Posts Tagged ‘irrevocable trusts’

Your Trust and Ownership of Real Property

MARCH 7, 2016 VOLUME 23 NUMBER 9

We occasionally get questions from our clients involving ownership of real estate — usually around the creation, funding or administration of a living trust. These questions are particularly common, and since we got them (from different clients) in the last two weeks, it seemed like a good time to review them.

I can’t find my original house deed. What do I need to do?

Nothing. At least in Arizona, there is no need to keep your original deed, once it has been filed with the appropriate County Recorder’s office.

Arizona real estate transactions (like most, but not all, states) rely heavily on title insurers issuing policies covering title to the property. That means that a non-governmental entity — the title insurance company — reviews the records regarding your property and decides whether they will issue an insurance policy. If they will, then that means they have determined that your ownership is clear enough for them to go forward. They will not need to see the original deed (or your mortgage, or anything else) so long as it has been recorded.

Is it OK to simply throw your original deed away? Probably — but of course lawyers hate to encourage people to destroy paper (and especially original documents). We recommend that you keep the original document — the deed from when you bought the property, the refinancing documents when you negotiated that lower loan rate, and the deed we prepared transferring the property to your trust — in the binder with your trust documents. But if you misplace the title documents, don’t worry one bit.

You can always get a new, certified copy of the deed(s) from the Recorder’s office — but we don’t even recommend that you take that step. It’s not that it hurts anything, but the certified copies are expensive and unnecessary.

Having a hard time remembering whether you ever signed a deed transferring the property to your trust? If we prepared your trust, we almost certainly got you to sign a deed at the same time. But it’s pretty easy to check — just look at your annual tax statement (ours arrived this week, so this might be a good time for you to look). Does your property get listed as belonging to you as trustee? If so, that’s a pretty good indication that it was transferred to the trust.

What if your property is not in Arizona? We aren’t sure, as there is some state-to-state variation.

But while it isn’t important to have the original deed in your possession, it is important to make sure that the property is titled properly. If you have created a living trust, you probably want title to the real estate transferred into the trust’s name.

Do I really have to transfer all my property to the living trust?

Yes. For most people, the primary purpose of creating a trust is to avoid the cost and administrative burden of going through a probate proceeding. That only works if property belongs not to you as an individual but to the trust.

It is possible, by the way, to have many kinds of property held in your individual name but with a “pay on death” or beneficiary designation causing it to be retitled to the trust upon your death. Talk with your lawyer about this concept if you are unsure or unclear.

If I transfer my property to my trust, will it affect the mortgage?

The short answer: no. But of course the answer can be much more complicated.

There are at least two things real property owners might worry about when transferring property to a trust: (1) will the mortgage need to be repaid immediately? and (2) if the bank ultimately forecloses on the property, is it easier for the bank to pursue any losses after establishment of a trust?

If you have a mortgage on your home, and you sell it (or even give it away), the bank will probably have the power to insist that its mortgage be paid off immediately. That is sometimes called a “due on sale” provision, and most (but not all) real estate loans include such a clause. But federal law (the Garn-St. Germain Depositary Institutions Act, if you’re looking for the actual law) says a due on sale provision can not be enforced when you transfer your property to a revocable living trust.

The bank’s ability to pursue a judgment for the uncollected value of their loan after sale of your house is a more complicated problem to analyze — and it varies more by state. If, say, you have a mortgage of $200,000 on your home but it is only worth $150,000, you can see that if the bank does foreclose they will not recover the full amount due.

If the bank does sue you for the balance due, they are said to be pursuing a “deficiency judgment.” Can they do that?

Of course, it depends. But in Arizona, at least, they usually can not — provided that the property is a single-family residence or duplex, and the loan was used to purchase the home in the first place. But here’s the most important piece: that answer does not change at all just because the property was transferred into your living trust.

Like any good lawyers, we can make these answers much more complicated. We could point out that in Arizona there are few “mortgages” — real estate secures notes with a “deed of trust” approach rather than a mortgage. We could wax eloquent about “purchase money mortgages”, and the difference between judicial foreclosure, non-judicial foreclosure, short sales and deeds in lieu of foreclosure. But the important message is this: creating a trust, and transferring your property into the trust’s name, will not usually have any effect on your mortgage and will not expose you to a higher likelihood of suffering a deficiency judgment.

As always, we hope this helps you to understand your legal status.

Exercise of a Power of Appointment Should Follow the Document

JUNE 29, 2015 VOLUME 22 NUMBER 24

Clients are often unfamiliar with the concept of a “power of appointment.” If they don’t know what it is, they can be excused for not knowing whether they have one, or how to use it.

Suppose Thomas leaves $10,000 to charities in his trust, but gives his brother Richard the authority to choose which charities. What Richard has is a power of appointment. Because Thomas says that only charities qualify, Richard’s power of appointment is said to be “limited” — in this case, limited to charitable organizations.

Now suppose that another portion of Thomas’s trust says that his other brother (you knew he would be named, Harold, didn’t you?) can decide how to distribute $10,000. Harold’s power of appointment could go to anyone — including to Harold himself. It is a “general” power of appointment.

As you can imagine, it would be good for Thomas to spell out what Richard and Harold have to say, or sign, in order to let the trustee know whom they have selected to receive their respective gifts. Since Thomas had his trust prepared by a capable lawyer (with a sense of whimsy), it says that “the power specified herein may be exercised by Richard delivering a signed, notarized document on blue paper to the trustee on a Wednesday before noon, Mountain Standard time.” Harold’s power of appointment is identical, except that it specifies green paper and afternoon delivery.

Can Thomas impose those (silly) requirements on the proper exercise of the powers of appointment he is giving to his two brothers? Of course he can — nothing in the law of trusts requires sober, businesslike language. The signer of a trust has considerable leeway to impose pretty much any technical requirements he (or she — or they) wish.

That’s the principle involved in a recent Arizona appellate decision. It involves a trust established by a husband and wife, and a power of appointment given to whichever spouse survived the other.

William and Mary Quick signed a joint, revocable trust in 1985. As is often the case, the trust was for their own benefit so long as both lived, and continued to be for the benefit of the survivor upon the death of the first spouse. One unusual provision was included in the trust, though: upon the death of the first spouse, the entire trust would become irrevocable, assuring that the couple’s two sons would receive everything upon the second spouse’s death.

The opinion does not explain whether William and Mary’s two sons were to receive equal shares under the trust’s default terms, but let us assume that they were. One thing the trust did provide, though, was that the surviving spouse would have a limited power of appointment, and could change the shares of the two sons after the first spouse’s death. The only requirement for exercise of the limited power of appointment was that it had to be done by a will, and that the will had to make specific reference to the power of appointment.

Mary died in 2003. A year later, William apparently decided that he wanted to change his sons’ shares of the trust. How did he do that? He signed a new trust document — a “restatement” of the trust — which altered the distribution shares upon his death. William lived for several years after the trust restatement was signed, but no further changes were made before his death, and he did not refer to his power of appointment in his will.

William was the sole trustee of the trust after Mary’s death. Assuming all assets were community property (which we don’t actually know to be true), half of the trust’s assets came from “his” share of the community. We can also reasonably assume that the trust permitted him, as trustee, to dip into the trust’s principal and distribute it to himself, at least in some circumstances. So was his failure to refer to the power of appointment in his will a problem?

One of the couple’s sons thought so, and a legal dispute was inevitable. Both brothers joined in asking the probate court for instructions: was William’s apparent exercise of his power of appointment valid? Should the trustee make distributions between them based on William and Mary’s original scheme, or rely on William’s restated trust document from after Mary’s death?

The probate court decided that what William had done was ineffective. Since the original trust became irrevocable on Mary’s death, and it required William to make any changes in his will, that was what was required. The original division between the two sons would be upheld.

The Arizona Court of Appeals agreed. It was not good enough that William almost did it right. Nor was it sufficient that William had the authority, and his wishes were clear. The trust required that the limited power of appointment must be exercised in William’s will, and that the will specifically refer to the power itself. William’s will did not exercise the power of appointment, or even refer to the original trust (or, for that matter, the restated version). Quisling v. Quisling, June 16, 2015.

Assuming, for the sake of education, that William really did mean to change the distribution shares of his two sons, what should he have done? The easy answer is that he should have followed the trust’s instructions: he could make the change by simply referring to the trust in his will, and no change needed to be made in the trust document itself.

Under Arizona law, though, that probably was not his only choice. William might have been able to “decant” the irrevocable trust into a new trust. He might have been able to withdraw some, most or even all of the trust’s principal and put it into his own name (and, subsequently, a new trust). He might have been able to avoid disputes by entering into an agreement with his two sons about how to handle the trust for the rest of his life and even after his death. But by simply restating the trust, without more, he failed to accomplish his goals. The lesson: exercise of a power of appointment must follow any instructions given with the power itself.

Definitions For Common Estate Planning Terms

FEBRUARY 3, 2014 VOLUME 21 NUMBER 5

Judging from the questions we field online and from clients, there is a lot of confusion about some of the basic terms commonly used in estate planning. We thought maybe we could do a service (and make our own explanations a little easier) by collecting some of the more-common ones — and defining them. Feel free to suggest additional terms or quibble with our definitions:

Will — this is the starting point for estate planning. It is the document by which you declare who will receive your property, and who will be in charge of handling your estate. Note, though, that if you have a “living trust” (see below), your will may actually be the least important document in your estate planning bundle.

Personal representative — this is the person you put in charge of probating your estate. It is an umbrella of a name, encompassing what we used to call executors, executrixes, administrators, administratrixes and other, less-common, terms. If you use one of the old-fashioned terms in your will, that probably won’t be a problem — we’ll just call them your “personal representative” when the time comes. Note that your personal representative has absolutely no authority until you have died and your will has been admitted to probate.

Devisee — that’s what we call each of the people (or organizations) your will names as receiving something.

Heir — if you didn’t have a will, your relatives would take your property in a specified order (see “intestate succession” below). The people who would get something if you hadn’t signed a will are your “heirs.” Note that some people can be both heirs and devisees.

Intestate succession — every state has a rule of intestate succession, and they are mostly pretty similar. The list of relatives is your legislature’s best guess of who most people would want to leave their estates to. Think of it as a sort of a default will — in Arizona, for instance, the principles of intestate succession are set out in Arizona Revised Statutes Title 14, Chapter 2, Article 1, beginning with section 14-2101 (keep clicking on “next document” to scroll through the relevant statutes).

Escheat — that’s the term lawyers use to describe the situation where you leave no close relatives, or all the people named in your will have died before you. Escheat is very, very rare, incidentally. Note that the Arizona statute eschews “escheat” in favor of “unclaimed estate.” There is a different, but related, concept in the statutes, too: if an heir or devisee exists but can’t be found, the property they would receive can be distributed to the state to be held until someone steps forward to claim their share. That is not an unclaimed estate, but an unclaimed asset.

Pourover will — when you create a living trust (see below), you usually mean to avoid having your estate go through probate at all. If everything works just right your will won’t ever be filed, and no probate proceeding will be necessary. Just in case, though, we will probably have you sign a will that leaves everything to your trust — we hope not to use it, but if we have to then the will directs that all of your assets be poured into the trust.

Trust — a trust is a separate entity, governed by its own rules and providing (usually) for who will receive assets or income upon the happening of specified events. Think of a trust as a sort of corporation (though of course it is not, and it is not subject to all of the rules governing corporations). It owns property and has an operating agreement — the trust document itself. There are a lot of different types of trusts, and usually the names are just shorthand ways of describing some of the trust’s characteristics.

Testamentary trust — the first kind of trust, and the oldest, is a trust created in a will. Of course, a testamentary trust will not exist until your estate has been probated, so it is of no use in any attempt to avoid probate. But  you can put a trust provision in your will so that any property going to particular beneficiaries will be managed according to rules you spell out. Testamentary trusts are relatively rare these days, but they still have a place in some estate plans.

Living trust — pretty much any trust that is not a testamentary trust can be called a living trust. The term really just means that the trust exists during the life of the person establishing the trust. If you sign a trust declaration or agreement, and you transfer no assets (or nominal assets) to it but provide that it will receive an insurance payout, or a share of your probate estate, it is still a living trust — it is just an unfunded living trust until assets arrive.

Trustee — this is the person who is in charge of a trust. Usually we say “trustee” for the person who is in charge now, and “successor trustee” for the person who will take over when some event (typically the death, resignation or incapacity of the current trustee) occurs. There can, of course, be co-trustees — multiple trustees with shared authority. Sometimes co-trustee are permitted to act independently, and sometimes they must all act together (or a majority of them must agree). The trust document should spell out which approach will apply, and how everyone will know that the successor trustee or trustees have taken over.

Grantor trust — this is a term mostly used in connection with the federal income tax code, but sometimes used more widely. In tax law, it means that the trust will be ignored for income tax purposes, and the grantor (or grantors) will be treated as owning the assets directly. Most living trusts funded during the life of the person signing the trust will be grantor trusts — but not all of them. Outside of tax settings the term “grantor trust” is often used more loosely, and it can sometimes mean any living trust whose grantor is still alive.

Revocable trust — means exactly what it sounds like. Someone (usually, but not always, the person who established the trust) has the power to revoke the trust. Sometimes that includes the power to designate where trust assets will go, but usually the trust just provides that upon revocation the assets go back to the person who contributed them to the trust.

Irrevocable trust — a trust that is not a revocable trust. Oddly, though, a trust can have “revocable” in its name and be irrevocable — if, for example, Dave and Sally Jones create the “Jones Family Revocable Trust,” it probably becomes irrevocable after Dave and Sally die. Its name doesn’t change, however.

Special needs trust — any trust with provisions for dealing with the actual or potential disability of a beneficiary can be said to be a special needs trust. Usually, but not always, a special needs trust is designed to provide benefits for someone who is on Supplemental Security Income (SSI), Social Security Disability (SSD) or other government programs. Sometimes the money comes from the beneficiary, and sometimes from family members or others wanting to provide for the beneficiary.

There’s more. A lot more, actually. Has this been helpful? Let us know and we’ll add to it in coming weeks. In the meantime, a reminder: ask your estate planning lawyer for help with these concepts. Don’t be embarrassed that they seem complicated — they are complicated.

Determining Which Court Has Jurisdiction Over Your Trust

JANUARY 13, 2014 VOLUME 21 NUMBER 2

In the past four or five decades there has been a tremendous growth in the use of trusts (usually, but not always, revocable living trusts) for estate planning purposes. Once very rare, they are now very popular. Perhaps as many as half of our estate planning clients choose to create a trust, and to transfer most or all of their assets into the trust’s name. Of course, one of the primary reasons to create a trust is usually to avoid probate court, or (in fact) any court involvement in handling your estate.

In about the same time frame, Americans have become very mobile. In the 1950s and 1960s, it was common — and usually expected — that most people would live, work and die in the same community where they were born. Today it seems rare not to have moved once, twice or even more times, both before and after retirement. In fact, U.S. Census Bureau figures suggest that the average American will move about a dozen times during her lifetime; at age 45, that average drops significantly, but still indicates about three more moves.

What do these two trends have to do with one another? Any lawyer can tell you: it’s often hard to figure out what court will have jurisdiction over trust disputes.

Wait — wasn’t the primary reason to establish a living trust based on a desire to avoid court? Yes, but things happen. Disgruntled family members do sometimes challenge trusts (though probably less often than they challenge wills). Trustees do steal funds, or mismanage them. Beneficiaries sometimes do believe that the trustee has misbehaved, even when she hasn’t. Trusts end up in court.

But which court? And what state’s laws apply to interpreting a trust when there is a dispute?

Here’s a general rule: a trust’s “situs” is usually where the trustee lives, not where the trust was written, or where the beneficiary lives, or even where the trust says it will be interpreted. “Situs” is not precisely the same as jurisdiction, but you can think of it as where the trust “lives.” And that, generally, is where the courts have jurisdiction over the trust and its trustee.

Let’s take a typical case to explain this legal principle. Allen and Melinda, a married couple, live in Alaska. They create a revocable living trust, naming themselves as trustee. The trust says that Alaska law applies. Upon the death of either Allen or Melinda, the surviving spouse remains as trustee. The trust is fully revocable by both of them, or by the survivor upon the death of either. So far, so good: Alaska courts are probably the only ones with jurisdiction — and even Alaska courts probably can’t do much with the trust while Allen or Melinda lives, since the trust is fully revocable.

Upon the death of both Allen and Melinda, though, the trust changes. By its terms, it becomes irrevocable — and their son Dave takes over as successor trustee. Dave lives in Arizona. A share of the trust continues, with Dave as trustee, for the benefit of Deborah and Diane, two of their other children. Deborah lives in Alaska, and Diane lives in Delaware (of course). If Diane thinks Dave is mishandling the trust, where does she hire a lawyer, and where will that lawyer end up filing a lawsuit? Delaware, where she lives? That doesn’t seem right.

But wait — maybe it will be Deborah (the one who stayed in Alaska) who consults a lawyer. It might make more sense for her to initiate any lawsuit in Alaska, since that’s where their parents lived, the trust was written and at least one beneficiary lives. Plus the trust says Alaska law applies.

Those are essentially the facts of a recent Arizona Court of Appeals case (though the names of everyone in the family, and most of the states involved, have been changed). Before we tell you the answer, we’ll pause for a moment for you to decide whether Arizona has jurisdiction over Allen and Melinda’s trust.

You’ve made up your mind? Okay, but hold on to that thought. We’ve misled you, ever so slightly. While Deborah and Diane are unhappy with Dave’s management of the trust, neither of them has filed a lawsuit at all. It’s actually Dave who has filed something with the court — he has filed a request that the Arizona court look over his administration of the trust, and bless the actions he has taken. If it works, it would prevent Deborah and Diane from challenging him later. Dave has done this relying on a provision of Arizona law permitting trustees to affirmatively seek court review of their administration of the trust.

The probate court where Dave filed his trust accounting action dismissed the petition, deciding that Dave should return to the state where the trust was written and Deborah lives. The Arizona Court of Appeals disagreed, ordering the probate court to go ahead and review Dave’s accounting. Arizona courts have jurisdiction, said the appellate judges, because Dave lives in Arizona and the trust is actually administered in Arizona Matter of the Lavery Living Trust, December 10, 2013.

There are still unanswered questions here. If Deborah had filed something in Alaska before Dave filed in Arizona, could the Alaska courts have made Dave go there to defend his actions? It’s not clear from the facts laid out in the opinion, but perhaps. Could Diane have made Dave defend himself in Delaware? Probably not, though that wasn’t an issue being decided in the Arizona court proceeding. In the Arizona court proceeding, whose law will apply? It’s not completely certain, but probably Arizona law will govern trust administration questions and Alaska law will govern any interpretations to be applied to the trust’s terms.

Trust jurisdiction and where to have a trustee’s actions reviewed is a somewhat unsettled area of the law. It is also very dependent on the facts of an individual case. Want to challenge a trustee, or are you a trustee seeking approval of your actions? Talk to your lawyer about situs, jurisdiction, governing law and the difference between those concepts.

Powers of Appointment and Trust Reformation

JULY 1, 2013 VOLUME 20 NUMBER 24
Sometimes things just don’t work out the way you intend. That is hardly a novel observation, but it can have a big effect on the work you hire a lawyer to do for you.

Let’s try an example. Suppose that you want to give some money to your grandchildren. You have four grandchildren, aged 10 through 17. You are planning on setting aside some money for education and to get them a start in life. You have done well in life, and are ready to put money aside right now.

Though your grandchildren are uncommonly smart (aren’t all our grandchildren above average?), they are pretty young. You agree with your lawyer that their money should be put in trust. You want to get the gifts completely out of your estate, however, so you decide to create irrevocable trusts — one for each grandchild. You ask your lawyer to draft the trusts, and you and your spouse intend to put $28,000 per year into each trust, at least as long as you are able to afford making the gifts.

The trusts are drafted; they name each grandchild’s parent (your daughter as to two of the grandchildren, your son as to the other two) as trustee. The documents are pretty much identical, and each is about twenty pages long. You have read them, but they are pretty hard to follow — though your lawyer has given you good advice about what they say. Did we mention that your lawyer is your son-in-law, the father of two of your grandchildren? He is very smart, and you know that he has thought through the provisions of the trust. You and your spouse sign, and you write the first of several annual checks to the respective trusts.

Four years go by. You by now have made $100,000 gifts to each of the grandchildren’s trusts. That is when you learn that your daughter and son-in-law are getting divorced. It’s unfortunate, but you are glad that you had the foresight to name your daughter as sole trustee rather than making her husband a co-trustee for their grandchildren.

Five years later, you have been making regular contributions to the trusts and they have grown significantly. Your grandchildren got scholarships for college and stayed close to home, so most of the money is still sitting there. Your family situation has gotten a little more complicated, though: your former son-in-law has remarried and had two more kids, and he  (and they) is pretty much out of your daughter’s life. Your son has also gotten divorced, but neither he nor his ex-wife has remarried.

Before the next installment, we feel constrained to remind you that this is your imaginary life. Your oldest grandson, now age 27, married, and making his way in the world, dies in a terrible auto accident. His trust had grown to over $200,000; what is to become of that money?

Look at the trust document. It says that your grandson had something called a “power of appointment.” That means he could have written a will designating who would receive the trust’s assets, but of course he did not make any will at all. What happens if he dies without a will? The trust says his money goes to his children, if he has any (he did not). It says nothing about his wife. The remaining money, it turns out, goes to his siblings.

But that means that two-thirds of the money you gave to your grandson would go to your former son-in-law’s children by his second wife. Surely that can not be what you intended. It hardly even seems likely that your former son-in-law had any such idea in mind when he wrote the trusts a decade ago. Is there any way to prevent the money from going to these children you don’t even know, and are not related to?

That story is a slimmed-down and somewhat sanitized version of a recent North Dakota Supreme Court case. It gives us a chance to write about not only the job of being a lawyer, but also the concept of court reformation of trusts.

One of the odd things about being a lawyer is the need to think through the many various ways that bad things could happen to our clients, whom we usually like very much. That’s also the reason legal language often seems so stilted and awkward; we are trying to clearly convey meaning in an uncertain future world. One convenient way to provide for future changes is to give trust beneficiaries (in appropriate cases, of course) the power to designate to whom trust monies will be given upon their own death. That power to appoint the trust to another person is a “power of appointment.” It can be general, or it can be limited (as in a power to appoint only to the beneficiary’s spouse, issue, parents or siblings, or only to charitable organizations, or only to beneficiaries named Dave, or whatever).

Effective use of a power of appointment, of course, requires the holder of the power to do something. That also explains why, when you make an appointment to talk about estate planning with a lawyer, she wants to know if you are a beneficiary of any other trusts, and to see the trust document(s); she is looking for powers of appointment that need to be exercised.

But back to our scenario: is it possible to convince a judge that you never intended family money to go to non-relatives? That you simply could not have imagined the sequence of events that played out back when you first signed those trust documents? Yes, as it turns out. Though the probate judge in the North Dakota case refused to allow reformation of the trust, the state Supreme Court reversed that holding and authorized a change to name only the deceased grandson’s siblings who were also descendants of the original trust creators. In Re Matthew Larson Trust Agreement, May 28, 2013.

Wise legal commentator Yogi Berra is often quoted for the legal maxim that describes how complicated a lawyer’s imagination must be. Turns out it wasn’t him, but probably was physicist Niels Bohr, who said “prediction is very difficult, especially about the future.” Bohr certainly was the source for this appropriate observation about the art of physics and lawyering: “an expert is a person who has found out by his own painful experience all the mistakes that one can make in a very narrow field.”

EINs for Trusts: The Questions Just Keep Pouring In

APRIL 16, 2012 VOLUME 19 NUMBER 15
Tax ID numbers for trusts. When we first wrote about this topic, we did not appreciate how interested our readers would be. We thought that the issue was sort of dry, actually, and that most people would have asked their lawyer or their accountant for direction. It has become one of the most enduringly popular topics at the Fleming & Curti, PLC, website.

Imagine our surprise. The questions just keep coming. We can’t and don’t try to answer them all individually — we are not here to give free legal advice based on incomplete information, and most of the questions leave out at least some of the detail we would need. But we do find your questions instructive for purposes of figuring out the level of interest — and confusion — out there.

Here are a few of the questions we have gotten (edited for space, or to focus the question on the area we want to answer). Please, please, please remember that we are not trying to give specific legal advice here — we only want to help you focus your questions for when you talk with your own lawyer, or when you find yourself arguing with the well-meaning but misinformed support person at a major mutual fund company.

My parents set up a living trust as joint trustees and used my fathers SSN Dad died, Mom survives but is incapacitated, I am the successor trustee. Do I need to get a new TIN?

The key to determining when a trust needs its own EIN (employer identification number — the correct term for a taxpayer identification number for a non-human entity) is whether or not the trust is a “grantor” trust. While your parents were both living the trust was probably revocable and for their joint benefit; it almost certainly could use one or the other parent’s Social Security Number as its TIN. With the death of your father, the question now is whether the trust (a) is still revocable and (b) contains money that was originally your mother’s.

For purposes of determining the trust’s revocability, we can ignore the fact that your mother may not be mentally able to revoke the trust. The test is whether she would have the legal authority to do so, were she competent to attempt it.

More importantly, if the trust consisted of your father’s property (and not joint or community property), then it may not be a grantor trust any longer. In that case it may need its own EIN.

Whether or not it needs to have its own EIN, it is permissible for you to get one. This is true because your mother is no longer the trustee. Many banks and brokerage houses think that the fact that she is not trustee makes a separate EIN mandatory; they are wrong. But there is no harm in getting one, and it might make it easier to deal with the financial industry. What the tax returns would look like in such a case is a separate question — one you probably ought to pose to the accountant who prepares the trust’s and your mother’s tax returns.

What name do you give the “new” trust created after the death of a spouse?

The most common scenario is this: husband and wife have either a joint revocable trust or reciprocal trusts. In either case, upon the death of the first spouse a separate trust is created for the benefit of the surviving spouse. This trust is irrevocable and contains assets that belonged originally to the now-deceased spouse. As we have described before, this new trust (it might be more accurate to call it a modification of the old trust, which is now irrevocable) needs its own EIN. But what is it called?

The trust document itself might give the answer. Mr. and Mrs. Jones’ trust might say something like “the share described herein shall be set aside into the Jones Family Trust Marital Sub-Trust” or “the Jones Family Decedent’s Trust.” If the document names the new (or sub-) trust, use that name. If not, we usually use language that makes clear — and helps us remember — what kind of trust it is. Perhaps “the Jones Family Trust — Decedent’s Share” is clear enough.

There is no particular magic to the language. Clarity is the key. There are no trust policemen waiting to arrest you for getting the name wrong, and sometimes it is easier to let the broker or banker win these arguments — even when they are wrong. But if you are trustee it IS important that you keep track of which funds belong to which sub-trust if there is more than one, and that you not commingle the money between trusts or, worse yet, with your own money.

I have my own revocable living trust, and I know it does not need a new EIN — it uses my Social Security Number. But I’m getting claim forms from the annuity company after my mother’s death, and they want me to have a trust EIN. The form lists the EIN in the xx-xxxxxxx format rather than xxx-xx-xxxx. Can I just put my Social Security Number in that odd format?

Yes, that is what we would do. It likely will work — not so much because there is a clearly right answer, but because there is no easy way for the annuity company to double-check. Their form is wrong to assume that all trusts have an EIN, and you are not even permitted to get an EIN for your revocable trust when you are the trustee and the original owner of all its assets. We encourage you to put your Social Security Number in the xx-xxxxxxx format and see if it works. We have done that before and it has.

I have a trust within my Will naming my son as beneficiary and directing my niece, the trustee, as to when to make distributions. Does she need a EIN?

She certainly will when you die. Until then, the trust doesn’t really exist, so there’s nothing to apply for now.

This suggests a question not really asked: what happens when you die with a will creating a trust? The first part of the answer: we will need to probate your estate. If your intention was to avoid probate by creating a trust, putting it in your will does not accomplish that. We see much confusion about this point among our clients and audiences when we give public presentations. Sometimes they then say something like: “ah, but we took care of that problem — we named our son as POD beneficiary” (or, sometimes, as joint tenant with right of survivorship). Great — no probate. Also — no trust. If you want your son’s money to pass in trust AND to avoid probate, you will need to talk about creating a living trust, not a testamentary trust. But that’s a lecture for another day.

Those were fun questions, but we’re out of time and space for this week’s newsletter installment. But keep sending them in — your questions help us decide where to focus our future articles. Please remember, however, that we are not here to give specific legal advice — we look for questions that raise larger questions that help us explain legal concepts for a lay audience. We hope we have helped you understand exactly why you need a lawyer for your more specific legal question.

Challenge to Three-Year-Old Trust Reformation is Dismissed

JANUARY 9, 2012 VOLUME 19 NUMBER 2
With the increased emphasis on (and use of) living trusts for estate planning, we lawyers are seeing more and more cases in which an old trust needs modification. Perhaps the tax laws have changed since a parent or grandparent died. Maybe what once made sense is less defensible in light of modern investment thinking, or the cost of living has caught up with what once seemed like a generous bequest. Family dynamics, always fluid, can change the reasonableness of a decades-old estate plan. Everyone knows someone whose family was once considered wealthy, and now is considerably less so. Any of those scenarios — and dozens of others — can be the basis of a desire to change something that seemed set in stone when the plan was adopted.

That’s when lawyers begin talking about trust reformation or modification. In recent years we have begun talking about decanting — pouring the contents of an older trust into the vessel of a new trust document. Not every state permits decanting, though, and state laws vary in how they approach modification of trusts. That can lead to uncertainty, family friction and even litigation.

Take, for instance, the recent Indiana case involving the trust — and the family — of John and Ruth Rhinehart. In 1997 Mr. and Mrs. Rhinehart established an irrevocable trust for the benefit of their daughter, Julie R. Waterfield. They placed $4 million in the trust, and provided that at least $100,000 per year would be paid to their daughter. When she dies her trust will divide into three new trusts — one for each of her children. Each of those trusts will pay $25,000 per year to the grandchild for whom it is set up.

That was certainly a generous gift, and should help provide for the welfare of the Rhinehart’s daughter and grandchildren for decades. In fact, the trust has grown — as of 2009 it was worth about $22 million. What could possibly be wrong with the Rhineharts’ largesse?

Sometime shortly after the trust was created, Julie Waterfield made a pledge to Indiana University – Purdue University Fort Wayne (IPFW). She promised the University $1.5 million so that a new recital hall could be built in the campus’s new music building — a building, incidentally, named after her parents.

There was only one problem with her pledge. By late in 2002, stock holdings she had expected to use for the donation had become worthless. It appeared that the only way for her to meet her pledge would be to increase the annual payments from the trust established by her parents. She would need not $100,000 per year, but more like $275,000.

She and her lawyer approached the trustees about how to reform the trust to permit the larger distributions. Everyone agreed that if she could get the approval of all of the future beneficiaries, the trust could be modified. The trustees engaged Ms. Waterfield’s lawyer to complete the process, and he filed a court proceeding seeking an increase in the distribution. The Indiana court approved the increase, conditional on getting all eighteen potential beneficiaries — current, future and contingent — to sign consents.

At a family meeting in December, 2002, all three of Ms. Waterfield’s children signed the agreement to reform the trust. One of them requested a copy of the full agreement, and the trust’s lawyer sent him a copy a few days later. Ms. Waterfield’s distributions were increased and, presumably, her pledge fulfilled.

Three years later, two of Ms. Waterfield’s children expressed concern about the increase in their mother’s distributions. They argued that their signatures on the agreement to reform the trust had been obtained by fraud, and they brought suit against their mother and the corporate co-trustee of the trust. Ms. Waterfield and the trustee argued that it was too late — that the statute of limitations on such an action ran out two years after the change was approved. In any case, they insisted, there was no injury to Ms. Waterfield’s children: there would be plenty of money available to fund their annual $25,000 distributions. The trial judge agreed and dismissed the lawsuit.

The Indiana Court of Appeals agreed. The appellate judges noted that both sons’ signatures were on the agreement, that they acknowledged they had gotten a letter from the lawyer which claimed it enclosed a copy of the agreement, and that it strained credulity to think that they would have failed to ask for the referenced enclosure if it had not in fact been in the envelope with the letter. In other words, their cause of action — if they had one — was known to them at least by the date of that letter. In Indiana, the statute of limitations on such an allegation of breach of fiduciary duty is two years — the Waterfield children waited more than a year too long before filing their lawsuit.

Furthermore, according to the appellate judges, the growth of the trust to $22 million — despite several years of increased distributions to Ms. Waterfield — adequately protected her sons’ interest so that they were not injured by the trust reformation. The Court of Appeals rejected their argument that the trust itself was injured by what they insisted was fraudulent behavior. The beneficiaries do not have the authority to bring their action on the basis of injury to the trust, but must show injury to themselves, according to the Court. Matter of Waterfield v. Trust Co., December 30, 2011.

Would the answer have been different in Arizona? Possibly. But it is more likely that the process itself would have been different in Arizona. With adoption of the Arizona Trust Code (a version of the Uniform Trust Code) it has become easier to modify or reform a trust. Some modifications can be done without the court’s involvement at all. Perhaps more importantly, it has become somewhat easier to clearly begin the running of the statute of limitations on claims against trustees under Arizona’s new law.

Decanting: It’s Not Just for Fine Wines Anymore

JUNE 20, 2011 VOLUME 18 NUMBER 22
Imagine this tragic scenario: your 33-year-old son has a serious illness, and requires extensive medical treatment. The good news is that the treatment may well effect a cure. The bad news is that it will be horribly expensive. Right now he qualifies for government assistance with that expense — after all, he hasn’t been able to work for several years. But that eligibility is about to change.

Your mother set up a trust for each of her grandchildren before her death five years ago. Each trust provided that the grandchild would receive his or her share outright at age 35. In two years, your son will be eligible to receive about $250,000 from his trust — and you think it will probably be spent immediately on medical care that otherwise would be provided at no cost to him.

Arizona (and a number of other states — but we’re not in the business of giving advice regarding state laws we don’t know about) now allows the trustee to do something about your son’s problem. It is possible to “decant” an irrevocable Arizona trust into a new trust, so long as a few basic principles are not violated. The new trust could, for example, be a “special needs” trust, allowing your son to still qualify for medical assistance.

The Arizona law is found at Arizona Revised Statutes section 14-10819. If you read it, you won’t find the word “decant” anywhere. That’s because the term is favored among trust lawyers, but not in the law itself. No matter — “decanting” is a pretty good description of what the trustee is doing. Basically, the trust’s assets are being poured from one bottle (the old trust) into a new, similar-but-different bottle (the new trust) and gaining new vigor and complexity in the process.

Your scenario might be different. It might be your daughter who is a chronic spendthrift. Perhaps one of your children married a spendthrift. You might even be the trust beneficiary interested in extending the period of the trust, perhaps for creditor protection purposes.

The amount of money might be more or less than the story we have sketched out here. You might be the trustee, or a bank or private fiduciary might have that position. None of that makes much difference — the trustee of an irrevocable Arizona trust can, unless the trust explicitly prohibits it, usually decant to solve real-world problems that have arisen since the trust was initially created.

The idea is not brand-new, nor unique to Arizona. New York adopted a similar law as early as 1992, and almost a dozen states now explicitly permit decanting. Arguably, the power to decant is not dependent on a state law — though trustees from states where there is no statute might be hesitant about testing that theory.

One requirement for Arizona’s decanting statute to be available: the trust must be an Arizona trust. That usually means that one trustee must be in Arizona, though even that might not be necessary in every case. Another requirement: the trustee must have the discretion to make a distribution to or for the benefit of the beneficiary. In other words, if Grandma’s trust required the distribution of all income directly to Junior but did not permit the trustee to ever reach the principal, decanting might not be an option.

Could you force an Arizona trustee to decant if you were the beneficiary’s concerned parent? Probably not. What if you were the beneficiary and desperately wanted the trustee to exercise its power to decant? Probably not again. Could you decant a trust if you were the trustee and the beneficiary? Oops — we’ve run out of space and time (that’s lawyer talk for “it depends”).

Decanting trusts is an interesting and useful idea. It can help “fix” problem trusts, especially where circumstances have changed since the trust was first established. If you know of a current or looming problem with distributions from an Arizona trust, you might want to talk to an experienced trust and estates lawyer about the options available.

More on Types of Trusts — Some of the Less Common Varieties

JANUARY 24, 2011 VOLUME 18 NUMBER 3
Last week we wrote about different types of trusts you might have encountered, and tried to explain some of the generic terms, differences among and between types, and likely settings where a given type of trust might be appropriate. We wrote about spendthrift trusts, bypass trusts, special needs trusts and the difference between revocable and irrevocable trusts. Let’s see if we can clear up some of the confusion over less-common trust names.

Crummey trusts. In 1962 Californian Dr. Clifford Crummey created a trust for the benefit of his four children, who then ranged in age from 11 to 22. He was trying to address a problem with estate tax law: he could give the money to his children outright (and then worry about how they spent it) or put it in trust for them to protect it (but then not get it out of his own estate for estate tax purposes). His clever idea: put the money in a trust for each kid’s benefit, but give that child the right to withdraw his “gift” from the trust until the end of the year. When they didn’t exercise that right (hey — the youngest was only 11, and even the oldest would understand that withdrawing his money might affect future gifts) it would lapse, and the gift would be completed but stay in trust.

The Internal Revenue Service thought it was a trick, and they argued that Dr. Crummey and his wife had not made gifts at all. The IRS lost that argument, and the “Crummey” trust was born, in a 1968 decision by the U.S. Ninth Circuit Court of Appeals. If you’d like to read the actual decision in Crummey v. Commissioner you may — but we warn you that it will be interesting to only a few diehards, most of them lawyers or accountants.

For nearly a half-century, then, the Crummey trust has been a primary tool in the estate planner’s toolbox. The trusts have morphed over time — now they are often used to purchase life insurance (and may be called Irrevocable Life Insurance Trusts, or ILITs). The length of time for a beneficiary to withdraw the funds has been shortened in most cases — often to a month and sometimes even less. Some practitioners even give the withdrawal right to people other than the primary trust beneficiary. The Crummey trust in each case is an irrevocable trust intended to get a gift out of the donor’s estate for tax purposes but into a trust to control the use of the money after the gift is completed. With the present high gift tax exemption in federal law ($5 million for 2011 and 2012) the use of Crummey trusts will probably diminish appreciably.

Generation-Skipping trusts. In the simplest sense, a GST (practitioners love acronyms) is any trust that continues for more than one generation of beneficiaries. The “current” generation, if you will, might or might not have the right to receive income, or access to principal, of the trust — but it will continue until at least the death of that current generation representative.

GSTs are often constructed to skip multiple generations. The model for the maintenance of accumulated family wealth is usually the Rockefeller family — some of the trusts established by John D. Rockefeller before his 1937 death and valued collectively at over $1.4 billion at the time — are still chugging along for the benefit of his descendants.

Because of concerns about the accumulation of family wealth, and the avoidance of estate taxes in multiple generations by the use of such trusts, the federal government in 1976 introduced a new GST taxation scheme. More recent changes in the GST tax have driven the types, terms and use of GSTs. The GST tax is very high, but only applies (as of 2011 — the rules may change in two years or thereafter) to “skips” of over $5 million. Very elaborate GSTs are sometimes marketed as Dynasty trusts. One common problem in addition to tax issues: the common-law “Rule Against Perpetuities” may make it difficult to extend trusts for multiple generations. In Arizona it is now at least theoretically possible to extend a trust over more than 500 years without facing problems with the Rule. That is a sobering thought when you consider that 500 years ago the land that was to become Arizona was all but unknown to ancestors of the Europeans, Asians, Africans and even many Native Americans who live here now.

QTIP trusts. QTIP stands for “Qualified Terminable Interest Property.” Does that explain the trust type? Well, not quite.

In very general terms, a QTIP trust is probably designed for one narrow purpose. It permits a wealthy spouse to leave property for the benefit of a less-well-off surviving spouse without consuming the deceased spouse’s full estate tax exemption amount. In other words: if you were worth, say, $10 million dollars in 2009, when the estate tax exemption was at $3.5 million, you might have left $3.5 million to your adult children from your first marriage and most of the rest of your property in a QTIP trust for your second husband (or wife). That way your estate would pay no estate tax, and the tax would be due on the death of the surviving spouse. Since he (or she) had no property in our example, that means that his (or her) $3.5 million exemption would get used on your property first, and only the excess would be subject to taxation as it passed to your children from the first marriage.

As you can see, it is getting harder and harder to make a QTIP trust a good planning opportunity, except for extremely large estates with very high disparity in net worth between the spouses. But the QTIP trust isn’t dead yet — uncertainty about the federal estate tax, continued state estate taxes in some states (but not Arizona) and inertia preventing modification of older estate plans will all contribute to keeping the QTIP alive for a few more years, at least.

We don’t know about you, but we’re exhausted. Maybe we’ll tackle some more trust types on another day. Suggestions? Do you want to know about QDoTs (sometimes called QDTs or QDOTs)? QDisTs (Qualified Disability Trusts)? Cristofani Trusts? Just ask, and we’ll take a run at them.

Different Types of Trusts for Different Purposes

JANUARY 17, 2011 VOLUME 18 NUMBER 2
We frequently are asked to explain the differences between different types of trusts, or to analyze a trust with no more information than its type. Confusion about the differences is widespread, and we hope to provide a little clarity to consideration of trust types.

Before we embark, we have three caveats:

  1. We are not trying to list every possible type of trust here, but just those our clients most often encounter. We may expand this list over time.
  2. Just because you believe your trust is, for example, a “spendthrift” trust does not necessarily make it so. Even if the name of the trust includes one of these categories, it might be inaccurate. The type of trust is determined by the language of the trust itself, and it may take some close reading to identify a trust’s correct categorization.
  3. Most of these categories are neither magical nor exclusive. Just because we can categorize a given trust as a “spendthrift” trust, for example, it does not necessarily mean that it will be protected against all of the beneficiary’s creditors. And just because a trust is a “spendthrift” trust does not mean it could not also be a “special needs” trust, a “bypass” trust or some other category.

With that out of the way, let’s get started on a partial list of common types of trusts you might encounter (or create):

Spendthrift trust. This trust is protected against the creditors of a beneficiary. The trustee can not be compelled to make distributions to a beneficiary, or to the beneficiary’s creditors. This does not necessarily mean that the trustee is not permitted to make such distributions (after all, it might be in the beneficiary’s best interests to pay his or her debts). Even very strong spendthrift language might not be effective against some types of creditors in some states. Common exceptions adopted by state law include child support and alimony obligations or governmental debts. State laws vary widely on these lists.

“Third-Party” Special Needs trust. These trusts are usually specialized spendthrift trusts created for a beneficiary who suffers from a disability. The language of the trust will usually include a clear expression of the intent that the trust’s monies should not interfere (or not interfere too much) with the beneficiary’s public benefits, like Supplemental Security Income or Medicaid. The variation here from state to state, and from beneficiary to beneficiary, can be tremendous, so be very careful about generalizing when discussing third-party special needs trusts.

“Self-Settled” Special Needs trusts. Just to keep the confusion level high, there are also special needs trusts created by the beneficiary himself or herself. Of course, a beneficiary with a disability may have to act through a court proceeding, a guardianship or conservatorship, or a parent or grandparent. But whoever signs the actual documents, if the money in a special needs trust comes from the beneficiary’s own resources (like a personal injury settlement, or an unrestricted inheritance) then the special needs trust will be treated as a self-settled trust. That means the rules will be more difficult, both as to creation and administration of the trust. Can a self-settled special needs trust also be a spendthrift trust? What an interesting question you ask.

Bypass trust. Sometimes these trusts are called “credit shelter,” “exemption,” “decedent’s,” or just “B” trusts, but all of those names are pretty much interchangeable. The basic premise of a bypass trust is that a married couple arranges to take full advantage of the federal estate tax exemption amount, so that they can pass up to twice that amount to their heirs on the second death. That means that on the first spouse’s death a portion of the couple’s assets transfers to the bypass trust irrevocably, with some limitations on the use of the money during the surviving spouse’s life.

Bypass trusts are a special breed just now. Because the new federal estate tax law allows a married couple to retain both estate tax exemption amounts without having to create a bypass trust, there are a lot of trusts out there that may not still be needed. If both spouses are still alive it may be time to change the documents. If one spouse has already died the problems are more complicated. About the time we all figure this out (in two years) the estate tax provisions are scheduled to end automatically. We will have to wait most of those two years to find out if bypass trusts will fade out of existence.

Revocable trusts. Any trust that can be revoked — by anyone, but usually by the person who established the trust — is “revocable.” You may sometimes see the phrase “revocable living trust,” which means the same thing. If the only person who can revoke the trust has died (or become permanently incapacitated) then the trust has become irrevocable. Even if the name of the trust includes the word “revocable” (as, for instance, “The Smith Family Revocable Trust”) it may now be irrevocable.

Irrevocable trusts. The flip side of a revocable trust is, obviously, an irrevocable trust. The category just means that no one has the power to revoke the trust. That does not mean it will go on forever — if the assets held by the trust are spent or distributed, it ceases to exist even though it was irrevocable.

Grantor trusts. This term is most important in considering federal income tax liabilities, but it is often used more broadly. In a nutshell, a grantor trust is one in which the person who established the trust has retained one or more of the elements of control listed in the federal income tax code. Most important (but not the only ones) are: the power to revoke the trust, the right to receive the trust’s income and/or principal, and the role of trustee. Grantor trust rules are actually quite complicated, and are sometimes subject to some interpretation — fortunately, the shades of meaning don’t show up very often. Most trusts are either quite obviously grantor trusts or quite clearly not.

Those are some of the most common terms you might see to describe trusts. In a future Elder Law Issues we will tackle some of the less common ones, like “Crummey” trusts and ILITs, QTIP and QDoT trusts, and — well, feel free to ask us to try to describe/define your favorite trust category.

©2017 Fleming & Curti, PLC