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Everything You Always Wanted To Know About Family Trusts But Were Afraid To Ask
 

Everything You Always Wanted To Know About Family Trusts But Were Afraid To Ask

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Family Trusts. Living Trusts. Inter Vivos Trusts. Revocable Trusts. Synonyms for trusts that are "Will substitutes." They help avoid probate and the need for a conservatorship. They help reduce ...

Family Trusts. Living Trusts. Inter Vivos Trusts. Revocable Trusts. Synonyms for trusts that are "Will substitutes." They help avoid probate and the need for a conservatorship. They help reduce the fees, including trustee and attorney fees, and delays of probate. Most of the documents are boilerplate, but why? What's wrong with using LegalZoom and other document preparation software? Must you file an IRS Form 1041 for a family trust? Must the living trust get its own EIN? What is a subtrust? What is an administrative trust? What is a grantor? A protector? A complex trust? How is competence determined? Are "no contest" clauses enforceable? Are illegitimate children "heirs"? Must a living trust be notarized? Must it be recorded? What is a "pourover" Will? What is a codicil? What is a holographic will? What is a personal property memorandum? What makes a power of attorney "durable"? What is a health care directive?
What is a "springing" power of attorney? What is a "pot" trust? What is a "specific" bequest? When should I use a corporate trustee? What's the difference between a fiduciary bond and fiduciary insurance? What is a trust certificate? What is a "blanket" assignment of assets? What is "per stirpes"? What is the rule against perpetuities?

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    Everything You Always Wanted To Know About Family Trusts But Were Afraid To Ask Everything You Always Wanted To Know About Family Trusts But Were Afraid To Ask Presentation Transcript

    • Everything You Always Wanted To Know About Family Trusts But Were Afraid To Ask Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 1
    • Everything You Always Wanted To Know About Family Trusts What We Will Cover: 1. 2. 3. 4. 5. 6. 7. 8. History. Living Trust Documents Pourover Wills Durable Powers Of Attorney Beneficiaries Fiduciaries Other Documents Oddballs Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com P. 3 P. 10 P. 29 P. 39 P. 47 P. 57 P. 67 P. 70 2 2
    • Everything You Always Wanted To Know About Family Trusts History Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 3 3
    • Everything You Always Wanted To Know About Family Trusts History 1. What Is Probate? Probate is the process of (i) gathering together all the assets; (ii) determining the value of the assets; (iii) determining and paying the decedent’s “just” debts (including taxes); and (iv) distributing the assets to the heirs (which might include trusts for the beneficiaries). Think of it this way: when someone is dead, the only person who can write a dead person’s name is a judge, and probate is the process of asking the judge to allow someone – the Executor – to sign the dead person’s name under the judge’s authority. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 4 4
    • Everything You Always Wanted To Know About Family Trusts History 2. Where Does Probate Come From? Probate, and most of our law on descent of property, comes from Medieval England. That is where the “Rule Against Perpetuities” and the need for witnesses to Wills comes from. In feudal times only powerful families owned land. These large estates were normally passed down from father to son. This transfer was naturally a matter of great political consequence and, thus, of great interest to the king. So the proceedings were made formal, complicated and costly. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 5 5
    • Everything You Always Wanted To Know About Family Trusts History 3. Why Did People Come To Hate Probate? The fees (roughly 1% of the gross estate) paid to both the executor and the executor’s attorney and the delays of probate (4 years was not uncommon in the “old” days). Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 6 6
    • Everything You Always Wanted To Know About Family Trusts Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 7 7
    • Everything You Always Wanted To Know About Family Trusts History [continued] 4. Why Was Fear Of Probate Fees Overblown? First, California law only sets a maximum probate fee. The family is free to negotiate a lower amount. Second, if the family member is the executor, then the family member may not charge a probate fee: why pay income tax on money you will otherwise receive free of income tax as an inheritance? 5. What Happened To Make Probate Virtually Disappear? Two things occurred: (1) Howard Jarvis, the author of Prop. 13, helped pass a proposition to repeal the California Inheritance Tax. Once California got out of the inheritance tax business, the delays of probate almost completely disappeared because almost all of the delays related to the State’s involvement. (2) Living Trusts took off starting in the mid-1970s. 6. What Benefits Are Claimed For Living Trusts? Eliminate Probate delays and fees. conservatorship if you become disabled. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com Preserve privacy. Avoid the need for a 8 8
    • Everything You Always Wanted To Know About Family Trusts Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 9 9
    • Everything You Always Wanted To Know About Family Trusts Living Trust Documents Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 10 10
    • Everything You Always Wanted To Know About Family Trusts Living Trust Documents 1. How Many Names Are There For A “Living Trust”? In common usage, the following are all synonyms for “Living Trust”: Family Trust; Revocable Trust; Inter Vivos Trust. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 11 11
    • Everything You Always Wanted To Know About Family Trusts Living Trust Documents 2. Why Is 90% Of The Document Boilerplate? Because the definition of “malpractice” is the failure to practice to the standard in the community, and the standard in the community is to include all of that stuff in the document. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 12 12
    • Everything You Always Wanted To Know About Family Trusts Living Trust Documents 3. What’s In That Boilerplate? Half the boilerplate consists of trustee’s powers, much of which is largely copied from the Probate Code. These powers have lengthened due to complexity of financial instruments, environmental liability for real estate, and other problems facing trustees. The other half of the boilerplate consists of “hurricane” clauses: what happens if the decedent dies on a Thursday and there is a hurricane? If there is a problem that arises, we want the living trust document to already have the answer in it so that recourse to the courts is unnecessary. Every year in this state there are hundreds of cases decided regarding Wills and Trusts. Inevitably about a half dozen arise to the level where all the lawyers say to themselves, “Hmm. I wouldn’t want that to happen to my clients.” As a result, a new clause or paragraph gets added to the boilerplate. The easy example is “no interest on gifts.” Because once – 50 years ago - someone died leaving a relative $10,000, the probate took 4 years to complete, and at the end of the 4 years, the relative got the $10,000, and sued for interest. To prevent that from recurring, every document has a clause providing “no interest on gifts.” Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 13 13
    • Everything You Always Wanted To Know About Family Trusts Living Trust Documents [continued] 4. How Long Is A Living Trust? 40 page documents are rare. 60 to 90 page documents are common. 5. When Did Living Trusts Become Popular? In the 1970s lawyers and charities started holding seminars in California promoting living trusts as a way to avoid probate. Within 20 years they became the dominant method for people with any amount of wealth to transmit their assets at death. That is less common in other states, especially back East. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 14 14
    • Everything You Always Wanted To Know About Family Trusts Living Trust Documents [continued] 6. Does A Living Trust Exist? No. A Living Trust is not a “person” in the same way that a corporation, LLC or partnership is a legal person. A corporation can open a bank account in its own name. An LLC can take title to real estate in its own name. By contrast, there is no such thing as real estate in the name of the Bruce and Kathy Givner Trust because a trust does not exist as a legal person who can hold title to an asset. The way title is held is in the name of the trustee: Bruce Givner and Kathy Givner, Trustees, of the Bruce and Kathy Givner Trust. Banks and others will, mistakenly, allow you to open accounts in the name of a trust. But that is absolutely wrong and has been repeatedly held to be wrong. See, as one of many examples, Presta v. Tepper, 179 Cal. App. 4th 909 (2009). Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 15 15
    • Everything You Always Wanted To Know About Family Trusts Living Trust Documents [continued] 7. What Should I Name My Living Trust? The name “Bruce and Kathy Givner Living Trust” does not make sense because, when they are dead, financial institutions will get confused (“But he’s dead!”). We recommend simply “Trust” after the names of the individuals. Some people like fictitious names, e.g., the AMKB Trust using the first names of the children and parents. The idea is that, all things being equal, why make it any easier for someone to figure out which assets held in the trust’s name are connected to you? However, if you truly wish anonymity, then we use a fictitious name trust, the beneficiary of which is your trust, and we use an independent third party as the trustee of the fictitious name trust. Real property is indexed at the Recorder’s office in the name of the trust and in the name of the trustee. This way, if you are Michelle Pfeiffer, and the name of the Trust is the East African Wildlife Preservation Fund, and the trustee is your business manager, and the beneficiary of that trust is your real living trust, no one will be able to connect it to you (especially if you acquired it in the name of that trust in the first place). Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 16 16
    • Everything You Always Wanted To Know About Family Trusts Living Trust Documents [continued] 8. What’s Wrong With Using LegalZoom.com? Document drafting software is capable of producing a good document. The problem is not the document: the problem is knowing the questions to ask so that someone can produce a good document. We’ve read many documents prepared by (i) laymen using commercial services like LegalZoom and (ii) lawyers using document drafting systems like the ones we use (Wealth counsel). In both cases we have seen some absolutely absurd documents, not just incomprehensible, but – in the legal sense – malpractice per se. Competent estate planning lawyers don’t sell paper: they sell judgment (e.g., asking the right questions) and experience. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 17 17
    • Everything You Always Wanted To Know About Family Trusts Living Trust Documents [continued] 9. Why Do We Care About The Generation Skipping Transfer Tax In A Living Trust? Assume the distribution to the children is 1/3rd at 25, 30 and 35. Assume Son has children and dies before reaching age 35. His death is a “taxable termination” of his trust. As a result the GSTT is imposed. The lengthy GSTT language in the living trust gives him a general power of appointment up to the amount of his GSTT exclusion. As a result, even though he does not exercise that power of appointment, that amount is not subject go GSTT. If the GSTT exclusion equals the lifetime transfer tax exclusion, that amount passes to his children free of all tax. 10. Must The Living Trust File An IRS Form 1041 (Does It Need An EIN)? Not as long as (i) the grantor is a trustee or co-trustee; (ii) uses his or her own Social Security number; and (iii) reports the income or his or her own return. If the grantor is not a trustee or co-trustee, the trustee must furnish the grantor with a statement showing all items of income, etc. Reg. Section 1.671-4(b). Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 18 18
    • Everything You Always Wanted To Know About Family Trusts Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 19 19
    • Everything You Always Wanted To Know About Family Trusts Living Trust Documents [continued] 11. What Is A Subtrust? A trust that is created by the living trust upon the occurrence of a certain event. For example, on the death of the first spouse the living trust is divided into a survivor’s trust, a bypass trust and a marital trust. Then on the survivor’s death the three subtrusts merge together and are divided into subtrusts for each of the children. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 20 20
    • Everything You Always Wanted To Know About Family Trusts Living Trust Documents [continued] 12. What Is A Share? A share is usually synonymous with a subtrust. 13. What Is An Administrative Trust? Upon the death of the first spouse, the Administrative Trust comes into existence and lasts until the trust is divided into the three subtrusts (survivor, exclusion and marital). On the survivor’s death the Administrative Trust comes into existence and lasts until the trust is divided into subtrusts for the children. Some trust instruments explicitly call for the creation of an Administrative Trust. In those that do not it is created for administrative convenience. 14. What Is A Grantor? The grantor is the creator of the trust. Synonyms include Settlor and Trustor. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 21 21
    • Everything You Always Wanted To Know About Family Trusts Living Trust Documents [continued] 15. When Is A Living Trust Inappropriate? You can argue that a single person who is not famous and has a small estate need not spend the money for a living trust. He or she would be fine with a statutory Will and DPOAs for healthcare and asset management. The same can be said for a young couple, with no children, and a small net worth. 16. What Is A Grantor Trust? A Grantor Trust is a trust which is ignored for income tax purposes. A living trust is – while both spouses are alive – ignored for income tax purposes. On the first spouse’s death, that spouse’s half becomes irrevocable and is no longer a grantor trust. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 22 22
    • Everything You Always Wanted To Know About Family Trusts Living Trust Documents [continued] 17. What Is A Complex Trust? A complex trust is one of three ways a trust can be classified for income tax purposes: grantor (ignored); simple (all income must be distributed) and complex (trustee has discretion on distributing income). which is a separate taxpayer. On the first spouse’s death, the bypass trust and marital trusts usually require all of the income to be distributed to the survivor. Therefore they are “simple” trusts. However, if the bypass (exclusion) trust allows the trustee discretion on whether or not to distribute income, then it is a “complex” trust. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 23 23
    • Everything You Always Wanted To Know About Family Trusts Living Trust Documents [continued] 18. How Is Competence Determined? There are three levels of competence: (i) capacity to run a business; (ii) capacity to enter into a contract; and (iii) the lowest – testamentary capacity. An attorney who prepares the estate plan for his client can determine whether he or she is comfortable that the client has testamentary capacity to sign the documents. Gonsalvez v. Alameda County Superior Court, #A062607 (10/29/93 – unpublished). With the benefit of hindsight, of course, parties turn to gero-neuropsychiatrists. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 24 24
    • Everything You Always Wanted To Know About Family Trusts Living Trust Documents [continued] 19. What Is The Problem Caused By Our Three Tier Definition Of Competence? Father may be incompetent to run a business and incompetent to enter into a contract. For example, the children may see that Father is getting ripped off by a stock broker. So they march into court and have Father removed as trustee of his trust to prevent further damage to Father’s accounts. However, Father still has testamentary capacity so he disinherits his children and leaves his estate to his stockbroker. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 25 25
    • Everything You Always Wanted To Know About Family Trusts Living Trust Documents [continued] 20. Are “No Contest” Clauses Enforceable In California? They were so restricted by the change in the law effective January 1, 2010, that they are difficult to draft and difficult to enforce. (i) A direct contest brought without probable cause; (ii) challenge to a transfer of property and (iii) creditor’s claim, but (ii) and (iii) only if the no contest clause expressly provides for that application. A direct contest must be on one of the following grounds: forgery; lack of due execution; incapacity; duress, fraud, undue influence; revocation; disqualification of beneficiary. Inappropriate when everything goes to the surviving spouse and then to the children in equal shares. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 26 26
    • Everything You Always Wanted To Know About Family Trusts Living Trust Documents [continued] 21. Are Illegitimate Children “Heirs”? You need to carefully draft the documents to be clear as to your intent. 22. Must A Living Trust Be Notarized? No. We do so to confirm the identity of the signers. We also do so in case, for some reason, it might need to be recorded. 23. Must A Living Trust Be Recorded? No. And living trusts are rarely, if ever, recorded. If a document must be recorded we offer the trust certificate (discussed later). 24. Can I Prepare My Own Trust Amendment? Certainly. But in a large estate, why take the chance of confusing a well constructed, complex document? Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 27 27
    • Everything You Always Wanted To Know About Family Trusts Living Trust Documents [continued] 25. When Do I Need To Amend And Restate The Trust vs. Do An Amendment? If the amendment is to one part, e.g., change of trustees, then an amendment will suffice. However, if the amendment is to many parts of the trust, or if there have been many amendments already made so that it becomes difficult to understand the document, it becomes safer to amend and restate the document than to do another “slap-on” amendment. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 28 28
    • Everything You Always Wanted To Know About Family Trusts Pourover Wills Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 29 29
    • Everything You Always Wanted To Know About Family Trusts Pourover Wills 1. What Is A “Pourover” Will? “Pourover” refers to the fact that the Will is a “cleanup” document. It transfers to the trust any assets which are not already “in” the trust at the time of your death. 2. Why Do We Still Need “Wills”? With the Heggstad case the and resultant “blanket” assignment, there would seem to be no reason to still prepare Wills. However: (i) a Will is the document which names a guardian in the case of a minor child; (ii) a Will has a provision in it to “reanimate” a trust if, for some reason, the trust were to fail; and (iii) the definition of malpractice is – again – the failure to practice to the standard in the community, and the standard in the community is still to have Wills when you have a living trust. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 30 30
    • Everything You Always Wanted To Know About Family Trusts Pourover Wills 3. What Is A Codicil? An amendment to a Will is called a codicil. It comes from the same Latin root (Codex) as the word for book and – not surprisingly – Code (not the same root as for codpiece). Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 31 31
    • Everything You Always Wanted To Know About Family Trusts Pourover Wills [continued] 4. Must We Prepare A Codicil Every Time We Amend The Trust? No. But the custom is to do so. This way the pourover Will refers to the trust as it currently exists. 5. Can I Prepare My Own Codicil? Yes. Just as you can prepare your own Holographic Will, you can prepare your own Holographic codicil. However, why chance goofing up a perfectly good estate plan by playing lawyer when the cost of a codicil – at the same time you are amending the trust – is nominal. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 32 32
    • Everything You Always Wanted To Know About Family Trusts Pourover Wills [continued] 6. Must A Codicil Be Witnessed? A Codicil must be executed with all the formalities of a Will. 7. When Do I Need A Codicil vs. A Whole New Will? Judgment call. If it’s one item, and it’s the first change, a codicil will suffice. If it’s extensive, or if you already have so many small changes that it is difficult to understand the Will, then it is time for a new Will. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 33 33
    • Everything You Always Wanted To Know About Family Trusts Pourover Wills [continued] 8. What Is A Holographic Will? One in which all of the important provisions are in your handwriting. PC Section 6111. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 34 34
    • Everything You Always Wanted To Know About Family Trusts Pourover Wills [continued] 9. What Is A Statutory Will? The California Probate Code includes an entire Will document. The intent is that it can be completed without the help of a lawyer. We give out copies freely to people. It has been improved over the years so that it now can be used (i) by same sex couples and (ii) to keep property in trust for heirs up to age 25. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 35 35
    • Everything You Always Wanted To Know About Family Trusts Pourover Wills [continued] 10. What If We Die Simultaneously? The documents do not permit a simultaneous death. In interpreting each spouse’s estate plan, that spouse is deemed to have survived. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 36 36
    • Everything You Always Wanted To Know About Family Trusts Pourover Wills [continued] 11. How Is Personal Property Handled? Substantial personal property should be identified and distributed in the living trust. Miscellaneous personal property can be addressed in the Wills with the statement that it shall be divided equally among the children as they can agree. However, what if they don’t agree? Then the executor will hold a hypothetical auction by first valuing the assets. Assume there are three children and the personal property is worth $30,000. Each child is given $10,000 of hypothetical money with which to bid on the personal property. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 37 37
    • Everything You Always Wanted To Know About Family Trusts Pourover Wills [continued] 12. What Is A Personal Property Memorandum? Probate Code Section 6132 authorizes a handwritten memorandum to dispose of up to $25,000 in tangible personal property, no item of which exceeds $5,000 in value. 13. How Many Witnesses Are Needed? Two. But we use three. None if it is holographic. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 38 38
    • Everything You Always Wanted To Know About Family Trusts Durable Powers Of Attorney Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 39 39
    • Everything You Always Wanted To Know About Family Trusts Durable Powers Of Attorney 1. What Makes A Power Of Attorney “Durable”? Under the “Common Law” (the law we inherited from England), a POA terminates when the principal becomes incompetent. A “durable” POA continues to be effective even if the principal becomes incompetent. 2. What Happened To Bring About Durable POAs? After an auto accident Nancy Cruzan was put on life support. Her family wanted her to be allowed to die peacefully, but the hospital refused. It took 9 years of litigation before the U.S. Supreme Court decided Cruzan v. v. Commissioner, Missouri Department of Health, 497 U.S. 261 (1990). The issue was who had the right to decide to remove a permanently brain-damaged and comatose patient from life-support systems, in the absence of the patient's own ability to express that determination. The case included family testimony expressing what they felt the patient's wishes would have been. She died 13 days after being taken off life support. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 40 40
    • Everything You Always Wanted To Know About Family Trusts Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 41 41
    • Everything You Always Wanted To Know About Family Trusts Durable Powers Of Attorney [continued] 3. What Is A “Living Will”? That was the earliest attempt to accomplish what we now accomplish with a health care directive. It was proposed in 1959. 4. What Is A Health Care Directive? It is a document adopted in accordance with the 1993 Uniform Health Care Decisions Act, which has been adopted in many states. 5. Why Do We Use The California Medical Association Health Care Directive? Some lawyers prepare their own forms for a client to give advice on medical care decisions. We do not. We believe that if it comes time to implement one of these, the physician and hospital will be more comfortable seeing the form that bears the imprint of the California Medical Association rather than having to hire a lawyer to read a form prepared by some law firm. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 42 42
    • Everything You Always Wanted To Know About Family Trusts Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 43 43
    • Everything You Always Wanted To Know About Family Trusts Durable Powers Of Attorney [continued] 6. Must A Health Care Directive Be Renewed Every 7 Years? No. That was trust of an earlier version, perhaps a decade ago. 7. What Are The Main Problems With A DPOA-Health Care? (i) Failure to give a copy to your primary physician. (ii) The hospital will shove a form in front of you as soon as you are admitted, which may cause you to fill out something quickly which will overturn the one which you previously, carefully considered. (iii) The California Medical Association Form does not permit you to appoint co-holders of the power. 8. What Is A “Springing” Power Of Attorney? “Springing” means that it comes into existence only upon the occurrence of a specific event. In our DPOA – asset management, the event is your incompetence. Your incompetence is determined by the vote of a committee of 3 people you name. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 44 44
    • Everything You Always Wanted To Know About Family Trusts Durable Powers Of Attorney [continued] 9. What Is The Impact Of HIPAA? The person you authorize to make health care decisions for you must also be given access to your medical records, and the DPOA-Health Care does not, by itself, make that happen. So we must interlineate the California Medical Association form to include special language re HIPAA (Health Insurance Portability and Accountability Act). Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 45 45
    • Everything You Always Wanted To Know About Family Trusts Durable Powers Of Attorney [continued] 10. What Is CMIA? California did not conform to HIPAA. Therefore, the person you appoint to make health care decisions for you must not only be appointed to have access to your medical records under HIPAA, but also under CMIA (California Medical Information Act). 11. When Would We Use An Immediate POA? When you want someone to be able to act for you now. That is almost never the case in connection with estate planning. By contrast, that might be the case if you were in the midst of closing escrow on the purchase of a home, and had to suddenly take a trip to Paris. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 46 46
    • Everything You Always Wanted To Know About Family Trusts Beneficiaries Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 47 47
    • Everything You Always Wanted To Know About Family Trusts Beneficiaries 1. What Is The Most Common Distribution Format For Children? Income in the trustee’s discretion to age 21. Income must be distributed starting at age 21. Principal in three equal shares, typically at ages 25, 30 and 35. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 48 48
    • Everything You Always Wanted To Know About Family Trusts Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 49 49
    • Everything You Always Wanted To Know About Family Trusts Beneficiaries 2. What Are The Extreme Distribution Formats For Children? One extreme is to give it to the children outright on the parent’s death. This way they can blow the money and get on with their lives. The other extreme is to leave all of the money in trust subject to the trustee’s discretion. The children may never get the principal and it will pass on to future generations. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 50 50
    • Everything You Always Wanted To Know About Family Trusts Beneficiaries 3. What’s An Incentive Distribution Format For Children? Example 1: at age 25 the trustee will give you an amount equal to what you show on your 1040 that you earned the year before. Example 2: at age 30 you get 1/3rd of your share. At age 35 you must show a certified financial statement showing that you are at least worth as much as the amount distributed at age 30 or you don’t get the next distribution. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 51 51
    • Everything You Always Wanted To Know About Family Trusts Beneficiaries [continued] 4. What Is A Specific Bequest? The phrase usually refers to a bequest that is not subjected to taxes and a share of the expenses. But this must be clearly spelled out. It is commonly going to be the case when, for example, the estate of $10,000,000 is being left to the children, but there is first a distribution of $10,000 to each of the parents’ nieces and nephews. The parents don’t expect the $10,000 to each of the nephews to be reduced by, for example, a 35% estate tax and a share of the trustee’s fees, etc. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 52 52
    • Everything You Always Wanted To Know About Family Trusts Beneficiaries [continued] 5. Is There A Good Reason Not To Leave A Bequest To Bruce Givner? No. We think it’s an excellent idea, and we encourage it. 6. What Is A Family Pot Trust? When the surviving parent dies, it is common to hold the assets in a common trust until the youngest child gets to a certain age, typically 21 or 25, before it is divided into separate shares for each child. Why? The idea is that if the kids are 17, 21 and 25, when the surviving parent dies, and each child’s share is going to consist of $1,000,000, it is unfair to have the 17 year old’s share have to pay for 4 years of college ($200,000) when the parents, while they were alive, paid for all 4 years for the now 25 year old. So the trust is kept together until that disparity has been made up, and then it is divided. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 53 53
    • Everything You Always Wanted To Know About Family Trusts Beneficiaries [continued] 7. What Is A Grandparent’s Trust? Example 1: $400,000 is left “off the top” in a trust to take care of grandma. When she passes away, that money gets allocated among the children. Example 2: grandma is taken care of out of the “family pot.” The trust is not finally distributed to the children until grandma passes away. 8. What Is A Contingent Beneficiary? A contingent beneficiary is the one who takes if the primary beneficiary is no longer there at the time of distribution. So if $10,000 is left to my friend Howard, what happens if he is dead? Does his gift lapse? Or does it go to his children? This question must be asked for every beneficiary. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 54 54
    • Everything You Always Wanted To Know About Family Trusts Beneficiaries [continued] 9. What Is A Special Needs Trust? Language which prevents the trustee from spending money on a beneficiary which will disqualify the beneficiary from qualifying for governmental aid programs. So, for example, the trustee may not spend trust funds to buy the beneficiary food and shelter. Bu the trustee can spend trust funds to get the beneficiary piano lessons and haircuts. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 55 55
    • Everything You Always Wanted To Know About Family Trusts Beneficiaries [continued] 10. What Is A Beneficiary Controlled Trust? There is no one clear meaning. It usually means that the beneficiary is given the power to remove and replace the trustee. It can also mean that the trustee is required to contribute the trust assets down into a single member LLC and name the beneficiary as the member. This is a way to give the beneficiary asset protection, but still give the beneficiary control of trust investments. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 56 56
    • Everything You Always Wanted To Know About Family Trusts Fiduciaries Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 57 57
    • Everything You Always Wanted To Know About Family Trusts Fiduciaries 1. What Is A Fiduciary? It comes from the Latin roots “Fides” (the common name for a dog is Fido) which means faithful and “Fiducia” meaning trust. Executors, guardians, trustees and conservators are all fiduciaries. As such they are held to the highest standard of good faith under the law. The same duty is owed by one spouse to another. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 58 58
    • Everything You Always Wanted To Know About Family Trusts Fiduciaries 2. Who Should Be The Successor Trustee If I’m Alive But Incompetent? Think twice before naming a child. If it comes to a decision of $5,000 per month vs. $10,000 per month to take care of you, the child may prefer the $5,000 per month for your care because it will leave more money for the child to inherit when you are dead (which may occur more quickly with the lower quality of care). 3. Who Should Be The Successor Trustee After I’m Dead? Think twice before naming a child, especially if you have more than one child. We recommend that you select an independent third party, e.g., your CPA if you have had the same one for thirty years. If you don’t have a trusted relative, friend or colleague, you may be wise to consider a trust company. This is true even if the assets are to be distributed outright to the children. Why? Because there is a “reasonable period of administration” that may take a year from the date of death to the date of distribution and, during that period, the use of an outsider will minimize the chance of family disputes (which are more likely to occur if you name one child or even a group of children). Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 59 59
    • Everything You Always Wanted To Know About Family Trusts Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 60 60
    • Everything You Always Wanted To Know About Family Trusts Fiduciaries [continued] 4. Should I Use Co-Trustees? If you don’t have one perfect person, then it makes sense to name two people to act together. That will make it more cumbersome for them to take actions. However, that is part of the point of having two people: to force them to work together. 5. Should I Have A Committee To Act As Trustee? If your estate is large enough, e.g., $30,000,000, and especially if it includes a closely held business, a committee of 3 people may make sense. In some situations, e.g., $150,000,000 estates, we have 5 member committees to act as trustee. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 61 61
    • Everything You Always Wanted To Know About Family Trusts Fiduciaries [continued] 6. Who Are Some Corporate Trustees? There are a number of “Blue Chip” corporate trustees. That group usually includes Wells Fargo; J.P. Morgan; U.S. Trust (B of A); Deutsche Bank; Wilmington Trust; and Northern Trust. There are large local trust companies such as City National Bank and Whittier Trust. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 62 62
    • Everything You Always Wanted To Know About Family Trusts Fiduciaries [continued] 7. Should I Use A Corporate Trustee? In one current situation we have advised a daughter, who was named as the trustee over the trusts of herself and her two siblings, to resign as trustee of the trust for her sister and name a corporate trustee. Why? Because her sister is a nightmare. So, if her sister sues, it won’t be her problem. There are other good reasons to use a corporate trustee, e.g., the fact that a corporate trustee will – above all else – try to preserve principal; the fact that a corporate trustee cannot, by definition, die; the fact that your beneficiaries have poor money management skills; the fact that the trust is expected to last for many generations. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 63 63
    • Everything You Always Wanted To Know About Family Trusts Fiduciaries [continued] 8. What Does A Corporate Trustee Charge? Each has a published fee schedule. They generally charge 1% of the assets for less than $3,000,000, scaling down as the assets increase in value. They charge more when they have control over investments. 9. What Does A Non-Corporate Trustee Charge? Generally the non-corporate trustee will refer to a corporate trustee’s published schedule. Professionals may ask to be paid their hourly rates, and will request inserting that language into the trust instrument. In every case the court reserve the right to approve or reject fees. 10. Should I Waive The Requirement For The Trustee To Post A Bond? We never recommend waiving the requirement to post a bond (unless the trustee is the spouse, and the assets are community property, or the child who is the beneficiary). Otherwise, if we recommend waiving the bond, and the trustee steals assets, we have arguably committed malpractice. On the other hand, getting a bond can be difficult as it requires the trustee to post personal assets. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 64 64
    • Everything You Always Wanted To Know About Family Trusts Fiduciaries [continued] 11. What Is The Difference Between A Bond And Fiduciary Insurance? A bond protects the beneficiaries. Fiduciary insurance protects the trustee if the trustee is sued by the beneficiaries. We always recommend that trustees buy fiduciary insurance. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 65 65
    • Everything You Always Wanted To Know About Family Trusts Fiduciaries [continued] 12. Should The Trustee Agree To Continue A Closely Held Business? It is very risky. We will have the trustee set up an independent board of directors to run the business rather than try to run the business himself (or herself). 13. Should I Set Up My Own Trust Company? Nevada allows you to do so by statute. An unregulated private trust company does not have to meet a capitalization requirement: cannot use “trust” in its name; cannot act as trustee except for immediate family members. In California there is no explicit statute, but the Department of Corporations appears to permit them on the same terms. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 66 66
    • Everything You Always Wanted To Know About Family Trusts Other Documents Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 67 67
    • Everything You Always Wanted To Know About Family Trusts Other Documents 1. What Is A Trust Certificate? It is an abbreviated version of the trust that you can give to banks or escrows who want copies of your trust when you acquire a new asset. The certificate only discloses (i) the trustees; (ii) the grantors; (iii) the trustee’s powers; (iv) whether the trust is irrevocable; (v) the trust taxpayer ID number; and (vi) how title to trust assets is to be taken. If someone is offered the certificate and still insists on a copy of the trust, they are liable for damages under state law. 2. Why Do Banks Require You To Fill Out Their Own “Trust Certificates”? No good reason. You can offer them your form instead. 3. What Is A “Blanket” Assignment? This is a document that declares that you are holding all of your assets, no matter how they are titled, as trustees of your trust. This became recognized as effective by Estate of Heggstad, 16 CA 4th 943 (6/21/93). The case was narrowed by Osswald, 49 CA 4th (1996), which requires real estate to be described by address or APN. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 68 68
    • Everything You Always Wanted To Know About Family Trusts Other Documents 4. What Is The Advantage Of A “Blanket” Assignment? It removes the pressure to meticulously change title on each bank account, each partnership interest and each parcel of real property into the name of your new living trust. 5. Why Not Transfer Every Asset Into The Trust’s Name? For younger people, we don’t have a good faith belief that they will own all of their present assets at the time of death, so spending time on transferring the current assets is likely to be a waste of time. By contrast, when someone comes in to our office at age 80, we meticulously transfer each bank account, each partnership interest and each parcel of real property. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 69 69
    • Everything You Always Wanted To Know About Family Trusts Oddballs Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 70 70
    • Everything You Always Wanted To Know About Family Trusts Oddballs 1. What Is “Per Stirpes”? It means by root or by branch. It is clearer to write “by right of representation.” It is as opposed to “per capita.” So if Mom and Dad have Son and Daughter; Son has two children; Son dies; then Son’s half of the estate goes 50% each to each of his children. That is “per stirpes.” Were it to be per capita then 1/3rd of the estate might go to both grandchildren and onethird to daughter. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 71 71
    • Everything You Always Wanted To Know About Family Trusts Oddballs 2. What Is The Rule Against Perpetuities? In Medieval England they did not like the idea of unlimited control from the grave (dead hand control). So they provided that all trusts must last no longer than “21 years after the death of a life in being.” That phrase was so unclear that a lawyer who violated it in 1954 was cleared of committing malpractice on the grounds that the Rule Against Perpetuities is so complex that the standard of care is that no one can understand it. California has a rule of (i) 21 years after the death of an individual then alive or (ii) 90 years after creation. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 72 72
    • Everything You Always Wanted To Know About Family Trusts Oddballs 3. Why Do We Use Blue Ink? Because it is easier to tell the originals than if we use black ink. 4. Why Do We Have The Clients Initial Every Page? To make it more difficult to slip in a page later. 5. Why Don’t We Keep Original Documents? Partly it’s a storage problem (we prefer PDFs). Partly it’s a matter of courtesy to the clients. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 73 73
    • Everything You Always Wanted To Know About Family Trusts Oddballs [continued] 6. Who Should Get Copies Of The Documents? Your CPA. Your first successor trustee. As to the DPOA – healthcare, certainly your primary physician. Your children? 7. How Often Must We Check Our Estate Plan Documents? Some people check them every year on the anniversary of the date they were signed. Some people check them every year on their birthday or on New Year’s. We recommend an annual maintenance program where we call you every 6 months. Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 74 74
    • Everything You Always Wanted To Know About Family Trusts Oddballs [continued] 8. What If We Lose The Originals? A copy of the document is usually sufficient to implement the estate plan. In the case of a dispute as to which is the most recent version of the estate plan, having the original may be important. However, in 35 years of practice, that has never come up. 9. What If We Move To Nevada? Show your documents to a competent lawyer in the state to which you move. Chances are there is nothing that must be done (though they lawyer may say so to generate revenue). Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 75 75
    • Everything You Always Wanted To Know About Family Trusts Questions and Answers Send us e-mail: Bruce@GivnerKaye.com Owen@GivnerKaye.com Kathy@GivnerKaye.com Neda@GivnerKaye.com Givner & Kaye, A Professional Corporation Owen@GivnerKaye.com 76 76