Posts Tagged ‘living trusts’

Failure of the Imagination in Seven-Decade-Old Trust

SEPTEMBER 6, 2016 VOLUME 23 NUMBER 33
Why involve an attorney in your estate planning? Partly because they know the rules — and not just the rules about how to prepare a valid and comprehensive document, but also the rules about taxes, trust limitations, and all of the related concerns you might not focus on without professional assistance. But lawyers are also good at imagining unlikely scenarios, and covering all the possibilities.

At least they usually are. Sometimes even lawyers suffer failures of imagination. Our training and inclination leads us to consciously consider unlikely scenarios, but sometimes even lawyers get caught up in the language or the particular desires of the client. And sometimes it takes years — or even decades — to find the flaw in the language.

Consider Darthea Harrison’s trust, signed in March of 1947 in Kansas. For context: living trusts were quite rare before the middle of the twentieth century. Most lawyers of the day might only have prepared a handful, and few state laws dealt specifically with trust interpretation. By contrast, wills were commonplace, and benefited from centuries of developed law addressing questions of interpretation. That might be why Ms. Harrison’s lawyers made the mistake they did.

The trust Ms. Harrison signed provided that she would receive all the income from trust assets for the rest of her life. After her death, her son (and only child) William would be entitled to the income for the rest of his life. After that, the trust principal was to be distributed to Ms. Harrison’s two brothers or, if they were no longer living, to their children.

That seems straightforward enough, but the failure was one of imagination. What actually happened: Ms. Harrison died in 1962 and her son William died in 2013 (without ever having had children). When William died, both of Ms. Harrison’s brothers had already died — and so had all of their children (they would have been Ms. Harrison’s nieces and nephews). But the nieces and nephews did leave a total of eight children of their own.

What should happen to the remaining trust principal? Should it be given to the grandchildren of Ms. Harrison’s two brothers? Should it go to Ms. Harrison’s estate (which was probated in 1964, and would have to be reopened to determine who would receive her “new” estate)? Should it “escheat” to the State of Kansas (where Ms. Harrison died) or to the State of Missouri (where the trust was administered)? What about the fact that Ms. Harrison’s husband — who survived her — was not the father of her son, and in fact married her after the trust was executed?

This uncertainty could easily have been resolved if, back in 1947, the attorneys drafting Ms. Harrison’s trust had simply provided that upon the death of her brothers their share of her trust would devolve not to their children, but to their descendants. Alternatively, she could have considered the possibility and decided that she would then want to benefit a charity, or more distant relatives, or someone else close to her.

If Ms. Harrison had signed a will with the same language as used in her trust, both Kansas and Missouri law would have filled in the blanks for her. Arizona law, incidentally, would have handled it the same way. In that case, five centuries of will interpretations have determined that leaving something to your relatives presumably includes their descendants if the relative dies before you — or before the future date when distribution is determined.

The Missouri probate court decided that the trust had failed, and that its remaining assets should be distributed to Ms. Harrison’s estate, which would thus need to be reopened. The Missouri Court of Appeals disagreed, and reversed the probate court holding. Instead, according to the appellate court, the interests of Ms. Harrison’s brother’s children had “vested” before they died — and the probate court should have determined where each of those beneficiaries’ shares should go now.

In some cases, that should mean that the nieces’ and nephews’ children should receive their shares. In others, it might mean that a will, or a surviving spouse, might change the outcome. In any case, the Missouri probate judge will need to conduct hearings to determine the final recipients of Ms. Harrison’s trust. Alexander v. UMB Bank, August 23, 2016.

Today, more careful drafting is commonplace. When your lawyer insists that you consider the possibility that your beneficiaries die in unlikely sequences, or that unanticipated children come into a family (by birth or adoption), or that odd combinations of simultaneous deaths occur, she is thinking about Ms. Harrison — even if she has never heard the story.

Dad (Mom), We Need to Talk

FEBRUARY 22, 2016 VOLUME 23 NUMBER 8

This week, a letter from Fleming & Curti, PLC attorney Amy Farrell Matheson, addressed to a father (not, as it happens, her father so much as your father):

Dad, we need to talk:

We love you and want the best for you. Over the past few months, we’ve noticed some things that are concerning to us. It makes us wonder if we should begin giving you some extra help around the house.

For example,

  • We have found late notices and even shut off notices from the electric company and the water company; this makes us worry that your bills aren’t getting paid on time. Your filing system was always so organized, but now we find papers jammed in every which way. It’s hard for us to tell what bills have been paid.
  • You and Step-Mom have always kept a lovely home, but now there are newspapers and unopened mail piling up, and the yard hasn’t been tended to. The refrigerator has expired and rotting food in it.
  • And your car has a scrape along one side that we don’t remember seeing before.

We respect your privacy and we understand that it’s important to you to manage your household as you see fit. If there are some things that we could do to help lighten the load, we would like to help.

It would help us if we had a better understanding of how your finances are arranged, so that if we needed to step in and help out, we could do so easily. For example, would you like one of us to arrange it so that we can view your banking accounts online? That would allow us to help you balance your checkbook and avoid bank fees for returned checks. We could help you arrange for automatic payments for utilities, rent/mortgage, and insurance, so that you aren’t having to pay late fees. We could remind you to take the required distribution from your IRA this year; you know there’s a penalty for that if you don’t.

One of us could help you prepare your income tax returns, or help you assemble the documents that you will need to take with you to the accountant.

We have been thinking about when Aunt Bertha fell and broke her hip, and how hard it was for her kids to figure out how to pay her bills while she was in the hospital. There was a lot of stress and some hurt feelings because none of the kids knew who was in charge. Everyone had a different idea of how to take care of Aunt Bertha. And the bank wouldn’t talk to any of the kids without a power of attorney. As uncomfortable as it might be for you to open up to us about these things, it would really be better to have a discussion about what you want, at a time when it isn’t an emergency situation.

We’ve been to see our lawyer to get our own estate plan updated. It reminded us that we know very little about what you’ve planned. For example, who would you want to speak for you, if you had a health emergency and the doctors needed information? Have you selected someone to handle your finances if you aren’t able to – have you prepared a durable financial power of attorney or a trust? Who is your attorney? Where should we look for copies of your estate planning documents if we needed them?

We’ve been to see our financial advisor for a “tune up.” It’s been a while since we took a hard look at our investments and our plans for retirement. Do you still have the same financial advisor you have been using for years? Are you happy with him or her? Do you have questions about how your money is invested?

We are so thankful that Step-Mom has come into your life. You were so sad when Mom died and it’s good to see you happy again. We want to respect the arrangements that you and Step-Mom have made, but we’re not certain what you are expecting from us, and what you have agreed with Step-Mom. If there were a medical emergency, who would speak for you? Step-Mom or one of us? Do you and Step-Mom have an agreement as to how you handle household expenses? Did you prepare a prenuptial agreement before you got married? Do the two of you have a trust? Do you have joint accounts, or do you keep your money separate?

What can we do to help you stay in your home as long as possible, and to be comfortable, safe — and happy — there?

Not Every Cognitively-Impaired Senior Needs a Conservator

SEPTEMBER 28, 2015 VOLUME 22 NUMBER 35

We handle a lot of guardianship and conservatorship proceedings at Fleming & Curti, PLC. We also meet with a lot of clients (or potential clients) and help them figure out how not to initiate a guardianship or conservatorship proceeding — we subscribe to the modern view that court involvement ought to be avoided when possible, and that people ought to be allowed the greatest possible autonomy and self-direction.

The view that court proceedings should be used sparingly is shared by the judges we work with in Arizona. That has not always been the case, and it is not necessarily true in every courtroom. It is easy for judges to get protective about the individuals they see in court, and sometimes judges can overreact.

We read this week about such a case, from Michigan. It involved a 74-year-old woman we’ll call Martha and her three daughters Dana, Diane and Dora. Martha’s husband (and the father of the three girls) had died a year before the legal troubles began, and Martha had spent some time in a hospital and a brief spell in a nursing home. Although she had returned to her home, she was a little weak and confused.

Martha had named Dana as agent in a power of attorney, and had made her co-trustee of the trust that held all of Martha’s assets. During the period of Martha’s illness, though, Dana had misused her position and had actually used some of Martha’s funds for her own benefit. Martha filed a court proceeding asking for an accounting from Dana. In the course of that family dispute, Dana asked the court to appoint a conservator to handle Martha’s finances.

Martha objected vigorously, but the judge ordered a psychological evaluation to address whether she could manage her own finances, and also appointed an attorney to act as Martha’s “guardian ad litem“. Both the psychologist and the guardian ad litem reported that Martha had memory limitations, but was not improperly using her funds or at any apparent risk of losing assets. Both noted that she had signed new documents naming another daughter, Diane, as her trustee and agent; that appeared to be appropriate and effective.

The judge hearing the dispute between Martha and Dana thought otherwise. He noted that the reports indicated Martha had “poor arithmetic and quantitative skills” and otherwise appeared to have diminished capacity. Michigan’s law (like Arizona’s) does not require a finding of incapacity before appointment of a conservator of the estate; the probate judge decided to appoint daughter Diane as conservator.

Diane did not think she needed to be Martha’s conservator. She thought that the trust and power of attorney were sufficient to allow her to help protect her mother. Martha also continued to believe that she did not need a conservator. Diane filed an appeal on behalf of her mother. Dana (still embroiled in her dispute with Martha over trust administration) disagreed, and argued that a conservator was necessary.

The Michigan Court of Appeals sounded a clear call for maximum individual autonomy and self-direction. It is not enough, ruled the appellate court, to show that Martha’s capacity is diminished by her memory and reasoning problems. Before a conservator can be appointed, it would also be necessary to show that Martha was unable to manage her own finances — or arrange for their proper management and protection.

Michigan’s conservatorship statutes (again, like Arizona’s) specifically direct the probate court to apply the law in a way that tends to “encourage the development of maximum self-reliance and independence,” noted the judges. In Martha’s case, she had appropriately chosen Diane to oversee her finances and had understood and signed the power of attorney and trust documents necessary to effect that change. Indeed, she had managed to monitor Dana’s handling of her finances sufficiently to observe that she had a problem that needed to be corrected. Appointment of a conservator was unnecessary and in fact impermissible in those facts. Bittner-Korbus v. Bittner, September 8, 2015.

The Michigan appellate court’s approach is consistent with what we see in Arizona, and what we like to implement in our practice. Is it possible to assist and protect the mildly impaired senior without recourse to the court? If so, we favor that alternative. Creating a trust, naming a trusted family member or friend as agent under a power of attorney, setting up a mechanism for monitoring finances — all of these approaches can help reduce the need for conservatorship or other court involvement.

It is worth observing that this is not just a matter of self-determination — it is also an issue of economics. Court oversight of a conservatorship tends to be an expensive undertaking. It can also be frustrating for both the subject of the proceedings and the conservator.

Of course conservatorship is an expense (and a frustration) that absolutely has to be incurred in many cases — but it should not be the default choice or even undertaken lightly or regularly. Our first effort is usually to try to figure out an alternative that provides both assistance, protection and even peace of mind.

[A word of warning about the principles we discuss in this article: not every state uses “conservator” and “guardian” the same way that Michigan (and Arizona) does. This case, and our observations about it, apply to conservatorship of the estate under Michigan’s law, which is very similar to Arizona’s.]

Is Dispute Inevitable When Two Children are Named as Co-Trustees?

MAY 18, 2015 VOLUME 22 NUMBER 19

So often our clients assure us that their children are different from other children. Our clients know that their children will fundamentally get along. They are sure that there will be no big problems when they die, and that the children will communicate and cooperate. Fortunately, that turns out to be the case for our clients. But other lawyers’ clients seem to be very different.

Betty Lundquist (not her real name) must have thought her two daughters could work well together, because she named them as successor co-trustees of the revocable living trust she set up. She directed that the daughters (Peggy and Lisa) were to split her estate equally. She also signed a “pour-over” will, directing transfer to her trust of any assets not already properly titled at her death. For whatever reason, she named Lisa as the sole personal representative of her probate estate.

Betty had actually transferred pretty much everything to her trust, and so probably envisioned that there wouldn’t be much need for a probate at all. As she approached death, however, things were already getting tense between Peggy and Lisa. The day before Betty’s death, Peggy and her husband tried to transfer some of her trust accounts into their own name. They got the original will and trust documents from Betty’s accountant, and declined to share them with Lisa. Peggy was living in Betty’s home, and wouldn’t let Lisa even into the home to look at — and inventory — their mother’s belongings.

When Betty died in 2011, Lisa filed an emergency petition with the probate court seeking release of the original will and other documentation. She ultimately was appointed personal representative, and Betty’s will was admitted to probate. Peggy thereafter refused to co-sign trust checks to pay Betty’s bills, or motor vehicle affidavits to transfer car titles.

Eventually the probate proceedings were wrapped up, though the sisters were still not getting along. Finally, Lisa filed a request for payment of her mother’s estate’s expenses — including her attorneys fees for the probate proceedings themselves. Peggy responded by arguing that Lisa should have been disinherited because she filed the probate proceedings at all. Her logic: Betty’s will and trust provided for automatic disinheritance for anyone challenging her estate plan, and Lisa’s filing of a probate proceeding amounted to a challenge of their mother’s plan to avoid probate altogether.

The probate court approved payment of attorneys fees of $8,081.20, and a little more than $7,000 of other costs incurred in administration of the estate. Since the bulk of Betty’s estate was actually in her trust, the probate judge also ordered that the payments would come from the trust to the extent necessary. Peggy appealed both the approval of attorneys fees and the order that the trust should pay the fees.

The Arizona Court of Appeals ruled that the attorneys fees were appropriate and reasonable, and upheld the order. Furthermore, it agreed that the probate court had the authority to order payment from the trust — even though the trust had not been submitted to the court for oversight. According to the appellate court, both the trust’s language and Arizona law provide for payment of the decedent’s expenses — including probate and administrative expenses — from trust assets. Johnson v. Walton, May 14, 2015.

Peggy’s argument (that no probate proceedings were even needed) might have carried more weight if the Court had not been convinced that she actively interfered with the orderly administration of her mother’s estate. In fact, with even a modicum of cooperation Betty’s daughters might well have had a smooth, easy and inexpensive trust administration, and no need for any probate proceedings. That is a common result in similar circumstances — especially when one of the children is put in charge and they behave responsibly and honestly. (Of course, the person in charge need not be one of the children — but that is the choice we see most often.)

Was Betty’s mistake putting her two daughters in joint charge, and assuming they would work together? It’s always hard to figure out exactly what else might be going on when reading a Court of Appeals opinion, but if the joint authority didn’t cause the problem, it certainly did not help prevent the later dispute.

Our usual advice: rather than appointing two (or more) children with equal authority, we suggest you default to a choice of the one person who is most responsible, most widely respected among your beneficiaries, most available and most trustworthy. For clients who tell us that each of those terms applies best to a different child, we suggest that they use some method to make a single selection (coin flips work in extreme cases). Fortunately, though, our clients’ children all get along, all work beautifully together and never have disputes. Just like our own children.

Top Ten Reasons to Skip the Living Trust and Sign a Will Instead

FEBRUARY 2, 2015 VOLUME 22 NUMBER 5

Last week we suggested some of the reasons why you might think about having a revocable living trust as part of your estate planning documents. This week we’ll try to turn it around, and give you ten reasons why you might prefer to have a will (“just” a will) instead.

Let us be clear about two important points before we begin. First, our views are not shared by all lawyers. Some — especially those practicing in states with famously simple probate procedures — are vigorously opposed to revocable living trusts. Arizona’s probate procedures are quite simple; they are much simpler, actually, than most people think they will be. We are not opposed to revocable living trust, though. We tend to think of the question as a cost/benefit analysis. The trust will almost always be a more efficient plan, but the initial costs may not be justifiable in your circumstances.

Which leads to our second point: the cost of establishing a revocable living trust will almost always be considerably higher than the cost of preparing a will instead. How much more costly will depend on your situation and will vary quite a lot from lawyer to lawyer, but the benefits of living trust need to outweigh those costs before you make the plunge.

With that background let’s see if we can come up with ten reasons to favor a will rather than a living trust:

  • 10.There’s some reason you really ought to subject your estate to the probate process. Probate in Arizona is much less formidable than people think, but most people still want to avoid it. But there are two good things that happen with probate: (1) court supervision of the management and distribution of your assets, which might actually be beneficial in some cases, and (2) clear resolution of any remaining claims against your estate. That last one is usually more important for professionals — if you are a doctor, or lawyer, or architect, it might be advantageous to intentionally require a probate of your estate to get protection against possible lingering malpractice actions, for instance.
  • 9. You really want to understand your estate planning documents. Trusts actually can be a little daunting to understand. We take pride in our ability to write legally sufficient provisions in something approximating the English language, but we know that even our documents can be hard to understand. That’s a bigger problem for trusts than for wills. We can overcome this problem, of course, but only if you want to participate.
  • 8. Your personal situation is completely stable. You say you’re widowed, and have just one completely child? And that your child is completely trustworthy, has already provided for her own children’s educations, and doesn’t need any help or support from you? Great. Your plan is likely to be very uncomplicated, and we probably can come up with a way to execute it without the cost or hassle of creating a trust. Of course, things change — let us know if your child’s situation changes or the simplicity of your personal and financial situations unravel.
  • 7. You love paper, and take good care of it. Do you have a notebook that includes recent statements from all of your accounts, together with your accountant’s, your financial planner’s, your attorney’s and all your doctors’ names and contact information. We love you. You might not need a trust because you’ve already done a lot of the organizational work for your family. Please keep that notebook up to date.
  • 6. You hate paper. Maybe you are the opposite of the person described above. You can’t even remember all of your bank and investment accounts, and have a big, unsorted pile of paper sitting on the floor next to the desk in your office. In that case, the creation of the trust — and the important task of transferring assets to it — might overwhelm you, and make the will a more attractive option. Of course, you are the person who would benefit most from the organizational structure of creating and funding a trust, but there’s no magical incantation we can attach to the trust to make it happen automatically.
  • 5.  You are thrifty. Do you think regular lawyer visits and the cost of estate planning are just too high? Do you suspect that all of this is just an attempt to get you to part with your hard-earned money? You might benefit from a trust, but you might also be anxious about whether you are being oversold. Even if a trust is a slightly better option, your desire to save the extra costs needs to be acknowledged.
  • 4. You have already completed beneficiary designations for everything. Great! You might well have worked around the value of a living trust, and at a much lower cost. Of course, you need to think about future changes. What happens if a named beneficiary dies? What about the possibility that you spend more from your bank savings than from your brokerage account in the next ten years? Or the reverse? What if there’s a new grandchild, or a marriage or divorce, in your family? Of course changes happen whether you have a will, a trust or beneficiary designations — but in the case of beneficiary designations, you might need to make changes to a dozen different accounts/assets. And you need to actually do it, promptly and completely. Beneficiary designations are a great alternative, but require your continued diligence.
  • 3. Your assets are uncomplicated. Maybe you have only a few different assets, and they are typical. You have a house, a single bank account, an IRA, a car and a single brokerage account? That’s pretty uncomplicated, and there might be other options (beneficiary designations, for instance). Oh, wait — you also have life insurance, and a half dozen government bonds? That starts getting a little more complicated. A small art collection? Three different banks? Hmmm.
  • 2. Your estate is worth less than $75,000. That’s a magic number in Arizona. That’s how much your beneficiaries can collect without having to do a probate proceeding. More good news: that figure is the amount subject to the probate process that you can transfer. In other words, if your house has a beneficiary designation, and your bank account has a POD (pay on death) entry, then your heirs can use the $75,000 rule to collect your car and that small credit union account. You might not need a trust to avoid probate.
  • 1. The odds of your estate plan “maturing” (that is, the odds of you dying) in the next, say, five years are very slight. If you are 25, married, and leaving everything to your spouse, most of the benefits of a living trust will only appear if the two of you die at about the same time. While that could happen, it’s not too likely. The additional cost of a living trust might not make any sense in your circumstances.

Does that help? We hope so. We do want to help demystify this decision.

Top Ten Reasons You Might Want a Trust, Rather Than Just a Will

JANUARY 26, 2015 VOLUME 22 NUMBER 4

Do you need a living trust? Even with an estate tax threshold of over $5 million (and double that, for most married couples)? That is the primary question posed by most of our estate planning clients.

For years the answer depended mostly on the size of your estate. Not that there were (or are now) any inherent estate tax benefits to having created a living trust, but it was easier to take advantage of the easy ways of minimizing taxes using a trust than otherwise. So most Arizona couples worth more than about $1 million were urged to establish a trust. Couples who hoped to be worth more than $1 million often took the step, too — on the chance that their assets might grow enough to create a possible estate tax liability.

Then the federal government started raising the tax level, ending up at $5 million and indexed for inflation (so that the threshold for 2015 is $5.43 million). They ultimately changed the rules for married couples, too, making it easier for a surviving spouse to use his or her deceased spouse’s exemption, effectively doubling the level at which estate taxes were a driving factor. The State of Arizona jumped into the act, too, by repealing its state estate tax altogether. That all means that for more than 99% of Arizona individuals (and couples), estate taxes are no longer an important reason to consider creating a trust.

Does that mean that no one needs a living trust any more? Not exactly.

First, let’s think about people who established a trust back when it was an important step — do they need to consider revoking their trusts now? No. There are almost no downsides to creating a trust, other than the cost and trouble of setting them up in the first instance. Even though it might be hard to justify setting up a trust now, the individual (or couple) who has already gone through that process should probably not undo their earlier work.

Should a person worth well less than $5 million ever create a trust? Yes — at least in some situations.

Let’s get right to the point: what are the top reasons you might want to create a trust? With thanks and a nod to our associate attorney Elizabeth N. Rollings, who created the original list, here are our offerings:

  • 10. You really, really hate the thought of probate. It’s not the monster you probably think it is, but that’s not to say it’s a lot of fun, or cost-free. We can try to persuade you that it’s not that important to avoid probate — or we can just help you avoid the process.
  • 9. You favor privacy. There’s not all that much public disclosure involved in the probate process, and most of what does need to be disclosed can just be shared with your heirs. But there are some things that get into the public record, like the text of your will and the names and addresses of the people to whom you have left money or property. Do you have unusual family dynamics, or a publicly recognizable name, business or assets? You might prefer to create a trust.
  • 8. You want to make it easier for your executor. We don’t actually use the term “executor” any more, but we know what you mean. It’s simply easier for a successor trustee to get control of your assets than it is for that same person when they are named as agent on a power of attorney. It’s also easier to arrange for an orderly transition as you are less able — from having your chosen administrator named as successor trustee to naming them as co-trustee, and dividing the job in a reasonable — and flexible — way.
  • 7. You have complicated assets. Most people don’t think their assets are complicated. “I just have Certificates of Deposit in the four Tucson banks that pay the highest interest rates,” you say. Oh, and then there are the government bonds. Plus a brokerage account at a national low-cost broker, and a rollover IRA. Did you remember to mention those almost-worthless oil and gas rights you just learned about from your grandfather’s estate? Complicated, complicated. Having a trust makes it much easier for someone to handle your assets for you — both after your death and while you are still alive but not functioning at the top of your game. Oh, and there may be income tax benefits to having your assets in the trust (though you — or your spouse — may have to die in order to get the tax benefits. So maybe we’ll soft-pedal those).
  • 6. You have complicated distribution plans. This one is related to the previous one, and — as with “complicated” assets — clients seldom think their plans are complicated. “I just want to leave everything equally to my three children,” you tell us. Oh, plus $10,000 to each grandchild, and a $100,000 gift to your church. Also, a list of personal property and who is to get it. And some thoughts about what should happen if, god forbid, one of your children should die before you. The more complicated your distribution scheme, the more you need to consider a trust. Why? Because your distribution will be more private, and it’s easier to adjust to changes in your future (should your church’s gift go up as your net worth expands, or down as you draw down your IRA?).
  • 5. You have real estate in more than one state. Probate, as we have said before, is not as difficult as you probably think. But if you have real estate in more than one state, we have to go through the process in each state. Some states are much more complicated and expensive than Arizona. So if you have your home in Arizona, a condo in California, a summer place in Wisconsin, and a timeshare in Virginia, you might want to think about a living trust. Even if you only have two of those, you might be a better candidate for a trust.
  • 4. You have professional children, or wealthy children. Your son is an architect, and your daughter is a physician. Why do they need their inheritances to be in trust? They don’t — but it’s an extra gift from you to put them in trust. You can help protect their inheritance from creditors, malpractice claims, even divorce proceedings. And you might be able to keep your assets out of their estates when they die, thereby reducing the amount of estate tax the grandchildren pay.
  • 3. You have minor children, or children (or grandchildren) under about age 25. Why 25? Recent research suggests that that’s about the age at which a child’s brain really matures, even though the legal system considers them mature at 18. Of course you get to choose the cut-off age, but we are urging people to think about 25-or-so for their planning. Even if your children are older, a share of your estate might go to grandchildren — and they could be younger than the cut-off age you choose.
  • 2. You have a family member who is just not good with money. Is your son (or, for that matter, his wife) a bit of a spendthrift? Is your youngest still trying “find” herself? You might want to provide some sort of management for that beneficiary’s share of your estate.
  • 1. You have a child or grandchild with a disability. Are they receiving public benefits like Supplemental Security Income (SSI) or Medicaid (in Arizona, AHCCCS)? You need to create a special needs trust for any share they will receive. Are they not on public benefits right now? You probably still want to consider a special needs trust, because you don’t know how things will change over time. The same rules apply for any person you plan to leave money to, including your long-time housekeeper’s son or the young woman who grew up with your kids and was treated like a member of the family. We just use “child or grandchild” because they are the most common recipients.

Any of those sound like you? Let’s talk about whether a living trust is the right choice. Oh, and if you don’t live in Arizona — talk to your own lawyer, who might rearrange the order, drop some of these points altogether, and add others.

How Increased Estate Tax Exemptions Affect Existing Trusts

SEPTEMBER 29, 2014 VOLUME 21 NUMBER 35

A lot has changed in American estate planning in the last decade (as you may have already heard). Estate tax thresholds have increased to (as of 2014) $5.34 million. On top of that figure, there is a relatively new concept of “portability” of the estate tax exemption, so that married couples can (more or less) double that exemption amount in most cases. Meanwhile, Arizona has eliminated its estate and gift tax regimens altogether.

It goes without saying, but we can’t avoid saying it: if you haven’t updated your estate plan in the past decade, you should contact your attorney right away about getting that process started. You probably can get by with a simpler estate plan than you needed before, and you can probably make most or all of your decisions on the basis of what you’d like to do with your money, rather than the tax consequences.

Meanwhile, we see a lot of estate plans that have not been updated. Some of those belong to people who have died with their aging wills and trusts in place. We also see a fair number of trusts for people who died years ago, and for whom estate tax liabilities turned out to be unimportant. Is there anything that can be shed to fix tax-driven complications that are no longer needed?

Yes, as it turns out. We do have a couple caveats that need to be mentioned as we open this discussion, though:

  1. We are writing about Arizona tax and estate law, not other states’. If you live in another state, or if your trust is set up in another state, you probably ought to speak with someone familiar with that state’s laws. Keep in mind, though, that the governing law might not be obvious; if your mother wrote a trust in, say, Florida, and died in Tennessee naming a California daughter as trustee, do you know which state’s law applies? Neither do we — the answer is going to be very fact-driven, and so the first question you might want to address with a lawyer is whether you’re even talking to a lawyer in the right state.
  2. Even if Arizona law applies, or the principles we describe here are the same for the state governing the trust, be very careful about generalizing the points we raise here. Discuss them with an attorney, and be alert for the possibility that seemingly small changes in facts can yield entirely different answers.

Disclaimers in mind, we can proceed to discuss what has to be done, and what can be done, with tax-driven estate plans that have not been updated to modern tax concerns. Here are a few examples of what we see:

  • Mr. and Mrs. Johnson created a joint revocable trust in 1995. It provided that on the first spouse’s death, the trust would be divided into two separate trusts. One is called the “decedent’s” trust, and it consists of the separate property of the first spouse to die, plus that spouse’s one-half interest in community property. Since Mr. and Mrs. Johnson are only worth about $1 million, they probably didn’t need such a two-trust arrangement at all — but Mr. Johnson has now died. Mrs. Johnson doesn’t want to go through the bother of dividing assets and, knowing that the estate tax exemption is now several times their combined net worth, she wonders if she can just skip the two-trust part.
  • Mr. and Mrs. Gonzales had a very similar trust. Mrs. Gonzales died in 1999, and Mr. Gonzales actually made the division into two trusts. The “decedent’s” trust is now worth about $1 million, and Mr. Gonzales is tired of paying the annual cost of preparing income tax reports for the trust and providing accounting information to his children (they say they don’t want him to have to do that, anyway). Can he just terminate the decedent’s trust?
  • Mr. and Mrs. Lee have a very similar trust. Mr. Lee is very ill, and Mrs. Lee has been handling their trust for the past several years. The Lees are worth about $6 million. Is there anything Mrs. Lee should be doing with their trust? Assuming Mr. Lee dies before Mrs. Lee, is there anything she should watch out for?
  • Mr. and Mrs. Jorgensen also created their two-trust arrangement in the late 1990s. A very large part of their estate is in Mr. Jorgensen’s 401(k), which names the trust as beneficiary. Is there anything they ought to be thinking about?

Of course the Johnsons, Gonzales’, and Lees could have made changes to their estate plans if both spouses were alive and able to understand and sign changes in each case. But since that didn’t happen, they may be stuck with their estate plans — unless either there is language in the trust or something in Arizona law allowing changes. The Jorgensens are in a little bit different situation, as the decision to name the trust as beneficiary of Mr. Jorgensen’s 401(k) was probably driven by tax considerations that no longer apply.

Let’s deal with the authority to make changes first. We have a couple suggestions for Mrs. Lee, Mr. Gonzales and Mrs. Johnson:

  1. Read the trust. Read it again. It may be hard to parse all the rules, but it will be a productive session. Look for things like the discretion to make distributions of principal, the authority to amend the trust, and any authority the trustee (or the surviving spouse) might have to modify the trust’s terms. Nothing there? Don’t panic. But you can’t just choose to ignore the parts you don’t like.
  2. Talk to a lawyer about Arizona’s law on modification of trusts. Ask specifically about three words: modification, reformation and decanting. Arizona law now makes it easy to change trust provisions in some circumstances — but note that you may well have an obligation not to hurt the interests of the remainder beneficiaries (children, step-children or whoever receives property on the death of the surviving spouse). Know that Arizona’s trust law has changed dramatically in the past few years, and so even if you got advice that nothing could be changed a decade ago, the answer today might be different.
  3. Check with the remainder beneficiaries. They might even agree with you that modification or termination of the trust might be a good idea. Just to be safe, though, talk with your lawyer first; she (or he) might give you a specific idea to discuss with them, or might want to initiate the discussion herself.

Mr. Jorgensen: get in to your lawyer’s office and discuss beneficiary designations. While naming a trust as beneficiary of a retirement account is not necessarily bad, it is usually dangerous and should only be done when you understand exactly what you are trying to accomplish.

Our takeaway: get good legal advice before you just decide to make changes. But don’t despair, as it might be possible to modify old estate plans, even after death.

What To Do About a Child Who Can’t Handle Money

SEPTEMBER 1, 2014 VOLUME 21 NUMBER 31

A reader asks: “could you do an article on how to leave inheritance to a son who is not good at handling money? Should I leave his portion to another son who is good at it? They are very close and would get along.”

First we have a disclaimer, then the answer, then an explanation.

The Disclaimer

We don’t know our reader’s life situation, or her son(s), well enough to give her actual legal advice. The answer we offer will be based on generalities, and might not apply to her very well. This is why one hires a lawyer — to get actual advice based on one’s real circumstances (oh, and for drafting of the documents — but that’s usually less important than the advice).

We do have some observations and suggestions to consider, but they are based on situations that we have seen before and our knowledge of law and human nature. They are offered not as an answer, but as an exploration of some of the alternatives our reader — and you, if you are in a similar situation — should think about.

The Answer

What you probably need, dear reader, is a trust for the benefit of your son who is not very good at handling money. Whether your son who is good at handling money will serve as trustee or not should be a question that you discuss with your attorney. But if you meant to ask whether you should just disinherit your son who is not good with money and give a double portion to your other son (expecting him to take care of his brother) — the answer to that question is a clear and firm “no!”

Some Definitions

(Special bonus section. It will help the explanation flow more smoothly.)

An arrangement where one person handles money for the benefit of another is called a trust. A trust can be formal, with lots of legalistic provisions and directions to the trustee, or very simple. You can simply hand a check to one person, saying “here, take care of this for your brother” and create a trust. But don’t — that’s a sure way to destroy familial relationships and transfer family wealth to lawyers. It is important to have an actual trust document.

A trust can be created in your will (in which case it is called a testamentary trust) or while you are still alive (in which case it is usually called a living trust, though some lawyers prefer the term inter vivos trust). The person who is entitled to receive benefits from the trust, whether right now or upon the death of the current recipient, is called a beneficiary.

A trust that prohibits the beneficiary from transferring his or her interest in the trust’s assets to another person is called a spendthrift trust. That doesn’t necessarily mean that the beneficiary is a spendthrift, though he or she may be.

The person who handles money for another is a trustee, and a trustee is a fiduciary. A fiduciary has an obligation to report the finances of the trust to the beneficiary (beneficiaries, actually — the people who receive benefits on the death of the current beneficiary may also be entitled to reports. But that’s a topic for another day).

If you create a testamentary trust (in your will, remember?), you have pretty much assured that your estate will need to go through the probate process in order to fund the trust. That’s not necessarily a bad thing, but it often comes as a surprise to clients. Avoiding probate while establishing a trust usually means a more expensive estate plan.

The Explanation

The question is deceptively simple, and the answers have a number of repercussions to consider. Can you simply disinherit a child who is not good with money? Yes, you can (at least in Arizona, and assuming the child is not a dependent or minor child). That might lead to hard feelings, and even litigation, but assuming you are competent and your wishes are clearly stated, the disinheritance should be effective.

At the same time, you can leave a disproportionate share of your estate to someone else. You can even tell them you expect them to take care of a sibling (or a grandchild, or a spouse, or anyone else you are disinheriting). But you can’t expect them to actually carry through. They may be saintly and responsible, but they are not immortal. Your son will probably leave his estate to his wife or children — and they might or might not carry through on his obligations. Or your son might have business reverses, or be sued by someone he injures accidentally, or … you can begin to see the variety of problems that could arise.

There’s a practical problem in addition to the legal/financial one. Your two sons get along well? We can tell you that cutting one out and telling the other to take care of his brother will end that positive relationship. The disinherited child will feel like he has to beg for something he is entitled to. The favored child will feel like he has been thrust into a parental relationship with his brother. Each will resent the other.

By creating a trust, you reduce that problem — but you do not eliminate it. The trustee son can now point to the document to explain his decision (“see? Mom said I was not to just turn the money over to you to buy as many cars as you thought you needed”), but there will still be a fundamental change in their relationship. You might want to consider making someone else trustee.

But who? The brother who already doesn’t get along with the beneficiary? (Don’t dismiss this idea so quickly — the question is asked half-humorously, but half-seriously.) The bank? Another family member (the cousin who is a bank officer, perhaps)? A professional (your accountant, your lawyer, your broker)? A professional fiduciary (they are set up in many, but not all, states)? Each of those choices has positives and negatives, and they are the topic for some future discussion here — and a more immediate one with the lawyer you hire to draft your trust.

Best of luck. It’s not easy to deal with your children’s different needs, abilities and expectations.

Does Your Personal Property Belong to Your Living Trust?

JULY 21, 2014 VOLUME 21 NUMBER 26

When you create a revocable living trust, you usually want to transfer most (maybe even all) of your assets to the trust — especially if one of the reasons for creating the trust is to avoid the probate process. A new deed to your home, a change in titling of your brokerage and bank accounts, perhaps even a new title for your car or cars are often part of the process. But what about your household possessions — furniture, art hanging on the wall, your priceless collection of antique tape dispensers, your stamp and coin collections?

Commonly (but not always) people who establish a living trust might also sign a document purporting to transfer all of their personal property to the trust. Usually this is not much of an issue, since there are no title documents for most of your personal effects, and your intended beneficiaries can just collect, disperse and/or sell the contents of your house.

But another purpose in executing a living trust is usually to reduce the possibilities for disputes among your family members. Your trust, after all, should include a comprehensive approach to your plans for distributing assets on your death. Even a well-drafted trust document, though, will not resolve all family disagreements.

Consider Cliff Cruz (not his real name). Cliff and his first wife had four children, all grown. After Cliff’s wife died in 2003, he moved to Arizona to be near some of his children — and here he met and married Geraldine.

Cliff and Geraldine took steps to arrange their estate plans. The signed a revocable living trust agreement, providing that on the death of either spouse the trust would be divided into two shares — one belonging outright to the surviving spouse, and one held in trust for the benefit of the surviving spouse but ultimately distributed to the deceased spouse’s children. They explicitly agreed that everything they owned, even those things they each brought into the marriage, would be treated as community property — which meant that each of them would henceforth own a one-half interest in all of their combined assets.

The couple also signed “pourover” wills, each leaving everything they owned to the trust upon death. They signed a deed transferring their home to the trust, along with transfer documents for all their other assets. Just to be thorough, they also signed a document which said that all of their personal property — household effects, furniture, contents of their home, and anything else — also belonged to the trust.

Cliff died three years later. Five days after his death, two of his children went to the couple’s home and removed four safes, all of Cliff’s gun collection and various other items, and took them to their homes. They argued that Cliff had given his children the contents of the safes and the guns during his life — before he even met Geraldine. In the safes: almost $400,000 worth of gold and silver coins.

Geraldine sued, arguing that her step-children had essentially stolen assets belonging to her as trustee and intended to form part of the trust for her benefit. The children responded claiming the prior gift, and arguing that the trust should be modified to reflect their right to the gold coins and guns. After months of legal maneuvering, the case was tried before a jury. Geraldine pointed to the documents and testified that she understood that Cliff had transferred everything to the trust; the children testified that Cliff had purchased all of those items as investments for the children, and had given them to his children (but held on to them for safekeeping) many years before his death.

If you were on the jury, do you know what you would have decided? Before you read on, stop a moment and see if you can make up your mind, or whether you need more information. If you need more information, what do you want to know?

After a three-day trial, the jury returned a verdict that two of Cliff’s four children had, indeed, taken property belonging to Geraldine and the trust. They entered a dollar verdict, rather than ordering return of the items; they therefore did not identify which items they believed were wrongfully taken. But the dollar amount of the judgment, just $15,000, made it hard to figure out what they thought belonged to the trust.

Geraldine appealed, arguing that the judgment made no sense. If the jury believed that trust property was taken by the children, she argued, then the judgment should have been more like $400,000.

The Arizona Court of Appeals disagreed. First, the appellate court noted, if there is any theory on which the jury’s verdict can be upheld, it will normally be confirmed. In this case, the fact that Cliff gave his children the combinations to the safes might have been sufficient proof of his “constructive” delivery of the coins and safe contents to the children prior to his marriage, even though he kept the safes themselves at his home. In that case, the jury verdict would make sense — and so it was affirmed. Covino v. Forrest, July 3, 2014.

What does Cliff’s estate plan tell us about good practice in other cases? For one thing, if you think you have given property to your children — or anyone else — during your life, you should make that clear. That is especially important if you still have some of the gifts in your possession. Especially in second-marriage cases, it would be really helpful if families talked about ownership and expectations early, before the death of a parent simultaneously raises the emotional level and removes an opportunity to simply ask for clarification. And, finally, just signing an assignment of personal property to your trust might not be enough, depending on your individual and family situation — you might be better served by sitting down and writing out your intentions and understanding.

Disinheritance of Adult Child With Disabilities Leads to Lawsuit

OCTOBER 21, 2013 VOLUME 20 NUMBER 40

Suppose you have two children. Your daughter is very capable, very mature, very responsible. Your son has a developmental disability, or a drinking problem, or just problems handling money. What should you do with any inheritance you leave to your son? Put it in a trust? Make your daughter trustee?

Again and again clients tell us that they don’t want to do that. It seems like a lot of fuss, and probably the son whose inheritance goes into a trust will feel injured, like maybe his parents have said they don’t trust him, or don’t value him. Can’t you just leave everything to your daughter, and tell her to be sure to take care of her brother? Won’t that work?

No.

That’s essentially what Howard Kaufman (not his real name) decided to do. By all reports Howard was very strong-willed and domineering. He had a living trust, written in 2002, which divided most of his estate equally between his two daughters. He named his daughters as successor co-trustees.

Howard’s older daughter, Diane, was blind, diabetic and receiving Social Security Disability benefits. His younger daughter, Jackie, was a successful business woman.

In 2009, Howard decided to change his trust’s terms. He called a meeting with Jackie and his long-time girlfriend (Diane was not included); he arranged for a notary to be present. He told the three of them that he had changed his mind, and that he was going to disinherit Diane. He told Jackie that it would be her duty to see that Diane was “taken care of” with the inheritance she was to receive. Then he had the notary prepare amendments to his trust removing Diane as a beneficiary.

When Howard died, Diane was surprised to learn that she had been left out of his estate plan. Nonetheless, she turned to her sister to continue the pattern Howard had set of helping out so that she could live on her Social Security and disability insurance payments. Jackie declined to continue his pattern of gifts; she insisted that her father had left her his estate (of approximately $4 million) to “do with as I will.”

Diane ended up suing her sister. The theory of her lawsuit, though, was unusual. Rather than arguing that the trust change was invalid, or that Jackie had unduly influenced their father, she sued for a breach of contract. Her theory: Jackie had promised to take care of her, and it would take about $2 million over her lifetime to do that. She also claimed that Jackie had taken advantage of both their father (a vulnerable adult) and Diane (a dependent adult).

The jury in Diane’s case found that Jackie had broken her promise, and had taken advantage of Diane. The jury awarded actual damages of $1.4 million, plus punitive damages of $260,000 and attorneys fees of another $700,000. The jury also ruled against Diane with regard to the vulnerable adult claim — it found that Jackie had not taken advantage of their father. Jackie appealed the judgments against her.

The California Court of Appeals upheld the verdict. It ruled that Diane’s lawsuit was not a disguised trust contest, and that it was not inconsistent that they found Jackie had exploited Diane but not their father. One of the main issues: whether Diane was entitled to a jury trial on her claim. The appellate court ruled that she had, and that Jackie’s promise to take care of her sister was an enforceable contract. Kalfin v. Kalfin, October 15, 2013.

What is the lesson to be learned from Howard’s trust case and his daughter’s lawsuit? There are several, but two key ones jump out:

  1. Disinheriting your child with disabilities and relying on another child to “take care of” them is not a reliable way to handle division of your estate. It might work, but there are real risks — and the cost and family disharmony resulting from litigation is almost certainly worse than what would be involved in simply setting up a trust for te child with a disability.
  2. Do you have a child with a disability? A complicated estate? Uncommon wishes? Talk to a lawyer. A notary public is not going to be the best choice for drafting your estate plan. The cost of doing it right will be way, way less than the cost of dealing with the aftermath.

 

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