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.
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.
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.
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.
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.
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.
SEPTEMBER 19, 2011 VOLUME 18 NUMBER 33
It’s frankly a little hard to explain why trust lawyers get excited about the subject of this week’s article. After all, it seems to be about who will pay for the new doors in a home renovation in a pricey suburb of Phoenix. The bill was large — $8,276.10 — but hardly astonishing. Let’s see if we can convey some of the excitement.
Richard and Kristen Williamson owned their home in Scottsdale, Arizona, just west of McDowell Mountain Regional Park. They had also created a revocable living trust. Just as they should, they had transferred the title to their home into the trust’s name.
But what does that mean? In Arizona, at least, that usually means that the trust “settlors” (the people who create the trust, sometimes also called “trustors” or “trust creators”) sign a deed from themselves as owners to themselves as trustees. So Mr. and Mrs. Williamson had transferred their home by just such a deed — and the Maricopa County Recorder’s office indicated that ownership of the home now belonged to “Richard M. Williamson and Kristen A. Williamson as Trustees of the Williamson Family Trust.”
Then the Williamsons — again quite properly — went about living their lives. In June, 2005, they decided to construct an addition on their home. They hired a contractor, Freedom Architectural Builders, to do the work. Their contract was unremarkable; it spelled out what the contractor would do and how funds would be released, in stages, as work progressed.
Almost two years later the work had progressed to the point that it was time to put doors on the addition. Freedom Architectural Builders sub-contracted with another company, PVOrbit, Inc. (it was doing business as Fountain Hills Door & Supply), to actually provide the doors and hinges. PVOrbit did what it was supposed to do, delivering doors and hinges to the home and sending its invoice to Freedom Architectural Builders.
Before the bill for doors got paid, however, Freedom Architectural Builders got into serious financial trouble. It notified Mr. and Mrs. Williamson that it could not complete the work on their home, and it walked away from the project. The Williamsons ended up hiring a new contractor to finish the work.
The Williamsons had no separate contract with PVOrbit or Fountain Hills Door & Supply, so they ignored demands for payment for the doors. Besides, they argued that they had already paid Freedom Architectural Builders for the doors, that they had to pay over $30,000 more than the total contract price to get the work done, and that PVOrbit’s complaint was with the contractor.
PVOrbit responded by filing a lien against the Williamsons’ home. The lien — often called a “materialman’s” lien or “mechanic’s” lien — can be unilaterally filed by someone who has provided materials used on real or personal property without having been paid. There are some specific rules about how such liens may be filed, and they vary from state to state. In Arizona, there is one important (for our purposes) limitation: such a lien can not be pursued against a home actually lived in by its owner.
Mr. and Mrs. Williamson sued, asking that PVOrbit be ordered to remove the lien and pay their attorneys fees and costs. At about the same time, PVOrbit sued the Williamsons and Freedom Architectural Builders for the doors they had installed. The two lawsuits were consolidated. Freedom Architectural Builders filed bankruptcy and was dismissed as a party in the consolidated lawsuits.
PVOrbit argued that the Williamsons were not owner/occupants of their home. The home, according to the door supplier, actually belonged to the Williamson Family Trust, not Mr. and Mrs. Williamson. Besides, said PVOrbit, the Williamsons shouldn’t be allowed to get away with not paying for the $8,276.10 worth of doors and hinges — to allow that would be to unjustly enrich them. The trial judge was not impressed with either argument; he dismissed the PVOrbit lawsuit and granted the Williamons $6,000 in fees and costs against the door company.
Admittedly, trust lawyers tend to be easily excited, at least when it comes to arcane issues like this question: who actually owns property titled to a trust? The Arizona Court of Appeals has probably raised the level of excitement (and agitation) among trust lawyers by upholding the trial judge in the Williamson/PVOrbit litigation, but with a slight twist. The appellate court has decided that because the deed says “Richard M. Williamson and Kristen A. Williamson,” the Williamsons are in fact owners of their home — even though the rest of the title qualifies their ownership interest: “…as trustees of the Williamson Family Trust.” It is a technical reading of the relationship of the Williamsons as individuals to the Williamsons as trustees. Williamson v. PVOrbit, Inc., September 1, 2011.
There is actually a perfectly good basis on which the Court of Appeals could have relied. Trust law has for centuries allowed for a distinction between the “legal” ownership of property (what the Williamsons as trustees held) and the “equitable” ownership of the same property (what the Williamsons held as trust beneficiaries). The appellate court could have decided that the statute protecting owner/occupants of homes was satisfied if the ownership interest is a beneficial one. That would have solved the problem.
What difference does it make? Well, what if Mr. and Mrs. Williamson — for whatever reason — decided to let their successor trustees take over. Now ownership might be held as “Skip and Marcy Jackson as Trustees of the Williamson Family Trust.” (Note: we don’t actually know who is successor trustee of the Willaimsons’ trust, and we don’t know anyone named Skip and Marcy — we just like the sound of it.) Would that mean that Skip and Marcy would have to move in with the Williamsons to protect against materialman’s liens? That would be silly — so long as Mr. and Mrs. Williamson are beneficiaries of the trust they created, they have the equitable ownership interest and the right to be, well, owner/occupants.
One other thing about the Williamson case strikes us. It may work to the advantage of people who worry about buyers’ title insurance policies. Some have suggested that transferring your home into a living trust could arguably be a transfer that voided your title insurance coverage. If the Williamson decision is valid, that argument would be a lot easier to strike down.
AUGUST 8, 2011 VOLUME 18 NUMBER 29
Last March we told you a good story about revocation of a living trust, though we cautioned you not to use the same method. A year before that we told you about another colorful character and how he revoked his will. Both of those court cases made us scratch our heads about the behavior of the individuals, but it occurs to us that we might never have told you what you should do to revoke your will or trust. Let us take care of that oversight now.
Please remember that we only practice law in Arizona. What works here might not work, or might not work exactly the same way, elsewhere. Your best bet is always to talk with a competent local attorney about how (and whether) to revoke a will or trust — or, for that matter, a power of attorney or other planning document you might have signed. With that caveat, here are some thoughts on how it might be done:
Revoking a will
The usual way to revoke a will is to sign a new one. It is very uncommon for an individual to want or need to revoke a will without making new arrangements for disposition of his or her property. Somewhere in your will — probably in the first paragraph or two — there is probably language that says something like “I hereby revoke all other prior wills I have signed.” That’s all it takes.
It is also possible to revoke a will by physically destroying the original document. Actually, Arizona law says you can do this by committing a “revocatory act” on the document. That can include burning, tearing, or other physical acts of destruction on the will or on a part of it. There are two keys here: you must intend to destroy the will, and you must do it yourself (though it is permitted to instruct someone else to do it in your presence). It is not an effective approach to call up your brother on the telephone, ask him to go down to the basement where the will is located, tear it up and report back to you — it must be done in your “conscious presence.”
Another way to revoke your will is more subtle: you can misplace it. If after your death no one can find your original will, and it is apparent that it was once in your possession, the law presumes that you must have destroyed it. That is only a presumption — we might be able to overcome it by showing, for instance, that you told everyone your will was completed and in a safe place shortly before your death. Obviously, a better choice is to keep track of your original will, and tell your heirs and family where to find it.
Another way to “revoke” your will: get married, or divorced, or have children. Actually, these life changes do not really revoke your will under Arizona law, but they can effectively rewrite your will — and in some circumstances can change your entire estate plan. There is a presumption in either case that you just didn’t get around to making appropriate changes in your will. Once again, you can overcome that presumption by taking appropriate action. There is a high likelihood that the law’s presumption will not be accurate as applied in your facts, so after marriage, divorce or birth of a child you should get together with a lawyer to make sure your estate plan is in order.
Revoking a trust
When a client asks about revoking a revocable living trust, our first question is not about “how” but “why.” There are very few disadvantages to having a revocable living trust — the two primary problems are the cost of setting one up and the difficulty of transferring assets to the trust. If you have already incurred both the cost and the difficulty of funding, it probably does not make sense to revoke the trust. Instead, let us talk with you about revising the trust to remove whatever provisions trouble you. Is it just that you don’t want your former girlfriend’s name to appear in the document? OK — we can probably “restate” the trust, which will involve replacing the entire trust document with a new one without the offending name.
For whatever reason, perhaps you just want to revoke your revocable living trust. After all, “revocable” is in the name, right? How do you do it?
First, you look at the trust document. Does it tell you how to revoke it? Perhaps it requires a written revocation, and maybe even it calls for the signature of the trustee (these are common but not universal requirements). If the trust tells you how to do it, follow the trust’s instructions.
Is it enough to tear up the trust? No, not under Arizona law. How about misplacing the trust document? No, a missing trust does not create a presumption of revocation in the way that a missing will would do.
How about getting married or divorced, or having children? This one involves a little more nuance. Your trust might take care of the children part — a well-drafted trust will usually make provision for the later birth (or death) of a child, or even a grandchild. Sometimes that provision is by one of the legal shorthand terms “by right of representation,” “per stirpes” or even “per capita.”
Marriage may not be covered in the trust document or Arizona’s default law. Divorce is covered by the same default statute as we described above for wills — but with the added wrinkle that if your trust is a joint trust between you and your spouse, it is a little harder to figure out what happens in individual circumstances. The message here: if you have any of these big life changes (marriage, divorce, birth or death of a child or other beneficiary) get in to your lawyer’s office as quickly as you can to make the appropriate changes to your revocable living trust.
Powers of attorney
How do you revoke your power of attorney? If you have never shared the document with the named agent or anyone else, you can revoke it by simply tearing it up and throwing it away. If you have shared it, you should write a separate letter to everyone who has seen it indicating that you are revoking the power. Make sure any new power of attorney you sign deals with the older one(s): it may not be enough to just rely on the most recent document, since they don’t automatically revoke older powers of attorney in the same way that wills do.
Keeping track of power of attorney documents and formally revoking older ones is important for another reason. Unlike trusts and wills, revoked powers of attorney are still valid to the extent that your agent acts without knowledge of the revocation. Save everyone a lot of heartache, expense and confusion by having an attorney prepare your new powers of attorney and properly revoke older versions.
One final note: you can see that the effect of having older, revoked documents around can be serious and can vary between the different types of documents. Help us keep your estate plan straight, and your life uncluttered. We know that you paid good money for those old documents, and that it is hard to throw them away. Just do it. If we prepare your new estate plan, we will offer to help you revoke and destroy the old documents (and all those drafts and copies we lawyers sent you), and we’ll volunteer our shredder to make it discreet and effective.
MARCH 14, 2011 VOLUME 18 NUMBER 9
Let us be clear right up front. The California Court of Appeals ultimately agreed that Steven Wayne Stoker had successfully revoked a will favoring a former girlfriend. He also successfully revoked the trust created at the same time as that original will. In a sense, our headline is incorrect, since Stoker’s technique worked. But why in the world (other than for the good story thereby bequeathed to your children) would you ever use this technique to straighten out your estate planning? The right approach: talk to your lawyer, explain what you have already done and what you want to accomplish, and leave the revocation method in the hands of professionals.
Back to our story, which is admittedly both instructive and entertaining. Steven Wayne Stoker signed a will in 1997. In it he left some items of personal property to friends, but the residue (and bulk) of his estate was to go to the Steven Wayne Stoker Revocable Trust, which he had signed that same day. The trust named his girlfriend, Destiny Gularte, as trustee and beneficiary.
According to later testimony Mr. Stoker and Ms. Gularte had an angry argument several years later, and they separated permanently. One night about eight years after signing the will and trust, he apparently had a conversation with another friend about estate planning, and he resolved to change his will. At Mr. Stoker’s request the friend took down what Mr. Stoker dictated:
I, Steve Stoker revoke my 1997 trust as of August 28, 2005. Destiny Gularte and Judy Stoker to get nothing. Everything is to go to my kids Darin and Danene Stoker. Darin and Danene are to have power of attorney over everything I own.
Mr. Stoker signed this document, but (though two friends watched him sign it) no one signed as a witness. Mr. Stoker apparently did not notice that his friend had misspelled both Darrin’s and Danine’s names — the court record is silent as to who introduced those errors. Then he took out the original 1997 will, urinated on it, and set it on fire.
Three years later Mr. Stoker died, but without having done anything more formal to clarify his estate plan. His signature and his actions in 2005 raised a number of legal questions:
Had he revoked the 1997 will?
Was the 2005 will valid?
If the 2005 will WAS valid, what effect did that have on the 1997 trust?
The California probate judge — who had listened to the testimony and assessed the credibility of the witnesses — found that the 2005 will expressed Mr. Stoker’s actual wishes, and that the 1997 will and trust had both been revoked. The California Court of Appeals agreed, and upheld the finding that Ms. Gularte would not receive anything from his estate.
It is important to note that state law differs, and that Arizona law would assess these actions differently — even though the outcome might ultimately be similar. Indeed, California had adopted changes in its probate laws in 2009 making it easier to show an individual’s intent even though the precise procedural rules might not have been followed. That change in law made it possible for the probate court to enforce Mr. Stoker’s apparent intent despite his not having secured two witnesses’ signatures, not having formally revoked his revocable living trust, and having taken an unusual approach to the revocation of his prior will. Estate of Stoker, March 3, 2011.
Would the same result be reached in Arizona? Perhaps, but for different reasons. Ideas to explore in an Arizona probate proceeding might include:
Arizona permits “holographic” wills without witnesses, but requires the important parts to be in the testator’s own handwriting. Mr. Stoker’s will probably would not have complied with this requirement, since the handwriting was almost all his friend’s — even though he might have dictated the words.
Arizona does have at least one court case allowing witnesses to sign later — even after the death of the person executing the will. Here there were apparently two actual witnesses, though they had not signed the document at the time. Could they sign attesting that they had witnessed the will even after Mr. Stoker’s death? Perhaps.
On one point there is no question. Arizona permits revocation of an old will by any “revocatory act.” There is little doubt that urinating on and then burning the will would meet that requirement. (The appellate court, noting the practical difficulty of using this technique, observed that “we hesitate to speculate how he accomplished the second act after the first.”)
While there is little doubt in Arizona that the successful revocation of his 1997 will would prevent transfer of additional assets to his revocable living trust after his death, it is less clear what would happen to assets he might have already transferred into the trust’s name. The California court opinion is unclear about whether there even were any such assets; if there were, Arizona law might lead to a different result. But even that is uncertain, since Arizona adopted a change in trust law as part of the Arizona Trust Code effective in 2009. Under the new provision, the court can usually treat any document as a trust amendment if it “manifest[s] clear and convincing evidence of the settlor’s intent.”
Mr. Stoker did leave his children a pretty good story, regardless of how much property and money they might have received. But our recommendation remains: if you want to make changes to your estate plan, the relatively small cost of getting professional assistance will pay off in the long run. We do endorse Mr. Stoker’s revocatory act: it left a convincing impression of his intent and wishes.
FEBRUARY 21, 2011 VOLUME 18 NUMBER 6
We get asked plenty of general legal questions. We try to give helpful answers, recognizing that we can not give specific legal advice to non-clients (and particularly to questioners from outside Arizona, where we are licensed to practice law). Often our best answer is “check with a local lawyer familiar with the appropriate area of law.” Unsatisfying, but it really is the right answer in many cases.
Still, we want to get general legal concepts out to the public. Why? Because we think it makes non-lawyers recognize when the legal problem they face is too complex for self-help, and it even helps make the questioner a better client when they do get to the lawyer’s office.
What kind of legal questions can we answer? very general ones. Like these, which are some of our most common questions:
Does my living trust need a new tax ID number? The best way to answer this is probably to explain when a trust doesn’t need its own “Employer Identification Number” (EIN — even if the trust isn’t an “employer,” that’s the kind of tax ID number it will get).
General rule: every separate entity requires its own TIN, whether that is a Social Security number (for you) or an EIN (for your corporation, trust, LLC, or whatever). First major exception to the general rule: if your trust is revocable, and you are the trustee, for tax purposes it is not a separate entity at all — you don’t need an EIN and, in fact, you shouldn’t get one.
Now let’s make it a little more complicated. If your trust is irrevocable, or you are not the trustee, the rules are a little harder to parse. The key question is whether your trust is a “grantor” trust. If it is, and if there is only one grantor (or one married couple), then it does not need an EIN. If it is not, or if there are multiple grantors, it must have its own EIN.
Note that whether or not the trust needs (or is even permitted to get) an EIN is not the same question as whether it has to file a separate tax return. That one is more complicated, and we’ll save it for another day.
Can a revocable trust be named as beneficiary of an IRA? Yes, but be careful. This is something you should discuss with your attorney or your accountant (or both).
Before we talk about naming your trust as the beneficiary, we have a question for you: what are you trying to accomplish by naming the trust as beneficiary? If your trust divides equally and distributes outright among a fairly small number of beneficiaries upon your death, why not just name those beneficiaries on the IRA as well as in the trust? Then you don’t have to figure out the rules on naming a trust as beneficiary, and you don’t have to keep wondering if you’ve done it right.
Maybe you have a child who is ill, or a spendthrift, or needs to have his inheritance placed in trust. In that case — and in a few other cases — it can make sense to name your trust as beneficiary of your IRA. Now you need to become familiar with the difference between what lawyers usually call “conduit” trusts and “accumulation” trusts. The former require distribution of any money received from the IRA’s minimum distribution requirements each year, and the latter allow (but do not require) the IRA distributions to accumulate. The distinction is important; the accumulation trust will require distributions on the basis of the oldest possible beneficiary of the trust. That is the result in most cases where a trust is named as beneficiary.
These same rules apply, by the way, for other tax-qualified accounts, like 401(k) and 403(b) plans. Some advisers will tell you it is not even permitted to name a trust as beneficiary of an IRA or qualified plan. They are wrong, but the rules are a little difficult to figure out in individual cases. Also, some account custodians (that is, the bank or financial institution where the money is held) may limit or even prohibit trusts as beneficiaries.
How does community property work in Arizona? Nine U.S. states are usually listed as the “community property” states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In addition, Puerto Rico recognizes community property, and Alaska allows couples to choose community property treatment of their joint assets.
But what does it mean to have property held as community property? In Arizona, it means that the property is jointly owned, that each spouse has an equal interest, and that either spouse has the right to manage the property on behalf of the community.
When one spouse dies, his (or her) half int0erest in the community property normally passes according to his will or, if he did not sign a will, to his children (including those who are also children of the surviving spouse). To avoid that result couples are permitted to specifically designate their property as “community property with right of survivorship.” If that title has been used, the surviving spouse receives the entire community asset on the first spouse’s death. Note that the different community property states treat the right of survivorship differently, and we are only describing Arizona’s approach here.
It is also possible for a portion of an asset to be subject to community rights. This might happen, for example, if one spouse brought the property into the marriage but mortgage payments were made during the period of marriage from community income or assets. This kind of calculation is usually much more important in divorce proceedings than upon the death of one spouse.
Property received by inheritance or gift, and property owned before the marriage, are not community property — they are the separate property of the recipient or owner. Couples can choose to convert their community property into separate property, and can even agree that property acquired in the future will be treated as separate property.
Thanks. But I have a different question to ask. Go ahead — pose your question as a comment here, and we’ll try to answer it. Don’t be too surprised if we tell you that it is too specific, or requires knowledge of another state’s laws, or we can’t answer it for some other reason. But we’ll try to be helpful.
One word of caution: do not give us a detailed fact pattern and ask us for advice. We simply can not provide individual legal advice — free or even for a fee — based on unsolicited e-mails or comments. You will not have any lawyer/client privilege for your recitation of the facts, and we will not be able to help with that kind of inquiry. We do welcome your general questions that give us a chance to explain legal principles, though.
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:
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.
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.
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.
DECEMBER 27, 2010 VOLUME 17 NUMBER 40
Kenneth Boyd established a revocable living trust in 2002. He named his daughter Carol Boyd as trustee, and directed that the trust be divided, upon his death, into three shares. One share each was to go to Carol, to Kenneth’s mother Elizabeth Boyd, and to Carol’s son Ben Scott. So far nothing is remarkable or unusual about Mr. Boyd’s trust arrangements.
Elizabeth Boyd entered a nursing home in November, 2007. Kenneth Boyd died a month later. When it came time to divide the trust estate among the three beneficiaries, Carol Boyd simply wrote checks to each one, and sent Elizabeth Boyd’s share to her in care of the agent under her durable power of attorney.
The agent refused to cash the checks. Putting the money into an account in Elizabeth Boyd’s name, she argued, would simply make her ineligible for Medicaid assistance with her nursing home costs, and assure that a third of Kenneth Boyd’s estate would go to nursing home care for Elizabeth. If Elizabeth Boyd’s share could stay in trust, it could benefit her during her life, allow her to remain eligible for Medicaid, and assure that there would be something to pass on to her heirs on her later death.
It seemed obvious to Elizabeth Boyd’s attorney-in-fact that the continued trust would be in her best interest. Language in the trust could be construed to permit Carol Boyd to do just that — to turn the distribution from the trust into a “third-party” special needs trust. Elizabeth, through her attorney-in-fact, ultimately filed suit in California, asking the court to compel Carol to continue to hold the funds in trust for Elizabeth but not distribute any proceeds outright to her.
Carol Boyd pointed to the language of the trust, which gave her the power to do what was asked but did not direct her to do so. She insisted that her father would have wanted his money to support his mother until her death (or until the money ran out), and she declined to establish a special needs trust. So the legal question became whether Carol had an obligation to do so.
In an unpublished opinion, the California Court of Appeals ruled that Carol did not breach her duty to Elizabeth by failing to segregate her trust distributions into a separate, third-party special needs trust. It was not completely clear to the appellate judges whether such an action would even be effective; in any event, the opinion makes clear that Kenneth Boyd’s trust gave Carol the power, but not the duty, to modify the distribution terms. Boyd v. Boyd, December 16, 2010.
As is so often the case, there were a number of complicating issues in the Boyd case. They help point up the importance of communicating clearly with the lawyer who prepares your estate planning documents, and keeping those documents updated. Among the complications:
Kenneth Boyd’s trust actually left a larger share to his brother, James, who was scheduled to receive 40% of the remaining funds on Kenneth’s death. James, however, died just a year before Kenneth did, and the trust did not provide that his share would pass either to his surviving wife or his step-daughter. Despite the fact that James’ marriage was of long standing, he had never adopted his step-daughter — if he had, she would have taken his share of the trust as his child. Since he died without any legal “issue,” his share lapsed and was divided equally among the other three beneficiaries (Carol, Elizabeth and Ben).
Carol Boyd was actually the adopted daughter of Kenneth Boyd. That makes no legal difference, and probably was explained to the lawyer who drafted the trust at the time. But the adoption had been completed when Carol was 32 years old, and she had never met Kenneth’s mother Elizabeth, his brother James or his wife.
Kenneth and Carol lived in California. Elizabeth, James and his wife lived in New York. Consequently, the California courts had jurisdiction over the trust interpretation — but they had to consider the effect on New York Medicaid eligibility and trust law. Interstate proceedings often create additional confusion and difficulty.
It is extremely hard to know what Kenneth actually would have wanted in the facts as they developed. That is why estate planning lawyers go through the almost ghoulish routine of asking clients to imagine unusual sequences of family deaths and disability. The reality is that Kenneth Boyd died just a year after his brother’s death, and a month after his mother entered the nursing home (and qualified for Medicaid). If he had discussed the family situation with his lawyer during the year after his brother died, he might have made changes in his trust language. At least he might have clarified his wishes, so that the issue would not have to be decided by court proceedings.
NOVEMBER 22, 2010 VOLUME 17 NUMBER 36
Our clients usually have similar goals in their estate planning. They want to take care of their children. They may want to leave something to charity. They usually want to minimize taxes that they, their estate or their beneficiaries might have to pay. And they often tell us they want to make sure there is no quarrel among their beneficiaries, and that the process will not be contentious. We tell our clients that we understand, and that we will do what we can to meet those goals, but that the last one is hard to assure. We have no control over what the beneficiaries might do, and we simply can not promise that there will be no contest or litigation.
Will contests are actually quite rare. Contests over living trust provisions are even rarer. There are three good reasons that they are rare:
The wills and trusts are usually valid, and any contest would be frivolous. It’s actually hard to win a proceeding contesting a well-drafted estate plan.
Most people leave the bulk of their estate to the same heirs who would receive it if they did not prepare a valid estate plan. No one has any reason to contest your will if they would get exactly the same amount even if they could prove the will was invalid.
The amount of money involved is most often not worth the legal expense — particularly if the likelihood of success is not good.
Sometimes, though, the amount of money, the change in distribution plans and the circumstances lead one or more beneficiaries to challenge the validity of a will or a living trust. They usually do not prevail — especially if the documents were carefully drafted and executed under the supervision of a competent attorney. But they may still raise the challenge.
That was what happened with the beneficiaries of Mercedes Kibbee’s estate. Ms. Kibbee lived in the small town of Sheridan, Wyoming. Her late husband Chandler Kibbee had been an important business executive, and the couple had ranched in Wyoming for years. In fact, Ms. Kibbee was worth about $32 million.
In 1996, after her husband’s death, Ms. Kibbee signed a trust which (at her death) would have left a trust for her daughter paying $50,000 per year, and divided the rest of her assets between trusts for her son and for her granddaughter (her daughter’s daughter). Her son and granddaughter had powers of attorney to handle both financial and health care issues for her, and were named as successor trustees. That would have exposed her estate to a substantial estate tax liability (depending, of course, on the year in which she died) of as much as half of the total estate.
In 2005 Ms. Kibbee fell and broke her hip, and ended up in a nursing home for rehabilitation. She wanted to return home, and she believed she had plenty of resources to provide whatever care she needed in her home. Her son and granddaughter thought she should stay in the care facility, and they arranged to take over as trustees of her trust and to keep her at the nursing home.
With the help of a long-time secretary and bookkeeper, Ms. Kibbee made contact with a local Wyoming attorney, Deb Wendtland. Ms. Wendtland helped Ms. Kibbee revoke the powers of attorney and remove her son and granddaughter as co-trustees of her trust. Instead she named herself and a local bank as co-trustees, and she returned to her home. The bank officer and Ms. Wendtland discussed her estate planning with her, and pointed out that she would be liable for a huge estate tax bill if she did not make changes to her documents. She was very disturbed by that prospect and asked the two to contact an estate planning lawyer to help organize her plans.
Robert H. Leonard, an experienced estate planning lawyer from Laramie, Wyoming, began visiting with Ms. Kibbee. Mr. Leonard was chosen because he was recognized as an authority on estate planning; he is, for example, a Fellow of the American College of Trust and Estate Counsel (ACTEC). At about the same time Ms. Kibbee asked her local lawyer, Ms. Wendtland, to make contact with Ms. Kibbee’s daughter and get her to visit and help with arrangements.
After many visits and much discussion, Ms. Kibbee signed a series of documents prepared by Mr. Leonard and Ms. Wendtland. She adopted a fairly complicated estate plan, which included charitable remainder trusts for her son and daughter, charitable lead trusts for her granddaughter and great-grandson, and a charitable foundation to receive much of her estate. Each document was carefully explained to her before signing, and her questions indicated that she understood them and agreed. Each document was reviewed with one or both of the attorneys and her bank trust officer. The entire plan was explained to her children and granddaughter as it was adopted.
Notwithstanding all of those careful plans, Ms. Kibbee’s son filed a challenge. He objected to the change in his mother’s estate plan, and particularly alleged that her daughter had unduly influenced her to make the changes. He argued that by the time of the signing she had become incompetent, and that the plan reflected her daughter’s wishes rather than her own. He filed his action while his mother was still alive, and argued that the successor trustee provisions should become effective immediately.
Ms. Kibbee, through her lawyers, answered the allegations and countered that she was fully competent and the planning reflected her own wishes. Unfortunately, Ms. Kibbee died just two months after her son filed his challenge.
It took more than two years to frame the legal issues for resolution, but in 2009 the trial judge dismissed all of the son’s allegations. He appealed, but the Wyoming Supreme Court agreed with the lower court and let the dismissal stand.
The preparation of Ms. Kibbee’s estate plan was comprehensive, thoughtful and reflective. It involved two different lawyers discussing her wishes with her, as well as a trust officer who was very familiar with her finances (and, by that time, with her family). She expressed her wishes clearly and consistently. On some issues, when she wasn’t sure how she wanted to proceed, she asked thoughtful questions and had heartfelt discussions with her advisers. In short, it is hard to imagine how a physically frail but mentally alert elder could have done better at addressing a complicated and difficult subject. The contest was not successful, but it was not prevented, either.
Two vignettes stand out in the Wyoming Supreme Court’s recitation of the case:
When Ms. Kibbee was considering whether to leave significant sums to the local YMCA for the benefit of youth programs, her advisers arranged for a group of children to visit her ranch house. They played in the pool, enjoyed a barbecue and chatted with Ms. Kibbee as she sat on her terrace in her wheelchair. She asked if they could return the next weekend.
When her attending physician was asked about her mental status, he described an inquisitive, playful, alert elderly woman who not only answered his questions but also challenged him. “…she had wit and intelligence, and I thought that she had kind of an ironic sort of personality where she would be almost like she was testing me,” said her doctor. “I was the so-called tester, and she was testee; but she had turned it around.”
Kibbee v. First Interstate Bank, November 5, 2010.
OCTOBER 18, 2010 VOLUME 17 NUMBER 32
Three weeks ago we wrote about how to leave an IRA (or other qualified retirement plan) to a special needs trust for your child who has a disability. Two weeks ago we wrote about whether you should (and how you would) name any trust as beneficiary of an IRA. At the risk of getting too technical for most readers, this week we are going to tread lightly where few have gone before: let us explain what happens after you have named a trust as beneficiary of your IRA, and what choices the trustee of your trust might face.
First we have to clarify a couple of often-misunderstood concepts. We will write here about IRAs, but the same rules will apply to pretty much any “qualified” retirement plan. That means 401(k), 403(b), Keogh, SIMPLE, SEP-IRA and other plans will follow the same rules. Different tax rules apply to Roth accounts, but some of the same distribution principles will apply. For convenience, though, we will keep talking about IRAs.
There are actually several stages of IRA we might discuss. Let’s distinguish among them:
A regular IRA is “owned” by the contributor. There may be some community property rules in the state in which the contributor resides, or some marital rights attaching to the IRA in non-community property states, but for tax purposes the contributor “owns” the IRA.
One choice your beneficiary may have after your death is to “roll over” your IRA. If your beneficiary is your spouse, he or she can roll the IRA over into a new IRA in their name. This, incidentally, is where the IRA/401(k) (and etc.) distinction gets muddy; your spouse can roll your 401(k) account over into a new IRA. Those IRAs, whatever their source, are usually referred to as “roll-over” IRAs.
Spouses are not the only ones who can roll IRAs into a new account. Non-spouse beneficiaries can also do something similar, and the resulting accounts are often called “roll-over” IRAs, too. But they are different. They are also “inherited” IRAs (see below), and the beneficiary must begin withdrawing money from an inherited IRA immediately.
If a non-spouse beneficiary leaves your IRA right where it is, they become the owner but the IRA is now an “inherited” IRA. They can designate a beneficiary in case they die before withdrawing all the IRA funds, but any beneficiary will have to make withdrawals at your beneficiary’s rate. So, in other words, you name your 45-year-old daughter as beneficiary, you die, she names her 22-year-old son as her beneficiary, and upon her death he has to withdraw based on her actuarial life expectancy, not his own. She might have decided to move your IRA to another custodian; in that case she has an IRA that is both a “roll-over” and an “inherited” IRA.
With that background, the Internal Revenue Service has recently clarified how this all can work if you name a trust as beneficiary of your IRA. In Private Letter Ruling 201038019, issued on September 24, 2010, the IRA gave guidance to an individual taxpayer who requested approval for a proposed way of handling just this problem.
Private Letter Rulings, by way of background, are not intended to be official regulations or rules. They are individual guidance offered (for a substantial fee) to individual taxpayers who want to be sure they are not going to get in trouble. Although “private” in the sense that they apply only to that taxpayer, they are public in the sense that the IRS discloses them to everyone, and they do give some indication of how the IRS thinks about the issues addressed. You are probably safe proceeding on the basis of an Private Letter Ruling.
Here’s what the taxpayer proposed to do, and what the IRS approved, in the recent Private Letter Ruling:
The decedent had named his revocable living trust as beneficiary of two IRAs. He had three children, each of whom was to receive an equal share of the trust after his death.
The trustees of his trust proposed to divide each of the IRAs into three separate IRAs. In other words, there would be a total of six IRAs, still (for the moment) in the name of the decedent. Then each child would be named as beneficiary of two of the IRAs — one from each of the original IRAs.
Once that was accomplished, each of the six “transitional” (their term) IRAs would be rolled over into a new IRA. Each of those new IRAs would name one of the children as the inherited owner, and each child could then name his or her own IRA beneficiaries.
The custodians of those “final” six IRAs were each given a copy of the decedent’s revocable living trust, which was valid under state law and became irrevocable upon the decedent’s death. Those elements of the plan critical because they are required by federal tax law.
Each of the three children would be required to begin withdrawing their IRAs immediately, and at the rate calculated for the oldest of the three children.
The taxpayer’s proposed approach was fine with the IRS, but it would not necessarily be the only way to proceed. The trustee of the trust might be permitted, for instance, to leave the IRAs right where they were, to withdraw the funds over the period of the oldest child’s life expectancy, and to distribute those withdrawn amounts to the three children. But the IRS guidance makes it clear that this approach works, too.
The Private Letter Ruling doesn’t address one question. Why would the original IRA owner have named his trust as beneficiary if the IRAs were going to be distributed outright to the three children anyway? In such a case, we usually recommend that the owner name his children as beneficiaries directly — thereby avoiding the shortened payout period based on the oldest child’s life expectancy, as well as the need to go through the intermediate steps described in the Private Letter Ruling.
There are a number of reasons the IRA owner might have chosen to leave his IRAs to his trust. Usually those reasons include a disabled spouse, a child receiving public benefits, an unequal distribution of proceeds or some other complication. The Private Letter Ruling in this case does not give us enough information to determine which, if any, of those conditions applied. Still, it does give us valuable guidance for those cases in which a trust is named as beneficiary of an IRA.
