The KRASA LAW, Inc. Estate Planning Blog

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 7, 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 9, 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,


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.

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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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