Posts Tagged ‘Alaska’

Dispute Between Special Needs Trustee and Beneficiary’s Family

MARCH 28, 2016 VOLUME 23 NUMBER 12

A recent case from the Alaska Supreme Court addresses special needs trusts. It doesn’t break any legal ground (the decision actually focuses on an entirely procedural issue), but it does give us a chance to talk about common problems arising in the administration of such trusts.

“T.V.”, then twelve years old, was riding his bicycle on an Anchorage residential street when he was struck by a car. He was seriously injured; he spent months in a coma, incurred over a million dollars in medical bills, and is now paralyzed from the chest down.

A lawyer was hired, and a lawsuit filed. Unfortunately, there was not enough insurance coverage to pay for T.V.’s care, and the settlement ultimately reached was not large enough to cover T.V.’s medical costs.

What to do with the too-small settlement? The lawyer asked the Alaska courts for permission to transfer T.V.’s settlement proceeds to a special needs trust, managed by a local Alaska non-profit. As it happened, the attorney sat on the Board of Directors for the non-profit, but he explained that he would avoid any involvement in managing T.V.’s money.

T.V.’s father Jack apparently became unhappy over the trust’s administration. He complained that the non-profit refused to make T.V.’s money available for his needs — though the non-profit insisted that he had never actually requested any trust distributions. Whatever the basis, Jack, representing himself, filed a motion with the court which had approved the original settlement. His motion asked that the court release T.V.’s trust money to him (with interest); he apparently figured that he could make better decisions about the settlement money than the non-profit trustee.

A court officer considered Jack’s request, but noted that the trustee was not actually a party to the original lawsuit, and so recommended that it be denied. Jack appealed to the Alaska Supreme Court, which directed the lower court to enter a final order on Jack’s petition. In response, the trial judge directed a hearing be held so that Jack could explain his concerns.

At the hearing, the non-profit trustee explained that they had never received any written requests for distributions. Jack insisted that he had made verbal requests, which had been ignored or denied. The trustee responded that they require requests to be written, and that they would work with Jack to resolve his concerns.

The trial court ultimately ruled that the trust itself was not a party to the personal injury lawsuit, and that any order directing return of the funds could have unintended consequences (like T.V. losing his eligibility for Medicaid coverage for his medical needs). Jack’s request for return of the trust funds was denied.

The Alaska Supreme Court then took up Jack’s appeal, and agreed with the trial judge. The correct way for Jack to proceed, they ruled, would have been to file an action for court supervision of the trust, and lay out his grievances with the trustee in that proceeding. For the moment, at least, Jack’s objections to the administration of the trust were unavailing. In the  Matter of a Petition for Approval of a Minor Settlement T.V., March 18, 2016.

Though there’s not much of legal substance in T.V.’s father’s challenge to his special needs trust, there is a lot that is of practical interest. Many special needs trusts name professional trustees. Family members often feel that they should be given more autonomy and control in management of those trusts. Professional trustees, however, are required to consider the needs of the trust beneficiary first — not the needs or desires of family members.

The appellate decision in T.V.’s trust case does not indicate how much money is in the trust, but one can reasonably infer that the settlement amount was very modest. In such a case, the challenge to a trustee is to maximize the benefit to the beneficiary (T.V., in this case), while minimizing any effect on Medicaid, Supplemental Security Income or other resources providing assistance or care. The trustee also has to keep administrative costs, accounting requirements and tax considerations in mind. All that must be balanced to make sure the trust’s administration is handled as carefully as possible.

Family members often see those constraints as unnecessarily restrictive. When families (particularly caretaker families) have settled on what they see as a good use of the funds, they often resist any discussion of alternatives, limitations or explanations about why their planned use may need to be modified. Tensions can and do arise, and can be exacerbated by what the family sometimes sees as bureaucratic excuses.

T.V.’s trustee’s requirement that requests be put in writing makes good sense, and is a reasonable limitation on fund use. A willingness to work with family members and sort out the priorities is critical; though the family may see that as the trustee being obstinate, it is important to have a process and to follow it.

What about when family members act as trustee? Sometimes the loss of a professional filter can put the trust at risk, leading to too-rapid diminution of its value and possible unintended effects on Medicaid and other public benefits.

What about just turning T.V.’s money over to Jack, his father, to manage and spend on his own? That likely would result in the temporary — or even semi-permanent — suspension of the very public benefits keeping T.V.’s medical and personal care going (we don’t know enough about his actual benefits profile to be certain of that, but it’s a likely outcome).

It can be a challenge to figure out how best to manage and spend limited personal injury proceeds for a trust beneficiary with considerable medical and social needs. Family members’ wishes are of course important, but should be carefully considered and monitored. A good working relationship is critical.

Joint Tenancy with Right of Survivorship, or Community Property?

MARCH 24, 2014 VOLUME 21 NUMBER 12

Which is better? How should we take title to our house? How about our brokerage account?

These questions are really common in our practice. The answer is actually pretty straightforward, but we do need to lay a little groundwork.

Arizona is a community property state. That means that property held by a husband and/or wife is presumed to belong to them as a community. That presumption does not apply if the property existed before the marriage, or was received by a gift or inheritance. There are special rules for property you owned in a non-community property state before you moved here. It’s also possible for a married couple to enter into an agreement that changes the nature of community property, but those agreements are relatively rare.

Historically, there was one great disadvantage to community property ownership, and one great advantage. That is, there was one advantage and one disadvantage if you assume that the couple would never get divorced. If you have substantial separate property and are considering turning it into jointly-held property, is that advisable? That question is beyond our short essay today, and the answer depends on your comfort level with your spouse and marriage. We’re not particularly accomplished marital counselors, and we don’t have any facts for your personal situation.

But assuming you and your spouse live together more-or-less-happily until  one of you dies, here are the competing considerations to holding property as community property:

Advantage: Income taxes. Upon the death of one spouse, property held as community property takes on a new “basis” for calculating future capital gains. If you have stock that you bought at $1,000 and that you now sell for $10,000 (congratulations!), you have “recognized” $9,000 of gain and will pay income taxes based on that amount. But if you held that property in joint tenancy with your late spouse, it got a step-up in basis to his or her date-of-death value; assuming the stock was worth $10,000 on that day, your income tax is only on $4,500 of the total gain. But if you had held that stock as community property with your late spouse, there would be no capital gains tax on the sale at all.

Disadvantage: Probate. Until 1995, community property could not pass automatically to the surviving spouse. That meant that a probate was often required to transfer the deceased spouse’s community property interest to the surviving spouse. Since no probate was required for property held in joint tenancy (the “right of survivorship” part of joint tenancy means the surviving joint tenant receives the property without having to go through the probate process), most married couples opted for joint tenancy rather than community property.

In 1995, the Arizona legislature made the disadvantage to community property disappear — they created a concept of “community property with right of survivorship.” That means a married couple can have it all: they can get the full stepped-up basis for income tax purposes, but avoid probate, on the first spouse’s death.

Does that mean that all property should be titled as community property with right of survivorship? Almost, but not quite. There are a handful of problems that occasionally crop up and have to be considered:

  • Not every married couple intends to leave everything to one another. You can still get the full stepped-up income tax basis and leave your share of community property to someone else — your children from a prior marriage, perhaps, or another family member. In such a case it might make sense to hold the property as “community property” (with no right of survivorship) but have a will or trust to make provisions for each spouse’s share.
  • The income tax benefit does not always appear. Note that the benefit is not a direct tax savings, but only a potential savings. If you get a full stepped-up basis on property that you then hold until your own death, you haven’t really saved any tax money. But the community property benefit just might give you flexibility — you can decide to sell property after your spouse’s death on the basis of good investment advice, rather than the tax effect.
  • The option only applies (this is obvious, but we need to say it) to married couples. “Community property” is not available to anyone else. Is it available to same-sex married couples? We think so (see our articles on the subject over the last few months here, here and here), but we might turn out to be wrong about this.
  • The benefit may not even be necessary for some assets. No growth in your brokerage account? No benefit. You invest only in municipal bonds and certificates of deposit? Minimal to no benefit. But here’s the big one: most people’s biggest growth asset is their home — and there’s already a substantial ($250,000) exemption from capital gains taxes for a single (widowed) person selling their home.
  • Have you already established a trust as part of your estate plan? You may not need to go through the analysis, since the practical effect of your plan may be the same as the benefit of community property with right of survivorship — or better. Ask your estate planning attorney to review this with you.
  • There are sometimes costs to making the change. For real estate, you will need someone to prepare a deed (you can probably get it right on your own, but it makes sense to hire a professional). In addition, there are modest costs to record the new deed.
  • This only applies to Arizona property. No problem with your brokerage or bank account — they are Arizona property if you live here. Your vacation cottage in Montana, or your Mexican condo held in a land trust, are a different matter. But if your vacation cottage is in Alaska, or California, Idaho, Nevada or Wisconsin, you might be able to do something similar. Ask a local lawyer about the possibility.
  • We need to reiterate: if you have separate property and transfer it to community property with right of survivorship to take advantage of income tax benefits, you may have made a gift of half of your separate property to your spouse. Be careful, and make sure you know what you’re doing.

What’s your bottom line? Should you change everything you own from joint tenancy with right of survivorship to community property with right of survivorship? Maybe, but your home is the least urgent thing to tackle. Your brokerage account? Absolutely. Your summer cottage in another state? Check with your lawyer and ask her (or him) to find out whether the other state has community property with right of survivorship.

Note that none of this really helps you deal with retirement accounts, IRAs, 401(k) accounts, separate property you brought from another state or your complex estate planning intentions. For those, you really need to talk with your lawyer. Also, please be clear: we do not know the correct answer if you live in a state other than Arizona — talk to your local lawyer about that.

 

Arizona Community Property Is Not Always Subject To Probate

OCTOBER 9, 2000 VOLUME 8, NUMBER 15

Arizona is one of nine “community property” states in the country, and that can be the source of some confusion about estate planning, taxes and property ownership rights for married couples. Recent changes in Arizona’s law make the “community property” designation a little more friendly and understandable, and the benefits to this unique property ownership choice are now clearer.

“Community property” concepts were not part of the English common law. Under the system imported to most of the American states, property was owned by one spouse or the other, though the non-owner might acquire some rights in his or her spouse’s property. The French and Spanish, however, understood the marital community to be a separate entity from either spouse individually, and permitted the “community” to own property. Each spouse then holds an equal interest in the community’s property.

Those American states with rich Spanish or French histories tended to adopt some version of the community property concept. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are community property states, although the method of implementing the concept varies somewhat. Alaska also permits some trust assets to be held as community property.

In community property states a married couple is presumed to hold assets as community property regardless of the actual title on the asset. Couples may, however, choose to hold their property in joint tenancy or as tenants in common if they wish.

One important advantage to having assets titled as community property comes, oddly enough, from federal tax law. Although capital gains taxes are ordinarily due any time an appreciated asset is sold, the increased value of property held by a decedent at the time of death is not taxed. The property’s income tax “basis” is said to “step up” to its value on the date of the owner’s death, often resulting in substantial income tax savings for heirs.

Jointly owned property only receives a partial “step up” in basis. Property held in joint tenancy will usually only get half the income tax benefit on the death of one joint owner. Community property, however, is treated differently: the entire value of a community property asset gets “stepped up” to the value on the first spouse’s death, resulting in twice the income tax savings.

The main drawback to holding community property in Arizona has long been the requirement of a probate proceeding to pass the property to the surviving spouse. Although the long-term tax savings can be substantial, the probate costs are immediate and, in most people’s minds, too high. Since 1995 Arizona has permitted married couples the best of both worlds: property can be held as “community property with right of survivorship” and secure the favorable income tax treatment while still avoiding the probate process. The value of this type of property ownership is, of course, restricted to married couples.

One caveat: some commentators, relying on fairly arcane interpretations of the federal tax law, argue that the “community property with right of survivorship” designation could conceivably be found to result in no step up in tax basis at all. So far the federal government has not taken such a position, but there remains some slight possibility of a problem. In addition, the effect of titling separate property as community property (with or without the “right of survivorship” language) has more than just tax effects. In other words, you should consult an Arizona attorney before changing title on your existing assets or deciding how to title a new acquisition.

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