My dad always said that wisdom is learning from other people’s mistakes – it’s cheaper than learning from your own mistakes. Here is a classic example to learn from: the estate of Estelle Elsa Manwell, from El Dorado County. Ms. Manwell was well to do – according to court documents she owned real estate in Contra Costa and El Dorado County worth $1,238,848. Ms. Manwell must have known that she did not have much time to live because she signed a handwritten will just days before she passed away. This handwritten, or “holographic” will left her estate to her 5 living children, but stated, “I do not want any of my property sold outside of my family for a minimum of 20 years.” The will also neglected to nominate an executor or mention whether the executor would be required to carry a bond. Ms. Manwell’s will left a few problems for her children.
Because by statute the executor is paid the same as the attorney (though some may choose to waive this fee) the position can have an enviable financial bonus for an heir. For an estate of $1 million, the executor can collect $23,000. The court records indicate that the children of Ms. Manwell fought over who would be executor. This fight could have been avoided by simply naming the executor in the will. Now the family relationships will have to recover from what was said and done in a public (and expensive) forum.
The attorney’s fees and executor fees could have all been avoided by creating a trust, allowing the assets to pass to the heirs without going through probate. That amounts to nearly $50,000 in expenses, not to mention the months, and potentially years it will take for the court to process this hand-crafted document.
Tying beneficiaries hands
Sometimes restraining the beneficiaries is for their own good, and serves as a way of protecting them from creditors or their own foolish choices. But in this case, the children (likely all in their 40’s or older) will be forced to stay on title together on assets with which they can do nothing until 20 years later, minimum. These five children, who have just finished fighting over who will be the executor, will have to manage multiple properties in several counties – together. I have a feeling only the lawyers will appreciate this arrangement. Managing real estate can be time-consuming and costly. Managing with multiple owners with their own unique perspective, and potentially antagonistic attitudes towards each other is a recipe for waste. Sometimes a client has a sentimental attachment towards particular items, like a home wrapped with memories of family events, holidays, and birthdays. I try to remind clients that their children have their own fond memories, but also have their own lives to lead. Tying their hands and preventing them from making necessary decisions could ultimately hurt their children in the long run. Better to create a structure that will make it easy for the children to carry out your wishes, but gives them necessary options.
Haste makes waste
In summary, by leaving these planning decisions to the very last minute, Ms. Manwell left behind a situation that will cost her children financially and emotionally over a long period of time. All of these things could have been avoided by careful advanced planning.
One of the questions I get all the time is, should I put _________ (name an asset) into my trust? The answer, of course, is that it depends on the asset, but generally speaking, everything you own should be transferred to the trust. Which leads to the follow-up question: do I lose control of my assets when I put them into my trust?
Why Put Your Assets Into A Trust
If your goal is to avoid probate and you’ve created a trust to accomplish that goal, you need to understand one thing. Assets owned by the trust avoid probate. Assets not owned by the trust are exposed to probate.
Now that you understand the importance of your trust owning your assets, who controls your assets?
Who Is In Charge of My Trust?
When you create your trust, naturally you put yourself in charge of your trust. And you also chose who will be in charge after you, and maybe even who will be in charge after that person. The person in charge of the trust and the assets inside the trust is called the Trustee. When you created the trust, you made the decision about who the successor trustee will be and when they step into your shoes as trustee. Though who the trustee is will change as time goes by, you made the decisions when you created the trust.
Who Gets to Benefit From My Trust?
While you’re alive, you’re the beneficiary of your trust, and after your gone, your surviving spouse is typically the sole beneficiary of the trust. After you and your spouse are gone, then you get to spell out in your trust exactly who gets your estate, when they get it, and under what circumstances.
It’s Your Trust
As the creators of the trust, you are completely in charge of what goes into, and what comes out of your trust. And because it’s a revocable trust, you can completely change the trust itself, including getting rid of it completely should you so choose. It’s all up to you.
A trust gives you the ability to spell out exactly who gets what and when. Now that is total control over your assets!
Not all living trusts are the same. And I’m not talking about quality either, though that is a major factor too. I’m talking about the difference between minivans, pickups, and sports cars. There are five major types of trusts that we use every day in our practice for different situations.
Probate Avoidance Trust
This is the basic, direct distribution trust that is the typical trust people are introduced to when they learn about wills vs. trusts. This trust takes a no-nonsense, keep-it-simple approach to dividing all the assets between the beneficiaries and having accomplished its purpose, ride off heroically into the sunset.
Personal Asset Trust
What if your beneficiaries’ inheritance could be protected against lawsuits, creditors, and even divorcing spouses? With Estate Plan Pros’ “Personal Asset Trust” you can provide dramatically increased protection for your beneficiaries against these financial risks. Read more about the Personal Asset Trust here.
Surviving Spouse Asset Protection Option
If you have children from another relationship that you’re including as beneficiaries, what happens when you’re not the surviving spouse? What happens to your assets? We can set up the trust to split in half at the death of the first spouse so that portion becomes an asset protection trust, and locks in the beneficiaries for your half of the estate.
Beneficiary Protection Trust
Some beneficiaries should not control their inheritance, or at the very least need some assistance managing their inheritance. A beneficiary might have significant disabilities that qualify them for government assisted programs like SSI, SSDI, Medi-Cal, or might have significant substance abuse issues, or event simply major financial problems. For these beneficiaries a Special Needs Trust or Spendthrift Trust can be set up to manage the inheritance for the beneficiary’s lifetime. This allows the beneficiary to receive the benefits of the inheritance without the burden or responsibility of managing the funds.
Retirement assets such as IRA’s, 401k’s and all their variations can often be the most significant asset that will be passed on to the next generation. Yet without prudent planning beneficiaries can accidentally or intentionally destroy the stretch-out of the inherited retirement plan. Additionally, the recent U.S. Supreme Court case, Clark vs Rameker, held that any asset protection you enjoy for your own retirement plan does not pass on to your beneficiaries. The Stand Alone Retirement Trust addresses both of these problems by helping ensure a proper rollover of the asset and giving your beneficiaries the option of using the retirement account as a protected asset. You can read more about the Stand Alone Retirement Trust here.
Every family is different, and their estate plan is going to reflect those differences of personalities and needs of beneficiaries. While these five broad categories describe the most common options, there other strategies and options that your estate planning attorney can review with you.
Missing files. Unprocessed checks totaling several hundred thousand dollars in filing fees. A procedural and paperwork mess that saw pleadings as far back as 2015 not docketed or scanned. The legal system is complicated enough, but when clerks behind the counter can’t handle the paperwork, the system doesn’t function. And unfortunately, that is exactly what happened in the Suffolk County Probate & Family Court in Massachusetts.
It was apparently an office already in trouble, the prior Register in charge of the office lost her seat after allegedly assaulting an employee after a holiday party. In 2014, with a new Register, the situation didn’t improve. The court brought in a temporary manager in October 2016 who found fifty bins of files scattered throughout the office. They estimated that an average of 20-30 cases went missing on any given day.
In California, the court system went through a rough patch when the statewide budget cuts hit. Things have improved, and overall thankfully, our local Sacramento office runs well.
Usually, when I discuss the probate process, and the reasons why you should avoid it, I assume a functional court. Unfortunately, this story illustrates that isn’t always a safe assumption.
Source: Severe dysfunction alleged in Suffolk Probate, Boston Globe, March 17, 2017
If you have the wrong kind of trust, naming it as the beneficiary of your retirement account could cost your kids a lot in extra taxes. How? It happened because you’ve just forced your heirs to report the entire amount as income.
When you inherit a retirement account, several things change immediately. The first is that the account will look at the new owner to re-calculate the measuring life on the account. If they can see a person, they’ll use that person’s age. This is called the “stretch out rule”. But, if they just see an entity like most trusts that have no age, there is no stretch out, and the beneficiary will be forced to close out the IRA account and take the income tax hit. If you have an ordinary trust, naming it as the beneficiary kills the possibility of a stretch-out.
The second big change when you inherit a retirement account is that there is no longer any early access penalty. You could withdraw the entire amount, or something less, and the only consequence is that you will owe income tax on the distribution. This is why the US Supreme Court in Clark v. Ramiker decided that creditor protection laws do not protect inherited retirement accounts.
What about the right kind of trust?
The right kind of trust is specifically designed to handle retirement accounts, and meet the four requirements of a see-through trust outlined by the IRS. A retirement trust allows you to preserve the stretch out for your beneficiaries, and put into place the plan and asset protection a trust can create.
Using this kind of trust, you can:
- Help keep the IRA in the family, by avoiding having a child name his or her spouse as a beneficiary, and seeing the money go to that new spouse’s children
- Protect the asset in case of a divorce
- Manage the account for beneficiaries who are young children, elderly or disabled
- Give direction and security for a beneficiary with poor money management skills
Unless you have the right kind of trust, don’t send your retirement funds there. But do consider the benefits to your children of using the right kind of trust for your retirement funds.
It’s 2006, Michael Jackson and his partners are meeting in a hotel. Jackson promises his partners shares in his company for their loyalty. Flash forward to today, and the business partners were in court, trying to get their agreement enforced against the estate.
The court had no problem sending them home empty-handed. The problem? Besides waiting 5 years after Michal Jackson’s death to file a claim against the estate, there was no writing backing up the agreement.
If you are making promises to your heirs, be sure to put those promises in writing. If you don’t, you could be setting up future court fights as heirs try to reconcile what you told them with what you actually did.