Sharp Estate Planning

Changes to Retirement Law in 2020

Mon, 20 Apr 2020 19:40:00 GMT

Beginning January 1, 2020, under the Secure Act, beneficiaries who inherit an IRA from someone other than a spouse are no longer able to stretch their distributions out over the lifetime of the oldest beneficiary of the retirement plan. Now, the longest period of time over which a beneficiary may stretch an inherited IRA from a non-spouse is ten (10) years.

If the beneficiary of the IRA is a trust, the entire IRA must be distributed within five (5) years of the participant’s date of death.

Surviving Spouse beneficiaries can still use a spousal rollover for IRAs they inherit from the deceased participant spouse. Spousal rollovers are treated like the Surviving Spouse’s own IRA: the Survivor can name new beneficiaries and can defer income taxes until the Surviving Spouse reaches the age at which minimum distributions must be paid. The Required Minimum Distributions (RMDs) will still be based on the life expectancy of the Surviving Spouse.

NOTE: Also under the Secure Ace, the minimum age at which a person must take distributions from their retirement accounts has increased from 70 ½ to age 72.

ALSO NOTE: These changes only affect IRAs from the year 2020 going forward. Those beneficiaries who have already inherited an IRA from a deceased participant in 2019 or earlier will not see a change to their distribution schedule.

SOME STRATEGIES FOR LESSENING THE TAX IMPACT

There are some alternatives that an IRA participant can make right now which may lessen the income tax impact for their designated beneficiaries. Be sure to contact your accountant before you implement any of the options discussed below.

☞ A New Kind of Beneficiary – The “Eligible Designated Beneficiary” is a new kind of beneficiary under the Secure Act. If qualified, an eligible designated beneficiary will still be able to use the lifetime stretch-out rules that existed under earlier laws.

Persons who qualify as an eligible designated beneficiary are limited to beneficiaries who: 1) are the participant’s children who are minors; 2) are chronically ill; 3) are less than ten (<10) years younger than the IRA participant; and 4) Surviving Spouses. There are two exceptions to the rule for minor children: once the minor child reaches the age of majority, the 10 year rule applies; and minor grandchildren do not qualify as an eligible designated beneficiary.

☞ Consider Income Tax Bracket of Beneficiary – You may wish to leave a Roth IRA to a beneficiary who is in a high income tax bracket (or who you expect to be in a high income tax bracket in the future) because distributions from a Roth IRA are not subject to income tax. You may want to leave a traditional IRA to beneficiaries who are in a low income tax bracket (or who you expect to be in a low income tax bracket in the future) since the 10 year rule may result in an increase in income tax.

It may make sense for you to convert your traditional IRA to a Roth IRA and, in essence, prepay the income tax liability for distributions. Your heirs are not allowed to do this after your death; it must be done by the IRA participant during his or her lifetime. Conversions may be done in fractions of the whole so that the income tax liability is not realized all at one time. Be sure to check with your accountant about how to do this.

☞ Consider the Timing of Distributions under the 10 Year Rule – The new rule does not require the beneficiary to withdraw sums every year for ten years the way the stretch-out beneficiary is required to do under the old law. Instead, the requirement is that the beneficiary take all of the money out by the end of the tenth year after the death of the participant. Whether the beneficiary waits ten years and then takes out the whole sum or takes it out in installments over the ten year period depends on whether the IRA is a traditional IRA or a Roth IRA. It makes no difference when the money is withdrawn by the beneficiary with the Roth IRA since there is no income tax liability for withdrawing the sums. A beneficiary of a traditional IRA is better off, tax-wise, taking the money in installments over a decade of time.

☞ Naming Heirs as Beneficiaries with Surviving Spouse – Another way to handle the changes in the law is to consider naming your heirs as co-beneficiaries with your spouse at your death. Elevating your beneficiaries so they receive money during your spouse’s lifetime impacts their share as seen in the following example:

At your death, your spouse and two children are named as your primary beneficiaries, each with an equal share of your IRA. At your death, your spouse would receive 1/3 which he or she can roll over into a spousal rollover and treat as if she were the participant. The other 2/3 would be distributed to your children over a ten year period from your date of death. Upon the death of your spouse, your children would get an additional ten years to withdraw the remaining money from your spouse’s spousal rollover; this results in your children getting 20 years to inherit the money from your original IRA instead of the 10 they would get if they inherited only on the death of the surviving spouse.

☞ Charitable Giving – The new rule may make gifts to charities more attractive. A qualified charitable remainder trust enables your beneficiaries to receive income after your death until the trust term ends or the beneficiaries die. The remaining assets are then transferred to the charity.

Estate Planning 101

Fri, 13 Mar 2020 21:45:00 GMT

Many of my trust clients need an estate planning “refresher” when they want to make changes to their existing estate plan. Whether or not you have done your estate plan, I hope you will find this newsletter useful; feel free to save or share it.

TITLE IS EVERYTHING!

The general rule is that if you die owning more than $150,000 in assets which are titled in your name (as an individual), at death, that title needs to be transferred to a living person. This transfer process is called PROBATE and it happens whether or not you have a Will.

If you have a Will, then you get to direct who receives title to your assets. If you do not have a Will, then the State of California has a plan for which of your next of kin will get title to your assets.

In California, the probate process is a court supervised event which is expensive. Attorney fees are calculated as a percentage of the value of the assets being probated and the Executor is entitled to be compensated at the same rate. To give you an order of magnitude, a probate estate worth $500,000 will generate $13,000 in attorney fees, $13,000 in Executor compensation, and approximately $1,500 in costs.

The probate process is also time consuming. In Los Angeles County, where I practice, it will take at least a year to complete the probate process; longer if there is litigation or other issues that need to be addressed.

The probate process is public. All the documents filed in the probate proceeding can be viewed by any member of the public.

HOW DO YOU OWN ASSETS DURING LIFE WITHOUT OWNING THEM AT DEATH?

Joint Tenancy. If you hold title to an asset with another person as joint tenants, there is an automatic right of survivorship which means that the surviving joint tenant owns the asset outright by operation of law. Probate, however, will be required at the death of the surviving joint tenant.

Note that transferring title to your current assets to joint tenancy with right of survivorship with another person results in your making an actual gift of one half of that asset to the other joint tenant. If the value of the this gift is more than the annual gift tax exclusion amount, you are required to file a gift tax return with the IRS (Form 709) and report that you have made a gift in excess of the exclusion. This is true even though you will likely not be required to pay a gift tax at the time of filing.

Living Trust. If you hold title to an asset as a Trustee of your living trust, then at your death, your trust, and not you as an individual, owns the asset. You will already have appointed a Successor Trustee who has these tasks: 1) take control of all assets titled in trust name; 2) pay all legal liabilities of the deceased trust owner; 3) pay all taxes owed by the trust owner or the owner’s estate; and 4) distribute the remaining assets as the trust owner directed in the trust agreement. These are similar tasks that an Executor does in handling a probate estate; the difference is that one process is court supervised and the other, generally, is done privately. The Successor Trustee has certain legal obligations to the trust beneficiaries at the death of the trust owner.

WHAT IS NOT CONTROLLED BY A WILL OR A LIVING TRUST?

You can own title to certain assets, such as retirement plans or life insurance, which are not controlled by the terms of your Will or your living trust. This is so because those assets will be distributed at your death directly to whomever you have named as a designated beneficiary. If, however, you have not named a beneficiary for either of these assets, then those assets will be subject to the probate process and they will pass to whomever you have named in your Will or to your next of kin under the California rules of intestacy (a term that means there was no Will).

SCHEDULE OF ASSETS DOES NOT TRANSFER TITLE

When you create a living trust you generally give the attorney a list of all of the assets that you own and you discuss what you want to have happen to those assets at your death. The attorney usually itemizes all your current assets (but not the retirement accounts since they have a designated beneficiary) on a schedule that is attached to your trust document.

It is very important to note that merely having an asset on the schedule DOES NOT, without additional action by you, transfer title to the asset from you an individual to you as the Trustee of your living trust. Once you create a living trust, you will have to transfer legal title of your assets to yourself as Trustee. Failure to do so may result in having to go through a probate process at your death.

ONGOING MANAGEMENT OF THE TRUST

Establishing a living trust means that you have entered into a written arrangement with yourself to hold title to your property in a specific legal way (as a Trustee).

Once you have transferred title of your current assets to your living trust, you can ensure that there is no probate at your death by ACQUIRING ALL FUTURE ASSETS as Trustee of your trust. Any time you are dealing with a financial asset, you should be thinking that you are acting on your behalf as a Trustee.

This means that when you decide to get a Certificate of Deposit at a new bank, open the new account as Trustee of your trust.

If you sell your residence and buy a new home you take both of those actions as Trustee of your trust.

Make sure that title on your brokerage accounts for your stocks, bonds, and mutual funds shows that the account is registered (and the statements are sent) to you as Trustee of your trust.

You want to buy a new car? Consider purchasing it as Trustee of your trust.

Contact me if you have any questions.

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Gifting Your Estate

Fri, 01 Dec 2017 22:53:00 GMT

GIFTING

In planning their estates, people have a wide variety of reasons for selecting particular beneficiaries and determining the amounts they want those beneficiaries to receive and the manner in which they want the beneficiaries to receive their inheritances. This newsletter explores gifting issues.

BENEFICIARIES vs. HEIRS AT LAW

Under California law, beneficiaries and heirs at law are required to receive written notice of a person’s death. They are also entitled to receive a copy of the deceased person’s Trust or Will upon request. The term “beneficiaries” and the term “heirs at law” are not synonymous or even subsets of each other. Not all beneficiaries are heirs at law; not all heirs at law are beneficiaries.

A beneficiary is someone who is specifically identified in a Trust or Will as the recipient of money or property from a deceased person’s estate. An heir at law is someone, related by blood to the deceased person, and who otherwise would receive all or a portion of the deceased person’s estate if the decedent did not create a valid Trust or Will prior to death. Heirs at law are also known as the natural objects of a person’s bounty. The California Probate Code provides a list of the heirs at law for a deceased person’s estate and determines how much that heir at law would receive if the decedent made no other plan.

SHOULD THE GIFT BE RESTRICTED?

Most of my clients who have children want to leave their estate to them. Few, however, decide to leave the estate as an outright gift to the children. The terms and conditions set on how and when the children receive their inheritance often depend on the dynamics of the family relationships. Statistically, someone who receives a lump sum of money spends the entire amount within eighteen months of its receipt. For many, parents prefer to give the inheritance to their children in a way that assists the child in resisting the urge to spend the gift as soon as it is received. The way to do this is to instruct the Trustee to hold the child’s share in trust for the child’s benefit. Consider the following:

• Restrictions may be imposed on a child’s share of the estate in an effort to control the child’s future behavior.

• Conditions may be set so that the child must achieve specified accomplishments, such as college graduation, or attaining a particular age, before receiving a specific percentage of the inheritance.

• Staggering the inheritance over a period of years allows the child multiple opportunities to manage their new found wealth and minimizes the chance that the money will be dissipated in a short amount of time.

• While the parents’ estate is held in trust for the benefit of the child, provisions can be set which preclude potential creditors of the child (including potential ex-spouses) from reaching the trust assets before they are actually paid out to the child. This kind of asset protection, while not available for the grantors of a living trust, is possible for the children of the grantors.

• Restrictions can also be placed for a child’s inheritance when the parents are concerned that the child has a substance abuse problem, mental illness, or other limitations that prevent the child from properly managing the money.

SPECIAL NEEDS

Sometimes, parents have children with particular mental or physical impairment which prevent the child from being able to care for himself or herself. It is critically important for parents of these children to be sure that their estate plan properly addresses those specific needs.

A particular kind of trust, called a Special Needs Trust, can be created to hold the child’s inheritance in such a way that the asset will be available to assist the child but not in such a way that would render the child ineligible for governmental benefits such as Supplemental Security Income (SSI). This is because SSI is a needs-based programs and the beneficiary would be required to spend down resources and income before being able to qualify for benefits from the state or federal government.

Governmental benefits usually include providing for a child’s food and shelter. The Trustee of a Special Needs Trust, created by the child’s parents, can provide certain things for the child which will enhance their life without causing the public benefits to be diminished.

The Trustee of the Special Needs Trust must provide the beneficiary with items that either become exempt items in the month following the month in which the item is given to the beneficiary, or items that are used in the month they are give; otherwise the benefits are reduced. Examples of items which become exempt assets are household goods, books, computers and other personal electronics. Examples of items that are used in the month in which they are given are vacations or tanks of gas. It is important to speak with an estate planning attorney who is familiar with the rules surrounding Special Needs Trusts to ensure that if they are necessary, they are properly created.

CHARITABLE GIVING

Sometimes, my clients want to be sure that their estate passes, in whole or in part, to one or more entities which qualify as charitable organizations under the Internal Revenue Code. Doing so results in an income tax deduction for the client’s estate and therefore is often used by large estates as a means of reducing the potential estate tax liability as well as encouraging the growth of organizations performing ongoing good works.

Charitable giving is also done when the parent’s desire to demonstrate the value they place on supporting particular causes, the importance of “giving back” to society, and to prevent their children from relying exclusively upon the expected inheritance for their means of support.

OTHER MOTIVATIONS FOR GIFTING

Perceived need is a reason that goes in both directions: it may be the cause for a person getting a gift (because he needs it) or as a reason for not getting a gift (because he married into a wealthy family). Also a sense of fairness may motivate parents either to give to their children equally, or to equalize gifts at death due to unequal lifetime gifts to children.

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Gifting to Beneficiaries and Heirs at Law

Wed, 01 Nov 2017 21:38:00 GMT

BENEFICIARIES vs. HEIRS AT LAW

SHOULD THE GIFT BE RESTRICTED?

• Restrictions may be imposed on a child’s share of the estate in an effort to control the child’s future behavior.
• Conditions may be set so that the child must achieve specified accomplishments, such as college graduation, or attaining a particular age, before receiving a specific percentage of the inheritance.
• Staggering the inheritance over a period of years allows the child multiple opportunities to manage their new found wealth and minimizes the chance that the money will be dissipated in a short amount of time.
• While the parents’ estate is held in trust for the benefit of the child, provisions can be set which preclude potential creditors of the child (including potential ex-spouses) from reaching the trust assets before they are actually paid out to the child. This kind of asset protection, while not available for the grantors of a living trust, is possible for the children of the grantors.
• Restrictions can also be placed for a child’s inheritance when the parents are concerned that the child has a substance abuse problem, mental illness, or other limitations that prevent the child from properly managing the money.

SPECIAL NEEDS

CHARITABLE GIVING

OTHER MOTIVATIONS FOR GIFTING

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What Beneficiaries Need to Know in Trust and Probate Administrations

Mon, 23 Oct 2017 23:25:00 GMT

I assist Successor Trustees in the administration of living trusts which became irrevocable by virtue of the death of the Settlor. I also am often the attorney for the estate of probate matters in which the decedent passed away owning assets outside of a living trust. Whether there is a trust estate or whether there is a probate estate, there are two questions common to both: “ Who needs to know about the administration of the trust or probate estate?” and “ What information needs to be given?”

HOW MUCH AND WHEN?

The beneficiaries, on the other hand, have a different pair of questions: “ How much will I receive?” and “ When will I receive it?”

Sometimes these questions arise because the beneficiary had no idea that he or she was actually named as a beneficiary of a trust or an estate. Sometimes, these questions arise because the beneficiary had already been expecting to receive something from the trust or estate on the death of the Decedent, and now a windfall was expected.

DON’T REVEAL TOO MUCH TOO SOON

I encourage my estate planning clients not to disclose the details of their estate plan to their loved ones during their lifetime. I believe doing so often creates an expectation on the part of the beneficiary which may, or may not, be realized when the actual date of death has occurred. In my opinion, the beneficiaries need to know only when the death has occurred.

Since most folks create their estate plans well in advance of their passing, there is generally a lot of time before the beneficiaries need to know. If the client lives a long time, it may be that much of the assets will be needed to care for the client prior to death. The facts that exist at the date of death such as what kinds of assets remain, and their value may be very different from what they were when the estate plan was initially created. Moreover, if the client established a revocable living trust, he client could change his or her mind about the ultimate disposition of his or her estate. Telling beneficiaries in advance often set them up for disappointment.

Disappointed beneficiaries plague both the administration of trusts and of probate estates, sometimes even going as far as engaging in costly and time consuming litigation with the Successor Trustee or Executor.

BENEFICIARIES DO NEED TO KNOW

California law requires disclosure to the beneficiaries about the terms of the trust or Will. I agree with the statutes that enable a beneficiary to know general information regarding the administration of a trust or the progress of probate estate.

In my experience, however, the beneficiaries often immediately start to think about ways to spend their inheritance sooner than they will actually receive it. I am often called by beneficiaries who tell me that they have this financial need or have made that plan for thus and such in anticipation of receiving their portion of a trust or probate estate. To my way of thinking, this behavior on part of the beneficiary is premature, and again is often the cause of disappointment. I recommend that beneficiaries wait until they actually receive the money they are inheriting before they make plans to spend it. I am certain this kind of behavior is one of the reasons that statistically, beneficiaries spend their entire inheritance within eighteen months of receiving it, regardless of how old they are when they receive it or how much they get.

LIFETIME GIFTS GO AWAY AT DEATH

Many of my clients are generous people. They like to help their family financially, and often give gifts to assist family members who need help. It can be difficult for the recipient of gifts to fully understand that once that person has died, the Successor Trustee or Executor is unable to continue the decedent’s former largesse. It is an unfortunate fact that those gifts end at death. The Successor Trustee or Executor serves as a fiduciary and has an obligation not only to marshal the decedent’s assets, but also to pay the decedent’s debts, expenses, and taxes before distributions can be made to the beneficiaries. This is especially true when the Successor Trustee steps in due to the incapacity of the creator of the trust.

APPROPRIATE ACTION BY THE BENEFICIARY OR HEIR

The beneficiary of a trust or heir of a probate estate may request a copy of the trust or Will if it was not provided when notice of administration was given. They may also request and are entitled to receive an accounting by the Successor Trustee or Executor which shows the value of the assets at date of death, the assets which came in to the trust or probate estate during the period of administration, the extent and nature of expenses that were paid, gains or losses that occurred between the date of death value on sales of assets, and the value of the trust or probate estate prior to final distribution.

If there is a question about an item stated in the accounting, the beneficiary may get additional information the Trustee or Executor, and can undertake further legal action if it becomes necessary; however formal legal action delays the actual distribution and usually diminishes the value of the inheritance.

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Preditor Protection

Mon, 30 Jan 2017 18:46:00 GMT

As people age, the ability to resist undue influence decreases. Predators use undue influence to overcome a persons own natural inclinations and imposes the predators wishes on senior adults that results in an involuntary estate plan, contrary to the persons long held wishes. Undue influence deprives a person of the right to be the one to determine who should receive his or her estate at death. California law allows its residents with the freedom to dispose of their property as desired, even if its on a whim, provided that the disposition is voluntary; that is, by the persons own choice.

WHO ARE PREDATORS?

Predators are people who seek to take something from someone for themselves. Predators influence elder adults to change their long-held estate plan to benefit themselves. They are often people who appear at first to be kind, friendly, helpful, and caring; however, their ultimate goal is to get the senior to give them his or her money or property, either during life, or at death.

Predators can be strangers, neighbors, or family members. There are many reasons why predators begin relationships with senior adults. Once the predators have gained the senior adults confidence, they can begin to exert their influence on the senior to benefit themselves. This is one of the reasons that California law prohibits gifts to caregivers except under certain circumstances.

CONSIDER THE FOLLOWING OPTIONS
TO PROTECT YOURSELF
FROM PREDATORS:

REQUIRE FACE TO FACE MEETINGS: Create a provision in your trust that requires a minimum number of face to face meetings with the same attorney who prepared the most recent version of your living trust before you are able to make any substantive changes to your estate plan. You could even attach an age threshold at which this provision would begin.

REQUIRE WAITING PERIOD: Create a provision in your trust that requires a waiting period between the time you review a draft of your amendment and when you actually sign the documents that implements substantive changes to your estate plan.

REQUIRE THIRD PARTY CONSENT: Create a provision in your trust that requires the consent of a neutral third party before your trust could be revoked or substantive changes could be made. The identity of this third party should be carefully considered and pre-selected; there should also be a back-up person in case the first person is not able to provide consent. Note that I DO NOT recommend the drafting estate planning attorney serve as the neutral third party.

LIMIT USE OF DURABLE POWER OF ATTORNEY: Create a provision in your trust that limits the authority in a durable power to revoke or amend your trust to people who are already identified in the trust instrument. This may protect you from someone new being named as your Agent in a future power of attorney.

USE DIFFERENT TRUST POWERS FOR DIFFERENT SIZE TRUST ASSETS: Create a provision in your trust to enable smaller, liquid assets to come under your exclusive control but more valuable assets such as investment accounts and real property would be under the power of a Special Trustee.

USE A TRUST PROTECTOR: Create a provision in your trust that appoints a Trust Protector who has the right to receive the trusts financial information directly from the financial institution so that the Trust Protector could detect potential fraud or undue influence through marked changes in your financial situation. Note that the use of this option may involve a stand-alone authorization from the financial institution before your information is authorized to be send to a third person.

USE A SPRINGING TRUSTEE: Springing powers are common in durable powers of attorney. Although a power of attorney is signed on a given day, the actual authority does not spring to life until a certain event, usually the incapacity of the Principal. You could create a springing Trustee who automatically becomes a Co-Trustee with you when you reach a certain age. Having two Trustees who have to sign on financial transactions or to accept changes to a living trust may be useful.

LIMIT THE SURVIVING SPOUSES POWER TO APPOINT TRUST ASSETS AFTER THE DECEASED SPOUSES DEATH.
Create a provision in the trust which limits the Surviving Spouses ability to change the ultimate disposition of the Trust regarding the Deceased Spouses share of the trust estate.

Since the estate tax exemption has been increased to over $5 million per person, many people are now choosing to hold all of the assets in a single trust during the lifetime of both spouses rather than dividing the trust estate into His and Her shares at the death of the first spouse. The trust instrument could give the Surviving Spouse a limited power of appointment over the Deceased Spouses share of the trust estate. The trust instrument could even eliminate the power of appointment over the Deceased Spouses share entirely so that the Survivor could not change the terms on which that portion of the trust estate is distributed when the second spouse dies.

CREATE A DISCLAIMER TRUST. Your trust instrument could create an irrevocable trust into which some or all of the Deceased Spouses portion of the trust estate would be distributed because the Surviving Spouse would disclaim trust assets. You could combine this option with the one that names a neutral third party as the Trustee (or Co-Trustee with you). This kind of Disclaimer Trust also provides protection from the Surviving Spouses creditors during his or her lifetime.

THE FIRST HURDLE

Of course, the first hurdle to overcome in order to protect yourself from predators is to recognize that as you age, you may get to a point at which you will become easily influenced by someone to do things you would not otherwise do. Most older adults cannot face the fact of their age and the possible diminishment of their physical health and mental ability. They often believe they are as fully capable of managing their affairs as they were when they were thirty. Acknowledging limitations can be a big hurdle to cross, but one which may be necessary for protection.

Source: Christopher D. Carico, Esq.

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A Tale of Two Deaths

Tue, 11 Oct 2016 18:26:00 GMT

A Tale of Two Deaths

I have experienced the death of two people with whom I had a close relationship. One occurred almost fifteen years ago, and one occurred last month. Although there were some interesting similarities between the two events, there were also significant differences.

My husband’s was the first death. He had never been sick during our marriage until he had a rare form of cancer that was untouched by chemotherapy or surgery. His death was tragic, and continues to leave its mark on my life and those of our children.

The second death was not tragic. My friend died last month at the age of 93. We first met twenty years ago and became friends through our active involvement in a women’s educational philanthropy.

SIMILARITIES

I was able to speak with both of these dear people right before they died, so the actual time and date of each of their deaths was a surprise to me. I find it curious that death can be sudden and unexpected even when you know it’s going to happen.

In my husband’s case, our heart bonding time was between eleven p.m. and midnight every night, after the kids were asleep, and I had completed the duties that coping with a chronic illness required. He died one morning moments after I did my first check-in.

I spoke with my friend just before she died. Years ago, she asked me to serve as her Agent under her Advance Health Care Directive. (I was not her attorney, so there was no conflict of interest.) Later in life, she lived in an assisted living facility, and had caregivers who were with her during most of the daytime to assist her with her meals and ambulation. One day, her caregiver called me to tell me she wasn’t feeling well. I called my friend to see if she wanted me to schedule a doctor’s appointment although she generally was adamantly opposed to doctor visits. She told me that she didn’t want the caregiver to bother me and then hung up. The caregiver called back twenty minutes later to tell me that my friend had stopped breathing. I rushed to her apartment, arriving along with the paramedics, but she was gone by the time we arrived.

DIFFERENCES

Coincidentally, both my husband and my friend are buried in the same cemetery. My husband and I did not have any preset funeral arrangements or prepaid plots because we were young with small children and did not expect death to come so soon. My friend, however, was fully prepared. She had made the arrangements with the mortuary and cemetery years before I ever met her. As her Agent under her Advance Health Care Directive, I had the legal authority to be sure that her arrangements were carried out as she planned.

BENEFITS OF PREPAID EXPENSES

Having the mortuary and cemetery expenses paid in advance made it extremely easy to carry out her wishes. The mortuary removed her from the assisted living facility, on a Saturday, and I met with them on the following Tuesday to sign the paperwork my friend had arranged. The mortuary put me in touch with the cemetery staff and I was asked which day I wanted for her burial. So on the chosen day, I was able to say my final good-bye. My friend’s brother had died twenty-five years before she did and she had chosen to be buried in his grave which was next to their parents’ graves. So I was not surprised to see that she had already had a headstone engraved with everything but the year of her death. There were no decisions I had to make in this whole process. I had not personally experienced this situation before, and now that I understand how easy it is for those left behind when the arrangements have been made and paid for, I urge you to consider doing the same so that your loved ones do not have to make those kind of decisions when they are grieving.

FUNERAL/MEMORIAL PLANNING

I have some clients who have very definite ideas about what they want to happen at either their funeral or their memorial service. They have selected the music, the instruments, the location of the service, the person to conduct the service, and meaningful poems or religious excerpts. Some have planned where they want their ashes scattered or in which cemetery they want to be buried. I have one client who has written down the names of the songs she wants sung to her if it is known that she is actively dying.

TRANSITIONS

There are volunteers I have met through a local grief counseling organization whose members have some hymns and other songs practiced so that they can go to the bedside of a dying person and sing to them when they are near then end of their life.

There are also folks who make a living in assisting terminally ill patients and their families make the transition from life to death. These folks not only help those who are actively dying, but also those who will be left behind. In some cases, they have been able to work out issues between siblings and other family members so that the siblings can still have a relationship with one another after the terminally ill patient has died, something which might not have happened without outside intervention.

ROOM FOR IMPROVEMENT

There is a great deal of room for improvement on how we as a society deal with the fact of death and help people cope and grieve with those who are dying and who have experienced the death of someone close to them.

My experience as a young, grieving widow was not unique. I endured condescension, platitudes, and patronizing comments from friends and strangers when what I really wanted was to hear them say, “yes, it is sad, and difficult, and hard to understand”, and to show some real depth of feeling.

So many people wanted me to “get over it” (as if I could) or, at least, stop showing my feelings after a couple of months. It is often difficult to witness someone else in grief and distress. Instead, people generally want to pretend there is no grief, or to cover up those intense feelings so that they themselves are not made uncomfortable by witnessing the emotion. Yet, acknowledging a person’s grief and its accompanying pain can help the griever heal.

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Record Keeping in Trust or Probate Administration

Tue, 12 Jul 2016 23:13:00 GMT

In April 2009, I summarized the proper handling of current estate planning documents. This included recommendations for storage of the original Trust versus the original Will. It also described who should have a copy of the Advance Health Care Directive and Durable Power of Attorney. If you wish to read or re-read that issue, you can find it in my newsletter vault on my website (see the website address below). Past issues of my newsletters are posted in the vault and available to all who subscribe to them.

This newsletter addresses record keeping issues after administration of an estate has been completed. There are several reasons for retaining your records used in the administration but the two main reasons are an IRS audit and potential creditor claims against the estate.

Trust Estate Administration

Upon the death of an individual Settlor, or upon the death of the Surviving Spouse, the Successor Trustee marshals the trust assets, pays all proper debts and expenses of the trust, including income taxes, and distributes the balance of the trust estate to the named beneficiaries as directed in the trust agreement. Once this has been completed, Trustees often ask me; “How long do I have to keep my records of the administration?” Before that question can be answered, the Successor Trustee must determine whether the Internal Revenue Service will audit the Trustee’s fiduciary income tax return.

Once the administration of a trust has been completed, the Successor Trustee should hold onto the trust administration records until he or she has determined that the IRS will not audit the fiduciary returns. The Trustee should obtain advice regarding the proper length of time from the CPA who prepared and filed the fiduciary returns.

Estate Tax Returns

The length of time during which the IRS may conduct an audit may be different for an estate tax return (which is reporting the value of the decedent’s assets on his or her date of death) than it is for a fiduciary income tax return (which is generally an annual return reporting the income of a trust during the calendar year). Once the estate tax return has been prepared, the accountant usually makes a written request for an immediate review of the return which shortens the time in which the IRS audits the return. No Trustee should distribute the trust assets to the beneficiaries until after he or she has received the closing letter from the IRS.

Probate Estate Administration

Probate estate administration differs from the administration of a trust estate. Estates that are subject to probate have the benefit of court oversight. Documents filed with the probate court in Los Angeles County, California during probate administration are now scanned and kept electronically. Copies of filed documents can be obtained directly from the courthouse.

Sometimes the length of time an Executor should retain probate documents is shorter than the length of time recommended for Trustees. One of the reasons for this pertains to potential creditor claims. In a probate proceeding, all ascertainable creditors of the Decedent are notified and requested to present their claims to the Executor. If a known creditor does not present a claim during the prescribed time in the probate process, the creditor is barred from doing so at a later date. So at the end of the probate process, the court is able to order distribution to the beneficiaries under the Decedent’s Will or to the Decedent’s heirs at law (if there was no Will) without concern that creditors will show up at a later date demanding payment.

Moreover, because all the documents filed in a probate matter in Los Angeles County are now scanned and can be viewed or copied by going to the Stanley Mosk Courthouse in downtown Los Angeles, there is little need to keep the original probate file for years after the receipts showing final distribution was made. Although I recommend that a copy of the probate documents be kept until the period of time for the IRS audit has elapsed, once the Executor has been discharged by the Judge, the public probate files can be discarded.

Once the probate has been completed, the Executor may request that the court discharge him or her as Executor. A court’s discharge terminates the Executor’s legal authority to act for the Decedent. If there is an asset belonging to the Decedent which is subsequently discovered, a new probate case will need to be opened in order to properly dispose of that later discovered asset.

Electronic Storage

Using current technology, a Trustee or Executor now has the capability to easily hold onto its records used in preparing the estate tax return, the fiduciary income tax returns, and the probate documents. The documents can be electronically scanned and stored indefinitely either on a computer’s hard drive, a portable flash drive, or even in “the cloud” by way of the Internet. Storing data electronically means that records can easily be kept for long periods of time without requiring the physical space that the paper documents need.

For many Trustees and Executors, some combination of paper documents and electronic copies of the paper documents is the ideal for keeping their records as long as necessary.

Original Wills with the Lawyer

Under the current rules, a California lawyer is required to keep, forever, a client’s original Will. Long ago, before living trusts became popular, it was common for lawyers to keep original Wills for their clients. This made good business sense at the time because the lawyer would often handle the probate of the Will when the client eventually died. However, if the lawyer died with original Wills in his possession, the person winding up the deceased lawyer’s practice could find himself on the hook for locating hundreds of people to return the original Wills to them. Therefore, I have a policy of NOT keeping my clients’ original documents.

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Children Have a Difficult Job as Trustee

Tue, 26 Apr 2016 20:20:00 GMT

Through the years I have advised many individuals, Private Professional Fiduciaries, and corporate Trust Officers on the administration of living trusts after the death of the grantor. The job of a Trustee is a high calling and should not be undertaken lightly. This newsletter highlights some of the difficulties encountered by children who are named as the parents’ Successor Trustees.

“BEING” VERSUS “SERVING”

One of the initial challenges facing a Trustee stems from the person’s perspective of the Trustee role. Does the person view the role as “being” a Trustee, with all the power and authority that comes with controlling the assets? Or does the person view the role from a service perspective, with the Trustee acting primarily on behalf of the named beneficiaries, giving those needs top priority?

Children of the grantor are particularly challenged when acting as the Successor Trustee. This is due, in part, to the role the child played in the family dynamics during the parent’s lifetime. It is nearly impossible for a child, upon the parent’s demise, to suddenly adopt a different role from the one the or she had while the parent was alive. However, I believe it is important for the child who has been named a parent’s Successor Trustee to strive to take on a new identity during the period of the trust administration. This new identity is that of a neutral third party administering the trust assets according to the direction given in the trust agreement. By adopting a neutral third party identity when acting as Successor Trustee, the child is better able to conduct the trust administration as a true fiduciary, upholding the high standards of a fiduciary set by law.

USE OF A PROFESSIONAL

Many of my clients prefer to name their children as their Successor Trustees to keep the administration of their trust in the family and because they have great faith in their children’s ability to act appropriately and carry out their stated wishes.

Sometimes, however, it is better for the relationships between the children after their parents’ deaths to have a Private Professional Fiduciary step in and handle the trust administration of the parents’ trusts. The compensation of a professional is comparable to the “reasonable” compensation allowed in most trust agreements. Having a neutral third party as Successor Trustee, means there is no power play between the children, no righting of perceived wrongs that took place during their childhood, and potential arguments about what the child/Trustee may or may not be doing can be prevented.

DUTIES OF A TRUSTEE

A Trustee has several important duties toward trust beneficiaries. These duties form the high standard the law requires of a person who is handling someone else’s financial affairs. The Trustee of a trust has a primary duty to administer the trust according to the terms of the trust agreement. The Trustee is acting on behalf of the trust’s beneficiaries and is looking out for their best interests. There are specific duties of a Trustee, some of which are identified here.

The Trustee cannot treat one beneficiary more favorably that another beneficiary . Too often, long standing family dynamics come in to play and the child/Trustee finds himself or herself in the position of being tempted to take an action that may favor his or her own interests and not treat the other beneficiaries as favorably. An example of this is when the Trustee want make a preliminary distribution for one beneficiary but not to distribute the same amount to another beneficiary because the second beneficiary does not “need” it as much as the first.

The Trustee must keep the beneficiary informed. When the Trustee is the beneficiary’s brother or sister, there may be times when the Trustee would prefer not to tell the beneficiary about all the decisions that need to be made during the administration of the trust. Sometimes this is because the beneficiary may argue with the Trustee about the decision to be made and the Trustee would prefer not to get into an argument. Nevertheless, the Trustee should consider whether the decision would be discussed with an unrelated third party beneficiary, and if so, the Trustee should discuss the decision with the trust beneficiaries.

The Trustee must keep accurate records and pay taxes on behalf of the trust . The Trustee must disclose to the beneficiaries all of the transactions that occurred during the administration of the trust. This includes income from all sources, reinvestment of dividends, and a description of the expenses paid. The records also should reflect the value of the property at the beginning of the administration and the value of the property at the time when the trust is ready to be distributed to the beneficiaries. The beneficiaries are entitled to know the details of trust transactions.

The Trustee must segregate the trust property from the Trustee’s own property . It may seem obvious that the Trustee must not commingle assets of the trust and the Trustee’s personal assets. Yet, this duty may be breached if the Trustee views his or her role as the “owner” of the trust property. The temptation to see the trust account to which the Trustee has access as being available for the Trustee’s own personal liabilities can become a great temptation.

REMEDIES FOR BREACH OF DUTIES

If a Trustee has violated his or her fiduciary duty to the trust beneficiaries, they are entitled to file suit to remove the Trustee, to request that the Trustee pay monetary recompense to the beneficiary who has been damaged, and/or to compel the Trustee get court approval of the accounting for the trust estate.

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New Beneficiary Deed for California Property

Sat, 09 Jan 2016 00:22:00 GMT

As of January 1, 2016, owners of California real estate can create a revocable Transfer on Death (TOD) Deed to give their house away at their death without probate. This deed must be recorded in the county where the real property is located within a certain period of time or else it is not effective to transfer title.

For those who like to do-it-yourself, this may be an idea that is long over due: an apparent easy way to transfer their home at their deaths and avoid probate. For others, however, myself included, it is may be a good idea in theory, but I wonder whether in practice if the transfer will be as smooth as easy as desired. I would hate for someone to think they have done it themselves correctly only to be faced with unexpected probate or litigation because of an inadvertent error.

WHAT DOES THE NEW LAW SAY?

You can use a TOD Deed to transfer residential property directly to one or more named beneficiaries at your death. If done properly, there will be no probate for your real estate. TOD Deeds are revocable, if you change your mind by recording before your death a new deed that expressly revokes the prior TOD Deed.

LIMITATIONS ON USE OF THIS DEED

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CA Adopts End of Life Option Act

Mon, 19 Oct 2015 00:22:00 GMT

Gov. Jerry Brown signed California Senate Bill 128 on October 5, 2015. It will take effect sometime in 2016, barring referendum efforts.

WHO QUALIFIES?

An adult who is age 18 years or older who has a terminal disease. A terminal disease is defined under the bill as an incurable and irreversible disease that has been medically confirmed and will, within reasonable medical judgment, result in death within six (6) months.

The person would need to have the mental capacity to make an informed medical decision for himself or herself about the end of his or her life. An informed medical decision means a decision to request and obtain a prescription for a drug that the individual may give to himself or herself which is based on the person’s understanding of the potential risks associated with taking the prescribed drug; the probable result of taking the drug; the possibility that the person may choose not to obtain the drug, or if he or she got a prescription for it, could choose later not to take it; and the feasible alternatives to obtaining the drug which the doctor has discussed with the individual.

HOW IS THIS DONE?

A qualified individual seeking to obtain a prescription for an aid-in-dying drug is required to submit TWO oral requests, a minimum of fifteen (15) days apart, and a written request to his or her doctor. The doctor must receive these requests directly from the patient. At this time, the patient cannot designate someone else to make this request on his or her behalf.

The written request must be dated and signed in the presence of two (2) witnesses each of whom makes a statement regarding the patient’s acting voluntarily, having the capacity to make this kind of decision, and lack of coercion or undue influence to make this request. One of the witnesses must also state that they are not related to the patient by blood, marriage, registered domestic partnership, or adoption. This requirement is similar to the requirement for witnesses to the Advance Health Care Directive (“Directive”) under current California law.

IMPACT OF MENTAL INCAPACITY

If the doctor determines that the patient is incapacitated or has a mental disorder, the doctor is required to refer the patient to a mental health specialist for an assessment. No aid-in-dying drug will be prescribed if the mental health specialist determines that the patient does not have the capacity to make the request for the drug or is suffering from impaired judgment because of the mental disorder.

ADVICE FOR THE PATIENT

Under the bill, a patient who seeks to obtain a drug to end his or her life is to be advised of all of the following:

OTHER PROTECTIONS

The doctor is to not only examine the patient, but to document the patient’s medical record to confirm the diagnosis of a terminal illness, confirm that the patient had the mental capacity to make the decision to request the drug, that no mental disorder exists which prevents the patient from requesting the drug, that the patient complied with the law in requesting the drug, that the advisories were given, and that the patient make the request directly and personally and not through another person.

The person who participates, in good faith, in a patient’s request for the drug, including being the person who is present when a qualified individual self-administers the drug is protected from civil, criminal, and other liability or disciplinary actions for his or her participation. The bill also notes that participation in the activities described are voluntary and that people may refuse to participate for reasons of conscience, morality, or ethics.

IMPACT ON ESTATE PLANNING

Wills created after that date may NOT have a provision that affects whether a person may make a request for an aid-in-dying drug, or whether a person may withdraw or rescind that request.

A conservator or guardian for a person may not seek court appointment using the patient’s request for the drug as the sole basis for seeking appointment.

A person who takes actions that comply with the bill, if it’s enacted as written, shall not have those actions used as a cause of action for neglect or elder abuse lawsuits.

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Compassion for the Caregiver

Sat, 03 Oct 2015 22:46:00 GMT

The vast majority of my clients state in their estate plans that they wish to remain at home in case they become incapacitated or otherwise unable to care for themselves. They prefer to be at home where they have familiar surroundings. The decision to remain at home usually means that one or more caregivers must be found to assist the person so that they can continue to live at home.

WHO IS A CAREGIVER?

Almost anyone can serve as a caregiver. A caregiver could be a spouse, a child or grandchild, a friend, a neighbor, or a paid professional.

TYPICAL SERVICES OF A CAREGIVER

While it is obvious that the type of services a caregiver in the home may provide depends on the actual needs of the person, the following are general categories of care:

Housekeeping Services – such as cooking, cleaning, and laundry.

Transportation – driving the person to doctor visits, shopping, running errands on the person’s behalf, and taking them where they need to go.

Medications – assists with the taking of prescriptions, whether it is a simple reminder or tracking when and which medications are to be taken.

Companionship – talking and listening to the person, taking him or her on outings, meals or entertainment, or reading to the person.

Personal Care – helping the person bathe, go to the bathroom, brush teeth, feed or dress themselves.

Movement – walking with the person or assisting when he or she moves about so that it can be done safely and without fear of falling.

Financial Assistance – helping the person pay his or her bills, assist with correspondence, review bank and credit card statements, manage cash flow. ** Note : there is great potential for elder financial abuse here. A person must be extremely careful when having another person access their financial information.

SUPPORT FOR THE CAREGIVER

While caring for someone else can be rewarding for both the person giving the care and the person receiving the care, it can also be exhausting. Caregivers may at times feel isolated, angry, frustrated, extremely tired, or overwhelmed. It is not uncommon for caregivers to feel burned out, stressed, or depressed.

Here are some things that can be done to provide support and show compassion for the caregiver:

Lighten the Load . Arrange for other people to share in the tasks of the caregiver. Simple things can make a difference for caregivers who never gets a break. Notice what a person is struggling with and offer to do it for them, even if it’s only one time.

The Power of Touch . Giving a hug, or pat on the shoulder or a gentle squeeze on the upper arm can let the caregiver know you appreciate what they’re doing. This is particularly helpful when the caregiver feels overwhelmed.

Say “Thank You” . You might be surprised how seldom caregivers are actually thanked verbally. The person they care for is often unable to focus on anyone other than themselves and what they need to do at any given time. It is more rewarding to work for someone when you feel your efforts are appreciated.

Smile . The patient to whom care is being given may not be able to smile at the caregiver when the caregiver comes to help them or acknowledge the good work that the caregiver provides. Be the patient’s smile for them. It is a reflexive action that often generates a smile in return.

Mind Your Tone . When you speak with a caregiver, be kind and sincere in your tone of voice rather than condescending or placating. This is especially important if you are asking the caregiver to do something for the patient in a different way from the way he or she did it or when you are asking the caregiver to take on an extra task for the patient.

Compensate Appropriately . Many caregivers are working for minimum wage. If the caregiver is a family member, other members of the family may consider that the caregiver should work for free because they are a family member, even if it means they give up gainful employment to be the caregiver. The law requires that caregivers be paid overtime for all hours worked more than nine hours in a day and for all hours worked more than forty hours in a week. Worker’s Compensation insurance and taxes is also required to be paid.

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Gifts to Caregivers

Fri, 03 Apr 2015 00:26:00 GMT

Sometimes appreciation is shown by making gifts to the caregiver in a Will or Living Trust. It is not unusual that a person who receives good treatment by a caregiver, especially when this occurs near the end of the person’s life, wants to make a gift to a caregiver at the end of the person’s life.

Under California law, gifts to caregivers are presumed to be invalid (on the basis of fraud or undue influence) if the person receiving the care signs the document making the gift during the period in which the caregiver is working for the person or within 90 days before or after that caregiving period.

A person who wishes to make a gift to a caregiver must have those wishes written in the person’s Will or Living Trust, AND must hire a second attorney to advise and counsel the person concerning the gift. The second attorney can then prepare a Certificate of Independent Review. Having this Certificate of Independent Review takes the gift out of the presumption that the gift was obtained by fraud or undue influence on the part of the caregiver and makes it more likely that the caregiver will be able to legally receive the gift that the patient wanted to give.

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Crimes Against the Elderly

Mon, 06 Oct 2014 00:20:00 GMT

Potential scams and ways in which people are wrongfully trying to separate an elderly person from their money or possessions.

STATISTICS FOR LOS ANGELES COUNTY

Under the law, a person is considered to be an elder if the person is aged 65 years or older. Statistically, 1 in 5 elders have been victims of fraud in California in recent years. The State of California has the largest elder population in the nation. Los Angeles County alone has more elders that the entire State of Arizona.

The senior population in Los Angeles County is expected to double in the next two decades to over 2 million people. Also, 70% of our nation’s wealth is held by our senior population. Unfortunately, for con artists, “bad” caregivers, greedy relatives, and strangers, these statistics point to a great opportunity for theft.

ELDERS ARE VULNERABLE AS VICTIMS

Elders, especially those who grew up during the Great Depression, are fiercely independent, and want to live in their own home until their death. They do not want to go to a retirement or assisted living facility, or to a nursing home as they perceive that in doing so they are going away from their home to die.

Living at home, alone, even with occasional caregivers, leaves the elder susceptible to the work of unscrupulous people. Elders are often isolated from others. This isolation makes them eager for attention and conversation. They are often polite and trusting of strangers. Sometimes, they have limited physical or cognitive abilities. Also, it is likely that they grew up with different social values than exist today for younger generations.

These characteristics makes them ideal targets for people who commit elder abuse. Unfortunately, it is the family member, caregiver, or the trusted professional who most often takes advantage of the elder. They may also be taken advantage of by neighbors, new “friends”, telemarketers, and outright con artists.

WHAT KIND OF ABUSE IS PROSECUTED?

The District Attorney’s Office prosecuted all kinds of cases involving our elder population, such as murder, sexual assault, residential burglaries, physical neglect or abuse, as well as financial abuse.

There are three (3) kinds of financial crimes against an elder:

POSSIBLE INDICATIONS OF A CRIME

Sometimes a lonely elder is approached by a stranger who is very friendly and kind. This person might visit frequently, perhaps even every day. The person demonstrates great interest in the elder, sometimes offering to take the elder somewhere for a meal or to a movie or theater, or to the grocery store. During this time of getting acquainted, the person asks questions of the elder such as: what is the elder’s financial stability or situation? What is the elder’s plans for future care of himself or herself? The person may ask to see the elder’s financial records or estate planning documents and offer to either get the elder person organized, or assist in obtaining benefits or medical care that the elder may need. All of this may be done out of ostensible care and concern for the elder.

Sometimes there is unusual banking activity that may alert a bank representative or a family member that the elder may be a victim of fraud. There may be a new ATM card requested, or a change of statement address. Maybe there is online banking established even though the elder does not have a computer or may not know how to use one. Perhaps there are changes in the spending habit of the elder which is out of his or her ordinary routine.

Sometimes this person newly interested in the elder may take him or her to an attorney or legal document preparer with the request to give this new person the power of attorney so that the new person can assist the elder with their financial matters.

Elders who have been victims of fraud may give implausible explanations of unusual activity or they may suddenly ask their grandchildren for money to pay their utilities or for some other basic need.

OTHER KINDS OF SCAMS ON THE ELDERLY

There are automobile scams in which an elder drives to the grocery store and on the way in is approached by a person who claims that the elder hit that person=s car. He shows the elder the damage to the car and then demands money so as not to go through the insurance company for a claim.

There are sweetheart scams where a person “dates” the elder, offering to take care of him or her and inquiring about the elder’s financial affairs. It can be hard for an elder’s family members to discern whether the new person in the elder’s life is truly someone who cares for the elder or is merely someone who is out for the elder’s money. Often, an indication may be that the new person tries to isolate the elder from his or her family so that the elder is solely dependent on him or her.

Sometimes the con artist gets the elder to trust him or her and then asks for the elder to invest in the con artist’s business or venture, without documentation, and usually with a need for a large amount of cash up front. The elder rarely is able to get his or her money back from such schemes, even if the con artist is successfully prosecuted for the crime.

YOU CAN HELP: If you think someone you know is a possible victim of a crime like one described in this newsletter, please call the Elder Abuse Hotline : 1-877-477-3646 of Adult Protective Services.

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Addressing End of Life Issues

Wed, 23 Jul 2014 00:15:00 GMT

I am often called when a client is nearing death or has passed away. I am usually asked specific questions regarding the first steps in the administration of a trust or an estate. I set forth below some things to consider regarding End of Life issues for yourself or for a loved one.

What Medical Care Do You Want? You can sign an Advance Directive for Health Care in which you appoint an agent to make medical decisions for you in case you become unable to make or communicate such decisions yourself. You can also state what your wishes are regarding specific life-sustaining procedures, nutrition, hydration, and pain medication.

Many of my clients speak openly with their loved ones and named agents about the decisions they want made if they are in a coma or are terminally ill and unable to make decisions. Some of my clients, understandably, have a difficult time talking about what they want to have happen. It is not an easy thing to discuss, but it is vital that you discuss those wishes with the person(s) you have authorized to act on your behalf.

Do you want to be Buried? If you think talking about your medical decisions is difficult to discuss, try talking about death! Yet, the first question I usually receive is: did Mom or Dad want to be buried or cremated? In California, the person with the legal authority to make that decision is your agent under your Advance Health Care Directive.

Sometimes family members cannot agree on what a person wanted done with his or her remains. One may believe that the decedent wanted to be buried, another understood the choice to be cremation. Avoid this conflict by being open with your family about what you want and having those wishes written down in your Advance Health Care Directive. You may even wish to have a prepaid burial or cremation plan so that your loved ones do not have to worry about what to do after you’re gone.

Do You Have Religious or Spiritual Needs? Does your family know what your wishes are regarding your religious or spiritual needs during a period of illness? Do you wish to have members of your church or synagogue informed of your health and to visit you? Would you find particular readings or music helpful?

Funeral or Memorial Service? If you were to pass away, would you want a funeral or memorial service held for you? Have you thought about how you would like to be remembered? Do you have music, songs, readings, or other things that are important to be included in the service? You may be surprised how important your personal wishes for these matters become to those who survive you.

Death Certificates – Be prepared to order from the mortuary a certified copy of the death certificate for each financial institution, parcel of real property, and retirement plan that was owned by the decedent. You will likely need to use them for handling those assets after his or her death.

Other Important Details to Share – Spending a few minutes completing an information list and sharing it with your loved ones could save them time and headaches after you’re gone.

Some examples:

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Private Professional Fiduciary

Wed, 02 Oct 2013 19:02:00 GMT

Why should a private professional fiduciary be appointed to administer either a revocable living trust or a probate estate?

PROFESSIONAL EXPERIENCE

A private professional fiduciary is in the business of acting for beneficiaries of a trust or heirs at law in a probate estate. He or she may also serve for the benefit of a conservatee in a conservatorship matter.

Advantages of appointing a private professional fiduciary include the following:

Professional and experienced in managing trusts and estates. A private professional fiduciary has been trained to manage the financial affairs of another person. He or she is experienced in making financial decisions for an incapacitated person during life, or in the settlement of the estate at death.

Experience navigating probate court proceedings. The private professional fiduciary is knowledgeable about the necessary steps in the probate process and can work easily with the estate attorney in the preparation and signing of the documents to be filed in court.

Neutral perspective regarding family dynamics . A fiduciary has the duty to act impartially and cannot act more favorably toward one beneficiary than another. The private professional fiduciary as a neutral third party can make objective discretionary decisions regarding distributions. A family member serving as a fiduciary may not be able to be objective due to long standing family dynamics.

Local . The private professional fiduciary’s office is usually located near where the administration of the trust or probate estate occurs. This is especially convenient when the beneficiaries or heirs live in other states. A family member, beneficiary, or heir who is serving as a trustee or executor may not be able to travel to where the real property is located in order to clean out the house or prepare it for sale whereas a local professional fiduciary can easily do so. Dealing with the real property held in an estate is often the biggest task facing a fiduciary.

REASONABLE FEES

A private professional fiduciary sets reasonable fees for the administration of trust matters, usually based on an hourly rate. The hourly rate compares favorably with corporate trustees which generally charge an annual percentage of the assets under management.

In probate estates, the compensation for the private professional fiduciary is set by statute. The date of death value of the estate is determined by a probate referee appointed by the court. The statutory compensation is a percentage of that value beginning at four percent (4%) on the first $100,000 of value through one percent (1%) on assets valued between $1 million and $10 million. The attorney’s fee for administration of the probate estate is calculated the same way.

LICENSING REQUIREMENTS

In order to be licensed by the State of California as a private professional fiduciary, a person must have either a baccalaureate degree of arts or science, or an associate of arts degree plus three (3) years of experience. The person must also complete thirty (30) hours of pre-licensing education in the field of conservatorships, trusts, and/or probates, and pass a licensing exam offered by the State.

A private professional fiduciary is fingerprinted and subject to a criminal background check by the California Department of Justice before a license will be issued.

AVOIDS FAMILY PROBLEMS

A private professional fiduciary avoids many of the problems that arise when a family member is serving as a trustee of a trust or the executor/administrator of a probate estate. Examples of family problems that can be avoided by using a private professional fiduciary include the following:

In a blended family where there are children from a prior marriage, there can be a conflict of interest when the surviving spouse serves as the trustee because his or her personal investment goals may be different from the goals of the deceased spouse’s children as beneficiaries of the remainder of the trust on the death of the surviving spouse. The surviving spouse may want to invest for income while the remainder beneficiaries may want the assets invested for growth.

When children are appointed as successor trustees of a trust, there can be conflicts when one child either fails to act in a timely manner or as directed by the trust, or when a child/Trustee administers the trust in a way that “corrects” a perceived unfairness which occurred during the parent’s lifetime.

Sometimes the terms and conditions of a child’s inheritances from the parents are not identical to those of one or more other children. The parents may have good reasons for making unequal distributions to their children at the death of the surviving spouse. A private professional fiduciary is useful in circumstances when a parent wants to manage a child’s inheritance over the child’s lifetime. As a neutral third party, the private professional fiduciary relieves the child/beneficiary of having to ask a brother or sister for money from the trust (which can feel humiliating for the beneficiary). In the same way, a private professional fiduciary relieves a child/trustee from making value judgments concerning the behavior of a brother or sister (which can put one child in an awkward position with the other child). Taking the management of financial affairs away from all of the children enables them to have brother/sister relationships unencumbered by such power struggles.

While a private professional fiduciary is not always the best choice for trustee or executor, under the circumstances described above, the private professional fiduciary is usually a better choice than a family member. If you want to find a private professional fiduciary, one place to look is at the website for the Professional Fiduciary Association of California which can be found at www.pfac.org.

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Don’t Sabotage Your Estate Plan

Fri, 05 Jul 2013 18:43:00 GMT

Your living trust is your plan for how your money and assets (your “estate”) should be used for your benefit during your lifetime and for your named beneficiaries at your death. Usually a lot of time has been invested in creating and establishing such a plan: Time to meet with your estate planning lawyer to discuss what you want to happen; Time to gather your financial information; Time to share your dreams and hopes for the future regarding legacies you wish to leave behind; Time you spent reviewing the legal documents prior to signing; and Time you spent in transferring title of your current assets to your living trust. Yet, despite all of that effort, your chosen plan for distributing your estate at your death can go awry.

Here are some of the ways your estate plan could be sabotaged:

New Bank Accounts . I have been at different banks when I have overheard a bank representative asking an elderly customer whether he or she wants to name a pay on death beneficiary for a new bank account that is being opened. To my mind, answering “yes” to this question may have unintended consequences. For example, your living trust may name your children as equal beneficiaries. However, if you answer “yes” and name only one child as the pay on death beneficiary of your new bank account, your children will not receive equal shares of your whole estate. The child who is the beneficiary of the bank account gets all of the remaining money in that account as well as an equal share of the assets held in your living trust, a result you may not have intended.

Once you have established a living trust, the general rule is to open up all new financial accounts in the name of your trust. No pay on death designations for your accounts need exist. For those of you who are my clients, your Certification of Trust will have a statement which shows exactly how title should be held.

Retirement Accounts. Your retirement accounts are held outside of your living trust. The trust is not the owner of your retirement account, nor is it usually your beneficiary. Neither your trust nor your Will controls the disposition of your retirement accounts. Those accounts pass to the last person you designated as beneficiary in the retirement custodian’s records.

You should be sure to periodically check your designated beneficiary for each retirement account. Sometimes, a beneficiary was named correctly when the retirement account first opened, but that designation is lost or omitted when the account is transferred to a new financial institution. Sometimes, a beneficiary is designated but not updated when certain events happen in the participant’s life. For example, you could name your spouse when you establish your retirement plan, but fail to change the designation upon divorce, or you could name a child, but not change that designation if the child predeceases you.

Verify that your retirement plans have the current beneficiary designated at the following times: 1) when you first establish your living trust, 2) when you change jobs, 3) when your retirement plan custodian or administrator changes, or 4) when you review your estate plan because you want to make changes to your trust.

Not All Assets are Held in Trust . The terms of your living trust which set forth your plan for distribution upon your passing will control only the assets to which your trust has title. One of the most common ways to sabotage your estate plan is to fail to re-title your current assets in the name of your trust.

As you may recall from my other posts, assets held in your name alone may be subject to the probate process which is time consuming, public, and expensive. Since one of the primary purposes of a living trust is to avoid probate, being certain your trust is fully funded with all your current assets ensures that you will avoid the expense and delay of probate.

Note that different kinds of assets require different kinds of legal documents for titling them in the name of the trust. For example, a deed transfers legal title for your real property but an assignment transfers personal property. You may have business interests which require specific legal documents or the consent of other persons before such assets can be held in your living trust.

Work with your estate planning attorney to be sure that you have completed all the proper legal documents to title your assets in the name of your living trust. Going forward, think of yourself as the “Trustee” every time you undertake a financial transaction. If you act in the capacity of “Trustee” for all your financial transactions, you will ensure that your assets are held appropriately for your estate plan.

Re-financing the House. If your house is currently titled in the name of your trust and you wish to refinance the mortgage, the ideal situation is to find a lender who is willing to lend to you as Trustee of your trust. This way, your house remains titled in the name of your trust and the terms of your trust will control what happens to the house at your death. However, sometimes you are required by your lender to take your house out of your trust for the purpose of obtaining a loan because the lender is providing the loan to you as an individual. In this case, it then becomes incumbent on you to be sure that title to your house returns to your trust once escrow on the refinance has closed.

See the prior note about working with your estate planning lawyer to be sure the appropriate legal documents are completed for the house to be held in your living trust.

Not Updating Your Trust. Your living trust is intended to be a set of instructions about how your estate is to be distributed both during your lifetime and at your death. The terms of your trust include the identity of the person establishing the trust (you), who manages the trust assets (you, during your lifetime, your Successor Trustee at your incapacity or death), who inherits your estate at your death (your beneficiaries) and on what terms.

It is important to review and update your living trust and ancillary documents whenever there is a change in your life such as a birth, death, marriage, divorce, change in relationship with persons named in your trust, or changes in the law. Periodic review with your estate planning attorney will help you tie up any loose ends.

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Changes in Tax Law May Require Changes to Your Trust

Mon, 14 Jan 2013 00:56:00 GMT

As you may know, Congress recently made certain changes in the tax code. The $5 million exemption from estate tax (which was available for persons dying in 2011 and 2012) was made permanent, indexed for inflation. That means that individuals now can shelter $5,250,000 (2013) from any estate tax liability.

Also, Surviving Spouses have the ability to use the Deceased Spouse’s unused exemption amount to increase the available exemption of the Surviving Spouse. This is the portability provision which has been discussed in prior newsletters.

The law also continues the unification of the estate and gift taxes.

DO YOU NEED TO CHANGE YOUR TRUST?

One impact of these recent tax law changes is that married couples who established their living trust with an A-B arrangement (dividing the trust into a Survivor’s Trust and a Bypass Trust at the death of the first spouse) or an A-B-C arrangement (adding a QTIP Trust to the arrangement) and who have total estates which are under $10 million, may not need to have such complexity in their trusts in order to avoid an estate tax liability on the death of the Surviving Spouse. Now, under current law, the whole estate of the couple may be sheltered by the available exemption amount. If such complexity is not needed for estate tax reasons, couples may want to simplify their living trusts by eliminating the Bypass and QTIP Trusts. For ease of examples, I will refer only to the Bypass Trust in the remainder of this newsletter.

ADVANTAGES OF ELIMINATING THE BYPASS TRUST

Ease of Administration : Simplifying the living trust may make it easier for the Surviving Spouse to understand and administer it after the death of the Deceased Spouse in the following ways:

There would be no need to create a separate Bypass Trust. The living trust would continue on as the Survivor’s revocable living trust, with the Surviving Spouse as Trustee, minimizing the trust administration process.

There would be no Bypass Trust funding hassles such as opening up new accounts in the name of the irrevocable Bypass Trust or signing new deeds which transfer real property. Note, however, that Affidavits of Death would still need to be recorded.

The Surviving Spouse would not have to obtain a new taxpayer identification number for the Bypass Trust, nor would he or she have to file a separate income tax return for each irrevocable trust.

Real property appraisals, however, would still be necessary in order to establish the new step-up in basis for the Surviving Spouse.

Step-Up in Basis on Death of Surviving Spouse: Unlike assets held in the Survivor’s Trust, assets held in a Bypass Trust do not receive a step-up in basis when they pass to the children on the death of the Surviving Spouse. Eliminating the Bypass Trust results in all the assets being held in the Surviving Spouse’s revocable trust. Such assets do receive a step-up in basis at the Survivor’s death.

A step-up in basis reduces or eliminates the potential capital gains tax liability on subsequent sale of such property by the children.

REASONS NOT TO CHANGE YOUR TRUST

While there are advantages to eliminating the Bypass Trust provisions from your living trust, there are some advantages for keeping your trust in its current A-B or A-B-C arrangement.

Ensures Children Receive the Deceased Spouse’s Property : There are risks associated with keeping a trust fully revocable by the Surviving Spouse. One such risk is that the Survivor could remarry after the Deceased Spouse’s death. If the trust is revocable by the Surviving Spouse, it is possible that he or she could change the trust instrument to leave trust assets to the new spouse, requiring either that the children to wait until the new spouse’s death to receive their inheritance, or removing the children as beneficiaries from all or a part of the trust estate.

If it is important to you that the Deceased Spouse’s property passes to his or her children on the death of the Surviving Spouse, a Bypass Trust is necessary. Since the Bypass Trust is an irrevocable trust, the Surviving Spouse would not be able to change the terms of the Bypass Trust. The Surviving Spouse may, however, be given a limited power of appointment over the Bypass Trust if it believed to be necessary to give the Survivor an opportunity to change the terms under which a child or grandchild could inherit. It depends on the underlying factual circumstances of your situation.

Provides Creditor Protection for the Surviving Spouse : In certain circumstances, the Bypass Trust can be used by the Surviving Spouse as a shield against potential future creditor claims. If it is important to you that the Deceased Spouse’s property be protected from future potential claims against the Surviving Spouse, keeping the Bypass Trust as a provision of your living trust is a useful way to accomplish that objective.

Now is a great time to call your estate planning attorney and discuss the particulars of your situation to determine whether or not you need to change your living trust to reflect the changes in the estate tax law.

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Caring for the Aging Settlor

Sun, 08 Jul 2012 00:18:00 GMT

It is no secret that family or friends of an aging person are faced with many challenges when they try to care for the elder, both physically and financially. I will use the term “ Settlor ” to mean the aging person who established a living trust or is the principal of a medical or financial power of attorney. The person who steps in for the Settlor will be called either the “ Agent ”, if serving under an Advance Health Care Directive, or a “ Successor Trustee ” if serving under the Settlor’s Living Trust.

WHEN TO STEP IN?

When does the Agent or Successor Trustee need to step in to assist the Settlor with his or her medical or financial decisions? The answer is not always clear.

The process of aging is a slow process. A person=s physical and mental health on any given day may appear to be stable. When viewed over a period of months or years, significant signs of aging are notable. Rarely is there a specific time in which it is obvious that the Agent or Successor Trustee needs to step in and take over the decisions for the benefit of the Settlor.

The need for the Agent to step in regarding the Settlor’s health care decisions is often easier to see than the need to step in for the Settlor’s financial management.

For example, if the Settlor has an medical emergency, whether accident or illness, which causes him or her to be physically unable to make his or her own medical decisions, the primary Agent under the Settlor=s Advance Health Care Directive can bring a copy of the Directive to the hospital to show the attending physician and medical staff that he or she is designated to serve and can begin working with the health care providers in making the appropriate decisions the Settlor set forth in the Directive.

WHEN TO STEP DOWN?

When does the Settlor need to step down and let his or her Agent or Successor Trustee take over making medical or financial decisions?

One of the challenges facing the Settlor is determining when is it in his or her best interest to let go of being in charge of his or her own financial responsibilities. Settlors are independent people. They are used to managing for themselves and deciding how and when to spend their money. They’ve been doing so quite well for all of their adult life. Letting go of that responsibility can make a Settlor feel insecure. Accepting the increasing limitations of aging can be difficult. Most people think of themselves as strong and competent. It is humbling to think one has become unable to do things one used to be able to do very well.

At what point should the Settlor step down and ask the Successor Trustee to take over his or her finances? My experience has been that the Successor Trustee (a child of the Settlor, perhaps) senses the need to step in and take over all or some part of the Settlor’s financial matters before the Settlor is ready to step down.

Sometimes this stems from the Successor Trustee witnessing the Settlor being a victim of one kind of financial scam or another. Sometimes, the Successor Trustee learns that the Settlor is suddenly beginning to lose track of how his or her money is spent. Sometimes, the Settlor does not see himself as the Successor sees him. The decline in mental or physical health can be so gradual that is becomes extremely difficult for the Settlor to determine when the time has come to step down.

STEPPING IN GENTLY

The issues and the best ways to deal with them are often driven by the personalities and relationships in the Settlor’s life.

If the Settlor has family members who are willing and able to step in, and if the relationship with the family members is such that they seek to do what is in the best interest of the Settlor, it generally makes it easier for the Agent or Successor Trustee to step in and for the Settlor to step down. It is more difficult in circumstances where there is not a good relationship or the Agent or Successor Trustee does not put the needs of the Settlor first.

Sometimes, the Settlor has no family available to step in. In such cases, there may be a long term friend who may be able and willing to step in. When there is no friend or family member able to step in for the Settlor, there are private professional fiduciaries who are in the business of providing such services. An estate planning attorney can assist in finding such a professional.

Regardless of who the person is who steps in, the best candidate for serving as an Agent or a Successor Trustee for the aging Settlor is someone who is compassionate towards the Settlor. Being able to understand the challenges the Settlor faces in dealing with his or her changes in physical and mental health, and having compassion for the Settlor being in such a situation, can go a long way in helping the Settlor to agree to step down.

My experience has been that Agents or Successor Trustees who come to the Settlor with a preconceived plan for managing the Settlor=s physical or financial life have a more difficult time in accomplishing that objective, even when it is a sensible plan, than an Agent or Successor Trustee who first engages with the Settlor in a conversation about how the Settlor wants to manage his or her physical or financial life. Sometimes, the Settlor becomes stubborn and implacable when faced with a situation in which he or she perceives that someone is trying to tell him or her what to do.

Respecting the Settlor’s decisions, even if the Agent or Successor Trustee disagrees with those decisions, can open a path of communication. Since the aging process is a slow process, the Agent or Successor Trustee may have a number of opportunities to discuss a given decision, and its ramifications, over a period of time. Ultimately, though, the decision remains with the Settlor as long as the Settlor is capable of making his or her own decisions.

There can be steps taken to reduce the Successor Trustee’s concern that the Settlor is spending his or her money imprudently. Sometimes the estate planning attorney needs to step in to help resolve differences of opinion. However, these differences may be resolved without the need to bring in an estate attorney by first trying compassion and gentle persuasion.

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Marital Property on Death of Spouse

Fri, 06 Apr 2012 00:34:00 GMT

Property for married couples in California may be characterized in three different ways: separate property (belonging to only one spouse solely), community property (belonging to both spouses in equal and undivided portions),or quasi-community property (property located outside of California that would be considered community property if it were held in California). In this newsletter, reference to “marital property” will mean either community property or quasi-community property, but not the person’s sole and separate property.

Married couples often do not give much consideration about the character of their property. They take title to their assets in whatever way seems expedient at the moment. Sometimes property is co-mingled between the spouses which further complicates the determination of its character. During the estate planning process, the issue of the character of the couples’ property requires careful consideration. The character of an asset impacts how that asset may be allocated or distributed at the death of the first spouse.

Note that allocation of assets at death may differ dramatically from allocation between spouses during divorce. I will focus solely on what happens to marital property at death.

INTESTATE SUCCESSION

Intestate succession of property refers to the transfer of property belonging to a person who did not complete his or her estate planning before death. The California Probate Code provides that upon the death of a married person, one half (2) of the marital property belongs to the Deceased Spouse and the other one half (2) of the marital property belongs to the Surviving Spouse.

The Deceased Spouse is allowed to dispose of his or her portion of the marital property (with one exception) to whomever desired by way of a testamentary instrument such as a Will or Trust. However, if no effective testamentary disposition is made, California law provides that the Deceased Spouse’s marital property passes to the Surviving Spouse. The exception to this rule is for property held by the married couple as “community property with right of survivorship”. A Deceased Spouse’s Will or Trust will have no effect on property titled in the names of both spouses as community property with right of survivorship. Such property passes to the Surviving Spouse by operation of law.

TRANSMUTATION OF PROPERTY

Married persons may agree to change the character of their property, either from the separate property of one of them to the community property of both of them, or from the community property of both of them to the separate property of one of them. This change in character of property is called “transmutation”. In order to be effective, a transmutation of property must be in writing, contain an express declaration of the intent to change the character of the property, and is joined in, consented to, or accepted by the spouse whose interest would be adversely affected by the change in the property’s character.

ITEM THEORY VS. AGGREGATE THEORY

California case law applies an “item theory” to the division of community property on the death of the first spouse. Under the item theory, each spouse has an undivided one half (2) interest in and to each and every item of community property held by the couple. However, many couples consider that they own an undivided interest in the community property estate as a whole (an “aggregate theory”).

Which theory of community property is used during the administration of a trust upon the death of the Deceased Spouse affects how the marital property is divided and allocated to the sub-trusts. It also affects the interest of the non-participant spouse in the retirement plan of the deceased spouse.

The California Probate Code allows spouses to agree in writing to use an aggregate theory rather than an item theory. In fact, under Section 104.5 of the Probate Code, the transfer of community property to a revocable trust is presumed to be an agreement that community property assets retain their character in the aggregate. Nevertheless, it is important to have an express statement of which theory is being used during the administration of living trusts.

NON-PROBATE TRANSFERS

Non-probate transfers are transfers of property without the administration of a probate estate or a trust estate. There will still be a certain amount of paperwork in order to complete the transfers, but a full blown probate process will not be necessary.

Examples of non-probate transfers include:

1) Bank accounts which have a designated beneficiary (Totten Trusts). If a bank account has a designated beneficiary, the person’s Will or trust will not control the disposition of it at the person’s death;

2) Personal property assets, generally under a certain dollar amount, which pass to the deceased person’s “successor in interest” (defined in the California Probate Code). The Code provides an order of priority as to which relative is first in line for these assets. Transfers area accomplished by a Small Estates Affidavit;

3) Real property of small value which passes to a deceased person’s next of kin (again with an order of priority provided in the Probate Code) by way of an abbreviated court process; and

4) Community property of a deceased spouse which passes to the Surviving Spouse. How this transfer is accomplished depends on what kind of asset it is, how much it is worth, and how title to it is held.

LIFE INSURANCE

A spouse can acquire a community property interest a life insurance policy owned by the insured when the person pays the insurance premiums from wages earned during the couple’s marriage. If the designated beneficiary of the life insurance policy is the spouse, this community property interest is normally not a disputed issue at the time of the person’s death because the spouse is the one receiving the full death benefit of the policy.

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Portability: Sharing Your Estate Tax Exemption

Mon, 16 Jan 2012 00:51:00 GMT

The last couple of years have been quite eventful for accountants and trust and estate lawyers. We began 2010 by being surprised that Congress had taken no action to address that year’s repeal of the estate tax law for decedents dying in 2010. Congress did eventually act, and on December 17, 2010, passed a tax law (“the 2010 Tax Act”) which changed the way a decedent’s estate was taxed in 2010. This left accountants and estate lawyers scrambling to try to figure out how to best advise our clients because we could “opt in” or “opt out” of applying the estate tax law and either have a step-up in tax basis or have a carry-over basis applied to the decedent’s estate.

The 2010 Tax Act also contains a provision which allows the Executor of a Deceased Spouse’s estate to elect to transfer any of the “deceased spousal unused exclusion amount” (“DSUEA”) to the estate of the Surviving Spouse, thereby increasing the amount of the exemption from estate tax available to the Surviving Spouse. “Portability”, while not specifically defined by the 2010 Tax Act, refers to this transfer of unused exemption amount from the Deceased Spouse to the Surviving Spouse. Portability benefits are only available for the estate of decedents dying in the year 2011 or the year 2012 unless Congress acts to extend this benefit.

TRUST ADMINISTRATION ISSUES

Whether or not to take advantage of the DSUEA should be analyzed on a case by case basis when administering an A-B Trust on the death of the first spouse. The Surviving Spouse must decide whether to fund a Bypass Trust without the benefit of hindsight. To make an optimal decision, the Surviving Spouse must evaluate, with his or her estate attorney the following issues: Which assets may be used to fund the Bypass Trust? What is the appreciation potential of those assets? What is the life expectancy of the Surviving Spouse? What is the likelihood that the Surviving Spouse will remarry and leave a second Surviving Spouse?

Assets held in a traditional Bypass Trust have the potential to appreciate without having that appreciation subject to estate tax upon the death of the Surviving Spouse. The valuation of those assets appraised at the Deceased Spouse’s date of death, however, sets the tax basis for the beneficiaries of the Bypass Trust when they receive those assets on the death of the Surviving Spouse. Assets in the Bypass Trust do not receive a second step-up in basis. Sale of Bypass Trust assets after the death of the Surviving Spouse may result in a capital gains tax liability to the beneficiaries of the Bypass Trust. Consideration of both the estate tax exemption and the potential capital gains tax liability is important at the death of the Deceased Spouse.

Transferring all assets to the Surviving Spouse and relying on the DSUEA to eliminate the potential estate tax liability of those assets at the Survivor’s death may make for a simplified trust administration for the Surviving Spouse. It may also provide a benefit to the beneficiaries of the Surviving Spouse because assets included in the Surviving Spouse’s estate could receive an adjustment (“step-up”) in income tax basis on the Surviving Spouse’s death. That basis adjustment would reduce or eliminate capital gains tax on the appreciation during the period between the first and second death of the spouses. Assets transferred to a Bypass Trust would not qualify for this adjustment.

BLENDED FAMILY ISSUES

In blended families, where the husband and wife each have children from a prior marriage, the decision to use the DSUEA has an impact on trust beneficiaries of both the Bypass Trust and the Survivor’s Trust. Filing an estate tax return to elect portability could provide significant savings to the Surviving Spouse’s beneficiaries because they would be able to increase the estate tax exemption available to the Surviving Spouse’s estate. On the other hand, filing an estate tax return incurs significant administrative expense for the deceased spouse’s beneficiaries.

There are also valuation issues which differ between the Surviving Spouse and the beneficiaries of the Deceased Spouse in blended families. The Surviving Spouse may want a lower valuation of assets at the death of the Deceased Spouse so that there will be more DSUEA available for his or her future estate. On the other hand, the Deceased Spouse’s beneficiaries (of the Bypass Trust) may want the assets to have a higher value in order to increase their tax basis and thereby reduce the potential capital gains liability of sale of those assets after the death of the Surviving Spouse.

REMARRIAGE ISSUES

Remarriage of the Surviving Spouse cuts off the right to use the prior spouse=s DSUEA. A Surviving Spouse who remarries will not be able to use the former spouse’s DSUEA. Only the most recent spouse’s DSUEA may be used at the Surviving Spouse’s death. Even if portability was elected at the death of the first Deceased Spouse, it is not available to the Surviving Spouse if he or she remarries.

MISCELLANEOUS ISSUES

No Inflation Adjustment . The estate tax exemption available for assets in a Surviving Spouse’s estate receive an adjustment for inflation. But the portable portion of the predeceased spouse’s exclusion is to be frozen at the date of death value, without the benefit of inflation indexing.

Record Keeping . A Surviving Spouse must file an estate tax return even though the size of the Deceased Spouse’s estate would not require one. The supporting documents and appraisals used for the estate tax return must be kept in the event of a future audit until after the Surviving Spouse’s death when the amount of the DSUEA and its application to the assets of the Surviving Spouse are calculated. Who should be responsible for keeping such records?

GST Tax Not Impacted. Portability is not applicable to the GST tax. The Surviving Spouse must apply the Deceased Spouse’s exemption at the death of the Deceased Spouse and any unused GST exemption is lost.

Circular 230 Disclosure, United States Treasury regulations effective June 21, 2005 require me to notify you that to the extent of this communication, or any of its attachments, contains or constitutes advice regarding any U.S. Federal tax issue, such advice is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that can be imposed by the Internal Revenue Service.

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Living Trusts Versus Wills

Fri, 15 Jul 2011 19:16:00 GMT

Reasonable minds may differ and reasonable people may disagree about any given issue. The issue of whether living trusts are better than probate is not universally settled. In my opinion, whether a person should create and establish a Living Trust , or a Last Will and Testament depends on a variety of factors, including (but not limited to) the marital status of the person, the size of the estate, whether there is a need to minimize estate taxes, the person’s family dynamics, the need to provide for children in a particular way, the financial sophistication level of the person, and, most importantly, the goals or objectives the person is trying to accomplish. In this newsletter, I will compare the living trust process with the probate process.

WHAT IS PROBATE?

Probate is the court supervised process of transferring legal title of assets from a deceased person to living people. It is necessary when a person dies holding real property or bank accounts or other assets in the person’s own name. If the person dies without a Will (“intestate”), the laws of the State of California direct where the person’s assets go under its laws on intestate succession. If the deceased person has a valid Will (“testate”) the assets will pass according to the provisions for the named beneficiaries stated in the Will. Further discussion in this newsletter assumes there is a Will.

The probate process involves asking the court to approve the decedent’s Will as valid and to appoint an Executor. The Executor has the legal authority to access the decedent’s accounts and property, and is charged with the responsibility of gathering, under the Executor’s control, all of the decedent’s assets. The Executor must also notify all known creditors of the decedent requesting the creditors to file proper claims against the decedent’s estate. The Executor files a detailed inventory with the court after the assets have been appraised. After all the decedent’s debts, expenses, and taxes have been properly paid or secured, and all the duties and responsibilities of the Executor have been completed, the Executor prepares an accounting of all the transactions during probate and requests the court to approve the accounting and authorize the Executor to distribute the decedent’s property to his or her beneficiaries.

REASONS TO AVOID PROBATE

There are three main reasons to avoid the probate process: 1) it is time consuming, 2) it is public, and 3) it is expensive.

Probate is time consuming . In Los Angeles County, even the simplest of probates take at least one year from the date of death to complete. Part of the reason for this is that due to budget cuts, there have been court closures, making fewer courtrooms available for probate cases. There are also prescribed periods of time for notice, creditor claims, inventory appraisals, and the like which must be fulfilled. Sometimes probates take longer than a year, depending on the circumstances.

Probate is public . Every document filed with the probate court is open to the public for inspection by anyone. There are heir hunters, realtors, investors, creditors, and predators who spend each day looking to see who has died, whether or not they have living relatives, and how much they were worth. The names, ages, and addresses of minor children may also made public.

Probate is expensive . The attorney and the Executor are each entitled to a fee equal to a percentage of the assets going through probate. The percentage is calculated at fair market value without any offsetting mortgage and is on a sliding scale. Consider a $500,000 home with a $400,000 mortgage as the only asset in a probate case. The equity in the home is $100,000. The probate estate will lose $13,000 in fees to the attorney and $13,000 to the Executor. That is in addition to the $1,000 or so paid for court and other fees. In this example, 27% of the equity in the home is paid out in fees and costs during probate.

WHAT IS A LIVING TRUST?

A trust is a declaration or agreement you make with yourself to hold your assets in a particular way, namely, in trust. The trust identifies the person who sets up the trust, called the “Settlor” or “Trustor”, and the person who will manage the trust assets during the term of the trust, called the “Trustee”. The Settlor is usually also the initial Trustee so that he or she can carry on with managing the assets in the same way as before the trust was created.

Living trusts, also known as “revocable living trusts” or “revocable inter-vivos trusts”, are created during a person’s lifetime. The terms of such a trust enable the person to revoke, amend, or modify the trust throughout the person’s lifetime.

Creating a living trust is the first step in avoiding probate. But a trust document, alone, is not enough to avoid probate. The most important step of establishing a living trust is ensuring that the trust is funded with all of the person’s assets . That means, each and every asset owned by the person (with the exception of retirement plans) must be re-titled in the name of the living trust. Failure to take this step during a person’s lifetime will result in a probate of each asset held in the person’s name at the date of the person’s death.

If all of a person’s assets are titled in the name of the person’s living trust, then, when the person dies, those assets will not be subject to probate because they are not “owned” by the person but rather by the living trust.

Administration of a living trust at the death of the Settlor is done privately, with the Successor Trustee and the estate lawyer, and can often be accomplished within a matter of months. The cost of trust administration is usually a negotiated fee between the Successor Trustee and the estate attorney, rather than as a percentage of the trust assets. Establishing and administering a living trust generally can be done for a fraction of the cost of probate for the same assets.

SO, WHICH IS BETTER?

It depends on the circumstances. I am biased in favor of living trusts because I believe avoiding probate is in the client’s best interest based on cost and time alone. However, there are circumstances in which the creation and establishment of a trust is not necessary.

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Retirement Distributions to Living Trust

Tue, 12 Oct 2010 00:46:00 GMT

The rules for retirement plan distributions are highly complex. They vary widely depending on the specific circumstances and kind of retirement plan held by the participant and therefore cannot be fully addressed here. My purpose in writing is to draw your attention to some of the issues of concern in this area so that you can speak specifically and directly with your estate planning attorney, accountant, and retirement plan advisor to coordinate an appropriate solution for your particular situation. It is important to properly provide for retirement plan distributions in your estate planning documents.

INDIVIDUALS AS DESIGNATED BENEFICIARIES

The primary beneficiary of an IRA or retirement plan is usually a spouse, if there is one, and then children or other relatives. One benefit of naming living persons as designated beneficiaries is that they can inherit the IRA and stretch-out the tax deferral on the principal over the beneficiary’s actuarial lifetime. If there are multiple beneficiaries, the oldest beneficiary’s life is the one used for calculating the stretch-out payments.

If there is no designated beneficiary, and the participant dies before the required beginning date of the IRA, then the entire IRA must be distributed within five (5) years from the participant’s date of death. If the participant had already begun to take distributions, then the IRA must be paid out over the participant’s life expectancy. Such distributions are treated as income for the year of distribution which may result in a large income tax liability.

TRUSTS AS DESIGNATED BENEFICIARIES

Only living (and breathing) individuals are recognized as “designated beneficiaries” under the MRD (Minimum Required Distribution) Rules. Since trusts are not living and breathing, they are excluded as designated beneficiaries unless the following requirements are met:

(1) the Trust is valid under state law;

(2) the Trust is irrevocable or, by its terms, becomes irrevocable on the IRA participant’s death, and

(3) the beneficiaries are identifiable from the trust document (and determined by September 30 ^th of the year following the participant’s death).

The Trustee must give the custodian or plan administrator a copy of the trust document by October 31 ^st of the year following the participant’s death.

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Title Policy Protection for Trustees

Thu, 14 Jan 2010 19:06:00 GMT

Despite the current economy and fluctuating home prices, it’s a good time to discuss one of the details that often gets overlooked in estate planning – did the transfer of your real property to your living trust cause your title insurance policy to lapse?

WHAT IS TITLE INSURANCE?

Title insurance is a policy that you purchase for a one-time premium during escrow when you first acquire your real property. The policy covers against defects in the chain of title prior to the property passing to you and lasts for as long as you or your heirs have an ownership interest in the property.

Before a title insurance company will issue a policy, an extensive search of property records is made for the particular parcel being purchased. All kinds of records are reviewed, including deeds, trusts, Wills, deeds of trust or mortgages, judgments, liens, easements, pending legal actions, if any, and notary public acknowledgments.

Title insurance differs from other kinds of insurance in that it insures against past events rather than possible future occurrences. If issued, a title insurance policy guarantees that the title to the property is free from hidden liens or defects and passes clearly from the seller to the buyer.

WHAT DEFECTS CAN OCCUR?

Someone records a forged deed naming a fictitious person who then lists the property for sale. The innocent buyer might be surprised one day to discover that the real owners of the property, who perhaps are living in another state, have sued to reclaim the property. Sometimes an unknown heir shows up claiming an interest in the property which passed through intestacy (without a Will). Sometimes a contractor for a remodel of the home records a mechanic’s lien after you purchase your home, claiming non-payment of services rendered. These are just a few of the problems against which title insurance protects.

Other defects also create a cloud on the title and may prevent you from selling your property as easily as you could if you had clear title. These defects include liens for taxes, mortgages, or judgments; typographical errors in the name of the grantor or grantee; errors in the legal description of the property; and errors in the percentage of ownership (if a partial interest is transferred).

IS YOUR TRUSTEE PROTECTED?

Some title insurers take the position that conveying title to the trustee of a living trust terminates the title policy, even if the grantor and the trustee are the same person.

How do you know if your title policy extends to your trustee? Check the language in the policy. If it says something like: “This policy also insures 1) anyone who inherits your title because of your death, 2) your spouse who receives your title on dissolution of marriage, 3) the trustee or successor trustee of a trust to whom you transfer title after the policy date, or 4) the beneficiaries of your trust upon your death….” Then your trustee is protected.

If your trustee is not currently protected, do not despair! Most title insurance companies allow you, for a minimal fee, to obtain an endorsement to the policy adding the trustee and successor trustee as an insured. You should check to see if your title insurance company will do this, if your policy does not already include your trustee or successor trustee as an insured.

WHAT IF I CAN’T FIND MY POLICY?

If you are unable to locate your policy, or if you are not certain that you obtained one when you purchased your property, contact the title company that handled it during your escrow. You may find the contact information on the standard HUD-1 form of settlement statement among the mountain of documents you received at the close of escrow. (These closing documents are also a good place to look for the deed of trust, legal description for your property, and exact title of your property if you can’t find your Grant Deed.) Contact your title insurance company for more information.

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Proper Handling of Estate Planning Documents

Thu, 09 Apr 2009 19:04:00 GMT

We live in an age of electronic technology which can be used to assist us with the mounds of paperwork that inundate our lives. Although original legal documents can be scanned and kept in a PDF or some other electronic format that prevents their being altered, proper handling and storage of the original paper document is critical when it is time to administer a person’s estate. During administration, the original documents must be retrieved and used either during the settlor’s incapacity or after a settlor dies. This issue gives a snapshot of proper handling of estate planning documents.

WHAT TO KEEP AT HOME

Your Estate Planning Portfolio . If you dont already have one, you should keep a binder with the following original documents at home in a safe, but accessible place:

WHAT TO KEEP IN A SAFE DEPOSIT BOX AT THE BANK

Your Will . You should keep your original Will in a fireproof location such as a safe deposit box at your bank.

Original Life Insurance Policies. You should keep the actual policy in the bank vault because it won’t be needed until a claim is being made for death benefits.

Original Deeds to Real Property. Once your Trust Transfer Deed has been recorded by the County Recorder’s office, you should keep the entire original document in the safe deposit box at the bank. You should keep a copy of the recorded deed in your Estate Planning Portfolio.

Personal Property . You should keep any jewelry, small keepsakes or family heirlooms and the like in the bank’s safe deposit box, especially if they are items you do not use or display regularly and which you want to give to specific persons at your death.

Correspondence to be Opened After Death . Sometimes, letters to loved ones should be kept in the safe deposit box in envelopes addressed to the intended recipients. This prevents such personal items from being misplaced or lost.

WHAT TO KEEP IN YOUR WALLET

You should keep a card in your wallet that states that you have an Advance Directive for Health Care and identifies at least one (preferably two or more) agents for making health care decisions for you. You should also keep information regarding organ donation and other pertinent medical information such as health conditions which would be affected by emergency medical treatment.

WHAT INFORMATION TO GIVE YOUR RELATIVES

Your CHILDREN and AGENTS under your Advance Directive for Health Care should be given:

A current list of the kind of medications and prescriptions you are taking, including their dosage and strength;

The name of the prescribing doctor;

Your medical insurance information;

Primary physician information, including addresses and telephone numbers.

Such information should be in your home in an easily accessible place in case of an emergency.

If you want to sign DNR [Do Not Resuscitate] or POLST [Physician’s Order for Life Sustaining Treatment] forms, your children and agents under your advance directive for health care should have a copy of such documents, they should be placed in your medical file, and if you are elderly and living at home, the information should be kept on the front of your refrigerator because emergency medical personnel know to look there for information.

If you have a specific medical condition that may affect emergency medical treatment, be sure to let your children and health care agents know about it.

INFORMATION ON A “NEED TO KNOW” BASIS

I do not recommend that you give a copy of your Trust or your Will to your children or your successor Trustee until they actually need to have one, such as in the event of incapacity or death. After a person becomes incapacitated or dies, the terms of these documents cannot legally be changed, and a Successor Trustee, Agent, or Executor, as the case may be, needs to step in and act for the incapacitated person or his or her estate or trust.

Sending copies too early means you will need to keep track of who has which copy. It may also create unrealistic expectations of inheritance such as a certain item or a certain amount in your children or other beneficiaries, and cause hard feelings or even lawsuits if you change your mind (and your documents).

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Pet Trusts

Thu, 23 Oct 2008 18:46:00 GMT

More than half of the American population currently own pets or grew up with one or more pets. Pets are a good way to teach children responsibility. Pets also act as a companion for older persons. Seniors enjoy caring for and interacting with their pets. But pet ownership requires a backup plan in case of a vacation or an emergency. In many cases, there are family members, friends, or neighbors who are willing to care for the pet if the owner has a specific need such as weekend care or holiday vacation. This arrangement works well because the caregiver is compensated for his or her efforts, and the owner can go away for short periods of time knowing that the pet’s circumstances are unaltered and its needs are met.

OWNER’S INCAPACITY OR DEATH

There are, however, circumstances under which the pet’s circumstances are dramatically altered, such as when the owner becomes incapacitated or dies. In such cases, it is no longer a matter of providing food, water, and some exercise on a limited basis, rather, the pet needs a caregiver who will provide for the pet for the remainder of the pet’s life. At this point, the informal arrangements are not suitable and a more formal arrangement should be established.

Because many pets have a relatively short life span compared with humans, it is easy to assume that the person will outlive the pet, but often that is not the case. When the pet has a long life span, the need to care for the pet beyond the owner’s life becomes even more important. Without a specific provision in a person’s Will or Trust, the beloved pet may end up in a shelter, or be otherwise discarded after the incapacity or death of the owner.

CREATION OF PET TRUSTS

Formal arrangements can be made either in a person’s Will or Trust Agreement. Specific bequests in these documents usually provide cash to the caregiver in exchange for the caregiver’s implicit promise to “adopt” the pet and care for it as the owner would have done. Current California law provides: “a trust for the care of a designated domestic or pet animal may be performed by the Trustee for the life of the animal…” The operative word here is “may”. Nothing in the current law provides for oversight to ensure that the caregiver who receives money in exchange for an agreement to provide pet care actually carries out the owner’s intent for the pet. The revised code section strengthens the law by stating that the instructions set forth in a pet trust are not to be considered merely a request, and brings the pet trust in line with the general laws of trusts.

The revised law also provides that the intended use of the principal or income from the pet trust may be enforced by a person designated for that purpose, or even by the court, where no enforcer is named in the trust instrument. So now the money in a pet trust must be used solely for the care of the designated pet. The trustee of the pet trust can be a different person from the caregiver to enforce this provision and the caregiver can be removed if he or she does not provide the care of the pet as set forth in the terms of the pet trust.

INFORMATION FOR THE CAREGIVER

The person who is designated by the owner to care for the pet if the owner is incapacitated or dies is someone who has already agreed to take on the responsibility for doing so. The owner should designate a primary caregiver and at least one backup caregiver in case circumstances prevent the primary caregiver from taking the pet.

The owner should give the caregiver information about the pet’s current habits and circumstances so that when the caregiver begins to care for the pet there will be the least disruption of routine as possible. Information that would be useful for the caregiver includes: (1) a description of each pet owned, its markings or special coloration to identify the specific pet, if there is more than one; (2) the specific brand of food the pet eats, how much it is fed daily and when; (3) the medical history and the name, address, and telephone number of the pet’s veterinarian; (4) special needs of the pet, including medication and exercise requirements; (5) unique behavioral habits such as sleeping preferences (for indoor pets), toy preferences, particular regular interactions with the owner, (6) pet insurance information, if any; and (7) desires re burial or cremation of the pet upon the pet’s demise.

CALCULATING SIZE OF PET’S NEED

In order to estimate the amount of pet care funds that may be necessary, the owner should consider the current costs of taking care of their pet, including such expenses as the cost of food, medication, grooming, veterinary services, boarding during vacations, toys, recreation, and entertainment of their pet.

The current costs could be multiplied by the number of years the pet is expected to live. For example, if the estimated annual expenditure for a pet cat is $500 and the cat is five years old currently, with an expected life span of twenty years, the trust should be funded with $7,500 ($500 per year times 15 years remaining). Additional money should be included in case of an unforeseen health problem, such as diabetes.

That amount is relatively modest, but what if the person has a horse? The annual expenses for a horse are tens of thousands of dollars times the twenty or thirty years life expectancy. To care for a horse after the owner dies could require $250,000 or more.

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Common Planning Mistakes

Tue, 08 Jul 2008 18:35:00 GMT

A person’s estate plan usually consists of a revocable living trust, a pour-over Will, advance directive for health care, durable power of attorney for property management, and appropriate funding documents which include assignment of the person’s tangible personal property and transfers of real property and other significant assets to the trust.

The living trust is considered by most clients to be their basic plan for administration of their assets during their lifetime and distributing their wealth to their loved ones on their death. Much time and thought is given to how such wealth should be distributed to children, grandchildren, and charities. The living trust reflects the person’s values and desires for their children’s future.

MISTAKE 1: NOT UPDATING OLD DESIGNATED BENEFICIARY FORMS

Held outside of the trust, however, are important assets which will NOT be distributed according to the terms of the living trust. Such assets may be a large part of a person’s estate such as an IRA, other qualified retirement asset, annuities, and life insurance.

The reason these assets will not be distributed according to the terms of the living trust is that upon the death of the owner, the assets pass to whomever is identified on the company’s designated beneficiary form. Old designated beneficiary forms, either from a time when the participant was not married, had no children, or for some other reason, supersede the newer estate planning documents even though the newer documents may reflect the participant’s current wishes with respect to such property. This is particularly true for persons who are divorced and who may have the ex-spouse identified on an old designated beneficiary form.

In some cases, the designated beneficiary forms are missing or left blank, and if not found or filed with the company or retirement plan custodian before the participant’s death, may result in the plan assets being paid to the participant’s estate, which means that it is subject to probate before being distributed under the terms of the owner’s pour-over Will. In the case of retirement plans, the assets will be subject to income tax and estate tax, if applicable.

MISTAKE 2: NOT NAMING CONTINGENT BENEFICIARIES

What if the person who is named as your primary beneficiary dies before you do? It can happen. Even if that person is younger than you. As mentioned before, if no one is named on the form, the assets are paid to the person’s “estate” meaning that is goes through probate and is distributed according to the terms of the Will, if there is one, or to the plan for intestate succession found in the California Probate Code.

MISTAKE 3: NAMING MINORS AS BENEFICIARIES

Persons who are legally incapacitated may not hold title to property. This includes minors and adults who are mentally or physically incapacitated so that they cannot give prompt and reasonable attention to their financial matters.

Designating minor children as beneficiaries will result in need for the surviving parent of the child to get a court ordered guardianship of the child’s estate established so that the life insurance company or retirement plan custodian can distribute the asset to the guardian for the benefit of the minor. This is an expensive and time consuming event which can be avoided with careful attention to naming the designated beneficiary. Moreover, the assets so distributed are held until the child reaches age 18 years when they are turned over to the child to do with as he or she pleases. I have not yet had a client who thought giving an 18 year old a large sum of money was a good idea.

MISTAKE 4: NAMING LIVING TRUST AS DESIGNATED BENEFICIARY OF IRA

Although the living trust should hold title to most of a person’s assets, it should NOT be the owner or the designated beneficiary of an IRA or other qualified retirement plan.

As you know, one of the main benefits of having assets in an IRA is that the income earned is not subject to income tax at the time it is earned, rather it is taxable only when it has been distributed to the plan participant, usually during the participant’s retirement when his or her tax bracket is lower than when the participant was actively part of the workforce.

If the ownership of the IRA or retirement plan is changed from the participant to the participant’s living trust, the entire value of the retirement account is subject to immediate taxation. There may even be an additional penalty if the participant was younger than 59 2.

Likewise, if the retirement plan’s designated beneficiary is a trust (and not a living and breathing human being) then all of the deferred income taxes on the entire value of the retirement plan is due and payable upon the participant’s death and the plan assets are includible in the participant’s gross estate for estate tax purposes.

When should you review your financial data and designated beneficiaries? Whenever you:

1)Establish a new estate plan;

2) Change an existing plan;

3) Divorce;

4) Marriage or re-marriage;

5) Birth of a child or grandchild; 6) Death of a parent.

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Children and Parents…The Sandwich Generation

Sat, 05 Jan 2008 00:59:00 GMT

It is well known that children are minors until they reach age eighteen (18). Until that time, the child has no legal ability to hold money or property. If a minor child is named as a beneficiary of a life insurance policy, or if there is a custodial account established for the benefit of the minor child, there are some problems that may arise that can be avoided if proper action is taken:

PROBLEM: Minor Child is Beneficiary of a Life Insurance Policy

If a minor is the designated beneficiary of a life insurance policy, and if the insured dies before the minor’s eighteenth birthday, the life insurance proceeds will not be paid out until the parent or guardian of the minor has been appointed by a court as the minor’s legal guardian.

This problem may be avoided if the parents of the minor establish a trust for the minor’s benefit and then designate the trust as the beneficiary of the life insurance proceeds. The insurance company can pay directly to Trustee of such a trust.

PROBLEM: Custodial Accounts for Minors

Many parents and grandparents establish custodial accounts in financial institutions pursuant to the provisions of the California Uniform Transfers to Minors Act (CUTMA) which is codified in the California Probate Code beginning at Section 3900. The problem arises when the named custodian becomes incapacitated, resigns, or dies before the minor reaches age fourteen (14).

Unless a substitute or successor custodian has already been nominated, the financial institution will require a successor custodian to be appointed by court order before anyone else can access or manage the custodial accounts.

This problem can be avoided by designating one ore more successor custodian(s) as set forth in the California Probate Code. This can be done at the time the custodial account is open, or at a later date by the current custodian provided that the procedure set forth in the Probate Code is followed.

Note that if the minor child is age fourteen (14) or older, the minor child may designate, in writing, a successor custodian under certain circumstances.

CARING FOR ELDERS

Aging is a process that is difficult not only for the parent, but for the child, who may either be providing the care for the elder or arranging for someone else to do so. There are several issues which should be addressed in the caring of our elders. Your estate planning attorney can help you address most of these issues.

Medical Issues : Does the elder have in place a valid Advance Directive for Health Care, naming designated health care agents and providing information about the kinds of medical treatment the elder does or does not want to have. Is the agent local or out of state? Are the agent’s address and telephone number up to date? In California, the Advance Directive for Health Care also provides for legal authority regarding the disposition of the elder’s remains in the event of death.

Financial Issues : Who has access to the elder’ financial accounts in the event the elder becomes incapacitated? This may depend on whether or not the elder has established and funded a revocable living trust. If there is a living trust, the successor Trustee steps into the elder’s shoes in managing the elder’s affairs in the event of the elder’s incapacity.

If the elder does not have a living trust funded with the elder’s financial accounts, does the elder have a Durable Power of Attorney for Finances?

Note that in California, there must be separate powers of attorney for health care and for finances. One type of power of attorney does not provide authority for the other type.

Also note that powers of attorney may be either effective immediately or springing. Springing powers of attorney require certification by one or more physicians of the principal’s incapacity before becoming effective.

Legal Issues : Does the elder have in place a valid Will or living trust which provides for the disposition of the elder=s assets upon death?

Care/Aging Resources : Here is a list of organizations which may provide useful information on issues involving aging or elder care:

U.S. Administration on Aging: www.aoa.gov

National Alliance for Caregiving: www.caregiving.org

Eldercare locator: http://www.eldercare.gov

National Association of Area Agencies on Aging: www.n4a.org

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Contingencies

Fri, 20 Jul 2007 18:39:00 GMT

As a lawyer, I am trained to look for the worst case scenarios in a given situation. This is especially important in the estate planning field because there are so many variables when assisting clients in planning the disposition of their estates.

One of the unknown variables is whether a named beneficiary will be alive when the time comes time to distribute the estate. If the beneficiary is not alive at that time, whom does the client wish to benefit? A child or grandchild? A niece or nephew? A charity or organization?

Most clients I work with are able to name alternate beneficiaries if their loved ones cannot receive the complete distribution of their gift. We set forth contingent beneficiaries in their living trusts to designate who receives the trust assets. We also may designate contingent beneficiaries for property that is distributed by the client’s Will.

However, I have noticed one area in which clients need to be more diligent in ensuring their wishes are carried out: naming alternate and contingent beneficiaries of the assets that pass outside of their trust or Will.

CONTINGENT BENEFICIARIES ARE NECESSARY FOR CERTAIN ASSETS

Certain assets are not controlled by a person’s Trust or Will. Most common of these assets are life insurance, IRAs or other qualified plans, and annuities. Upon a person’s death, these assets are paid to whomever the person designated as a beneficiary.

Recently, I have seen clients name their spouse as the designated beneficiary of their life insurance and retirement assets. Few, however, have designated an alternate beneficiary if their spouse is not then living. It is not safe to assume that if your spouse is not living then your children will inherit these assets if they are not specifically named. The asset may end up passing to someone else unintentionally.

For example, if a person designates his spouse as the beneficiary of his life insurance policy and the spouse has died, the life insurance company will process the claim as if the person did not designate anyone as a beneficiary of the policy and thereby will pay it to the person’s “estate”. This means that the life insurance proceeds, which otherwise would pass directly to a loved one (without charge or delay), must go through the probate process (which in Los Angeles County takes a minimum of a year) before being paid to the person’s heirs.

Such a mistake can be costly. In California, current probate fees are quite high – $4,000 for the first $100,000 in estate value, plus $3,000 for the next $100,000 in value and 2% of the next $800,000 in value. These fees are calculated without offsets for liabilities of the estate.

MINORS AS BENEFICIARIES REQUIRE SPECIAL ATTENTION

Even when a person names an alternate or contingent beneficiary, such designation requires careful attention, especially if the beneficiary is a minor or under a legal disability which would prevent receipt of the gift.

If a minor is the designated beneficiary, proceeds would be paid to the legal guardian who most likely would need to show actual court appointment as the guardian of the minor’s estate. Most companies will not pay to the natural parent of a minor child without a court order.

Retirement assets have a complex set of rules for distributions upon the death of the participant. In some cases, specialized designated beneficiary forms need to be created. For example, you might be able to name a child as the contingent beneficiary, but state that if the child is a minor, then the proceeds are payable to either the guardian or the Trustee of a trust which may be established for the minor child under the participant’s living trust.

And of course, perhaps there should be an alternate contingent beneficiary if the child or secondary beneficiary is not then living. The important thing is to not designate your spouse as the beneficiary without planning for the possibility that the spouse may not be around to receive the benefit.

ASSET TITLE IS IMPORTANT

The importance of naming contingent beneficiaries of your asset which are not controlled by the terms of your Trust or your Will cannot be over-emphasized.

The reason this is important is that how an asset is titled will control what happens to it upon your death.

Assets that are titled in your name as Trustee of your Living Trust, will be subject to the control of the successor Trust upon your death who will distribute the property as you direct in the Living Trust agreement.

Assets that are titled in your name alone, however, will be disposed of by the terms of your Will, if you have one, or by the State of California’s law for intestacy if you don’t have a Will.

Take a moment to review the name under which your current assets are registered. Do statements come to you just in your name? In the name of your Trust? Review your beneficiary designation for all life insurance policies, IRAs, qualified plans, and annuities. Be sure they accurately reflect how you want to have your property distributed if your first choice of recipient is unable to receive it. You won’t be sorry.

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Title to Property A Primer

Fri, 26 Jan 2007 00:36:00 GMT

How you hold title to real property affects your estate plan. In some cases, an improperly held asset may actually have the opposite result from what you intend. This issue focuses on some of the issues that arise from different forms of legal title to property. It is not intended to provide specific legal counsel for your particular circumstances, rather, it raises some “food for thought” when you meet with your estate planning attorney to create or modify your estate plan.

WAYS TO OWN PROPERTY

California law provides several ways in which a person can hold legal title to assets such as real property or financial accounts. The primary forms of title for a married couple are: joint tenants with right of survivorship, community property, community property with right of survivorship, and tenants in common. A married person’s property which was acquired before marriage or which was acquired during marriage by a specific gift or inheritance may be held as the married person’s sole and separate property. A single person may hold title to property with another person either as joint tenants with right of survivorship or as tenants in common. I will discuss what happens with each form of title on the death of one of the persons on title.

JOINT TENANCY

The survivorship right belonging to a person who holds title with someone else as “joint tenants with right of survivorship ” means that upon the death of the first person to die, the property belongs to the surviving person by operation of law.

For example, John and Jane Doe, a newly married couple, purchase their first home together. When the real estate agent asks, “How do you want to hold title?” they respond, “Jointly!” The property becomes conveyed to them as follows: “John Doe and Jane Doe, husband and wife, as joint tenants with right of survivorship”. Upon the death of John Doe, Jane Doe will own the property by operation of law and title will pass to her upon the recording of an affidavit of John’s death. John Doe’s Last Will and Testament or his Living Trust will not control the ownership of this property.

COMMUNITY PROPERTY

Another way for couples to hold title to their property is “husband and wife as community property ”. If this form of title is used, the California Probate Code provides that “upon the death of a married person, one-half of the community property belongs to the surviving spouse and the other half belongs to the decedent”. This means that the deceased spouse’s interest in the community property does not automatically belong to the surviving spouse when the deceased spouse dies. If a married person signs a Will which gives his or her community property interest to someone other than his or her spouse, such as to a child or to a grandchild, that person, rather than the surviving spouse, owns the property. This may not exactly be what the deceased spouse wanted.

Note that if a married person dies without a Will, that is, intestate , the California Probate Code provides that “the intestate share of the surviving spouse is the one-half of the community property that belongs to the decedent”. Therefore, upon the death of a married person without a Will, all of the community property belongs to the surviving spouse.

*Community Property is discussed here only as it relates to couples who are married to each other at the time of the death of one spouse. There are other issues regarding community property under circumstances where the couple’s marriage is dissolved or the dissolution is pending which are outside the scope of this article.

COMMUNITY PROPERTY WITH RIGHT OF SURVIVORSHIP

As of July 1, 2001, California law added a form of community property which expressly provided for a right of survivorship. If a couple wanted to hold title as “ community property with right of survivorship ”, then such property would pass to the surviving spouse on the death of one of the spouse, by operation of law, the same way it does for persons who hold title as joint tenants with right of survivorship. Unlike “community property”, a couple who holds title to their property as “community property with right of survivorship” may not transfer either of their undivided interests by their Will or Living Trust.

Note that for this form of title, there must be a specific reference to the survivorship right in order for the property to pass to the survivor without administration.

TENANTS IN COMMON

Tenants in common is a form of joint ownership but without the survivorship right upon the death of one of the joint owners. On the death of one of the owners, the portion of the property held as “ tenants in common ” which belongs to the deceased owner passes under the decedent’s Will. The recipient of such property continues to hold title with the surviving original owner as tenants in common.

Title to property may inadvertently change from joint tenants with right of survivorship to tenants in common if the joint tenancy is severed. This can be done by one of the joint tenants unilaterally and without the consent of the other joint tenant.

As you can see, the manner in which title is held is a vital part of your estate plan that should be discussed thoroughly with your estate planning attorney.

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Trust Admin-Survivor’s Trust

Thu, 27 Jul 2006 19:12:00 GMT

One of the trusts that comes into existence upon the death of the first spouse of a married couple who have an A-B trust arrangement in their estate plan is called the Survivor’s Trust.

WHAT IS THE Survivor’s TRUST?

When a couple has a joint living trust with a typical A-B arrangement, the joint trust usually holds all of the couple’s community property, i.e. what is “theirs”. When one of the spouses dies, what is “theirs” is separated into two shares, which may be thought of as “his” and “hers”. If all of the property in the joint living trust is community property, then “his” and “her” share of the community will be half of what was “theirs” before this death.

If “he”is the deceased spouse, then “his” share is distributed to the Bypass Trust and “her” share is distributed to the Survivor’s Trust. The Survivor’s Trust holds all of the Surviving Spouse’s separate property and the one half of the community property of the couple which belongs to the Surviving Spouse. Separate property may be held in the couple’s joint revocable living trust provided that the separate property is not commingled with the community property and the couple keeps track of the separate property asset apart from the community property assets held in the living trust. Unlike the Bypass Trust, the amount of assets allocated to the Survivor=s Trust is not dependent on the amount available to be sheltered from estate tax. No estate tax calculation is performed on assets held in the Survivor’s Trust until the Surviving Spouse dies.

FUNDING OF THE SURVIVOR’S TRUST

The process for “funding” the Survivor’s Trust, that is, the actual transfer of title to the Survivor’s Trust after the death of the first spouse, is similar to the process for funding the Bypass Trust discussed in the last issue. Once the allocation agreement has been prepared which identifies which assets of the joint trust are allocated to the Bypass Trust and which assets are allocated to the Survivor’s Trust, trust transfer deeds and certificates of trust with letters of instruction to the financial institutions are signed by the Surviving Spouse as the sole successor Trustee. The trust transfer documents are then sent to the appropriate entities for processing. The Surviving Spouse should review carefully the next statements received from such entities to be sure that the re-registration of the assets to the Survivor’s Trust has been completed. Follow-up calls may be necessary.

My law office handles real property transfers in two steps. First, the Surviving Spouse records an Affidavit Death of Trustee with the County Recorder’s office. Once the recorded Affidavit is received by my office, the second step is taken, which involves the recording of a Trust Transfer Deed from the Surviving Spouse as Trustee of the joint revocable living trust to the Surviving Spouse as Trustee of the Survivor’s Trust. In Los Angeles County, the Surviving Spouse may not receive the recorded documents for approximately six(6) to eight (8) weeks. This means that the real property transfer may take four months or so to complete.

WHAT ARE THE SURVIVING SPOUSE’S RIGHTS WITH RESPECT TO THE SURVIVOR’S TRUST?

The Surviving Spouse only has as much right to the Survivor=s Trust as the trust instrument provides. Normally, however, the Surviving Spouse may consider the Survivor’s Trust as his or her own revocable living trust. If the trust so provides, the Surviving Spouse may use as much net income and principal as the Surviving Spouse needs, even if all of the Survivor’s Trust assets are used for care and support during his or her lifetime.

The trust may also provide the Surviving Spouse with the power to revoke it or change the terms of the Survivor’s Trust. This means that the Survivor may change the identity of beneficiaries of the Survivor’s Trust or the manner in which the original beneficiaries receive property from the Survivor’s Trust. Unless otherwise provided in the trust agreement, the Surviving Spouse may leave assets in the Survivor’s Trust to a new spouse upon remarriage.

GENERAL POWER OF APPOINTMENT

The trust may provide that the Surviving Spouse has a general power of appointment over trust assets. A general power of appointment means that the Surviving Spouse can direct where the assets of the Survivor’s Trust pass on the death of the Surviving Spouse. The manner by which a Surviving Spouse may appoint the property of the Survivor=s Trust is usually set forth in the document which gives the power of appointment; it often requires the Surviving Spouse to write a new Will.

If a general power of appointment is given to the Surviving Spouse, the assets of the Survivor’s Trust may be reached by creditors of the Surviving Spouse or be otherwise available to pay the Surviving Spouse’s debts.

ALLOCATION OF PRIMARY RESIDENCE

In allocating property to the Survivor’s Trust and to the Bypass Trust, consideration must be given to the needs of the Surviving Spouse with respect to the couple’s primary residence. In general, the residence is allocated entirely to the Survivor’s Trust. One of the reasons for doing this is to enable the Surviving Spouse to obtain a mortgage on the property, either by refinancing the existing mortgage, or by obtaining a new mortgage on the property. The Surviving Spouse would not be able to do so if all or part of the residence were held in the Bypass Trust.

Another reason to allocate all of the primary residence to the Survivor’s Trust has to do with basis and capital gains tax. Under current law, the Surviving Spouse receives a step-up in basis for the home when the first spouse dies. This means that the new cost basis for the Surviving Spouse is the date of death value of the home which is determined by a formal real property appraisal. If the Surviving Spouse sells the property after the first death, he or she can shelter from capital gains tax $250,000 in appreciation from the date of death value. This savings could be significant. Capital gains taxes currently run 25% (combined federal and State of California) of the value of the property to be taxed which means the tax savings could be significant.

The post Trust Admin-Survivor’s Trust appeared first on Sharp Estate Planning .

Trust Admin-Bypass Trust

Thu, 06 Apr 2006 19:09:00 GMT

Unfortunately, I have had some of my dear clients pass away since the beginning of the year. So I have been involved in several administrations of their living trusts. This leads me to think of some of the common and not so common issues that may arise during trust administration which may be useful to discuss.

WHAT IS THE BYPASS TRUST?

When a couple has a joint living trust with a typical A-B arrangement, the joint trust usually holds all of the couple’s community property – what is “theirs”. When one of the spouses dies, what is “theirs” is separated into two shares, which may be thought of as “his” and “hers”. If all of the property in the joint living trust is community property, then “his” and “her” share of the community will be half of what was “theirs” before this death.

If “he” is the deceased spouse, then “his” share is distributed to the Bypass Trust and “her” share is distributed to the Survivor’s Trust. The amount of assets distributed to the Bypass Trust is usually dependent on the amount available to be sheltered from estate tax, sometimes called the applicable exclusion amount. This number is available to each spouse. One of the reasons a couple establishes a revocable living trust is to enable a couple to use each spouse’s applicable exclusion amount, thereby minimizing the potential estate tax liability. This technique maximizes the amount of assets which may pass to the children on the death of both of the spouses.

FUNDING OF THE BYPASS TRUST

Just like the process when the joint revocable living trust is established, once the allocation agreement has been prepared and the assets to be transferred to the Bypass Trust are known, the Bypass Trust must be funded with those assets. This means that trust transfer deeds for real property assets and letters of instruction for bank and brokerage accounts must be delivered to the institution.

HOW DOES THE IRREVOCABILITY OF THE BYPASS TRUST WORK?

I am often asked this question from the surviving spouse who is confronted with allocating assets held in a joint living trust to two or three subtrusts. There seems to be some confusion as to how the Bypass Trust works for the surviving spouse as the beneficiary of such trust and as the Trustee of the Bypass Trust.

On the death of the first spouse, the terms of the Bypass Trust become irrevocable. The right of the surviving spouse to receive distributions of net income from the investments of the Bypass Trust and the right to receive distributions of principal from the Bypass Trust cannot be changed by the survivor once one spouse dies. Likewise, the surviving spouse cannot dictate where and in what manner the assets of the Bypass Trust pass upon his or her death. The terms cannot be changed by the surviving spouse. This is because the assets held by the Bypass Trust represent the share of the deceased spouse’s community and separate property (do you remember the schematic I drew at our initial meeting which shows this allocation of assets?). Since the property belonged to a person who is no longer living, the disposition of those assets cannot be changed because the deceased spouse is no longer able to consent to such change.

While the terms of the Bypass Trust cannot be changed by the surviving spouse, the survivor can, as Trustee of the Bypass Trust, direct and change the investment of the assets during the surviving spouse’s lifetime. As Trustee, the survivor has the power to act as stated in the trust instrument and the laws of the state where the trust is administered. This power may include the ability to buy and sell trust assets, to invest in all kinds of assets such as real property, intangible personal property such as stocks or bonds, or even tangible personal property such as artwork, collectibles and the like.

CONSIDER THIS ILLUSTRATION:

A piece of rental property is transferred to the Bypass Trust when the deceased spouse dies. The surviving spouse, as Trustee, can receive rental income from the property, but must place the rental income in an account titled in the name of the Bypass Trust. (By the way, the Bypass, as an irrevocable trust, has its own tax identification number because it is a separate taxpaying entity).

If the terms of the trust provide that the surviving spouse may receive net income annually, then the survivor transfers to the survivor’s trust, all of the net income from the rental property.

If the survivor wants to sell the rental property, he or she may do so, as Trustee of the Bypass Trust, but the proceeds from the sale remain in the Bypass Trust, either to purchase a new piece of rental property or to be invested in some other way.

Income taxes are paid at trust rates if the income remains in the Bypass Trust. If the income is transferred to the surviving spouse, he or she pays income tax on such income at his or her personal income tax rate. A separate income tax return is filed for the Bypass Trust each year after the deceased spouse dies.

INCOME IN RESPECT OF A DECEDENT

The Internal Revenue Service provides that certain assets owned by a decedent do not receive a step-up in basis on the decedent’s death and therefore may accelerate an income tax liability after death. Income in respect of a decedent (IRD) is income earned by the deceased person which has not been reported on the decedent’s income tax form.

Assets which trigger IRD include IRAs, appreciated Savings Bonds, promissory notes, deferred compensation, accounts receivable, some dividends, some installment obligations, and commissions earned before death which were not paid until after death.

Trustees who are administering a trust upon the death of a Settlor must report IRD when it is actually received, which may occur during the process of funding subtrusts as provided in the trust agreement.

Also, Trustees may need to determine whether the IRD is characterized as ordinary income or as capital gains which affects the amount of income tax to be paid. The general rule is that whatever character the asset had when the decedent was alive, that is its character in the hands of the recipient.

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What is the Difference Between Executor and Trustee?

Tue, 03 Jan 2006 18:40:00 GMT

Estate planning is an area of law that can be confusing for clients in that there are several terms which have a precise legal definition but which are interchangeable in the minds of many clients. I hope to make the distinctions clear in this newsletter.

WHAT EXACTLY IS A TRUSTEE?

Those readers who have created a trust centered estate plan are aware that they are the Trustees for their revocable living trust. As Trustee, they have control over all of the assets that are titled in the name of their trust. The person who set up the trust and has transferred assets to such trust has a “trust estate”. As someone once said to me, “So the Trustee is the boss of the trust”. Exactly.

Trustees have only as much power and control over the trust as the trust document provides. If the trust document does not say that a Trustee can take a particular action, such as the ability to invest in real property, then the Trustee has no legal authority to purchase a parcel of real property in the name of the trust. Likewise, if the trust provides that the Trustee must account annually to the income beneficiaries, the Trustee must make a written accounting of all the transactions of the trust for the prior twelve months and send it to each income beneficiary of the trust.

The Trustee, however, has no control over any asset held by a person as an individual. Assets that are titled in the name of a person individually may be handled only by a court appointed Executor or by an agent under a durable power of attorney.

HOW DOES A TRUSTEE DIFFER FROM AN EXECUTOR?

As stated above, a Trustee is the person who is authorized to act with regard to assets held in a trust. An Executor, however, is a person who has been appointed by a court of law to act for a deceased person through the probate process. Executors are only appointed if they have been named in a person’s Last Will and Testament. A person who dies without leaving a Will has an Administrator handling the probate process rather than an Executor, but the function is identical. If a person dies owning property in his or her own name, that person has a “probate estate” which must be administered by a court appointed Executor or Administrator. Sometimes the word “Personal Representative” is used instead of Executor, but Personal Representative is a broader term.

AGENTS AND PRINCIPALS

An Agent is the person who has the legal authority to act on behalf of another person. Agents are generally appointed by a Principal who has signed a power of attorney. An Agent may also be called an “Attorney-in-Fact”. An Agent acts as extra hands for the Principal much like a valued personal assistant. The Agent takes direction from the Principal in person or by the written instructions contained in the signed power of attorney.

The power of attorney signed by a Principal gives certain legal authority to the Agent. Under California law, powers of attorney are broadly placed into two categories: power over a person and power over assets.

Power over a person takes the form of a power of attorney for health care. Under current law, such power of attorney is called an Advance Directive for Health Care and contains two parts: a power of attorney and an advance directive to physicians. The power of attorney part gives the named agents the legal authority to make medical decisions for an incapacitated principal. The advance directive part tells the agent what sorts of treatment and procedures the principal would want given certain medical circumstances.

Power over assets gives the Agent the ability to manage the Principal’s financial affairs. Such powers can be general, in that they have a broad scope of authority given to the Agent. They might also be “springing” in which they only become effective after the Principal is certified by one or more physicians to be incapacitated. Many powers of attorney for assets are effective immediately upon signing by the Principal.

Powers of attorney should be “durable” and contain the phrase “This power of attorney will continue to be effective even though the Principal becomes incapacitated.” Without such language, the power of attorney is not durable and is not effective if the Principal becomes incapacitated.

Once the Principal dies, the Agent’s authority ceases. After death, the Principal’s property can be controlled by a court appointed Executor/ Administrator. If an Agent dies or becomes incapacitated, the power of attorney may identify a successor Agent who could then take over the former Agent’s responsibilities for the Principal’s property.

WHAT MAKES A GOOD AGENT, EXECUTOR, OR TRUSTEE?

Selecting an individual as an Agent, Executor, or Trustee should be done after careful consideration. Such a person may be required to handle detailed financial transactions, make personal decisions for someone’s personal care or medical treatment, and report such actions to others such as beneficiaries, courts, and taxing authorities. The person selected for these tasks must be honest and trustworthy as well as have the ability to follow through with the many decisions that may need to be made.

Choosing an individual who is a family member has advantages and disadvantages. On one hand, the family member’s personal knowledge of family matters and level of personal involvement may serve the situation well. On the other hand, family members may have their own personal issues which may result in actions or communications that frustrate the administrative process.

Choosing a corporate entity may have the investment expertise and organizational skills to effectively administer an estate. Corporate entities usually charge a fee based on the fair market value of the assets under management. Sometimes a corporate entity declines to serve because the value of the assets is insufficient to make it worth their while.

It may be that a combination of corporate and family act as Agents, Executors or Trustees. You should discuss this more fully with your estate planning attorney as there are many creative solutions for finding the right person to administer a person’s estate.

The post What is the Difference Between Executor and Trustee? appeared first on Sharp Estate Planning .

Health Care Under HIPAA: Changes in Your Privacy Rights

Tue, 13 Jul 2004 00:28:00 GMT

California and federal laws provide for the confidentiality of a patient’s medical information. The general rule is that a patient’s medical information may not be disclosed without the patient’s express written consent. However, there are at least two major statutory and regulatory provisions which affect the disclosure of confidential medical information and may prevent your designated health care agent from receiving important information about you. They are 1) the Health Insurance Portability and Accountability Act (HIPAA) and 2) the California Confidentiality of Medical Information Act (CMIA).

HIPAA REGULATIONS

Privacy rules under HIPAA became effective in April 2003 and since then the legal and medical communities have been working to understand how these rules apply to the various transactions that occur in the context of providing a health care to a person. HIPAA applies to doctors and other “covered entities” which transmit protected health information in the course of their treatment of a patient and their receipt of payment for such treatment.

The “protected health information” which is subject to HIPAA privacy rules includes ‘any information, whether oral or recorded in any form or medium, that is created or received by a health care provider, health plan, public health authority, employer, life insurer, school or university, or health care clearing house which relates to the past, present or future physical or mental health or condition of an individual; the provision of health care to an individual; or the past, present, or future payment for the provisions of health care to an individual’.

Improper disclosure of a person’s protected health information carries with it heavy monetary and criminal penalties: up to $250,000 in fines and 10 years in prison! However, a doctor or other covered entity that has a valid authorization to disclose a patient’s medical information to a third party will not be penalized for transmitting the patient’s information to the third party. Further, the third party who properly receives such information may reveal that information to others without penalty.

VALID AUTHORIZATION UNDER HIPAA

Since HIPAA is a federal law, it preempts any state law which provides less protection. This means that the health care power of attorney or an advance directive, which is authorized by the California Probate Code, giving your agent or attorney-in-fact the right to receive medical information about you, may not be a valid privacy waiver under HIPAA. You should either sign a new advance directive for health care or sign a standalone authorization which is valid under HIPAA.

An authorization for release of medical information is valid if:

It is handwritten by the patient, or printed in at least 14 point type;

It is signed and dated by the patient, the patient’s legal representative, the patient’s spouse;

or the person financially responsible for the patient where the information is solely for the purpose of processing applications for dependent health care coverage, or the beneficiary or personal representative of a deceased patient;

It states the specific use and limitations on the type of information to be disclosed;

It states the name of the health care provider which may disclose the medical information;

It states the specific uses of and limitations on the use of the medical information by the authorized recipients;

Sets a specific termination date; and

States that the person authorized may have a copy of the authorization.

CALIFORNIA CONFIDENTIALITY OF MEDICAL INFORMATION ACT

California’s medical privacy law also prevents doctors from disclosing medical information without a valid authorization. In some respects, California’s law is stricter than the federal law. For example, a patient is defined as “any natural person, whether or not living” which brings the law into the estate planning context for probates and conservatorships. There has been concern in the legal community that disclosure of a person’s medical condition which often is the subject of a conservatorship hearing may be a violation either under HIPAA or the CMIA if there is no valid authorization to disclose such information by the proposed conservatee.

Likewise, because the issue of whether or not a person has “capacity” to execute a Will or Trust or other estate planning document is often litigated probate courts, testimony involving a person=s medical condition can be revealed which may be a violation of the person’s privacy rights. The problem is that any disclosure of protected health information about a person who is a settlor of a trust or a trustee is a “disclosure” that is regulated under HIPAA and CMIA.

PSYCHOTHERAPY RECORDS

There are special rules for the discretionary release of a patient’s participation in out-patient treatment with a psychotherapist and such release of information is prohibited without the written request of the person wanting to receive the information. Such person must be an authorized recipient under the California Civil Code and must contain specific reference as to how the information will be used and the length of time it will be kept before it is destroyed.

GENERAL INFORMATION GIVEN TO WELL WISHERS

A doctor is permitted to respond to anyone’s question about a specific patient by disclosing general information which is limited to the following: the patient’s name, address, age, gender, a general description of the reason for the treatment, the nature of the injury, general condition, and non-medical information.

DISPUTE OF DENIAL OF PAYMENT BY INSURERS

It is common for doctors to dispute denials of payment with third part payors such as insurance companies. Important confidentiality concerns are associated with a doctor’s correspondence to the insurer because it usually includes specific information about the patient’s diagnosis and treatment in order to prove that the care was indeed medically necessary or covered by the health insurance plan. Doctors should not communicate with payors without a valid written authorization from the patient. You can expect to see increased use of authorization forms when you next visit your doctor or health care provider.

The post Health Care Under HIPAA: Changes in Your Privacy Rights appeared first on Sharp Estate Planning .

Estate Planning for Registered Domestic Partners

Tue, 01 Jul 2003 19:23:00 GMT

For those who are eligible, registration of Domestic Partners with the California Secretary of State may provide important benefits for you and your partner. To be eligible, you and your partner must meet the following criteria:

As of January 1, 2002, the key benefits of registration as a domestic partner include the following:

Medical Advantages: 1) You may make medical decisions for your incapacitated partner; 2) You may claim an exemption to state income tax on health benefits provided to your domestic partner; 3) You may file for disability benefits on behalf of your incapacitated domestic partner; 4) You may continue health benefits for surviving domestic partners of governmental employees and retirees; 5) You may use your sick leave to care for your domestic partner or the child of your domestic partner.

Legal Advantages: 1) You have standing to sue for wrongful death of your domestic partner; 2) You may relocate with your domestic partner without losing unemployment benefits; 3) You may adopt a partner’s child using the stepparent adoption process.

Estate Planning Advantages: 1) You may leave your property to a domestic partner in your will; 2) You may administer your domestic partner’s estate.

As of July 1, 2003 , your domestic partner has additional rights to receive from your estate if you die without leaving a valid Will (known as dying intestate). California Probate Code Section 37 defines a Domestic Partner as one of two persons who have filed a Declaration of Domestic Partnership with the Secretary of State under California Family Code Section 297.

Death of a Domestic Partner results in the termination of the domestic partnership; however, if neither party filed a Notice of Termination with the Secretary of State prior to the death of one of the Domestic Partners, the surviving Domestic Partner has certain rights to the deceased Domestic Partner’s estate if he or she died without leaving a valid Will.

The intestate provisions of California Probate Code Section 6401 provides that the surviving Domestic Partner may receive the same intestate share of the property of a deceased Domestic Partner to which a surviving spouse is entitled to receive from the deceased spouse’s separate property.

California’s intestate plan for distribution to the surviving spouse or Domestic Partner currently:

May be the entire separate property of the decedent if there are no living issue, parents, siblings, or nieces/nephews of siblings of the decedent.

May be one half of the decedent’s separate property if he or she had either one child living at the time of death, had grandchildren living from a deceased child, or had no issue, but had parents (or issue of parents) living.

May be one third of the decedent’s separate property if he or she had more than one child living at the time of death, or had one child living plus grandchildren living from a deceased child, or had grandchildren living from more than one deceased child.

Note that the above law is effective only if the domestic partners do not have a will, trust, or other estate plan in place. If domestic partners do not wish to have their property distributed as provided above, I recommend that they see an estate planning attorney to assist them with the creation and establishment of a living trust, will, or other estate plan that will achieve their goals of leaving their property to whom they want, the way they want, and when they want.

TERMINATION OF DOMESTIC PARTNERSHIP

Under existing law, you or your domestic partner may terminate your domestic partnership in the following ways:

In all of the above cases, you, or your domestic partner, must immediately file with the Secretary of State, a Notice of Termination of Domestic Partnership. Doing so will establish an actual date of termination. The date becomes important in an estate planning context because failure to file such notice may result in your ex-domestic partner being able to inherit from your estate if you were to die after actual termination but before formal notice is given to the Secretary of State. If, however, you or your domestic partner marry or no longer share a common residence, neither you nor your former domestic partner may inherit from the other.

Registration forms may be obtained from the Secretary of State’s website at www.ss.ca.gov or from the local county clerk’s office. Registration requires notarization of your signature and a filing fee of $10.

The post Estate Planning for Registered Domestic Partners appeared first on Sharp Estate Planning .

Funding Living Trusts

Wed, 23 Apr 2003 18:45:00 GMT

If your estate plan includes the creation and establishment of a revocable living trust, your attorney probably informed you that your trust can only control the assets to which it has title. Trusts do not control assets held as joint tenants with right of survivorship, assets held in an individual’s name, or assets that are distributed pursuant to a designate beneficiary such as life insurance, IRAs, and qualified retirement plans. The process of actually transferring title to your assets, called “funding the trust” is the one of the most important parts of using a living trust as a foundation for your estate plan.

All too often I have seen cases in which family members ask me to assist them with the administration of a living trust upon the passing of a Settlor (the person who initially established the trust) only to find out that the trust did not have title to all the assets held by the deceased person.

Assets not titled in the name of the trust may have to go through a court supervised probate before being distributed to the named beneficiaries in living trust. A person’s estate which is not fully funded means there may be one or more assets that have to go through probate which, for many clients, was one of the goals they sought to attain by using a living trust!

YOUR TRUST SHOULD REFLECT YOUR CURRENT SITUATION

When new clients come to see me about creating and establishing their estate plans, one of the things I tell them is that the living trust should be considered a reflection of their current circumstances with regard to their net worth, nature and number of family members, marital status, and goals or objectives.

I view living trusts as “living documents”. By that phrase, I mean that your trust should be a dynamic plan which is expected to change over time as the particulars of your life changes. You should expect to amend or change your trust periodically as your life circumstances changes. Some of the life changes which may require a change in your estate planning documents include: death of an alternate trustee, birth of children or grandchildren, dramatic changes in your net worth (both positive and negative), divorce, changes in existing laws.

Many people I’ve met view the creation of their estate plan as a once in a lifetime event that upon completion is not to be seen again while that person is alive. In my view this is a flawed perspective. A couple who comes to see me while in their thirties because they have a newborn will be in a different place when they are in their fifties and their children are adults. Without updating your estate plan, distributions may not be made as you want.

ASSISTING MY CLIENTS WITH FUNDING

As part of my estate planning practice, clients generally sign the following funding documents, depending on the extent and nature of the assets they own:

Trust Transfer Deed – this document, once signed and notarized, is recorded with the County Recorder’s Office for the county where the real property is located.

Personal Property Assignment – this document transfers title to a person’s tangible personal property to the trust. Such personal property includes furniture, furnishings, cars, collectibles, jewelry, china, silverware, etc.

Certificate of Trust and Letters of Instruction – the Certificate of Trust is a document authorized by the California Probate Code which provides banks and other financial institutions with information about the creation of the trust, the identity of the trustees, the powers of the trustees and the tax identification number for the trust. It enables financial institutions to ascertain the existence of a trust when requested to change the registration on the account. Certificates of Trust do not disclose the personal parts of the trust agreement which include the names of the beneficiaries and the terms and conditions of distributions to such beneficiaries.

SOME ASSETS REQUIRE SPECIAL FUNDING ACTION

There are special funding requirements for certain types of assets. If you have one or more of the assets listed below, you should see an estate planning attorney to be sure such assets are controlled by the terms of your trust. Such assets include (but are not limited to):

It is vital to the implementation and administration of your trust to have all of your assets appropriately titled in the name of your trust…thereby having your trust fully funded. Failure to do so may result in one or more assets having to go through probate which will frustrate your loved ones.

I urge you to take time today to be sure that your bank and brokerage statements are coming to you as trustee of your trust. Look at your real property tax bill to see if the real property is titled in your name as trustee of your trust. Be aware of how your account information reads. Don’t wait until after something happens to find out if things have been done correctly. Give yourself the peace of mind that comes with knowing the hard work you and your attorney put into the creation of your estate plan will accomplish your stated goals because the trust controls all of the appropriate assets.

Note that IRAs and qualified retirement plans that name your spouse as the primary beneficiary should NOT be transferred to your trust. If you spouse is named as the primary beneficiary of your retirement plans, he or she will be able to roll such accounts over into his or her name and thus be able to continue the tax deferral treatment those monies receive.

The post Funding Living Trusts appeared first on Sharp Estate Planning .

Trustee Duties

Fri, 19 Oct 2001 19:13:00 GMT

A trust is any arrangement in which property (the trust estate) is transferred by someone (the settlor) for the benefit of a third person (the beneficiary). A revocable living trust is usually created by the settlor for his or her own benefit during his or her lifetime. Upon death of the settlor, the trust becomes irrevocable, that is, its terms and conditions of administration and distribution cannot be changed. It also becomes a new taxpayer, separate from the settlor.

If you are acting as a trustee, read the duties in this newsletter and see if you are doing your job well. If you are a settlor of a trust, think about the person you chose as trustee. Is this person able to do the things required of such a fiduciary?

GENERAL DUTIES

Basic duties as trustee involve the collection, management, and investment of trust assets and the accumulation and distribution of income and principal according to the terms of the trust agreement. Another important set of duties relates to tax matters; see the discussion below.

It is a fundamental rule of trust law that a trustee must be faithful to the interests of the trust and its beneficiaries. The trustee must also keep proper accounts and records of all the financial transactions of the trust.

BOOKS AND RECORDS

Fiduciary record keeping differs substantially from normal bookkeeping or even personal income tax record keeping. A fiduciary is responsible for every penny which passes through his or her fingers and must therefore account to the penny. Thus, the trustee is required to keep a precise record of every receipt and disbursement, every gain and loss, every distribution to a beneficiary, and every change in the nature of an asset of the trust. I recommend that all disbursements made on behalf of the trust be made by check, and the purpose of the payment. Such a record could be kept on a photocopy of each check or in a list of cash disbursements.

TAXPAYER ACCOUNT NUMBER

The trustee will need an employer identification number. I am available to all the trustees for my clients to assist them in obtaining such a number for the trust. The number becomes the trust’s tax identification number and should be used for all trust transactions. The trustee should NOT use the settlor’s personal social security number.

SPECIFIC DUTIES UNDER CALIFORNIA LAW

I list below a brief synopsis of the relevant statutes you need to understand regarding your specific duties as it relates to trust beneficiaries:

Probate Code Section 16000: Duty to administer the trust. This statute requires the trustee to administer a trust according to law and in accordance with the trust instrument. No matter how good the trustee’s intentions, the trustee is not free to administer the trust in some other manner.

Probate Code Section 16002: Duty of loyalty. This statute states that the trustee has a duty to administer the trust solely in the interest of the beneficiaries. The trustee cannot use the trust for his or her own benefit.

Probate Code Section 16003: Duty to deal impartially with beneficiaries. A trustee cannot favor one beneficiary over another. This is particularly critical when the trustee is also one of the beneficiaries. In such cases, it is a clear violation of the law for the trustee to favor himself or herself over another beneficiary. It is also a violation when the trustee “helps” one beneficiary more than another unless instructed by the trust instrument.

Probate Code Section 16004: Duty to avoid conflict of interest. This prohibits the trustee from entering into transactions with trust property which will result in a profit to the trustee, or in which the trustee’s interests adverse to the interests of the trust or its beneficiaries. For example, the trustee must avoid loaning personal funds to the trust because it would result in the trustee having a conflict between duty to the trust and duty to himself or herself.

Probate Code Section 16006: Duty to take control and preserve trust property. The trustee must take affirmative action to take and keep control of trust property and to preserve it.

Probate Code Section 16007: Duty to make trust property productive. This requires a trustee to make sure the property is wisely invested and is earning interest when possible. It may also mean that some assets should be sold and income producing assets purchased.

Probate Code Section 16009: Duty to keep trust property separate and identified. This statute prohibits the trustee from commingling personal property with trust property. Unless the trustee is making a distribution to himself or herself as a named beneficiary under the trust (assuming such a distribution is directed), the trustee must keep trust assets separate from the trustee’s personal assets.

Probate Code Section 16060-1606.1: Duty to report to beneficiaries. The trustee must keep the beneficiaries of the trust informed with respect to matters involving the trust. This is especially important when the beneficiaries are not close family members. In such a case, the trustee should be sure there is a free flow of essential information to each beneficiary so that the beneficiary’s interest in the trust assets are made known. It also provides an opportunity for checks and balances between the trustee in the performance of trust powers, and the rights of the beneficiary to receive information relating to his or her interest. The beneficiary may also wish to contest a provision of the trust and in fairness must have an opportunity to do so.

Probate Code Section 16062: Duty to account to beneficiaries. Accounts are detailed statements regarding the financial transactions of the trust. They are similar to bank account statements in which a bank reports a beginning balance, an ending balance, and all transactions that occurred during the reporting period. A trustee must keep careful records in order to comply with this requirement.

Probate Code Section 16080: Discretionary powers to be exercised reasonably. When a trustee is given discretion, the trustee must act reasonably and is not free to act in whatever way the trustee wants. This is true even if the document states that the trustee’s discretion is absolute.

Probate Code Section 16200: General powers of trustee. A trustee’s power to take actions pertaining to the trust is not unlimited, and may be restricted. The trustee should look to both the statute and the trust instrument to be certain that only authorized actions are taken when acting as trustee.

IF YOU HAVE ANY QUESTIONS ABOUT YOUR CHOSEN TRUSTEE OR YOUR DUTIES, IF YOU ARE NOMINATED AS A TRUSTEE, PLEASE FEEL FREE TO CALL ME. I AM HAPPY TO DISCUSS YOUR RESPONSIBILITIES WITH YOU.

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Community Property with a Twist

Wed, 11 Jul 2001 00:05:00 GMT

If you own your property as joint tenants with right of survivorship California law presumes you mean exactly that; even if the joint tenants are husband and wife. This means that married couples do not automatically receive the benefits of community property ownership upon the death of the first spouse, even for property that would be considered community property if the couple divorced. In order to claim community property benefits at death, the couple must state in writing that the property is intended to be their community property despite its form of title.

A NEW TITLE FOR CALIFORNIA REAL PROPERTY OWNERS

As of July 1, 2001, the California Civil Code Section 682.1 provides California residents with a new form of title for their real property: community property with right of survivorship . Note that the title does not apply for joint accounts held in banks or other financial institutions.

In creating this new form of title, the state legislature provides a form of title which:

Unlike joint tenancy, this form of title can only be used by married couples.

Although such form of title has not been tested with the Internal Revenue Service for California residents, it has been accepted by the Internal Revenue Service as community property in Arizona without problems.

If you are a client of mine, you know that I always ask you how you hold title to your property. Most married couples who have done no estate planning have taken title to their real property as joint tenants . Upon the death of a spouse, the survivor usually terminates the joint tenancy by recording an Affidavit – Death of Joint Tenant with the county recorder’s office for the county in which the real property is held. In so doing, the survivor loses the opportunity to have the deceased spouse’s interest in the property stepped-up to its date of death value. The result is that upon sale by the surviving spouse, there may be a capital gains tax due on the amount of the deceased spouse’s interest in the property which increased from the date of purchase value.

Particularly hard hit may be elderly surviving spouses who have lived in their homes over thirty years and have seen a large gain in the value of the property during that time. They may be on a fixed income and face a large capital gains tax liability.

SPOUSAL PROPERTY PETITION

The alternative to filing the Affidavit – Death of Joint Tenant is to file a spousal property action with the superior court’s probate department under the California Probate Code Section 13650. Upon declaration of relevant facts, the surviving spouse may be able to obtain a court order which declares the property to be community property even though title is held as joint tenants. The cost of going through this process is relatively modest, but it may deter some surviving spouses.

REFINANCING YOUR HOUSE – HOW YOU CAN HELP

If you are married and are refinancing your house, now is the time to take an active role in that process. You can help educate your mortgage broker, title company, and escrow company on the importance of taking title to property. This is not a decision that should be left to a clerk. Ask me about what form of title is appropriate and see to it that the appropriate form of title is used when you refinance your house.

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Trouble with Second Marriages

Sat, 07 Apr 2001 22:57:00 GMT

Many of my clients are couples in their second marriage. Sometimes they have children from a prior marriage. Sometimes, they have separate property as well as property they own with their spouses. I set forth in this newsletter general information that affects the estate plan for people in second marriages. In most cases, you should consult with your estate planning attorney (like me) to see how best to tailor your estate plan to your particular circumstances.

REAL PROPERTY OWNERSHIP

When couples in their second marriage own real property together, they may take title to such property as tenants in common. This is usually done when the one or both of the spouses have children from a prior marriage. As tenants in common, the deceased spouse’s interest can pass to the children under his or her Will. (The property may also pass under the deceased spouse’s living trust if the interest in the property was titled in the name of the trust.) The surviving spouse’s interest remains with the surviving spouse.

The problem with this approach is that the children from a prior marriage are now on title with the surviving step-parent. What if they don’t get along? A quarreling tenant in common can force the sale of property even if the other co-owners don’t want to sell it. This is called a “partition” lawsuit. If successful, the court orders the property to be sold and the proceeds are divided among all the tenants in common.

DISPARATE AGES OF HUSBAND AND WIFE

Sometimes in second marriages, one spouse is much younger than the other. If the elder spouse dies, and has children from a prior marriage, those children are often forced to wait until the death of the step-parent before receiving the benefits of their parent’s estate. This result leads to hurt feelings and even lawsuits by the children who want to receive the benefit from their parent’s estate nearer the date of death.

One solution is to purchase life insurance on the elder spouse with the children of that spouse named as the beneficiaries. This enables the children to receive some benefits upon their parent’s death without reducing the assets available for the care of the surviving spouse. If the children are minors, such interests should be held in trust.

SEPARATE PROPERTY OF A SPOUSE

Couples in their second marriage often have significant assets in their own name from the death or divorce of their former spouse. Title to such assets are held as an unmarried person as his or her separate property. Upon the second marriage, the title may not be changed. If there is no prenuptial or postnuptial agreement controlling such property, the new spouse may have a claim on the property under California community property law.

The issue is further complicated because community property is treated differently depending upon whether the couple divorces, or one spouse dies. For this reason, many couples choose to sign either a prenuptial agreement, which is done before they marry, or a postnuptial agreement which is done after they marry. In both cases, the couples’ separate and community property interests should be addressed and a schedule of which assets belong as the separate property of each spouse and which are community assets should be attached. To be fully effective, the husband and wife should each have an attorney representing their interests.

In addition to setting forth separate property interests, all couples can benefit from a marital property agreement concerning ownership of the couples’ community property. Current California community property law provides that each spouse owns an undivided interest in each and every item of community property owned by the spouses. When one spouse dies, each and every item of community property must be fractionalized in order to properly fund the by-pass and survivor’s trusts.

A marital property agreement which provides that the couple owns their community property under an aggregate theory of ownership, in which each spouse owns an undivided interest in the whole, allows the sub-trusts to be funded by allocating whole assets to one or the other trust rather than fractionalizing each spouse’s interest.

INVESTMENT CONFLICT

The conflict between the interests of the surviving spouse and the deceased spouse’s children from a prior marriage arises on the deceased spouse’s death. Most living trusts state that the surviving spouse is to receive income from the assets held by the by-pass trust. The terms usually provide that children from the prior marriage receive those assets upon the death of the surviving spouse. The problem is that investing for the highest current income is not a proper investment for capital appreciation. This is one reason why I suggest the use of the total return trust for assets held in the by-pass trust.

Using a total return trust enables the surviving spouse to benefit from the capital appreciation of the underlying asset because interest payments are calculated as a percentage return on the value of the underlying asset. As the assets increases in value (good for the children), the surviving spouse receives an increase in income (good for the spouse).

LOSS OF ESTATE TAX SHELTER

Sometimes couples in second marriages only have separate property and no community property. In that case, the husband and wife each have their own living trust which holds their own separate property. Many of those separate trusts state that the property is to be held in a QTIP (qualified terminable interest property) trust for the benefit of the surviving spouse for his or her lifetime, after the deceased spouse dies.

The advantage of holding separate property in a QTIP trust for the spouse is that it will qualify for the unlimited marital deduction currently available under federal tax law, and no estate tax is due on the deceased spouse’s death. The disadvantage of holding separate property in a QTIP trust for the spouse is that all of the property held in the QTIP trust is included in the surviving spouse’s estate. The benefits of the deceased spouse’s applicable exclusion amount, which is normally held in a by-pass trust, is lost because such a trust is not created nor funded under typical separate property trusts. This means that all of the assets which go into the QTIP trust are taxable upon the death of the surviving spouse because they are included in his or her estate. The children from a prior marriage lose part of their benefits to unnecessary estate tax. If this is the way your trust is set up, call your estate planning attorney immediately.

NEED FOR ESTATE PLANNING ATTORNEY

So, how do you provide for a second spouse for his or her lifetime and also provide for children from a prior marriage? Your estate planning attorney can develop the appropriate plan for you.

The post Trouble with Second Marriages appeared first on Sharp Estate Planning .

Incapacity and Your Retirement Plans

Fri, 23 Jun 2000 22:54:00 GMT

During the planning of your estate, you probably signed Health Care Power of Attorney. The power of attorney should be made durable. This means that you want your named agent to make medical decisions for you if you become incapacitated and unable to make such decisions for yourself. Without the word “durable” or reference to a statement that the power of attorney shall not be affected by your subsequent incapacity, this power will lapse precisely when you need it most, when you are unable to act on your own behalf.

INCAPACITY AFFECTS YOUR RETIREMENT PLANS

What happens if you become incapacitated prior to the required beginning date when you must take distributions from your existing retirement plans? Signing a Durable Power of Attorney for Property Management now would enable you to authorize your agent to change your distribution election, change your investment vehicles, and account custodian, and accelerate distributions if you need it. Such authority could also allow your agent to make gifts to save transfer taxes or convert IRAs to Roth IRAs which may also be a tax advantage to you.

Ideally, your beneficiary designation should be prepared by your estate planning attorney rather than by your plan administrator. The advantage of this is that your customized beneficiary designation could cover circumstances not usually provided for by the plan fill- in-the blank forms. Examples include 1) the ability for your surviving spouse to disclaim assets, 2) simultaneous death of you and your spouse, 3) distribution on the death of a beneficiary who survives the plan participant but dies before the account is fully distributed, 4) the ability of the beneficiary to change investments, custodians, or accelerate distributions, 5) the creation of separate accounts or shares after the participant’s death.

If your children are named as beneficiaries, it may be prudent to establish separate accounts for each child, otherwise, your oldest child is treated as the designated beneficiary for purposes of calculating the minimum distribution requirement. If you do this, however, you will also need to evaluate the added administrative burden of maintaining those separate accounts.

Surviving spouses who wish to disclaim some or all of a large IRA for its tax advantages must do so in writing within nine months from the date of the participant’s death.

OTHER PRACTICAL RECOMMENDATIONS FOR YOUR IRAS

Custom beneficiary designations should be sent return receipt requested to the IRA custodian or trustee. Be prepared to meet with some resistance from the IRA custodian regarding the acceptance of custom designations as most prefer you to use their familiar form. It may be necessary to have your estate planning attorney review the underlying IRA account agreement, in addition to preparing the customized beneficiary designation, to assist you in the implementation of your designations.

An IRA beneficiary who is not the surviving spouse must be able to identify the source of each IRA held. The IRA custodian, should designate the account as “John Q. Public, beneficiary of the Jane Doe IRA”. This is important because the rules are different depending on the relationship of the beneficiary to the IRA owner. IRAs established by a non-spouse beneficiary must be kept separate from one established by that person as his or her own IRA.

Don’t overlook the benefits of recalculating the distributions on your life or your spouse=s life. This should be done before the required beginning date.

If the QTIP trust, bypass trust, or child’s trust is to be the beneficiary of a retirement plan, you should designate the actual sub-trust rather than the revocable living trust or the testamentary instrument. Failure to do this may mean that retirement assets would be available to pay the decedent’s expenses and taxes, resulting in the estate being the beneficiary. This also means that there would be no life expectancy recognized for minimum distribution purposes.

Be sure your estate planning attorney addresses community property issues with respect to your IRAs and other qualified retirement plans. This is especially important if you are in a second marriage and you and your spouse have children from prior marriages. You may also wish to discuss the use of an aggregate theory approach to community property.

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Food for Thought on Your Retirement

Fri, 18 Apr 1997 23:19:00 GMT

The Internal Revenue Service (IRS) has adopted rules which allow each of us to set aside part of our wages in tax deferred accounts for our retirement. Once we start withdrawing from the retirement accounts, we will pay income tax on the amount withdrawn. We may also be charge “extra” taxes depending on how much in the account is distributed and under what circumstances.

The most important thing to remember when including your retirement plans in your estate planning calculations is that the tax rules are such that when you die you will lose virtually all of your retirement assets to Uncle Sam. On your death, your plan assets will be subject to income tax, excise tax, and perhaps, estate tax, which can use up 70% of your plan assets or more. You can see the importance of coordinating your retirement and estate plans!

WHEN SHOULD YOU TAKE DISTRIBUTIONS FROM YOUR RETIREMENT PLANS?

As you may know, once you reach age 59 1/2, you are eligible to receive distributions from your retirement plan. You may withdraw money from your plan or leave it there until you reach 70 1/2 when you must take money out of the plan. The age at which you are required to take distributions is called the required beginning date. The amount which are you required to take out of the plan is called required minimum distribution.

Your financial advisor or accountant will be able to help you figure out how much you are required to take.

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