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The KRASA LAW, Inc. Estate Planning Blog

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 Through

You 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.

 


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KRASA LAW assists clients with Estate Planning, Elder Law, Pet Trusts, Asset Protection, Special Needs Planning and Probate / Estate Administration in Pacific Grove, CA(93950), Monterey (93944, 93940, 93943, 93942), Salinas (93901, 93905, 93906, 93907), Hollister (95023,95023) Pebble Beach (93953), Carmel By The Sea (93921), Seaside (93955) and Carmel (93923, 93922) in Monterey County and San Benito California.

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