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.

 

 

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.  

To be honest I have lost track of how we refer to different generations.  I know baby-boomers and generation X, I’ve heard tell of generation Y, but I’m lost after that.  So let’s just call everyone under age 21 as of now “generation X-Box.”  How do you deal with the transfer of wealth to generation X-Box?

The reason Trust and Will litigation lawyers are in business today is largely due to sibling rivalry—just like children fighting over an X-Box, they fight over a parent’s assets.  And parents have a hand in that as well, sometimes not planning the transfer of their assets or sometimes planning in a way that defies reality.  For example, parents like to put the oldest child in charge after they are gone, is that a good idea?  Maybe or maybe not depends on the personal traits of the oldest child.

Sometimes none of the children should be appointed to act as successor trustees because there’s just too much discord among the children.  That’s when parents need to be realistic.  There are other options, such as corporate trustees or private, professional trustees, that can do a great job administering the Trust while they remain above the fray created by sibling rivalry. 

In fact, some sibling rivalries are so explosive, that just having one child acting over another is enough to create an atmosphere of doubt and mistrust—which could be justified or just perceived.  Either way, tensions mount and Trust matters boil over into Court action.  That’s great for the lawyers, no so good for the Trust and its beneficiaries. 

Further, family dynamics are become more complicated with people being married multiple times and having children from different marriages.  Then the tension truly shoots through the roof when the children of one parent are fighting with the children of the other parent. 

What’s the answer?  Not every potential conflict can be resolved with planning, but there is much that can be done with a proper (and realistic) estate plan.  Here are some lessons we have learned from our year’s of litigating trust and will messes that can help in passing wealth to generation X-Box:

  1. The Oldest Child doesn’t always know best.  It is common for parents to name a child as their successor trustee, and sometimes multiple children.  The problem is that (1) not every child is ready to handle that type of responsibility—especially where the law requires that the trustee treat all beneficiaries fairly—(2) sometimes the mere fact of having a child in charge causes problems with the other children.  The solution: be realistic with your choice of co-trustee.  If your going to name a child, pick the right one, make sure they can handle the job of trustee and that they understand their duties as trustee (few people really understand their duties).  Or consider using either a corporate trustee or a private, professional trustee.  Private, professional trustees are a great alternative because they charge less than corporate trustees (usually) and provide more hands-on attention to the Trust administration.
  2. Co-Trustees can lead to Co-headaches.  Some people think the solution to sibling rivalry is to put all the kids in charge, that way no one can complain about being left out.  Bad idea.  Children who can’t get along should not be expected to work together in managing the Trust and its assets.  The better solution is to find a neutral third party. A trusted friend or advisor, a private professional trustee, or a corporate trustee—anyone other than the children.
  3. Messy Amendments = Happy Lawyers.  Want to help keep lawyers employed?  When you go to amend your Trust or Will don’t do it with the help of a lawyer.  Instead, write on the document, in the margins without signing it, or write on the back of a napkin, or use a computer program without knowing how to complete the amendment.  All of these techniques will end up in a mess of a plan, and a messy plan means good business for lawyers because there’s more to argue over. 
  4. Information is Key – don’t be shy about what you want.  And whoever is placed in charge needs to know the duties and obligations they are undertaking.  Share at least some basic information with your successor trustee.  You don’t need to show them your Trust or Will, but tell them you have it, where it is kept, and what you expect when the time comes.
  5. Don’t be Afraid to Lay Down the Law – if you’re going to disinherit someone, tell them beforehand.  I know it is hard to do, but it can save those children who are not disinherited a heap of trouble after you are gone.
  6. If you really want a personal memento to go to one child, give it to him or her while your still alive.  Small personal items can be easily lost, misplaced, overlooked or stolen.  And nothing ignites family discord like fighting over the smallest personal item.  It may have no economic value, but there’s tons of emotional value and that will keep the fire of litigation burning for years.
  7. Make sure your assets are properly titled.  There’s nothing more frustrating than seeing a perfectly good Trust go to waste because the decedent’s assets were not titled in the name of the Trust.  Hopefully there is a pour-over Will that transfers the assets to the Trust, but that’s not always the case.  So some assets pass under the Trust, some pass under the Estate, and some may even pass under joint tenancy.

These are just a few of the biggest issues we see on a daily basis.  When it comes time to sit down and plan your estate, give these items some thought and be sure you are ready to hand your estate to generation X-box with as little fighting as possible.

I will admit that I am not the biggest proponent of asset protection devices.  Primarily because there seems to be a lot of schemes and scams sold under the guise of “asset protection.”  But not every asset protection device is bad.  In fact, there are some very good, and legitimate (and, yes, legal), asset protection strategies.  Our friend and colleague, Michael Hackard, at Hackard Law in Sacramento, was kind enough to submit this guest post on the subject of domestic asset protection trusts, one of the legitimate forms of asset protection.  Hope you enjoy this informative post:


THE SUBTITLE: I struggled a bit for an appropriate subtitle regarding Domestic Asset Protection Trusts (DAPTs). I wanted the subtitle to be descriptive, to underscore the benefits of DAPTs and to neither overstate nor understate the trusts’ advantages. While such trusts have limitations, they can substantially improve “financial longevity” for individuals and families.

DEFINITION: Alaska has been the leader in updating its trust laws and has some of the most expansive asset protection laws in the United States. Alaska was the first state in the country to allow “self-settled” trusts. The advantages and a description of “self-settled” are delineated in the website of one of Alaska’s leading trust companies.

Alaska has the best trust spendthrift statutes for both the grantor and other trust beneficiaries. Alaska provides for “self-settled” spendthrift trusts which allows the grantor to set up an irrevocable trust, be a discretionary beneficiary and avoid having the assets be subject to creditor claims of either the grantor or any other beneficiary. Also, the assets in such a trust may be excluded from the grantor’s taxable estate even though the grantor is a trust beneficiary. . . Alaska has no special “class” of creditors which, unlike the laws of other states, would permit those creditors to attach the assets of the trust. Alaska allows creditors to attach trust assets in a self-settled trust only upon proving by actual fraud (and not “constructive” fraud).[1]

ADVANTAGES: As the above definition reflects, “self-settled” spendthrift trusts allow the grantor to establish an irrevocable trust while still being a discretionary beneficiary of the trust. A grantor is the creator of a trust and is the person who initially places his or her assets into a trust. Thirteen states now have some statutory frameworks that allow for self-settled trusts. Not all statutes are the same, and the level of protection available to grantors varies widely. That said, the remaining states that do not allow “self-settled” trusts follow the common law rule that generally prohibits the establishment of a trust with your own assets to benefit yourself.

ASSET PROTECTION AND THE DANGERS OF LITIGATION: The New York Times recently addressed one of the realities facing American families: The United States is the most litigious society on earth.[2] I purposefully did not describe asset protection as “insuring financial longevity” because asset protection does not provide absolute insurance from the potential of runaway litigation. It does improve the probabilities of financial longevity and should address an orderly wealth transfer with effective tax planning. Self-settled spendthrift trusts are only part of asset protection. A number of other multiple entity structures are also important to effective planning.

SUCCESSES AND FAILURES: All states recognize the attorney-client privilege. The attorney-client privilege provides that what is said and written between a client and his or her lawyer is confidential and protected from disclosure to others. The “ethical duty of client-lawyer confidentiality is quite extensive in terms of what information is protected. It applies not only to matters communicated in confidence by the client but also to all information relating to the representation regardless of whether it came from the client herself, or from another source.”[3]

The attorney-client privilege precludes much storytelling in the domestic asset protection field. Suffice it to say that some circumstances will preclude the utility of DAPTs while other circumstances will present “golden opportunities” for domestic asset protection that substantially improves family and personal “financial longevity.”Asset protection successes are successes that rightly belong in the zone of confidentiality and constitutional rights of privacy. Asset protection failures are often the focus of news stories or the cautionary tales of creditors’ lawyers.

CAVEATS: Wealth preservation planning is an ongoing process. Attorneys competent in the field must be aware of the ethical and legal issues that are part and parcel of asset protection. On the one hand an attorney might be vulnerable for failing to counsel a client about asset protection; on the other hand the same attorney must be cautious in counseling clients who wish to protect their assets from creditors. The asset preservation available in Domestic Asset Protection Trusts is evolving. Not many years ago self-settled spendthrift trusts were not allowed in the United States. Now the trend, although not cascading, is for their allowance. The impact of this trend and the statutes that accompany it will be part of “the life of the law” and its evolution through “experience.”

The life of the law has not been logic; it has been experience . . . The law embodies the story of a nation’s development through many centuries, and it cannot be dealt with as if it contained only the axioms and corollaries of a book of mathematics. (Holmes, Selections from the Common Law, The Mind and Faith of Justice Holmes (Random House 1943), 51.)

It is likely that the role of Domestic Asset Protection Trusts will be tested, expanded, at times contracted, explored, updated and judicially articulated as time goes on. That said, their utility for estate planning should at the very least be considered and weighed for their applicability. Our observation in “Successes and Failures” is an appropriate close to this article: Some circumstances will preclude the utility of DAPTs while other circumstances will present “golden opportunities” for domestic asset protection that substantially improve family and personal “financial longevity.”

© Copyright Michael A. Hackard, 2012. All rights reserved. 

 


[1] Alaska Trust Company (August 10, 2012), available at http://alaskatrust.com/index.php?id=89 (last viewed August 10, 2012).

[2] Rubin, More Money Into Bad Suits, The New York Times, Nov. 16, 2010, available at http://www.nytimes.com/roomfordebate/2010/11/15/investing-in-someone-elses-lawsuit/more-money-into-bad-suits (last viewed August 10, 2012).

[3] Sue Michmerhuizen, Confidentiality, Privilege: A Basic Value in Two Different Applications, Center for Professional Responsibility (May 2007) available at http://www.americanbar.org/content/dam/aba/administrative/professional_responsibility/confidentiality_or_attorney.authcheckdam.pdf  (last viewed August 10, 2012).

 

You may think that a California Will or Trust controls the distribution of all your assets after your death.  You may be surprised to learn just how meaningless a Will or Trust can be depending on how your assets are titled.

When a person is alive, his assets are viewed as belonging to him.  When that same person dies, however, his assets suddenly become separated into distinct legal entities that may have nothing to do with one another.  And each legal entity has its own set of rules and procedures governing its distribution.

For example, let’s say you have one living parent (we’ll call her Mom), she has three children and she owns the following assets:

  • House—A home titled in the name of her revocable Trust, which lists all three children as equal beneficiaries,
  • Bank Accounts—A checking and savings account at Citibank titled jointly in her name and her oldest son’s name (we’ll call him Adam),
  • Brokerage Account—A brokerage account titled jointly with her youngest son’s name (we’ll call him Bob),
  • Retirement Accounts—An IRA and 401(k) with all three of her children designated as equal beneficiaries, and
  • Life Insurance—that names her only daughter as the sole beneficiary (we’ll call her Cindy).

While Mom is alive she can do whatever she likes with her assets.  She can open and close accounts, she can move money into or out of her revocable Trust, she can even name different beneficiaries for her life insurance policies.  It’s all just one big pot.

But when Mom dies, things change.  All of the various assets become essentially locked into whatever state they were in prior to Mom’s death.  And each entity has its own, independent distribution scheme.

That means, for example, that the assets will pass in different ways:

  • House—passes to the three kids equally under the terms of Mom’s revocable Trust,
  • Bank Accounts—pass to Adam ONLY, because he is the surviving joint tenant (neither the revocable trust nor any Will control this asset after Mom’s death),
  • Brokerage Accounts—passes to Bob ONLY as the surviving joint tenant,
  • Retirement Accounts—pass under the beneficiary designations to the three children equally, and
  • Life Insurance—passes to Cindy ONLY as the sole named beneficiary. 

Even if Mom had a Will, the Will would not control any of these assets because none of the assets are passing under Mom’s estate.  They all bypass the estate because the assets are held in so many different probate-avoidance vehicles.  In fact, even the revocable trust controls very little of this estate—the House only.  Since the other assets were not titled in the name of the Trust, none of them pass in accordance with the Trust terms.

Mom may have thought that ALL of her assets would be divided equally among her children because that’s what her revocable Trust stated.  But Mom couldn’t be more wrong.  When setting up accounts in a certain form—such as joint tenancy or assets with designated beneficiaries (like life insurance and 401(k) accounts)—those forms control the assets after death.  In other words, the title to an asset has significant legal meaning after death.  Yet so many people create things like joint tenancy accounts without fully appreciating the consequences of their actions.

Further, if you are going to contest how an asset passes, then you better know which legal entity you need to go after.  If you sue the Trust based on an asset that does not belong to the Trust, then you’re going to waste a lot of time and money going down a deadend road.  

Most of us are not capable of giving billions to charity, like Warren Buffet and Bill Gates  But charities, to be successful, don’t need billions (they’d love to have billions, I’m sure, but most operate on far less than that).

Most people make modest charitable gifts to their favorite charity, university or church during their lifetime.  But the amount of gifts each of us is able and willing to make during our lifetime is somewhat limited by our resources.  For example, you can’t give your house to charity while you’re alive because you need it to live in; giving it away would be absurd.

What if I told you that you could make a very large charitable gift (large being relative to your own individual resources) to your favorite charity, university or church and never feel the pain of losing your hard-earned assets?  It can be done as part of your California Trust or Will  planning by leaving a charitable gift upon your death.

Think of the power you have.  Making a gift to charity at death is often referred to as “planned giving” or charitable estate planning.  Charitable planning can take many forms, and can get pretty fancy if you want, but it can also be extraordinarily simple by just naming a charitable beneficiary in your Trust or Will.

Now I am not suggesting that you leave all you have to charity (unless you want to), and cut out your children or other heirs entirely.  But I am suggesting that by making a little room in your California Will or Trust for a charitable cause, you can give a gift far bigger than you are able to give during your lifetime and still have plenty left over for your children.

For example, let’s say you have a home, a rental house and some money in the bank.  During your lifetime, you live in your home–you don’t want to give that up.  And you rely on rental income from your rental, while the money in the bank acts as a safety net in case you need more care and assistance as you grow older.  So there is not much room in your finances for a large charitable gift while you are alive.

But upon your death, if you gave let’s say a quarter of your rental property to charity, that could be a significant gift.  Even if the rental home is only worth say $200,000, one-fourth of that would be $50,000!  Could you imagine giving $50,000 to charity during your lifetime?  No.  But as part of your estate plan, a generous gift can be made to the charity of your choosing and your children still receive the remainder of your assets.

Do you think $50,000 is too much?  Make it $10,000, that’s still a larger gift than you can make while alive.

There are many good causes out there that would be overjoyed to receive a gift of $10,000.  And they often remember your gift by any number of recognitions. Also, your children can participate in the charitable gifts, including having them make decisions on how the money is spent and the programs that are sponsored by your gift. 

The point is, giving “till it hurts” is much easier to take when you are not here to feel the “hurt.”  And making some room for charity in your Trust and Will is a great way to leave a legacy that will be long remembered by those in need, without hurting those you love.