Articles Posted in Trusts

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Making charitable bequests in Wills or Trusts is a common practice. However, many individuals merely name a charity and do not specify for what purpose such a gift should be earmarked. Recently, an extremely generous, if not equally frugal, librarian in New Hampshire left his entire $4 million estate to the University of New Hampshire. He stated that $100,000 must be used for the library, but did not specify how the rest of the funds must be used. The University has decided to use $2.5 million to expand a career center for students and alumni. However, the University has also decided to use $1 million to purchase a video scoreboard for the school’s football team. This decision is causing an uproar among students and community members who believe that the spirit of the gift is not being followed. The contention is that the donor would be “turning in his grave” if he knew that his money was being used to purchase a video scoreboard.

To prevent similar issues for your charitable gifts, you should leave specific instructions and directions as to how your gift must be used. If you do not, the charity has the discretion to use the funds in any way it chooses. Sample language includes, “To Charity X to be used for ___________” or “$$$$ to Charity X to establish a ______________ in my name.”

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We frequently get calls from beneficiaries wanting to change the title to California vacation homes. They already have a probate process in another state and merely need help “transferring title.” However, transferring title to real property after the death of an owner is usually not a simple process. If there is no joint tenant on the property, and the property is not in a Trust, a probate will be required to transfer title to the heirs or beneficiaries of a Will.

An ancillary probate is a probate proceeding for a decedent who was a resident of another state or country. This comes up frequently when residents of another state have a vacation home in California worth more than $150,000. In this case, there will be a primary probate in the decedent’s home state and then an ancillary probate in California. Unfortunately, the distinction between a primary and ancillary property is merely semantic. The same rules and procedures must be followed for an ancillary probate as they would for a primary probate. This means the process will take a minimum of four months, requires a formal petition and at least two hearings, the property must be inventoried and appraised and a publication must be made in a local paper.

An ancillary probate can be avoided if the property is in a Trust. An uncomplicated trust set up in California funded with the California real property will allow a much simpler transfer of title to that property. Furthermore, even a Trust set up in another state can hold real property in California.

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Bankruptcy can disrupt your estate plan. We previously discussed here the problem bankruptcy creates if you have assets in joint tenancy with a bankruptcy debtor. However, bankruptcy can also effect your estate plan for your beneficiaries if certain precautions are not followed. A recent case, Frealy v. Reynolds, highlights this problem. A Trust beneficiary was part of bankruptcy and the bankruptcy Trustee attempted to get all of the beneficiary’s interest in a Trust to pay off creditors. The Ninth Circuit ruled that a bankruptcy trustee’s recovery was limited to 25% pursuant to the Probate Code. However, 25% is still a large amount.

Imagine the situation of leaving your entire trust estate to two children outright and free of trust. You think this is fair and equitable. However, if one of them is in a bankruptcy, his share will be greatly reduced after the bankruptcy court takes 25% to pay off your child’s creditors. Your intention of providing equally for your children has now been disrupted.

A more effective approach would leave the bankrupt child’s assets to a spendthrift Trust or keep the assets retained in Trust with spendthrift provisions. The Trustee could have the discretion to distribute to the child but not if the money will be used to pay creditors. The Trustee would not be obligated to make payments and therefore the beneficiary is not considered the owner of the assets. Since the beneficiary is not the owner the bankruptcy court cannot compel the distributions which would go to the creditors. Instead, the Trustee may wait until the bankruptcy proceedings are over to make any distributions to the beneficiary.

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We have previously discussed the importance of keeping your estate plan up-to-date. It’s a good rule of thumb to have an experienced estate planning attorney review your documents at least every five years. Out dated documents may have unnecessary provisions that can be very detrimental.

Recently, we are seeing a lot of clients who have an A/B split trust which may be unnecessary for their current situation. Back in the days of low estate tax exemption amounts, A/B Trusts were a convenient and effective way of reducing estate tax liability. However, the current estate tax exemption amount is $5,340,000 in 2014 and will rise to $5,430,000 in 2015. This means that you won’t pay a penny in estate taxes if your estate is less than the exemption amount.

Not so long ago, the estate tax exemption was only $1,500,000 (in 2005) so many trusts had A/B split provisions automatically placed in the document. This is great for reducing estate tax liability but can restrict the use of Trust funds for the Surviving Spouse. Under a trust with a A/B split, when the first spouse dies, 50% of the assets are transferred into a Decedent’s Trust (also called a Trust B) which usually cannot be amended or revoked by the Surviving Spouse. Also, the Surviving Spouse generally does not have access to principal and can only receive the income from the assets in this Trust. It can be difficult explaining to a Surviving Spouse that she doesn’t actually have use of all of the Trust funds when her spouse dies.

However, a benefit of the A/B split is that your Surviving Spouse cannot disinherit your beneficiaries. This is important especially in blended families where both spouses have children from prior marriages. Under the A/B split a Surviving Spouse cannot change the provisions of the Decedent’s Spouses’ Trust and therefore cannot disinherit step-children.

If your assets have changed significantly since your trust was initially created, or you no longer believe that an A/B split Trust is right for you contact an experienced estate planning attorney.
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As Estate Planning attorneys in La Quinta, we frequently get calls from beneficiaries who have just received notice that they are named in a trust. Sometimes they require our services; sometimes they do not. Below is a guide to help trust beneficiaries through the murky waters of trust administrations.

Step 1: Read the entire Trust and all amendments

If you do not have a copy of the trust, request one. In California, all beneficiaries are entitled to a copy of the trust instrument and all amendments. If something is unclear in the trust, ask questions. You may be able to get satisfactory answers from the Trustee or the Trustee’s attorney. If you don’t you may need to contact a lawyer.

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While the end of DOMA is wonderful, it doesn’t solve all problems for same-sex couples. The lifting of DOMA restrictions only applies to married same-sex couples. Unmarried same-sex, and also opposite-sex, couples have unique issues and concerns when creating an estate plan. Various techniques and tax saving vehicles are unavailable to unmarried partners.

Joint Trusts

Joint trusts are unadvisable for unmarried partners since the couple does not enjoy marital exemptions in gifting. Unmarried partners may choose instead to have separate trusts with identical provisions. For example, when one partner dies the other inherits everything.

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There are numerous tax and other important consequences of the Supreme Court’s decision to overturn the Defense of Marriage Act (DOMA). Also, estate planning for same-sex married couples will be easier and less cumbersome than ever before. Some of the effects of the recent decision are discussed below.

“Married” Filing Status for Federal Income Taxes

Same-sex married couples will now file their annual federal income taxes as married, either jointly or separately. Tax preparation should be less expensive and simpler than under DOMA. Married same-sex couples will no longer have to decide which spouse takes which deduction or who claims which dependent child.

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Our Palm Springs Estate Planning attorneys have clients who frequently ask about putting their children’s name on their real property deed. The assumption is that this will avoid probate and will also avoid the necessity for a living trust or other complicated estate planning documents. However, this technique is usually a bad idea.

Minor Children
Except under very limited circumstances, minor children should not own real property. A minor cannot execute legal contracts and thus it becomes extremely problematic when you want to mortgage, sale or rent real property that is jointly owned with a minor.

Creditors
When you own property with your children then the property becomes part of their estate. This means that any creditor of your children’s estate can attach liens and judgments against this property. Although your child may not have any known creditors beware of the unknown creditors. What happens if your child is at fault in a car accident? The creditor in this scenario can attempt to attach a lien or judgment against the property.

Joint Ownership
You may have transferred part of the property to your child just to avoid more complicated estate planning documents. However, now your child actually owns a piece of the property. This means that you will need their written consent to sale, mortgage or rent the property.

Predeceased Children
No one wants to contemplate that their child may predecease them. Unfortunately, this does occur. Also, many families travel together. If you and your children die simultaneously now the property must be probated but it will be a mess. The child’s ownership interest and your ownership interest must go through separate probate cases.

Gifting Concerns
The minute you put your child’s name on your deed it is as though you just gifted to them a portion of the property. If the value of the gift is over $14,000 you will be required to file a Gift Tax Return. Although you probably will not owe any taxes on this gift transfer, you are still required to file the return.
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The Supreme Court heard arguments last week regarding the constitutionality of the Defense of Marriage Act (DOMA). The legal arguments focused primarily on the 10th amendment and the freedom of individual states to choose how to define marriage. Ending DOMA would mean that the federal government would recognize any union that an individual state recognizes. For instance, a same-sex married couple from Massachusetts would be treated as a “married couple” under federal law. As the law stands now, that same-sex married couple from Massachusetts is not recognized as married under federal law.

The impact of DOMA on same-sex married couples is vast. DOMA prevents these couples from enjoying federal pension benefits, immigration benefits, gift and estate tax benefits, income tax benefits and many other things that opposite-sex married persons enjoy. Another important impact of DOMA is the effect on estate planning for same-sex married couples.

An opposite-sex married couple’s estate plan is usually pretty straightforward. They create a joint trust, execute some Power of Attorneys and Advance Health Care directives and reciprocal wills. However, estate planning for a same-sex couple is much more complicated. If a same-sex married couple creates a joint trust there are various legal and tax hurdles to overcome. Since the federal government does not recognize the couple as “married” any gifts made between the couple will be subject to federal gift taxes. When the couple funds the joint trust with assets they must trace the genesis of the assets. If one partner contributes more than the other, then there may be some gift tax complications. Furthermore, the Trust would require its own Taxpayer Identification Number since a same-sex couple could not use one of their Social Security Numbers as the identifier for joint assets.

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All parents want to make sure their young children are provided for financially in the event of their death. Grandparents may also wish to leave assets to grandchildren in a will or trust. However, leaving assets outright to minor children is usually not a good idea. Additionally, naming minor children as beneficiaries on life insurance policies or retirement accounts is also troublesome.

If you name a minor child as a beneficiary on a life insurance policy, retirement account or bank account the child has the right to 100% of the proceeds upon their 18th birthday. Equally scary is that the guardian of the child can’t access any of the money while they are raising the child. Some parents have overcome this by naming the guardian as the beneficiary with the agreement that all proceeds will be used for the child. This is not foolproof since technically the guardian has no legal obligation to use the funds for the child. Also, once the funds are transferred to the guardian they become assets of the guardian and can be used to satisfy personal debts of the guardian.

Overcoming these hurdles is simple. Establish a revocable trust and name the trust as the beneficiary for all of the accounts. We still recommend that if you have a spouse you name your spouse first, but as a contingent beneficiary you can name your trust. This way, all the financial institutions will pay out the proceeds to the trust and the trust provisions will dictate when and how the money is used.
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