TRUST ADMINISTRATION

Published on: November 3, 2014

How Does a “Survivorship Clause” in a Will or Trust Work?

In making a will or trust, you should consider the possibility your chosen beneficiaries will not outlive you. It is therefore common practice to include a survivorship clause, specifying that a gift will lapse unless the recipient survives you. Some survivorship clauses require the recipient survive you by a specific period of time, say 30 or 60 days, in order to inherit.

A common survivorship clause scenario involves a married couple that dies simultaneously, for example in a car accident. The spouses may structure their wills or trusts to dictate which spouse is deemed to have survived the other. Absent such provisions, California law will presume each spouse predeceased the other. This means any estate will be distributed assuming there was no surviving spouse.

Marble v. Fibiger

Published on: October 31, 2014

When Does a “Revocable” Living Trust Become Irrevocable?

by Scott C. Soady

A revocable living trust is a flexible estate planning device that allows you to transfer your property to a trustee–usually yourself–thereby reducing those assets subject to a court-supervised probate after your death. Your trust document names a successor trustee to assume responsibility for the trust assets after your death. And as the name implies, a revocable living trust may be modified or revoked at any point during your lifetime.

But what about after your lifetime? Does a successor trustee have the right to modify the terms of your trust? That was the question before a California appeals court recently, which had to decide whether the spouse of a deceased trust grantor could alter the distribution of assets he specified.

Wright v. Tufft

Published on: August 31, 2014

Medi-Cal and “Estate Recovery”

by Scott C. Soady

An estate is not only responsible for distributing property after your death. It must also pay any valid debts to the extent your assets allow. Medical debts are a common expense most estates must pay. And if the deceased received health care benefits from the California Medical Assistance Program (Medi-Cal), the estate may have to reimburse the State of California for some of those expenses.

Estate Recovery

This is known as estate recovery. Medi-Cal is part of the federal Medicaid program. Medicaid rules require states to try and recoup the costs of certain long-term care from the estates of now-deceased recipients. California law goes even further and seeks recovery of costs for most covered services provided to people ages 55 and over. The Affordable Care Act (aka “Obamacare”) prohibits California from conducting estate recovery if the beneficiary was under 55 and received coverage under the low-income expansion to Medicaid and Medi-Cal.

Published on: July 22, 2014

Using a Trust to Control Your Assets After Your Death

by Scott C. Soady

One benefit to using a trust as part of your estate plan is that it allows you to exercise greater control over the distribution of your assets even after you’re gone. As the name implies, a trust exists when you transfer assets to the control of a trustee, who is then bound to follow your instructions in managing and distributing those assets. A trust may last for many years after the maker’s death, depending on the conditions specified in the original trust instrument.

It is not uncommon for a trust to make conditional bequests to beneficiaries. For example, a person making a trust (a grantor) may want certain assets used for the benefit of his children, but for one reason or another, he may decide it is not advisable to simply give the children everything upon his death. One solution would be to structure the trust distributions based on age: the children get one-third of their share upon turning 21, another third upon turning 25, and the remainder upon turning 30. In this way, the grantor of the trust has some assurance his children will not receive a large sum of money before they are mature enough to handle it.

Another example of a conditional bequest is a trust established to defray certain types of expenses. A grantor may decide she wants to set aside funds to pay for her grandchildren’s college education or the medical expenses of a child with ongoing special needs. In these circumstances, the trust should instruct the trustee on how and when to distribute trust assets to fulfill these specific purposes. The trust should also contain clear provisions on when to terminate the trust, and who to distribute any remaining assets to; otherwise the trust may continue indefinitely, which may not be the grantor’s intent. There is, in common law, a “rule against perpetuities,” which holds a trust should terminate no later than 21 years after the death of the last person identified as a beneficiary at the time the trust was made, but this rule may be overruled by the express terms of the trust.

Published on: June 24, 2014

Transferring Corporate Shares Via Estate Planning

by Scott C. Soady

A family-owned business poses unique estate planning challenges. If the business is organized as a corporation, certain formalities must be observed with respect to the transfer of ownership upon a shareholder’s death. Under California corporations law, every shareholder, even if it is a family member, must receive a certificate specifying the number and type of shares owned. When a shareholder dies and transfers shares by will or trust to a beneficiary, the corporation must record this transaction and issue certificates to the new shareholder.

In theory this sounds simple enough. But in practice things can and do go wrong. A recent court case from Ohio illustrates this.

Graham v. Szuch

Published on: June 13, 2014

Understanding the Difference Between Trust and Personal Assets

by Scott C. Soady

A living trust is an estate planning device whereby a person, known as the “settlor,” transfers his or her assets to the custody of a trustee. In most living trusts, the settlor and trustee are the same person. When the settlor dies, the trust instrument appoints a successor trustee, who then manages or distributes the trust assets as the settlor directed.

If you decide to create a living trust, it is essential that you and your successor trustee observe all appropriate formalities. That is, when dealing with trust assets, you must not refer to yourself as the owner, but rather the trust. Let’s say John Doe creates a living trust. He wishes to fund the trust with his home. In order for the house to be considered a trust asset, Doe must file a deed transferring the property from himself to “John Doe, Trustee of the John Doe Revocable Living Trust.” Failure to take this step means a court may decide the asset was never part of the trust.

Avoid Co-Mingling Trust Assets

Published on: June 4, 2014

Understanding Death and Taxes

by Scott C. Soady

Benjamin Franklin famously wrote, “in this world nothing can be said to be certain, except death and taxes.” And the latter does not cease upon the former. Death introduces a number of tax issues that must be dealt with as part of your estate. Proper estate planning can help ease the burden, however, and minimize tax difficulties arising from an uncertain world.

Income Taxes

Your estate must still file a final individual income tax return-the common federal Form 1040 or California Form 540-for the tax year you die. This return should only reflect the income and deductions accrued through the date of death. Any income or losses earned after your death are credited to your estate.

Published on: June 2, 2014

Who Can Be Held Responsible for an Estate’s Debts?

by Scott C. Soady

The Washington Post reported recently the Internal Revenue Service has “intercepted” hundreds of tax refunds to repay decades-old debts. What is disturbing is that these are not debts owed by the taxpayers, but by their long-deceased parents. The IRS claims that in the past, families of deceased Social Security beneficiaries received overpayments from the government.

Even more shocking, the government now claims the right to collect those “overpayments” without having to prove the validity of the debt. According to the Post, the IRS makes no effort to determine who actually benefited from the alleged overpayment; instead “the policy is to seek compensation from the oldest sibling and work down through the family until the debt is paid.” After public outcry over the Post report, the IRS subsequently announced it would suspend its collection program.

Not the Normal Way to Satisfy Debts

Published on: March 14, 2014

Using a Life Estate to Protect Your Spouse’s Right to Remain at Home

by Scott C. Soady

A life estate provides a means of transferring real property before death. In a life estate, Person A conveys the title to his house to Person B with the stipulation that Person A may continue to live in the house until his death, at which time Person B assumes sole ownership. It sounds simple enough, but life estates can produce unforeseen complications, as one recent California appeals court decision demonstrates. This case is discussed here for informational purposes only and should not be considered a complete statement of California law on the subject of life estates.

McCay v. Turnboo

The parties in this case are a stepfather and stepson. The stepfather, Warren Turnboo, married his wife Helen in 1960. She had a son, Brian McCay, from a prior marriage. Helen Turnboo brought to her second marriage the house she acquired following the dissolution of her first marriage. At the time of her second marriage, there was a mortgage of about $9,600 on the property. Helen Turnboo remained sole owner of the house, but she and her second husband lived there together and they use their funds to pay household expenses, including the mortgage. The mortgage was finally paid in 1978.

Published on: January 30, 2014

California Supreme Court Rejects Application of “No-Contest” Clause in Trust

by Scott C. Soady

A “no-contest clause” is a common California estate planning device used in wills and trusts to discourage litigation over a person’s estate. The basic idea is simple: If a beneficiary named in a will or trust files a lawsuit challenging that document’s validity, that beneficiary is effectively disinherited. What’s not so simple, however, is California’s approach to no-contest clauses. Such clauses have long been recognized under the common law in California, but the state legislature has adopted numerous restrictions on their enforcement over the years.

The most recent law, which took effect in 2010, limits enforcement of no-contest clauses to three types of claims: (1) “A direct contest that is brought without probable cause”; (2) a creditor’s claim; and (3) a beneficiary’s claim to trust property (also known as a “forced election”). These latter two case types must be expressly mentioned in the no-contest clause in order to have effect.

Prior to 2010, California law allowed beneficiaries to file “safe harbor” proceedings, which allowed them access to the courts without invoking a no-contest clause. The 2010 law eliminated such proceedings. But what about safe harbor applications still pending as of 2010? Recently, the California Supreme Court considered just such a case.