Funding a trust

Posted on May 17, 2011 | Leave a comment

I am frequently asked what assets should not be funded into a Trust. The first asset that I list is retirement accounts.

First, let’s distinguish between the owner of a retirement account such as an IRA or 401k and its pay on death beneficiary. For example, if you were to change the ownership of an IRA to the name of the Trustees in their capacity as Trustees of the Trust, the IRS would consider this retirement account to be “terminated” and would tax the entire contents of the IRA in the year of termination. On the other hand, you CAN and in many circumstances SHOULD make the Trust the primary or contingent pay on death beneficiary in order to assure the assets will be distributed according to your wishes set forth in the trust, such as holding them in trust for a minor, or managing them for a spendthrift. However, you need to understand the income tax consequences of doing so. This area of the law is extremely complicated primarily because of the discrepancies between the Internal Revenue Code, IRS regulations, and private letter rulings issued by the IRS. I won’t go into detail regarding those discrepancies in this blog.

Here is what you need to know. If you name a Trust as a beneficiary of a retirement plan (IRA, 401k, 403b, etc.), unless the ultimate individual beneficiary can be clearly identified, the IRS will require that the entire retirement account will have to be withdrawn within 5 years and of course subject to ordinary income tax when withdrawn. Alternatively, if the beneficiary designation contains specific language permitting the individual ultimate beneficiary to be identified, the “see through” regulation will permit the beneficiary to treat the account as an “inherited IRA” and allow the beneficiary to withdraw its content using the beneficiary’s life expectancy to calculate the minimum annual withdrawal amount, thus creating far greater flexibility and tax deferral.

A sample of language to use in designating a Trust as a beneficiary would be as follows:  “Betty Jones as to 50% and Jeffrey Jones as to 50% to be further administered pursuant to the provisions of the Parent Jones Living Trust.”

If cash accounts are held outside of the Trust name, the Trustee will have no control over those assets. Thus, I highly recommend the assets be held in the name of the Trust. However, it also underscores the fact that a Trust, by itself, is not a complete estate plan. A complete estate plan should also include among other things, a durable power of attorney for property management which would permit the appointed attorney-in-fact to handle the Trustor’s legal and financial affairs that have nothing to do with the assets held in the Trust, for instance to be able to bring or defend lawsuits, handle income tax audits, etc. The Trustee of the Trust has no authority to do these things. If financial accounts are not held in the name of the Trust, the person holding the power of attorney can access those accounts, even in the event of the incapacity of the Trustor.

And sometimes there are good reasons to have accounts held outside of the Trust. Sometimes (albeit rarely) sufficient funds to pay for funeral expenses should be held outside of the Trust in joint names. For instance, if Mom passes away and all of the checking and savings accounts are held in the Trust, those accounts will remain inaccessible until the successor Trustee can present a death certificate to the bank. It may take ten to fourteen days to get the death certificates. If the family, (impoverished children) don’t have the cash or enough room on their credit cards to bury Mom, the funeral may have to be delayed until death certificates can be obtained giving access to Mom’s accounts and the funds necessary to bury her. So in that instance, it may have been advisable to have accounts held outside of the Trust in joint names to permit quick access.

There are no cookie cutter answers regarding estate planning and funding a trust and an estate planning professional should be consulted to discuss your particular situation and goals.

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Conservatorship Versus Power of Attorney

Posted on May 5, 2011 | Leave a comment

Generally, a durable power of attorney for property management is recognized as a good alternative to a conservatorship and keeps all of the related matters out of the court process. However, sometimes a power of attorney doesn’t work for a variety of reasons. In those circumstances, a conservatorship may be appropriate to replace or act in conjunction with the power of attorney.

For instance, if the person holding a durable power of attorney for property management is found to be misappropriating funds, or isn’t meeting their fiduciary obligations as property agent, then it would be appropriate to bring an action to have a conservator of the estate appointed. That conservator would have the legal ability to revoke or modify the previously granted power of attorney.

Or perhaps a durable power of attorney for medical decisions has been granted to someone who isn’t performing their duties as health care agent due to illness, mental incapacity or death. In that event, bringing an action for the appointment of a conservator of the person would be appropriate. Interestingly, the conservator CANNOT revoke a durable power of attorney for medical decisions, and if push comes to shove, the person holding the durable power of attorney for health care decisions will prevail. It then becomes a question of whether or not the acting health care agent should be removed by court action. This is an area of the law that is usually decided on a fact-specific basis.

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Separate Property and Trusts Versus Prenuptial Agreements

Posted on April 21, 2011 | Leave a comment

I am frequently asked if creating a living trust prior to marriage will protect the assets, specifically a home, in the event of a divorce. The answer is, probably not. The question is much more of a family law question than an estate planning question. First, transferring the home into a trust will not protect it in the event of a divorce. Having married without the benefit of a prenuptial agreement to the contrary, each of the spouses’ incomes will become community property from and after the date of marriage. Using any of that community income (whether held in a separate account or not) to pay the indebtedness on the home, will result in each spouse acquiring a community property interest in the home. You then have what is referred to as a “commingled” asset, part separate property and part community property. Division of commingled assets in a divorce can follow any number of different rules depending upon a variety of factors, including the mood of the judge on a particular day.

To avoid this situation, you need to have a well prepared prenuptial agreement which would include a provision that the home would remain the sole and separate property of one of the spouses, even though community property funds may be used to pay the debt.

(A reminder that this blog applies to California residents and is based on California law).

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Actions by Someone Holding a Fraudulent Power of Attorney

Posted on March 31, 2011 | Leave a comment

I was recently asked what someone should do when they suspect that the co-owner of a parcel of property has obtained a loan using a forged power of attorney. I responded by advising that the first thing to do is answer a number of factual questions, the very first of which is whether or not any such fraudulent activity has actually occurred. If the co-owner has executed any documents pertaining to the “jointly” owned property, such document will be a matter of public record and reflected in the documents recorded with the county recorder’s office. For instance, if a loan encumbering the property was fraudulently obtained, evidence of that loan and the fraud itself will be reflected in the security instrument (normally a “deed of trust”) filed with the county recorder. Having done a search and determined that such a document does exist of record, immediate legal action would need to be undertaken to set aside the transaction. Absent very unusual circumstances, any such fraudulent lending transaction is not enforceable and can be expunged from county property records. The person who achieved the fraudulent loan will then be liable to the lender for the damages the lender has incurred (the proceeds of the loan, costs, damages, and probably attorney fees). And of course any fraud is a criminal act and may be the subject of criminal prosecution.

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Compelling a Conservatorship

Posted on March 19, 2011 | Leave a comment

I am frequently asked the question of how and when do family members draw a line in the sand and decide that their elder can no longer take care of themselves.  This is a very tough legal and emotional question, probably one of the hardest for family members to address. And where the elder is adamantly uncooperative, it becomes even harder.

No one wants to tell their parent or other loved one that they are no longer capable of taking care of themselves. The emotional confrontation can be devastating and may cause riffs in the family which will never heal. And, it needs to be done.

The legal question is an issue of mental capacity. If your loved one is mentally competent, then they have every right to live however they chose. But at the same time, how they chose to live is often a reflection of their mental capacity. If they insist on living in filth and squalor, this is evidence of their lack of mental capacity to properly provide for their own personal needs.

Each state will have its own laws pertaining to the issue of mental capacity. Normally the issue of mental capacity is a judgment call made by a physician whose evidence is presented to a judge. The judge in turn makes a determination of competency. If someone is found to be incompetent and thus incapable of providing for their own personal needs, the judge will appoint someone to assume that responsibility. From state to state, such a person is referred to variously as a conservator or guardian. The conservator or guardian is delegated the duty to provide (not financially) for the care and needs of the elder. If necessary, it can be done with the assistance of police and/or health care workers.

We all hope for the cooperation of the elder. But when they are uncooperative, it may be necessary to bring a court action to appoint a conservator or guardian for the elder to assure they are protected and receiving good care.

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Prolonged Trust Administration

Posted on March 8, 2011 | 1 Comment

I was recently asked what the ramifications are for a trustee unduly prolonging a trust administration. The answer is that the legal ramifications will depend upon the circumstances. There is no set period of time during which the administration of a trust must be completed unless it is set forth in the trust document itself. If an estate tax return is due, it must be filed within 9 months after the date of death unless it is extended by filing an application with the IRS. There are also rules regarding giving notices of the administration to heirs and agencies. But there are not hard and fast rules dictating when the trust administration must be completed. At the same time, the trustee has a fiduciary responsibility to complete the trust administration within a “reasonable” period of time. What is reasonable depends entirely upon what needs to be done and how long it should take to reasonably conclude the work.

In the interim, beneficiaries have a right to receive a copy of the trust document and to receive information about its ongoing administration. [California Probate Code Sections 16061, 16064 and 17200(b)(7)].  If the failure to conclude the administration is sufficiently egregious, the court can be asked to instruct the trustee to get it done, and/or to remove the trustee and replace him/her with someone who will conclude the administration in a timely manner. And in some cases, if the delay has caused financial harm to the estate, the trustee can be held liable for those losses.

Before any action is taken, I suggest that you speak to the trustee to express your concerns before you get attorneys involved.

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Preventing Fraudulent Changes in a Trust Document

Posted on March 2, 2011 | Leave a comment

I was recently asked how to prevent someone from fraudulently changing the terms of a trust by removing pages and inserting changes. The answer is, the wider the distribution of the trust’s contents, the more difficult it is to commit fraud. Distributing multiple copies of the trust instrument will eliminate the possibility of the one and only copy being changed to meet some fraudulent goal. You can also record your living trust with the county recorder’s office. Additionally, make sure that people who have copies of your trust document are updated as to any changes you might make, and give them the name and contact information of the attorney who created your trust so if fraudulent versions do appear, the attorney can be called upon to produce a copy of the original document from the attorney’s records.

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Veteran’s Administration Special Pension Programs

Posted on February 7, 2011 | Leave a comment

I was recently asked an in-depth question regarding a spouse qualifying for VA benefits. I thought this topic would be of interest to those who read my blog.

Summary of question:  My mother recently placed my father in a nursing home due to his dementia, which has proved to be a huge financial burden. However, my mother is not eligible for Veteran’s Aid since she has a sizable IRA account and, therefore does not qualify for aid.  If she converts her IRA account to an annuity, she could qualify for government aid while not being taxed for early withdrawal of her IRA account. My mother has serious reservations about her money being tied up in an annuity and my questions are as follows: “Could we transfer the IRA into something other than an annuity that would not levy a heavy tax burden? If not, then she would go with an annuity only if she were assured that we would qualify for Veterans Aid. Under the eligibility requirements for VA she could only have $80K in savings and her house, but what would her allowable monthly income be? Would paying off her mortgage from the IRA account be tax exempt?”

Answer:  There are three VA “special pension” programs as follows: 1) Low Income, 2) Housebound and 3) Aid and Attendance.  These programs are only available to Veterans who served during a period of war and their surviving spouses.  These are “means based” programs, meaning that in order to qualify, the VA will make a determination of whether or not the applicant has the ability to support themselves.  For administrative convenience, the VA has set a rule that no application will be approved if the applicant has more than $80,000 of assets without VA headquarters approval.  Rarely is such approval granted. 

For doing the asset calculation, the VA does count the value of assets held in a retirement account (unlike Medi-Cal).

So I understand your question to be how your mother can rearrange her assets so she can qualify for the VA benefit.  There are a variety of ways to do this.  First, if the assets in the annuity have no cash surrender value, the assets are ignored.  However, the annuity will have to meet all of the IRS guidelines including being actuarially sound based upon your mother’s age.  Thus, although the principal amount of the annuity would be ignored, the required distributions will be considered in determining her income.

I understand your concern about taking the money out of the IRA and paying the income taxes on it.  However, you may need to get over that.  If paying the income taxes on the distribution and moving the remaining assets to an exempt form is the only way to qualify her for the VA benefit she needs, then maybe the payment of the income taxes are necessary to incur.  It is a decision to be decided based upon the cost incurred versus the benefit to be received.  You make that same decision every time you buy a hamburger or a glass of milk.

As an aside, I want to point out that the VA has no “look back rules” similar like the Medi-Cal system.  So your mother can cash in her IRA, gift it away, and almost immediately thereafter qualify for the VA special pension benefit.  However, you have to be careful with how you do this and to whom such gifts are made.  For instance, a gift of assets to a family member living in the same household will result in the assets being considered as still owned by your mother.  Further, making a gift which doesn’t violate the VA rules will often result in violating the Medi-Cal rules. So if a person qualifies for the VA benefit, but their illness progresses to the point that anything short of skilled nursing home care is inadequate, the gifting they made to qualify for the VA benefit may now prevent them from qualifying for Medi-Cal benefits.

Obviously, you need to speak to an attorney very skilled in both VA benefits planning as well as Medi-Cal benefits planning in order to carefully coordinate any action you take.

For more information on Veteran’s Health and Benefits Administration, read my blog on that topic at:  http://californiaestateplanningattorneyoffice.com/2010/09/17/veteran%e2%80%99s-health-and-benefits-administration/

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Changing Title of Assets into the Trust Name

Posted on January 31, 2011 | Leave a comment

As an estate planning attorney I am often confronted with situations where the person who has created a trust has not done all of their homework.  In short, I’m talking about situations where the trustor has not undertaken the action necessary to transfer registered title of one or more assets into the name of the trust.

As an example, pretend Bill Doe creates a living trust, and notwithstanding instructions given him to do so, he does not change the title ownership of his brokerage account which holds $400,000 of publicly traded securities.  To fulfill this task, he simple needed to contact the brokerage firm and change title on the account from himself to “Bill Doe, Trustee of the Bill Doe Living Trust”.  But he did not do that.  At the time of his death, the account was held in his individual name, not in the name of the trust.

Assets held in the trust name are not the subject of the death probate, but assets not held in the name of the trust may have to be probated in order to transfer legal title to the decedent’s heirs.

But there are ways to avoid the death probate process, even in these circumstances.

The following assets are not required to be probated upon the death of the owner:

  1. Assets held in joint (tenancy) with right of survivorship;
  2. Assets held in community property;
  3. Assets the subject of a contractual disposition, like life insurance and IRA accounts;
  4. Accounts the subject of a pay on death designation, like savings and brokerage accounts; and
  5. There are numerous exceptions for avoiding probate contained in the California Probate Code, starting at Section 13000, the most commonly used of which is an affidavit procedure pursuant to Probate Code §13100.  This section permits the transfer of title of assets without probate based upon the presentation of an affidavit, provided ALL assets which would otherwise be the subject of a probate do not exceed $100,000 in COMBINED value.

But in the example of Bill Doe above, unless he has changed the account owner to be the trust or designated a pay on death beneficiary for his brokerage account, it will have to be probated resulting in substantial delay and $11,000 of statutory attorney fees.

But there may still be another way to avoid probate in this example.  And that is to bring a petition before the Probate Court under Probate Code §850(a)(3)(B) for a determination that the trustee of the trust “. . . has a claim to real or personal property, title to or possession of which is held by another” and request “. . .  an order authorizing and directing the personal representative or other fiduciary, or the person having title to or possession of the property, to execute a conveyance or transfer to the person entitled thereto, or granting other appropriate relief.”[1]  To do so, the court must be “. . . satisfied that a conveyance, transfer, or other order should be made”[2], in other words, that the trust has a valid claim.

Probate Code Section 850 has its beginnings in the case of Estate of Heggstad (1993) 16 Cal.App.4th 943.)  In that case a decedent had executed a living trust and attached to it a list of assets intended to be held in the name of the trust.  The decedent thereafter changed legal title to all of those assets into the name of the trust with the exception of one parcel of real property, title of which was never changed.  Whether or not said real property was subject to disposition pursuant to the trust terms was an issue of more than whether or not the asset would have to be probated.  If it is was the subject of the trust, it would pass to the trust beneficiaries, otherwise, as a probate asset it would have been the subject of the California intestacy laws and would pass in part to the decedent’s surviving spouse.  Without getting into a great deal of detail, the Heggstad court determined that the listing of the real property as a trust asset  which schedule of assets was incorporated into the trust  was a sufficient showing of the decedent’s intent, and confirmed its ownership by the trust.  Shortly thereafter, the Probate Code was amended to provide a statutory method of bringing petitions before the probate court in similar cases, and eventually that amendment ended up in Probate Code §850.

Normally the Probate Courts are very liberal in granting these petitions, especially when there is no opposition.  However, in one recent case, the Probate Judge denied the petition, and in turn, that decision was appealed.

The facts in this recent care are that an elderly trustor created a living trust, and in conjunction with that made a list of assets intended to be held in the trust.  Omitted from that list was reference to securities held in her individual name with a value exceeding $100,000 (and thus not subject to avoiding probate pursuant to Probate Code §13100).  The stock certificate evidencing her ownership to these stocks had been lost, thus impeding her changing title of those to the trust.  She died shortly after creating the trust and before title to the stocks could be changed.

However, at the time she executed her trust, she also executed a general property assignment which stated “I . . . hereby assign, transfer and convey to [the] Trustee of the [the Trust], all of my right, title and interest in all property owned by me, both real and personal and wherever located.”  She also executed a pour over will providing that her entire estate should be distributed to the trustee of her trust.

The Judge of the Probate Court denied the petition to confirm ownership of the stocks by the trust based upon the statute of frauds[3] requiring transfers of assets to be evidenced by a document in writing.  The Court of Appeal reversed the Probate Court ruling, holding that the Civil Code subsection relied upon was only applicable to documents pertaining to loans, and finding that the general assignment form, combined with the intent of the trustor as set forth in her pour over will was sufficient grounds for a finding that the stocks were intended to be held in the trust, and ruled accordingly.

There are several lessons to be learned from this case.  First, it is important to change legal title of your assets to the name of the trust.  Second, if that hasn’t occurred, there may still be other ways to avoid the probate process, albeit more expensive than if you had followed the first rule.  Third, having a complete estate plan, including things like a general assignment form and pour over will are extremely important, because you never know when those might be needed.

[1] Probate Code Section 856.

[2] Probate Code Section 856.

[3] Civil Code Section 1624(a)(7)

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How The New Estate Tax Exclusion Affects Your Estate Plan

Posted on January 5, 2011 | Leave a comment

To read this article, follow the link below to our website Law Firm News section at: http://www.attorneyoffice.com/estate-planning/news.aspx?cid=10798

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