see if a living trust is right for your situation. 408-957-0807

Saturday, April 18, 2009

What is a Living Will?

A living will is a legal document that a person uses to make known his or her wishes regarding life prolonging medical treatments. It can also be referred to as an advance directive, health care directive, or a physician's directive.

A living will should not be confused with a living trust, which is a mechanism for holding and distributing a person's assets to avoid probate. It is important to have a living will as it informs your health care providers and your family about your desires for medical treatment in the event you are not able to speak for yourself.

The requirements for a living will vary by state so you may want to have a lawyer prepare your living will. Many lawyers who practice in the area of estate planning include a living will and a health care power of attorney in their package of estate planning documents. If you need to write or update a will or trust, you can take care of your living will at the same time.

Friday, April 17, 2009

Death & Estate Taxes

You probabaly know the two go hand in hand.  But did you know that the US Government will soon (2011) get a windfall from people that die with estates valued at more than $1 million (and in California that is easy to do)! 

Your estate will have to pay federal estate taxes if its net value when you die is more than the "exempt" amount set by Congress at that time. Here is the current schedule:

Year of Death........."Exemption" Amount
2000-2001..................$675,000
2002-2003..................$1 million
2004-2005..................$1.5 million
2006-2008..................$2 million
2009.........................$3.5 million
2010.........................N/A (estate tax repealed)
2011 and therafter.......$1 million

2011 is coming fast and with our government's current spending strategy it seems highly unlikely that the exemption amount will go back up anytime soon after 2011.  Stay tuned as we wait and see what Congress plans to do with all your hard earned money. 

Fortunately, through estate planning there are techniques you can employ to reduce your estate taxes.  You should talk to your lawyer and CPA about ways to reduce your estate taxes.