Salt Lake City Estate Planning

Discretionary Trusts Can Trump Bankruptcy Liquidation

The simple answers are usually painfully wrong, and the real art of asset protection is the exercise of considerable forethought as to how the structure will work under extreme duress, with creditors getting writs and orders so as to financially strangle the Debtor.

Sometimes giving assets to a loved one in hopes of protecting those assets from future creditors may not be such a good idea. This is especially true when the loved one is a young one. No, if you want your asset protection planning to be successful, then that usually means a trust is necessary.

Trusts are incredibly powerful tools for a number of reasons, foremost because they allow you to protect both the beneficiary and the assets.

A powerful lesson on trusts recently came out and is featured in a recent Forbes article. It’s the case of re McCoy, 2011 WL 6748388 (Bkrtcy.W.D.Wis., Slip Copy, Dec. 21, 2011) and it’s worth a look.

The case focuses on a trust containing a “spendthrift provision” against bankruptcy. A mother set up the trust for her daughter (and soon to be debtor) with her son as trustee. The trust has a spendthrift provision, meaning that the assets are controlled and kept from the beneficiary except in regular distributions. Further, the trust provided that the brother, as trustee, has discretionary control over the distributions, and can release them or hold them in the trust as deemed appropriate in his capacity as trustee.

The daughter went bankrupt. Soon thereafter, her bankruptcy trustee soon turned a leering eye to those trust funds. You see, bankruptcy is about marshalling the available assets of a debtor to pay as many debts as possible. However, thanks to the spendthrift provision the trust funds are immediately disqualified from consideration.

Why? Because the beneficiary doesn’t “own or exercise control” over them. Nevertheless, the bankruptcy trustee did try to grab an upcoming distribution, thinking it was leaving the trust and therefore fair game. This, too, was denied, because the trustee had discretionary control over its release and simply wouldn’t release it into the hungry jaws of creditors.

If the trust had appointed the brother as trustee without granting discretionary powers and, instead, required mandatory distributions, then the distributions would have fallen into the hands of the creditors – but instead it was saved.

In the end, there are a few good lessons for the wise in this case. Here are a succinct few advanced by the Forbes author:

1. A well-drafted Living Trust can provide, as here, very substantial asset protection for beneficiaries. Mark me as in the camp that says that children should never be given a significant gift outside of a trust, since children (particularly those with money, but without experience) are prone to develop creditors.
2. A well-drafted non-self-settled trust can provide, as here, very substantial asset protection for beneficiaries. Contrast this with self-settled spendthrift trusts (a/k/a “asset protection trusts” which despite their nickname provide at best highly dubious and almost entirely untested asset protection advantages). See Chart Regarding Effectiveness of Asset Protection Trusts
3. For asset protection purposes, trusts should be drafted as discretionary trusts. Remember: If a beneficiary has a right to the trust assets or payments, etc., so will creditors.

To learn more and to successfully set up a trust for your loved ones, you will want competent counsel. This is not a Do-It-Yourself project.

Reference: Forbes (December 28, 2011) “The Real McCoy: Living Trust Provides Spendthrift Protection To Assets Of Beneficiary In Bankruptcy”

 

Selecting the Right Trustee

While hiring a professional trustee may not always be the best solution, it is almost always better to have a professional with experience managing special needs trusts serve in place of an unqualified or overwhelmed non-professional trustee.

So, you’ve created a trust to protect your loved ones. Did you name the right person as trustee? Likewise, perhaps you’ve just been asked to serve as trustee without a firm appreciation for what that means, or perhaps you’ve just figured it out. Question: Should the trust have a professional trustee?

Whether you’re parent who’s set up a trust or you’re a named trustee, Special Needs Answers recently offered a couple of tests to determine if the trust has the right trustee and if a professional may be in order. Their advice, as you would imagine, is especially poignant in the case of a special needs trust, but also has broader application.

Does the trustee have enough time? Being a trustee is not like being a god-parent; it’s almost like another job and even a full-time job for some kinds of trusts. Is the trustee able to keep up with it?

Does the trustee keep track of the rules? Every trust has various rules in place to maintain it, and even more to make sure it accomplishes its goals. In the case of a special needs trust this means keeping track of government benefit rules (even as they change, or threaten to change as in the current political climate). The trustee has to be able to do this.

Does the beneficiary make things complicated for the trustee? If the trustee knows the beneficiary directly, whether by familial relation or long acquaintance, then they also may exert more influence on the trustee than the trustee ought to allow. If the beneficiary feels entitled or wants to ask for something, they may have leverage and the trustee may cave.

Of course, these questions illustrate the common difficulties a trust and a trustee will have to face. Everyone involved ought to understand these difficulties in advance and make the right choices for all concerned.

Bottom line: If you’re setting up a trust, seek the advice of qualified estate planning legal counsel.

Reference: Special Needs Answers (November 2, 2011) “Is It Time For A Professional Trustee?”

 

 

Trusts for Heirs – Six Rules for the Road

If you’re in the fortunate position of deciding where to leave your millions or billions, take some advice from billionaire Warren Buffett’s son, Peter: Don’t spoil them.

It doesn’t take an experienced estate planner to say so, but “money is the root of all evil.” Unfortunately money bears with it the potential for good and bad ends alike. An experienced estate planner can help your loved ones lean to the positive when it comes to the inheritance you leave them.

When it comes to trust money, and inheritances in general, you need to find a balance that will help your children become the people you know they can be. For some solid tips, check out this article and the 5 trust fund rules to help children. The balance these rules help to create, as so aptly put by Warren Buffet, give your children “enough to do anything, but not enough to do nothing.” So, let’s review a few of the rules.

Carrots and Sticks. A trust need not just leave money; but it can be a tool. By building the appropriate provisions, you can offer certain tests and incentives to guide your heirs towards positive goals. You earned your money through hard work and, likewise, the trust can help foster similar lessons as you see fit.

Timing. The funds in a trust can be made readily available or made available over time, with or without incentive goals. After all, you might not want to lock a child into set goals (you might not know enough about which goals are appropriate for them), but you might want to keep their access to the funds at a pace consistent with their age and maturity. Generally speaking, such an approach generally is a solid bet. It can give a sense of security, without instilling laziness, too.

Money Isn’t Everything. In keeping with the above, consider using the conditions that surround the trust (i.e., your death) as an opportunity to provide your wisdom through your own letters or videotapes of success stories, so that the trust fund is opened as your words are received.

That’s only three of the five rules. For the other two, read the original article.

Regardless, the time to act is now.

The issues surrounding how to create the trust are worth mulling over, but just as important is the planning that goes into creating the trust and the correct timing to maximize its value. You can make good use of this timing given the present generous state of our estate and gift tax law, along with the currently depressed asset values.

Again, whether it’s thinking about the funds to put in the trust or the future of the inheritor, there’s no time like the present! 

Reference: The Fiscal Times (September 20, 2011) “5 Trust Fund Rules That Can Really Help Children”

 

 

EXECUTORS… BEWARE!

Being asked by friends or family to be executor of an estate is a big honor, but the warm feelings can vanish once the job starts.

Choosing an executor can be a difficult task, and in no small part this is because it means finding someone you trust to do as you would do. Oftentimes it is gesture of trust and respect made to a friend or family member. Neither the estate planner nor the would-be executor ought to forget, however, that serving as executor can be a fairly difficult role to play. The Wall street Journal recently offered some practical insights and advice on the topic, noting that to be named executor is both “an honor… and a pain.”

Simply put, the executor administers a decedent’s Last Will and Testament through probate, navigating the many twists and turns of that court process. Administration involves accounting for assets, paying bills, and distributing assets in accordance with the terms of the Last Will.

The process typically takes time, too. It can mean up to several years for larger estates, and during that time the executor must keep up with the associated laws, tax code changes, and financial investments, or else intelligently delegate such responsibilities to professionals. It means that a “non-professional” can do the job, but perhaps not an amateur; you have to know your abilities and have confidence. To top it off, the compensation for being an executor is often meager, given the heavy workload, and is regulated by state laws.

The biggest problem an executor will face, by and large, is a shifting relationship with the family. Money can make people antsy or even belligerent, even if the terms are clear in the Last Will, and that’s something an executor might have to bear. This is especially true of family members turned executors who may face soured relationships at family functions. Accordingly, that can make for some awkward moments around the Thanksgiving table.

Practically speaking, to serve as an executor you must anticipate the challenges ahead of time, prepare for them, and remain organized. Indeed, organization is essential throughout the probate process, to include separating yourself into the two roles: executor and family member/friend.

While planning your estate and settling on an executor, consider alerting your would-be executor your decision ahead of time. Doing so will allow them to prepare for the role, and perhaps even get directions from you personally. For more advice and anecdotes you can read the original article here, but to get a better idea of the challenges it is best to consult with your estate planning attorney for advice and counsel. 

Reference: The Wall Street Journal (September 19, 2011) “Estate Executors: An Honor… and a Pain”

To learn more about how we can help you in your estate planning needs, please visit the Fundamental Estate Planning section of our website.

 

Special Needs Planning – A Changing Landscape

Deciding how to leave your assets to your kids is tricky enough. If your adult child has a chronic disability, the task is much more complicated.

Estate planning is never easy, if only because it means thinking about protecting your loved ones when you’re no longer around. It’s bad enough making plans to protect self-sufficient heirs who take care of themselves and an inheritance. However, it can be a real challenge when planning for heirs with special needs for a variety of personal and legal reasons. Unfortunately, as The Wall Street Journal Online recently pointed out, with the economy and politics as they are, there are new concerns to bear in mind as you plan.

Both the State and federal budgets are strapped for cash and the burden is falling on Medicare and Medicaid. It’s up to the Congressional Special Committee to consider the future of Medicare now, but many Medicaid programs already are feeling the squeeze with tighter income restrictions for benefits and services.

Of course, much of the disabled population (12% of the overall population) relies on state and federal services for those services that they couldn’t afford in the private market. To plan for an heir with special needs, then, means planning to provide for them without risking their main sources of care. Now, more than ever, that means a “special needs trust,” tailored to provide the inheritance as a safety net without endangering the continuation of benefits. [Sidebar: Sometimes an older parent can make this move kill two birds with one stone. How? They create the trust now for themselves and a loved one with special needs so that both qualify for government benefits, once the “look back” period has past for eligibility disqualification. As budgets get tighter, expect greater governmental scrutiny of such moves.]

The other major issue, and a related one, is housing. Many Americans with special needs live in group housing programs. These programs are, in turn, subsidized by government agencies, but are increasingly unable to meet demand and are cash-strapped. For one, the same political/economic pressure is keeping those agencies from expanding.

At the same time, there simply are more prospective residents due to lengthening life expectancies. The US would have had to expand its residential-services capacity by 28% to meet the demand as of two years ago. Clearly, housing has been an issue and it will only get worse.

Amidst all of this uncertainty, you still need to plan where your loved one will live. This might mean another form of trust. For example, a “Qualified Personal Residence Trust” (QPRT) would provide that you live in your home until your death, but that your family member with special needs would live there (without disqualifying ownership). Great care would need to be given in the preparation of such an arrangement. Also, it may be possible to provide a home to shelter several persons with special needs. For example, say several families pool resources, or even to leave a home to a non-profit that can convert the home into a new group home. The options are limited by your creativity.

Ultimately, the best plan will depend on your own unique family circumstances, as well as the current state and federal laws governing benefits and services. Unfortunately, according to a recent study by Arc, an advocacy group, only one-third of affected actually has plans to control what happens when the caregiver grows old and after they are gone.

Bottom line: Remember to engage qualified legal counsel to help you navigate the regulatory minefields.

Reference: The Wall Street Journal Online (September 3, 2011) “Taking Care of Disabled Heirs”

Please visit the Estate Planning section of our website, and feel free to call our office (801.631.0228) today to set up your initial consultation.

Keeping The Family Vacation Home...In the Family

If you enjoyed that last summer outing to your vacation home this Labor Day weekend, it's a good time to start thinking about creating a succession plan for the property. A detailed plan will make the transfer of ownership easier and establishes rules to will help prevent bitter family conflicts down the road, experts say.

For those of you with still-fresh memories of this past Labor Day weekend out at the family cottage, now may be the time to take action to ensure that future Labor Days and summer outings will continue to be enjoyed by your family long after you are gone. In other words, ensure the future of the family cottage and the peace and domestic tranquility of your family through proper estate planning. So, how do you do that? The Wall Street Journal Online recently touched on the topic.

The best way to leave an inheritance that includes a family vacation home depends on who will be inheriting it. That is the first essential decision. For example, are you leaving it to one family member or to several? Who will be interested in the home (or more interested in your portfolio)? Who will be able to use the home? The adult child living in California might not be able to enjoy the Cape Cod cottage. This is especially true if they have their own vacation property, or if they wouldn’t be able to afford the upkeep, insurance and taxes.

If you’ve settled on a single person to inherit the family vacation home, then it is relatively easy: you can either gift it during your lifetime (before 2013 would be prudent), or leave it through your Last Will and Testament or Revocable Living Trust. If you are leaving it to multiple beneficiaries, like an entire generation of your family, then perhaps consider establishing a specific arrangement for such ownership. For example, many families find the Limited Liability Company (LLC) or various forms of trusts to be practical tools.

If all of the heirs are adults, then an LLC might be a better bet as it allows members a more equal say in what to do, while still providing a framework for decisions or an organizational structure through the use of a solid operating agreement. Of course, you could take it a step further and form a trust that owns an LLC that owns the home, or even specific trusts like a Qualified Personal Residence Trust (QPRT.).

On the other hand, if there are young children in the family, then a trust with a long-term duration might be better. Why? Because it allows parents to pass on the vacation home to their children while still appointing an adult in charge as trustee. In addition, properly drafted with “spendthrift provisions,” such trusts can protect the family home from the potential divorces, lawsuits and bankruptcies of the heirs.

For many, a family vacation cottage is a place of many happy memories shared over a long family history. As a result, it just has to stay in the family. Once you start down the path to make that happen, however, don’t wander too far without appropriate legal counsel. You will need experienced help to navigate the details, figure out what’s best for your unique situation, and eventually put ink to paper.

See the The Wall Street Journal Online Article from September 4, 2011, entitled “Create A Plan To Pass On The Family Cottage” for more information.  Or, feel free to contact our office to discuss your estate planning needs.

Creating a Comprehensive Estate Plan for Peace of Mind

Most experts recommend creating a comprehensive folder of documents that family members can access in case of an emergency, so they aren't left scrambling to find and organize a hodgepodge of disparate bank accounts, insurance policies and brokerage accounts.

--The Wall Street Journal - Saabira Chaudhuri (July 2, 2011) “The 25 Documents You Need Before You Die”

The financial consequences of failing to keep your legal and financial documents in order can be significant. As pointed out in a recent Wall Street Journal article, state treasurers currently hold $32.9 billion in unclaimed bank accounts and other assets. Additionally, some of the country’s largest life insurers are under investigation for failing to pay out unclaimed life policies to beneficiaries. Insurers say they are behaving lawfully and under their policy contracts are required to pay a claim only when beneficiaries come forward.

Will your family members reap the full benefit of your estate planning efforts, or will they miss out simply because they cannot locate all of your important legal and financial documents in a timely manner? Of course, you don’t have to keep every single scrap of paper, but the WSJ offers a pretty comprehensive list of the 25 most important legal and financial documents you should compile, and make sure your heirs can quickly access, to include:

1. Will
2. Letter of instruction
3. Trust documents
4. Housing, land, and cemetery deeds
5. Escrow mortgage accounts
6. Proof of loans made and debts owed
7. Vehicle titles
8. Stock certificates, savings bonds, and brokerage accounts
9. Partnership and corporate operating agreements
10. Tax returns
11. List of bank accounts
12. List of all user names and passwords
13. List of safe-deposit boxes
14. Durable health-care power of attorney
15. Authorization to release health care information
16. Living will
17. Do-not-resuscitate order
18. Personal and family medical history
19. Life insurance policies
20. Individual retirement accounts
21. 401(k) accounts
22. Pension documents
23. Annuity contracts
24. Marriage license
25. Divorce papers

The original article goes into much more detail with each, and whether you have or need each of these documents will depend on your individual situation and the various legal facets of your life.  You would be well advised to talk to an estate planning attorney.  By putting this all together you help your loved ones to more quickly and easily pick up the pieces and put your plan into operation.

 

The Honor and Risk Of Being Named a Trustee

 "You may feel honored when asked to be a trustee and readily accept. What you may not know is that you're taking on lots of legal risks. Trustees could be held liable not just for investment losses, but also for profits that could have resulted from more prudent investing."

From Barron’s (May 21, 2011) “The Five Biggest Ways To Bungle a Trust”

 

 
Have you been named the trustee for a close friend or family member? Did you feel honored when they asked? Well, it’s okay to feel honored, as the request does show a high level of trust and respect from your friend or family member. But think twice before accepting this “honor,” especially if there are no professionals on board as co-trustees. Trustees take on a lot of legal risk, especially for any mistakes they make, and there are plenty of ways to bungle a trust. Barron’s recently listed the five most common:

            1) Faulty Records: a trustee has to provide regular comprehensive, accurate accountings to beneficiaries, both primary beneficiaries and the family members down the line who will receive the principal once the trust has been dissolved, also known as the remaindermen. Failure to do so could lead to lawsuits by beneficiaries or remaindermen.

            2) Failure to Diversify: just because a stock is working now, has worked in the past, or has sentimental value doesn’t mean you – as a trustee – should keep it in the investment portfolio. As a trustee, you have a legal duty to thoroughly diversify investments. Investment management is the area that probably leads to the most litigation against trustees.

            3) Biased Distributions: trustees owe a fiduciary duty to the current beneficiaries and the remaindermen. The problem is that many individual trustees don’t realize there is a duty to both, and sometimes their interests conflict. Barron’s tip is to keep records of each decision, citing why you chose as you did and offering supporting documentation.

            4) Expecting a Payday: You may assume that you will be paid a trustee fee for all of your work, and that the payment will be reasonable and paid within a reasonable timeframe. You may be wrong. In reality, it takes a lot of time and effort to get paid, largely because of laws that give beneficiaries the right to voice objections, even start litigation. Their objections can delay your payments. The best thing to do is settle the matter of payments early on.

            5) False Sense of Safety: Few individuals comprehend the extent of the risk they take on when assuming the role of trustee. As Adam von Poblitz, head of Estate Planning at Citi Private Bank said, “this is a role that potentially has unlimited liability.” Trustees could be held liable not just for investment losses, but also for profits that could have resulted from more prudent investing.

Consult with an estate planning attorney to see what legal obligations a trustee has and how best to protect yourself as a trustee or the trustees you named in your trust.

Cosigning With A Child: Putting Your Assets on the Line

A few weeks ago, I read an article entitled "Should You Cosign With Your Kids" on CNNFN.  As an estate planning attorney / tax attorney in Utah, asset protection is almost always part of my client engagements.  As I help clients develop asset protection plans (using basic estate planning tools to complex trusts and family limited partnerships), debts on which they have cosigned with their kids are frequently discussed.  I am frequently surprised to find out that some of my clients have not given any thought to the consequence of cosigning on a debt with a child.  To be clear, when you cosign on a debt with your child, it is because his or her credit is not sufficient to secure the loan.  For many clients, it seems that lenders put the child on as a courtesy, but the parent is always the primary debtor.  That means that if the child made a bad investment or defaults on the debt, the parent is stuck paying the bill--i.e., the parent's assets are exposed.

I have seen this situation come up a lot in the past few years as parents have cosigned with children  to help them make real estate investments.  Of late, I have had several clients who have signed guaranties for children or who have cosigned with children have to pay large settlements, eating away at their retirement savings.  A commonality with most of these clients is that they did not understand what they were doing when they cosigned.

The article I referenced above seems to focus on smaller matters (e.g., cosigning on a credit card, apartment lease, car), but it raises several precautions, as follows:

1. Consider what your child would do with the amount of money he/she is borrowing.  For example, if you are cosigning on a credit card with a $10,000 limit, consider whether your child could responsibly manage $10,000. 

2.  Pretend you are the lender.  Investigate your child's credit.  No one wants to know the dirt about their own children, but to save your retirement...I'd suggest it is worth it.

3.  Understand the risks.  If you cosign, you are almost certainly the primary debtor (not a secondary debtor, as I have suggested above).

4.  Limit your exposure.  Don't cosign for more than is absolutly necessary for the child.  Go for a small credit limit on a credit card. 

To these points, I would add that if you have cosigned on a debt, you may want to adjust your will and/or revocable living trust to adjust that child's share.  Otherwise, the debt may be settled as part of your estate and paid from your assets even though the child has benefitted, not your estate.  This is frequently the case.  You can adjust your will or revocable trust to adjust shares distributed to your children.  I recommend you do this with an estate planning attorney to assure smooth estate (probate) and trust administration.

If you have loaned money to a child or cosigned with a child, make sure it is addressed in your estate plan to avoid future family contention.

Estate Planning Trusts: GRATs and CLTs and the AFR...

"Applicable federal rate (AFR) for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest under Section 7520 for November 2010 is 2.0%."

-INVESTORS.COM (OCT. 22, 2010): ESTATE STRATEGIES HELPED BY LOW RATES (see http://www.investors.com/NewsAndAnalysis/Article/551358/201010221825/Estate-Strategies-Helped-By-Low-Rates.aspx)

Every month, the IRS quietly makes a mostly-unheralded announcement of the current Applicable Federal Rate (AFR) for determining the present value of an annuity, an interest for life or a term of year, or a remainder or reversionary interest under Section 7520. Ha! If you made it through that sentence, then you already know why this announcement goes mostly un-noticed by most mainstream media!

However, if you are charitably-inclined, or want to make a large, nontaxable gift to your heirs, it could be very important for you to know that the November rate is set at an all-time low of just two percent. This low rate makes certain estate planning strategies, such as grantor retained annuity trusts (GRATs) and charitable lead trusts (CLTs) quite attractive, especially in light of the return of the estate tax next year.

GRATs and CLTs involve a mix of income streams and gifts to beneficiaries. With both types of trusts, current interest rates influence how much income can be generated while still enabling you, the donor, to make a nontaxable gift.  The lower the rate, the less income you take from the trust each year, and the larger your eventual tax-free gift.  Of course, you should assess how large you actually want that gift to be with your estate planning attorney, tax attorney, accountant, and/or financial advisor in formulating the plan.

GRATs and CLTs strategies generally appeal to people who have enough current income from other sources and whose goals are to maximize their non-taxable gifting.

Investor’s Business Daily last week had an excellent article explaining these strategies, both the benefits and the potential pitfalls.

I am encouraging appropriate clients to establish these types of trusts now, before interest rates start rising.  Again, these are great solutions for appropriate clients--you will need to consult with a qualified tax attorney or estate planning attorney to determine if you are an "appropriate client." For more information about charitable planning, you may want to read the September issue of our newsletter, “Charitable Opportunities.”  Also, be sure to visit the Charitable Planning section of our website, where we discuss the charitable lead trust and other tax-savvy strategies to help you help your preferred charitable causes.