Wednesday, May 09, 2012 An Eternal Presence
My mother died a week after Valentine’s Day of my senior year in college. I flew home to California from my school in Vermont to spend time with my family and attend her “celebration of life.” Upon my return, I went to the campus post office to pick up my mail. When I opened my mailbox, waiting for me was a card from my mother. For a brief moment I thought that my mother’s death had all been a bad dream. Then suddenly I realized that she must have sent the card right before she died. I opened it to discover that it was a belated Valentine’s Day card which read, “Do you know how much I love you?” The experience was actually very comforting – it was as if my mother were still present.
I was reminded of this episode when I recently thought about my own estate plan for the benefit of my son who is about to turn two years old. Being an estate planning attorney, I made sure that my wife and I nominated guardians to raise him should something happen to both of us before he becomes an adult. We tried to identify the core values that we would want his guardians to possess and considered practical issues such as the potential guardians’ locations and whether he’d be able to remain in the same school. We thought about whether the same persons we nominate as guardians should also be named as trustees to manage his inheritance, or whether it would be better to have a system of checks and balances. We even named temporary guardians so that in an emergency, he wouldn’t automatically be placed in child protective services while the Court took the time to officially appoint a guardian.
But I realized that, despite all of this detailed, legally-centric planning, we overlooked one key element: how will we continue to be a presence in his life? Right now, we are his whole world. But if something happened to us, would we become a fading memory? Is there anything we can do about this? And then I remembered my mother’s last Valentine’s Day card.
What if when I graduated from college, somebody handed me a letter that my mother had written before her death telling me what it means to apply my education to the “real world”? What if when I received the positive results of the Bar Exam, somebody handed me a letter from my mom about what an incredible accomplishment I achieved? What if at my wedding, somebody handed me a letter from my mom about love and commitment? What if when my son was born, somebody handed me a letter from my mom about the instant and unconditional love a parent has for a child? I thought about how I was lucky enough to have that comforting experience once, by accident. It would have been wonderful if I could have had that experience over and over again throughout my life.
In addition to making all the important legal and practical plans, I realized that my wife and I – as well as all parents of young children – should spend a weekend sitting down and thinking about what messages we plan to give to our son at certain milestones of his life. We should memorialize those messages in personal letters. Hopefully, we’ll be able to actually read those letters to him. But, should we not be that fortunate, we will ensure that we will have some presence in his life well into the future.
Tuesday, April 24, 2012 What is the Difference Between a Revocable Trust and Irrevocable Trust?
In my last two columns, I spoke about the various methods of modifying both revocable and irrevocable trusts. This series of articles provoked the obvious question from a few readers: What is the difference between a revocable trust and an irrevocable trust?
Revocable Trust
A revocable trust is the most common and basic type of trust. When you create the trust, you as the trust maker, reserve the power to change anything about the trust at any time without the need of obtaining permission from anybody.
The beneficiaries of the revocable trust have no legal right to any of the assets of the trust. You can change the beneficiaries at your whim and thus the beneficiaries merely have an “expectancy” of inheriting something from you but are not guaranteed or promised anything.
Because you have full control and because you can change anything about the trust at any time, for the most part, the trust is not considered to be a separate entity from you. All the assets in the trust are still part of your estate and you use your Social Security Number as the Tax Identification Number of the Trust. Your state and federal income taxes, your property taxes, and your estate taxes remain exactly the same as if you never created the revocable trust in the first place. The trust serves as merely a “pass through.”
If everything is the same, why create a revocable trust in the first place? The reason is to create a contingency plan in case you become incapacitated or pass away. Your trust will name a successor trustee and give that person instructions on how to pay your bills, manage your property, and distribute your assets to your beneficiaries. This is the essence of estate planning and in the vast majority of situations, the revocable trust is the most efficient way to ensure that your wishes are carried out smoothly and with the least expense possible upon your incapacity or death.
Irrevocable Trust
An irrevocable trust is a trust that cannot be changed easily by the trust maker once it is completed. As I mentioned in a previous article, you still might be able to change your irrevocable trust, but you need to often obtain permission from the beneficiaries, the Court, or both.
The beneficiaries have an enforceable right to the trust assets, rather than merely an “expectancy” as with revocable trusts. The trustee must take special care as to consider not only the current beneficiaries of the trust but also the remainder beneficiaries: sometimes this can be a very tricky balance.
An irrevocable trust is considered a separate entity from you as an individual. Often, you will need to obtain a new Tax Identification Number for the trust. Transfers of assets into the trust will often be considered taxable gifts and such assets will generally be removed from your estate. The irrevocable trust can be drafted in such a way as to place income tax liability on the trust itself, requiring the trust to file its own tax return, or can be drafted in such a way to keep the tax burden on you as the trust maker.
Reasons for creating irrevocable trusts include tax and gift planning, planning with life insurance, ensuring that assets in the trust are used to carry out a specific purpose such as caring for a pet or providing a person with a legal defense fund, planning for minor children, and – in some circumstances – providing asset protection to the beneficiaries.
Tuesday, April 10, 2012 Irrevocable Trusts: Not Necessarily Set in Stone
In my last article, I discussed the typical procedures for modifying revocable trusts. I noted that a trust in California is presumed to be revocable unless it indicates otherwise. However, there are many reasons why you might decide to create an irrevocable trust such as tax planning, gifting, special needs planning, and asset protection planning. But what happens if you have a change of heart after establishing an irrevocable trust? Is it too late to change your mind?
Fortunately, the California legislature recognizes the problem of “dead hand control” and allows several procedures for modifying irrevocable trusts. A few of the most common procedures are detailed below.
1. Consent of Settlor and All Beneficiaries.
If the trust maker (also referred to as the “settlor”) and all the beneficiaries of the irrevocable trust agree to a particular modification, they may modify the trust in writing privately, without the need of obtaining court approval. If not all of the beneficiaries agree to a particular modification, the beneficiaries who wish to modify the trust may petition the court to approve a particular modification, provided that they have the consent of the settlor. The court has the discretion to approve the particular modification as long as “the interests of the beneficiaries who do not consent are not substantially impaired.”
2. Consent of All Beneficiaries.
Sometimes the desire to modify an irrevocable trust does not develop until after the settlor has become incapacitated or has passed away. In these circumstances, it is still possible to modify an irrevocable trust if all the beneficiaries agree. Without the ability to obtain the consent of the settlor, the beneficiaries must obtain court approval. The court will typically approve of the proposed modification as long as either no “material purpose” of the trust is affected by the proposed modification or that the reason making the modification outweighs the material purpose of the trust.
3. Changed Circumstances.
Sometimes circumstances change. What makes sense to the settlor when establishing the irrevocable trust might not make sense years later. A trustee or beneficiary may petition the court to modify or terminate an irrevocable trust if “owing to circumstances not known to the settlor and not anticipated by the settlor, the continuation of the trust under its terms would defeat or substantially impair the accomplishment of the purposes of the trust.”
As the aforementioned examples articulate, an irrevocable trust is not necessarily set in stone. Most people – including attorneys – assume that it is impossible to change an irrevocable trust, but there are several procedures worth investigating if there is a desire to make a change to an irrevocable trust. Once these procedures are understood, opportunities for advanced and creative planning become abundant.
When attempting to modify an irrevocable trust, it is very important to be mindful of the tax implications of the particular change and to be very careful so as not to create any unintended consequences. However, it is important to remember that even with an irrevocable trust, you are not necessarily “stuck” with an outdated plan.
Monday, March 26, 2012 Revocable Trusts: Not Set in Stone
As General Patton once famously said, “A good plan today is better than a perfect plan tomorrow.” In the context of estate planning, most clients understand this adage and create an estate plan even if they are not 100% sure of their wishes. They know that it is important to avoid procrastination and that they may always change their estate plan in the future should they later develop a better idea of their wishes.
Living trusts are central to most estate plans. In California, a trust is presumed to be revocable unless it states otherwise. However, even if a trust is revocable, it is important to follow the proper procedure for modifying it in order to make the changes effective.
If the trust dictates a specific procedure for making modifications, that procedure controls. Absent a specific procedure, a trust must be amended by a separate writing clearly stating the changes, signed by the trustmaker, and delivered to the trustee.
Some individuals think that it would be easier and less expensive to simply cross out provisions of the trust and write in their changes. Others try to type something themselves, often overlooking the specific procedure or the various nuances of the trust instrument that render the attempted change void. Once, I even saw a client attempt to make modifications by scotch taping updated typed clauses over the existing trust document – literally a “cut and paste!”
While these “do-it-yourself” methods of modification might seem easy and straightforward, it is important to spend the time, effort, and fee to have a qualified attorney prepare your modification in order to ensure its efficacy.
A modification might consist of a simple amendment if there are only one or two details of the trust that the trustmaker wishes to change, such as the addition or subtraction of successor trustees or a change in the amount that a beneficiary receives. This would be akin to “changing sparkplugs.” However, if the trustmaker wants to make structural changes to a trust, or if the trustmaker has many details that he or she would like to change, the trustmaker likely would be better served by creating a “restatement,” an amendment that changes the trust in its entirety – in other words, a “full body restoration.”
Many married couples have an “A/B trust” which means that the trust is wholly revocable while both spouses are living. However, when the first spouse passes away, part of the trust becomes irrevocable, unless the surviving spouse is given a “power of appointment.” Occasionally, the surviving spouse mistakenly assumes that he or she is able to make changes to the entire trust after the death of the first spouse. If the surviving spouse attempts to make such a change without the aid of a qualified attorney, the surviving spouse might never realize that his or her changes were not effective. The good news is that even irrevocable trusts may be modified under certain circumstances.
In my next blog, I will discuss the various methods of modifying irrevocable trusts.
Monday, March 12, 2012 Who Will "Parent" Your Children
Most people do not get around to planning their estates until later in life, long after their children have all grown up and moved out of the house. It is rare to find a young person thinking about estate planning. The reason is that most young people feel that they have more debt than equity and they do not think that it is likely that they’ll become incapacitated or will die in the near future. It is easier to put off thinking about such grim things until the time is “necessary.” However, young people who have minor children of their own need to create an estate plan now that includes extensive guardianship provisions.
Guardians can be nominated by parents to both (1) be responsible for their children’s care, custody, control, and education and (2) be responsible for the management and control of their children’s property in the event that the parents can no longer fill these essential roles due to incapacity or death. The parents can nominate the same person or persons to fill both roles or can nominate one set of guardians to be responsible for the minor child’s custody and personal needs and a second set of guardians to manage the minor child’s property.
Parents may nominate a guardian in writing. The writing may be part of a will, a power of attorney, a trust, or may be a separate, independent document. The writing typically states the circumstances under which a guardian is nominated, such as the death or incapacity of both parents.
When a guardian is needed, the Court will then appoint a guardian and will give strong consideration to the person or persons whom the parents nominated in writing. The Court will want to ensure that the proposed guardian really will be a beneficial choice for the minor children, but, barring any problems, the court will likely abide by the parents’ choice.
By nominating a guardian in writing ahead of time, the parent’s plan will most likely reduce delay in the procedure for appointing a guardian and avoid a family dispute over who should be appointed as the guardian.
Because the formal legal appointment of a guardian does not happen instantly, there is a strong possibility that in an emergency, law enforcement will place minor children in Child Protective Services until the Court formally appoints the guardians nominated by the parents. In order to prevent this from happening, it is prudent for parents to sign a second writing, nominating “temporary” guardians until a permanent guardian can be appointed by the Court. This additional document should include specific instructions that it is the wish of the parents that the children be placed in the custody of the temporary guardians rather than Child Protective Services until such time as the Court can appoint permanent guardians.
The additional “temporary” guardianship nomination can be especially helpful if the permanent guardians do not live locally and law enforcement must find temporary placement immediately. However, even if the temporary guardians are the same as the permanent guardians, because the guardians do not become permanent until after the Court formally appoints them, the additional “temporary” guardianship appointment is important in all circumstances.
Although most young people do not think they need to worry about estate planning, issues surrounding the custody, care, and upbringing of minor children introduce a whole host of concerns unique to their circumstances that make planning ahead essential, despite not having a significant estate or any immediate known health problems.
Wednesday, February 29, 2012 Papers, Please
Managing the affairs of a decedent’s estate is never easy. Not only are you in shock and grief over losing a loved one, but you are forced to navigate complex rules and barriers when attempting to settle the estate. Gaining access to accounts or even basic information can seem like an insurmountable hurdle. If the decedent did not have his/her assets titled to a trust, you will likely be asked to present “Letters of Administration” to the financial institutions before you are allowed any control over the accounts.
“Letters of Administration” (or “Letters Testamentary”) refers to a document that the court issues to an executor (also known as a “personal representative”) of an estate which gives that person court authority to access the decedent’s accounts. The problem is that in order to obtain the Letters, you must open up a formal probate which is time consuming, public, and expensive.
You want to avoid probate if you can help it. Contrary to what a financial institution might tell you, you might be able to avoid a probate if the estate falls within certain categories.
First, if the decedent created a trust but left some bank accounts outside of the trust, you might be able to use a procedure known as a “Heggstad Petition” if there was any writing (such as a “Schedule A”) that provides evidence that the decedent intended to transfer the accounts into the trust. A “Heggstad Petition” is rather simple and inexpensive, especially when compared to a probate.
Second, the estate might fall into a category known as a “small estate.” If the total value of the decedent’s estate is worth $150,000 or less, then a “small estate affidavit” would generally be available to take control of the decedent’s personal property, including bank and stock accounts. Rather than going to Court, certain individuals known as “successors to the decedent” can simply wait 40 days, sign a one-page affidavit containing specific provisions, present it to the bank, and legally compel the bank to transfer the decedent’s accounts.
Third, for surviving spouses of the decedent, sometimes all or part of the decedent’s property automatically passes to the surviving spouse by operation of law. If the financial institution refuses to accept this fact, the surviving spouse might decide to pursue a “spousal petition,” a simple petition requesting that the Court issue an order that the decedent’s property in fact belongs to the surviving spouse.
Unfortunately, most employees at financial institutions are unfamiliar with these alternatives to probate and are trained to simply tell you that Letters are required in order to proceed. This “papers, please” approach can create unnecessary problems if you are not aware that there might be methods other than probate to settle the estate. An attorney who specializes in estate planning can figure out whether a probate alternative is available, thus saving a great deal of time, effort, expense, and frustration.
Tuesday, February 07, 2012 The Superhero of Trusts!
You’ve known for years that you need to “get your affairs in order.” While you don’t like thinking about it, you know that you are merely mortal and that it would be wise – a gift to your loved ones, in fact – to create an estate plan that allows a trusted person to handle your personal and financial affairs in accordance with your wishes in the event of incapacity or death. You finally decided to visit your estate planning attorney to address all these lingering issues that you have been mentally and emotionally postponing for far too long.
Your main estate planning document is your revocable living trust. It clearly dictates who will inherit from you (your “beneficiaries”), how they will inherit, and who will manage your finances in the event of your incapacity and administer the trust upon your death (your “successor trustee”).
You are comfortable with your trust as it clearly expresses your intent in a legally binding manner. You know, however, that circumstances might change: what seems like a good idea today might turn into a disaster tomorrow. Your beneficiaries might develop special needs or financial / lawsuit problems, the trusted friend or advisor you named as trustee might turn out to be unreliable or deceitful. You know that as long as you are alive and have capacity, you can change any part of the trust. But is there any hope after you become incapacitated or pass away?
The solution may be to name a trust protector in addition to a trustee. A trust protector is a third party who is independent from the trust. The trust protector has certain powers to protect your overall intent of the trust. The concept originated in the context of complex offshore irrevocable trusts that were designed for asset protection, but has evolved to be useful in the context of a many common domestic trusts such as life insurance trusts, gifting trusts, and even revocable living trusts.
Some of the powers of a trust protector might include the ability to hire and fire trustees, the ability to change the governing law of a trust, the power to resolve disputes between co-trustees or disputes between trustees and beneficiaries, the ability to veto investment decisions of the trustee, and the ability to modify the trust to keep up with current law or to provide better protection to a beneficiary. With these powers, just like a superhero, the trust protector can jump in to protect or save the trust when necessary.
If a trust is irrevocable at the start, designating a trust protector is a way of maintaining flexibility and control over the trust. If a trust is revocable at the start – such as a revocable living trust – having trust protector provisions can provide flexibility and control when the trust eventually becomes irrevocable upon your incapacity or death.
Figuring out whom to designate as your trust protector can be challenging. While the trust protector does not have the day-to-day responsibilities of your trustee, your trust protector generally has more sophisticated powers and duties. Generally, naming a trusted advisor such as a CPA or an attorney as your trust protector makes sense. Alternatively, you may decide not to name a trust protector at the outset, but have provisions that provide a procedure for naming a trust protector in the future if one is needed.
Tuesday, January 24, 2012 Should Those "Alabama Boys" Hire Me?
I am a guy who likes adventure. Good, clean, responsible, wholesome adventure. My most recent adventure was my participation in the 2012 U.S. Pond Hockey Championships in Minneapolis, Minnesota. It’s a tournament where the organizers set up 26 hockey rinks on frozen Lake Nokomis for three days of competition and camaraderie in snowy sub-zero conditions.
On the first night of my trip, while I was waiting for the shuttle to take me from the lake back to my hotel, I met a team from Alabama. They were all originally from Canada and all played minor league hockey for years, one of them even enjoying a brief stint with the NHL’s Calgary Flames. They were as rowdy and non-PC as you might expect a bunch of former Canadian minor league hockey players to be.
They invited me to accompany them for the night as they planned to go out and have some fun. I declined as I suspected that the kind of adventures they had in mind that night were probably not of the “good, clean, responsible, wholesome” variety. However, once they found out I was a lawyer, they all asked me for my phone number in case they needed legal help at 3:00 in the morning. I tried to explain to them that (1) as an Estate Planning lawyer, I do not specialize in Criminal Law; and (2) I am not licensed to practice law in Minnesota. I’m not sure if these fine points ever sunk in. However, this anecdote reveals an important lesson about finding the right lawyer.
Historically, it was common for the town lawyer to practice in a variety of fields. The same lawyer could file a lawsuit on your behalf relating to a business transaction, could defend you in a criminal case, and could draft your Will. However, as society and the legal system have become more complex, the “general practitioner” lawyer is rare and is probably not the best person to handle your legal matter. “Dabbling” in a practice area can be dangerous and you want to be sure you have a lawyer who has the expertise to help you with your issue.
I have no hesitation in turning down legal projects if I feel that a particular issue is outside my scope of expertise. I firmly believe that it is important to be honest about the matters that I am able to handle well and those that would be better handled by a lawyer who specializes in a different area of the law. What should always be paramount is that a particular client’s matter will be handled well.
A good method for finding a lawyer who specializes in a particular area of the law is to look for lawyers who are certified by the State Bar of California as “Legal Specialists.” Each Certified Legal Specialist must practice in the area for a minimum number of years, have a minimum number of educational credits in the particular area, be recommended for certification by numerous peers, and take a 6.5 hour exam. The State Bar of California certifies “specialists” in 11 practice areas. For more information, please visit www.calbar.org and click on “Legal Specialists.”
Although I am a Certified Legal Specialist by the State Bar of California in Estate Planning, Trust and Probate Law, I would not have a clue about how to handle a criminal matter; likewise, a criminal attorney would likely not be able to draft an effective estate plan.
Saturday, January 14, 2012 Determining Your Fate
One of the most important aspects of Estate Planning is to provide a mechanism to deal with incapacity. In the event that you are mentally or physically unable to effectively manage your personal or financial affairs, who will fill this important role? Just as important, how will that trusted person be able to take control of your assets and manage them for your benefit with the least amount of expense and bureaucratic hoops?
Without proper planning, your loved ones will most likely have to petition for a Conservatorship, a court-supervised process that can be time-consuming, costly, and embarrassing. If you have proper Estate Planning, your Revocable Living Trust gives your trustee the authority to manage your trust assets during your incapacity and your Durable General Power of Attorney gives your “Attorney-in-Fact” the authority to manage assets that are titled in your individual name as well as authority over other personal affairs such as access to mail, the ability to deal with the IRS, the ability to enter into contracts, etc. (For purposes of this article, “trustee” and “attorney-in-fact” shall both be referred to as “agent.”)
It is important to understand how your Trust and Power or Attorney give your agent the authority to manage your assets in the event of incapacity. Most clients who are currently of sound mind and health prefer to only allow their agents to have power over their assets in the event that they are incapacitated. This is often referred to as a “springing power,” a power that only “springs” into effect upon your incapacity: your agent has no power over your assets unless that power is triggered by your subsequent incapacity.
With a springing power, your Trust and Power of Attorney should (1) clearly define “incapacity” and (2) articulate how “incapacity” is determined.
Regarding the definition, it is important that it be clearly stated so that a title company or a bank officer will easily understand it. I often use the following definition: “I will be considered incapacitated during any time that I am unable to effectively manage my property or financial affairs because of age, illness, mental disorder, dependence on prescription medication or other substances, or any other cause.”
As far as determining whether the definition has been met, you have a number of options. The most common option is to require that two licensed physicians sign a statement stating that you have met the threshold of the definition. The thinking behind having two physicians sign a statement is to provide a check and a balance: taking away your ability to manage your affairs and giving them to someone else is significant and you want to be protected from a whim or fraud. A further protection would be to require that the two physicians be independent of each other, i.e., not in the same practice.
The downside to this check and balance is that it will require more effort, time, and complexity to obtain the necessary documentation. As a result, some Trusts and Power of Attorney documents only require one doctor to make the determination.
Another approach is to create a “disability panel,” where a number of persons – either doctors, laypersons, or some combination thereof – will vote to determine whether or not you have met the definition of “incapacity.” This is especially helpful if due to personal or religious values you prefer not to have a medical doctor involved in the determination of your mental health.
In addition to your Trust and Power of Attorney having a clear procedure for determining your incapacity, it is also critical to authorize your agent to have access to your medical records by executing a “HIPAA Waiver.”
Tuesday, December 27, 2011 A "Crummey" Idea (Part 2 of 2 - Continued from "The Estate Freeze")
In my last blog, entitled “The Estate Freeze,” I described an Estate Planning technique known as an “Estate Freeze” whereby you make gifts during your lifetime, take the Estate and Gift Tax consequences now, and allow those assets to appreciate in your beneficiaries’ estates rather than in your own estate. This technique often involves consideration of the federal Gift Tax Exemption and the annual exclusion, allowing you to gift up to $13,000 per person per year. However, what if you want to take advantage of this technique but still want control over the gifts? For example, you may have beneficiaries who are minors such as children or grandchildren. The solution is an irrevocable trust known as a “Crummey Trust.”
In order to maintain control, the idea is to make gifts to an irrevocable trust rather than to the beneficiary directly. The fact that the trust is irrevocable and has certain features means that the gifts are no longer part of your estate. The trust outlines circumstances in which the gifts may be used on behalf of the beneficiary and also names a Trustee – a trusted third party – who will follow the trust’s guidelines.
When attorneys first came up with this concept, they encountered a problem: in order for the annual $13,000 exclusion to apply, such gifts needed to be a “present interest,” meaning that the beneficiary has to be able to use the gift right away. This contradicts the whole point of setting up the trust in the first place – to prevent the beneficiary from having unfettered access to the gift.
To combat this problem, Estate Planning attorneys developed the concept known as a “Crummey Trust,” named after a famous Court case that upheld this structure. The trust includes language that states each time a gift is made to it, the beneficiaries have a certain window of time (usually between 30 and 60 days) to demand that the gift be given directly to them (“demand right.”) After that period of time, the beneficiary no longer has any right to demand the gift and instead it is subject to the restrictions of the trust. The existence of the demand right satisfies the “present interest” requirement and thus the annual $13,000 exclusion applies to the gift. However, the beneficiary must know that he or she has this demand right. As a result, each time a gift is made to the trust, the Trustee must send the beneficiary a letter informing him/her of the demand right. This is known as a “Crummey Letter.”
While it is true that during the window of time the demand right is open, the beneficiary could simply demand the entire gift, the beneficiary will learn that if he or she ever exercises that right, you will no longer make any gifts into the trust at all. The beneficiary will see the “big picture” and allow the demand right to lapse so that you will not be discouraged from making future gifts to the trust.
This can be a powerful gifting tool. Crummey Trusts are often used with life insurance (also known as an “Irrevocable Life Insurance Trust” or an “ILIT”) but can be applied to a broad range of situations. One key exception is beneficiaries with Special Needs: because of typical concerns with maintaining public benefits, Crummey provisions cannot be inserted in Special Needs Trusts.
It is paramount that Crummey Trusts are “maintained” in that the Trustee must send Crummey Letters to the beneficiaries each year a gift is made. For good measure, the beneficiaries should acknowledge receipt of the Crummey Letters. Failure to issue Crummey Letters could collapse the entire plan.
Monday, December 26, 2011 The Estate Freeze (Part 1 of 2 - Continued in "A Crummey Idea")
This year and next year, most people won’t have to worry about the federal Estate Tax on inheritance (also known as the “Death Tax”) because the Estate Tax Exemption is $5,000,000 for 2011 and $5,120,000 for 2012. This means that if you were to add up the fair market value of all assets you own at the time of your death, your estate would only need to pay Estate Tax on the amount over the Exemption. However, unless Congress acts, the Estate Tax Exemption will drop dramatically to $1,000,000 in 2013 and the Estate Tax for any inheritance over that amount will be a 55% tax. As a result, many more people will have to worry about the Estate Tax as it will affect many more households.
Coupled with the Estate Tax is the Gift Tax. The idea is to prevent people from gifting away all of their assets before death so that, upon their death, they will not have a high enough estate for the Estate Tax to apply. The basic idea is to reduce dollar-for-dollar a person’s Estate Tax Exemption for every lifetime gift that is made. To keep track of this, when certain lifetime gifts are made, you must file an IRS Form 709 Gift Tax return. However, in order to permit gifts that have nothing to do with Estate Tax planning, Congress created a key exception to the Gift Tax rules known as the “Annual Exclusion.” The idea is that everybody can gift up to a certain amount (currently $13,000) to each person in the world each year without eating into their Estate Tax Exemption and without needing to file a 709 Gift Tax return.
Although at first glance it may not seem to be an advantage to make lifetime gifts if your Estate Tax Exemption is reduced accordingly, there can be significant advantages. First, you are able to gift up to $13,000 per person per year as part of your Annual Exclusion without eating into your Estate Tax Exemption. Second, if you have property that you think will appreciate in the future, better to give it now when it is worth less, take the Estate and Gift Tax consequences now, and then allow all future appreciation to occur in the beneficiary’s estate rather than in your own estate. This is known as an “estate freeze.”
This can provide a significant advantage, particularly in the current economic climate where many assets are valued low and should (hopefully) appreciate in the future. This is especially an advantageous time when the Gift Tax Exemption is the highest in history. However, there are some issues to be cautious about.
First, if you make a gift of between $1,000,001 and $5,000,000 now, while the Estate and Gift Tax Exemptions are so high, will you owe tax if the Exemptions fall back to $1,000,000 in 2013 as scheduled? This concept is known as a “claw-back” and pundits argue over whether it would be possible but there is no definitive rule on the subject. Second, if you make lifetime gifts of Capital Gains assets such as real estate and stocks, you must factor in the loss of the “step-up in basis,” a usually advantageous rule that applies to certain assets that are transferred at death but does not apply to lifetime transfers.
My next blog, entitled "A 'Crummey' Idea," will discuss a type of irrevocable trust that serves as a powerful tool that allows you to take advantage of these gifting principles while still allowing you to retain control.
Tuesday, November 29, 2011 Intimations of Ancestry
I was very close to all of my grandparents. My mother’s parents lived in Oakland and I fondly remember visiting with them, watching old movies, and taking long walks. I was even closer to my father’s parents who lived right here on the Monterey Peninsula, in the same house in which my wife, son, and I currently reside. They were originally from Czechoslovakia and they would often tell me stories about their daring escape from their native country with my father – a young boy at the time –shortly after World War II. Although I had the benefit of hearing about my grandparents’ experiences for most of my childhood, there are still some compelling events of the past that can easily be forgotten forever.
A few months ago I received an email through my law firm’s website from a gentleman in Massachusetts. The email stated that the person did not have a legal question but wondered if my grandfather was the same person who was a “famous hockey player who defected in the 1940s.” I immediately wrote back to confirm the gentleman’s hunch. He stated that he was researching Post War hockey and that he came across an article about my grandfather that was published in The Hockey News in 1949. The article described my grandfather’s hockey career in Europe, his escape, and his “surprise” appearance at a meeting of American amateur hockey players in New York City. My grandfather was quoted as saying, “I really love the game and would be extremely happy to get back into it.”
Instead of getting back into hockey, my grandfather got a job teaching Czech at the DLI, moved to Monterey, concentrated on golf, and lived a completely different second half of his life.
Even though I was so close to my grandparents and knew so much about their past, there was so much I didn’t know. I knew my grandfather played hockey but I didn’t know how prominent he was until I read the article. I never thought about how his life took such a dramatic turn when he accepted the position at the DLI – how different his life could have been had he stayed in New York and, for example, started coaching hockey. This nugget of information could have been lost from my family forever.
With regard to Estate Planning, we often focus so much on transferring cash, bonds, real property, automobiles, and personal items – the tangible “things” – that we forget about the intangible assets we all have. This is why I encourage my clients to write an “ethical will.”
An “ethical will” is often described as a “voice of the heart” or a “love letter to the family.” It often includes a description of personal values and beliefs, life’s lessons, wishes for future generations, and descriptions of rich experiences and building blocks that have shaped who you are as a person and how you wish to be remembered. Consider writing an “ethical will” in addition to your other Estate Planning documents so that future generations have a better sense of where they came from and can carry your spirit into the future.
Full Text of the Aforementioned Article from The Hockey News, June 15, 1949
Puckster Fled From Reds; Wants Place In Game Here
NEW YORK, N.Y.—A surprise visitor to the Skyline Suite at the Hotel New Yorker on June 3 was Karel A. Krasa, prominent player, coach, manager and secretary of European hockey teams during the last 20 years. Krasa, who was forced to leave his native Czechoslovakia due to the Communists, is now living in New York where he is employed as a reporter for a Czech-American newspaper.
Krasa, who is now 45 but looks 10 years younger, was secretary of the best team to ever come out of Czechoslovakia.
That was the Czechoslovakian Lawn Club Team which toured England in December of 1947. Karel coached and managed several other first-grade Czech teams prior to 1947.
Star In Britain
Before becoming a coach he was a star player in his own right. He played center for the Queen’s Club in London, England, 20 years ago. He also starred at center for a Belgian team.
When he would not conform with the policies laid down by the Communist controlled Czech government he was dismissed from his job at the Czech Foreign Trade Commissioner’s office and left for this country. He had difficulty getting his wife and six-months-old child out of the country but after a most trying journey they turned up in New York last March.
Since coming to New York Karel has contacted Tommy Lockhart and hopes that he will be able to become associated with hockey again in some capacity or another. “I really love the game and would be extremely happy to get back into it,” Krasa stated.
Sunday, November 20, 2011 The Stale Trust Funding Dilemma
By Kyle A. Krasa, Esq. and Travis H. Long, CPA
A very common Estate Planning technique for married couples is an “A/B Trust.” The ideas behind the A/B Trust are to preserve the Estate Tax Exemption of the first spouse to die and to retain a degree of control over the deceased spouse’s share of the estate, protecting the deceased spouse’s beneficiaries from the whims of the surviving spouse. Upon the death of the first spouse, the trust sub-divides into an “A Trust” (also known as a “Survivor’s Trust”) and a “B Trust” (also known as an “Exemption Trust,” a “Bypass Trust,” or a “Family Trust”).
Many surviving spouses who have A/B Trusts either do not realize that upon the death of the first spouse they need to physically split the assets between the A and B Trusts or consciously neglect to split the assets because they feel it’s unnecessary, expensive, or time consuming. Occasionally, a surviving spouse with an A/B Trust will realize years after the death of the first spouse that the A/B split was never completed. Alternatively, the surviving children of a deceased couple who had an A/B Trust where no A/B split was completed upon the death of the first spouse realize the estate was never settled. In both cases, the A/B split should have been done upon the death of the first spouse and the task at hand is to figure out how to handle the situation.
The question becomes whether the assets should be split between the A and B Trusts now, correcting the mistake of neglecting to split the assets upon the first spouse’s death (known as “stale trust funding”), or whether the A/B provisions of the trust can be ignored.
Many people upon first blush will want to ignore the A/B provisions of the trust. After all, trying to correct a mistake made many years ago will undoubtedly create additional legal fees, accounting and tax preparation fees, time, effort, and complications. It is much easier to sweep these problems under the proverbial rug. However, there are many legal and tax issues that must be carefully considered before deciding to ignore what can be a significant problem.
First, the tax purpose of the A/B split is to preserve the first spouse’s Estate Tax Exemption. If the estate is larger than one spouse’s Estate Tax Exemption, by not performing a stale A/B split, you will be forgoing perhaps hundreds of thousands of dollars in Estate Tax savings.
Second, the beneficiaries of the B Trust might be different than the beneficiaries of the A Trust. If you ignore the A/B split, are you disenfranchising the B Trust beneficiaries?
Third, the Trustee has a fiduciary duty to carry out the terms of the trust and is thus legally required to perform the A/B split if that is what the trust dictates. The Trustee could face serious legal consequences by ignoring the law.
Fourth, the trustee could be held liable for tax returns that were not properly filed.
Normally, an administrative trust tax return is filed for any income generated by the decedent’s assets between the date of death and the date the A and B sub-trusts are funded. After that point, the A trust income gets reported on the surviving spouse’s 1040, and the B trust income is reported on a form 1041 tax return each year going forward.
What happens when the funding is not done for years? Most people in these situations continue to report all the income on their 1040s after their spouse passed away, as if nothing had happened. This is incorrect.
So, do you have to go back and file tax returns for the B trust for all those years? The IRS generally takes the position that since the B trust was never funded, there are no tax returns needed for that trust. Once you fund the trust, then you start filing returns for it, even if years later. However, at the same time, the IRS views the decedent’s share of assets as having belonged to an administrative trust since the date of death – still waiting to be properly distributed. This administrative trust should have had tax returns filed every year. It is further complicated when those assets are used, retitled, sold, and mixed with other assets improperly.
There are generally three different approaches to solving the return filing problem. The first is to go back and file tax returns for the administrative trust dating back to the date of death. This is the safest route, but is probably the most expensive, and may be impossible depending on the records available. You also have the problem of potentially amending all your 1040s that were not properly prepared as a result.
The second approach some practitioners use is to essentially file blank 1041s dating back to the date of death and include a statement with each return that all the income was reported on the surviving spouse’s 1040. The problem with this is that the amount of tax owed, besides being paid on behalf of the wrong taxable entity, is rarely the same. Filing blank 1041s clearly brings the issue front and center to the IRS, but, it could also bring closure to the issue.
The third approach some practitioners take is to not file any administrative trust returns for the past, and just start filing returns for the B trust going forward. This approach has risks because required returns are never filed, and therefore the statute of limitations never begins. The issue could theoretically pop-up at any time in the future without the appearance of being forthright.
It is clear there are many issues to consider in a stale trust administration. If you find yourself in this situation as a surviving spouse or you think you may be the future beneficiary of funds from a stale trust, it would behoove you to seek qualified professional advice to determine if or to what extent you could be affected, and what your options are. The most common reaction is to ignore it and hope it goes away or think someone else will deal with it later. Unfortunately, if there is an issue, it almost always resurfaces upon the death of the second spouse, at which point it gets more expensive to handle, is more likely to cause fighting between beneficiaries, or creates an irreversible financial disaster for the beneficiaries. Fortunately, there are solutions if you act today!
Prior articles are republished on our websites at www.krasalaw.com and www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
KRASA LAW is located at 704-D Forest Avenue, PG, and Kyle can be reached at 831-920-0205.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Tuesday, October 25, 2011 Ensuring That My Son Will Be a Packer Backer
Despite the fact that I grew up on the Monterey Peninsula, my favorite sports team is the Green Bay Packers. Perhaps it was my attraction to watching football being played in inclement weather, my love for America’s small towns, my affection for green and yellow, my addiction to cheese, or the fact that the Packers are owned by approximately 112,000 members of the public who have limited voting powers, no rights to dividends, but who are entitled to free tours of Lambeau Field.
There are rumors that Packers stock will go on sale for the fifth time in history at the end of this season and I am ready to buy a share of my favorite team. After all, in my battle with my wife – a Patriots fan – over what team our 17-month old son will support, what better way to seal the deal than to be able to pass on ownership of an NFL team to him?
As an Estate Planning attorney, my immediate thought is once I buy the Packers stock, how do I fund it into my Revocable Living Trust? Trust funding is a process of changing title so that the title reflects the existence of the Trust as the owner of the asset. Trust funding makes it easier for successor trustees to gain control of the assets in the event of incapacity or upon death and generally avoids the court-supervised procedures known as conservatorship and probate.
The process for trust funding varies depending upon the specific asset. For example, real property is funded into a Trust by drafting and executing a deed and recording it with the county Recorder’s office. Bank accounts, safe deposit boxes, and taxable brokerage/investment accounts are funded into a trust by filling out signature cards or ownership documents, changing ownership from individuals to the Trust.
When it comes to stock held in certificate form, generally the process is to mail the stock certificates to the stock transfer agent and request that the certificates be re-issued in the name of the Trust. With regard to the Packers stock I plan to acquire, since my motivations for owning it are sentimental rather than economic, and since the Packers stock certificate will have no resale value, I’m going to prefer to have the stock certificate show my name as the owner rather than my Living Trust.
However, I will “assign” my ownership of the stock into my Trust by drafting a document that states I intend to hold the asset in my Trust. Assignments are generally used to transfer tangible personal property – assets with no formal title – into Trusts, but may be used in other circumstances – such as my Packers stock situation.
With the Packers stock funded to my Living Trust, it will pass on to my son free of probate, and he will (hopefully) continue a tradition of being a West Coast Cheesehead!
Tuesday, October 18, 2011 Do I Get Paid For This?
Acting as a Trustee or a Power of Attorney Agent is a lot of work which involves a significant degree of liability. Because of this, a person or organization acting as Trustee or a Power of Attorney Agent is entitled to compensation for such services. Although Trusts and Power of Attorney documents may specify the amount of compensation, most estate plans state that the Trustee / Power of Attorney agent shall receive “reasonable compensation,” which is a term of art referenced by the California Probate Code. How do you know whether compensation is “reasonable”?
“Reasonable compensation” is not a defined term. When California courts determine “reasonable compensation,” they look at specific factors in accordance to California Rules of Court which are:
• The gross income of the trust;
• The success or failure of the trustee's administration, as measured, e.g., by the growth in value of the investments;
• Any unusual skill, expertise, or experience that the trustee has brought to the position, e.g., investment management expertise;
• The "fidelity" or "disloyalty" shown by the trustee,
• The amount of risk and responsibility assumed by the trustee, as measured, e.g., by negotiation of oil leases or management of a large office building;
• The time that the trustee spent performing trust duties;
• The custom in the community, including the compensation allowed to trustees by settlors or courts and the fees charged by corporate trustees; and
• Whether the work was routine or required more than ordinary skill and judgment.
In practice, most non-professional Trustees use corporate trustee fee schedules as an upper limit on their own fees. These fee schedules are not legal standards but they may suggest benchmarks for what constitutes “reasonable compensation.” Corporate trustee fees on the first $1 million of market value of trust assets tend to range from 1.0 to 1.3 percent and fees on the second $1 million tend to range from 0.70 to 1.25 percent per year. Therefore, a non-professional trustee taking a fee slightly less than that would likely fall within “reasonable compensation.”
It is important to note that although the Trustee / Power of Attorneyt Agent are entitled by law to “reasonable compensation,” the Trustee’s / Power of Attorney’ Agent’s method for determining “reasonable compensation” is not final and may be challenged by beneficiaries of the trust. The judge will ultimately look to the factors listed above to determine whether a particular fee is “reasonable.” However, because the method based on corporate trustee schedules is so common, it is likely a good benchmark for what a judge will ultimately determine whether a fee is “reasonable.”
Tuesday, September 27, 2011 Do You "Have the Power"?
One of my favorite cartoons growing up was He-Man. Mimicking the title character when he transforms from Prince Adam into a supernatural figure, I’d pull a toy sword from the back of my OshKosh B’Gosh overalls and proclaim, “I have the power!” Though less dramatic, in the context of Estate Planning, beneficiaries might feel the same way when they learn about the options afforded to them in a Power of Appointment.
As it is becoming more common to leave inheritances “in trust” rather than directly to the beneficiary in order to minimize the estate tax and to provide a degree of creditor and divorce protection, Powers of Appointment are becoming increasingly important. When an inheritance is given to a beneficiary in trust, the question becomes where does the unused balance of the trust share, if any, go when the beneficiary dies? The trust maker can control where this unused balance goes. However, the trust maker can also give the beneficiary a Power of Appointment to direct where the balance goes, overriding the default “remainder beneficiary” named by the trust maker.
The Power of Appointment can be “wide open,” where the beneficiary is allowed to name anyone in the world to receive the remainder of the trust assets, or can be very “narrow,” limiting the possible remainder beneficiaries to certain persons or classes of individuals (i.e., descendants of the trust maker). In the context of a Beneficiary Controlled Trust, where the trust maker does not want to limit the beneficiary’s control over the trust share, a “wide open” Power of Appointment makes sense. However, in the context of a Bypass Trust for the benefit of a surviving spouse, a “narrow” Power of Appointment might be the best option to give the surviving spouse flexibility but still prevent the spouse from leaving trust assets to the tennis instructor or the belly dancer at the expense of the children.
The method for exercising a Power of Appointment is significant. Many old fashioned trusts state that a Power of Appointment must be exercised by a valid will. The problem with this procedure is that it requires a probate, even if all of the assets are in the trust. The better method is to allow a Power of Appointment to be exercised by trust or separate writing in order to create less administration when settling the estate.
Many beneficiaries might not know that they have a Power of Appointment and thus never exercise their right. This is why I always ask my Estate Planning clients if they have received an “in-trust” inheritance. If so, it is important to determine whether they have a Power of Appointment, whether they want to exercise it, and how to exercise it. Tuesday, September 13, 2011 Paying for Long Term Care while Protecting the Home
As medical expenses increase, it is becoming more common for people to worry about paying for long term care. The average cost of a skilled nursing home is approximately $5,000 to $7,000 per month. Regardless of the size of one’s estate, an extended period of time spent in a nursing home can significantly deplete one’s resources. Because of this dire situation, more people are applying for Medi-Cal.
Medi-Cal is the California version of Medicaid, a means-tested program available for those in need. In the context of long-term care, Medi-Cal will pay the costs of a skilled nursing facility on your behalf, minus any income that you make. In order to qualify for Medi-Cal, you must have less than $2,000 in “countable” assets. “Countable” assets include cash, stocks, investments, retirement savings, automobiles other than your primary vehicle, and real property other than your personal residence.
Although the personal residence typically does not count toward the $2,000 threshold and therefore typically does not prevent you from qualifying for Medi-Cal regardless of its value, there are certain issues regarding the residence that must be considered if you are on Medi-Cal or likely to be on Medi-Cal in the future.
First, if you ever need to tap the equity in the home either through a mortgage (traditional mortgage or reverse mortgage) or through a sale, you will be converting the non-countable asset (the home) into a countable asset (cash), thereby suddenly making you ineligible for Medi-Cal again.
Second, if you still own the residence in your name upon death, Medi-Cal may recover against the value of the residence to reimburse itself for the nursing home costs it paid for during your lifetime before your beneficiaries receive it as part of an inheritance. In many cases, the residence could be completely lost to a Medi-Cal recovery.
A common solution to these issues regarding the residence is a “Medi-Cal Trust.” Under this strategy, the residence is transferred to the Medi-Cal Trust and its equity could be tapped during your lifetime without interfering with your Medi-Cal eligibility. Furthermore, the residence can be transferred to your heirs upon death without a Medi-Cal recovery, regardless of how much Medi-Cal paid to nursing homes on your behalf during your lifetime.
Medi-Cal rules and strategies are complex but, with the right guidance, they present a number of planning opportunities. Wednesday, August 31, 2011 Show Me the Money!In the movies and on television, when a person dies, there is often a dramatic scene where all the family members and friends gather for the "reading of the will." All the usual characters are present: the grieving surviving spouse, the much younger girlfriend, the greedy son, and so on. The lawyer pulls out the will and begins to read it out loud. Some are shocked, some are excited, and some are disappointed. The scenario always makes an excellent story line.
In real life, formal "readings of the will" are not common any more. Instead, most beneficiaries learn about the contents of a decedent's will or a trust by receiving a copy of it in the mail. For decedents dying with wills, the executor must send a copy of the will to each natural heir and each person named in the will along with a copy of the petition to the court to open the probate. The beneficiary will also receive a notice of the date, time, and location of a hearing. It is not necessary for the beneficiary to appear at the hearing unless the beneficiary wants to challenge the validity of the will or the appointment of the executor.
For decedents dying with trusts, the successor trustee is required to send a specific notice out to each natural heir and named beneficiary of the trust informing them that the person died with a trust, that they have a right to a complete copy of the trust, and that they have a limited time in which to contest the trust.
In either case, if the beneficiary or heir has no reason to contest the terms of the will or the trust and does not object to the identity of the executor or successor trustee, then there is not much for the beneficiary to do. The process to settle an account involves many tasks and duties imposed upon the executor or successor trustee: taking inventory of and appraising the assets, filing final tax returns, acquiring a new Tax ID number, sending out notices, filing documents with the Assessor's Office and Recorder's Office, protecting and investing the assets, paying off final bills, etc. Although a trust administration is faster than probate, in both cases there is a process that must be followed.
Many beneficiaries who are not involved in the process of settling the estate do not understand how much work is involved. After several months, it is not uncommon for some beneficiaries to start inquiring. "It's been a long time," they say, "Show me the money!" This phenomenon can be very frustrating for the executor / successor trustees and their attorneys who are working very hard to make it possible for the distribution to happen.
As a beneficiary, while you do have a right to keep informed of the status of the settlement, it is important to understand that it is an involved process and that patience is the key. The more grief you give the executor / successor trustee, the longer - and perhaps more expensive - it might be to settle the estate.
Saturday, August 13, 2011 The Follow ThroughYou are part of the small minority who has actually taken the time to plan your estate by executing a Revocable Living Trust and other Estate Planning documents. You spent time with a qualified attorney who specializes in Estate Planning and who helped you articulate your wishes. But will the persons you designated to carry out your wishes understand the legalese?
Ensuring that your carefully crafted plan will be carried out is just as important as creating the plan in the first place. Below are some common mistakes that people without proper guidance make when trying to interpret and carry out an Estate Plan.
1. Failure to Split the Trust on the Death of the First Spouse
Many married joint Trusts have some sort of "A/B" provisions that are used to plan for the estate tax and also used to provide a degree of control over part of the Trust. Upon the death of the first spouse, the Trust will instruct the Trustee to sub-divide the Trust into two sub-trusts, an "A Trust" for the surviving spouse's assets and a "B Trust" for the deceased spouse's assets. Often the surviving spouse is too overwhelmed with grief to deal with these seemingly complex provisions and ignores or overlooks this issue. This can create a bigger problem later in terms of estate tax and income tax, and can even adversely impact a beneficiary's share.
2. Failure to Obtain a New Taxpayer Identification Number
We all know that we use our Social Security Numbers ("SSN") to report income that is generated during our lives. However, after death, our Social Security Number should no longer be used to report future income. Any Trust that becomes irrevocable due to death must get a new Taxpayer Identification Number ("TIN"). Many successor trustees and family members make the mistake of continuing to report income on the decedent's SSN which can create a web that needs to be un-tangled at some point.
3. Failure to Understand the Nuances of the Distributions
Traditionally, after the death of the person(s) who created the Trust, the Trust would terminate and the beneficiaries would receive their shares in their own individual names. Modernly, it is exceedingly common for Trusts to create "in-trust" inheritances to provide benefits such as creditor protection, divorce protection, and further estate tax protection for the beneficiaries. However, often trustees and even their attorneys don't understand these nuances and simply distribute the assets free-of-trust to the beneficiaries, blowing these added benefits.
To ensure that mistakes such as those described above are avoided, it is good practice to introduce your successor trustees and family members to your estate planning attorney and to make sure that they understand that there are nuances that must be interpreted and understood. It is also important to make sure that they hire an experienced attorney to help guide them through this process. Tuesday, July 26, 2011 On Top of It: Latest Trends and Strategies in Estate Planning
I believe it is important to make sure that I am up-to-date on the latest trends and strategies in order to provide my clients with the best service possible. One of the best ways I ensure that I am up-to-date is through my membership in WealthCounsel, a national organization of attorneys who are dedicated to Estate Planning, Elder Law, and Asset Protection.
Each year, WealthCounsel hosts its annual "Planning for the Generations Symposium" which provides stimulating classes and networking opportunities. This year's Generations Symposium was held in Chicago from July 20 through July 22 and I had the privilege of attending.
Below is a summary of some of the classes I attended as well as my observations and comments.
1. Piping Hot Planning
This class discussed taking advantage of the $5 million estate and gift tax exclusion that is set to expire in 2013 unless Congress takes further action. It also covered the use of a "Trust Protector," someone who has the power to update a trust even after it is irrevocable. Trust Protectors are becoming increasingly common and I often incorporate provisions for naming a Trust Protector even in basic Revocable Living Trusts. They allow trusts to be flexible and adaptable years down the line which can be extremely valuable.
2. Who Should You Name as the Beneficiary of Your IRA?
I've discussed this issue many times in my column. It's a very important topic but one to which most clients and their advisors pay very little attention. The class covered the specific steps you must take to name a trust as the beneficiary of your IRA while allowing your beneficiaries to "stretch out" inherited IRA's for as long as possible. The specific wording of the beneficiary designation as well as "conduit provisions" are a must! The class also discussed the reasons why it sometimes is prudent to draft a separate, stand-alone "Retirement Trust."
3. Taking the Mystery Out of Drafting and Administering Special Needs Trusts
This class focused on the specific requirements in drafting either a "first party" or a "third party" Special Needs Trust, a trust that allows someone to keep his/her public benefits while still benefiting from an inheritance or settlement. The class also focused on the role of the Trustee in administering Special Needs Trusts in accordance with the various complex rules and considerations involved with these kinds of trusts.
4. When is Aid and Attendance Better than Medicaid?
When planning for long-term care benefits for seniors, Medicaid ("Medi-Cal" in California) is often the primary focus. While often Medicaid is the only option, for certain veterans and their spouses, they might be entitled to a program known as "Aid and Attendance" benefits. This class focused on the difference between the two programs and when one might be more appropriate than the other.
Tuesday, July 12, 2011 Building a Fortress Around Your Retirement Plans
It is common knowledge that there is a strong degree of creditor protection for retirement plans. Many people may recall that O.J. Simpson was largely insulated from the plaintiffs in his wrongful death suit due at least in part to the fact that much of his wealth consisted of pensions.
Generally, employer-sponsored retirement plans (i.e., defined benefit plans, 401(k)'s, 403(b)'s, SEP IRA's, and SIMPLE IRA's) are covered under the federal Employee Retirement Income Security Act ("ERISA"). ERISA contains "anti-alienation" provisions which means that creditors of the plan beneficiary are unable to attack it.
Traditional IRA's and Roth IRA's are not covered under ERISA. However, these plans also have a degree of creditor protection. In California, such IRA's are generally exempt from bankruptcy up to $1 million. With regard to other kinds of creditors, such plans are protected up to the extent that they are needed for retirement. While it's up to the court's discretion, most experts agree that the $1 million threshold is a good rule of thumb for non-bankruptcy creditors as well.
However, with respect to retirement plans that are inherited from a third party, such inherited plans generally offer no asset protection from the creditors of the beneficiaries. However, you can still provide your beneficiaries with creditor protection for the retirement plans that they will inherit from you with a properly drafted trust.
Assuming your trust is structured in a certain way, instead of naming your beneficiaries directly as the recipients of your retirement plan, you would name your trust in a very specific manner.
There is a misconception that naming your trust as the beneficiary of your retirement plans will invariably force your beneficiaries to take out Required Minimum Distributions ("RMD's") sooner, preventing them from "stretching" out their inherited defined contribution plans. This is not true if there are certain conditions, two of which are described below.
First, you want to make sure your trust has "conduit" provisions which force the trustee to distribute the RMD's each year to the beneficiary rather than keeping them in the trust. The RMD's will not be protected from your beneficiary's creditors, but the rest of the retirement plan will be protected.
Second, the beneficiary designation must specifically list each beneficiary's sub-trust, rather than simply listing the "master trust." For example, instead of filling out the beneficiary form as: "100% to the Mom & Dad Living Trust," you would fill it out as follows: "50% to the Daughter Trust established under the Mom & Dad Living Trust and 50% to the Son Trust established under the Mom & Dad Living Trust."
Furthermore, there may be situations where preserving the ability to stretch out the RMD's is not as important as providing creditor protection for the RMD's, planning for beneficiaries with special needs, or protecting a beneficiary from his/her own financial mismanagement. In such cases, you simply would not add "conduit" provisions to the trust, sacrificing the stretch out for other, more important reasons unique to the specific situation.
In light of all of these issues, everybody should strongly consider whether it would be prudent to name a trust as the benefiicary of a retirement plan rather than an individual.
Wednesday, June 29, 2011 Essential Steps of Settling an Estate
When settling a person’s estate, there are several basic issues that must be addressed in order to carry out the decedent’s wishes and to transfer the assets to the appropriate beneficiaries. As fundamental as these issues are, they are often not examined closely, which can cause unnecessary complications and expenses.
1. Is there a plan?
While it might seem obvious, the first question to ask is whether the decedent died leaving a legally valid estate plan. If the decedent did not leave an estate plan or left a will-based estate plan, then a probate is likely required. If the decedent left a trust-based estate plan, then a probate is unnecessary as long as most of the assets are in fact titled to the trust.
2. Who is in charge?
If the decedent died without an estate plan, the California Probate Code lists persons who have priority to serve as the “Administrator” of the estate based on their relationships to the decedent. If there are persons of equal priority, they will have to decide who shall handle the task. Such person(s) will petition the Court to be appointed as Administrator.
Decedents dying with a will often nominate an “Executor” to handle the estate. The nominated Executor must petition the Court to be officially appointed as Executor in order to assume the powers of the office and to administer the estate.
Decedents dying with a trust appoint a Successor Trustee. If the asset is titled to the trust, then the Successor Trustee has immediate control over the trust assets without any need for Court involvement.
In any case, the Administrator, Executor, or Successor Trustee (collectively known as the “fiduciary”) have similar responsibilities: they must marshal the assets, pay taxes, creditors, and expenses, and distribute the assets to the beneficiaries.
3. What are the assets?
It is impossible to settle an estate without having a firm understanding of the decedent’s assets. Some decedents leave detailed lists of assets to make it easier for the fiduciary to handle this task. In any case, the fiduciary should examine the decedent’s records, bank statements, and tax returns for this information. Furthermore, the fiduciary must obtain date of death values for each asset to establish a tax basis and to determine if an estate tax return is legally required.
4. Who are the beneficiaries?
If there is no formal estate plan, the California Probate code determines the decedent’s heirs. If the decedent died with either a will or a trust, then the will or trust will identify the beneficiaries. The fiduciary should take note of who the beneficiaries are, what they are entitled to receive, and how they are to receive their inheritance. The fiduciary also must give notice to the beneficiaries regarding the administration of the estate and how to contact the fiduciary and his/her attorney.
Tuesday, June 07, 2011 Receive an Inheritance? No Thank You!
Receiving an inheritance is usually a good thing. However, there may be times when you'd rather say "no thank you" to a particular inheritance. An extreme example would be inheriting property contaminated with toxic waste. You might decide that you're better off having nothing to do with the asset than receiving it and coping with its baggage.
The IRS and the California Probate Code allow you to refuse an inheritance if you sign a "disclaimer" within nine months of the decedent's date of death. If property is disclaimed, your Will or Trust can instruct where the disclaimed property will go. If there are no instructions in your Will or Trust, such property will go to heirs specified in the Probate Code. The use of a disclaimer is not limited to undesirable inheritances. Given the right circumstances, a disclaimer can be a strategic tool.
One example is where a decedent dies without proper planning. Any Separate Property that belonged to the decedent would normally be split between the surviving spouse and the children, parents, siblings, or nieces / nephews of the decedent. If the expectation was that the Separate Property should go 100% to the surviving spouse and the family is in agreement, the children, parents, siblings, and nieces / nephews could all sign disclaimers to get the property to the surviving spouse without any adverse tax consequences for the other family members.
A second example would be where a beneficiary inheriting certain property feels that he or she has plenty of assets and doesn't want the inherited assets to be taxed as part of his or her estate. Subject to certain limitations, the beneficiary could disclaim certain assets so that they pass to his or her children and do not have to be taxed upon the beneficiary's death.
Sometimes the use of disclaimers can be implemented when designing an Estate Plan. A common Estate Planning strategy for married couples is to create an "A/B Trust," where the trust splits into two sub-trusts upon the death of the first spouse. The advantage of the strategy is to use both spouse's Estate Tax Exemptions. The downside is that splitting the Trust creates additional administration. If a couple is not sure whether their estate will be subject to Estate Tax based on changing values to their assets the amount of the Estate Tax Exemption in flux, a "disclaimer trust" can be implemented. The idea is that the trust will not split into two sub-trusts upon the death of the first spouse unless the surviving spouse executes a disclaimer, giving the spouse the option of dividing the trust or not.
A disclaimer can be a powerful tool and should always be considered in both Estate Planning and Estate Settlement.
Tuesday, May 24, 2011 You Have a Will - Whether You Know It Or Not!
If you are part of the approximately 70% of the U.S. population who does not have a formal Estate Plan of any kind, you may be surprised to learn that your Will has already been written for you. If you die without formally executing a Will or a Trust, the California Probate Code determines who will inherit your property. These laws - known as "intestacy laws" - are based upon often archaic assumptions about where you would have wanted your property to go had you taken the time and effort to create a formal Estate Plan.
If you were married at the time of your death, 100% of your Community Property - assets acquired during the marriage other than by gift or inheritance - will be distributed to your surviving spouse. Separate Property - assets acquired prior to the marriage or by gift or inheritance - will likely be divided between your surviving spouse and your children or your parents. For example, if you have one surviving child or one surviving parent, your Separate Property will be divided 50% between your surviving spouse and 50% to the one surviving child or parent. If you have more than one surviving child, 1/3 of your Separate Property will be distributed to your surviving spouse and 2/3 of your Separate Property will be distributed to your children.
Occasionally, spouses who acquire Community Property may convert such assets into Separate Property for asset protection purposes, not realizing that if they do not have a formal Estate Plan, those assets may be divided between the surviving spouse and the deceased spouse's surviving children and/or surviving parents, rather than passing 100% to the surviving spouse.
Assets not passing to a surviving spouse will generally be divided equally between the children, if any, and if not to the surviving parents, if any, and if not to the decedent's siblings. The Probate Code goes on to describe additional contingencies beyond siblings such as cousins, grandparents, etc.
In addition, the Probate Code will not factor in whether a child is on public benefits, is financially immature, or has creditor problems - issues that proper planning can address. Finally, this entire process will be subject to probate, a time consuming and court-supervised process that oversees the distribution of assets upon death.
It's best to take control of your planning by creating a formal Estate Plan to avoid the unnecessary uncertainly, unintended consequences, and complications that can result by allowing the California Probate Code to "draft" your "Estate Plan."
Monday, May 09, 2011 Putting Your Trust to Work
One of the most common reasons clients choose to utilize a Revocable Living Trust is to avoid probate, a time-consuming and expensive court-supervised process that oversees the distribution of assets upon death. There are two key aspects to ensure that a Revocable Living Trust will in fact avoid probate: (1) designing, drafting, and signing a comprehensive Revocable Living Trust; and (2) re-titling assets to the trust ("trust funding"). While many clients and their attorneys concentrate on the first aspect, the second aspect is often overlooked, causing unnecessary and unintended consequences.
Once your trust is completed and signed, the next step is to take inventory of all of your assets. In general, you will want to re-title all of your assets to your trust. This means instructing your banks to change the title on your checking accounts, savings accounts, money market accounts, certificate of deposit accounts, and safe deposit boxes from your name to the name of your trust. This involves signing new signature cards and giving the bank some basic information about your trust.
For taxable investment accounts, again you will need to instruct your brokerage firm to re-title the accounts from your name to the trust. Brokerage firms will often have their own forms for you to fill out giving the firm basic information about the trust and your powers to control investments as trustee.
Your home and other real property such as rental properties, commercial properties, and vacant lots need to be deeded to your trust via new deeds. It is very important that the deeds are worded correctly to avoid adverse income and property tax consequences. In California, additional forms such as a Preliminary Change of Ownership Report must be completed along with the deed. It is also a good idea to notify your homeowner's insurance company of the fact that you have transferred title to your trust and to request that the insurance company add the trust as an additional insured.
Business entities such as corporations, LLC's, and general partnerships should also be re-titled to the trust by issuing new stock/membership certificates or amending the entity's governing documents.
If you own any timeshares, they should also be re-titled to the trust. Some timeshares are "deed based," in which case a new deed will need to be executed and recorded. Other timeshares are "account based," in which case the timeshare company should be contacted with a request to change title from your name to the name of your trust.
Certain assets are purposely not placed into your trust while you are living: retirement plans, life insurance, and annuities. For these assets, you need to make sure that the designated beneficiary forms are up-to-date and coordinated with your overall estate plan.
Many attorneys leave all of the work of trust funding up to the client. Because trust funding is crucial and because it's much more complex and detailed than it might appear, I always insist on doing my clients' funding for them. It's also one of the first issues that should be examined when reviewing an already existing trust. You can have the most beautifully drafted trust in the world but if it's not funded, it won't work as expected.
Saturday, April 30, 2011 Preventing Assets From Becoming Liabilities
In addition to ensuring that your hard-earned assets are passed to your loved ones in an efficient manner, comprehensive Estate Planning also involves exploring ways to protect and preserve those assets. After all, if you are wiped out by a lawsuit, you could have the most beautiful Estate Plan in the world but it won't provide for your children or other beneficiaries because there won't be anything left to inherit. One of the most common types of asset to protect is investment real properties.
Whenever I see that a client owns investment or rental real properties, I always have a discussion about liability protection and whether forming one more Limited Liability Companies ("LLC's") to hold the investment properties would be appropriate. An owner of investment real properties can be liable for millions of dollars if there is an injury or a death on the real property. Creditors who have a legal claim against the owner of real property arising out of the property are known as "inside creditors." An properly formed LLC can limit the property owner's liability to those assets that are held in the LLC, preventing the inside creditor from going after personal assets or other investment assets that are not held in the LLC. When clients own multiple investment properties, sometimes it makes sense to form multiple LLC's to further minimize risk.
Investment properties are also at risk if the property owners are sued for personal reasons such as a car accident, professional malpractice, or a business deal gone wrong. Creditors who have a legal claim arising out of such alleged personal transgressions are known as "outside creditors." Generally outside creditors are able to attack investment real properties, even if they are held in an LLC. However, certain states such as Wyoming and Nevada provide protection of LLC assets from outside creditors as well as from inside creditors. Such states prevent outside creditors from seizing properties held in an LLC and instead only give the outside creditors a "charging order," a right to any distributions made from the LLC to the LLC member. The LLC would simply refrain from making any distributions to the LLC member and the outside creditor would be empty-handed.
Because of this additional protection against outside creditors, it often makes sense to form an LLC under the laws of favorable states such as Wyoming or Nevada, even if all of the properties or businesses held in the LLC are located in California. It's not certain how a California court would apply the law, but it still provides a degree of creditor protection against outside creditors that California LLC's do not provide.
Protecting your assets is often as important as planning your Estate in the first place. While asset protection is not appropriate for everyone, it's an issued that should always be considered.
Monday, April 11, 2011 Don't Let It Go Away
Comprehensive Estate Planning involves a multitude of legal documents: a Living Trust, Pour Over Wills, Durable General Power of Attorney documents, Health Care documents, Property Agreements, Assignments, Deeds, and Beneficiary Designations to name a few. Once clients have completed their Estate Planning and realize how many documents comprise their Estate Planning portfolio, the question becomes where to safely store such documents.
Historically, when Estate Planning did not involve so many documents, clients would often keep their original documents in safe deposit boxes at the local bank. As the number and length of Estate Planning documents grew, it became more difficult to find a safe deposit box large enough and thus many clients chose to buy safes to keep at home in order to store their Estate Planning documents. However, the Japanese tsunami has taught us that safes - and perhaps even safe deposit boxes - are not foolproof.
According to recent press reports, hundreds of dented metal safes are washing up on the shores of Japan's coast. The Ofunato, Japan Police Department found so many washed up safes that the department transformed its parking garage into a storage facility for washed up safes. Compounding the problem is that many safes could go unclaimed. The safes' owners could have passed away and family members might not be aware of the safes or might not be able to accurately describe them or know how to open them. Furthermore, even if a person is able to track down a safe, it may be very difficult to prove ownership. Finally, even if a safe is located and a person is able to prove ownership, the contents of a safe might be destroyed.
Fortunately, modern technology provides a simple solution: storing an electronic version of your Estate Planning documents online. In response to disasters such as the hurricane in New Orleans and the tsunami in Japan, many businesses and individuals now regularly make electronic copies of all their important documents and keep them backed up online. Most online back-up services have multiple storage facilities throughout the country so if a natural disaster strikes one part of the country, the data will still be safe. Companies such as LegalVault provide a secure online database to store electronic copies of your legal and financial documents. Not only will the documents be protected from natural disasters, but you will be able to access your documents from any computer around the world.
Protecting your legal documents is just as important as executing them in the first place. To quote the famous rock star Gwen Stefani, "Don't let it go away." With secure online storage, you can have peace of mind that your important legal documents will not disappear.
For more information about LegalVault, please see the LegalVault page on this website, www.krasalaw.com.
Sunday, April 10, 2011 Dividing Up the Responsibilities
One of the most basic decisions everybody must make when designing an Estate Plan is to name a Successor Trustee: someone who will have the responsibility to manage your assets in the event of incapacity and upon death. It is prudent to also name alternate Successor Trustees in the event that the Successor Trustee named is unwilling or unable to act as Trustee. Although it is common for clients to name one person or institution to act as Trustee at a time, in certain circumstances it may be appropriate name multiple persons or institutions simultaneously.
Acting as a Trustee is a big responsibility and thus some clients will name two or more people as Co-Trustees to share the responsibility. In such circumstances, the clients will give any of the Co-Trustees the power to act independently so that whoever is available at a given time to carry out a task can handle the issue on behalf of the entire trust.
In other instances, clients are concerned about checks and balances and thus require that all Co-Trustees must act unanimously or by majority vote on every issue. While this does ensure that every action is agreed upon by at least two people, it is a less efficient method for carrying out certain tasks, especially if some of the Co-Trustees are unavailable or out of town. Furthermore, if the Co-Trustees cannot agree on a particular course of action, there may be a stalemate requiring court intervention.
Some clients may divide the duties of the Trustee among various individuals. For example, the clients might give one Co-Trustee the authority to handle the investments of the Trust (the "Investment Trustee") and give another person the authority to handle questions of when and how much to distribute to the beneficiaries of the Trust (the "Distribution Trustee"). This can be an effective asset protection tool where the beneficiary of a trust may be named as the Investment Trustee to control how the Trust assets are managed but some independent third party is named as the Distribution Trustee to prevent a creditor from being able to force the beneficiary to distribute assets. However, such a division of duties can also create problems as the Distribution Trustee might be held liable for the actions of the Investment Trustee and vice versa.
While there are numerous possibilities with Co-Trustees and the division of duties, such planning adds a layer of complexity and therefore some clients - after exploring the various options - decide to keep everything simple by naming only one Successor Trustee at a time.
Thursday, March 17, 2011 Special Needs Require Special Estate Planning
I have often commented that how a beneficiary inherits is often as important – and in some cases more important – than what a beneficiary inherits. This maxim is particularly important when it comes to beneficiaries with special needs. Often, public benefits that are available to special needs beneficiaries such as SSI and Medi-Cal are “means-tested,” which means that the beneficiary’s assets cannot exceed a certain amount. With regard to Estate Planning, the concern is that a special needs beneficiary’s inheritance will increase the beneficiary’s assets to the point where such public benefits will be eliminated. The key to preventing this from happening is to establish a Special Needs Trust (“SNT”) for the special needs beneficiary’s inheritance.
The idea behind an SNT is to restrict the special needs beneficiary’s rights in the inheritance so that it won’t count as an asset or a “resource” of the beneficiary. The trustee will be instructed to use the SNT’s assets to “supplement but not supplant” needs-based government benefits. For example, the trustee will not be permitted to use the SNT assets to pay for the beneficiary’s food or shelter as public benefits are often available for such needs. On the other hand, the trustee would be permitted to use the SNT assets to pay for the beneficiary’s entertainment and other comforts that are not provided by public benefits.
A key issue in designing an SNT is to make a prudent selection for the trustee. The SNT should last for the lifetime of the special needs beneficiary so it is important to name a younger person as trustee and to name several alternate trustees should the first trustee no longer be willing or able to continue to act as trustee. Alternatively, naming a bank or trust company as trustee might make the most sense since such institutions will most likely continue to be in existence for the lifetime of the special needs beneficiary.
An SNT may either be embedded in a Revocable Living Trust or may stand alone as a separate and independent document. Although it often involves additional expense to create a separate “stand alone” SNT, if the creators of the trust feel that other family members and friends might want to make gifts or bequests to the special needs beneficiary, such a separate SNT makes the most sense.
Tuesday, February 22, 2011 IRA's Can Be Tricky in Estate Planning
It is becoming increasingly common for clients to hold significant wealth in Individual Retirement Arrangements (IRA's). IRA's provide tax advantages for retirement savings. Upon death, IRA's are controlled by Beneficiary Designation Forms that you are requested to fill out upon the establishment of the IRA. Such Beneficiary Designation Forms control who receives your IRA regardless of what your Will or Trust says. As a result, it is very important to make sure your IRA Beneficiary Designations are coordinated with your overall Estate Plan.
For example, you may have created an Estate Plan that leaves everything to your spouse but you established your IRA before you got married and the Beneficiary Designation Form still names another relative or a friend as the beneficiary. In such a case, your spouse will not be entitled to the IRA. Additionally, you may want to name a Trust as a beneficiary, particularly if you have a minor or special needs beneficiary.
While it is often important to name a Trust as the beneficiary of an IRA, you must use extreme caution when doing so as there are many traps for the unwary. Most of the issues surround the effort to preserve the beneficiary's ability to "stretch-out" IRA's as long as possible, only taking the minimum withdrawal possible so that the bulk of the IRA can continue to grow tax free.
One key aspect to protect a "stretch-out" is to make sure the Trust has "conduit provisions," meaning that each required withdrawal is paid automatically to the beneficiary. Most basic Trusts do not have such conduit provisions. A second key aspect to protect a "stretch-out" is to separately name each beneficiary's trust share, rather than naming the entire Trust as the beneficiary. There is often not enough room to name each beneficiary's separate trust share on the Designated Beneficiary Form and thus you may be required to attach a separate letter to the form.
Regardless of these issues, preserving a "stretch-out" might not be of paramount concern if it is more important to protect a beneficiary's public benefits or to protect a beneficiary from creditors to the maximum extent possible. As a result, it is very important to seek the counsel of an attorney who has the specific expertise in these matters.
Monday, February 14, 2011 Your Cyber Legacy
When you think about how many online accounts and profiles a typical person has, it's mind boggling. In just a few short years, many individuals have amassed dozens of online identities: a Facebook page, a LinkedIn page, a company website, various professional online profiles, subscriptions to newspapers and research materials, as well as many other online services. It's often hard to keep track of so many websites and their various usernames and passwords.
In addition to the large volume of websites containing personal information, a person's online image has become intertwined with his or her "real world" reputation. There have been numerous articles about employers screening potential new employees by conducting online investigations, ranging from a simple Yahoo search to more detailed online background checks. Many people are becoming aware that unflattering pictures, poor grammar, and unsavory comments on a Facebook page can mean lost opportunities for jobs, scholarships, and volunteer activities. While the focus has thus far been on the effect of online images on a person's lifetime reputation, not many have focused on the impact of such online identities upon a person's legacy.
Upon death, what happens to your Facebook page for example? Do you want it to be frozen in time from the last moment you logged on? Do you want it terminated or do you want it modified so as to serve as cyber "tribute"? These are modern versions of the eternal question: How do you want to be remembered? This is an important issue yet it is often overlooked in Estate Planning.
Think about your collective cyber image from the various online identities you possess and how you might want that image modified or solidified upon death. Take the time to articulate in writing guidelines for what should happen to every online account.
In addition, it is important to provide your trusted loved ones with access to your online accounts. Using a service such as LegalVault (www.krasalaw.com/legalvault) that securely stores all of your online usernames and passwords and allows you to designate a person to have post-death access to such information can make this important, modern task much easier and thus more likely to be carried out.
Monday, February 14, 2011 Portability - a Magic Provision?
Most people who pay attention to the Estate Tax (or the “Death Tax”) understand that Congress increased the Estate Tax Exemption to $5 million through 2012 in the recent tax bill signed by President Obama on December 17, 2010. However, the legislation also includes a little-known surprising feature that many estate planning professionals had been lobbying for over the course of many years. This new feature, known as “Portability,” has the potential to dramatically influence Estate Planning. In order to understand Portability, it is first important to understand the problem it attempts to resolve.
With regard to a married couple, each spouse has his or her own Estate Tax Exemption. Historically, if a married couple prefers to leave the entire estate to the surviving spouse, the couple wastes the deceased spouse’s Estate Tax Exemption unless they create a special type of trust known as an “A/B Trust.” Portability is designed to eliminate the need for a couple to create an A/B Trust in order to use the deceased spouse’s Estate Tax Exemption.
Under the new law, for decedents dying in 2011 and 2012, the surviving spouse has the option to file an Estate Tax return in order to “claim” the deceased spouse’s unused Estate Tax Exemption. Not only does this feature allow a surviving spouse to “recover” from a lack of proper Estate Tax Exemption planning, but Portability may also be useful for couples who have A/B Trusts in place and for couples who have significant non-trust assets such as IRA’s, qualified retirement plans, and annuities. Estate Planning attorneys are only beginning to explore methods for taking advantage of this new rule.
Despite this exciting new feature, it is still best practice for a married couple to utilize an A/B Trust. First, Portability is set to expire in 2013 unless Congress passes additional legislation that extends this rule. Second, A/B Trust planning provides additional tax-saving features that Portability lacks. Finally, A/B Trust planning also provides non-tax benefits that appeal to many couples. Nevertheless, Portability represents an exciting new frontier in Estate Planning that – when utilized properly – will provide new advantages and protections for clients and their families.
Monday, February 14, 2011 Providing for "Children" who Wear Fur Coats
Many people are aware of the benefits of using Trusts with regard to their Estate Planning. Trusts can accomplish many objectives such as avoiding probate, tax planning, asset protection, and Medi-Cal planning. Probably the most commonly understood purpose of a Trust is to provide a gift or an inheritance to a child or other beneficiary who is not mature or responsible enough to manage the property. The basic idea is to entrust the property with a third party who will manage it on behalf of the beneficiary. Much like an immature or irresponsible beneficiary, a beloved animal cannot take care of itself and is in need of a caretaker.
Most people never think of their pets in the context of Estate Planning. It is a common assumption that friends or family members will automatically be willing to assume the role of caretaker to a companion animal. The reality is that when a pet owner dies or becomes incapacitated, it is often very difficult to find caretakers for pets. In fact, The Humane Society estimates approximately 1 million pets are euthanized each year as a result of pet owners not adequately planning for their care in the event of incapacity or death. Fortunately, there is a solution: a "Pet Trust."
A Pet Trust is a mechanism where a pet owner can designate a certain amount of funds to be held in trust by a third party for the benefit of a companion animal. The idea is very similar to providing a certain amount of money for a minor child or immature beneficiary. Using a Pet Trust, you can ensure that your beloved animals will be have somebody - and a source of funds - to provide for their care and needs for the rest of their lives.
If you are interested in learning more about Pet Trusts, please join me for a panel discussion on Pet Trusts on Saturday, March 12, 2011 from 10:00 am to noon at 700 Jewell Avenue, Pacific Grove, sponsored by Animal Friends Rescue Project (831-333-0722) and Peace of Mind Dog Rescue (831-718-9122). RSVP by calling either agency.
Tuesday, December 28, 2010 Health Care Agents: Do I Have to Choose?
One of the most important aspects of Estate Planning is the completion of an Advance Health Care Directive ("AHCD"). An AHCD has two main components: (1) making your wishes known regarding your general health care philosophy; and (2) naming an agent who has the responsibility to carry out your wishes in the event of your incapacity. Selecting your health care agent requires careful considerations.
You may wish to name an adult child as your health care agent. If you have more than one child, you might be tempted to name all of your children as co-agents so as not to choose between them. While naming co-trustees on your Revocable Living Trust or co-agents on your property Power of Attorney might be prudent in certain circumstances, the vast majority of doctors and lawyers strongly discourage you from naming co-agents for health care decisions.
Naming co-agents for health care decisions can create problems when it becomes critical that health decisions are made quickly. One co-agent might be available while another co-agent could be out-of-town or simply out-of-reach. The available co-agent might be forced to make a decision that the unavailable co-agent - who was not privy to the difficult, exigent circumstances - might later find objectionable. On the other hand, if the available co-agent waits until the unavailable co-agent can be reached or is able to visit the health care facility, critical time might be lost. Furthermore, even if both co-agents are available, they might not agree on a specific course of action and they might interpret the medical options, possible risks, expected benefits, and even your wishes differently. When siblings are named as co-agents for health decisions, issues of sibling rivalry and differences of opinion can impede the decision making process. This is why most doctors prefer to deal with only one spokesperson rather than a "committee" of spokespersons.
The problems involved in naming co-agents on health care decisions are unequivocal to the point where the "standard" AHCD Form that is most often used in California was designed specifically not to have a section for naming co-agents with the purpose of discouraging clients from naming co-agents on health care decisions.
It is, however, important to name alternate agents on your AHCD who each serve one at a time. If the first agent is unwilling or unable to act - or if the first agent cannot be reached by health care professionals - then the next agent named in the AHCD will be in charge.
It is critical to seek the counsel of an attorney or a doctor when executing an AHCD so that you can be properly advised on how to make the critical decisions on the form. Recent laws allow Medicare to pay doctors to have this crucial discussion with their patients.
Monday, November 22, 2010 What is Probate?
If an asset is titled in the decedent's name at death, generally nobody else will be able to manage it. For example, if a loved one owns a checking account and then passes away, the bank will not take direction from anyone in terms of what to do with that account. Instead, the account will be frozen until someone is able to provide the bank with proof that he or she has the authority to deal with the asset. The same is true with all kinds of assets including savings accounts, investment accounts, stocks, bonds, and real property.
By submitting the decedent's estate to probate, you are requesting that the Court appoint someone as Executor and issuing "Letters of Administration," legal authority that allows the third party to manage all assets that are titled in the decedent's name. By showing the "Letters of Administration" to the financial institutions, the Executor will be able to take control of the decedent's assets. With this authority comes responsibility.
The Executor has the legal duty to take inventory and appraise all assets in the estate, protect the assets of the estate, notify known creditors of the decedent's death, publish notice in a newspaper of the decedent's death to give unknown creditors the opportunity to step forward, address creditor claims, pay taxes, and keep the beneficiaries informed.
After all of the above tasks are completed, the Executor is ready to request the Court's permission to distribute the assets to the beneficiaries of the estate. The Executor must file a "Petition for Final Distribution" which reports on all of the Executor's activities and proposes how the estate should be distributed. Once the Court approves of the proposed final distribution, the Executor is able to transfer the assets to the beneficiaries.
Most of the time, the Executor is not able to accomplish all of these tasks without legal counsel. Attorney fees for probate are set by statute and are based upon the gross value of the estate. Such fees are usually much higher than if the Executor were able to pay the attorney an hourly rate.
Most clients who are familiar with the probate process choose to base their estate plans around a Revocable Living Trust which allows loved ones to avoid the probate process all together. All of the above tasks will still need to be performed, but with a properly drafted Revocable Living Trust, the courts most often can be avoided entirely and there are no set statutory attorney fees: the trustee and attorney can agree on whatever fee structure is most appropriate for the specific situation.
Monday, November 22, 2010 The Beneficiary Controlled Trust
Most Estate Planning attorneys recommend Revocable Living Trusts as the main vehicle for managing assets in the event of incapacity and transferring assets upon death. The most common reasons for utilizing Revocable Living Trusts are (1) probate avoidance and (2) the minimization or elimination of Estate Tax. While these are important objectives, most Estate Planning attorneys fail to fully utilize all beneficial aspects that a trust structure can provide, particularly for the Revocable Living Trust's beneficiaries.
If the attorney only thinks about (1) probate avoidance and (2) the minimization or elimination of Estate Tax as the reasons for creating a Revocable Living Trust, the attorney most likely will structure the trust to provide "outright distributions" to the beneficiaries upon the death of the trust makers. This means that the trust will distribute the inheritances out to the beneficiaries in their individual names and then the trust will terminate. The inheritances will be comingled with the beneficiaries' other property and subject to the total control of the beneficiaries. While this makes sense on the surface, a deeper understanding of the additional advantages trusts can provide for beneficiaries demonstrates why outright distributions - though extremely common - are less than ideal.
If a trust is properly structured, receiving an inheritance in trust rather than directly in the beneficiary's name can provide additional features such as (1) divorce protection; (2) creditor protection; and (3) additional Estate Tax protection.
Receiving an inheritance in trust rather than in one's own name creates a bright line distinction between property that has been inherited by a beneficiary and property that the beneficiary and his/her spouse have earned together. In a divorce, it will generally be much easier to distinguish between what property is separate (the inheritance) and what property is community and thus subject to division.
If the trust for the beneficiary has certain provisions, the inheritance can often be protected from the beneficiary's creditors. With the proliferation of lawsuits over the last several years, many people are concerned about frivolous lawsuits subjecting hard earned assets to plaintiffs and their attorneys. Receiving an inheritance in trust rather than outright provides significant creditor protection.
Finally, within certain limits, an in-trust inheritance can mean that some or all of the inheritance received by the beneficiary will not be considered part of the beneficiary's estate and thus will not use up the beneficiary's Estate Tax exemption.
If the trust makers feel that the beneficiary is capable of handling his/her inheritance, the trust for the beneficiary can be designed as a "beneficiary controlled trust," giving the beneficiary the protections of an "in-trust" inheritance while at the same time giving the beneficiary control over the inheritance. With all of these additional protections, "in-trust" inheritances are far more valuable than "outright inheritances," yet most attorneys are not aware of these additional benefits.
Monday, October 25, 2010 When Inheritance Can Create Unnecessary Problems
When most people create their Estate Planning, they focus on what or how much they are going to give to their loved ones as inheritance. Very few think about how they are going to structure such inheritances. Sometimes the "how" question is much more important than the "what" question. Without careful consideration about how to structure inheritance, you could be creating unnecessary problems for your loved ones.
One of the most important questions I ask my clients during the initial interview process is whether their children or other beneficiaries have any health problems or are receiving any public benefits. The reason I take the time to ask this question is because if their proposed beneficiaries are on public benefits, it may be necessary to structure their inheritance in a Special Needs Trust.
The most common public benefits programs, which are established and governed under the Social Security Administration, are SSDI and SSI.
SSDI is an "entitlement" program which means that eligibility is based upon how much you have paid into the Social Security system through taxes. SSDI is a monthly stipend the amount of which is based upon your estimated Social Security benefit had you been able to work until retirement age if you did not have a disability. Although you have to meet the definition of "disabled" in order to receive this stipend, it does not matter how much money or income you have. An SSDI recipient is therefore able to receive an inheritance without worrying about interference with his/her SSDI stipend.
SSI is also a monthly stipend. However, the amount of the stipend is fixed. SSI is a "means tested" benefit: you must be under a certain asset and income level in order to qualify. If your asset level ever exceeds the maximum allowed in order to receive SSI, you will lose all of your public benefits. As a result, if you are an SSI recipient, an inheritance will likely throw you off public benefits.
The good news is that a properly drafted Special Needs Trust will allow the SSI recipient to enjoy the benefits of an inheritance while still maintaining his/her public benefits. However, it is important to address these issues in the planning stages, which is why proper and comprehensive Estate Planning is essential.
Friday, October 22, 2010 Estate Planning - Not Just for the Wealthy
When most people hear the term, "estate," they think of Bill Gates and Oprah Winfrey; they think of large mansions with vast property. As a result, most people logically think that "Estate Planning" is reserved only for the wealthy. The truth is that the right kind of Estate Planning is appropriate for everyone. In fact, in certain situations, proper, comprehensive Estate Planning is much more important for lower income individuals.
In California, all estates worth over $100,000.00 are subject to probate. Probate is a time-consuming and expensive public process that most people want to avoid. Furthermore, until a person is appointed Executor by the Court, all of the decedent's bank accounts and other assets are frozen. It takes at least a month for someone to be appointed as Executor as well as approximately $355 in filing fees and approximately $500 in publication fees.
For wealthier families, this is a mere inconvenience at most as they would be able to front the costs of the filing and publication fees as well as the expenses of the estate such as mortgage, rent, and insurance, until an Executor is appointed and access is granted to the decedent's finances. For lower income families, this delay and inability to access the decedent's finances can be crippling.
Not only is Estate Planning a necessity for almost everybody, but proper Estate Planning is essential. Although there is a proliferation of legal "self-help" guides on the market, using such materials is fraught with peril. I have seen cases were self-drafted Wills did not meet the legal execution requires, left out key provisions such as waiving the requirement of a bond, or did not provide for circumstances such as a beneficiary's special needs or creditor problems. The California legislature even recognized these problems with "self-help" materials: "In this age of computers and easy internet access to self-help legal information and forms, one can almost predict the commission of drafting errors and improper interpretations of instructions for form wills or codicils. . . . These technicalities are a minefield for non-lawyers."
Such mistakes can delay the probate process even further, requiring the filing of additional research and other materials before the Court is comfortable in appointing an Executor.
There is an appropriate kind of Estate Planning for everybody with estates of any size. In each case, proper, attorney-drafted Estate Planning is essential in order to avoid leaving your loved ones with an unnecessary, expensive, and stressful mess.
Monday, September 27, 2010 Living Trust v. Power of Attorney
Estate Planning is more than transferring assets to your loved ones upon death. Perhaps more importantly, comprehensive Estate Planning includes appointing an agent to manage your financial affairs in the event of incapacity. Most Estate Plans include the use of both a Living Trust and a Power of Attorney. Many agents are unclear as to why they need both documents to essentially carry out the same task: manage your affairs while you are incapacitated.
Your Living Trust is your main Estate Planning Document. It handles both the management of your assets while you are incapacitated and it also handles the distribution of your assets upon your death. A key aspect of planning with a Living Trust is that you must re-title your assets to your Living Trust in order for the Living Trust to be effective. Your Living Trust gives your agent, normally referred to as a "Trustee," authority to manage all assets that are titled to your Living Trust when you are incapacitated. Conversely, your Living Trust does not give your Trustee authority over any assets that are not titled to your Living Trust.
Upon your incapacity, your agent may discover that you forgot to transfer some of your assets to your Living Trust. In addition, there are certain assets that are purposely not transferred to your Living Trust, such as Retirement Accounts, Annuities, Life Insurance policies, and Social Security. If your agent needs to manage any of these assets, your agent will have no authority to do so under your Living Trust. This is where a Power of Attorney becomes necessary.
Your Power of Attorney gives your agent the authority to manage your non-trust assets, i.e., assets that are titled in your individual name. Under the authority of the Power of Attorney, your agent will be able to manage any assets you forgot to transfer to your Living Trust as well as your Retirement Accounts, Annuities, Life Insurance policies, and Social Security. In addition, your Power of Attorney will give your agent broader authority over such issues as the ability to gain access to your mail, the ability to deal with the IRS, and the ability to enter into contracts on your behalf.
Comprehensive Estate Planning includes both a Living Trust and a Power of Attorney. Your agent should be aware of the interplay between these two documents in order to know what document to present when attempting to manage your financial affairs in the event of your incapacity.
Monday, September 27, 2010 Taking Charge of Your Health Care Wishes
Perhaps the most important component of comprehensive Estate Planning is creating a legally binding set of instructions with regard to your health care wishes in the event of incapacity. Normally when you have a health issue, it is your basic civil right to weigh the medical options, examine the advice given to you by your health care providers, assess the risks and benefits, and settle on a course of action. However, if you are incapacitated, who is going to make such important and personal decisions on your behalf and how will that person know what you would want?
The best way to address these issues is to execute an Advance Health Care Directive ("AHCD"). The AHCD has two main elements. The first element is to designate an agent to make health care decisions on your behalf if you are incapacitated. Your agent's role is to choose your doctor and your health care provider, speak with your health care team regarding your condition and your treatment options, review your medical record and authorize its release when necessary, and accept or refuse medical treatment, including artificial nutrition and hydration and resuscitation attempts. In choosing your agent, you should consider if that person will be available when needed, is willing to speak on your behalf, knows you well and understand your beliefs, will be comfortable asking your health care team questions, will do his/her best to make decisions in accordance with what you would have wanted, and is willing to be an advocate on your behalf. It is also a good idea to designate alternate agents in case your first choice is unwilling or unable to act as your agent.
The second element of an AHCD is to generally express your wishes with respect to your health care. You can write your preferences about accepting or refusing life-sustaining treatment, receiving pain medication, making organ donations, indicating your main doctor for providing your care, or other things that express your wishes and values.
An AHCD is appropriate for all adults, regardless of age or health condition as it appoints an agent and acts as a general guide for your health care wishes. If you are seriously ill or in poor health, you may want to consider executing a Physician Orders for Life Sustaining Treatment form ("POLST" form). A POLST form compliments your AHCD and is a medical order signed by your doctor and you which gives much more detail about your wishes with respect to end-of-life decisions.
Tuesday, August 24, 2010 Maintaining Your Prop. 13 Tax Base
Most real property owners in California have at least a rudimentary understanding of Prop 13, the landmark legislation passed by voter referendum in 1978. The concern that prompted Prop 13 was dramatically increasing property values that resulted in dramatically increasing property taxes that many homeowners couldn't afford. Prop 13 first froze the assessed or taxable value of every Californian's home to the March 1, 1975 fair market value level. Secondly, Prop 13 restricted annual increases in assessed value of real property to an inflation factor not to exceed 2% annually. The idea was that all homeowners would always have predictability with respect to what their property taxes would be in a given year.
Real property may not be reassessed for property tax purposes unless there is a change in ownership or new construction. Even if there is a change in ownership of real property, there are several important exceptions to the general rule that a change in ownership triggers reassessment. These exceptions must be carefully considered when property owners contemplate transferring property either by lifetime gift or by a bequest upon death.
One of the most common exceptions to the change in ownership rule is transfers of real property into or out of a Revocable Living Trust. Most Estate Plans in California are based upon Revocable Living Trusts which require property owners to re-title their properties into their Trusts. Transferring title into our out of a Revocable Living Trust does not impact a property owner's Prop 13 tax base.
Another common exception is transfers between spouses. A husband and a wife may transfer real property between themselves without having to worry about triggering a reassessment.
Transfers of a principal residence from a parent to a child or from a child to a parent are exempt from a reassessment under Prop 13. Transfers of additional real property up to $1 million in assessed value are also exempt from a reassessment. It is important to note that the $1 million limitation on transfers of additional real property is based on assessed value, not fair market value. If real property has been owned for a long time, there is likely a dramatic difference between the very low assessed value and the very high fair market value.
Although there is an exemption from reassessment for a transfer between a parent and a child, there is no exemption from reassessment from a transfer from a sibling to a sibling. Therefore, if for example a parent dies and leaves all of her property to her two children 50/50 and only one child wants to keep the house, it is crucial that the house gets transferred out of the estate 100% to the child who wants to keep the house and other assets of equal value be transferred out of the estate to the other child.
There is also a very limited exemption for certain transfers between a grandparent and a grandchild.
Anybody transferring real property must be keenly aware of the Prop 13 issues in order to avoid an unnecessary reassessment which could result in a dramatic property tax increase for as long as the property is owned. In addition, certain forms must be filled out and filed with the County in order to claim the exemptions discussed above. Many property owners make the mistake of transferring real properties without proper guidance, unnecessarily creating a reassessment.
Tuesday, August 24, 2010 Traps for the Unwary
Most Americans have never done their Estate Planning. Everybody knows that human beings are mere mortals and that it is a good idea to plan for the event of incapacity or death. However, for most people, thinking about these issues is uncomfortable and there are many other tasks we'd rather focus upon such as planning a vacation, looking forward to a relative's graduation, and celebrating a birthday.
Some folks who decide to finally do their Estate Planning look for shortcuts such as "do-it-yourself" kits or "trust mills"- out-of-town companies that provide a "one-size-fits-all" plan for a nominal fee. However, delving into the complicated world of Estate Planning without detailed knowledge of key issues can lead to traps for the unwary.
A common problem is when individuals attempt to draft their own Wills. While the formalities of a legally binding Will are not complicated, they are specific. If the Will is typed, the Will must be signed by the testator and must also be signed by two disinterested witnesses during the testator's lifetime. A common mistake is to have a Will notarized instead of witnessed which does not comply with the law. If a Will is not properly witnessed, it may still be valid if the material terms are in the testator's handwriting. If a Will is not properly witnessed and if the material terms are not in the testator's handwriting, a Will may still be valid if there is "clear and convincing evidence" that the testator intended the document to be his or her Will. While the Will may eventually be considered valid, a lack of proper formalities can create unnecessary hurdles.
Another common problem relates to Trusts. Most individuals decide to use a Trust rather than a Will in order to avoid probate. However, a Trust will only control what is titled to it. Many people who use "do-it-yourself" kits or "trust mills" will draft a trust but will fail to properly re-title their assets to their Trust. As a result, they have an empty document that is ineffective and it is as if they never did their Estate Planning in the first place.
Finally, without proper guidance, many people do not realize that other mechanisms may supersede the provisions of a Will or a Trust. For example, any property held in joint tenancy will automatically pass to the surviving joint tenant, even if the Will or Trust has a specific clause that gives the property to someone else. Retirement plans and life insurance are controlled by beneficiary designations. If there is a conflict between the beneficiary designation and the Will or Trust, the beneficiary designation controls.
Most people think their Estate Planning is simple. However, without detailed knowledge of the complex laws, many people fall into unexpected traps that lead to tragic results.
Thursday, July 29, 2010 Incorporating Savings for College in your Estate Plan
The cost of higher education in the United States is staggering and is climbing rapidly each year. This fact combined with the scheduled dramatic reduction in the Estate Tax Exemption starting on January 1, 2011 causes many clients to think about planning for their children's or grandchildren's future college expenses in the course of addressing their Estate Planning.
One of the simplest ways to reduce the future impact of the Estate Tax is to make gifts. If you have a smaller estate at death, there is less for the IRS to possibly tax. However, there are two primary concerns that arise when contemplating making gifts to children or grandchildren to fund future college expenses as a way to reduce the impact of potential Estate Tax.
First, many parents and grandparents are not keen on the idea of giving children direct access to thousands of dollars. As soon as the children or grandchildren turn 18, they're likely headed directly to the Porsche dealer. Second, generally there are limits placed on how much donors can give away each year without impacting their Estate Tax Exemption. Currently, the limit is $13,000 per year per beneficiary.
A solution that navigates both of these concerns is a § 529 College Savings Account ("CSA"). In a CSA, a contributor funds an account for purposes of meeting the qualified higher education expenses incurred by a beneficiary in the future. Distributions made for qualified educational expenses are tax-exempt. The contributor is typically the account owner, and retains significant controls over the account, including the ability to control distributions, to change the beneficiary, and to reacquire the assets in the account. Contributions are not deductible for federal income tax purposes but are treated as completed gifts. In addition, a special provision applicable only to CSA's allows a contributor to fund an account with an amount equal to 5 years' worth of $13,000 annual exclusions at one time, and elect to treat the contribution as if it were being made pro rata over 5 consecutive years.
Because the account owner holds such significant controls over CSA's, an individual's CSA should be considered at every estate planning juncture. For example, if an account owner dies, who has control over the CSA? This problem can be resolved by either naming a successor owner or by transferring ownership of the CSA into a Revocable Living Trust. Any such Trust should have special provisions concerning the management and investment over the CSA. Additionally, the specific CSA account agreement should be consulted to ensure that the particular plan allows for either successor owners or Trust ownership.
Tuesday, July 20, 2010 Press Release: Nationally Recognized Law Firm Forms "Of Counsel" Relationship with KRASA LAW
HEADLINE:
Wealth Strategies Counsel and Jeffrey R. Matsen, One of the Nation’s ”Top 100 Attorneys” according to Worth Magazine, has formed an “Of Counsel” relationship with the Pacific Grove firm of KRASA LAW.
DATE:
July, 2010
LOCATION:
Pacific Grove, California
SUMMARY:
Kyle A. Krasa of KRASA LAW, a Pacific Grove, California Estate Planning Law Firm, is happy to announce that Nationally Recognized Estate and Business Planning Attorney, Jeffrey R. Matsen and his Orange County, California firm, Wealth Strategies Counsel (WSC) of Bohm, Matsen, Kegel, & Aguilera LLP, are “Of Counsel” to KRASA LAW. This relationship provides KRASA LAW with additional resources and prestige associated with Attorney Matsen and his firm, ultimately increasing the services to clients with Estate, Business and Asset Protection Planning as well as the ability to provide Offshore services.
BODY:
Attorney Kyle A. Krasa is a native of the Monterey Peninsula. He provides clients with personal, compassionate, and thorough legal services in the practice areas of Estate Planning, Elder Law / Medicaid Planning, Asset Protection, and Probate / Estate Administration. He is a Certified Legal Specialist in Estate Planning, Trust & Probate Law by the State Bar of California Board of Legal Specialization. Kyle is known for his Client-centered, holistic approach and for his ability to explain complex legal principles into easy-to-understand "plain English." His clients' testimonials, which can be found on his website at www.krasalaw.com, describe him as patient, kind, knowledgeable, and a pleasure to work with.
Attorney Jeffrey R. Matsen’s knowledge, professionalism, responsiveness and integrity have vaulted him to the top of his field culminating in his designation by Worth magazine as one of "America’s Top 100 Attorneys", by Los Angeles Magazine as one of California’s "Super Lawyers". The Nationally Renowned Attorney Rating Service, ‘AVVO’ has rated Mr. Matsen a perfect "10/10 Superb" and he has continued to achieve the highest "AV rating" and has been designated a "Preeminent Lawyer" by the only other prestigious attorney rating directory, Martindale Hubble. He is internationally recognized in the areas of Asset Protection, International Trusts and Offshore Business Entity Formation and has a myriad of world-wide legal, financial and business connections.
Matsen is the founding partner of Wealth Strategies Counsel (WSC), the Estate Planning and Business Transactions Department of the Orange County California premier law firm of Bohm, Matsen, Kegel & Aguilera, LLP with offices in Orange County California, Chicago, Honolulu, Salt Lake City, Boise Idaho, New York City and now, Pacific Grove/Monterey/Carmel, California. With over 35 years of experience, WSC handles complex and sophisticated asset protection, estate and business planning matters locally, nationally and internationally. WSC serves a variety of clients by providing solutions they can count on and advisors they can trust. WSC make certain that their client’s wishes are not only being fulfilled, but that they are sound and tax advantaged.
Both KRASA LAW and WSC are members of Wealth Counsel (WC), a national association of Estate Planning attorneys and a leading provider of tools and intelligence to the Estate Planning community. It provides its member attorneys with back office technology solutions and continuing legal education that keeps them on the leading edge of professional knowledge and engages the attorney membership in a collaborative network where each attorney can exchange ideas and problem solve. There are over 1000 member attorneys nationally in Wealth Counsel, including many of the leading Estate Planning practitioners in the country. Attorney Matsen has presented continuing legal education through WC and continually collaborates with other WC attorneys, which is how the two firms became associated and began working on mutual cases together.
“I am excited to be affiliated with KRASA LAW and value Kyle's opinions and ideas! The decision to join KRASA LAW on an 'Of Counsel' basis was made after considerable due diligence and concluding it is a very professional and outstanding firm. Our combined expertise and resources provide a strategic advantage to our mutual clients,” stated Jeffrey R. Matsen, Founding Partner, Wealth Strategies Counsel.
Kyle A. Krasa, of KRASA LAW said, "I am honored to have Jeff and Wealth Strategies Counsel as my 'Of Counsel.' In this complex legal climate, it is important to be able to exchange ideas and brainstorm about various legal strategies in order to make sure all clients receive the best legal services possible. Being able to collaborate with a prestigious and knowledgeable attorney such as Jeff, and to have a large, "big city" law firm and its sophisticated staff as a "back office," is invaluable and is another way to provide value-added service to my clients."
BRIEF BIO:
Jeffrey R. Matsen of Wealth Strategies Counsel helps his clients structure their personal and business assets in the best way possible to preserve, protect, and transfer them in the most efficient and tax saving manner.
Kyle A. Krasa, of KRASA LAW, takes a warm, personal, and guiding approach to assisting clients in the areas of Estate Planning, Asset Protection, Trust, Probate, and Medi-Cal Planning.
CONTACTS:
Tuesday, July 13, 2010 Yankees Owner Gets Away With It Again!
Over the past several months, I have written several columns about the impact of the 2010 Estate Tax rules. In summary, there is normally a Estate Tax or "death tax" on inheritances. The Estate Tax is typically around 50%. The good news is that not everyone is subject to the Estate Tax. In most years, there is an Exemption that shelters a certain amount of inheritance from the Estate Tax. The Exemption has ranged from $675,000 in 2001 to $3.5 Million in 2009. Under current 2010 law, there is an unlimited Exemption from the Estate Tax which is another way of saying that there is no Estate Tax. However, in 2011, the Estate Tax comes roaring back with only a $1 Million Exemption.
At the start of 2010, many observers felt that Congress would retroactively pass a law that would prevent an unlimited Exemption for decedents dying this year. Although the House passed legislation in December 2009, the Senate was never able to ratify the bill. Now that it is the middle of summer, most experts feel that Congress will not be able to pass any retroactive Estate Tax legislation for the year 2010. Furthermore, observers felt that if an ultra wealthy person died in 2010, that person's heirs would have great incentive to challenge any attempted retroactive Estate Tax legislation. As it turns out, a few ultra wealth individuals did in fact die in 2010, including New York Yankees owner George Steinbrenner.
When George Steinbrenner purchased the Yankees in 1970, he paid $10 Million. Today, the team is worth approximately $1 Billion. If George Steinbrenner died in any other year, his heirs would have been required to pay hundreds of millions of dollars in Estate Tax. However, because the 80-year-old baseball icon died in 2010, his heirs will not have to pay the IRS a dime in Estate Tax! If Congress attempts to pass a law that retroactively reinstates the Estate Tax in 2010, you can bet that heirs such as George Steinbrenner's family will hire high-powered attorneys to challenge the legality of retroactively creating such a law. As the husband of a native New Englander and a loyal Red Sox fan, it's disheartening to see George Steinbrenner get away with another one.
With the passing of George Steinbrenner, it definitely appears that there will not be any Estate Tax for decedents dying in 2010. However, observers thus far have not had good luck in predicting what will happen with regard to the Estate Tax law. Almost all practitioners agree that Congress needs to come up with a permanent and fair Estate Tax solution for decedents dying in 2011 and beyond.
KRASA LAW is located at 704-D Forest Avenue, PG, and Kyle can be reached at 831-920-0205.
Tuesday, July 06, 2010 What can a Certified Legal Specialist Do for You?
When the legal world was simpler, it was common for attorneys to be "general practitioners" who practiced in an array of legal areas. The same person who drafted your Will would also handle your divorce and even defend you in a criminal action. Everybody within a particular community would visit the same "town lawyer" for all of their legal matters.
However, today it is rare to find an attorney who will take anything that walks into the door. The reason is that society has become much more complex and it is not possible for any one person to have the requisite depth of knowledge to practice competently in all practice areas. It has thus become a necessity to focus in one or two key areas of the law. Most laypersons understand this as a common question I receive when I state that I am an attorney is, "In what area do you specialize?"
With Estate Planning in particular, there is a problem with attorneys practicing without the requisite skill and depth of knowledge necessary to be competent and effective. The reason is because many attorneys who advertise that they practice Estate Planning are really experts in other, more stressful fields such as litigation, and turn to Estate Planning after "burning out." How do you know if a particular attorney has requisite skill, education, and dedication to Estate Planning? One way is to inquire as to whether the attorney is a Certified Legal Specialist in Estate Planning, Trust & Probate Law by the State Bar of California Board of Legal Specialization.
The California State Bar certifies Legal Specialists to help the public identify attorneys who have demonstrated proficiency in specialized fields of law and to encourage the maintenance and improvement of attorney competence in specialized fields of law. Estate Planning, Trust and Probate law is complex and constantly changing - a Certified Legal Specialist stays current with the law.
A Certified Legal Specialist is more than just an attorney who specializes in a particular area of the law. A California attorney who is certified by the State Bar as an Estate Planning, Trust & Probate Law Specialist must have (1) taken and passed a written six hour and fifteen minute examination in Estate Planning, Trust & Probate Law; (2) demonstrated a high level of experience in Estate Planning, Trust & Probate Law; (3) fulfilled ongoing education requirements; and (4) been favorably evaluated by other attorneys and judges familiar with his or her work.
For an alphabetical list by county of certified Estate Planning, Trust & Probate Law specialists, visit www.californiaspecialist.org.
Kyle A. Krasa, Esq. is a Certified Legal Specialist in Estate Planning, Trust & Probate Law by the California Board of Legal Specialization. Tuesday, June 08, 2010 Reverse Estate Planning
When most advisors and their clients consider Estate Planning, they look "downstream" to future generations. They think about how to structure the Estate Plan so as to provide for children, grandchildren, and other younger beneficiaries. The perspective is always, "How can we benefit future generations?" While this is a key aspect of any Estate Planning, there is not enough focus on the reverse: "upstream" Estate Planning. Clients should also focus upon how gifts and inheritances they expect to receive should be structured in order to benefit themselves.
Basic Estate Planning usually involves creating a Living Trust for the purpose of avoiding conservatorship in the event of incapacity and avoiding probate upon death. There is no question that for the vast majority of clients, being able to avoid the cost, expense, frustration, and other hassles with conservatorship and probate is worth the legal fee in creating a Living Trust.
Traditionally, most attorneys and other advisors have not seen additional benefits of creating a Living Trust beyond avoiding conservatorship and probate. As a result, provided the beneficiaries are mature enough to manage their inheritances, most Living Trusts terminate upon the death of the client(s) and the beneficiaries receive their inheritances free of trust, in their own name(s). This is simple, straight-forward, easy-to-understand Estate Planning.
Recently, the trend among national experts in Estate Planning, especially in light of the plummeting economy and the resulting dramatic increase in litigation, is to keep inheritances in trust for beneficiaries. The reason is because when a Trust is created for the benefit of a third party, the Trust can provide so many more benefits than avoiding conservatorship and probate. A Trust can provide superior creditor protection for the third party beneficiary in the event of frivolous lawsuits or extraordinary health care bills. A Trust can also provide significant divorce protection and even additional Estate Tax protection for the third party beneficiary. If the beneficiary is mature, the beneficiary can even be in charge of his/her Trust share.
However, such protections are only effective if a Trust is created by someone else for the benefit of a third party: i.e., you cannot enjoy the same benefits if you try to create such a trust for yourself. With all this focus on protecting future generations, how can you provide yourself with these same benefits?
One answer is to ask your potential benefactors (parents, grandparents, etc.) to structure their Estate Planning in order to provide "in trust" inheritances rather than outright inheritances. Some benefactors don't want to dramatically alter the structure of their Estate Planning. In that case, clients can have their own attorneys draft a special kind of Trust designed to receive assets from third party benefactors, sometimes referred to as a "Heritage Trust." The Heritage Trust will have all of the protections necessary to allow the beneficiary to enjoy as much creditor protection, divorce protection, and Estate Tax protection as possible. The benefactors would simply be asked to sign the Heritage Trust and would be asked to make a slight modification to their Estate Planning to leave any inheritance to the Heritage Trust. Any lifetime gifting should also be made to a Heritage Trust in order to provide for the same protections.
The key is for clients and their advisors to be aware of the concept of "reverse" or "upstream" Estate Planning and for clients to ask their benefactors if they'd be willing to sign a Heritage Trust and make a slight modification to their Estate Planning. As a nationally recognized expert on the subject once said, "It is rare that a parent would say 'No' to a mature child who asks the parent to do this. The parents often say, 'Hmmm...It protects it from your spouse! Where do I sign up?'"
Tuesday, May 25, 2010 Children: A Reason to Plan NOW!
Four days ago, I had the honor of experiencing the birth of my first child. (Admittedly, my wife "experienced" it a bit more than I did.) At that moment, I suddenly understood all the clichés about having children: how it's miraculous; how it changes your life; how you experience an instant love-at-first-sight like none other; how you would do anything to protect them. That's when I realized: we need to change our Estate Plan!
Having young children is one of the most important reasons to execute an Estate Plan in the first place. Unfortunately, most young parents don't think about Estate Planning. They are too busy with work, raising their children, school activities, slumber parties, and family vacations. It isn't until they near retirement and their children have become adults that most people start seriously thinking about Estate Planning. However, Estate Planning is probably most important for young parents because young children need much more detailed planning than older children.
Guardians. One of the biggest issues facing parents with young children is designating legal Guardians to take care of their children in the event of incapacity or death. Most parents realize that they should nominate Guardians but would rather not think about someone else raising their own children and thus fail to plan. Unfortunately, without taking the time to designate legal Guardians, parents leave it up to chance as far as who will eventually be appointed as Guardians of their own children. It's a difficult issue but one in which parents with young children should tackle right away. It's traumatic enough for a child to lose a parent and there is no need to add uncertainty and family squabbles into the mix.
In selecting Guardians, parents should think beyond the obvious choices. While close family members often make good candidates, parents should also think about extended family members and even friends. Sometimes a friend may have closer religious beliefs, moral values, educational values, social values, and child-rearing philosophies than relatives.
It takes time for a Court to legally appoint a Guardian, even if that Guardian is designated in a parent's Estate Plan. As a result, it is a good idea to also designate temporary Guardians who can take care of the children until a Court is able to legally appoint the Guardian of the parents' choice. Without a temporary Guardian designation, children may have to go into the custody of child protective services in the meantime.
It is also important to name alternate Guardians. Just as something could happen to a parent, something could happen to a Guardian. Although it's difficult to come up with even one person to designate as a Guardian, designating at least two or three alternate Guardians should be part of every parent's Estate Plan.
Inheritance. Most parents assume that all their assets - their bank accounts, investment accounts, retirement accounts, homes, other real property - will automatically be given to their children. While it is true that children are the default heirs of their parents, careful planning is still necessary. Without proper Estate Planning, the parents' estates will have to be subject to Probate, a very time consuming, public, and expensive court-supervised process. Furthermore, until the children reach age 18, all assets will likely need to be placed in a custodial account with an adult custodian who will be designated to manage the assets. Once the child turns 18, he or she will be entitled to 100% of his or her share of the inheritance without any guidance. Most parents realize that not many 18 year old individuals have the maturity and the foresight to properly manage money.
For most parents, the best solution is to establish a Trust for their children. With a Trust, the parents can select a successor Trustee, an adult of their choice who will have the responsibility to manage the assets of each child's share of the inheritance. The Trustee can be the same person designated as the child's legal Guardian or the Trustee can be a different person. Parents can also select an age in which the children assume management and control over their inheritance. Until the child reaches that age, the inheritance is still available to the child, but it is in the discretion of the Trustee, usually with certain guidelines established by the parents.
When children reach the designated age to be able to assume management and control over their inheritance, good planning will provide that the Trust remains intact and that the child simply takes over as Trustee, rather than terminating the Trust and distributing the inheritance to the child directly. By keeping the inheritance in Trust, the child may be afforded some Estate Tax and GST Tax benefits, a degree of divorce and creditor protection, and options in the event the children ever develop Special Needs.
Values. An effective Estate Plan can also instill parents' values in their children. Part of this process includes the choice of guardians and the manner in which the inheritance is received as mentioned above. However, a comprehensive Estate Plan should include an "Ethical Will" - a statement of the parent's life story, childhood, background, and philosophy. In addition, parents can provide guidelines to the Guardian, the Trustee, and the children directly regarding their approach to life. Such guidelines can include books or "must see" movies that embrace parents' ideas, views about religion, moral values, personal relationships that the parents wish the child to maintain, activities and hobbies that the parents wish the child to engage, and particular goals the parents wish the children to have.
Comprehensive Estate Planning should be near the top of the "to do list" for every parent. Unfortunately, it is an issue that most parents never think about in the midst of raising their children. Those parents who do take the time to execute a comprehensive Estate Plan will be providing their children with an invaluable gift and will be providing themselves with peace of mind.
Tuesday, May 11, 2010 Protecting Your Home
Even in today’s market, your home is likely your most valuable asset. It is also your most important asset. Not only does it provide necessary shelter and comfort, but it is an outward manifestation of your very existence. Sentimentally, your house is priceless. Of all your assets, your house is the most important to protect from frivolous lawsuits (i.e. traffic accidents, former employees, professional malpractice) and creditors (i.e. unpaid health care bills). Ironically, your house is also the most difficult asset to protect.
You may be under the mistaken assumption that your house is somehow protected from creditors and/or bankruptcy in the form of a “homestead exemption.” Only a few states – such as Florida and Texas – provide an unlimited homestead exemption for your personal residence (this is the primary reason O.J. Simpson moved from California to Florida in the wake of his loss in a wrongful death lawsuit). In California, the homestead exemption is limited to $75,000 in equity for a single person, $100,000 in equity for a family, and $175,000 for homeowners over 65 or disabled. As a result, if a creditor has a claim against you for more than the homestead exemption amount, the creditor can force the sale of your home.
The most common form of asset protection for real property – a Limited Liability Company or “LLC” – is typically unavailable for your house due to the requirement that you must have a “business purpose” in order to form an LLC. You ordinarily do not have a legitimate “business purpose” when it comes to your personal residence. (If you have a true home office or rent out a room or a guesthouse, you may have a legitimate “business purpose,” but there are other potential problems with transferring your personal residence into an LLC.)
A popular form of asset protection for your home is a practice known as “equity stripping.” The basic idea behind equity stripping is to take out a loan against your house in an amount that leaves little or no equity. Your home thus becomes “valueless” in the eyes of a creditor. You can invest the liquidity in rental property or other assets that are easier to protect with the use of LLC’s or other structures. The most common form of equity stripping is to take out a Home Equity Line of Credit (“HELOC”) on your house, which can also provide liquidity for emergencies or unexpected financial obligations.
Another method for protecting your home is to establish a Domestic Asset Protection Trust (“DAPT”). Only 11 states - such as Nevada and Delaware but not California - allow DAPT’s. Nevertheless, many clients still place California homes in an out-of-state DAPT on the theory that doing so is better than leaving the house completely vulnerable. An even stronger barrier is to combine equity stripping with the use of a DAPT, making it much harder for a creditor to go after the home and thus much more likely to settle or give up all together.
As with all asset protection planning, you should always employ equity stripping and DAPT’s long before there is any hint of a potential lawsuit. It is best that any such transaction is “old and cold” by the time a creditor asserts a claim.
Friday, May 07, 2010 Will Everybody Need Advanced Estate Planning?
The bad news is that the Estate Tax, or "Death Tax," is a confiscatory tax on inheritance with rates as high as 55%. The good news is that everyone is entitled to an exemption from the Estate Tax. Over the last decade, the exemption has rapidly risen from $675,000 in 2001 to $3.5 million in 2009. As a result of these rules, most clients over the last decade have not had to do more than Basic Estate Planning such as setting up an A/B Trust. However, beginning in 2011, many clients may have to engage in Advanced Estate Planning, once only reserved for extremely wealthy individuals.
Currently in 2010, there is no Estate Tax. However, in 2011, the Estate Tax comes back and the Estate Tax Exemption is scheduled to drop to $1 million. This means that if you add up the fair market value of everything you own, any amount over $1 million will be subject to a 55% Estate Tax. Advanced Estate Planning may be the answer.
One Advanced Estate Planning technique is to make annual gifts to relatives. Each person may gift up to $13,000 per person per year without any Gift Tax or Estate Tax ramifications. Many clients make it an annual habit to gift $13,000 to children, grandchildren, and other loved ones. Some clients take it a step further by forming Family Limited Partnerships or Family LLC's and giving away fractional interests in such entities. By doing so, they can take advantage of "fractional discounts" - the principal that a minority interest in an entity is worth something less than the proportional fair market value of the interest since there is no control over the entity. This technique allows you to give more away at a lower Gift Tax "cost."
Another Advanced technique is to gift an asset that is expected to appreciate. If you give away more than $13,000 to a single person in a single year, you start using up your Estate Tax Exemption. However, if you think a particular asset will dramatically appreciate in value in the future, you may want to gift that asset now, while the value is low, and allow the appreciation to occur in your beneficiary's Estate rather than in your Estate. This technique is known as an "Estate Freeze."
A sophisticated "Estate Freeze" technique is a special kind of irrevocable trust known as a Qualified Personal Residence Trust, or a "QPRT" (pronounced “cue-pert”). Our homes are often our most valuable assets and hence one of the largest components of our taxable estate. A QPRT allows you to give away your house or vacation home at a great discount, freeze its value for estate tax purposes, and still continue to live in it. Here is how it works: You transfer the title to your house to the QPRT (usually for the benefit of your family members), reserving the right to live in the house for a specified number of years. If you live to the end of the specified period, the house (as well as any appreciation in its value since the transfer) passes to your children or other beneficiaries free of any additional estate or gift taxes. After the end of the specified period, you may continue to live in the home but you must pay rent to your family or designated beneficiary in order to avoid inclusion of the residence in your estate. This may be an added benefit as it serves to further reduce the value of your taxable estate, though the rent income does have income tax consequences for your family. If you die before the end of the period, the full value of the house will be included in your estate for estate tax purposes, though in most cases you are no worse off than you would have been had you not established a QPRT. An added benefit of the QPRT is that it also serves as an excellent asset/creditor protection vehicle since you no longer technically own the property once the trust is established and your residence is transferred to the QPRT.
In addition, there are other Advanced techniques that may be worth discussing with an attorney in anticipation of the scheduled 2011 Estate Tax Exemption.
Wednesday, April 14, 2010 Don't Fall Into a Property Tax Trap
Thanks to Proposition 13, if you’ve owned real property in California for several years, it is likely that your property taxes are relatively low. Proposition 13 essentially freezes the assessed value of your California real property for property tax purposes until either there is (1) new construction or (2) a change in ownership. The idea is to give homeowners predictability with regard to their annual property tax liability, especially in a state where real property values have soared over the past 30 years while many homeowners’ incomes have not necessarily increased. Many homeowners have become accustomed to their property tax rates and hope that their heirs can enjoy the same benefits.
Under Proposition 58, a transfer of the principal residence between a parent and a child is completely exempt from a property tax reassessment despite the change of ownership. In addition, a transfer of real property other than a principal residence between a parent and a child is exempt up to $1,000,000 of assessed value. In order to preserve this exemption, proper estate planning and estate / trust administration is essential. For example, if multiple children are the beneficiaries of an estate but only one child wants to keep certain real property, the trustee or executor should determine whether the trust or will allows non-pro rata distributions of property. If this is the case, the trustee or executor should refrain from distributing all of the inheritance in equal shares to the children and instead transfer 100% of the real property to the child who wants to keep the real property and transfer other assets of equal value to the other children.
In addition, Proposition 193 excludes from reassessment transfers of real property from grandparents to grandchildren, providing that all the parents of the grandchildren who qualify as children of the grandparents are deceased as of the date of transfer.
In order to claim either the parent/child exclusion or the grandparent/grandchild exclusion, be sure to file the proper forms upon the death of a real property owner. These forms include the Death of Real Property Ownership Report, the Preliminary Change of Ownership Report, and the Parent/Child or Grandparent/Grandchild Exclusion forms.
Friday, April 02, 2010 Is Your Well-Meaning Friend Out of Luck?
Establishing your estate plan is a very personal and sensitive task. More important than the actual money or property that you leave to a loved one is the acknowledgment of appreciation that mentioning someone in your estate plan conveys. However, without careful planning, sometimes the best intentions can accidentally create a legal mess.
In 1992, the L.A. Times ran a series of articles about estate planning attorney James D. Gunderson who had an office within Leisure World, a Southern California gated retirement community. Mr. Gunderson had a habit of inserting himself in his clients' estate plans. Over the years, his clients "left" him millions of dollars in cash and other property. Many observers questioned the propriety of the estate plans Mr. Gunderson drafted. In response, the California legislature passed Probate Code Section 21350 which disqualified estate planning gifts made to the drafting attorney, the law partners of the drafting attorney, and employees of the drafting attorney with narrow exceptions.
Five years later, in 1997, the California legislature added a new sub-section to Probate Code Section 21350 which also made "a care custodian of a dependent adult" disqualified from receiving gifts through estate plans. The concern was that in-home caregivers might unduly influence vulnerable seniors and manipulate them into handing over their estates. Originally, California courts held that only professional or paid caregivers fell into the disqualified category within the meaning of the statute. However, in 2006, the California Supreme Court case of Bernard v. Foley held that "care custodian" included unpaid caregivers, even friends who simply shopped, did banking, and cooked for the senior. This expansive interpretation of the law results in disqualifying gifts to well-meaning friends of the senior.
Fortunately, there is a saving grace. If you intend to leave part of your estate to a friend who occasionally runs errands for you, the best practice is to have a second attorney sign a "Certificate of Independent Review" which states that the second attorney has explained the estate plan to you and believes that you are not under undue influence or fraud. If your estate plan creates a gift for a friend, you may want an attorney review it to make sure the "Certificate of Independent Review" procedure is not necessary. Your estate plan may have been created prior to the 2006 case. Furthermore, what was a friend at the time you signed your estate plan may have since turned into a "care custodian."
Tuesday, March 09, 2010 Destroying the Incentive to Litigate
Many people are increasingly concerned about becoming the targets of lawsuits and other creditors. We live in a litigious society and there is no greater tragedy than losing everything that one has worked hard over a lifetime to attain due to an aggressive plaintiff's attorney and a persuaded jury. It seems that there are no limits as to why someone is sued. Recently the Associated Press reported that actress Lindsay Lohan filed a lawsuit against E-Trade claiming that an advertisement featuring babies referring to a "milkaholic" named Lindsay is modeled after her and is damaging her reputation. With endless possible ways to be on the wrong end of a subpoena, proper Asset Protection Planning is generating more interest.
Perhaps the most common form of Asset Protection involves creating entities such as corporations or Limited Liability Companies ("LLC's") to hold business or investment property. If you run a business or own rental property, holding such assets in a corporation or an LLC will provide you with a degree of creditor protection. "Inside creditors" - those individuals who claim they have been harmed by the business or on the rental property - generally will be limited in their recourse to the assets that are held in the corporation or LLC and will not be able to go after your personal assets. If the LLC is structured in a certain way and is governed under an Asset Protection friendly state such as Nevada, "outside creditors" - those individuals who claim they have been harmed personally by the defendant - generally will be limited in their recourse to personal assets and not the business assets.
Protecting personal assets is more difficult. Historically, it was not possible to create an entity in the United States that shielded your own assets from your own creditors. However, years ago foreign jurisdictions such as the Cook Islands allowed so called "Asset Protection Trusts." The idea was to create a trust in a foreign jurisdiction, hire a foreign trustee, and rely upon the foreign jurisdiction's laws to protect your personal assets.
More recently, states such as Nevada and Delaware have amended their laws to allow domestic Asset Protection Trusts. The idea is similar to a foreign Asset Protection Trust but instead of moving title to your assets off-shore, you only need to move title to your assets to another state. This method is generally less expensive and it is less worrisome for most clients to hold title in another state rather than in another country.
Both foreign and domestic Asset Protection trusts are not foolproof but the idea is to make it harder and more expensive for a potential plaintiff to go after your assets. The concept is to put as many obstacles between the potential plaintiff and your assets in order to destroy the economic incentive to litigate.
For more information, I am hosting two seminars on Asset Protection Planning with special guest, nationally-known Asset Protection attorney Jeffrey R. Matsen. Both seminars will be held on Thursday, March 25, 2010. Please call Marilyn Beans at 831-920-0205 to RSVP.
Thursday, February 25, 2010 Seminar Advertisement: What Everybody Should Know About Asset Protection
The Pacific Grove law firm of KRASA LAW presents two seminars on "What Everybody Should Know About Asset Protection," with special guest, Jeffrey R. Matsen, Esq.
Never before has the subject of Asset Protection been more important and topical! More and more people are using the legal system to deprive others of their life's work. Numerous lawsuits are filed in the United States every year, many of which are frivolous or settled for sums greater than the actual liability.
Business owners, professionals such as doctors, dentists, lawyers and accountants, and property owners in particular should be aware of the risk associated with conducting their business, practicing in their respective fields, and taking responsibility for others.
Asset Protection is about assisting clients in arranging their finances, real property and other assets in a manner that minimizes their exposure to potential creditors.
KRASA LAW presents two informative seminars on "What Everybody Should Know About Asset Protection," co-presented by Jeffrey R. Matsen, Esq.
1. For Advisors / Professionals:
Thursday, March 25, 2010, 12:00 to 1:15 pm
Bay Park Hotel
1425 Munras Avenue, Monterey, California
Lunch Provided
2. For Clients / Consumers:
Thursday, March 25, 2010, 6:00 to 7:15 pm
700 Jewell Avenue, Pacific Grove, California
Refreshments Provided
Host Kyle A. Krasa, Esq. of KRASA LAW in Pacific Grove, California is a native of the Monterey Peninsula and a local Estate Planning attorney. He is well known for his personal, client-centered approach to his practice.
Special guest Jeffrey R. Matsen, Esq. of Bohm, Matsen, Kegel & Aguilera, LLP in Costa Mesa, California has been recognized by Worth Magazine as one of the "Top 100 Attorneys" in the country and is well known nationally as a leading and cutting edge lawyer in Asset Protection.
Please RSVP to Marilyn Beans at 831-920-0205. Seating is limited.
Tuesday, February 23, 2010 On Schedule
Most Estate Plans utilize a Revocable Living Trust as the primary legal document that governs the management and distribution of one's assets in the event of incapacity and upon death. One of the main reasons that Revocable Living Trusts are so popular is the fact that they allow the avoidance of Probate. Rather than subjecting your loved ones to an expensive, time-consuming, public, court-supervised process, a Revocable Living Trust allows your representative to take inventory of your estate, pay your taxes and creditors, and distribute your assets to your loved ones privately, without court-supervision. Although there is still a process involved, Trust Administration is faster and less expensive than a probate.
The key to effectively avoiding probate with a Revocable Living Trust is to make sure that assets are titled to the Trust. This means that the financial institutions need to change the owner of record from the individual client to the Trust. Stocks held in certificate form showing the individual as the owner should be swapped for stock certificates showing the Trust as the owner. Real property such as houses, condominiums, commercial real estate, and vacant land should be re-deeded to the Trust. Mobile homes should be re-registered to the name of the Trust. Even timeshares should be re-titled to the Trust.
It can be very complicated and time-consuming in order to re-title one's assets to a Trust. However, failing to do so may cause an unintentional probate - the very scenario most clients attempt to avoid by taking the time and effort to create a Revocable Living Trust. Furthermore, it takes time to re-title one's assets to a Trust and something could happen in between the time a Trust is created and the time that assets are re-titled to a Trust. Fortunately, California offers a saving grace, known as a Heggstad Petition.
On October 20, 1990, Halvard L. Heggstad died. He had executed a Revocable Living Trust a year earlier and re-titled all of his assets to his Trust except for an interest in real property located in Menlo Park. At the same time, he listed all of his assets - including his interest in the Menlo Park real property - on a "Schedule A" attached to his Trust. The Trust referred to the "Schedule A" and stated that it was Mr. Heggstad's intent to transfer all of the assets listed on "Schedule A" to his Trust. In a 1993 case, the Court ruled that because he demonstrated his intent to transfer his interest in the Menlo Park real property to his trust by listing it on the "Schedule A," the property was in the Trust and thus a probate was not necessary.
Subsequently, there have been numerous cases with the same facts: a person died with assets titled to the individual's name but there was a "Schedule A" or other written document that expressed the person's intent to transfer that asset into the Trust. This kind of case is known as a "Heggstad Petition." If you can demonstrate some written intent to transfer the property into the Trust, courts will typically rule that such property is in fact in the Trust and that a probate is not necessary. As a result, a simple stopgap measure for avoiding a probate is to take the time to make a list of assets you intend to transfer into the Trust by completing a "Schedule A." I usually have my clients sign their "Schedule A" for added protection though it is not necessary. While it is still best to make sure assets are re-titled to the Trust, executing a "Schedule A" contemporaneously with executing a Trust is an easy way to ensure that the Trust carries out its objectives in avoiding probate.
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