Articles Posted in Trusts

Can I give everything to the “love of my life” and keep it secret?

NO DISCLOSURE TO OMITTED HEIRS?

Up until 1997 a person could legally change his or her estate plan and the people previously benefited did not have any legal way to find out what the situation was. Before the law was changed to require disclosure as it is now, the state legislature committee reviewing the proposed legislation was presented with a case of a 90-year-old man who met the “love of his life” on a bar stool and married her three months later.

Love of his life.

He then changed his entire estate plan to disinherit his three children and six grandchildren and to leave everything to his new wife. At that time, the persons administering the 90-year-old man’s estate could legally refuse to tell his children and grandchildren what happened to his estate and could legally refuse to provide any of the documentation. The family was left in this type of situation with no alternative but to pursue expensive and timely court litigation.

THE LAW NOW REQUIRES DISCLOSURES

Where there is a living trust which becomes permanent on death and no probate court proceeding, there is no access to the trust document or its terms unless the successor trustee provides it. In a typical living trust situation, the person who established the living trust is the trustee of his or her own trust. The trust document provides for somebody else to be a successor trustee when the person establishing the trust either resigns or becomes deceased and no longer able to be the trustee. Upon the death of the person establishing a trust, the trust typically becomes permanent and irrevocable. The California probate code now provides that the trustee has a duty to provide a true and complete copy of a revocable trust after it has become a revocable to not only the beneficiaries named in the trust but also to any heir of a deceased person who requests a copy of the trust. The beneficiaries are the people named in the trust who are to receive benefits from the trust. Persons who are legal heirs have no legal right to receive benefits from the trust unless they are actually named as beneficiary of the trust. The term “heir” basically refers to a person who would be entitled to inherit from a deceased person if there were no will or no trust establishing who is to be paid the estate of the deceased person.

How Does the Successor Trustee Handle the Bills and Debts of the Deceased Trustor?

LIVING TRUST ADMINISTRATION

Successor Trustee paying trustor debtsIf there is a living trust and all of the deceased person’s assets have been placed into the living trust prior to death, there is no need for a probate court administration. Creditor Rights? For probates, there are specific court-supervised formal steps required to notify creditors and for approval and rejection of creditor’s claims. The situation involving a trust is much less formal and the laws differ somewhat. The person who administers a living trust following the death of the trustors (the persons who created the trust) is known as the successor trustee.

The successor trustee’s job is to follow the directions in the trust for the distribution of the trust estate to the beneficiaries. The successor trustee’s job may also be to pay the debts and bills of the trustors before distributing the estate to the beneficiaries, depending upon how the trust is worded.

TRUST & BENEFICIARIES GENERALLY LIABLE FOR THE DEBTS

By law, a living/revocable trust is liable for the debts of the trustors. The death of the trustors causes the living trust to become permanent and irrevocable. However, the debts still remain and the creditors to whom the debts are owed have rights against the trust to collect the money owed if the trust was revocable at the date of death of the trustors. If the successor trustee does not pay the debts but instead distributes the trust assets to the beneficiaries, then the creditors can sue the beneficiaries. In other words, the trust assets passed to the beneficiaries are still liable for the debts of the trustors. If the beneficiaries are sued by the creditors then they can cross-complain back against the successor trustee for failing to pay the debts. For this reason, a successor trustee may want to use the optional trust creditors claim procedure discussed below.

WHY DID THE TRUSTEE PAY ALL THAT MONEY TO HIMSELF?

WHAT ARE TRUSTEE FEES?

A trust is typically established by a document known as a declaration of trust will which is a document with instructions for how the trust assets are to be handled. The declaration of trust also identifies the trust creators, known as trustors, the beneficiaries who will be receiving money and benefits out of the trust and the trustee. The trustee is the person or institution responsible for administering the trust, writing the checks, paying the bills, etc. The trustees fees are what is paid to the trustee for doing the work of administering the trust.

THE LAW DOES NOT SPECIFY WHAT TO PAY TRUSTEES

To have a valid Trust, California law only requires a proper manifestation of the Trustor’s intention to create a trust, trust property, a valid trust purpose, and a beneficiary. The law does not have any detailed requirements about trustee fees or what trustees fees are to be paid.  If trustees fees are not mentioned in the declaration of trust, then the law allows for “reasonable” trustees fees.

FAILURE TO SPECIFY WHAT TRUSTEES FEES ARE TO BE PAID LEADS TO DISAGREEMENTS

Most declarations of trust do not have any rules or schedules as to what the trustee is to be paid or guidlines for trustee fees. Most declarations of trust simply provide for payment of “reasonable trustees fees” which simply sows the seeds for disagreement. I once had a trust case where the trust consisted of a few bank accounts and a very modest house in Long Beach which was ultimately sold for $200,000. The trustees insisted that they be paid $40,000 for trustees fees since they supervised some cleanup and fix up of the house before was sold. I represented a beneficiary and we took the position that $40,000 was absurd and that we would have to file a lawsuit with the probate court to have the judge decide. Ultimately, the case was settled on an agreed trustees fee of $14,000.

Image of elderly man with adult son walking on beach

A Trust Can Be Set Aside and Disregarded if a Court Finds that a Trust Maker Lacked Capacity

PRESUMPTION OF CAPACITY

California law presumes that everyone has the mental capacity to make a trust.  Thus, if someone challenges a trust in court for lack of mental capacity it is up to the challenger to prove lack of capacity with sufficient evidence.

CAPACITY TO MAKE A TRUST

Generally speaking, the legal rules to prove that a person is competent enough to execute a trust are more stringent then the rules as to competency to make a will. A trust is considered a contract and the law has higher standards for capacity to make contracts.  That capacity means that a person has the ability to communicate verbally or by any other means and to understand and appreciate (i) the rights, duties, and responsibilities created by or affected by the trust; (ii) the probable consequences for the decision-maker and the persons affected by the decision; and (iii) the significant risks, benefits, and reasonable alternatives involved in the decision.

CONTRAST THE CAPACITY TO MAKE A VALID WILL

A person must be at least 18 years old and of sound mind to make a will. A person is not mentally competent to make a will if at the time of making the will (i) he or she does not understand the nature of the testamentary act, (ii) does not understand and recollect the nature and situation of his or her property, (iii) and does not remember or understand his or her relations to living descendants, spouse, parents, and those whose interests are affected by the will.  Also a person is not mentally competent to make a will if he or she suffers from a mental disorder with symptoms including delusions or hallucinations, which result in his or her devising property in the will in a way which except for the existence of the delusions or hallucinations he or she would not have done.

How did that kid get so much money to blow!

18 is the age of majority

When a child turns 18 years he or she is considered to be an adult under California law. In legal terms, children under age 18 are called “minors” and when they reach age 18 they are called “adults”. Minors and adults are treated differently as far as inheritance rights are concerned. Minors still have rights to inherit but any inheritance which comes to them is subject to certain legal controls because the law presumes that minors are not capable of handling money or property as well as adults.

Inheritance can occur in 3 typical ways

Inheritance Rights For Children – Minors can inherit money or property in the following types of situations:

  1. where a family member dies and does not leave a will (also called intestate succession);
  2. where somebody dies leaving a will which gifts money or property to a minor (also called intestate succession);
  3. and where trust is established naming a minor as a trust beneficiary.

The minors inheritance is handled differently in each of these situations.

Intro

Image of older couple jogging on beach

BE CAREFUL WHO YOU TRUST WITH YOUR TRUST

Trust terminology basics

A trust is created by a written  document  known as a declaration of trust, and is then funded by transfer of money  into  trust bank accounts and/or deeding or transferring of properties to the  trust.   The creator of the trust is known as the “Trustor” or the “Settlor.”

Trusts are usually prepared by attorneys because each trust is custom for the situation and there are many types of trusts.  The persons who are to receive money and property out of the trust are known as the “Beneficiaries.” The person or institution that takes care of the money and property  of  the  trust is the “trustee”.  The trustee is bound by law to follow the  directions contained in the declaration of trust.

Image of two sisters angry with each other

My Sister is the Trustee and She Refuses to Pay My Share

Trust terminology basics

A trust is created by a written document known as a declaration of trust, and is then funded by transfer of money into trust bank accounts and/or deeding or transferring of properties to the trust.   The creator of the trust is known as the “Trustor” or the “Settlor.”  Trusts are usually prepared by attorneys because each trust is custom for the situation and there are many types of trusts.  The persons who are to receive money and property out of the trust are known as the “Beneficiaries.” The person or institution that takes care of the money and property of the trust is the “Trustee”.  The trustee is bound by law to follow the directions contained in the declaration of trust.

Getting Money Out of a Trust – the typical process

Payout events – When do the beneficiaries get paid?

In a typical trust the beneficiaries are scheduled to be paid their share after the trustors’ death.  Because declarations of trust are custom prepared, some are better than others as far as payout instructions. If there are not any instructions as to the exact payment dates, then the trustee is simply required to pay out the shares in a reasonable period of time.  In smaller estates I typically require payouts to occur within less than a year or maybe even 60 to 90 days.  I also typically require that all personal property and furniture be divided up and distributed within 60 days so that it is not held up with the rest of the estate. In larger estates, especially where a business or property is involved in which need to be sold it may be reasonable to give the trustee a year or more to distribute. The first step in getting a beneficiary’s share paid is to obtain a copy of the declaration of trust and see what it says.

BULLETPROOF YOUR KIDS’ INHERITANCE

What is a spendthrift trust?

Image of young shopaholic with her hands full of brightly colored shopping bagsA spendthrift trust is a trust that is created for the benefit of a person who is often unable to control his or her spending and gives an independent trustee full authority to make decisions as to how the trust funds may be spent for the benefit of the beneficiary. Spendthrift trust are often established when the beneficiary is too young, immature, or doesn’t have the mental capacity to manage their own money and wants to protect a beneficiary from the beneficiary’s own tendency to uncontrollably, imprudently —and usually rapidly— will exhaust assets.

Spendthrift trust – a simple example

This is best illustrated by a simple example. Mom & Dad set up a living trust for their children and put $500,000 principal into it to be held for the benefit of the children. Suppose one or more of the children has financial trouble and owes money to creditors. With a properly written spendthrift clause in the trust document, the creditors of the children cannot enforce their claims against the children’s share of the trust. The trustee of the trust still would be have discretion to pay money out to the children. People also can set up trusts to benefit themselves but those types of trust are subject to more limits on the spendthrift provisions.

General rule-transfers to creditors can be prohibited

California law generally allows a trust instrument to legally provide that a trust beneficiary’s interest in trust may not be transferred and may not be subject to enforcement of a creditor’s money judgment. Thus, in the $500,000 put into the trust in the above example, if the money is to be held in the trust until the children reach age 35, then before the children reach that age a creditor with a money judgment against the children cannot reach that money. However when a child reaches age 35 in the example and is entitled to his trust principal distribution, the child’s creditors can get a court order to have the child’s principal paid to the creditors to satisfy the judgment. Likewise, if the trust provides for discretionary payment of trust income to trust beneficiaries (as opposed to mandatory payment of income) then the children’s creditors cannot force the trust to pay the income to them.

Taxation of Irrevocable Trusts – Tax rates can be high on permanent trusts

IRREVOCABLE TRUST DEFINED

Image of older man holding his cat while sitting on benchThe term “irrevocable trust” is commonly used by estate lawyers and financial planners to describe a trust which is permanent and cannot be changed or revoked. 

An example would be where you establish a trust and put $100,000 into it for the benefit of your children and the $100,000 stays there no matter what happens to you.  The actual documentation establishing the trust has to be read before you can say for sure if the trust is permanent or irrevocable.

THE IRS DOES RECOGNIZE IRREVOCABLE TRUSTS FOR TAX PURPOSES

The Internal Revenue Code, which is the place where all of the federal tax laws are located in the federal legal system, has provisions for the taxation of permanent/irrevocable trusts.  A permanent/irrevocable trust is a separate taxable entity and would need to obtain a federal tax ID# upon formation.   Tax returns to be filed are form 1041 fiduciary income tax return and California fiduciary income tax return form 541. These tax returns are due on April 15.  

Living Trust Taxation – The IRS ignores revocable living trusts

LIVING TRUST DEFINED

Image of Old man resting on bench and cuddling dog and catThe term “living trust” is commonly used by estate lawyers and financial planners to describe a trust which is established during a person’s lifetime and which is revocable and changeable. 

Living trusts – are also known as “revocable trusts”. A living trust could have components which are permanent and not revocable so the actual documentation establishing the trust has to be read before you can say for sure if the trust is revocable.

TRUST DOCUMENTATION IS NOT REGISTERED WITH THE GOVERNMENT

Documentation prepared to establish a trust is not registered with any government agency or taxing authority. The only way to find out what a trust says is to actually have the documentation prepared and signed when the trust was formed. Typically the estate lawyer will retain a copy of any trust prepared and then the people establishing the trust will have their own copies. However, in the context of probate and estates, we have seen instances where the trust documentation is lost or destroyed so nobody can figure out what the trust requires. That is the subject of another blog.

THE IRS DOES NOT RECOGNIZE REVOCABLE TRUSTS FOR TAX PURPOSES

The Internal Revenue Code, which is the place where all of the federal tax laws are located in the federal legal system, has a special term for revocable trusts.  That term is “grantor trust”.  Under the grantor trust rules the person who transfers property to a trust and retains certain powers or interests is treated as the owner of what is transferred to the trust for income tax purposes. This means for example if you transfer a savings account to a revocable trust, the interest income on that savings account is reported on your personal tax return. The IRS does not recognize revocable trusts (grantor trusts) as a tax paying entity. The IRS does not require revocable trusts (grantor trusts) to have a separate tax ID number. In fact, if it is a revocable trust, your Social Security number would be the number on the account in this situation.

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