Domestic Asset Protection Trusts

Michigan Trust Law has remained fairly static in recent years with little change since the adoption of the Estates and Protected Individuals Code and the Michigan Trust Code. That changed recently with the passing of bills which allow the creation of Michigan based, self-settled, asset protection trusts. 

     February 2017 brings us an exciting change in Michigan Trust Law. As of Sunday, February 5, 2017, Michigan becomes the 16th state to permit Domestic Asset Protection Trusts (DAPT). A DAPT allows an individual (the “Grantor”) to create and fund an irrevocable trust which, subject to certain legal requirements, allows the Grantor to shield assets from the claims of a creditor.

     There are number of rules that a Grantor must follow in order to establish a valid DAPT, including the prohibition on the trust Grantor acting as the Trustee. However if properly drafted and funded, a DAPT will provide significant creditor protection while still allowing the Grantor to retain substantial rights with respect to the Trust property, including the ability:

• to receive all of the income produced by the trust’s assets as well as to receive discretionary distributions of the Trust’s principal; 
• to direct the investment of Trust assets 
• to remove and replace trustees; and 
• direct the distribution of assets following the Grant’s death.

While the Grantor cannot act as the Trustee of their own Trust, they do have broad discretion over who to appoint and can even appoint family members to serve in that role. 

     While a DAPT is incredibly powerful tool for creditor protection, it does have limitations. Most prominently, there is a two-year period from the date assets are transferred to the trust before creditor protection is achieved. Additionally, in situations related to bankruptcy or fraudulent concealment, protection takes longer to be applicable or may be completely unavailable. Due to these limitations, it is important to create and fund a DAPT well in advance of any claim arising. 

     DAPTs have the potential to become a very important part of estate planning, especially for those individuals such as doctors and business owners who face higher than average creditor exposure. However in order for them to provide the intended protection it is vital to ensure the DAPT comports with the governing statute. As always, before attempting to include a DAPT in your planning, or the planning of your clients, it is important to consult an experienced estate planning attorney.

Alan and Matt

Avoiding Personal Property Fights

While we value our client's privacy and would hate to have any of their affairs end up as a news story, there are lessons that are better learned by observing others than by experiencing them ourselves. With that in mind today's blog addresses an all to common problem that arises even when an estate does not contain an Oscar statuette. 

A current news story about the actor and comedian Robin Williams's estate is a clear example of why complete estate planning is necessary. The comedian's wife, Susan, and children  Zachary, Zelda and Cody are fighting over his estate, specifically personal property. Susan, married to Williams for three years, is claiming personal items that the children argue were to be given to them.

The dispute centers around two houses owned by Robin Williams at the time of his death. Williams' Trust grants Susan one residence and its contents upon his death, but there is another clause that says that his children get all of his "clothing, jewelry, personal photos taken prior to his marriage to his current wife,... memorabilia and awards in the entertainment industry and the tangible personal property located in Napa."  The wife is asking the court to define "memorabilia" to exclude Williams' collections , including Japanese anime figurines, antique weapons, carved boxes, theater masked, rare books, lapel pins, fossils, graphic novels and skulls, which the children are claiming. 

While Robin Williams carefully thought out his estate planning to protect all of his loved ones, he, like many others, failed to specify in detail personal property bequests. This can lead at a minimum to hurt feelings and can escalate into significant family disharmony and tear families apart.

Rather than leaving personal property bequests to the interpretation of various beneficiaries or the courts, it makes more sense to specify personal property bequests in a "Personal Property Memorandum", coordinated with the client's Living Trust, detailing specific beneficiaries for various personal items including, artwork, collections, specific pieces of jewelry, and any other personal property. 

We all have the ability to prevent family squabbles over personal property, whether of great value or sentimental value. Why leave it to others, including the courts, to guess or argue about how we really wanted our personal property to be distributed.

Using Trusts to Supplement Existing Benefits

     Often when we discuss trust distributions with clients, a major concern is whether their beneficiaries are capable of responsibly handling a sudden influx of money. In those situations where clients have concerns about the beneficiaries' spendthrift habits, marital difficulties, or potential creditors, we structure distribution provisions to protect the beneficiaries’ assets over a longer period. In other circumstances, clients are less concerned about their beneficiaries' ability to handle money and more concerned about how an influx of assets will affect a beneficiary’s ability to qualify for various forms of government assistance.

     In those situations where clients desire to provide for a loved one receiving some form of state or federal assistance, for example Medicaid or Social Security benefits, the goal is to supplement the government assistance being received, not replace it. A Supplemental Needs Trust, sometimes known as a Wholly Discretionary Trust, is a technique that provides assets to pay for the beneficiary's additional needs that government assistance does not cover.

     This assistance can include providing funds to the beneficiary for a wide variety of uses, including travels, hobbies, cultural experiences, and care not covered by governmental assistance. The trustee of a Supplemental Needs Trust has complete discretion to provide the beneficiary with these funds, limited only by the requirement that a distribution from the trust cannot affect the beneficiary’s ability to qualify for other forms of assistance. This level of discretion does require the client to consider carefully whom they name as trustee of the Supplemental Needs Trust, because that person will have a great deal flexibility and  responsibility for the client’s loved ones after the client passes away.

     An additional benefit of establishing a Supplemental Needs Trust for loved ones who receive government benefits is the ability for others, such as grandparents, to make gifts to that Trust through their estate planning to avoid accidentally jeopardizing the beneficiary’s eligibility for assistance.

     A Supplemental Needs Trust is an advanced planning technique that should be prepared by a professional with experience and expertise in the field. Each trust, just like the beneficiaries of those trusts, is unique and clients should work closely with their professionals to ensure that all the planning they do works together to achieve their planning goals.

Matt Ferrara

How the Investment Income Tax Effects Trusts and Estates

The American Taxpayer Relief Act of 2012 imposes a 3.8% tax on the net investment income (NII) of individuals, estates, and trusts to the extent that the taxpayer's adjusted gross income exceeds the applicable thresholds. While the threshold amount for married and single filers are relatively high, the threshold for an estate or trust is only $11,950 for the tax year 2013. Therefore, if the undistributed NII of an estate or trust exceeds $11,950, the excess is subject to the 3.8% Medicare tax.

A trust or estate is only subject to the NII tax if the trust or estate contains undistributed net investment income. Therefore, the trust or estate can avoid this tax entirely by distributing its net investment income to its beneficiaries. With some trusts, especially those that contain mandatory distributions of all income or where the trustee regularly distributes all the trust income to pay the beneficiaries’ expenses, this is simple. However, for trusts that seek to minimize income distributions, such as Supplemental Needs Trusts for beneficiaries receiving government benefits, avoiding this tax becomes more problematic.

In situations where the distribution of trust income has the potential to create problems the Trustee must weigh the benefits of tax avoidance against the drawbacks of giving income to beneficiaries who may waste it or actually do harm to themselves. In these situations, rather than distributing income to avoid the NII tax it may be better to restructure the trust's investments to avoid receipt of NII. Investing in tax-exempt investments such as municipal bonds or tax-deferred investments or accounts such as life insurance or deferred annuity contracts can avoid the net investment income. It may also make sense to select investments producing growth but little or no income. Trustees can sell such assets later when cash is needed for distributions.

Another, less common concern, is that the value of income generated by a trust will exceed the liability threshold for a beneficiary as an individual. This issue may be addressed by including a number of permissible, but not mandatory beneficiaries in the trust, such as including grandchildren as permissible beneficiaries of a trust for their parent. This allows the trustee to make distributions to a number of trust beneficiaries who do not otherwise have sufficient income to subject themselves to this 3.8% Medicare tax, and  spreads the income among taxpayers potentially eliminating the tax liability altogether.

It is important for trustees and personal representatives of trusts and estates containing significant income generating investments to review those entities as soon as possible in order to determine the best results for each trust or estate. Clients should discuss the options with their professionals in order to maximize tax savings.

As a reminder, the IRS treats income distributed from a trust within the first 65 days following the year-end as distributed in the prior year. For example if a Trustee makes distributions from a trust of income earned in 2013 in the first 65 days of 2014, the beneficiaries report that income on their 2013 income tax return. This gives some flexibility in planning, but Planners should not delay acting to avoid problems. 

Alan Ferrara

Extra Privacy Gained from Trusts

     Increased privacy is one of the major benefits of using a living trust in estate planning. The Trust allows you to avoid public disclosure of the assets of the estate and the distribution provisions of the Will in the Probate Court. It also allows the Grantor to provide Beneficiaries with information that applies to their own distribution but not the distributions for other Beneficiaries. 

     The Michigan Trust Code (MTC), which governs the duties and powers of the trustee along with the rights and interests of trust beneficiaries, requires that a trustee of an Irrevocable Trust or a Living Trust which became Irrevocable upon the death of the Grantor inform a trust beneficiary of the following information:

• That a trust exists that names the person as a beneficiary 
• The identity of the Grantor of the trust. 
• The Trustee’s identity, including address and telephone number 
• The court, if any, in which the trust is registered The terms of the trust that describe or affect the beneficiary’s interest and relevant information about the trust property.

     The MTC also mandates that the trustee must provide an annual accounting of the Trust property to everyone who receives, or may receive, a distribution from the Trust. The Grantor of a Trust may override that statutory requirement and dictate whom, if anyone, the Trustee must provide with an accounting. It is important to note that even when the terms of the trust waive the annual accounting, a Probate Judge has the authority to order the Trustee to provide the court, or other parties, with an accounting.

     The benefits of these statutes to a Grantor include the ability to provide bequests of different values for children without revealing the differences in gifting. Alternately, it allows the Grantor to make equal gifts to multiple children, but under different terms, without creating strife because one child receives their bequest outright while other gifts continue in trust with restrictions on distribution. 

     The Michigan Trust Code strikes a balance between the Grantors’ right to privacy and the Beneficiary’s ability to confirm the Trustee meets their fiduciary duty. The information that Trustees must provide to a beneficiary gives that person sufficient information about their rights to the trust assets to determine whether the Trustee is doing their job. If the beneficiary suspects something is amiss, the information gives them a basis for the Probate Court to order a complete accounting. 

     It is important for successor trustees to understand the law and review the terms of the trust in order to determine the scope of their duty under the trust and applicable law. Often the attorney who drafted the trust document is the most useful resource for successor trustees in determining what information the trustee must provide to beneficiaries. A responsible attorney will provide clients with contact information and assurances that they will be available to help the successor trustees administer the trust when the time comes.

Matt Ferrara

More Potential Pitfalls of the New Estate Tax Law

     As we discussed in our last post, the increase in the applicable exclusion to $5,250,000, which dramatically reduced the number of estates with estate tax liability, also has the potential to create large problems for surviving beneficiaries if older estate plans are not updated. This is especially true in plans where the existing non-marital share primarily benefits other than the surviving spouse. This situation arises most commonly where clients want their children to receive something immediately upon the death of the first spouse or where the client wanted to provide for the children of a first marriage after remarrying. This strategy may have made sense at the time, because in prior years the applicable exclusion was smaller resulting in a smaller non-marital share and thus leaving sufficient assets to provide for the surviving spouse in the marital share. 

     With the new larger applicable exclusion, existing trusts will allocate significantly more assets to the non-marital share, potentially resulting in an inadvertent disinheritance of the surviving spouse. Some alternatives for protecting the surviving spouse in a situation such as this, while still achieving the goals of older trusts include the following modifications to the trust provisions: 

• Revise the non-marital share to provide the spouse is the sole beneficiary of distributions of income during the spouse's lifetime with the remainder going to children. 
• Revise the non-marital share to include the spouse as a beneficiary or co-beneficiary of income and/or principal together with the children, within the discretion of the trustee. 
• Revise the non-marital portion of the trust to limit the size of the non-marital trust for children and descendants (such as the figure that the client originally intended as the highest estate tax exemption) while providing the remainder of the non-marital portion be used for the exclusive or primary benefit of the surviving spouse. The amount of this cap will depend on the goals of the client and the needs of the surviving spouse. 

     Keep in mind that merely placing an arbitrary cap on the non-marital share, with the remainder going to the marital share will increase the surviving spouse's taxable estate by increasing the marital share. This increase could cause the surviving spouse's estate to be subject to estate taxes where the combination of the surviving spouse's separate assets and the enlarged marital share exceed the surviving spouse's applicable exclusion amount. The permanent adoption of portability has the potential to alleviate this problem in many situations. Portability is a complex topic that we will address in a separate post in the near future. 

     What is important to know is that with careful planning it is possible to provide a surviving spouse with extensive rights in and powers over the trust funds without causing the entire trust fund to be included in the surviving spouse's gross estate. Such rights and powers would include: 

• The right to all income, distributed currently. 
• The right to withdraw or require distributions of principal in such amounts and at such times as are necessary for the surviving spouse's health, education, support, or maintenance. 
• The right to receive distributions of principal in such amounts and at such times as the trustee (other than the surviving spouse) deems appropriate for any or at least a broader purpose. 
• The noncumulative annual right to withdraw the greater of 5% of the value of the trust fund or $5,000 dollars. 
• A testamentary power to appoint the trust fund to a class of beneficiaries that does not include the surviving spouse, his or her creditors, his or her estate, or its creditors. 
• The right to serve as the sole trustee or as a co-trustee or to remove and replace other persons serving as trustees. 

     As you can see, failing to review estate plan documents after tax law changes can lead to significant problems. Those problems can be remedied easily making changes to documents so that they again will reflect the intentions of the clients.

Alan Ferrara

Planning for the Terminally Ill Client, Part II

     As we discussed last time, when a client becomes seriously ill or is diagnosed with a terminal illness it is obviously a trying time, but a complete review of their estate planning documents is important. We previously discussed the Durable Power of Attorney and the Patient Advocate Designation, but a client's Trust and funding documents also require review.
     The client may have neglected to update their Living Trust despite changes in the client's financial situation and family situation. Their estate planning documents require revisions because of these changes in order to avoid adverse consequences. Items to consider include:

1. The value of assets in the Trust may have increased dramatically since the last time the Trust was reviewed. Distribution terms for spouse and children may need to change because of the increase in assets. 
2. If the spouse or the other family members have been identified as being spendthrifts, the terms of distribution may need significant revisions. Rather than allowing for automatic distributions within the spouse's total discretion, an "ascertainable standard" as defined by the IRS, may be more appropriate so that the Trustee has the ability to pay or withhold principal and/or income for the spouse's benefit. 
3. The children who are beneficiaries may have creditor issues, unhappy marriages or destructive dependencies, which may require restrictions on distributions to protect them from themselves. 
4. If the client has remarried since the last time the Living Trust was reviewed and modified, provisions may be needed to protect the children of the prior marriage. While it is normal for the client to want to protect the current spouse as long as the spouse is alive, the trust should provide for the eventual distribution of principal to the client's children. Otherwise, the second spouse may be able to distribute assets to her family, disinheriting the client's children. 
5. Because of the increased size of the estate, or because of changing charitable inclinations, a client may want to make charitable contributions at death. 
6. The client may no longer be comfortable with those persons designated as Trustees and Successor Trustees to administer the trust assets for the benefit of spouse and children. 
7. A client may want to revise the trust to protect the current spouse demanding children or a second spouse. 

     In addition to carefully reviewing the trust distribution provisions, a client should review the ownership of assets to confirm that all of the assets have been transferred to the Living Trust or beneficiary designations revised where appropriate, in order to avoid probate upon the client the death. If not, these transfers should be made soon as possible.
     Once these changes are handled, the client can be comfortable that if the worst happens, loved ones will be protected.

Alan Ferrara

Should I Panic about being Named Successor Trustee?

     In October, we explained how a trust works. We have also recently addressed the role of the Personal Representative in the probate process. As a follow-up to those posts, today we will discuss the role of the successor trustee of a Living Trust. 

     Normally the Grantor, the person who set up the Living Trust, acts as the initial Trustee, with total control over the trust assets. The Grantor designates other individuals or corporate fiduciaries, to act as successor Trustees upon their incapacity or death. Most successor trustees do not understand their role, either during the lifetime of the Grantor or at their death or disability. It is important that the Successor Trustee be aware of their designation so that they can assume the role and responsibilities of trustee quickly upon the death or incapacity of the initial Trustee. The successor Trustee should either have access to the trust document because they have been given a copy of the Trust document or at least know where the document is located. The Successor Trustee must review the document in order to understand their obligations. Because the Successor Trustee is a fiduciary and therefore subject to a high degree of care in order to avoid liability for actions the trustee, should seek clarification of any questions from the attorney who drafted the trust or another attorney regarding the successor’s responsibilities. 
     The trustee can use a copy of the Trust or the Certificate of Trust Existence and Authority to show their authority when acting on behalf of the Trust. These documents will show their power to deal with assets of the trust, wherever located. Armed with knowledge of the trust and a copy of documents showing their authority, the trustee can then take action on behalf of the trust beneficiaries. One of the Successor Trustee's important duties is determine the scope and amount of the Trust assets and inform the institutions maintaining those assets of the change in Trustee. This step is much like the Personal Representative's role in discovering the estate's assets except that it does not rely on the Probate Court's order to establish the Trustee's authority to act and therefore can occur quicker and with fewer problems. It is important for the successor Trustee to establish a thorough accounting of the Trust assets because, like the Personal Representative, the successor Trustee is responsible for providing the Beneficiaries of the Trust with a regular accounting of the Trust assets. Our next post will deal with more of these important actions.

Matt Ferrara

Estate Planning for a Second Marriage

     Recently a colleague asked for information about the use of trusts in estate planning following a divorce and remarriage. Since we have not addressed this topic yet, a post on the subject seemed appropriate. It is important for client to consider estate planning issues following a divorce and remarriage to avoid inadvertently disinheriting either the new spouse or children of the first marriage. Clients (husband and wife) in their first marriage usually have common goals, such as providing for the surviving spouse during their lifetime and leaving any remaining assets to their children equally. This makes estate planning relatively simple, because a living trust holds the assets to limit tax liability, avoid probate, and ensure the assets pass to the surviving spouse for use during the spouse's lifetime and then on to the couple's children.

     Clients in second marriages, whether because of divorce or death, usually have a more complex situation with which to deal. In those circumstances there are concerns regarding the surviving spouse, children from the first marriage, the surviving spouse's children, and possibly children from the second marriage. Clients wish to ensure the surviving spouse has sufficient assets during lifetime, while also ensuring that the assets they brought into the marriage eventually pass to their children.

     A frequent concern of clients in their second marriage is ensuring that both their second spouse and their children receive gifts following the client's death. A common technique used to achieve this goal provides the surviving spouse with a regular stream of income from the trust assets, while reserving distributions of principal for the client’s children following the death of the surviving spouse. When using this technique, it is also common to provide the trustee with the discretion to make distributions of principal to the surviving spouse, under a limited set of circumstances, to ensure that the surviving spouse has sufficient assets to live on following the first spouse's death. It is important in these circumstances that the trustee understand that part of their responsibility is to balance the best interests of both the spouse and children from the first marriage in making distributions. It is a good idea for the client to discuss these issues with the named trustee.

     Alternatively, some clients opt to address this issue by distributing different assets to their surviving spouse and their children. For example, a trust might provide that the client’s children receive immediate distributions from the trust assets equal to the payout from a life insurance policy. The client may also provide that the children are beneficiaries of the client’s IRA or other retirement accounts. The trust then provides that the client's surviving spouse receive all income from the remaining trust assets, and gives the trustee broad discretion to make distributions of principal for the surviving spouse's needs. Any trust assets that remain following the death of the second spouse are distributed to the client’s children. This technique ensures that that the client’s children receive an immediate gift as well as the potential for additional assets should any remain after ensuring that the surviving spouse has sufficient assets during the their lifetime.

     A well-drafted trust is required to make use of these techniques because you need an entity maintain the trust assets instead of passing those assets directly to the surviving spouse. During a first marriage, a common technique for probate avoidance is to own property jointly with rights of survivorship. This allows the surviving spouse to remain the sole owner of the property following the first spouse's death without the property passing through probate. If this same technique is used following a second marriage, the surviving spouse becomes the sole owner of the property or bank account and then is free to do with that property whatever he or she chooses. This means that property the client intended for children to inherit following the second spouse's death could pass directly to the second spouse's children or family and completely disinherit the client's children from the first marriage.

     There is not always controversy about who inherits which assets. In many second marriages, spouses and their children from first marriages live in perfect harmony. Even in these circumstances, the spouses may wish to ensure that particular assets, such as vacation homes or collectibles, that each has brought into their second marriage are eventually inherited by their own children. With proper planning, it is possible to maintain these separate assets for both spouses’ use while ensuring that after the second death the assets will go to each spouse’s children, while assets earned jointly during the marriage are split equally amongst all the children.

     It is clear that the circumstances that exist when contemplating estate planning for a second marriage involve a level of complexity that generally does not exist when planning during a first marriage. These circumstances can become even more complex if either spouse’s children has special needs, dependency issues, creditor problems, or if there are significant personal conflicts between children and second spouses.  You may actually have a case where the new spouse has his or her own issues, which need to be addressed. An example of this occurs if the new spouse has an unpaid federal income tax liability and the spouse transfers a residence originally owned individually to the other spouse as joint tenants. Now the IRS can attach a lien to the residence. It is important to speak with an experienced attorney to ensure that the estate plan meets the goals of both spouses and is implemented with a minimum of conflict.

The Effects of Divorce on Estate Planning

     Divorce is frequently a difficult and painful experience for the parties involved. By the time the proceedings are complete, most people want to go their separate ways and interact with their former spouse as little as possible. Unfortunately, as with other major life events, divorce is also a time where it is important to review and update an existing estate plan.

Under Michigan law, divorce has a substantial effect on existing estate plan documents, including:

• automatic revocation of any potential disposition of property made by a divorced individual to his or her former spouse as a beneficiary under a Will or Trust;
• automatic revocation of provisions conferring powers of appointment on the divorced individual’s former spouse so that the former spouse can no longer appoint beneficiaries under a Will or Trust; and
• revocation of any nominations of the divorced individual’s former spouse to serve in a fiduciary or representative capacity rendering the former spouse unable to act as Personal Representative or Trustee even though named in the document.

     Additionally, divorce severs interests of a former spouse in property held at the time of divorce as joint tenants with rights of survivorship, and it is important to retitle real estate following a divorce. While all of these changes result in a change in the distribution of assets via estate plan documents, they do not negate the documents themselves, therefore the documents continue to function and successor beneficiaries, including minors, may become the primary beneficiaries because of the divorce. If there are no successor beneficiaries, then the Intestacy Statute dictates distribution of those assets.

       Presuming that successor beneficiaries are named, the change in beneficiary is important because in many documents there is a presumption that should something happen to the Grantor their now former spouse will receive such distributions and the terms of the trust did not adequately provide for direct distribution to minor children. Further, even when there is adequate provisions for maintain assets in trust for minors, it is important to ensure that the trustee named to administer that trust is a person the Grantor believes will look out for the best interests of any children and ensure funds are available for their long-term care. It is worth mentioning that a decree of divorce may contain provisions requiring the inclusion of certain provisions in an estate plan, including the purchase of life insurance to cover alimony or child support payments should something happen to the Grantor. Failure to comply with such requirements can have adverse consequences.

     While a review of the terms of the Trust, the beneficiaries, and the successor trustees is important, it is just as it is important to ensure those individuals who are designated to make decisions upon incapacity are also the people the Grantor now wants to make decisions on their behalf. Many people execute Patient Advocate Designations and Durable Powers of Attorney naming their spouses as the sole designee to make decisions on their behalf. Following a divorce those documents are revoked and the grantor is left without a designate to make medical decisions. Even if those documents name other successor designee, it is important to ensure that those individuals are still the best people to be making decisions should the Grantor become incapacitated. Frequently successor designee's are close friends of the couple, who may not continue to be actively involved in their separate lives following a divorce.

      As a side note, it is important to remember that in addition to revoking all the above interests held by former spouses, divorce also revokes interests held by former spouse’s relatives. Thus if after a divorce an individual wishes to continue to leave assets to a relative of the former spouse or name their former spouse’s relatives as a designee, it is necessary to execute new documents reaffirming that desire. While this may seem like an unlikely scenario, is important to remember how many people meet their spouse through a friendship with siblings, grow close to extended family during the course of a marriage, or feel that a former spouse’s sibling or parent is still a good trustee for minor children.

      Also related to updating estate plan documents, is the importance of updating beneficiary designations of assets that transfer outside of the probate process. This includes such assets as insurance policy proceeds and retirement benefits. Updating beneficiary designations are important because these beneficiary designations are a contractual agreement between parties, and divorce does not negate such designations. It is possible for a former spouse to receive large amounts of assets that the deceased certainly would rather have distributed to the beneficiaries of their newly updated estate plan.

      With all of the changes following the dissolution of the marriage, the updating of an estate plan can easily get lost in the shuffle. However due to the substantial impact that a divorce has upon an estate plan, it is important to take the time to review documents for necessary changes. When contemplating making changes be sure to consult an attorney to ensure that changes are made properly.

The Importance of Regular Document Review

Many of my clients, after signing their estate planning documents, express with relief, “I'm glad we’re done with that task". Whenever I hear that statement, I remind my clients that, while executing documents is an excellent first step in the estate planning process, as their life changes, their documents may someday need changes, updates, or revisions. I suggest three primary events that should cause them to review and possibly update their estate planning documents:

 Substantial Change in the Value of Assets

An important goal of estate planning is to minimize or avoid gifting and estate taxes. As asset values increase, especially the point where a portion of the estate may be subject to estate taxes, it is critical to review documents to determine if the current strategies implemented are sufficient to achieve planning goals and to determine if different or additional strategies are advisable to protect against possible tax liability.

As assets increase, it may be advisable, or desirable, to take advantage of advanced gifting strategies for loved ones. This not only benefits family in the near-term, but also reduces the value of the future estate, thereby reducing estate tax liability. Certain gifting strategies also have an effect on income tax liability. By transferring income-producing assets to children or grandchildren, the income created by those is taxed at a lower rate due to the new owner’s lower total income.

In addition to reviewing an estate plan in regards to eventual distributions, as assets increase it is important to make sure additional assets are appropriately included in the trust property. Proper funding is important to achieve the second goal of estate planning, probate avoidance.

An increase in assets is not the only reason to review estate plan documents. If the value of assets decreases, it may be possible to simplify an existing estate plan by eliminating revocable trusts that are no longer necessary. Additionally, existing gifting plans may require review to ensure the existence of sufficient assets to provide for continued personal well-being.

Change in Family Situation

The family situation and dynamics are rarely stable, with many possible events creating a desire to modify an existing estate plan. Those events include,

1. The birth of additional children
2. The birth of grandchildren and a desire to provide for their future in addition to, or in lieu of, providing for children
3.  A special need arises with a child or grandchild
4.  A child demonstrates greater maturity earlier than anticipated, or perhaps demonstrates significant immaturity, raising questions about their ability to handle funds
5.  A parent or another elderly relative indicates a potential financial need
6. The need to remove an ex-spouse as a beneficiary following divorce
7.  In contemplating remarriage the need to ensure protection for both a new spouse and children from a prior marriage
8.  A significant change in personal health
9.  For any number of reasons, those people chosen to act as guardians for minor children, trustees, or persons designated to make legal or medical decisions in the event of incapacity are no longer appropriate choices.

These and many other naturally occurring family events require periodic review to make sure that estate plan documents reflect the changing situation and present desires.

Changes in the Law

Since 1976, almost every year has brought a modification to federal estate tax statutes. Case law is constantly evolving as the Internal Revenue Service litigates positions in opposition to strategies used by taxpayers to minimize or eliminate estate taxes. In addition, state law as it relates to probate, trusts, and powers of attorney and patient advocate designations has changed a number of times. Regular review of documents and the status of the law help ensure maximum estate tax and probate savings.

These three factors may have different relevance for clients with different situations. For an older client whose assets remain constant there may be little need to revise estate planning strategies for tax law changes, but it may be more important in the family dynamics change concern arises for beneficiaries with previously unforeseen issues. For younger clients with growing families and growing balance sheet, document review becomes important as assets approach taxable levels, or the birth of children creates an increased need for protection in the event the unexpected occurs.

Whatever the reason, it is important to be mindful that in order to provide maximum protection for loved ones and minimize potential tax liability estate planning must be an ongoing process. For younger families with rapidly changing lives, a review every three to four years, or perhaps even more frequently, is advisable. For families in more mature or secure situations, less frequent review is necessary. A good estate-planning attorney should provide guidance when there is a change in the law that affects existing documents, but since a client’s personal life rarely makes front-page news it is important to keep attorneys apprised of major life changes. This allows them to provide guidance and support that creates peace of mind from knowing that an estate plan continues to provide protection for loved ones.

Protecting Four-Legged Loved Ones

The subject of today's blog started as a joke over the holidays as I discussed with a number of friends my desire to expose more people to the information in our blog. Those friends informed me that the most successful blogs they know of deal primarily with pictures of cute animals and/or celebrity gossip. In honor of that discussion, I start today's blog with this adorable photo.

While we do not intend to make a habit of luring readership to our site with adorable puppy pictures, we are not opposed to an occasional cute picture in order to educate people about the estate planning process.

-Matt

For most people, the process of estate planning revolves around ensuring that their assets go to the people they care for and that sufficient protections are in place so that those assets are put to the greatest possible use. For some people this means establishing 529 Education Savings Plans to ensure that funds are available for children or grandchildren to attend college. For others it means limitations on the distribution of trust principal to ensure that beneficiaries with spending issues or other personal issues have a source of income over their lifetimes. Often forgotten in the estate planning process is the fact that a person's loved ones sometimes include nonhuman companions that will also require care after their owner has died. While it is certainly possible to nominate an individual to care for a loved pet and leave that person funds for that purpose, the use of a pet trust ensures that those funds are used only for the benefit of the pet and the new owner does not skimp on the pet’s care to supplement their own income.

Currently forty-eight states, including Michigan, allow for the creation of a trust for the benefit of animals. These trusts, commonly known as Pet Trusts, allow people to ensure that assets are available to provide for their furry friends after they are gone. In Michigan, Pet Trusts are governed by MCL 700.2722. This statute formalizes the principle that the care of a pet is a lawful, noncharitable purpose, for which the trust can be created. Furthermore, the statute creates a presumption against construing a bequest for the benefit of the pet as merely precatory or honorary, thus discouraging courts from refusing to enforce such bequests.

The Michigan statute does however place certain limitations on the use of Pet Trusts. First, the statute limits the term of a Pet Trust to the lifetime of the animal or animals named as beneficiaries. However, the statute recognizes that certain animals have extremely long lifespans and therefore exempts trusts created under the statute from the uniform statutory rule against perpetuities, which would otherwise cause such trusts to fail and be unenforceable. It is possible for a pet trust to provide for multiple generations of animals or for multiple animals of varying ages. Second, the statute specifically allows the probate court to reduce the amount of property transferred to the trust if the court determines that the amount designated substantially exceeds the amount required to care for the animal. When a court makes this determination, the amount of reduction passes pursuant to the terms of trust as if those assets were not expended caring for the animal. This means that as in the case of Leona Helmsley, who attempted to leave her dog, "Trouble", $12,000,000 in the trust fund, the probate court is free to determine the amount of assets needed to care for a pet over its remaining expected lifespan. In the case of Trouble, it is worth noting that the probate court determined that a reasonable sum to provide care for the rest of his lifetime was only $2,000,000.

For those people who are not real estate moguls with the desire to keep their Maltese in handmade dog food and fur coats for the rest of their lives, a pet trust still provides an excellent resource for ensuring care of their animal companions and encouraging a two legged loved one to take the pet into their home. When creating a pet trust it is important to remember three things. First, as discussed, it is important to determine how much to leave in trust for the pet’s care. You should also determine what happens to any amount left in trust at the death of the pet. As with any other residuary distribution from a trust, the grantor can determine how such funds are distributed. In the simplest case, any remaining funds are distributed to the other beneficiaries. Alternately, if the grantor is charitably inclined, remaining funds could be used to benefit charitable organizations including the ASPCA, Humane Society, or World Wildlife Fund. In addition, it is important to name individuals who you wish to care for your pets. A pet trust does very little good if there is not a human alive to expend the trust assets for the pet’s benefit. From a common sense perspective, it is preferable to name someone other than the Trustee of the trust as the guardian for the pet, thus ensuring that there is supervision over the use of the assets. Lastly, it is important to remember that pet trusts are not limited to dogs and cats. The statute allows the creation of the trust for any animal, thus it is possible to ensure that funds are available to care for large animals such as horses or long-lived animals such as turtles long after the original owner has passed away.

As with any other form of trust is important to work with a knowledgeable and licensed attorney to ensure the observation of the legal formalities of creating a trust and that the trust is enforceable. Planning for the long-term care of an animal is as complex as planning for the long-term care of any other loved one, but with the proper assistance it is possible to ensure that all of our friends and family, on two legs or four, receive the best possible care even after we are gone.

It is Better to Give than Receive

At this time of the year, our thoughts turn to the holidays and sometimes we get caught up in the hustle and bustle of shopping, parties, family gatherings, and religious services. Our minds race with countless questions; what should I get for everyone; what am I getting; where are we going; what time is that party; and will I survive the stress?

In addition, we also take time to reflect on the blessings of our family, friends, and business acquaintances. We remember that not all people are so fortunate and we reach out a hand to our fellow man through acts of charity. We all feel warmer inside after giving, whether to the Salvation Army Red Kettle at the mall, to our own church or temple, to the local food kitchen, or to countless other groups that seek to assist those in need or find cures for medical conditions. Not only does charitable giving feel good, but also it is good for you.

•      Charitable contributions are income tax deductible: Gifts made directly to charities are income tax deductible and reduce your taxable income in the year of the contribution, if the charity receives the gift by December 31.
•     Charitable contributions are not counted when determining estate tax liability: The value of gifts made at death reduce your taxable estate, saving 35%-50% depending upon the current estate tax rate
•     If structured properly, charitable contributions may avoid capital gains on highly appreciated property: By executing a charitable trust, it is possible to provide funds to charities while also gaining additional tax advantages.

USING CHARITABLE TRUSTS

Some people want to retain control over assets they intend to give away, allowing them to take advantage of a current or future income stream while also guaranteeing a benefit to their favorite charities at some point in time. Achieving these goals is possible with a charitable trust. Charitable trusts take advantage of the differences between present interests (or as I like to refer to them “here” interests) and future interests (“hereafter” interests) to provide benefits to trust beneficiaries.

A Charitable Remainder Trust (CRT) allows you to receive the current income stream from assets transferred to the trust and distributes the remainder portion to the charity after a specified time, or at your death. You get to enjoy the “here” and the charity enjoys the “hereafter.” Through the use of a properly structured CRT, you, your heirs and your chosen charities all benefit, and the IRS receives nothing

The CRT is especially useful where the transferred asset is highly appreciated. If the CRT trustee sells appreciated property, following the property’s transfer to the CRT, there is no capital gains tax liability (unlike if you sold the property yourself). This results in the availability of more assets to provide greater income in the “here.”

While any distributed trust income is taxed to you as ordinary income or capital gains, depending upon its character, you may consider leveraging the CRT by using such income you receive to fund gifts to an Irrevocable Life Insurance Trust so your heirs can receive more value at your death without it being subject to income or estate taxes. Alternatively, some people name their children or grandchildren as the current beneficiaries of the CRT to provide those beneficiaries with income taxed at a lower rate than if the grantor of the CRT took distributions directly.

A final thought on the use of CRTs, the amount of the income tax deduction for contributions to the CRT is determined using IRS tables. The longer the period before the charity gets complete control of the trust property, the smaller the deduction you are able to take.

A Charitable Lead Trust (CLT) functions similar to a CRT but provides for the charity in the “here” by giving the charity the current income stream from assets transferred to the trust and for other beneficiaries in the “hereafter” by distributing the remainder portion to family members after a specified time or your death. Again, the amount of the income tax deduction for contributions to the CLT is determined using IRS tables. The longer the period the charity gets the income from the trust property, the smaller the gift to the remainder beneficiaries, and the larger the deduction you are able to take. However, tax rules require you pay tax on the income as the charitable beneficiary receives in order to take the immediate charitable income tax deduction. By making use of a CLT, you can fulfill your charitable inclinations, shift income and assets to eventual beneficiaries with little gift tax cost, and remove assets form your estate. 

The CRT and the CLT both serve as excellent methods of charitable giving as part of a larger estate plan. If however your charitable inclinations include a long-term, active charitable commitment, it may be appropriate to consider organizing your own Charitable Foundation. While creating and maintaining a Foundation requires substantial administrative effort, the use of a Foundation allows you to receive charitable tax deductions, manage the long-term distribution of assets, choose and change which charities benefit from your philanthropy, and potentially provide a vehicle for a multigenerational commitment to doing good works.

No matter how you decide to satisfy your charitable wishes, with proper planning you can benefit your favorite causes, shift income and assets from your estate to other family members and teach your children and grandchildren the lesson of doing good works. If you have specific questions regarding charitable trusts and foundations, feel free to email us or leave them in the comments section.

Irrevocable Life Insurance Trusts

Our prior posts have focused solely on Living, or Revocable, Trusts. However, as a client’s assets increase so does the potential complexity of their estate plan. A frequent concern of higher net worth clients is the prospect of paying estate taxes on the assets they choose to leave to their beneficiaries. Due to the present large estate tax lifetime exclusion of $5,120,000.00 (due to expire on December 31, 2012), planning strategies that address this concern have become less common in the past decade. However, for those clients with a net worth large enough to create an estate tax liability (a group that could increase in size dramatically should the Lifetime Exclusion decline to $1,000,000 or some other amount in 2013) the Irrevocable Life Insurance Trust may be a valuable tool. The greatest benefit of the Irrevocable Life Insurance Trust its ability to provide liquidity and finance a fund to offset expected estate taxes. 

The Irrevocable Trust

An "Irrevocable Life Insurance Trust" is a Trust designed to have as its only asset a life insurance policy on the life of a Grantor or a Grantor and his or her Spouse. It is drafted to provide that the proceeds from the insurance policy will not be a part of the Grantor's estate upon death and will pass to beneficiaries income tax-free. If the Grantor owns an insurance policy and retains control over the policy, then the proceeds from that policy are included in the Grantor's estate even if the proceeds from that policy are payable to someone other than the Grantor. For example, if the Grantor owns a $1,000,000.00 policy, and dies, that policy will be includable in the Grantor's estate and be subject to federal estate tax (taxed at a 35% rate this year and potentially a 50% rate next year), if the Grantor's estate exceeds the Lifetime Exclusion. If the Irrevocable Trust owns the $1,000,000.00 life insurance policy, and the Grantor dies, the policy proceeds are not includable in the Grantor's estate and will not be subject to the estate tax.

The Irrevocable Life Insurance Trust is commonly part of an estate plan when the Grantor's estate exceeds the value of the Lifetime Exclusion and there will be taxes owed at the time of the Grantor's death. Rather than having the taxes paid on a dollar for dollar basis from the Grantor's estate, an Irrevocable Life Insurance Trust holds an insurance policy and receives the proceeds from that policy. Those proceeds offset the taxes paid to the federal government and are distributed to the beneficiaries pursuant to the terms of the Irrevocable Trust, which may be the same or different from the terms of the Grantor’s Living Trust. The benefit to the estate comes from the fact that the cost of the annual insurance premiums are a fraction of the cost of the taxes paid on a dollar for dollar basis from the estate. 

In situations where the estate exceeds the value of the Lifetime Exclusion, an Irrevocable Life Insurance Trust is a good strategy. However, many of my clients are reluctant initially because of their lack of knowledge of life insurance policies and premiums costs. I suggest they consider this strictly from an economic standpoint. If the payment of the premiums will reduce their lifestyle, do they really want to give their children a greater lifestyle at the expense of their own inconvenience? However, the reality for most clients considering this technique is that the payment of premiums will come from excess assets, not assets otherwise used to support a client's lifestyle, and therefore the decision to use an Irrevocable Life Insurance Trust becomes an easier one.

A second use of an Irrevocable Life Insurance Trust is to provide for the needs of a special needs child while preserving any existing government benefits. The proceeds of the life insurance policy held by the Irrevocable Trust are used as appropriate for the child while the remainder of the Grantor's assets can benefit the Grantor's other beneficiaries. When used for this purpose the Trust will include language to ensure that distribution of the proceeds occurs at the Trustee's complete discretion so that the funds are used in addition to and not in lieu of any government benefits. In a similar fashion, an Irrevocable Trust can protect a second spouse by providing funds for him/her while distributing the rest of the Grantor's estate to children of prior marriage. In the alternative, the Irrevocable Trust can protect the Grantor's children by guaranteeing a specified amount, with the remainder the estate going to a second spouse or other beneficiaries.

The Insurance Policy

In order to ensure that the insurance policy is not included in the Grantor's estate, the Grantor must first execute the Irrevocable Life Insurance Trust and then the Trustee of the Trust applies for the policy on behalf of the Trust. It is important to use a new insurance policy to fund the Trust, because if an existing policy on the life of the Grantor is transferred to the Trust, and the Grantor dies within three years of the transfer, the insurance policy is considered part of the estate of the Grantor and subject to the estate tax. If at the time the Trust is established, the Grantor is not insurable and an existing policy must be used, as long as the Grantor survives for three years the policy will not be included in the Grantor's estate.

An additional requirement of an Irrevocable Life Insurance Trust is the requirement that the Grantor normally make annual gifts to the Trust in order to pay the annual premiums. The Grantor typically wants these annual gifts to count as "present gifts" to take advantage of the Gift Tax Annual Exclusion (presently $13,000.00 per donee). For that to occur, the beneficiary or beneficiaries must have at least a short period of time in which to be able to request that his or her portion of the annual premium be distributed to him or her rather than held in the Trust. For this reason, "Crummey Notices" generally are given to each of the beneficiaries, or their guardians if a beneficiary is a minor. The Crummey Notice, named for a tax case, Crummey vs. Commissioner, explains it that each beneficiary has a right to take his or her pro rata portion of the annual gift. If the beneficiary does not exercise that option within 30 days, that option expires, the gift is considered a “present gift’, and the Trustee can then pay the insurance premium.

An insurance policy taken out by the Trustee can be either a permanent policy or a term policy, except that if the policy is on the life of the Grantor and Grantor's spouse, only permanent policies are available. As with other life insurance policies, there are many funding choices. Some Grantors prefer to front-load premiums (pursuant to allowable insurance guidelines) so as to be able cease gifts to the Trust at a certain point in time and have the policy continue indefinitely. Others, who seek to keep gifts to a minimum, may actually use a term policy. The problem with the term policy is it will end after a certain number of years and if the grantor is uninsurable at that time, the strategy fails. Practically speaking, if there is an insurance need to offset estate taxes, that need is probably always there and a permanent policy should be considered. If there is no longer a need for the policy, or if the Grantor decides not to make additional gifts, the Trustee can cease making premium payments and the policy will lapse. 

Even though the trust itself is irrevocable and its terms cannot be changed, the Trustee and the Trustee's advisors should consider reviewing the life insurance policy on a regular basis to determine if the policy is still appropriate. It is possible a new policy with better provisions or with lower premiums would be a better choice for the situation. The duties of a Trustee of an Irrevocable Life Insurance Trust extend beyond simply providing the Crummey Notices and paying the premiums.

A strategy which is available now but which will expire on December 31, 2012, is to make a large gift to an Irrevocable Trust using the current $5,120,000.00 Lifetime Exclusion and purchase a large single pay premium policy. In the event changes in the law reduce the Lifetime Exclusion to $1,000,000.00, the Grantor has already fully funded the policy and need not make any large gifts thereafter. The strategy melds the time-tested strategy of the Irrevocable Life Insurance Trust with the short-term availability of making large gifts currently in the event that the Lifetime Exclusion is reduced significantly.

Just like the other strategies we have discussed, the Irrevocable Life Insurance Trust is another tool to be used where appropriate and can provide significant protection for specific beneficiaries and offset (at a much lower cost) estate taxes that will likely be paid at the death of the Grantor and Grantor's spouse. As is the case with these other tools, it is important to discuss what options are appropriate with a licensed attorney prior to taking any action.

Trust Funding—Filling the Trust-Bucket to Avoid Probate

As we have previously discussed, executing a Trust creates a legal entity that can own property. However unless steps are taken to transfer property to that entity, even the best-drafted Trust will provide very little value. I have previously referred to a newly executed Living Trust as an empty bucket. The Grantor/Initial Trustee carries the trust-bucket around during their life and makes use of its contents. If the trust-bucket does not have any assets in it, then the bucket is not doing its job. Thankfully, the process of funding a Trust, though sometimes complex, can be completed and provide protection.  Examples of  items to place into the trust-bucket are:

Tangible Personal Property Tangible personal property includes all the property a person owns that is movable; this includes clothing, furniture, and other household goods. Tangible personal property also includes items such as artwork, unique collectibles, firearms, and jewelry. These items are added to the bucket (and thus funded to the trust) through the execution of an Assignment of Personal Property. In our office, when we draft a Living Trust we automatically draft an Assignment of Personal Property. This ensures that before the client leaves we know that their Trust is the owner of their tangible personal property.

Real Estate.  The next item commonly funded to a Living Trust is real estate, such as a residence or vacation home. In order to fund real estate to the Living Trust the Grantor executes a quitclaim deed transferring the property to the Trust. Upon signing the deed, the Trust becomes the owner of the property. State law then requires recording of the deed with the county to ensure a complete record of property ownership exists. It is worth noting that in some circumstance it is more advantageous, primarily for creditor protection, not to fund real estate to a Living Trust. The decision to fund real estate to a Trust is a discussion that each individual needs to have with their attorney to determine what the best course of action is in their particular set of circumstances.

Investment Accounts   The third type of asset to place in the trust-bucket is accounts with financial institutions. Funding these assets to a Living Trust ensures that not only do those accounts pass directly to the beneficiaries without the delay of probate, but also that the Successor Trustee has access to those assets upon the death of the Grantor in order to make any payments that need to be made prior to making distributions to the beneficiaries. A subset of financial account assets frequently handled by banks and financial advisers is life insurance policies, IRAs, and other retirement accounts. These accounts are not funded to the Living Trust during the owner’s life but instead the Living Trust is one of the designated beneficiaries of the accounts at the owner’s death. In the case of life insurance policies, we recommend that the Living Trust be the primary beneficiary for the policy. This ensures this ensures that at the death of the insured party the proceeds from the insurance policy are distributed directly to the Living Trust. As for IRAs, if our clients are married we recommend that they designate their spouse as the primary beneficiary of the IRA, because spouses enjoy preferential distribution treatment, and then name the Living Trust as a contingent beneficiary.

Business Entities.  The final assets commonly funded into a Living Trust are interests in Business Entities such as Companies, Corporations, and Partnerships. The funding of these interests to a Living Trust is completed with an Assignment. This Assignment can occur any time after the signing of the Living Trust, and if the Entity issues stock certificates those certificates need to be updated to reflect that the Living Trust is the owner of the interest. When funding a business interest to a Living Trust it is important to review the Operating Agreement for the business entity to ensure that there is no restriction on transfer of stock to a living trust.

After all this funding is complete, the trust-bucket now contains bank accounts, investment accounts, deeds to real estate, and interests in business entities. Insurance policies and IRAs designate that they pay out directly to the Living Trust and thus those assets drop into the bucket at the death of the owner. All of this ensures that when the Grantor/Initial Trustee passes away and the Successor Trustee comes along to pick up the bucket and follows the instructions written inside it, all of the Grantor’s assets are in the bucket and there is little to no need to deal with the Probate Court.

In the event that a Grantor has not funded an asset to the Living Trust prior to the Grantors death, a properly drafted estate plan will include a Will that designates the Living Trust as the sole beneficiary of the entire probate estate. This means that any asset that needs to pass through the probate process will end up as a Trust asset for the Trustee to distribute pursuant to the terms of the trust. While this will act as a safety net, catching anything that happens to be missed in the initial planning process, like all other circumstances involving a safety net the intention is to never need to make use of that net.

Each individual's circumstances are unique and due to those unique circumstances, it may not benefit an individual to transfer an asset into the name of the trust. These circumstances are one of many reasons that it is important to consult a licensed attorney to assist you with estate planning and to share information openly with that attorney.

How a Trust Works

Over the past few posts, we have done our best to give you an idea of what a Living Trust can do and how such a Trust can be advantageous to a wide variety of people. For many of our clients, having this information is all they need to make the decision to move forward with the Estate Planning process. However for other clients, learning that a Trust can provide these advantages leads them to the inevitable question of how does a Trust make these things happen.

Trusts have been in use for hundreds of years and the law that controls their use is substantial and complex. In Michigan, where we practice, the Michigan Trust Code (part of the Estates and Protected Individuals Code (EPIC)) governs the use of Trusts. Each state has their own law governing Trusts and it is important to consult an attorney who is familiar with that law before engaging in any planning. Today however, we will discuss the broad concepts that allow a Trust to provide benefits to those who include one in their Estate Plan.

Owning Assets

The law allows for the creation of a number of different types of Entities, including Trusts, Corporations, and Companies that have rights and privileges similar to those of Individuals. One of these rights is the ownership of property. Business Entities use this ownership option to spread the cost, liability, and profits of their ventures amongst investors. A properly drafted Living Trust uses this ownership option to create an Entity that owns the property for purposes of control and transfer while subjecting the property to be taxed as if an Individual owned it. This dual natured ownership creates one of the largest advantages of including a Trust in an estate plan, the ability to avoid probate.

Avoiding Probate

Assets owned by a Trust avoid the probate process because the only assets regulated by Probate Courts are those owned by Individuals when they die. Since a Trust is not an Individual and cannot die, it is not subject to the probate process.

The concept that the Trust Grantor may use all of the Trust assets as they see fit during their lifetime yet not be treated as the owner of the assets at death is often one that confuses clients. It is helpful to think of the Living Trust as a bucket containing the Grantor’s assets that the Grantor/Initial Trustee carries around during lifetime. The trust-bucket contains a list of instructions that says that the Grantor/Initial Trustee may use the assets contained in the bucket as he or she sees fit. When the Grantor/Initial Trustee passes away, the Successor Trustee picks up the trust-bucket and uses the assets according to the Grantor’s instructions.

An additional benefit of avoiding the probate process, besides the time and cost involved, is the ability of the Trustee, and not court, to control distributions to Beneficiaries who may be unprepared to handle an influx of assets. While the probate courts can provide a measure of protection for minor children, that protection ends at age 18. For adult beneficiaries in need of additional assistance due to addiction, disability, or other difficult circumstance, the probate courts only have the extreme option of imposing a guardianship or conservatorship if circumstances warrant it.

Enforcing the Grantors Wishes after Death

Legally, the Trust is a contractual arrangement between the Grantor and the Trustee. Upon the death of the Grantor/Initial Trustee, the contract provides the Successor Trustee with the authority to take actions on behalf of the Trust needed to comply with the Grantor’s instructions. This authority is not limitless and the Successor Trustee owes a fiduciary duty to the Beneficiaries (those people who the Trust says will receive the Trust assets).

A fiduciary duty requires the Trustee to act solely for the benefit of the Beneficiaries in taking actions in relation to the Trust and avoid any conflict of interest between the Trustee and the Beneficiaries. A fiduciary duty is the strictest duty of care recognized by the legal system and a Trustee who breaches this duty is subject to removal and a civil lawsuit. A Beneficiary who proves that a Trustee has violated their fiduciary duty may recover profits made by the Trustee, even if the Beneficiary has not suffered any actual harm.

Additionally it is illegal for a Trustee to conceal the existence of a Trust from a Beneficiary of that Trust. While the terms of the Trust may limit the amount of information the Trustee must provide to a Beneficiary, certain information must be provided to a Beneficiary and a court may always order a Trustee to provide information to the Beneficiary or to the court. This requirement ensures that a Beneficiary has the information required to protect their interest in the Trust assets.

The complexity of trust law in the wide variety of trusts in existence make it understandable that an individual would not want to blindly accept that a Trust is able to provide them and their loved ones with all of the promised benefits. As attorneys, we strive to provide our clients with all the information they need to be understand how the documents we draft for them are able to protect them and their loved ones. If you have specific questions regarding how part of a Trust works, please leave us a comment or e-mail us and we will be happy to address that in later posts.