Posts Tagged ‘joint revocable trust’

Home Refinance Can Foul Up Estate Planning

MAY 19, 2014 VOLUME 21 NUMBER 18

When our clients consider creating a revocable living trust, we usually explain that there are several benefits to that estate planning device. Chief among those benefits for most people: avoidance of probate on the death of the client. For married couples, there is usually no probate required on the first death anyway, so a living trust mostly protects against having a probate on the second death.

A few of our clients also see other benefits from living trusts. They may make it easier to minimize estate taxes on the death of the second spouse (though, frankly, current estate tax rules for Arizona residents make this a benefit for a very, very small portion of the population). They may make it easier to control the use of funds for heirs — though many clients are uninterested in imposing any restrictions on the inheritances they leave to children or others.

The living trust may have benefits beyond probate avoidance for a small number of our clients, based on their family situation, type of assets or the size of their estate. But for every client who decides on a living trust, the same two drawbacks need to be weighed against the benefits in their circumstances. First, a living trust is a more expensive estate planning option (how much more expensive? That will depend on individual circumstances, but typically between $1,000 and $2,000 more for most of our clients). Second, and the subject of this week’s cautionary story, is this: if you have a living trust, you need to keep that in mind for the rest of your life, and make sure that your assets get transferred to, and remain titled to, your living trust.

We were reminded of this issue by a typical client story we heard last month. A couple who have been long-time clients — we’ll call them Dick and Jane — created their joint revocable living trust a few years ago. They did it for the usual reason (to avoid probate on the second death), but also for a less-common reason — Dick had been diagnosed with early dementia, and the trust would make it easier for Jane to manage their joint assets as his capacity began to diminish.

After they created their trust, that’s exactly what happened. Dick became less and less able to make decisions, and more and more reliant on assistance with activities of daily living. In fact, Jane found that she had to hire help to take care of Dick in their home. Fortunately, she had a durable power of attorney and the living trust in place — she was able to take care of their finances and marshal them for Dick’s care needs.

Jane figured out that it would make sense for them to refinance their home mortgage. That might have been true just because of the current historically low interest rates — in Dick and Jane’s case, it also made sense to take out some additional principal from their home equity, so that Jane would have sufficient reserve to cover Dick’s growing care costs. It was a good thing that their home had been transferred to their joint trust, since Dick had lost the ability to sign refinancing documents. Because she was the sole trustee, Jane would be able to handle the refinancing by herself.

You might know where this story is going next. If Jane had called us, we could have warned her about the problem that was likely to arise. We don’t expect our clients to call us before making major financial decisions, but in this case it would have been good to hear from Jane. Why? Because the title insurance company insisted that Dick and Jane’s home had to be transferred out of the trust before the refinancing could be completed. And (possibly because the title company was based in Kansas, not Arizona) there was another problem in the documents: the title company’s attempt to create a joint tenancy between Dick and Jane did not comply with Arizona’s requirements. That meant that when Dick died a year later, his one-half interest in the family home had to go through the probate process.

To be clear, that result was not nearly as tragic as Dick’s medical and mental decline and ultimate death. In the scheme of things, the need for a probate proceeding — especially in a state, like Arizona, where probate is a relatively simple process — is more properly characterized as “nuisance” than “tragedy”. But the irony of Dick and Jane’s experience was that they intended to simplify things, and to save money for their heirs — and, despite their best efforts, the result was that Jane actually had to go through extra legal proceedings (since their home was originally in joint tenancy, there would not have been a probate on Dick’s death but for the refinancing following the trust). To be sure, if they had not created the trust and signed powers of attorney, Jane probably could not have refinanced the home at all without a court proceeding to establish authority over Dick’s share of the home, so the net effect was probably beneficial. But the disconnect between the estate plan and the title company’s odd insistence on taking the home out of the trust meant that Dick and Jane missed an opportunity to have their plan work perfectly.

Why do title companies insist on taking homes out of trust for refinancing? This has always puzzled us, too. Apparently, they think that the record is unclear about whether the trustees of a trust have the right to encumber the home with a mortgage — but they are not at all troubled about the trustees’ right to transfer the house outright. Why don’t the title companies then transfer the home back into trust? This one puzzles us, too. Until a decade or so ago, they would do so upon request. Now they typically fail to mention it to their clients at all. And why would a Kansas title company try to practice law in Arizona, creating a defective joint tenancy deed? We have no answer for this one.

Here’s the moral of the Dick and Jane story (or at least this tiny slice of their story — their real story is far, far richer than this one small glitch): if you have established a revocable living trust, be very cautious about titles to your property. Your home, your bank and brokerage accounts, and most of your other assets should probably be titled to the trust (talk to your lawyer — this is not always the case). Once things are titled to the trust, you have to be mindful of any changes you might precipitate, even (especially?) if you did not intend to make any change.

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Tax Issues for Trusts — Simplified

JULY 29, 2013 VOLUME 20 NUMBER 28

Judging from the questions and comments we get here, taxation of trusts is one of the most confusing issues we regularly write about. We’re going to try to collect the most important rules here for your convenience. Note that we will not try (in this summary) to touch on every exception, every caveat — we want to try to spell out some of the major categories of trusts and of taxation, and see if we can help you figure out what tax issues you have to face. We will try to give very concise answers, a little explanation and a warning about some of the more common or important exceptions in each category.

Do I need to get an EIN for my revocable living trust?

Short answer: no.

More detail: if you created a trust, put your money in it, and retained the right to revoke it — the IRS doesn’t think of it as a trust at all. It is not a separate taxpaying entity. Not only do you not need to get an Employer Identification Number, you can’t get one. A revocable living trust is always a grantor trust, and it does not file its own tax return.

Important exception: if you are trustee of a revocable living trust created by someone else, you can get an EIN but you are not required to do so. Even if you do get an EIN, the trust does not file a separate trust tax return.

I am setting up a special needs trust for my child, who has a disability. I plan on leaving his share of my estate to the trust. Does it need an EIN?

Short answer: probably not — yet.

More detail: while you are still alive you probably will be the “grantor” of the trust for tax purposes — and that may even be true if the trust is irrevocable. Probably you will pay the taxes on any income the trust receives (note: your contributions to the trust are not “income” for tax purposes). But probably this is not important — you really are probably asking about what happens when you die and your estate flows to this trust. THEN it will need an EIN and it will file its own tax returns. Probably it will be what the IRS calls a “complex” trust.

Important exception: if the trust is both irrevocable and immediately funded, it probably does need an EIN even before you die and leave a larger share of your estate to it.

My daughter’s special needs trust was funded with money from a personal injury settlement. Does it need an EIN?

Short answer: almost certainly not.

More detail: even though it is irrevocable, and even though your daughter is not her own trustee, this trust is almost unquestionably going to be a grantor trust for tax purposes. That means it does not need to have a separate EIN; it uses your daughter’s Social Security number as its taxpayer identification number.

Important exception: although it does not have to get an EIN, this kind of trust may get an EIN. But even if it does, the trust does not file a separate income tax return — all the trust’s income gets reported on your daughter’s individual return.

My father established a revocable living trust to avoid probate, and he died earlier this year. Do I need to get an EIN for his trust? Can I just keep using his Social Security number?

Short answer: Yes, you do. No, you can’t.

More detail: With your father’s death his trust became a different entity. It is no longer a “grantor” trust, so should be filing its own income tax returns for the rest of the calendar year of his death and for the future (if the trust continues).

Important exception: While the trust should have its own EIN, it will only have to file a return if it earns $600 in income in any one year after his death. So if the trust gets resolved fairly quickly, and/or does not hold any income-producing property, it may not need a tax return. In that case, and that case only, it may also not need to have a separate EIN.

As a separate exception to the general rule, note that there are some limited circumstances in which your father’s trust may not have to use a calendar year. That can have significant favorable income tax consequences, so be sure to discuss the tax issues with your accountant and/or attorney.

My wife and I created a joint revocable living trust. She died two years ago, and I was simply too busy dealing with everything to do anything about the trust. Are there tax issues I need to resolve, or am I going to get into trouble for not doing anything quickly?

Short answer: You probably are not in any serious trouble, but you should talk with an accountant and/or attorney soon. Don’t continue to put it off, please.

More detail: It may be that nothing needs to be done regarding your trust. It may be that your trust was supposed to be divided into two shares upon the first death. It may be that such a division no longer makes tax sense — but it might still be necessary to deal with it. It’s too hard to generalize about all those possibilities, and your lawyer needs to look at the trust document AND know how assets are titled. Make an appointment and start gathering information. If you don’t do anything before your own death, your children (or whomever you have named as ultimate beneficiaries) will have a much more complicated time dealing with it than you do now. Incidentally, in our experience it is fairly rare that a surviving spouse does not want to make any changes whatsoever — even if all you want to do is to accelerate the pace at which your children receive your estate, it is a good idea to meet with your attorney.

Important exception: If you are certain that your trust does not require division into separate shares on the first spouse’s death, AND you still want the same people to administer your estate, AND you still want everything divided the same way as the original document provides, then it may not be necessary to make any changes. Most lawyers will tell you that it still makes sense to update powers of attorney and your will to remove your late wife’s name (just so your back-up agent doesn’t have to produce a death certificate before banks and doctors will talk with her), but it may not be critical to do so. Still, talking with lawyers is kinda fun, and almost everyone should do it more often.

There you have it. Our most-asked-about trust taxation questions, with simplified answers. Please be careful about this information, though — there is a lot of nuance we have glossed over. Talk to your accountant and your lawyer to confirm what we have told you here before relying on it. Our goal is to give you a bit of a roadmap, not to answer complex legal questions with oversimplified generic answers. But we hope we have helped.

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Step-Children and Disinherited Children Might Have Rights — It Depends

NOVEMBER 12, 2012 VOLUME 19 NUMBER 41
A prospective client asks: “Can my mother cut me out of her will after my father dies? His will leaves everything to the children after her death.” That deceptively simple question comes in a number of variations (like: “My mother’s will left everything to her children, but her estate was not probated. After her husband, my stepfather, died, we learned that everything went to his children from a prior marriage. Can we do anything about that?” Or: “Our father and stepmother had a joint trust leaving everything to all of their children — my siblings and my step-siblings — when the second one of them died. After my father’s death, my stepmother changed the trust to go only to her children. What rights do I have?”

To each of those questions the answer is almost certainly the same: “It depends.” That’s the classic lawyer’s answer, but it reflects a reality that we deal with whenever we talk to a new client or prospective client. We almost never have enough information to give a definitive answer after the initial consultation, and that is particularly true with these questions.

What does it depend on? State law, sometimes. The actual wording of documents, in most cases. Titling of the property, pretty often. The cost of pursuing the issue weighed against the value of the “lost” inheritance, almost every time.

Please remember that what we describe here is based on Arizona law. It’s what we know; we don’t know enough about other states’ laws to do more than speculate about whether the same answer would be true in another state. Heck, sometimes we don’t know enough to determine whether Arizona or some other state’s laws even apply to the question. So check these answers with a qualified lawyer in your state (or the state where your parent(s)/step-parent lived and died).

Disclaimers aside, let’s look at some of the more-common scenarios:

1. Herb and Vonda signed identical wills, leaving everything to one another and, on the second death, to their three children in equal shares. Herb died. No probate was even filed, since everything was owned as joint tenants with right of survivorship. All Vonda had to do was distribute Herb’s death certificate and everything was transferred to her name. Five years later Vonda changed her will to leave everything to one of the three children.

Vonda’s will might be subject to challenge based on undue influence or lack of testamentary capacity, but it is unlikely to be set aside based on Herb’s intention that his property be divided equally among his children. He left everything to Vonda — both in his will and by the joint tenancy designations. She was probably free to do what she wanted with what then became her own property.

Herb and Vonda might have signed an agreement to keep their wills the same. Their wills might have even included a provision that promised the survivor would not change her will after the first spouse died. But such a provision would be rare (not unheard of, but rare). Even if there was such a provision it’s not completely clear that it would apply in these circumstances, since Vonda did not acquire Herb’s interest in the jointly held property by his will — she got it by operation of the joint tenancy arrangement.

2. Richard and Fern signed a joint revocable trust. It provided that on the first spouse’s death, the survivor would have complete control over the trust and the property in the trust — including the right to amend the trust. If the trust was not amended, it would leave everything to Richard and Fern’s only son, Ralph. All their assets were transferred into the trust.

After Fern died, Richard amended the trust to leave everything to a neighbor. At least that’s what Ralph suspects. The neighbor is named as trustee and refuses to even give Ralph a copy of the amended trust. Ralph wants to know if he has a right to at least Fern’s half of the joint estate, and how he can find out about the circumstances of any amendment. He has a copy of the old trust showing him as beneficiary (though the copy he has does not show that it was actually signed). The lawyer who prepared that draft trust won’t return his phone calls.

Can Ralph get a copy of the new trust? Not necessarily. If he has been completely eliminated from the trust, the trustee is under no obligation to give him anything. How does he know if that’s the case? He doesn’t. He could bring a court case to have the Judge interpret the validity of the suspected amendment, but if it is as the neighbor says he will probably lose — he probably won’t get a copy of the trust document and he may end up paying the neighbor’s legal fees in addition to his own.

To be clear, if the neighbor consulted us we would advise that it’s easier to show Ralph the amended trust and be done with it. But we would also tell him (assuming Ralph has been excluded and the document appears to have been properly prepared) that he is not obligated to do so. Ralph is likely to get further by being reasonable and friendly than by being confrontational. Oh, and he is probably not entitled to any portion of “Fern’s estate,” since she appears to have left it all to Richard.

3. Grant and Julia were each married once before they got together. Grant has two children from the first marriage, Julia has three and the two of them had one child together. They signed a joint revocable living trust and transferred all their assets into the trust’s name. It provided that on the death of one of them, the entire trust estate was to be divided into two shares — with half of the combined assets assigned to each share.

One share of the trust would continue to be completely under the control of the surviving spouse (the trust refers to this as the “Survivor’s Trust Share”). The other (the “Decedent’s Trust Share”) is held in trust for the benefit of the surviving spouse (he or she is entitled to all the income and, if he or she needs it, principal of this trust share). On the death of the second spouse, according to the trust document, the “Decedent’s Trust Share” is to be divided equally among all six children. The surviving spouse is named as trustee of the Decedent’s Trust Share, but has no power to modify or amend it.

After Grant died, Julia continued to administer both halves of the trust. She never provided any accountings to any of the children, though her oldest daughter did help her keep bank records and took documents to the accountant for tax preparation every year. None of the children wanted to confront her about how she was handling the money, and so no one every challenged her.

When Julia died (more than a decade after Grant’s death), it turned out that the Decedent’s Trust Share was empty. Julia had withdrawn most of the money in the last five years of her life, and had used it to fix up her house (it was titled to the Survivor’s Trust Share) and to make substantial gifts to two of her children (including the one helping out with the accounting). She had also incurred significant medical bills, and had even paid for in-home care for most of her last two years. Most of the children — and especially Grant’s children — felt like she should have moved into an assisted living facility to save money during that period.

When Grant’s oldest son asked for more information, Julia’s daughter (who, it turned out, had been named as successor Trustee) blew up at him and accused him of just being about the money — not caring what his father would want or what his step-mother needed. He wants to know now what he is entitled to.

Can he get account information? Almost certainly — especially for the Decedent’s Trust Share. Is he entitled to information about the Survivor’s Trust Share? Maybe, if he is still a beneficiary (or if the finances of the Survivor’s Trust Share would affect what Julia had needed from the Decedent’s Trust Share).

We always encourage clients to ask themselves one more question, though: will Grant’s son be happy with any likely outcome? Probably not. The cost of pursuing his step-mother’s estate and his step-sister will likely be high, and the resolution will not give him everything he is entitled to receive. Depending on the size of the estate and the portion at issue, it might be financially worth pursuing. Basically: “it depends.”

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Tax Identification Numbers for Trusts After Death of Spouse

MARCH 26, 2012 VOLUME 19 NUMBER 12
Here at Fleming & Curti, PLC, we keep tabs on what brings people to our website. We look at referring pages, at search terms and at a variety of other items. We are intrigued by what persistently tops the search-engine list. The most common search? It’s some variation of: “do I need a new tax ID number for my living trust?” (For those keeping score, the second-most-common question seems to be “can I leave my IRA to a living trust?“)

Why the enduring interest? Because the question is so much less complicated than people think it is. There is a surprising paucity of clear information about when you need to have a new tax ID number (an EIN, if you want to use the correct acronym). And much of the information out there is contradictory.

We have written about the question several times before. In 2009 we asked and answered the question: “Do you need a new tax ID number for your living trust?” Just last year we reviewed the question, along with some other reader questions, and provided a little more detail on when your trust needs an EIN. Since those two explanations the rules haven’t really changed — but your questions have gotten a little bit more sophisticated.

Several of those questions deal with the same basic scenario: what happens when a husband and wife have a joint trust, using one spouse’s Social Security number, and then that spouse dies? The answer will depend on what the trust provides.

First, a word about joint trusts for spouses: they are common in community property states (like Arizona), not as common in those states where community property principles do not apply. Remember, please, that we are Arizona lawyers, and so we write here about Arizona rules. Attorneys from other states are more than free to add their comments; we will post them as we receive them — but we are not vouching for the accuracy of their advice in states other than Arizona.

Let’s set up a scenario, drawn from our common experience: Husband and wife created a joint revocable trust, and their bank accounts, brokerage accounts, insurance — all of their assets, in fact — listed the husband’s Social Security number. They could do that because, as with a joint account outside of a trust, tax rules allow one owner’s identifying number to be used rather than having to use all owners’ numbers. But now the husband has died. What should the (surviving) wife do about the TIN (Taxpayer Identification Number)?

Before we answer, we need to know what happens to the trust on the death of the first spouse. Let’s assume, for a moment, that it remains in one trust, that the wife now has the power to amend or revoke it in its entirety, and that she is the sole trustee. In that case, the direction is easy: tell the bank, the brokerage house and the insurance company to change the name of the trustee from the couple to the wife, and to change the TIN to the wife’s Social Security number. How do you do that? Send them a death certificate and a letter instructing them to make the changes. Assume, incidentally, that they won’t — it will often take you two or three tries, several phone calls, and some wheedling to get the task done. But that’s what should happen.

What if the wife is not the sole trustee? Let’s say, for a moment, that the oldest daughter now becomes co-trustee with her mother, but that the trust remains revocable and amendable by the wife. In that situation, we have the same answer: switch to the wife’s Social Security number.

What if the wife has the power to revoke or amend the trust, but she is now incapacitated? The oldest daughter is the sole trustee, and isn’t sure what to tell the financial institutions. The answer is still the same: the trust is still revocable (even though there may be no practical way to revoke it if the only person with power to do so is incapacitated), and the wife’s Social Security number is the trust’s TIN (expect to have an argument with the financial institutions over this one). Is a bank trust department the successor trustee instead? Same answer — but with the ironic twist that the argument between trustee and financial institution will now occur between two branches of the same organization.

Sometimes a joint revocable trust becomes irrevocable on the death of one spouse. More commonly it splits into two (or sometimes three) portions, one (or two) of which are irrevocable. What happens then? The answer, as you might expect, is a little bit more complicated — and may not be the same in every case.

Generally speaking, an irrevocable trust that does not contain the assets originally belonging to the beneficiary is likely to need its own EIN. That may mean that one (sometimes two) of the trusts resulting from the death of one spouse needs a new EIN, and one just uses the surviving spouse’s Social Security number.

Let’s use a specific example: in our earlier scenario, after the death of the husband the joint revocable trust splits into a “Decedent’s” (sometimes “bypass”) share and a “Survivor’s” share. The Decedent’s Trust is irrevocable. Wife is the trustee, and she is entitled to all the income from the trust. She may even have the ability to distribute trust principal to herself, or to decide how the Trust is divided among the couple’s children at her death. But this trust is not  “grantor” trust — it gets taxed as a separate entity. Hence, it needs its own EIN, and it files its own tax returns.

Mechanically, the process of dividing the trust is a little more complicated than in our earlier scenario. An estate tax return may be required (although it may not). A division of trust assets needs to be completed (the assistance of a competent lawyer and a good accountant is essential here). The share to be assigned to the Decedent’s Trust needs to be identified, and then physically transferred into a new account — often titled something like “The Jones Family Trust — Decedent’s Trust” (yeah, we know — your name isn’t Jones. Stick with us anyway). And that new account needs to use the Decedent’s Trust’s new EIN.

Note that we said that the assets need to be transferred into the new account. Most financial institutions will insist on opening a new account, with a new account number, rather than simply changing the name on an existing account. But when the process is completed — however you and the financial institution get there — the Decedent’s Trust should be physically separated from the Survivor’s Trust, it will have its own EIN, and it will need to file tax returns. Note: it probably will not pay any tax as a separate entity — all its income will  probably be imputed to the surviving spouse.

Meanwhile, the remaining trust assets in our example will continue to use the wife’s Social Security number. It may not be crucial to change the name on that account to “The Jones Family Trust — Survivor’s Trust” (those Joneses — they end up will all the money anyway). If you long for clarity, we would certainly support a transfer of the Surivor’s Trust share into a new account, titled as part of that sub-trust, and bearing the wife’s Social Security number — even if it is not required.

Recall, please, that there are lots of variations on this basic scenario. Be careful about generalizing from this information to your precise circumstances. Our goal here is to give you some general notions about what needs to be done — we do not think of ourselves as a substitute for good, personalized legal advice. We think, in fact, that you should get some of that, because your situation might well be more complicated than you think it is. But we hope we’ve given you some idea of what your attorney will be asking you, and what he or she is likely to tell you.

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