Category: Estate Planning

Most people choose to utilize a revocable living trust in order to allow their beneficiaries to avoid court.  Court actions can often be time-consuming and expensive and avoiding the formal adjudication of the law is often preferable.  A properly titled trust can avoid the court procedure of conservatorship in the event of incapacity as well as the court procedure of probate upon death.  However, there are times when a trust ends up in court.  

California Probate Code Section 17200(b) outlines specific instances when an interested party can petition the court regarding the “internal affairs” of a trust.  These include:

“(1) Determining questions of construction of a trust instrument.

(2) Determining the existence or nonexistence of any immunity, power, privilege, duty, or right.

(3) Determining the validity of a trust provision.

(4) Ascertaining beneficiaries and determining to whom property shall pass or be delivered upon final or partial termination of the trust, to the extent the determination is not made by the trust instrument.

(5) Settling the accounts and passing upon the acts of the trustee, including the exercise of discretionary powers.

(6) Instructing the trustee.

(7) Compelling the trustee to do any of the following:

(A) Provide a copy of the terms of the trust.

(B) Provide information about the trust under Section 16061 if the trustee has failed to provide the requested information within 60 days after the beneficiary’s reasonable written request, and the beneficiary has not received the requested information from the trustee within the six months preceding the request.

(C) Account to the beneficiary, subject to the provisions of Section 16064, if the trustee has failed to submit a requested account within 60 days after written request of the beneficiary and no account has been made within six months preceding the request.

(8) Granting powers to the trustee.

9) Fixing or allowing payment of the trustee’s compensation or reviewing the reasonableness of the trustee’s compensation.

(10) Appointing or removing a trustee.

(11) Accepting the resignation of a trustee.

(12) Compelling redress of a breach of the trust by any available remedy.

(13) Approving or directing the modification or termination of the trust.

(14) Approving or directing the combination or division of trusts.

(15) Amending or conforming the trust instrument in the manner required to qualify a decedent’s estate for the charitable estate tax deduction under federal law, including the addition of mandatory governing instrument requirements for a charitable remainder trust as required by final regulations and rulings of the United States Internal Revenue Service.

(16) Authorizing or directing transfer of a trust or trust property to or from another jurisdiction.

(17) Directing transfer of a testamentary trust subject to continuing court jurisdiction from one county to another.

(18) Approving removal of a testamentary trust from continuing court jurisdiction.

(19) Reforming or excusing compliance with the governing instrument of an organization pursuant to Section 16105.

(20) Determining the liability of the trust for any debts of a deceased settlor. However, nothing in this paragraph shall provide standing to bring an action concerning the internal affairs of the trust to a person whose only claim to the assets of the decedent is as a creditor.

(21) Determining petitions filed pursuant to Section 15687 and reviewing the reasonableness of compensation for legal services authorized under that section. In determining the reasonableness of compensation under this paragraph, the court may consider, together with all other relevant circumstances, whether prior approval was obtained pursuant to Section 15687.

(22) If a member of the State Bar of California has transferred the economic interest of his or her practice to a trustee and if the member is a deceased member under Section 9764, a petition may be brought to appoint a practice administrator. The procedures, including, but not limited to, notice requirements, that apply to the appointment of a practice administrator for a deceased member shall apply to the petition brought under this section.

(23) If a member of the State Bar of California has transferred the economic interest of his or her practice to a trustee and if the member is a disabled member under Section 2468, a petition may be brought to appoint a practice administrator. The procedures, including, but not limited to, notice requirements, that apply to the appointment of a practice administrator for a disabled member shall apply to the petition brought under this section.”

A detailed, comprehensive, and well-drafted trust with clear provisions that address a wide variety of foreseeable contingencies can dramatically reduce the chances that it ends up in court regarding any of the circumstances described above.  However, if the trust does not provide clear direction, or if there is disagreement among the beneficiaries and the trustees regarding the administration of the trust, the court has authority to provide assistance.

KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California 93950 and Kyle may be reached at 831-920-0205.

Disclaimer: This article is for general information only.  Reading this article does not establish an attorney-client relationship.  Before acting upon any of the information provided in this article, you should consult a competent attorney who is licensed to practice law in your community.    

The most common type of estate planning instrument is a revocable living trust.  Because it is revocable, you can change it at any time.  Your trust might have a provision to give a $10,000 gift to your favorite nephew after your death and next week you can increase that gift, decrease that gift, or completely take it out as if it were never there in the first place by signing a trust amendment.

Most people like the flexibility of revocable trusts because circumstances change over time.  However, there are occasions when establishing an irrevocable trust makes sense.  Below is a summary of some of the most common types of irrevocable trusts and their purposes.

Irrevocable Life Insurance Trust (“ILIT”)

The death benefit proceeds of a life insurance policy that you own at the time of your death are included in your estate for estate tax purposes.  If you have concern that the total value of your estate might exceed your estate tax exemption, you might consider establishing an Irrevocable Life Insurance Trust (“ILIT”) to own your policy.  If the ILIT owns the policy from the beginning, or if you survive at least three years after transferring an existing life insurance policy to an ILIT, then the death benefit proceeds will not be subject to estate tax.

Qualified Personal Residence Trust (“QPRT”)

It is common for your most valuable asset to be your personal residence.  If you are concerned that the value of your residence will create an estate tax, you might want to consider establishing a Qualified Personal Residence Trust (“QPRT”).  The QPRT is a special type of irrevocable trust that allows you to make a gift of a future interest in your residence to your children or other beneficiaries in a way that greatly minimizes the wasting of your gift and estate tax exemption.

Bypass Trust

The “Bypass Trust,” also known as a “Family Trust,” an “Exemption Trust,” a “Credit Shelter Trust,” or a “B Trust,” allows you to benefit your surviving spouse and/or other family members while utilizing your estate tax exemption to mitigate or completely eliminate the application of the estate tax upon your death.  

Qualified Terminable Interest Property Trust (“QTIP”)

If you make a gift to your surviving spouse who is a U.S. Citizen, you do not have to worry about the size of your estate due to the “unlimited marital deduction,” a concept that there should be no estate tax upon any gift to a spouse who is a U.S. Citizen.  However, you might be uncomfortable with making a gift to a spouse without any strings attached.  A Qualified Terminable Interest Property Trust (“QTIP”) allows you to make a gift to your spouse, take advantage of the unlimited marital deduction, while still being able to control distributions of principal during your spouse’s lifetime and ultimately how the remainder of the trust is distributed upon your spouse’s death.  QTIP’s are popular in second marriages where there are separate children.  

Qualified Domestic Trust (“QDOT”)

The unlimited marital deduction described above is only available to surviving spouses who are U.S. Citizens.  If a surviving spouse is not a U.S. Citizen, in order to utilizing the unlimited marital deduction, a Qualified Domestic Trust (“QDOT”) should be established.  Among other requirements, the QDOT mandates that at least one co-trustee of the trust be a U.S. Citizen so the federal government retains jurisdiction over the trust assets.

Special Needs Trust (“SNT”)

Individuals with special needs might be reliant upon means-tested government benefits for health care and other support.  In order to be eligible for such benefits, the recipient’s total assets must be below a specified threshold.  If the recipient were to receive an inheritance without any restriction, the inheritance could jeopardize the eligibility for public benefits.  However, by establishing a Special Needs Trust (“SNT”) for that person, the receipt of the inheritance will not affect the person’s public benefits.  There are different kinds of SNT’s, including a first-party SNT and a third-party SNT.  Strict rules must be followed in the drafting and the administration of SNT’s in order for them to be effective.

IRA Trust

Individual Retirement Arrangements, or “IRA’s,” are popular vehicles for retirement savings.  Financial institutions that hold and manage IRA’s provide beneficiary designation forms that allow you to name beneficiaries of your IRA’s upon your death.  You might decide to name individuals as beneficiaries of your IRA, or you might decide to name a trust for the benefit of your beneficiaries for a variety of reasons such as asset protection and management for young or financially irresponsible beneficiaries.  IRA’s involve many nuanced taxation rules that are further complicated by involving trusts.  When naming a trust as a beneficiary of an IRA, it is important to establish a carefully drafted IRA Trust that features specific provisions to handle these complex rules.

Gifting / Inheritance Trust

The general rule in California as well as the majority of states is that you cannot establish a trust for yourself with your own assets in order to provide yourself with asset protection.  However, if you gift assets to a trust that you establish for the benefit of a third party, you can provide that third party with significant asset protection if the trust is drafted in a specific manner.  With the prevalence of divorce and litigation, you might want to consider including asset protection features for the benefit of your beneficiaries whenever making a lifetime or testamentary gift to a third party.  A properly drafted and administered Gifting or Inheritance Trust can give your beneficiaries significant protection from divorce and litigation.

Domestic Asset Protection Trust (“DAPT”)

Although the majority of states do not allow you to provide yourself with asset protection by establishing a trust for your own benefit with your own assets, there are several states that do allow this kind of arrangement.  A Domestic Asset Protection Trust (“DAPT”) can provide you with asset protection of your own assets under certain conditions.  Some of the most popular jurisdictions that allow DAPT’s include Nevada, Delaware, and Wyoming.

KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California and Kyle may be reached at 831-920-0205.

Disclaimer: This article is for general information only.  Reading this article does not establish an attorney/client relationship.  Before acting on any of the information presented in this article, you should consult a competent attorney who is licensed to practice law in your community.
    

One of the most common complaints about lawyers and their billing practices is the unpredictability of their fees.  Nobody wants to be nervous about the lawyer’s bill coming in the mail and having to wonder what the “damage” is for the month.  The traditional law firm model of billing by the hour creates this uncertainty.  The question from the client, “How long do you think it will take?” is really a question of “How much will this cost?”  From the attorney’s perspective, the answer to that question is, “As long as is necessary.”  

That response is not comforting to the client because there appears to be no limit as to what the final cost might be.  The client has no way to budget for the expense or to judge ahead of time as to whether the service the attorney is to provide will be worth the total fees that will be billed.

The billable hour method also creates a perverse dynamic.  The attorney is actually incentivized to be as inefficient as possible.  On the other hand, the client attempts to “over-correct” by insisting upon a “rush job,” which when dealing with complex legal issues leads to mistakes that can have dire consequences.  While simple yet complete solutions are desirable, cutting corners is never a good idea in the legal profession.

Another aspect of the billable hour method that does not make sense is the arbitrary value placed on an hour of the attorney’s time.  Some attorneys bill under $300 an hour while other attorneys bill in excess of $700 an hour depending upon the experience of the attorney, the practice area, and the particular community.  These variable hourly rates undermine the notion that billing by the number of hours spent on a project creates an objective standard of value given to the client.

Finally, the concept that clients buy time from attorneys is misguided.  If an attorney at an hourly rate of $400 spends three hours trying to develop a solution to a client’s problem but falls short, is the value of that project really $1,200?  Imagine the attorney saying to the client: “Well, I spent three hours trying to find the solution to your problem but couldn’t figure anything out so you’re back to square one.  But, you owe me $1,200.”  If the client is just purchasing time, then that makes sense.  However, if the client is purchasing a solution, then the client does not owe the attorney anything. Similarly, if the attorney found a solution that was worth $1,200, it shouldn’t matter whether it took the attorney three hours, one hour, or six hours!  

Another aspect of the billable hour that is frustrating for both clients and attorneys is the need to track time.  Most law firms bill in six-minute increments: 0.1 represents six minutes; 0.2 represents twelve minutes; 0.3 represents eighteen minutes, and so on.  It actually takes a lot of time for attorneys to have to track their days in six-minute increments!  Furthermore, it feels to the client like the attorney is nickel and diming them when their bill has a series of entries such as: “0.1 – Clicked open email; 0.1 – Listened to voicemail message . . .”

Because of these problems with the traditional billable hour, there has been a trend over the past several years for law firms to move toward a flat fee, “value-based” method of billing.  

First, flat fees allow there to be a certainty of cost for the client.  There are no surprises or worries about how much the next bill will be.  

Second, flat fees allow for a collaborative approach between the client and the attorney.  Both parties can relax about how much time they are spending and can devote their efforts to the work at hand.  If the attorney feels that some extra steps should be taken or that there should be additional meetings or phone calls, the client is not wondering whether the attorney is just trying to “run-up” the meter.  

Third, the attorney is able to spend as long as is necessary on a particular project, but is also incentivized to create efficiencies and to help the client in a timely manner.  

Fourth, the attorney is likely to be motivated to demonstrate value in each step of every project so that the client can feel that the fee charged is worth the service provided.

Fifth, the focus of a flat fee billing arrangement allows both the client and the attorney to focus on the value of the services provided rather than the time spent.  

Finally, the attorney does not have to spend unnecessary time and effort on tracking each day in six-minute increments and the client doesn’t have to be bombarded with monthly bills listing every microscopic expenditure of energy on the client’s project.

Flat fee billing does not work in every scenario, but it should be employed more often.  The vast majority of the time, both the client and the attorney appreciate the benefits of flat fee billing and much prefer it to the traditional billable hour.

KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California and Kyle may be reached at 831-920-0205.

Disclaimer: This article is for general information only.  Reading this article does not establish an attorney-client relationship.  Before acting on any of the information presented in this article, you should consult with a competent attorney who is licensed to practice law in your community.
          

Small business owners who become profitable often find it advantageous to incorporate. There are a variety of reasons to form a corporation such as certain tax benefits, the ability to establish substantial retirement plans for business owners and their employees, liability protection, and the establishment of a mechanism to add partners or to transfer the business to third parties upon retirement or death.

Business owners form corporations by filing Articles of Incorporation with the Secretary of State, adopting bylaws, holding organizational meetings, issuing stock certificates, and restructuring payroll procedures to be consistent with corporate law.

Professionals, such as dentists, certified public accountants, doctors, veterinarians, lawyers, optometrists, marriage and family therapists, psychiatrists, and psychologists among others must form a special type of corporation known as a “professional corporation.”  

Professional corporations require additional rules, restrictions, and procedures.

First, in general, only licensed practitioners are allowed to be shareholders of a professional corporation. For example, only lawyers who are licensed to practice law in the State of California may be shareholders of a California law corporation.

Second, most professions require that certain language be included in the bylaws and on the stock certificates that restrict the ownership of the professional corporation to individuals licensed in the particular profession.

Third, many professions require that the respective licensing board issue a certificate to allow a professional to operate as a professional corporation.  For example, the California Board of Accountancy requires that all certified public accountants apply for and receive a certificate that approves the operation as a professional corporation. Before issuing a certificate, the licensing board might insist upon reviewing the corporation’s bylaws and stock certificates to ensure that the appropriate language limiting ownership to licensed professionals is included.

Fourth, many professions have specific rules regarding the name of the corporation, including approved suffixes such as “Inc.,” “Incorporated,” and “Ltd.”  It is critical for professional corporations to ensure that their names are in compliance with the rules before issuing membership certificate, publishing letterhead and business cards, and advertising.

The function of professional corporations upon incapacity or death can be challenging for a professional’s family, particularly if other members of the family are not licensed in the same profession.  There is a limited period of time after a professional’s death for the professional’s family to transfer or sell the professional corporation to another licensed professional. To address this problem, professionals should designate “practice administrators,” other licensed professionals, to run the business and arrange its disposition after the death of a professional.

Professional corporations can be very attractive entities for a many reasons.  However, because of the specific restrictions placed on such organizations, it is critical to seek the counsel of an experienced attorney who can help navigate the nuances related to each profession.

KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California and Kyle may be reached at 831-920-0205.

Disclaimer: This article is for general information only. Reading this article does not establish an attorney/client relationship. Before acting on any of the information presented in this article, you should consult a competent attorney who is licensed to practice law in your community.    

In my last article I discussed the fact that while IRA’s should not be re-titled to your trust during your lifetime, you might want to consider naming a trust as a beneficiary of your IRA upon your death under certain conditions.  I also discussed the paramount importance of making sure that a trust that is to be named as a beneficiary of an IRA is structured in such a way as to qualify as a “Designated Beneficiary” under the IRS rules which will allow the trust beneficiaries to stretch Required Minimum Distributions (“RMDs”) over the oldest trust beneficiary’s life expectancy.  

The rule requiring that the oldest trust beneficiary’s life expectancy be used to calculate RMD’s creates two further issues: (1) How is the “oldest trust beneficiary” determined? (2) Can anything be done to prevent the younger beneficiaries from having to use the oldest trust beneficiary’s life expectancy?

(1)  How is the “Oldest Trust Beneficiary” Determined?

Assume that the Pop Star Trust is named as the 100% beneficiary of an IRA.  The Pop Star Trust names three beneficiaries to inherit the IRA in equal shares: Gwen, Kelly, and Meghan.  Gwen is 47; Kelly is 35; and Meghan is 23.  Assume further that the trust provides that if Gwen dies while still leaving a portion of her IRA, then the remaining balance of her share shall be distributed to Bing who is 74.  

In legal terms, Gwen, Kelly, and Meghan are considered “current beneficiaries” while Bing is considered a “contingent” beneficiary.  Who is the “oldest” trust beneficiary?  Is it Gwen, the oldest current beneficiary, or is it Bing?  This is a critical question because Gwen’s longer life expectancy would allow more tax deferred growth and tax savings than Bing’s shorter life expectancy.  Fortunately the IRS has some guidance on this issue.

If the Pop Star Trust is designed as a “conduit trust,” meaning that the RMD’s must be distributed out of the trust and to the individual beneficiaries, then you only need to consider the ages of the current beneficiaries and not the contingent beneficiaries.  With regard to a “conduit trust,” Gwen would be considered the oldest trust beneficiary and not Bing.

Although the conduit provisions make it much easier to determine the “oldest” beneficiary, it could be less than ideal to force the RMD’s out of the trust and to the individual beneficiaries.  You might have concern about the beneficiary’s ability to manage his or her inheritance or the beneficiary might have special needs and the receipt of the RMD’s might make the beneficiary ineligible for public benefits.  As a result, an “accumulation” trust might be preferred.

If the trust is designed as an “accumulation trust,” then the trustee is not forced to distribute RMD’s out of the trust and to the beneficiary directly.  The RMD’s that are taken out of the IRA can therefore “accumulate” in the trust and be distributed over a much longer timeframe at the discretion of the trustee.  However, if the trust is structured as an “accumulation trust,” then contingent beneficiaries must be considered when determining who is the “oldest” trust beneficiary.  With regard to an “accumulation trust,” Bing would be considered the oldest trust beneficiary and not Gwen.

One way to draft around this problem would be to make sure that in no case can a beneficiary older than Gwen be considered a beneficiary of the trust.  Even if you do not name a specific beneficiary who is older than Gwen, it is likely that you will name trust-maker’s natural heirs as remote contingent beneficiaries.  Depending upon the circumstances, it is possible that a natural heir could end up being younger than Gwen.  To be safe, specific language should be included to state that anybody who was born before Gwen shall be considered to be deceased for purposes of the trust, ensuring that Gwen – and not a contingent beneficiary – should be considered the oldest trust beneficiary.     

(2) Can anything be done to prevent the younger beneficiaries from having to use the oldest trust beneficiary’s life expectancy?

If the Pop Star Trust is named as the beneficiary of an IRA and is structured as a “conduit trust,” or is structured as an “accumulation trust” but has specific language that eliminates any contingent beneficiary who was born before the oldest current beneficiary, then Gwen’s life expectancy will be used to calculate RMD’s for all of the trust beneficiaries.  While this is better than using Bing’s life expectancy, it is still a great disadvantage to Meghan and Kelly who are both considerably younger than Gwen.

The ideal situation would be to allow for “separate share treatment”: each beneficiary calculating her RMD’s for her share of the IRA to be based on her own life expectancy.

To achieve this result, instead of naming the Pop Star Trust as the 100% beneficiary on the IRA beneficiary designation form and allowing the trust to divide the IRA into three separate shares, each separate share should be listed directly on the IRA form as follows: 33.4% to the Gwen Trust established under the Pop Star Trust; 33.3% to the Kelly Trust established under the Pop Star Trust; and 33.3% to the Meghan Trust established under the Pop Star Trust.  Although there is rarely enough room on a standard IRA beneficiary designation form to fit in so much text, naming each share separately is critical in order to maximize the tax benefits for each beneficiary.  

KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California 93950 and Kyle may be reached at 831-920-0205.

Disclaimer: This article is for general information only.  Reading this article does not establish an attorney-client relationship.  Before acting upon any of the information presented in this article, you should consult a competent attorney who is licensed to practice law in your community.    

With regard to a trust-based estate plan, you should re-title most of your assets to your trust.  This process known as “trust funding” includes transferring your bank accounts, taxable investment accounts, stocks, and real properties such as your residence to your trust. One key exception is your retirement plans: if you make the mistake of transferring title to your IRA or other qualified defined contribution plan such as a 401(k) or 403(b) plan while you are living, the IRS will take the position that you just cashed out your plan. Come April 15 you will have a very unpleasant surprise in the form of a major tax bill.

Instead of transferring title of your IRA to your trust while you are living, you should name specific beneficiaries of your IRA’s through each financial institution where you hold a retirement plan.  Upon your death, you IRA’s will be transferred to your named beneficiaries without probate, assuming that your named beneficiaries survive you.  Retirement plans have unique features that are governed under complex tax rules which make the identity of your named beneficiaries of paramount importance. Careful and thoughtful planning is necessary.

IRA’s and other similar retirement plans involve special tax rules that are designed to encourage you to save for retirement. For example, with a traditional IRA, you get a tax deduction for a contribution into the IRA, the investments grow in a tax-deferred manner, and you are taxed on the portion that you withdraw from the plan. With a few exceptions, you are not allowed to withdraw from the plan prior to age 59.5 because the purpose of the tax benefits is to save for retirement. However, once you reach age 70.5, you are required to start taking “Required Minimum Distributions,” or “RMD’s,” so that the IRS gets a portion of its tax back. RMD’s are based upon your life expectancy in accordance with various life expectancy tables published by the IRS. The younger you are, the less you have to withdraw; the older you are, the more you have to withdraw.

After your death, your named beneficiaries will be subject to RMD’s no matter how young they are. If they qualify as “Designated Beneficiaries,” they will be able to “stretch” their RMD’s over their lifetimes. If they are younger than you are, this can be a significant advantage as they will enjoy years of tax-deferred growth on the portion of the inherited IRA that is not subject to RMD’s. However, not all named beneficiaries qualify as “Designated Beneficiaries” within the meaning of the rules.

First, if you fail to name a surviving individual beneficiary, then your “estate” is considered to be your beneficiary and your entire IRA will have to be distributed within 5 years if you died before age 70.5 or over the course of your remaining life expectancy if you died after age 70.5. This can result in dramatic accelerated tax which is unnecessary if you had simply taken the time to ensure that you named beneficiaries who qualified as “Designated Beneficiaries” under the rules.  

Second, if you name your trust as a beneficiary of your IRA, you could jeopardize the “Designated Beneficiary” status unless certain conditions are met.  However, it may be preferable to name your trust as the beneficiary of your IRA (1) if your beneficiary is unable to manage his/her inheritance due to immaturity or irresponsibility; (2) if you want to benefit someone for life but want to control how the remainder is distributed; (3) if you want to have greater control over the contingent beneficiaries; or (4) if you want to provide significant divorce and creditor protection for your beneficiaries.

The IRS will “look through” your trust and allow the beneficiaries of your trust to be considered “Designated Beneficiaries” if your trust satisfies the following four elements:

(1) The trust is a valid trust under state law.

(2) The trust is irrevocable, or will, by its terms, becomes irrevocable on your death.

(3) The beneficiaries of the trust are identifiable from the trust instrument.

(4) A copy of the trust instrument and a list of all of the beneficiaries of the trust is provided to the plan administrator by October 31 of the year following the year of death.

If your trust satisfies the aforementioned four elements, then the beneficiaries of your trust are considered “Designated Beneficiaries.”  They will be able to “stretch” out distributions over a longer period of time than if they did not have “Designated Beneficiary” status. This is far preferable to the rapid withdrawal of your IRA’s if the trust did not satisfy the four elements listed above.

However, RMD’s must be based upon the life expectancy of the oldest trust beneficiary. This rule creates two further issues: (1) How is the “oldest trust beneficiary” determined? (2) Can anything be done to prevent the younger beneficiaries from having to use the oldest trust beneficiary’s life expectancy?  

These two questions are critical and involve further nuanced rules.  I will address both of these key questions along with other important planning considerations when naming trusts as IRA beneficiaries in my next article.

KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California and Kyle may be reached at 831-920-0205.

Disclaimer: This article is for general information only. Reading this article does not establish an attorney-client relationship. Before acting on any of the information presented in this article, you should consult a competent attorney who is licensed to practice law in your community.

Executing and maintaining a comprehensive estate plan is critical in order to maintain control of your personal and financial wishes in the event of your incapacity or death.  A thorough estate plan consists of several different documents that address specific nuances to accomplish a common goal.  Below is a summary of the various documents that should be part of any estate plan.    

Revocable Living Trust

A Revocable Living Trust allows you to address many aspects of your planning including the management of most of your assets in the event of your incapacity and the distribution of your assets upon death.  Furthermore, your Revocable Living Trust allows you to also address other issues that you might feel are important such as the management of inheritances for minor beneficiaries, divorce protection for your beneficiaries, asset protection for your beneficiaries and, in some cases, asset protection for your surviving spouse, if any, tax planning and Medi-Cal planning. A properly executed and funded Revocable Living Trust will avoid conservatorship in the event of your incapacity and avoid probate upon death.

Trust Funding

A trust does nothing to avoid probate or conservatorship if your assets are not properly titled to the trust. Some attorneys will help you with your Trust Funding while others will provide only partial help while placing the majority of this responsibility on you as the client.  I have generally found that no matter how sophisticated you are, placing this burden on clients seldom goes well. In my practice, we assist you with the Trust Funding process.  We typically prepare letters of instruction for all of your assets to make sure that they are either properly titled to your trust or that they have proper beneficiary designations. We also help you follow-up with the financial institutions and coordinate in any way we can.  Finally, if the financial institutions ask you to fill out their own forms, we will fill them out for you.  This is a critical component that too often is overlooked.

Pour-Over Wills

In the event that you accidentally leave an asset outside of the trust, the Pour-Over Will names your Revocable Living Trust as the beneficiary. However, if the value of the assets outside of your Revocable Living Trust at the time of your death exceeds a specified value, then a probate might be required in order to transfer such assets to your Revocable Living Trust.  This is why Trust Funding is paramount.  

The Pour-Over Will also designates permanent guardians for minor children upon your death.

Temporary Guardianship Designations

Another often overlooked aspect of planning, it always takes time for the Court to appoint a Permanent Guardian in the event of your incapacity or death. Until such time for the Court to act, without naming Temporary Guardians, minor children likely would be placed with Child Protective Services rather than with family members or close friends. Appointing Temporary Guardians helps to solve this problem.

Financial Power of Attorney Documents

In the event of your incapacity, your Trustee can handle most financial transactions. However, some such transactions will be outside the scope of the trustee’s powers.  This includes managing your retirement plans, filing your personal tax returns, dealing with Social Security and Medicare, getting your mail, etc. The Financial Power of Attorney will appoint an Agent (probably the same person as your Successor Trustee) to have power over such matters.  

The Financial Power of Attorney also names Permanent Guardians for minor children in the event of your incapacity.

Healthcare Documents

In the event of your incapacity, it is important to express your wishes as to how you would like your medical decisions handled (sometimes referred to as a “Living Will”), and to appoint a Health Care Agent to carry out your wishes (sometimes referred to as a “Health Care Power of Attorney”).  Both issues are addressed in an Advance Health Care Directive.

Your Health Care Agent will need to be able to have access to your health information in order to carry out his/her duties.  However, there are medical privacy laws as part of the Health Insurance Portability and Accountability Act (“HIPAA”) that often prevent your Agents from gaining access to your health information.  This is why it is important for you to sign a HIPAA Waiver that allows your agents to access your health information so that they can make informed decisions about your care.

KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California and Kyle may be reached at 831-920-0205.

Disclaimer: This article is for general information only.  Reading this article does not establish an attorney-client relationship.  Before acting on any of the information presented in this article, it is important that you consult a competent attorney who is licensed to practice law in your community.  

A Trust involves three roles: (1) the Grantor (also known as the “Settlor,” “Trustor,” or “Trust-Maker”) who establishes the trust, (2) the Trustee (also known as the “Trust Manager”) who is given the responsibility to manage the assets of the trust in accordance with its instructions, and (3) the Beneficiary who receives beneficial enjoyment of the trust’s assets under provisions and circumstances as set forth in the instrument.  

With respect to a “Revocable Living Trust” which is used as a will and power of attorney substitute in basic estate planning, the same person (or married couple) will often occupy all three roles at the beginning.  The purpose of such a trust is to allow the Grantor to maintain control over the trust assets while he or she is living and has capacity, but to have a contingency plan in place in the event of the Grantor’s incapacity or death.  After such an occurrence, the roles of the Trustees and Beneficiaries will change in order to create an efficient adjustment to the new circumstances and to allow the Grantor’s intent to be carried out in a variety of circumstances.

In other situations, each role will be occupied by a different person.  A Grantor might want to make a gift to a Beneficiary for estate planning purposes but might not want the Beneficiary to have direct control over the asset due to the Beneficiary’s young age, financial irresponsibility, or special needs.  Under these circumstances, the Grantor entrusts the management and control over the assets of the trust in the Trustee who has a legal obligation administer the trust in accordance with the Grantor’s intent for the benefit of the Beneficiary.  

One of the longest sections in the California Probate Code outlines the duties of the Trustee in carrying out the terms of a trust as established by the Grantor for the benefit of the Beneficiary.  These duties include, but are not limited to, the following:

1)    Duty to Administer Trust Governed by Instrument (Section 16000).
2)    Duty of Loyalty to Beneficiaries (Section 16002).
3)    Duty to Deal Impartially with Beneficiaries (Section 16003).
4)    Duty to Avoid Conflicts of Interest (Section 16004).
5)    Duty to Control and Preserve Trust Property (Section 16006).
6)    Duty to Segregate and Identify Trust Property (Section 16009).
7)    Duty to Avoid Improper Delegation and Supervise Performance of Delegated Matter (Section 16012).
8)    Duty to prudently manage and invest the assets of the trust (Sections 16046, 16047, and 16048).

The Trustee also has another category of duties that relate to the Beneficiary’s right to certain information regarding the trust.  These duties include, but are not limited to, the following:

1)    Duty to Inform Beneficiaries (Section 16060).
2)    Duty to Provide Terms of Trust at Beneficiary’s Request (Section 16060.7).
3)    Duty to Report at Beneficiary’s Request (Section 16061).
4)    Duty to Provide Notification of Events (Section 16061.7).
5)    Duty to Account to Beneficiaries (Section 16062).

If there is a dispute between a Trustee and a Beneficiary over the Trustee’s exercise of authority and/or management of the trust, such dispute may be resolved by court action under Sections 17000 through 17457.  In essence, the Beneficiary may enforce the terms of the trust by compelling the Trustee to carry out its duties by petitioning the probate court for judicial relief.  Additionally, if a Trustee is uncertain about how to properly carry out its duties, the Trustee may petition the probate court for instructions on how to proceed.

Most trusts are drafted with the intent to avoid court action, though court action might be necessary to enforce the terms of a trust in the event of a disagreement between the Trustee and the Beneficiary over the interpretation or management of a trust.  

KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California 93950 and Kyle may be reached at 831-920-0205.

Disclaimer: This article is for general information only.  Reading this article does not establish an attorney/client relationship.  Before acting on any of the information provided in this article, you should consult a competent attorney who is licensed to practice law in your community.

One of the first issues you must examine when closing a Trust Administraiton is how much the trustee should take in compensation.  Often the trustee will ask you for counsel in this area.  The trustee assumes a great deal of responsibility and liability and thus should be justly compensated for his or her work.  At the same time, it is important that the trustee not take a fee that is too high or that will raise questions from the beneficiaries on whether or not the fee was justified.  As a result, counseling the trustee on the proper fee is critical.

In determining a proper fee, you first should examine the trust itself.  California Probate Code Section 15680 states that “if the trust instrument provides for the trustee’s compensation, the trustee is entitled to be compensated in accordance with the instrument.”  If the trust sets a fee that you and the trustee feel is reasonable, that might be the end of the discussion.  However, keep in mind that Section 15680 does allow a procedure for the court to adjust the fee higher or lower given factors such as whether the trustee’s duties were different than contemplated or whether the set fee is unreasonably high or low.  If the set fee does not seem appropriate given the circumstances, you might consider taking a lower fee (if the set fee appears too high) or petitioning the court for a higher fee (if the set fee appears too low).   

While there are trusts that set a specific fee for trust compenstaion, more commonly trusts state that the trustee is entitled to “reasonable compensation.”  In fact, California Probate Code Section 15681 states that “If the trust instrument does not specify the trustee’s compensation, the trustee is entitled to reasonable compensation under the circumstances.”  

The difficulty is that “reasonable compensation” is not a defined term.  If the trust refers to “reasonable compensation” or is silent on the issue of trustee compensation, it becomes a judgment call as far as how much the trustee should take as a fee.  The trustee will likely have no idea how to determine “reasonable compensation” and will rely upon you for the answer.  Fortunately, there is some guidance.    

In general when California courts determine “reasonable compensation,” they look at specific factors in accordance with California Rules of Court Section 7.776 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.

Another source for determining an appropriate trustee fee is the fee schedules for corporate trustees in the local community.  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.  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.”

A key aspect of determining an appropriate fee is to decide whether trustee compensation should be calculated upon a percentage of the estate or upon an hourly basis.  Although most corporate trustee fees are calculated upon a percentage, your local court might have a practice of allowing a specified hourly rate.  Furthermore, some private professional fiduciaries in your community might determine their compensation based upon a specified hourly rate and that can give you guidance as to what an appropriate hourly fee is for your trustee.   

    
Often the best practice is to “test” your proposed fee under both methods.  Once you have figured out an appropriate percentage and an appropriate hourly rate using the process described above, calculate the trustee fee under both methods.  If they are close, the trustee is likely justified in taking either fee.  If they are far apart, try to determine whether one fee appears more “reasonable’ under the circumstances than the other fee.  You might ultimately decide to “split the difference.”

However you arrive at the trustee’s fee, the key is to make sure that you can demonstrate thoughtfulness and a reasoned approach to calculating a fee.  Be prepared to defend or explain how the fee was calculated to the beneficiaries or to a court.  In the end, as long as you can make a good faith argument in support of the trustee’s chosen fee, it is more likely that the beneficiaries or a court will agree that the trustee’s fee is “reasonable.”

Keep in mind the fact that trustee compensation is taxable income to the trustee.  This factor might play in to how much the trustee decides that he or she wants to take as compensation.  If the trustee is also a significant beneficiary of the estate, it might be advantageous to take a smaller trustee fee as the receipt of the inheritance is not considered income to the beneficiary.  

KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California and Kyle may be reached at 831-920-0205.

Disclaimer: This article is for general information only. Reading this article does not establish an attorney/client relationship. Before acting on any of the information presented in this article, you should consult a competent attorney who is licensed to practice law in your community.

A revocable trust is a trust in which the Trust-Maker (“the Grantor”) may amend or revoke at any time.  In essence, it is a trust that is “not set in stone” and may change at the whim of the Grantor.  A revocable trust is often used as a will and power of attorney substitute.    The idea is to create a plan for the management and distribution of the Grantor’s estate in the event of incapacity and upon death.  The Grantor might include provisions in the trust that dictate a gift of a certain asset to a specified Beneficiary upon the Grantor’s death.  Just as with a will, the Grantor is free to change his or her mind after establishing the revocable trust and may increase, decrease, or eliminate a particular gift all together.   

An irrevocable trust is a trust that cannot easily be changed once it is established.  A Grantor might create an irrevocable trust for tax purposes, creditor protection purposes, or after death to benefit one beneficiary for his or her lifetime (such as a spouse) and then to benefit other beneficiaries (such as children) after the initial beneficiary’s death.  Once the irrevocable trust is executed and assets are transferred to it, the Grantor or the Beneficiaries are limited in their ability to change the terms of the trust.

It is important to understand, however, that there are circumstances in which an otherwise irrevocable trust can in fact be modified or terminated.  Some of the most important provisions governing the modification or termination of an otherwise irrevocable trust are described below.  

California Probate Code Section 15403 allows for the modification or termination of an otherwise irrevocable trust upon petition to the court if all of the beneficiaries consent.  If the court finds that continuance of the trust is necessary to carry out a material purpose of the trust, the trust cannot be modified or terminated unless the court determines that the reason for doing so under the circumstances outweighs the interest in accomplishing a material purpose of the trust.  Furthermore, an irrevocable trust may not be terminated under this section if it contains a “spendthrift clause,” a clause that does not allow for the transfer of a beneficiary’s interest in the trust to a third party.  Note that even if the trust contains a spendthrift clause, the trust may nevertheless be modified under this section.  

California Probate Code Section 15404 allows for the modification or termination of a trust if the Grantor and all of the Beneficiaries consent.  Under this section, there is no need for court approval of the proposed modification or termination of the trust.  Note that an irrevocable trust may be terminated under this section even if there is a spendthrift clause in the trust, contrary to Section 15403.

California Probate Code Section 15409 allows for the modification or termination of an otherwise irrevocable trust upon petition to the court if there are changed circumstances not known to or reasonably anticipated by the Grantor and continuation of the trust would defeat or substantially impair the accomplishment of the purposes of the trust.  Note that an irrevocable trust may be terminated under this section even if there is a spendthrift clause in the trust, contrary to Section 15403.

Despite the clear Probate Code sections that allow modification of an otherwise irrevocable trust under numerous circumstances, many attorneys and their clients are unaware of the ability to make changes to outdated trusts.  Consequently, attorneys who have mastery of the Probate Code sections that allow for the modification or termination of otherwise irrevocable trusts can provide exemplary service to their clients in creative ways.  

KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California and Kyle may be reached at 831-920-0205.

Disclaimer: This article is for general information only.  Reading this article does not establish an attorney/client relationship.  Before acting upon any of the information presented in this article, you should consult a competent attorney who is licensed to practice law in your community.