 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
|
SOME FREQUENTLY ASKED ESTATE PLANNING QUESTIONS The following are some of the questions that are frequently asked of us by our clients concerning their estate planning matters. If you have a question that is not addressed here, please feel free to any of our estate planning attorneys with your question at (858) 756-6342, or e-mail your question to nhenderson@hcesq.com.
The primary goal of basic estate planning is to insure the orderly management and disposition of assets upon your incapacity or death. For estates in excess of $2,000,000 (including life insurance, retirement plans and joint tenancy property), another important objective may be estate tax planning. The appropriate means for you to accomplish these objectives will vary somewhat depending upon the size of your estate, the composition of your assets, the nature of your ultimate beneficiaries, and other factors. However, in California, the "flagship" for most basic estate plans is a funded revocable living trust. A funded revocable living trust permits the management and disposition of trust assets during the settlor's life if the settlor should become incompetent and after the settlor's death, at which point the revocable trust will establish the terms for the distribution of the trust assets to individual beneficiaries, to continuing trusts, or to charity. In addition to a funded revocable living trust, a basic estate plan generally includes a Will (which nominates an Executor and guardians for any minor children, addresses certain tax elections, and directs the disposition of assets to the revocable trust), a durable general power of attorney, a health care advance directive, and possibly a community property agreement for married settlors. We generally recommend an annual review of basic estate planning documents (your Will, revocable living trust, durable power of attorney, healthcare directive, and various beneficiary designations) in order to be certain that they continue to meet your estate planning objectives. This annual review can be conducted by you without an attorney, unless you have questions or concerns that your attorney can address for you. Once every three to five years, it is advisable to meet with your estate planning attorney to review the terms of your documents and to discuss whether changes in the law or your personal circumstances require you to modify one or more of your documents. In fact, if you experience a significant change in your health, family or finances, you should contact your estate planning lawyer to be sure that your estate plan continues to be accomplish your objectives, even if it has been less than three years since those documents were prepared. Choosing a successor trustee is one of the most important estate planning decisions that you will make. Choosing the right trustee can insure that assets are properly managed and invested, that the administration of the trust is carried out efficiently and in accordance with the terms of the trust agreement and applicable trust and tax law, and that the needs of the beneficiaries are met in accordance with your objectives in establishing the trust. Choosing the wrong trustee can result in loss to the trust estate, discord between the trustee and the beneficiaries, and costly litigation. Many people wish to name a trusted family friend or professional advisor as successor trustee rather than a corporate trustee. This choice is often motivated by a desire to limit outside involvement in family financial affairs, to lend a more personal touch to the administration of the trust, and to reduce cost by avoiding corporate trustee’s fees. Before naming an individual to serve as successor trustee, however, you must consider very carefully whether the individual has the experience, the skills, the time, and, of course, the moral fiber necessary to carry out the duties of a trustee. The duties and responsibilities of a trustee are established by state law and the terms of the trust agreement. Simply because an individual has been successful managing your investments, for example, does not mean that individual is the appropriate choice for managing the overall administration of your affairs after your disability or death, for complying with state trust law and state and federal tax law, and for dealing with the personal needs of the beneficiaries, which can be a tremendous burden. Even the best intentioned individual trustee may run afoul of technical rules, resulting in personal liability for any loss to the trust estate or the beneficiaries. Further, there are an endless number of horror stories about trusted friends or advisors who, because of their own financial problems, have used the trust assets for their personal benefit, resulting in an uninsured loss to the beneficiaries. (While it is possible for an individual trustee to be bonded, providing a fund against which the beneficiaries can make claims if the trustee is negligent or engages in misconduct causing loss to the trust, such bonds can be very expensive and the premiums are paid by the trust rather than the trustee. As a result, most trust agreements waive the requirement that the trustee obtain a bond.) From the standpoint of cost, it is not reasonable to assume that an individual trustee should undertake the responsibility of trusteeship for free. In fact, most individual trustees ultimately charge a fee based upon what their advisors tell them is the average fee charged by professional trustees. On top of charging the trustee’s fee, the individual trustee must also pay for the services of outside advisors, such as trust attorneys, CPAs, investment advisors and others, and these fees are typically paid for out of the trust, not by the trustee personally. A final disadvantage of an individual trustee is, of course, that they may become disabled, die or otherwise be unable to continue to manage the trust before the purposes of the trust have been fully accomplished. The primary alternative to naming a trusted friend, family member or professional advisor is to appoint a corporate trustee (that is, a trust company or the trust department of a bank or financial services institution). The benefits of appointing a corporate trustee are numerous. Because a corporate trustee manages trusts on a daily basis, your family will benefit from the corporate trustee’s experience in investment and tax planning, in managing trusts in accordance with applicable laws, and in dealing with any special issues affecting the trust assets or the beneficiaries. Further, if a corporate trustee makes a mistake, the trust estate and the beneficiaries have a source of recovery against corporate assets. While corporate trustees must charge a fee for their services, these fees are generally more reasonable than you might anticipate. Because of the corporate trustee’s experience in managing trusts, the corporate trustee consults far less frequently with outside advisors at the expense of the trust than does the typical untrained individual trustee. In addition, the corporate trustee often bundles other services into its fee that would otherwise be paid for separately by a trust administered by an individual trustee. Continuity is insured with a corporate trustee because the corporation has unlimited life. This, however, does not mean that you and your beneficiaries must use the same trustee for the entire term of the trust. For example, if the beneficiaries and the corporate trustee are incompatible, or if a merger or other corporate reorganization changes the character of the corporate trustee, the trust agreement can be drafted to allow the beneficiaries to remove and replace the corporate trustee with a different corporate trustee. Finally, the “personal touch” that is often sought in naming an individual trustee, can be secured by naming an individual co-trustee or by establishing a committee of individual advisors to the corporate trustee. A third alternative is to appoint a private professional fiduciary. A private professional fiduciary is an individual who is in the business of providing services in such capacities as trustee, executor, agent, conservator, or guardian. In choosing a private professional fiduciary, it is important to confirm that he or she has substantial experience managing trusts or estates of similar size and asset composition, to obtain references, and to establish a plan for continuity of trust management if the individual professional fiduciary becomes disabled, dies or retires. Your attorney can assist you in choosing the right trustee, taking into consideration the nature of the trust assets, the needs of the beneficiaries, and your personal goals and objectives in establishing the trust. So long as you do not hold your property in a form which passes that property at your death outside of your Will (such as joint tenancy property or property that passes by beneficiary designation) and you have a "pour over" Will that distributes your non-trust assets to your revocable trust at your death, your estate plan is most likely effective, even though you have never "funded" your revocable trust. However, failing to fund your revocable trust means that, upon your death, your entire estate must be subjected to a probate proceeding in order to transfer your assets to the successor trustee of the revocable trust. This is inefficient and unnecessary. It is true that transferring assets from your name individually to your name as trustee of your revocable trust can be time consuming and, if you utilize the services of your attorney to accomplish the transfers, may cost you some money. However, the minor inconvenience and additional cost of funding your trust is generally made up many times over through a more efficient administration of your estate at your death. Benefits are also secured during your lifetime in the event of your incapacity, when your successor trustee can continue to manage the trust assets for your benefit until, if ever, you regain the capacity to manage your own financial affairs. It is true that the trustee of a fully funded revocable living trust can handle many of the tasks in the event of your incapacity that would otherwise be performed by an agent under a durable general power of attorney (or a court-appointed conservator of your estate). For example, a successor trustee can sell or otherwise deal with trust property and can make distributions for your health care and support and for that of your dependants. A successor trustee, however, has no authority to deal with your non-trust assets, such as joint tenancy property, retirement accounts (such as IRAs) or life insurance (other than life insurance owned by the trustee). An agent under a durable general power of attorney can handle these matters. In addition, an agent can be authorized to make gifts to descendants or charity for tax or estate planning reasons, to exercise your rights in the estates or trusts of other people, to file income and gift tax returns for you, and to deal with government agencies on your behalf (such as the Social Security Administration or the Veterans Administration). Perhaps most importantly, if you have failed to fully fund your revocable trust before you become incompetent, your agent under a durable general power of attorney can transfer assets to the trustee, thereby avoiding the need to probate those assets upon your death. It is therefore good planning for you to have both a revocable living trust as well as a durable general power of attorney. This concern is shared by many individuals who are planning for the eventual transfer of their wealth to children, grandchildren or other beneficiaries. Certainly, the best way for a wealthy person to prepare a beneficiary for an inheritance is to personally train the beneficiary, in both word and deed, on matters of personal values, as well as the use and management of wealth. Where this is an impractical or insufficient solution, however, placing the beneficiary's inheritance (temporarily or permanently) in an incentive trust might be a viable option. An incentive trust is a trust that incorporates both financial incentives and disincentives designed to encourage productive behavior in the trust beneficiary and to discourage unproductive behavior. For example, distributions might be made to a beneficiary who attains certain academic achievements, to match the beneficiary's earned income in whole or part, or to assist a beneficiary who has put career goals aside in order to raise children. Distributions might also be made to a beneficiary who makes an important contribution to his or her community. Conversely, distributions can be limited to those beneficiaries who do not work to maintain their desired standard of living or who engage in substance abuse or other imprudent behavior. Incentive trusts can go further than the simple "carrot and stick" approach to actually train the beneficiary in matters of personal financial responsibility. For example, the trustee (or an appropriate professional selected by the trustee) might assist the beneficiary with personal budgeting or train the beneficiary to prepare a business plan. The terms of the trust agreement might furnish opportunities for the beneficiary to learn about prudent investing, or the trust agreement might provide incentives for retirement or other savings by the beneficiary. Each incentive trust is customized to the creator's individual goals and personal values, and the possible variations in these trusts are virtually unlimited. In designing an incentive trust, it is important to work with an attorney who is both experienced and comfortable with the concept and who can walk you through how the desired provisions will actually work in practice. It is also important to choose a trustee who is both willing and able to carry out the terms of an incentive trust. Your estate planning attorney can help you choose the best trustee for this purpose. Under the right circumstances, a charitable remainder trust ("CRT") can be a powerful tax and estate planning device. It is particularly useful for individuals who already intend to benefit charity through their estate plans, although this is not required for a CRT to provide significant benefits. In somewhat over-simplified terms, a CRT is an irrevocable trust which provides payments on an annual or more frequent basis to individual beneficiaries (usually the grantor or the grantor and the grantor's spouse) either for a period of up to 20 years or, more commonly, for the lifetime of the individual beneficiary or beneficiaries (which may be longer than 20 years). The amount of the payments each year may either be based upon a fixed percentage of the initial value of the trust property (a charitable remainder annuity trust, or "CRAT") or a fixed percentage of the value of the trust property redetermined each year (a charitable remainder unitrust, or "CRUT"). The terms of a CRUT may further limit distributions to the lesser of the annual unitrust payment or the actual income produced by the trust in a given year (a net income CRUT), which can be useful for both tax and practical reasons in certain circumstances. Certain other variations on these themes are also permitted. In all cases, when the term of years expires, or when the surviving individual beneficiary dies, the trust property must either be distributed outright to charity, or it may be retained in trust for exclusively charitable purposes. In addition to important gift and estate tax benefits, a CRT produces two significant income tax benefits. First, the grantor secures a current income tax deduction for the actuarial value of the charitable remainder interest (which must be at least 10% of the value of the property transferred to the trust in order for the trust to qualify as a CRT). Second, because the CRT is tax-exempt, the trustee of the CRT can sell low basis assets held in the trust and reinvest the proceeds without incurring immediate capital gains taxes. The distributions to the individual beneficiary are not necessarily tax-free, however, as they will carry out the realized income and gain of the CRT. Whether a CRT is a viable option depends upon the nature of the asset or assets to be transferred to the CRT (as well as the grantor's assets outside of the CRT), the ages and health of the individual beneficiaries as well as their relationship to the grantor, the grantor's tax status, whether the grantor otherwise intends to benefit charity in his or her estate plan, and numerous other factors. An attorney or CPA who has experience working with charitable remainder trusts can assist you in determining whether this is an appropriate tax planning strategy under your particular facts and circumstances. Generally, gift taxes are imposed upon the value of a gifted asset (such as pre-IPO stock) determined as of the date of the gift based upon what a hypothetical "willing buyer" would pay a hypothetical "willing seller" for that asset if neither the buyer nor the seller are under any compulsion to buy or sell and if both parties have possession of all of the relevant information. On this basis, it is clearly most efficient from a gift and estate tax planning point of view to make gifts of appreciating assets before they substantially appreciate. To increase the potential tax savings, the value of such assets (such as pre-IPO stock) can be further reduced for gift tax purposes through the use of such vehicles as grantor retained annuity trusts(GRATs), installment sales to "intentionally defective" grantor trusts, charitable lead trusts, and family partnerships, to name a few. Further, to insure that the wealth transferred does not have a negative effect upon the beneficiaries, the gifted stock (or family partnership interests) can be placed in trusts that limit distributions to the beneficiaries for certain purposes (such as health and education) or until the beneficiaries reach a minimum age. Trusts can also protect the gifted asset (or the proceeds from the sale of that asset) from the beneficiary's creditors or ex-spouses, can restrict distributions to unproductive or troubled beneficiaries, and, in some cases, can allow wealth to pass from one generation of beneficiaries to the next without the further imposition of gift, estate or generation-skipping transfer taxes. A grantor retained annuity trust (GRAT) is frequently used to transfer future appreciation in an asset (such as appreciating stock or a family partnership interest) to beneficiaries without making a taxable gift of the full current value of the asset itself. In somewhat overly simplified terms, a GRAT is an irrevocable trust created by you in which you retain the right to an annual payment (an annuity payment) for a specified number of years (the annuity period). When your annuity period ends, the trust property either continues in trust for the benefit of the remainder beneficiaries (such as your children), or the trust property may be distributed to these beneficiaries outright and free of trust. (For technical reasons, a GRAT is generally not a tax efficient vehicle for making gifts to grandchildren or more remote descendants.) The value of the gift to a GRAT is determined on the date that the GRAT is created and funded, not on the date that the trust property passes to the remainder beneficiaries, regardless of how much the trust property appreciates during your annuity period. Further, the amount of the initial gift to the trust is reduced for gift tax purposes by the actuarial value of your retained annuity interest. The GRAT is therefore an excellent estate and gift tax planning device for assets that are expected to appreciate at a rate substantially higher than the rate table used by the IRS to compute the actuarial value of your annuity interest. Note that, in order for the GRAT to be successful, you must survive until the end of the annuity period. If you do not survive until the end of the annuity period, it is the position of the IRS that the assets in the GRAT will be taxable in your estate at their full date-of-death value. In addition, the GRAT assets must either produce enough income to make the annual payments to you each year in cash, or it must distribute trust assets back to you each year with a value equal to the annuity payment. Under no circumstances can the GRAT make annuity payments to you in the form of a promissory note.
site developed by media cube design |
