Mixer Feelings

While a great deal of an attorney’s responsibility attaches to understanding the law, in the area of estate planning an experienced attorney will also serve as a guide, counselor and mediator, assisting client's designees as they navigate complex family dynamics. It is important to communicate to beneficiaries left behind after a client has died the wishes of the client as laid out in the estate planning documents. While a beneficiary may disagree or be unhappy with the terms of the documents and what has been left for them, it is important that all beneficiaries understand the intent of the client and that arguing against it can cost all parties significant time delays and expense. Despite this process, a may still act against their own best interest and the best interest of the other beneficiaries.

Ramona was a lovely woman who had strong, but different, relationships with her two daughters, Samantha and Tammy. Ramona's relationships with her daughters reflected different hobbies that each enjoyed, and because of differences in Samantha and Tammy’s personalities, Ramona's relationships with her daughters rarely overlapped. Unfortunately, while Samantha and Tammy's different personalities allowed Ramona to enjoy time with each of her daughters, those personality differences also created deep-seated tension between the sisters.

Following Ramona's death, Tammy and Samantha were named as co-trustees to administer their mother's Trust, but unfortunately almost immediately problems began to arise. Shortly after Ramona's death Tammy went to Ramona's home and removed a number of items of personal property. In response, Samantha took steps to secure Ramona's estate planning documents, which led to rapidly escalating retaliatory actions between the women until both realized that they would be unable to continue the administration of their mother's Trust without some sort of mediator. We had represented Ramona in preparing her estate plan and, thankfully, her daughters trusted us to act as impartial arbitrators and guide them through the administration process.

Tammy and Samantha divided the administrative efforts so that their contact would be minimal and for the most part occur using us as intermediaries, which worked well until it came time to address the division of the remaining personal property. This portion of the administration grew increasingly acrimonious as Samantha and Tammy continued to argue. The argument came to a head in our offices where we met with the two women in separate conference rooms and attempted to sort out the cause of their fighting. After much discussion, it became clear that Samantha was particularly incensed by Tammy's initial removal of items from Ramona's house, including a KitchenAid stand mixer. That mixer was a particular sticking point because Samantha knew that Tammy already owned a stand mixer and therefore likely had no need for Ramona's mixer.

When we broached the subject of the mixer with Tammy, she shared with us a number of wonderful memories of her time speaking with her mother and recollected how impressed Ramona always was that the mixer she received as a wedding present held up so well over many decades of use. Tammy indicated that she hoped her mother's mixer would continue to serve her just as well and help her to remember her mother every time she baked. As Tammy shared the story, it became clear that her initial action had not been malicious, but that she never considered how Samantha might feel about the situation. The idea of a compromise began to form and we returned to speak with Samantha.

After confirming that Samantha did not share Tammy's sentimental feelings about the mixer we brought the two women together and asked Tammy to share the memories of baking with Ramona with her sister. After Tammy recounted all the years that she baked with her mother, we were able to work out an arrangement where Samantha received Tammy's mixer, Tammy kept Ramona's mixer, and the two sisters began the process of healing their relationship. While I cannot say that we created lasting peace in our time, we did at least enable the family to effectively administer their loved one's affairs.

While not all conflicts are as simple to resolve as swapping small appliances is important to recognize that often what seemed like insurmountable conflicts have their roots in relatively small transgressions and with proper assistance, it is possible to begin the healing process. An experienced estate planning attorney will do more for the family than prepare documents or go to the Probate Court. They can also help strengthen family bonds in the face of emotional difficulties.

Matt and Al

Planning to Protect a Second Wife and Five Adult Daughters

Over the past year our goal in writing Plainly Legal was to discuss many of the technical legal issues in the area of estate planning that impact the practices of financial planners. Using this information as a basis, going forward we will be addressing specific situations raised by our clients and how we dealt with those situations. As we address these examples, we will do our best to link back to previous posts that address the technical issues. If any of you run across an issue or have a question on how to solve a client problem, feel free to e-mail us and we can address it in future posts.

A client of ours, diagnosed with cancer and given only a short time to live, was concerned about protecting his second wife during her lifetime, yet treating his five adult daughters fairly. The client owned a valuable business and also had significant personal assets, but was concerned that some of his daughters might create problems for his wife after his death. He was also concerned that he had not taught his daughters the value of money and worried they would not handle an inheritance well.

Initially, he wanted to leave everything in trust for his wife for use during her lifetime, with distributions to the daughters after her death. Knowing that the wife was somewhat younger than our client was and in good health, I raised the issue that it might be some time before the daughters received anything. To address this concern I suggested we carve out sufficient assets in a Marital Trust, including the residence and sufficient invested assets to maintain the wife's accustomed standard of living, for her use during her lifetime. Since the residence had significant value, we wanted to provide flexibility for the wife if she ever decided to sell the residence, and therefore we provided the Trustee with the power to sell the residence and use the funds to purchase a new residence for the wife, with any remaining funds added to the Marital Trust for the spouse. This power to purchase a new residence gave the wife the flexibility to downsize her residence or move to a different state for health or personal reasons if necessary. We also named the wife as a Co-Trustee of the Marital Trust set aside for her benefit, so that she had a say in the management of the assets held for her benefit.

To protect the daughters from their spending habits and maintain the value of the business, we placed the business and the remaining assets in a Children's Trust for the daughters benefit. The daughters received income automatically from their Trust each year, but principal distributions were totally discretionary until the oldest child reached the age of forty. At that point, the trust began distributing principal at the rate of 20% per year for the next five years. Our client felt comfortable that this would provide an income stream for each of the daughters, allowing them time to learn the value of money and how to manage the business, yet protect the value of the business so that disagreements among his daughters would not result in the sale of the business. To address the client’s concern that his daughters might cause his wife problems, we suggested that the wife be the Trustee of the Children's Trust, with a corporate fiduciary as a Successor Trustee in the event that the wife ever decided to resign as Trustee. Our client liked the idea because it gave the wife control over the children's future assets and distributions, which he felt would lessen the chance that the children would give her problems.

Fourteen years have passed and I am happy to report that the Marital Trust, with good investment advice, has provided sufficient income to maintain the wife's accustomed standard of living. She still lives in and enjoys the residence. Over time, the daughters received all their distributions and now jointly own the still successful family business. They learned the values of hard work and cooperation and the business provides each of them a good income. As an added bonus, some of them even enjoy a good relationship with their stepmother.

This is a good example of how planning can protect families and their assets following a client’s passing. While this particular client was in good health, we completed other planning that facilitated a smooth transition of other business assets and provided funds for payment of Federal Estate taxes when the client passed away. Next week we will address this planning in detail.

Alan Ferrara

Distributing Potentially Problematic Assets

     Our previous two blogs focused on how estate-planning documents achieve the client's planning goals. Today's blog focuses on how successor Trustees distribute assets to beneficiaries. While sometimes the distribution of trust assets is as simple as writing checks to the beneficiaries, certain assets, such as items of personal property and investment accounts, present special issues.

     With personal property, we provide our clients with the ability to leave a memorandum indicating which individuals receive particular pieces of personal property. After giving effect to this memorandum, the Trustee must distribute the remaining personal property pursuant to the terms of the trust, usually in approximately equal shares amongst a number of people. In many circumstances, this division is amicable, with the beneficiaries each keeping the items of personal and monetary value without issue. The trustee can then dispose of the unwanted remaining personal property through either an estate sale or donation to charity. This of course is the best-case scenario, but there are times beneficiaries are unable to agree as to the division of the property. At this point, the Trustee becomes a mix of accountant and mediator, keeping track of the value of property and sorting out disagreements between beneficiaries over whom receives what from their loved one’s estate. Trusts often provide the Trustee with the final decision as to the distribution of personal property when beneficiaries disagree, allowing the Trustee to settle disagreements as he or she see fit and in compliance with the terms of the trust.

     Investment accounts may also be difficult to divide and distribute. While the actual division of an investment account is a simple matter easily accomplished, the Trustee must first determine when the assets should be distributed and how they should be invested prior to distribution. The Trustee is a fiduciary under a high standard of care, and therefore must make distribution decisions with care. If the Trustee intends to make distributions in the near future, it may be better to liquidate investments to protect the principal against market losses. If assets will be held in trust prior to distribution, the Trustee must decide between the benefit of capturing market gains against the possibility of incurring market losses. If possible, it may be simpler to equally split each of the investments in the portfolio distribute them in kind, and allow each beneficiary to make their own investment decisions.

     It is important that the Trustee consult with knowledgeable advisors to ensure that the interests of both the present and residual beneficiaries receive fair treatment. The employment of such a qualified advisor may relieve the trustee of their duty to ensure that assets are properly invested, so it is important to that the Trustee work closely with the advisor.

     These are just two examples of assets that may cause successor trustees issues when distributing trust assets to the beneficiaries. Because of these potential issues, it is important for the initial trustees to keep good records regarding the assets held in their trust so that their successor trustees can administer the trust to achieve the grantor's goals with a minimum of trouble and inconvenience. If you have questions regarding funding assets to the trust please feel free to contact us directly and we will provide you with additional information.

Matt Ferrara

What Happens When Successor Trustees Take Control?

     In our last blog, we discussed steps a client’s Personal Representative takes as part of the probate process upon the client's death. Today's blog addresses how the client’s Living Trust and their successor Trustee fit into that picture. In most cases, the Successor Trustee plays a significantly larger role in the administration, because a properly funded Living Trust limits the assets that need to pass through the Probate Court.

     Unlike a Personal Representative, the Successor Trustee does not need to wait for the Probate Court to approve their appointment.  The Successor Trustee can sign an Acceptance of Trust indicating acceptance of the trustee position and then take possession of the trust assets on behalf of the trust beneficiaries. The Trustee is responsible for the care and custody of assets and making investment decisions, but may rely on qualified professionals for assistance. It is important to remember that a Trustee is a "fiduciary" and must meet a very high standard of care with respect to all actions.

     One of the first things a Trustee must do is apply for a federal tax identification number for the Trust. While a Living Trust uses the Grantor’s Social Security number during the Grantor’s lifetime, both the Estate of a deceased individual and that person’s Living Trust must have separate tax identification numbers and file income tax returns for as long as the Estate remains open and the Trust continues to hold any assets. In limited circumstances, the Estate and Trust may file a combined return; however, it is important to seek the advice of a qualified professional before filing such return.

     Next, the Trustee should provide the beneficiaries of the Trust with certain information, including informing beneficiaries of the existence of the Trust, the name and contact information of the successor Trustee, and information regarding the scope and terms of their individual bequest. This statutorily required notice serves as a check on the Trustee's powers by giving the beneficiaries sufficient information to hold the Trustee responsible for their actions. The Trust normally provides that the Trustee must provide an annual accounting to beneficiaries during the time the trust owns any assets. Prior to making any distributions to the beneficiaries, the Trustee should coordinate with the Personal Representative to pay the grantor’s creditors as may be required by law.

     When all Trust Matters are completed, the Trustee distributes the trust assets to beneficiaries pursuant to the Grantor’s instructions. In all circumstances, it is important that a successor Trustee seek the advice of competent counsel in order to comply with all of their responsibilities, and to assist in the smooth administration of the trust to achieve the grantor’s goals. Later this week we will discuss how the successor trustee should handle distributions of particular assets, including personal property and investment accounts.

Matt Ferrara

Planning for Terminally Ill Clients

     While we hope the estate planning we engage in will be as good thirty years from now as it is today, and that we will not need to use it until then, it is a sad fact of life that an unexpected serious illness requires us to reconsider our planning.

    Most of my clients have a Durable Power of Attorney that is only effective upon their incapacity. This means that the person designated to make decisions has no power until two doctors certify that the client is incapacitated and cannot care for their own physical or financial well-being. It may be a good idea for seriously ill clients and those with a terminal illness to provide for an Immediate Durable Power of Attorney. This allows the person designated to make legal decisions even if the client is not incapacitated, but simply unable to physically deal with financial issues. It gives the person designated flexibility in working with banks, brokers and others on behalf of the seriously ill client.

     An additional concern we have started to encounter is that some banks and brokers are unwilling to accept Durable Powers of Attorney executed longer than six months ago. These entities consider these documents "stale,” and are concerned they may not reflect the current viewpoint of the client. While the Michigan statute has no time limit on a Power of Attorney properly executed, it is usually cheaper to revise the Durable Power of Attorney rather than argue with the entity. For that reason, it may be advisable for a seriously ill or terminal client to "refresh" the Durable Power of Attorney so it is acceptable to banks and brokers.

     Just as Powers of Attorney frequently only function following a client’s incapacity, most clients are the sole Trustee of their Living Trust, and a successor Trustee does not have any authority until the client becomes incapacitated or dies. Again, it may be a good idea for a seriously ill or terminal client to modify their Living Trust to provide for a Co-Trustee immediately rather than only on the death of the client. Again, this Co-Trustee will help the client deal with matters relating to assets owned by the Trust.

     Finally, when reviewing documents in these circumstances, it is also a good idea to review the Patient Advocate Designation and evaluate those people named to make medical decisions in the event the client is unable to make their own decisions. Since those people may be called upon to make decisions sooner than later, it is important that the client remain confident in their ability to follow the client’s wishes. 

   On Thursday we will discuss reviewing dispositive provisions of the estate plan in consideration of the fact that a person's life may be cut short.

Alan Ferrara

Should I Panic about being Named a Successor Trustee? - Part II

     Last week we began discussing the obligations of a Successor Trustee after the death of the Grantor. In addition to determining whom the beneficiaries of the Trust are and reviewing the Trust provisions, an important duty is assembling a list of the trust assets Sometimes that task is easy because the Grantor has kept good records. Other times the Successor Trustee must become a "detective" and find some of the assets. In addition to locating the assets, the Successor Trustee is responsible for determining the best way to invest the assets until making distributions pursuant to the terms of the Trust. The Trustee must follow the "Prudent Investor Rule", which requires that the Trustee must exercise reasonable care, skill, and caution in the investment and management of assets, taking into account the purposes, terms, and distribution requirement expressed in the Trust. Fortunately, the Trustee may retain qualified investment professionals to manage the assets if the Trustee does have the requisite investment skills necessary.

     The Successor Trustee may also be required to work in coordination with the Personal Representative of the Grantor’s Estate. In many instances, the Trust agreement instructs the Trustee to work with the Personal Representative of the Estate to pay for expenses, settle debts, and make tax elections. It is also common for an estate plan to name the same person as Personal Representative and successor Trustee. Whatever the case, it is important that the successor Trustee comply with the administrative provisions of the Trust and keep complete records of any expenses paid or distributions made from trust assets. 

     After securing the Trust assets and determining the instructions for administration and distribution of the assets, the Trustee should inform the Trust Beneficiaries of their interest in the Trust, how the assets are to be distributed, and how the assets are being spent. Once the initial duties of the successor Trustee are complete, the Trustee can begin making distributions from the Trust assets pursuant to the Trust provisions. While the Trustee may have some discretion, the Trustee must make distributions pursuant to the terms of the Trust. This means if the Trust places any limitations on the use of distributions or requirements that must be met prior to making a distribution, it is the Trustee's responsibility to ensure that the Beneficiary complies with these limitations or has met those requirements. 

     While in some cases, the administration of the Trust is very simple because the Trust requires immediate distributions to all beneficiaries, often the Trustee’s responsibility continues for many years while making distributions to Beneficiaries as they meet the Trust's requirements, assisting Beneficiaries who have spending and/or dependency issues, or simply maintaining assets until Beneficiaries reach mandated milestones, at which point the Trust assets may be distributed. 

     The role of the Successor Trustee is not one to accept lightly, as the position exposes the individual to a great amount of responsibility and work. Thankfully, Successor Trustees do not need to be personally responsible for all of the tasks of administering a Trust. The Successor Trustee can rely on other professionals, such as attorneys, accountants, and financial managers, to assist in the review, explanation and the administration of the Trusts. These professionals can be of great assistance to a Successor Trustee by providing guidance and assistance throughout the administration process. With this assistance, the Successor Trustee can serve in this important and rewarding position, and assist the Grantor's loved ones after the death of the Grantor.

Matt 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.

I've Been Named as a Trustee, What do I Need to Do?

     At some point, a friend or loved one may ask you to serve as successor trustee for their trust. Usually people are flattered when this happens, but rarely have they considered what is required of a successor trustee. The successor trustee is responsible for the administration of the trust once the trust maker, or grantor, dies. On occasion the successor trustee will also take over administration of the trust if the grantor becomes incapacitated. Sometimes administration is relatively simple, such as when the beneficiaries are all adults and the trust has no provisions to distribute assets over an extended time. Other times, the successor trustee may administer the trust for a significant amount of time if the beneficiaries are minors or the grantor feels that the beneficiaries are unable to handle their own assets until sometime in the future, if ever.

     Whether trust administration is short-term or long-term, there are rules in the common law and Michigan statutes that a successor trustee must follow. When you agree to act as a trustee, you place yourself in a fiduciary situation, and must act with a high degree of care with respect to the trust and its beneficiaries. The Trustee:

1. Must follow the instructions of the trust agreement as specified by the trust maker
2. Must in good faith, act in the best interests of the beneficiaries of the trust. Good faith means not taking advantage of another, even through technicalities of law
3. Must use ordinary care and diligence in the administration of their duties, even if not receiving any compensation for services
4. Must invest the funds of the trust properly to preserve the principal and earn a reasonable rate of return
5. Must provide accountings to beneficiaries 
6. Must make distributions to beneficiaries as stated in the trust. 
7. May not deal with the trust property for Trustee’s own benefit or for any purpose not connected with the trust’s purpose.
8. Must not commingle trust property and non-trust property 

     These are the default provisions under the law, Michigan law allows the grantor to supplement or waive many of the above requirements. For example, the trust provisions may allow the trustee to ignore the normal prudence and diversification requirements for investment of the trust assets, when the grantor wishes to maximize income for the current beneficiary rather than balancing the interests of all the beneficiaries. Additionally, the grantor may also allow the trustee to provide accountings only for current beneficiaries and not contingent beneficiaries unless the court so provides.

     Just as the rules for administering the trust can vary, the terms of the trust related to the distribution of the trust assets can take many forms. The trust may provide for great flexibility in distributing assets to beneficiaries by allowing the trustee to make distributions within their total and complete discretion. Alternately, the trust may provide a broad standard, such as health, education, and maintenance of accustomed standard of living. Such a standard would include making distributions to a beneficiary to assist them in starting a business or purchasing a home, but does not allow the trustee to distribute all of the funds outright. Finally, the distribution standard may be very narrow or subject to many restrictions. In these cases, the trustee must carefully monitor the actions of the beneficiaries to ensure that the beneficiary meets all the requirements before making any distributions.

     Trust law and the terms of a trust are frequently complex and the trust normally provides that the successor trustee can retain qualified professional help in administering the trust. This means that the trustee can retain accountants, attorneys, or financial professionals to assist in trust administration. The trustee must still take care to monitor the actions of the hired professionals because these professionals do not relieve the trustee of their fiduciary duty, and the beneficiaries can sue the trustee personally and personal assets to the trustee can be reached to compensate beneficiaries for any breach of fiduciary duties.

     Unfortunately, trust administration may create the potential for litigation. While the trust maker can include a "no contest provision" in the trust that provides the beneficiary who challenges the document be disinherited, the effectiveness of this type of provision is somewhat mitigated by Michigan law. Beneficiaries may disagree with the terms for distributions the grantor has set; blended families, where there are a number of different beneficiaries with different interest, may also create issues for the trustee; and occasionally a beneficiary may argue that the trust maker had been subject to undue influence or a lack of capacity when the trust provisions were initially prepared or later modified. All of these scenarios make the trustee’s position more difficult because even as they attempt to deal with litigation they must also continue to administer the trust for the benefit of any of the other beneficiaries.

     When accepting a trusteeship of a trust is important to remember that it comes with significant responsibilities and may create a larger headache than you ever imagined. While you may feel a personal obligation, should always be aware that a person named as the successor trustee has the option to decline to serve or to resign after initially accepting the position. If you are in the position of being required to make a decision whether or not to accept a trusteeship, it may be appropriate to discuss the situation with qualified counsel to determine if this is the best course of action for you and/or the trust beneficiaries.

Selecting People to Administer your Estate Plan

An important part of developing an estate plan is selecting people to help administer the plan at your death or incapacity. This includes Personal Representatives to administer the Will under Michigan probate, Guardians to see to the physical well-being of your minor children, and Successor Trustees to administer the assets of the Living Trust for the benefit of your beneficiaries. Sometimes selecting people to serve in these capacities is not an easy task because there may not be family members or friends you trust enough to select for those positions. Alternately, there may also be a concern that you will offend some people by not naming them to certain positions. This should not deter you from making decisions that you think are the best ones, because, after all, you will not be around to listen to their complaints.

Guardians are obviously important because you want to select people whose child-rearing philosophies are similar to your own. That may actually be a sibling and his or her spouse, but it may actually be another relative or a close friend. Another common concern when selecting guardians is geographic location. While a family member who lives in another state may be more than capable of caring for your children is important to consider whether such a drastic move is good for your children. The thing to focus on is "what is the best for my children?"

Nearly as important as the Guardian, the Successor Trustee administers trusts, pursuant to their terms, when the initial trustee (who is usually the trust maker) becomes incapacitated or dies. Naming a successor trustee is not a decision made lightly. It is possible to name a family member, a friend or colleague, a corporate trustee, or a combination of them as trustee or co-trustees. Each of these alternatives has positive and negative aspects.

Family Member

Pro: They have family experience with the beneficiaries, are empathetic, and are personally involved.

Con: They are probably unskilled in business, there is no record of accomplishment in maintaining or growing assets, or they can become too emotionally involved.

Friends or Colleagues

Pro: They likely have a personal knowledge about the beneficiary's, and are trained professionals or have good business sense

Con: They may not have enough time to do a good job, may themselves pass away, or may have a conflict of interest when it comes to a business asset of the trust.

Professional or Corporate Trustee

Pro: Corporate trustees have the benefit of being professional, experienced, and objective, regulated and will not die.

Con: Corporate trustees are dispassionate, possibly ignorant of family dynamics, may be too conservative, and may have a high turnover of corporate trust officers.

Some clients use a team approach, considering that "two heads may be better than one,” or that they want a combination of professional and personal co-trustees. Unfortunately this tactic may only give the illusion of safety because it creates a trust that may be clumsy to administer.

What ultimately is important is selecting the person or persons you feel will be able to make good decisions. It is not necessary that they have significant expertise or experience with administration and investments, as long as they are capable of retaining qualified people to assist them. You want someone who has a similar philosophy and values as yourself, because they will be administering the trust for your loved ones.

I often use the story of how I selected my own trustee when my children were small. I have two brothers who I was considering as successor trustee. I asked myself what my brothers would say if one of my children came to the successor trustee and asked for a Porsche to drive down to Wayne State University for college classes. One of my brothers would have said "sure.” The other brother would have said, "You do need a car, but your dad would have bought you an Escort.” I of course chose the brother who took into consideration what I would have done in that situation.

Once you have selected successor trustees, the decision regarding whom to name as a personal representative under the will becomes much easier. Since the successor trustee and the personal representative will work closely with one another during the initial probate process many clients opt to name the same individual in both positions so there is no conflict.

Finally we do not want to forget that during the planning process you will also name individuals to make decisions on your behalf should you become incapacitated. You want to consider carefully whom you are naming under your Patient Advocate Designation to make medical decisions in the event you are incapacitated and whom you are naming under your Durable Power of Attorney to make legal decisions in the event you are incapacitated.  Again, it is important that those people you name have an understanding of your philosophy and values when it comes to making medical decisions, especially those "pull the plug decisions". You want to make sure that the person or persons you name will be able to make those decisions when the time comes, yet will not make them too quickly.

As you can see, naming people to administer your documents for your benefit and the benefit of your beneficiaries is as important as determining where you want your assets to go. If in the estate planning process, you find yourself unable to decide whom to name to these important positions your estate planning professional should be able to assist you in making these important decisions.

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.

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.

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.