Share

The KRASA LAW, Inc. Estate Planning Blog

Monday, March 12, 2012

Who Will "Parent" Your Children

Most people do not get around to planning their estates until later in life, long after their children have all grown up and moved out of the house.  It is rare to find a young person thinking about estate planning.  The reason is that most young people feel that they have more debt than equity and they do not think that it is likely that they’ll become incapacitated or will die in the near future.  It is easier to put off thinking about such grim things until the time is “necessary.”  However, young people who have minor children of their own need to create an estate plan now that includes extensive guardianship provisions.

Guardians can be nominated by parents to both (1) be responsible for their children’s care, custody, control, and education and (2) be responsible for the management and control of their children’s property in the event that the parents can no longer fill these essential roles due to incapacity or death.  The parents can nominate the same person or persons to fill both roles or can nominate one set of guardians to be responsible for the minor child’s custody and personal needs and a second set of guardians to manage the minor child’s property.

Parents may nominate a guardian in writing.  The writing may be part of a will, a power of attorney, a trust, or may be a separate, independent document.  The writing typically states the circumstances under which a guardian is nominated, such as the death or incapacity of both parents.

When a guardian is needed, the Court will then appoint a guardian and will give strong consideration to the person or persons whom the parents nominated in writing.  The Court will want to ensure that the proposed guardian really will be a beneficial choice for the minor children, but, barring any problems, the court will likely abide by the parents’ choice.

By nominating a guardian in writing ahead of time, the parent’s plan will most likely reduce delay in the procedure for appointing a guardian and avoid a family dispute over who should be appointed as the guardian.

Because the formal legal appointment of a guardian does not happen instantly, there is a strong possibility that in an emergency, law enforcement will place minor children in Child Protective Services until the Court formally appoints the guardians nominated by the parents.  In order to prevent this from happening, it is prudent for parents to sign a second writing, nominating “temporary” guardians until a permanent guardian can be appointed by the Court.  This additional document should include specific instructions that it is the wish of the parents that the children be placed in the custody of the temporary guardians rather than Child Protective Services until such time as the Court can appoint permanent guardians.

The additional “temporary” guardianship nomination can be especially helpful if the permanent guardians do not live locally and law enforcement must find temporary placement immediately.  However, even if the temporary guardians are the same as the permanent guardians, because the guardians do not become permanent until after the Court formally appoints them, the additional “temporary” guardianship appointment is important in all circumstances.

Although most young people do not think they need to worry about estate planning, issues surrounding the custody, care, and upbringing of minor children introduce a whole host of concerns unique to their circumstances that make planning ahead essential, despite not having a significant estate or any immediate known health problems. 
 


Wednesday, February 29, 2012

Papers, Please

Managing the affairs of a decedent’s estate is never easy.  Not only are you in shock and grief over losing a loved one, but you are forced to navigate complex rules and barriers when attempting to settle the estate.  Gaining access to accounts or even basic information can seem like an insurmountable hurdle.  If the decedent did not have his/her assets titled to a trust, you will likely be asked to present “Letters of Administration” to the financial institutions before you are allowed any control over the accounts. 

“Letters of Administration” (or “Letters Testamentary”) refers to a document that the court issues to an executor (also known as a “personal representative”) of an estate which gives that person court authority to access the decedent’s accounts.  The problem is that in order to obtain the Letters, you must open up a formal probate which is time consuming, public, and expensive.

You want to avoid probate if you can help it.  Contrary to what a financial institution might tell you, you might be able to avoid a probate if the estate falls within certain categories.

First, if the decedent created a trust but left some bank accounts outside of the trust, you might be able to use a procedure known as a “Heggstad Petition” if there was any writing (such as a “Schedule A”) that provides evidence that the decedent intended to transfer the accounts into the trust.  A “Heggstad Petition” is rather simple and inexpensive, especially when compared to a probate.

Second, the estate might fall into a category known as a “small estate.”  If the total value of the decedent’s estate is worth $150,000 or less, then a “small estate affidavit” would generally be available to take control of the decedent’s personal property, including bank and stock accounts.  Rather than going to Court, certain individuals known as “successors to the decedent” can simply wait 40 days, sign a one-page affidavit containing specific provisions, present it to the bank, and legally compel the bank to transfer the decedent’s accounts. 

Third, for surviving spouses of the decedent, sometimes all or part of the decedent’s property automatically passes to the surviving spouse by operation of law.  If the financial institution refuses to accept this fact, the surviving spouse might decide to pursue a “spousal petition,” a simple petition requesting that the Court issue an order that the decedent’s property in fact belongs to the surviving spouse.

Unfortunately, most employees at financial institutions are unfamiliar with these alternatives to probate and are trained to simply tell you that Letters are required in order to proceed.  This “papers, please” approach can create unnecessary problems if you are not aware that there might be methods other than probate to settle the estate.  An attorney who specializes in estate planning can figure out whether a probate alternative is available, thus saving a great deal of time, effort, expense, and frustration.


Tuesday, February 7, 2012

The Superhero of Trusts!

You’ve known for years that you need to “get your affairs in order.”  While you don’t like thinking about it, you know that you are merely mortal and that it would be wise – a gift to your loved ones, in fact – to create an estate plan that allows a trusted person to handle your personal and financial affairs in accordance with your wishes in the event of incapacity or death.  You finally decided to visit your estate planning attorney to address all these lingering issues that you have been mentally and emotionally postponing for far too long.


Your main estate planning document is your revocable living trust.  It clearly dictates who will inherit from you (your “beneficiaries”), how they will inherit, and who will manage your finances in the event of your incapacity and administer the trust upon your death (your “successor trustee”).

 
You are comfortable with your trust as it clearly expresses your intent in a legally binding manner.  You know, however, that circumstances might change: what seems like a good idea today might turn into a disaster tomorrow.  Your beneficiaries might develop special needs or financial / lawsuit problems, the trusted friend or advisor you named as trustee might turn out to be unreliable or deceitful.  You know that as long as you are alive and have capacity, you can change any part of the trust.  But is there any hope after you become incapacitated or pass away?


The solution may be to name a trust protector in addition to a trustee.  A trust protector is a third party who is independent from the trust.  The trust protector has certain powers to protect your overall intent of the trust.  The concept originated in the context of complex offshore irrevocable trusts that were designed for asset protection, but has evolved to be useful in the context of a many common domestic trusts such as life insurance trusts, gifting trusts, and even revocable living trusts.


Some of the powers of a trust protector might include the ability to hire and fire trustees, the ability to change the governing law of a trust, the power to resolve disputes between co-trustees or disputes between trustees and beneficiaries, the ability to veto investment decisions of the trustee, and the ability to modify the trust to keep up with current law or to provide better protection to a beneficiary.  With these powers, just like a superhero, the trust protector can jump in to protect or save the trust when necessary.

 
If a trust is irrevocable at the start, designating a trust protector is a way of maintaining flexibility and control over the trust.  If a trust is revocable at the start – such as a revocable living trust – having trust protector provisions can provide flexibility and control when the trust eventually becomes irrevocable upon your incapacity or death.  


Figuring out whom to designate as your trust protector can be challenging.  While the trust protector does not have the day-to-day responsibilities of your trustee, your trust protector generally has more sophisticated powers and duties.  Generally, naming a trusted advisor such as a CPA or an attorney as your trust protector makes sense.  Alternatively, you may decide not to name a trust protector at the outset, but have provisions that provide a procedure for naming a trust protector in the future if one is needed.


Tuesday, January 24, 2012

Should Those "Alabama Boys" Hire Me?

I am a guy who likes adventure.  Good, clean, responsible, wholesome adventure.  My most recent adventure was my participation in the 2012 U.S. Pond Hockey Championships in Minneapolis, Minnesota.  It’s a tournament where the organizers set up 26 hockey rinks on frozen Lake Nokomis for three days of competition and camaraderie in snowy sub-zero conditions.

On the first night of my trip, while I was waiting for the shuttle to take me from the lake back to my hotel, I met a team from Alabama.  They were all originally from Canada and all played minor league hockey for years, one of them even enjoying a brief stint with the NHL’s Calgary Flames.  They were as rowdy and non-PC as you might expect a bunch of former Canadian minor league hockey players to be. 

They invited me to accompany them for the night as they planned to go out and have some fun.  I declined as I suspected that the kind of adventures they had in mind that night were probably not of the “good, clean, responsible, wholesome” variety.  However, once they found out I was a lawyer, they all asked me for my phone number in case they needed legal help at 3:00 in the morning.  I tried to explain to them that (1) as an Estate Planning lawyer, I do not specialize in Criminal Law; and (2) I am not licensed to practice law in Minnesota.  I’m not sure if these fine points ever sunk in.  However, this anecdote reveals an important lesson about finding the right lawyer.

Historically, it was common for the town lawyer to practice in a variety of fields.  The same lawyer could file a lawsuit on your behalf relating to a business transaction, could defend you in a criminal case, and could draft your Will.  However, as society and the legal system have become more complex, the “general practitioner” lawyer is rare and is probably not the best person to handle your legal matter.  “Dabbling” in a practice area can be dangerous and you want to be sure you have a lawyer who has the expertise to help you with your issue. 

I have no hesitation in turning down legal projects if I feel that a particular issue is outside my scope of expertise.  I firmly believe that it is important to be honest about the matters that I am able to handle well and those that would be better handled by a lawyer who specializes in a different area of the law.  What should always be paramount is that a particular client’s matter will be handled well.  

A good method for finding a lawyer who specializes in a particular area of the law is to look for lawyers who are certified by the State Bar of California as “Legal Specialists.”  Each Certified Legal Specialist must practice in the area for a minimum number of years, have a minimum number of educational credits in the particular area, be recommended for certification by numerous peers, and take a 6.5 hour exam.  The State Bar of California certifies “specialists” in 11 practice areas.  For more information, please visit www.calbar.org and click on “Legal Specialists.”

Although I am a Certified Legal Specialist by the State Bar of California in Estate Planning, Trust and Probate Law, I would not have a clue about how to handle a criminal matter; likewise, a criminal attorney would likely not be able to draft an effective estate plan.


Saturday, January 14, 2012

Determining Your Fate

One of the most important aspects of Estate Planning is to provide a mechanism to deal with incapacity.  In the event that you are mentally or physically unable to effectively manage your personal or financial affairs, who will fill this important role?  Just as important, how will that trusted person be able to take control of your assets and manage them for your benefit with the least amount of expense and bureaucratic hoops?

Without proper planning, your loved ones will most likely have to petition for a Conservatorship, a court-supervised process that can be time-consuming, costly, and embarrassing.  If you have proper Estate Planning, your Revocable Living Trust gives your trustee the authority to manage your trust assets during your incapacity and your Durable General Power of Attorney gives your “Attorney-in-Fact” the authority to manage assets that are titled in your individual name as well as authority over other personal affairs such as access to mail, the ability to deal with the IRS, the ability to enter into contracts, etc.  (For purposes of this article, “trustee” and “attorney-in-fact” shall both be referred to as “agent.”)

It is important to understand how your Trust and Power or Attorney give your agent the authority to manage your assets in the event of incapacity.  Most clients who are currently of sound mind and health prefer to only allow their agents to have power over their assets in the event that they are incapacitated.  This is often referred to as a “springing power,” a power that only “springs” into effect upon your incapacity: your agent has no power over your assets unless that power is triggered by your subsequent incapacity.

With a springing power, your Trust and Power of Attorney should (1) clearly define “incapacity” and (2) articulate how “incapacity” is determined. 

Regarding the definition, it is important that it be clearly stated so that a title company or a bank officer will easily understand it.  I often use the following definition: “I will be considered incapacitated during any time that I am unable to effectively manage my property or financial affairs because of age, illness, mental disorder, dependence on prescription medication or other substances, or any other cause.”

As far as determining whether the definition has been met, you have a number of options.  The most common option is to require that two licensed physicians sign a statement stating that you have met the threshold of the definition.  The thinking behind having two physicians sign a statement is to provide a check and a balance: taking away your ability to manage your affairs and giving them to someone else is significant and you want to be protected from a whim or fraud.  A further protection would be to require that the two physicians be independent of each other, i.e., not in the same practice. 

The downside to this check and balance is that it will require more effort, time, and complexity to obtain the necessary documentation.  As a result, some Trusts and Power of Attorney documents only require one doctor to make the determination.
Another approach is to create a “disability panel,” where a number of persons – either doctors, laypersons, or some combination thereof – will vote to determine whether or not you have met the definition of “incapacity.”  This is especially helpful if due to personal or religious values you prefer not to have a medical doctor involved in the determination of your mental health.

In addition to your Trust and Power of Attorney having a clear procedure for determining your incapacity, it is also critical to authorize your agent to have access to your medical records by executing a “HIPAA Waiver.”


Tuesday, December 27, 2011

A "Crummey" Idea (Part 2 of 2 - Continued from "The Estate Freeze")

In my last blog, entitled “The Estate Freeze,” I described an Estate Planning technique known as an “Estate Freeze” whereby you make gifts during your lifetime, take the Estate and Gift Tax consequences now, and allow those assets to appreciate in your beneficiaries’ estates rather than in your own estate.  This technique often involves consideration of the federal Gift Tax Exemption and the annual exclusion, allowing you to gift up to $13,000 per person per year.  However, what if you want to take advantage of this technique but still want control over the gifts?  For example, you may have beneficiaries who are minors such as children or grandchildren.  The solution is an irrevocable trust known as a “Crummey Trust.”


In order to maintain control, the idea is to make gifts to an irrevocable trust rather than to the beneficiary directly.  The fact that the trust is irrevocable and has certain features means that the gifts are no longer part of your estate.  The trust outlines circumstances in which the gifts may be used on behalf of the beneficiary and also names a Trustee – a trusted third party – who will follow the trust’s guidelines.  


When attorneys first came up with this concept, they encountered a problem: in order for the annual $13,000 exclusion to apply, such gifts needed to be a “present interest,” meaning that the beneficiary has to be able to use the gift right away.  This contradicts the whole point of setting up the trust in the first place – to prevent the beneficiary from having unfettered access to the gift.


To combat this problem, Estate Planning attorneys developed the concept known as a “Crummey Trust,” named after a famous Court case that upheld this structure.  The trust includes language that states each time a gift is made to it, the beneficiaries have a certain window of time (usually between 30 and 60 days) to demand that the gift be given directly to them (“demand right.”)  After that period of time, the beneficiary no longer has any right to demand the gift and instead it is subject to the restrictions of the trust.  The existence of the demand right satisfies the “present interest” requirement and thus the annual $13,000 exclusion applies to the gift.  However, the beneficiary must know that he or she has this demand right.  As a result, each time a gift is made to the trust, the Trustee must send the beneficiary a letter informing him/her of the demand right.  This is known as a “Crummey Letter.”  


While it is true that during the window of time the demand right is open, the beneficiary could simply demand the entire gift, the beneficiary will learn that if he or she ever exercises that right, you will no longer make any gifts into the trust at all.  The beneficiary will see the “big picture” and allow the demand right to lapse so that you will not be discouraged from making future gifts to the trust.

This can be a powerful gifting tool.  Crummey Trusts are often used with life insurance (also known as an “Irrevocable Life Insurance Trust” or an “ILIT”) but can be applied to a broad range of situations.  One key exception is beneficiaries with Special Needs: because of typical concerns with maintaining public benefits, Crummey provisions cannot be inserted in Special Needs Trusts.

 
It is paramount that Crummey Trusts are “maintained” in that the Trustee must send Crummey Letters to the beneficiaries each year a gift is made.  For good measure, the beneficiaries should acknowledge receipt of the Crummey Letters.  Failure to issue Crummey Letters could collapse the entire plan.


Monday, December 26, 2011

The Estate Freeze (Part 1 of 2 - Continued in "A Crummey Idea")

This year and next year, most people won’t have to worry about the federal Estate Tax on inheritance (also known as the “Death Tax”) because the Estate Tax Exemption is $5,000,000 for 2011 and $5,120,000 for 2012.  This means that if you were to add up the fair market value of all assets you own at the time of your death, your estate would only need to pay Estate Tax on the amount over the Exemption.  However, unless Congress acts, the Estate Tax Exemption will drop dramatically to $1,000,000 in 2013 and the Estate Tax for any inheritance over that amount will be a 55% tax.  As a result, many more people will have to worry about the Estate Tax as it will affect many more households.


Coupled with the Estate Tax is the Gift Tax.  The idea is to prevent people from gifting away all of their assets before death so that, upon their death, they will not have a high enough estate for the Estate Tax to apply.  The basic idea is to reduce dollar-for-dollar a person’s Estate Tax Exemption for every lifetime gift that is made.  To keep track of this, when certain lifetime gifts are made, you must file an IRS Form 709 Gift Tax return.  However, in order to permit gifts that have nothing to do with Estate Tax planning, Congress created a key exception to the Gift Tax rules known as the “Annual Exclusion.”  The idea is that everybody can gift up to a certain amount (currently $13,000) to each person in the world each year without eating into their Estate Tax Exemption and without needing to file a 709 Gift Tax return.


Although at first glance it may not seem to be an advantage to make lifetime gifts if your Estate Tax Exemption is reduced accordingly, there can be significant advantages.  First, you are able to gift up to $13,000 per person per year as part of your Annual Exclusion without eating into your Estate Tax Exemption.  Second, if you have property that you think will appreciate in the future, better to give it now when it is worth less, take the Estate and Gift Tax consequences now, and then allow all future appreciation to occur in the beneficiary’s estate rather than in your own estate.  This is known as an “estate freeze.”  

 
This can provide a significant advantage, particularly in the current economic climate where many assets are valued low and should (hopefully) appreciate in the future.  This is especially an advantageous time when the Gift Tax Exemption is the highest in history. However, there are some issues to be cautious about. 

First, if you make a gift of between $1,000,001 and $5,000,000 now, while the Estate and Gift Tax Exemptions are so high, will you owe tax if the Exemptions fall back to $1,000,000 in 2013 as scheduled?  This concept is known as a “claw-back” and pundits argue over whether it would be possible but there is no definitive rule on the subject.  Second, if you make lifetime gifts of Capital Gains assets such as real estate and stocks, you must factor in the loss of the “step-up in basis,” a usually advantageous rule that applies to certain assets that are transferred at death but does not apply to lifetime transfers.


My next blog, entitled "A 'Crummey' Idea," will discuss a type of irrevocable trust that serves as a powerful tool that allows you to take advantage of these gifting principles while still allowing you to retain control.


Tuesday, November 29, 2011

Intimations of Ancestry

I was very close to all of my grandparents.  My mother’s parents lived in Oakland and I fondly remember visiting with them, watching old movies, and taking long walks.  I was even closer to my father’s parents who lived right here on the Monterey Peninsula, in the same house in which my wife, son, and I currently reside.  They were originally from Czechoslovakia and they would often tell me stories about their daring escape from their native country with my father – a young boy at the time –shortly after World War II.  Although I had the benefit of hearing about my grandparents’ experiences for most of my childhood, there are still some compelling events of the past that can easily be forgotten forever.

A few months ago I received an email through my law firm’s website from a gentleman in Massachusetts.  The email stated that the person did not have a legal question but wondered if my grandfather was the same person who was a “famous hockey player who defected in the 1940s.”  I immediately wrote back to confirm the gentleman’s hunch.  He stated that he was researching Post War hockey and that he came across an article about my grandfather that was published in The Hockey News in 1949.  The article described my grandfather’s hockey career in Europe, his escape, and his “surprise” appearance at a meeting of American amateur hockey players in New York City.  My grandfather was quoted as saying, “I really love the game and would be extremely happy to get back into it.” 

Instead of getting back into hockey, my grandfather got a job teaching Czech at the DLI, moved to Monterey, concentrated on golf, and lived a completely different second half of his life.

Even though I was so close to my grandparents and knew so much about their past, there was so much I didn’t know.  I knew my grandfather played hockey but I didn’t know how prominent he was until I read the article.  I never thought about how his life took such a dramatic turn when he accepted the position at the DLI – how different his life could have been had he stayed in New York and, for example, started coaching hockey.  This nugget of information could have been lost from my family forever. 

With regard to Estate Planning, we often focus so much on transferring cash, bonds, real property, automobiles, and personal items – the tangible “things” – that we forget about the intangible assets we all have.  This is why I encourage my clients to write an “ethical will.”

An “ethical will” is often described as a “voice of the heart” or a “love letter to the family.”  It often includes a description of personal values and beliefs, life’s lessons, wishes for future generations, and descriptions of rich experiences and building blocks that have shaped who you are as a person and how you wish to be remembered.   Consider writing an “ethical will” in addition to your other Estate Planning documents so that future generations have a better sense of where they came from and can carry your spirit into the future.

Full Text of the Aforementioned Article from The Hockey News, June 15, 1949

Puckster Fled From Reds; Wants Place In Game Here

NEW YORK, N.Y.—A surprise visitor to the Skyline Suite at the Hotel New Yorker on June 3 was Karel A. Krasa, prominent player, coach, manager and secretary of European hockey teams during the last 20 years. Krasa, who was forced to leave his native Czechoslovakia due to the Communists, is now living in New York where he is employed as a reporter for a Czech-American newspaper.

Krasa, who is now 45 but looks 10 years younger, was secretary of the best team to ever come out of Czechoslovakia.

That was the Czechoslovakian Lawn Club Team which toured England in December of 1947. Karel coached and managed several other first-grade Czech teams prior to 1947.

Star In Britain

Before becoming a coach he was a star player in his own right. He played center for the Queen’s Club in London, England, 20 years ago. He also starred at center for a Belgian team.

When he would not conform with the policies laid down by the Communist controlled Czech government he was dismissed from his job at the Czech Foreign Trade Commissioner’s office and left for this country. He had difficulty getting his wife and six-months-old child out of the country but after a most trying journey they turned up in New York last March.

Since coming to New York Karel has contacted Tommy Lockhart and hopes that he will be able to become associated with hockey again in some capacity or another. “I really love the game and would be extremely happy to get back into it,” Krasa stated.


Sunday, November 20, 2011

The Stale Trust Funding Dilemma

By Kyle A. Krasa, Esq. and Travis H. Long, CPA

A very common Estate Planning technique for married couples is an “A/B Trust.”  The ideas behind the A/B Trust are to preserve the Estate Tax Exemption of the first spouse to die and to retain a degree of control over the deceased spouse’s share of the estate, protecting the deceased spouse’s beneficiaries from the whims of the surviving spouse.  Upon the death of the first spouse, the trust sub-divides into an “A Trust” (also known as a “Survivor’s Trust”) and a “B Trust” (also known as an “Exemption Trust,” a “Bypass Trust,” or a “Family Trust”).

 

Many surviving spouses who have A/B Trusts either do not realize that upon the death of the first spouse they need to physically split the assets between the A and B Trusts or consciously neglect to split the assets because they feel it’s unnecessary, expensive, or time consuming.  Occasionally, a surviving spouse with an A/B Trust will realize years after the death of the first spouse that the A/B split was never completed.  Alternatively, the surviving children of a deceased couple who had an A/B Trust where no A/B split was completed upon the death of the first spouse realize the estate was never settled.  In both cases, the A/B split should have been done upon the death of the first spouse and the task at hand is to figure out how to handle the situation.

 

The question becomes whether the assets should be split between the A and B Trusts now, correcting the mistake of neglecting to split the assets upon the first spouse’s death (known as “stale trust funding”), or whether the A/B provisions of the trust can be ignored.

 

Many people upon first blush will want to ignore the A/B provisions of the trust.  After all, trying to correct a mistake made many years ago will undoubtedly create additional legal fees, accounting and tax preparation fees, time, effort, and complications.  It is much easier to sweep these problems under the proverbial rug.  However, there are many legal and tax issues that must be carefully considered before deciding to ignore what can be a significant problem.

 

First, the tax purpose of the A/B split is to preserve the first spouse’s Estate Tax Exemption.  If the estate is larger than one spouse’s Estate Tax Exemption, by not performing a stale A/B split, you will be forgoing perhaps hundreds of thousands of dollars in Estate Tax savings.

 

Second, the beneficiaries of the B Trust might be different than the beneficiaries of the A Trust.  If you ignore the A/B split, are you disenfranchising the B Trust beneficiaries?

 

Third, the Trustee has a fiduciary duty to carry out the terms of the trust and is thus legally required to perform the A/B split if that is what the trust dictates.  The Trustee could face serious legal consequences by ignoring the law.

 

Fourth, the trustee could be held liable for tax returns that were not properly filed.

 

Normally, an administrative trust tax return is filed for any income generated by the decedent’s assets between the date of death and the date the A and B sub-trusts are funded.  After that point, the A trust income gets reported on the surviving spouse’s 1040, and the B trust income is reported on a form 1041 tax return each year going forward.

 

What happens when the funding is not done for years?  Most people in these situations continue to report all the income on their 1040s after their spouse passed away, as if nothing had happened. This is incorrect.

 

So, do you have to go back and file tax returns for the B trust for all those years?  The IRS generally takes the position that since the B trust was never funded, there are no tax returns needed for that trust.  Once you fund the trust, then you start filing returns for it, even if years later.  However, at the same time, the IRS views the decedent’s share of assets as having belonged to an administrative trust since the date of death – still waiting to be properly distributed.  This administrative trust should have had tax returns filed every year.  It is further complicated when those assets are used, retitled, sold, and mixed with other assets improperly.

 

There are generally three different approaches to solving the return filing problem.  The first is to go back and file tax returns for the administrative trust dating back to the date of death.  This is the safest route, but is probably the most expensive, and may be impossible depending on the records available.  You also have the problem of potentially amending all your 1040s that were not properly prepared as a result.

 

The second approach some practitioners use is to essentially file blank 1041s dating back to the date of death and include a statement with each return that all the income was reported on the surviving spouse’s 1040.  The problem with this is that the amount of tax owed, besides being paid on behalf of the wrong taxable entity, is rarely the same.  Filing blank 1041s clearly brings the issue front and center to the IRS, but, it could also bring closure to the issue.

 

The third approach some practitioners take is to not file any administrative trust returns for the past, and just start filing returns for the B trust going forward.  This approach has risks because required returns are never filed, and therefore the statute of limitations never begins.  The issue could theoretically pop-up at any time in the future without the appearance of being forthright.

 

It is clear there are many issues to consider in a stale trust administration.  If you find yourself in this situation as a surviving spouse or you think you may be the future beneficiary of funds from a stale trust, it would behoove you to seek qualified professional advice to determine if or to what extent you could be affected, and what your options are.  The most common reaction is to ignore it and hope it goes away or think someone else will deal with it later.  Unfortunately, if there is an issue, it almost always resurfaces upon the death of the second spouse, at which point it gets more expensive to handle, is more likely to cause fighting between beneficiaries, or creates an irreversible financial disaster for the beneficiaries.  Fortunately, there are solutions if you act today!

 

Prior articles are republished on our websites at www.krasalaw.com and www.tlongcpa.com/blog.

 

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

 

KRASA LAW is located at 704-D Forest Avenue, PG, and Kyle can be reached at 831-920-0205.

 

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.


Tuesday, October 25, 2011

Ensuring That My Son Will Be a Packer Backer

Despite the fact that I grew up on the Monterey Peninsula, my favorite sports team is the Green Bay Packers.  Perhaps it was my attraction to watching football being played in inclement weather, my love for America’s small towns, my affection for green and yellow, my addiction to cheese, or the fact that the Packers are owned by approximately 112,000 members of the public who have limited voting powers, no rights to dividends, but who are entitled to free tours of Lambeau Field.

 
There are rumors that Packers stock will go on sale for the fifth time in history at the end of this season and I am ready to buy a share of my favorite team.  After all, in my battle with my wife – a Patriots fan – over what team our 17-month old son will support, what better way to seal the deal than to be able to pass on ownership of an NFL team to him?


As an Estate Planning attorney, my immediate thought is once I buy the Packers stock, how do I fund it into my Revocable Living Trust?  Trust funding is a process of changing title so that the title reflects the existence of the Trust as the owner of the asset.  Trust funding makes it easier for successor trustees to gain control of the assets in the event of incapacity or upon death and generally avoids the court-supervised procedures known as conservatorship and probate. 

 
The process for trust funding varies depending upon the specific asset.  For example, real property is funded into a Trust by drafting and executing a deed and recording it with the county Recorder’s office.  Bank accounts, safe deposit boxes, and taxable brokerage/investment accounts are funded into a trust by filling out signature cards or ownership documents, changing ownership from individuals to the Trust.


When it comes to stock held in certificate form, generally the process is to mail the stock certificates to the stock transfer agent and request that the certificates be re-issued in the name of the Trust.  With regard to the Packers stock I plan to acquire, since my motivations for owning it are sentimental rather than economic, and since the Packers stock certificate will have no resale value, I’m going to prefer to have the stock certificate show my name as the owner rather than my Living Trust.

 
However, I will “assign” my ownership of the stock into my Trust by drafting a document that states I intend to hold the asset in my Trust.  Assignments are generally used to transfer tangible personal property – assets with no formal title – into Trusts, but may be used in other circumstances – such as my Packers stock situation. 

With the Packers stock funded to my Living Trust, it will pass on to my son free of probate, and he will (hopefully) continue a tradition of being a West Coast Cheesehead!


Tuesday, October 18, 2011

Do I Get Paid For This?

Acting as a Trustee or a Power of Attorney Agent is a lot of work which involves a significant degree of liability.  Because of this, a person or organization acting as Trustee or a Power of Attorney Agent is entitled to compensation for such services.  Although Trusts and Power of Attorney documents may specify the amount of compensation, most estate plans state that the Trustee / Power of Attorney agent shall receive “reasonable compensation,” which is a term of art referenced by the California Probate Code.  How do you know whether compensation is “reasonable”?

“Reasonable compensation” is not a defined term.  When California courts determine “reasonable compensation,” they look at specific factors in accordance to California Rules of Court which are:


•    The gross income of the trust;
•    The success or failure of the trustee's administration, as measured, e.g., by the growth in value of the investments;
•    Any unusual skill, expertise, or experience that the trustee has brought to the position, e.g., investment management expertise;
•    The "fidelity" or "disloyalty" shown by the trustee,
•    The amount of risk and responsibility assumed by the trustee, as measured, e.g., by negotiation of oil leases or management of a large office building;
•    The time that the trustee spent performing trust duties;
•    The custom in the community, including the compensation allowed to trustees by settlors or courts and the fees charged by corporate trustees; and
•    Whether the work was routine or required more than ordinary skill and judgment.


In practice, most non-professional Trustees use corporate trustee fee schedules as an upper limit on their own fees.  These fee schedules are not legal standards but they may suggest benchmarks for what constitutes “reasonable compensation.”  Corporate trustee fees on the first $1 million of market value of trust assets tend to range from 1.0 to 1.3 percent and fees on the second $1 million tend to range from 0.70 to 1.25 percent per year.  Therefore, a non-professional trustee taking a fee slightly less than that would likely fall within “reasonable compensation.”


It is important to note that although the Trustee / Power of Attorneyt Agent are entitled by law to “reasonable compensation,” the Trustee’s / Power of Attorney’ Agent’s method for determining “reasonable compensation” is not final and may be challenged by beneficiaries of the trust.  The judge will ultimately look to the factors listed above to determine whether a particular fee is “reasonable.”  However, because the method based on corporate trustee schedules is so common, it is likely a good benchmark for what a judge will ultimately determine whether a fee is “reasonable.”


Archived Posts

2018
2017
2016
2015
2014
2013
2012
2011
2010
2009


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.

Please read our disclaimer prior to using any information on this website



© 2018 KRASA LAW, Inc. | Disclaimer
704-D Forest Avenue, Pacific Grove, CA 93950
| Phone: 831-920-0205

Estate Planning | Probate / Estate Administration | Asset Protection | Elder Law | Special Needs Planning | Pet Trusts | Advanced Estate Planning | Testimonials | Kyle’s Famous Legal Lessons | About The Firm | LegalVault | Request Kyle as a Speaker

Attorney Website Design by
Zola Creative