Sebastopol Trusts & Estates Law Blog

Age is generally not a primary factor in determining whether one needs a Living Trust.

While it is obvious that an older person or couple (with a statistically shorter remaining life expectancy) needs Estate Planning, it is also appropriate for families to set up a Living Trust while their children are very young. For them, a Living Trust is the best way to ensure a safe supply of money for the support, maintenance and education of their children in case the parents die.

In fact, for families with minor children, a Living Trust makes an excellent beneficiary for Life Insurance and retirement plans when you want the proceeds to be held for your children and used for their support without a formal court supervised financial guardianship. With a Living Trust, there is much more flexibility, control, cost savings, and the final distribution to your children can be delayed until they reach an appropriate age.

In any event, procrastination is dangerous. I’ve had far too many calls from adult children whose parents are incapacitated (recent stroke, etc.) who want to know if we can now prepare a Living Trust. “I’m sorry,” I must reply, “it’s just too late…”

I usually recommend that my clients tell their family about the details of their Estate Plan. This is true in the case of a child who for whatever reason may feel shorted as compared to his or her siblings, or even a child who is disinherited.

I find that this open and frank discussion with one’s family often quells suspicion, and give the children an opportunity to ask questions. I find that most Estate Contests, or at least bad feelings even when no legal action is initiated, are the result of anger after a parent dies. For example, a disinherited child who didn’t not know that he or she is to be disinherited may be angry at the parent, but since the parent is then deceased, he or she takes out the anger on his or her siblings in the form of a Will Contest. The problem is even if the other siblings prevail, as they usually will when the estate plan is properly prepared and executed by a qualified attorney, the financial and emotional costs are still very high for the family. If a disinherited child has an opportunity to express his or her anger to the parent for being disinherited, while in the short term it can of course be unpleasant, in the long term the family is often better off.

So….at Thanksgiving this year will you be talking about your desires regarding funeral and burial?

By the way, for a video and transcript of Warren Buffet’s testimony to congress about Estate Taxes click here.
-Ken

To make changes to a Living Trust you generally need to execute an Amendment (which is like a Codicil to a Will). Note that changes which require an Amendment are things such as changing the successor trustee, changing the distribution plan, or changing certain tax clauses. Transferring assets in and out of a trust is not an Amendment, but rather is known as Trust Funding.

A Trust Amendment should be prepared and executed with the same formality as the original Living Trust. It is not something most people should attempt to tackle on their own. Most importantly, do not try to amend your Living Trust by crossing out lines or making changes to the original document. Your original trust was notarized and presumably executed with many formalities, all supervised by the drafting attorney. Writing on the trust document after it was signed and notarized simply leads to an obvious problem: The handwritten changes and cross-outs were not notarized. So as a general rule, Do Not Write on Your Original Trust or Will!
You do not need to return to the drafting attorney to amend a Living Trust. Any qualified Trusts & Estates attorney can handle it for you.

In some instances an attorney may recommend an Amended & Restated Trust. In this case the entire trust is re-written, but the name of the trust remains the same. In effect you are amending the entire trust. This allows a major revision of the Living Trust without the needing to re-title assets currently in the trust.

In short, amending a Living Trust is as important as the drafting of the original document. As always, be careful!

-Ken

On Wednesday, November 14, the Senate Finance Committee will be holding a hearing titled “Federal Estate Tax: Uncertainty in Planning Under the Current Law“. The issue is that the current Estate Tax Law is set to gradually phase out Estate Taxes through 2010, with a total repeal in 2011. At that point, unless Congress acts, estate taxes will be restored to their 2001 levels. (That’s the “uncertainty in planning” to which the hearing title refers.)

Witnesses scheduled to testify include Warren Buffett, a staunch defender of the Estate Tax. Also scheduled to testify are an estate planner from Connecticut, a Nevada rancher, and the head of a small manufacturing company in Iowa.

Where should you keep your original Living Trust, Will, and other Estate Documents? The common answer I get is, “In my safe deposit box.” However, you must consider that while that sounds like a good place to keep these documents, it is in fact “locking the key in the safe”. The reason is simply that it is those estate documents that will allow your trustee/executor to get into the safe deposit box in the event your your death.

There are legal procedures to retrieve estate documents out of a safe deposit box when the owner dies. Nevertheless, I strongly urge you to keep your Living Trust, Will, and other Estate Documents at home in an accessible place. You will need then from time to time, especially your Living Trust, for your own business transactions. Put a photocopy in your safe deposit box, or leave it with a trusted family member or friend as a backup in case something happens to your original.

I also often hear that, “My lawyer kept the original”. I do not think this is a good idea. One, this may seem cynical, but I think many law firms “safeguard originals” primarily as a way of guaranteeing future business. Two, law firms and lawyers go out of business, move, die, retire, etc. For these reasons I strongly feel clients should keep their own original documents, with the lawyer holding a back-up copy.

One last thing….Do you have someone else on the signature card of your safe deposit box who can access it if you become disabled or die?

-Ken

Any time you’ve filled out paperwork for a retirement account, annuity, or life insurance policy, you named a beneficiary. You can also name beneficiaries on bank accounts, and many investment accounts. The beneficiary is the person, people, or entity who will receive the account or policy in case of your death. Filling out the blanks on these forms may seem simple. However, the way you complete these forms can have significant tax and estate planning consequences.

Beneficiary Designation Trumps a Will. A beneficiary will receive the account or policy outright at your death. It is important to note that the beneficiary designation overrides anything that you may have written in a Will. For example, you may name one child as a beneficiary with instructions in a Will to share those funds among siblings. The instructions in the Will in this example have no effect; the child named as beneficiary is the 100% new owner of the account.

Minor Children. Another pitfall is naming minor children as beneficiaries. Someone under 18 (in California) cannot receive the funds outright. Instead, the money will end up in a potentially costly court guardianship proceeding. Consider naming a trust instead.

Name an Alternate Beneficiary. Be sure you name both a primary and contingent (alternate) beneficiary. The contingent beneficiary receives the money in the event the primary beneficiary predeceases you. I have had many instances where the primary beneficiary is deceased and we are forced to probate the account simply because there is no living named beneficiary.

Living Trust as Beneficiary? Be careful naming a living trust as a beneficiary. There are many instances where naming a trust is appropriate, such as a case where there are minor children or a disabled beneficiary. However, in many instances there are tax advantages of naming humans (as opposed to a trust) as beneficiary. This topic is complex, and you are urged to consult your tax adviser or estate planning attorney if you have questions.

A Big Mistake. Be cautious naming different beneficiaries of different accounts. I once had a situation where a mother named each of her three children as beneficiary of three different large accounts. Eventually the mother became incapacitated and needed assistance from a part time caregiver. The children (who did not get along) began to fight about “whose account” should pay for the costs. It was a sad an unfortunate situation that could have been easily avoided.

The basic message here is BE CAREFUL. Talk to your estate planning, financial and tax advisers about your beneficiary designations. A mistake can be costly.

-Ken

The first question I get from many clients is, “Which is best for me, a Will or a Living Trust?” There is no quick and easy answer to that questions, but I can offer some general advice.

In California an estate usually must go through probate when the estate value exceeds $100,000 in market value (not equity value). Probate is the court process to administer an estate with or without a Will. In other words, having a Will does not avoid probate, in fact, it generally guarantees probate. Probate is something most families want to avoid. It is very costly, takes many months to over a year, can be required in multiple states, and is generally a hassle for everyone.

There are many ways to avoid probate. Account beneficiary designations (TOD or POD accounts) and Joint Tenancy are two of the most common. However, each of these also has a downside in many cases. There are of course situations where these methods work, but in many instances problems occur.

This leads us to the best way to avoid probate for most clients: The Living Trust. A Living Trust not only avoids probate, it is usually the quicker, easier, cheaper, and most hassle-free way to administer an estate. For married couples it can minimize or completely avoid Estate Taxes. It handles situations where someone becomes incapacitated. In many cases it is more likely to achieve one’s wishes regarding estate distribution than other alternatives.

In short, for most Californians who have an estate with a market value over one hundred thousand dollars (meaning just about anyone owning real estate), a Living Trust is the preferred estate planning document. To read more about Living Trusts on my website click here.

-Ken

Living Trusts are by far the most useful and popular Estate Planning tool in California today. However, there are 3 common mistakes I see far too often at my office when clients bring in trusts to be reviewed.

Mistake #1: The trust is not funded. For a living trust to work as intended, all your significant assets must be titled in the name of the trust. This means property deeds, investment accounts, CDs, and savings accounts should be titled in the name of the trust. Simply listing the asset or account on the trust’s schedule of assets is not enough. Very often I see people who assume the asset or account is in the name of the trust, but when we review the paperwork it in fact is not titled properly. This is especially true when real estate is taken out of a trust as part of a refinance but never put back into the trust.

SOLUTION: Check your accounts and real estate at least once a year (at tax time?) to ensure everything is titled properly.

Mistake #2: Handmade Changes. A trust is a formal notarized legal document. Please do not attempt to change your trust by crossing out or adding words. Your trust was notarized when it was originally executed, the changes were not notarized. This can lead to many problems, including unnecessary taxes, contests, and hassle for your heirs.

SOLUTION: Contact a qualified estate planning attorney to make changes to this important legal document.

Mistake #3: Wrong Estate Tax Clause. Many married couples have a so-called “AB Trust” or “ABC Trust”. This trust requires a division of the estate at the time of the first to die. There may be very good reasons for this, tax and otherwise, and it may be appropriate for you. On the other hand, it may be a very big hassle for the survivor with no tax benefit for the family.

SOLUTION: It is a good idea to review your trust, and if you have an “AB Trust” or “ABC Trust”, consider whether other options, such as a “Disclaimer Trust” (aka “Optional B Trust”) might work better for you. See my website page on this topic for more information.

As always, if you have questions about this subject, feel free to call me at (707) 829-7303, or email me at ken@kenjacobs.com.

-Ken

When I started my Estate Planning, Trust & Probate Law practice in 1992, I had a old 386 computer with a 2400 baud modem to connect to the so-called internet. I’ve always been comfortable with computers, and have always looked for ways to improve my practice using computers and other modern technology. Law books were replaced with CDs and now on-line legal research. Faxes gave way to email. Office procedures have become more streamlined. The result is I am better able to provide quality legal services, whether it is a Living Trust, Will, Powers of Attorney, Probate, or Trust Administration, more efficiently and at a reasonable price.

I reserved my URL, www.kenjacobs.com, during the mid-1990s, and have had a static website up for several years. Recently, however, I decided to move to the next step. My new revised and improved website will not only contain information about my practice, it will contain useful tools and links, as well as interactive pages such as this blog. All this will take time, but as it develops I will appreciate any and all feedback sent my way. Please feel free to email me at ken@kenjacobs.com, or if you prefer, call me at 707-829-7303. Of course, please feel free to contact me anytime if you have questions about Living Trusts, Wills, Powers of Attorney, other Estate Planning Documents, Probate, or Trust and Estate Administration.

I plan to use this blog space to answer common questions, to post interesting news about trusts & estates law, and to help people avoid the many traps and pitfalls common to this area of law. I’ll probably also post a few more pictures of my cute kids too!
Please check back regularly, there is a lot more to come.

-Ken