1. Make certain that the document is a
Living Trust, not a Testamentary Trust.
A Testamentary Trust is one created by will and does not avoid
probate. Of the two, only the Living Trust avoids probate.
2. Be sure you know whether the trust is Revocable or Irrevocable.
One is changeable, one is not. Neither one is right or wrong, the
question is "which is appropriate for your situation?" Most people
start with a Revocable Trust and then if the size of the estate, or
the type of assets justify, an Irrevocable Trust might be appropriate,
in addition to the Revocable Trust.
3.
Be certain that you have the right type of trust: Simple, AB, ABC,
Disclaimer, etc.
The best trust for you depends on the
type of assets that you have, the size of the estate and the ultimate
beneficiary of the trust. It is common for the discounted estate plan
to offer the "one size fits all" AB Trust. If the size of your estate
doesn't justify this type of trust, you will end up paying unnecessary
settlement fees to solve an estate tax problem you don't have, while
triggering income tax problems that would not have existed but for the
Trust. If you're not sure whether the AB will be necessary, use a
Disclaimer Trust and let the survivor decide.
4. Make sure that your trust document or some companion document
indicates that the assets are to be treated as though they are
community property.
Assets treated as community property will receive an adjustment in the
basis when one spouse passes away, alleviating any capital gains on
appreciation up to the death of the first spouse. And don't make the
mistake of assuming that all assets in the state of California are
community property. They are not and the I.R.S. treats non-community
property assets different than separate property assets for adjustment
and basis purposes.
5. Be sure that your trust contains the assets it should - not all
assets should be owned by the trust!
Traditional assets that trigger probate, such as: real property,
stocks, bonds, securities and bank accounts typically should be placed
in the name of the trust. Qualified Retirement Accounts where income
taxes are being deferred should not be placed in the trust. Make sure
you have written instruction clarifying the difference for your
particular estate plan.
6. Is your life insurance payable to the trust?
Remember, life insurance proceeds are estate tax includable. This
means that careful planning needs to be done with regard to the life
insurance, depending on the size of the estate and the face amount of
the life insurance policy. In most cases, life insurance should not be
payable to a spouse, but rather payable to a trust and/or owned by an
Irrevocable Trust, depending on the size of the estate.
7. Be certain that the removal of Trustee process is understood.
When one Trustee cannot act, the other one typically takes over. This
is usually a spouse, a son or daughter, or many times, an independent
fiduciary, such as a bank or commercial Trust Company. The process for
removing a Trustee is one of three things. One - death; two -
resignation; and three - incompetence. It is in the incompetence area
that we run into problems. How is it defined? If the document is left
without a standard of incompetence, the traditional approach is to
have a Conservatorship appointed for the Trustee. The problem with
this is a Conservatorship proceeding is one of the elements we are
trying to avoid in the creation of a trust. A more appropriate method
might be to have some standard less than that, such as the Trustee is
no longer able to sign their name or doesn't know what they are
signing. This does not necessarily mean the person is incompetent, it
simply means that they cannot sign their name. The next question is
who is the individual who decides that the Trustee is no longer
capable of signing and knowing what they're signing. One of the
options is having the alternate Trustee make that decision. That might
be appropriate depending on who the alternate Trustee is. However, it
may be a conflict of interest. Another alternative might be having
family members all vote when the Trustee is no longer able to act.
Make sure you have a good relationship with your family members.
Another alternative would be to have two independent licensed
physicians make the decision. Not the decision that you should be
placed under Conservatorship, but rather you are unable to sign your
name and/or you don't know what you're signing.
8. Be careful that the Trustee has the ability, if necessary, to
qualify your estate for State assistance.
Trying to qualify for State assistance is difficult if you don't have
the right assets. The State typically ignores some assets and others
have a maximum amount of which you cannot exceed. The goal, if we're
trying to qualify for assistance from the State, is to own those
assets that are excluded, either by retention or by acquisition, and
try to reduce the value of those assets that are not excluded.
Unfortunately, if the Trustee of a trust is required by its terms to
liquidate assets within the trust in order to facilitate payment of
bills (such as long-term nursing care), it will work in direct
opposition of what we want to actually do. In other words, if the
Trustee is required to liquidate the estate, this will create cash.
Cash is not ignored in the qualification process. Hence the trustee's
instruction may cause depletion of the estate due to the excess cash
position. The solution is to include a catastrophic illness provision
in the trust, allowing the trustee to acquire those assets which are
ignored for qualification. (There is a maximum amount of liquid assets
you can have and qualify for assistance) and the goal is to require
assets which are excluded, the Trustee's instructions may mandate that
the estate be liquidated and lost.
9. Make sure that the purpose of the Revocable Living Trust is not
asset protection.
Because the trust is revocable and you
have access to all of your assets, your creditors likewise can access
the assets also. If the goal is to put the assets out of the reach of
creditors, then other methods of protection should be considered, such
as a Qualified Personal Residence Trust (this will also reduce the
estate tax consequence at the death of the Trustor), a Family Limited
Partnership (this is a very popular method of not only protecting the
estate from law suits, but reducing the estate tax consequences while
maintaining control for the creator or General Partner), and/or some
type of a corporation ("S" Corporation, Limited Liability Corporation,
or a "C" Corporation).
10. Be certain that you have not only a power of attorney, but the
correct power of attorney.
There are basically two types of powers of attorney. One is for health
care and one is for financial care. The Financial Power of Attorney
can be general or durable and either one of those can either be
current or springing. Basically the durable is preferable because is
endures beyond the incompetence of the principal, (the one who gave
the power to the agent). The springing power of attorney becomes
effective when the principal becomes incompetent. The immediate power
of attorney is effective immediately upon signature of the principal.
Which is appropriate for you depends on your circumstances. However,
because of its tremendous potential impact, the type of power of
attorney and choice of agents should be closely monitored.
11. Make sure that your Health Care Powers of Attorney was not
signed prior to 1992.
The second kind of Power of Attorney is the Health Care Power of
Attorney. This is an important part of your estate planning documents,
but be sure the one you have is not dated before 1992. Prior to that
date all powers of attorney had an expiration of seven years or less.
Obviously, they have all expired now and need to be reissued. The new
Health Care Powers of Attorney do not need to have an expiration
provision in them. A common companion to the Health Care Power of
Attorney is a document called a Directive to Physician, commonly
called a Living Will. These documents, if signed prior to 1992, also
had an expiration clause of five years in them. Again, the new version
does not have an expiration clause. Consequently, if updated and
properly signed, will last your lifetime.
12. Make sure that the individuals that you have appointed to serve
in various capacities in your documents are still willing, able, and
your choice.
The person that you choose to be in charge in a trust is called a
Trustee. Often times, people will choose Trustees who made sense at
the time, but some years later, those Trustees may have moved away,
your relationship with them may have deteriorated and/or it might be
more appropriate simply to choose somebody else as the Trustee. When
you choose the new Trustee, make certain that the companion Will to
your document, wherein you name Executors, is consistent with the
Trustees. If you have young children, Guardians for these minors
should also be nominated in the Will and these need to be reviewed
possibly more often than other representatives as these are the people
who will be raising your children. As we all know, children's needs
change and so does the willingness of people to serve as Guardians. In
addition, the agents under your Health Care Power of Attorney and
Financial Power of Attorney should be reviewed and analyzed. Make sure
that the person that is making life and death decisions at the
hospital is on good terms with you!
13. Analyze the distribution schedule to see if it's still
appropriate with your circumstances.
Sometimes it makes sense to distribute the assets outright free of
further trust and sometimes it doesn't. If you have younger children,
it wouldn't be appropriate to deliver the assets to these minors or to
young inexperienced children. Assets can be held in a trust for a
number of years until the desired age is attained with discretionary
distribution for emergency needs such as health or education.
Sometimes the purpose for placing the assets in the trust for the
benefit of your children is to avoid their creditors. This can be done
so that the children have access to the funds but nobody else does,
(i.e. lawsuits, divorce situations, creditors, I.R.S., etc.). Then
again the appropriate provisions were placed in the trust to hold the
assets until the child or children got older and they are older now.
This section should be monitored very closely.
14. Protect your estate by obtaining qualified legal advice!
The last and most serious mistake (This is a bonus, I only promised
thirteen) is assuming that you can readily understand all of this
without the assistance of a qualified experienced attorney. Not a
paralegal or a financial planner. These are wonderful professionals,
but they cannot give legal advice. Whether you already have a trust
that needs to be corrected or whether you're just putting your plan
together, it doesn't have to be expensive. And that includes the expense of a law
firm that for over twenty years has done nothing but estate planning.
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