Would you

There are times when a Trust settlor names a successor Trustee who is not a beneficiary of the Trust. This is often a great idea because naming a child as Trustee can be disastrous. And naming two or more children as Co-Trustees is a fantastic idea if you want to keep lawyers fully employed (and who doesn’t want that???).

The problem, however, is when the non-beneficiary Trustee is challenged by a Trust beneficiary. For instance, if a warring beneficiary is determined to exert control over the Trust, he or she may challenge the appointment of the successor Trustee when the time comes for that Trustee to act. What incentive does a third-party have to fight to be Trustee when there’s nothing in it for them?

Fighting to block a named successor Trustee from acting is not an easy thing to do depending on the Trust terms. Most Trust terms do not allow a beneficiary to remove and appoint a new Trustee. That means a Trustee has a right to act provided there are no “skeletons” in the Trustee’s closet. What type of skeletons would block the appointment of a Trustee?

Probate Code section 15642 provides the grounds for Trustee removal, which can be used at times to block a named successor Trustee from acting in the first instance. The grounds include things like insolvency of the Trustee, unfit to act (whatever “unfit” means), where the Trustee committed a breach of trust, where the person cannot resist fraud or undue influence, and the like.

The problem arises where a named successor Trustee has not yet taken control of the Trust assets, but is challenged by a beneficiary from acting. The named successor may not be able to access and use Trust funds to fight the beneficiary over appointment as Trustee. And a non-beneficiary Trustee has no financial stake in the outcome of his or her appointment. In other words, the named Trustee is put in the unusual position of paying out of her own pocket for the right to take on a thankless job with an unruly beneficiary to deal with.

So why would anyone take on such a fight? It comes down to principal. Sometimes standing up for what the Settlor wanted is more important than the personal sacrifices incurred in such a fight.

The better approach for all concerned is to have an easy way out—a safety valve that will allow someone to step in and cure the problem without excessive fighting. And that brings us to the unique, and rarely used, idea of a “special” Trustee or a Trust protector. For our discussion here, both terms can do the same function; namely exercise the power to remove and appoint Trustees.

If a beneficiary insists on fighting against a named successor, then give the power to remove and appoint to a neutral third-party (called a Trust protector or special Trustee) who can choose an alternate Trustee. This approach satisfies the beneficiary by preventing the named Trustee from acting, but it also prevents the beneficiary from effectively controlling the Trust by appointing a pliable lackey as Trustee. Instead, the Trust protector can independently choose a competent person to act as Trustee who is NOT beholden to the beneficiary for his or her job.

Just another example of how well laid plans can help avoid disaster.

AvoidEstate TaxExplosion

Will your estate be subject to estate taxes at the time of your death? That may not be so clear. After all, Congress seems intent to keep changing the estate tax laws. In recent years, the estate tax has been set to apply only to estates that exceed $5 million in value, with an inflationary adjustment that makes the estate tax limit $5.45 million in 2016. But Democrats want to lower the estate tax limit and Republicans want to repeal it altogether. Who knows what the future holds.

That’s where Discretionary Trusts come in. If you have an estate that potentially could be above the estate tax limit when you die (and who knows what that limit will be), then you may benefit from a Disclaimer Trust.

A disclaimer is simply a declaration by the recipient of an inheritance that they don’t want the property. There are a number of rules that apply to disclaimer, but the two you should know is that (1) a disclaimer must be made in writing within nine months of the decedent’s death, and (2) you cannot control where the property goes after you disclaim it.

Legally speaking, you are not obligated to accept a gift. And if you disclaim that gift, you are saying you do not want it and will not take any control over it. By doing so, the gift will pass according to the Trust terms as if you died before the Trust settlor. That means you wash your hands of the gift and you have nothing more to do with it.

In tax planning, we use the disclaimer to our advantage by providing Trust terms that direct the disclaimed assets to a trust (aptly named the Disclaimer Trust), where the assets are held for the benefit of the surviving spouse. This allows the surviving spouse to disclaim assets for tax planning purposes, and then have the assets pass into a Disclaimer Trust to be held for the survivor’s benefit.

If you have ever heard of a Bypass Trust, then you already know what a Disclaimer Trust is. A Disclaimer Trust is just a voluntary Bypass Trust that the surviving spouse can elect to create after the first spouse’s death. Whereas Bypass Trusts are mandatory and must be created after the first spouse’s death.

In other words, a Disclaimer Trust is merely a safety valve that allows the survivor to disclaim whatever portion of the estate would be over the $5.45 million mark after the surviving spouse’s death. Once that determination is made, the assets can be disclaimed, and the Disclaimer Trust is created.

So even though Congress has no idea what it will do with the estate tax limit, you can rest assured that any future estate tax can be properly dealt with and planned for simply by including a Disclaimer Trust in your revocable living trust.

Do Estate Plans Really Protect You From

 

Do estate plans really protect you when you need them to? Yes and no.

In a perfect world, an estate plan is all you need to provide for your care and well-being when you lose the capacity or ability to care for your own finances. And for some people, this works great because they have loving (and non-manipulative) family members who all get along and agree on the correct course to take.

And then there’s the other side of the coin, where an estate plan does not work so well because family members do not agree. Or worse, a family member is manipulative or making decisions and changing documents to protect his or her own financial interests rather than caring for the elder’s well-being.

While things like revocable Trusts, durable powers of attorneys, and health care directives work great when all is well, they are not as useful when someone is taking advantage of an elder. In fact, an abuser often will have new documents signed that give them the power to control the health or finances of an elder.

When confronted with disaster, the only way to protect an elder is to file for conservatorship.  A conservator is a court appointed person who steps into the elder’s shoes and becomes the only person with the legal authority to make health and finance decisions on behalf of an elder.

But wait, isn’t an estate plan created to avoid conservatorships? Yes, but when someone is being manipulative or abusive, the court process is the only way to protect an elder. Once a conservator is appointed, he or she can take steps to protect the elder, provide proper medical and health services, and look over the finances. Also, in the context of a conservatorship action, the Court can invalidate any health care directives or durable powers of attorney that harm the elder.

Is estate planning still worthwhile? Yes, absolutely because without a plan you will most definitely end up in court. And a majority of estate plans work well to avoid court intervention. But when estate plans go awry, the court system is the only answer to protect an elder from abuse.

Casey Kasem’s passing is a sober reminder of how people with estate plans can still be subject to bitter Court disputes in their golden years.  Prior to Mr. Kasem’s death his wife and children (from a prior marriage) were involved in a bitter conservatorship dispute.  Mr. Kasem had apparently prepared a healthcare directive naming his daughter and her husband as agents to make health care decisions (according to news reports).  But Kasem’s wife

had other ideas.  She refused to allow Kasem’s daughter and husband to act.  When faced with the possible appointment of a conservator over Kasem, she fled the state and went to Washington state where the battle over Kasem continued.  Kasem’s passing ends the conservatorship dispute, but my guess is that there is an estate fight in the works.

Kasem’s plight prompts the question: what are family members to do when planning documents fail them?

Healthcare Directive Issues

In Kasem’s case, he had the right planning document in place—a healthcare directive—but it did him little good because his wife did not honor it, and the document cannot enforce itself.  Since Kasim’s wife had possession of him, she was able to circumvent his wishes as stated in the Healthcare Directive apparently.  So what good is a Healthcare Directive?

As with most planning, it is great to have and will work most of the time, but not all of the time.  When you have warring family members who do not get along and work at cross-purposes to each other, then a piece of paper is not going to help much.

The key, is working together with family members to develop a workable plan that works for everyone.  Easier said than done in some cases.  But still, even in tough family situations communication is key.

Having a clear plan on who will make decisions, what the future plans will be for financial management and caregiving (either at home or at a facility), and as much about future medical decisions, or philosophies, is all helpful information.  And the more that is written down, the better.  If nothing else, it will help a Court make a good decision if ever a Court has to get involved in your future care.  Don’t leave it up to chance, as chances are, you will be sadly disappointed by what occurs.

Convincing a Parent to Step Down as Sole Trustee

A similar problem is when a parent no longer has the ability to manage his or her financial affairs, but refuses to admit it.  How does a child step in as successor Trustee when a parent refuses to step aside?  While most Trust documents have a procedure to find a parent “incapacitated” to act, that procedure typically requires a note from one or two physicians—what if your parent refuses to go to the doctor, or refuses to have a mental exam done?

This is a tough problem with no good solution.  If you cannot convince a parent to either step down or see a physician for a mental exam, you have few good choices.

Of course, you can file to obtain a conservatorship over your parent, which would then establish (in a very forcible, expensive, and public way) that your parent no longer has capacity (that’s what happens in a conservatorship, before being awarded the Court must make a finding that the elder lacks mental capacity).  But that is not a good option, as it tends to make a mess of the entire situation (not to mention royally piss-off your parent—and you thought staying out past curfew was bad…).

Alternatively, I have had children act as a Co-Trustee as a means to provide help to a parent without pushing the parent aside altogether.  Co-Trustees work together to jointly manage the Trust estate and pay bills.  The Co-Trustee idea allows you to approach your parent and ask to help them in their role as Trustee, rather than replacing them in that role.  A parent can remain as Co-Trustee with you, and you can take the laboring oar in managing Trust assets and paying bills.  It can be a real win-win for everyone involved.  And it is much easier to talk to a parent about helping them—not replacing them.

Estate planning is not perfect.  There are challenges and issues that we must face.  There’s no doubt that planning is important to avoid being dragged into Court, and a majority of the time good planning will avoid a trip to the courthouse, but not always.

 

 

A few years ago we created the Albertson & Davidson Children’s Foundation as a way to give back to our community and help one of the most vulnerable, and promising, segments of

Helping Childrenour population—children.  Last year, our firm donated $12,000 to the foundation, and the foundation in turn has made charitable contributions to promote educational opportunities for underprivileged children.  To date, we have made gifts to:

Corona Norco Schools Educational Foundation

Norco Educational Support Team, Inc.

La Sierra Academy

Loma Linda Academy

Norco Elementary School

And this is just the beginning.  We have a lot more planned for the foundation and look forward to discovering, and helping, as many children’s causes as we can. 

But we can’t help people by ourselves.  In fact, the foundation is only possible because of our clients, our staff, and our shared commitment to helping those around us.  We have made it a central purpose of our law firm to help people and fight hard for those who need our help.  We take this purpose seriously, and we choose professionals to work in our firm who share this core value—and boy do they share it!  At times, I am the student of my staff and they teach me how to carry our purpose into its fullest effect.

My partner, Stewart, and I are thankful to our clients, our friends, and our law firm family for the contribution they make everyday to our world.  Lawsuits and litigation is not a friendly business by its nature.  It takes resolve, perseverance, courage, understanding, and a willingness to stand up for what is right to help people in this area.  But helping people through the toughest time of their lives is rewarding and worth whatever sacrifice it may require.  As we guide our clients through these tough times and educate them on the road ahead, we also learn from them as they shoulder the emotional and financial burden litigation extracts—and the courage and determination they show us. 

It is this spirit of helping others that we put to good use through the Albertson & Davidson Children’s Foundation.  And we are proud of what the foundation represents of our firm, our staff, our clients, and our community. 

We encourage everyone in our community to join us in making a difference. 

I have heard it a million times before: “I don’t need a Trust because ____________” you fill in the blank: I don’t have enough money, I won’t care when I’m dead, California probate is easy, my wife and I own everything in joint tenancy…there’s many, many excuses and misinformation regarding Trusts in California.

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In California, a probate must be opened for anyone dying with more than $150,000 in personal property (things like bank accounts, brokerage accounts, stocks, bonds, etc); or more than $50,000 in real property (which in California is almost all real property).  That means that if you own a home, regardless of whether the home has a mortgage or not, your estate will likely have to go through probate before it can transfer to your heirs. 

Probate is no easy task. See our prior posts on probate here and here.  It can take 12 to 18 months (or more) to complete, and it costs a lot.  For even a modest estate worth $500,000, the statutory attorneys’ fees alone are $13,000.  Add in another $13,000 for the executor and anywhere from $1,500 to $2,000 in hard costs (such as court fees, probate appraiser fees, publication of notice, etc.) and the total probate fees and costs can be around $28,000 for a $500,000 estate.  That’s far more than the typical fee for a lawyer to prepare an estate plan, which can run from $2,000 to $3,000 on average. 

How about estate taxes?  Luckily, California does not have an estate tax or inheritance tax.  But the Federal Government does have an estate tax, and the current estate tax limit is $5 million (plus a little more for inflation).  That means that anyone with an estate worth less than $5 million will pay no tax. 

There was a time when a Trust was necessary to save substantial money on estate taxes, back when the estate tax limit was only $600,000.  Now that the estate tax limit is $5 million, most people don’t need a Trust to save on estate taxes.  But a Trust still saves the trouble and expense of probate if you own real property or have more than $150,000 in personal property.  It also allows for someone to manage your financial affairs if you ever lose capacity, which is reason enough to have a Trust.

Still not convinced?  That’s okay because us lawyers make far more money on estates where proper planning is not done.  We would much rather earn a big, fat probate fee or spend years litigating your estate after you’re gone.  Not planning is a great way to make a lawyer a beneficiary, and maybe even the biggest beneficiary, of your estate. 

That may sound a bit jaded, but I have learned over the years that no matter how much sense planning makes, many people just won’t do it.  If you really want to save money, time, and trips to the Courthouse, it’s time to put your Trust in Trusts.

Did you know that amending a California Trust is not the only way to “amend” a Trust?  Sounds like a riddle, but it’s actually a concept known as a “power of appointment.”

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A Trust amendment is a simple way to change a California revocable Trust.  And an amendment can change any part of the Trust provisions, from the distribution section, to Trustees, to Trustee powers—anything can be changed on a revocable Trust.  Amendments are done by the Trust settlors (the people who created the  Trust in the first place).

But the Trust distribution provisions can also be changed using a device known as a power of appointment. The power allows a named person to appoint the assets among certain beneficiaries.  Sometimes the power is given to one of the Trust settlors and sometimes it is given to a third party (usually one of the beneficiaries).  It’s like giving a gift using someone else’s money.

Here’s how they work:

1.         Creation of a Power of Appointment.  A power of appointment is created by reference to it in the Trust document.  The power is created by language that goes something like this:

“Upon the death of the Surviving Settlor, the Trustee shall distribute the remaining balance of the Trust estate to such person or persons as the Surviving Settlor shall appoint and direct in any writing delivered to the Trustee, other than a Will”

This is just one example.  Powers of appointment can vary widely, and can be limited or general in how they are applied.

2.         Exercise of a Power of Appointment.  Once a power of appointment is created in a Trust, it must be exercised.  “Exercised” means that the named person who has the power to change the distribution of Trust assets puts his or her intent in writing. 

The general rule is that a power of appointment must be exercised as specified in the Trust that creates the power.  Typically, the Trust language requires the power to be exercised by a writing, other than a Will, signed by the power holder and delivered to the Trustee.  Why “other than a Will?”  Because exercising a power of appointment in a Will can be problematic.  A Will is not officially deemed a valid Will until it is approved by the Court and entered into Probate.  And we use Trust’s in California to avoid probate, so you rarely want to have a procedure to exercise a power of appointment that forces you to use something (i.e., Probate) you are trying to avoid.  But if a Trust specifically states that it is acceptable to exercise a power of appointment by Will, then a Will is sufficient.

 Once a power of appointment is exercised in writing, it governs the distribution of the Trust assets and it supercedes the distribution section in the Trust.

3.         Failure to Exercise Power of Appointment.  If the person given the power to exercise a power of appointment fails to do so, then the power is ignored and the Trust distribution section goes into effect as it is last written in the Trust after any amendments by the Trust settlors.

A power of appointment is an effective and flexible way to give a named person the power to vary the Trust distribution terms—a way to amend a Trust without doing an amendment.