Wills, Trusts & Taxes

Parent Cafe
41

<p>HImom, I’m living both sides of your issue (fast-forward 30 years). My parents have named me trustee of their modest estate. I (and hopefully my siblings) see their legacy as the education, etc. they provided us in our formative years. Best case scenario is they live out their senior years with proceeds from their estate. I’ve told the other siblings after their passing, it’s liquidate and divide by four.</p>

<p>DH’s mom, on the other hand, has a sizable estate and very complicated dynamics for disbursement. So she sits in inertia, not seeing the right solution. But really that’s just setting her up for her worst case scenario. Estate goes to probate, irresponsible children get a lump sum without limitations after Uncle Sam takes his cut. </p>

<p>DH & I put together our original trust using a coupon circa 1991 from the PennySaver. We’ve revisited it several times (without a coupon, DH’s company has a generous financial planning benefit) and that boilerplate trust holds up very well.</p>

<p>So, yes … put something together. Revisit it if needed when complicated family dynamics occur.</p>

42

<p>HIMom - I am pretty sure that Hawaii is one of the states that does recognize a tenancy in the entirety for the primary residence of a married couple, so be sure and discuss that issue with your attorney. I also am pretty sure that the advantages of the tenancy in the entirety outweigh any disadvantages of having to go through probate for that one asset, but again, discuss that with your attorney.</p>

43

<p>“That’s a mixed bag, I think – because if the designated trustee opts to ignore some of the wishes…”</p>

<p>You can always designate a non-beneficiary as your successor trustee if you don’t trust your children (you are the trustee of your revocable trust until death or incompetency unless you specify another to be your trustee during your life). A close friend or an impartial party, such as an attorney or bank employee can be designated as your successor trustee with their approval (although the latter option means a fee is paid).</p>

44

<p>“DH & I put together our original trust using a coupon circa 1991 from the PennySaver. We’ve revisited it several times (without a coupon, DH’s company has a generous financial planning benefit) and that boilerplate trust holds up very well.”</p>

<p>Agree that these revocable trusts are typically simple instruments and generally don’t cost much to have an attorney prepare. You can do them yourself, but if you do, you may not grasp concepts like the benefit of holding your primary residence as a tenancy in the entirety or the implications of a simultaneous death statute or lack thereof. Another thing to consider is how to structure the instrument in the case of one spouse dying before the other and then going on to have children in the future with a new spouse. A decent wills and trusts attorney should be able to help you to understand those issues.</p>

45

<p>As for structuring a will/trust to account for the situation where one spouse dies first, and the other then remarries. What happens if you leave all of your assets to your spouse and he/she remarries? Well many times, your surviving spouse then has a will/trust that designates his new spouse the beneficiary should he/she die. That means all of your assets upon your surviving spouse’s death pass to his new spouse, and none to your children.</p>

<p>One thing you can do is leave your spouse a life estate with the remainder to pass to your children. If you try to do a will/trust yourself, you may never have considered that option or even if you do consider it, may not structure it properly. Other issues come up if your current spouse or you have children from past relationships. A decent wills and trusts attorney should counsel you on how to properly structure a trust to protect assets you would like to see pass to your children from past relationships or your children with your spouse from being passed instead to your surviving spouse’s future spouse or future children.</p>

46

<p>Doing your own estate planning when you have significant assets increases your likelihood of having a fool for a client, unless you happen to be an estate planning attorney and keep up with all the twists and turns in the law. Anyone can read a form book & substitute the names for the forms of their state. </p>

<p>Decent estate planning attorneys SHOULD have a questionnaire for you to complete and help counsel you based on YOUR specific circumstances, including what has happened to some different anonymous clients under different scenarios so you can make informed choices.</p>

<p>The courses I took on estate planning were decades ago – the attorney we will be working with has handled thousands of estates and seen what has worked well and not so well. We hope to benefit from his wisdom so as best we can all envision it, things will happen as we hope after we’re gone.</p>

<p>All the “forms in a box” for legal things tend to encourage folks to “do-it-yourself,” but this can be a costly mistake if we have significant assets (a house, savings, securities, potentiall other real estate), especially as others have pointed out, when some of them may be in other states or held with other family members. It really can be a savings to spend a few $$ to straighten things out as best one can while people can express their preferences.</p>

47

<p>Going way back to post #8 and #12:</p>

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<p>As I understand it, it is not a good thing to sell assets unless you really need to for estate purposes as you will have to pay capital gains on any sale. Under current law, the cost-basis for your heirs of all assets begins with their valuation at the time of death, so you avoid any capital gains if you sell them off immediately afterward. This can be a huge benefit to heirs and is considered an unfair loophole by some. I think they are talking about changing this if they ever get a new law in place.</p>

<p>Maybe JHS or somebody else can confirm this.</p>

48

<p>^ Wildwood - There’s no “one size fits all” answer to your question. In some circumstances, converting to cash while still alive is best … in other circumstances, waiting for stepped-up value make more sense. It depends on each family’s situation.</p>

49

<p>Who knows what Congress will do with the estate tax and whether or not they will keep the stepped up basis provisions. Until they do, it’s almost impossible to do any estate planning.</p>

<p>It could be that the capital gains are minimal and that it would be worth it to avoid the hassle of selling the real estate after death. In my H’s uncle’s case, the real estate was unimproved land in another state that he had planned on building on someday. (Someday never came). But after his death, a probate had to be opened in the state, a realtor had to be retained, etc. It was a hassle for a property that was worth not that much relative to the hassle of settling everything after death.</p>

50

<p>Actually, under current law (calendar year 2010) the step up in basis is limited to $1.3 million. Of course most people don’t have anything like $1.3 million in capital gains, but for those that do and die in 2010, there is supposed to be a form the IRS will develop where the estate will select which assets get the step-up in basis.</p>

<p>If Congress does nothing on the estate tax, the law reverts to the status quo of circa 2001, with a $1 million exemption from estate tax and step up in basis of all assets to their value on the date of death.</p>

51

<p>Wildwood - in my MIL’s case the only asset other than case was her house. She had moved into a nursing home and the house needed to be sold. The property taxes alone were about $8000/year. Capital Gains was not an issue.</p>

<p>To leave a house to 4 siblings is a pandora’s box - IMO.<br>
In your scenario - while the benefactors will avoid capital gains - the estate still would have to pay them. This is my understanding.</p>

52

<p>No. In the “normal” regime (i.e., every year in memory except the year we’re in now), if a person dies with a low-basis, high-value asset, like a house in a good neighborhood bought long ago, and her executors sell the house after she dies, neither the estate nor the beneficiaries will pay any income tax (capital gains) on the appreciation in value. If the decedent had sold the house the day before she died, her estate would owe capital gain tax on the appreciation. She would be out tax money that would not have been paid had she held the property until death.</p>

<p>This year, it’s a little more complicated, and for wealthy people with lots of unrealized capital gains it may make sense to sell some property before death.</p>

53

<p>How about if the house is sold well over a few million dollars? Let’s say the capital gain was $1M long term. That would make the tax $150K. In the normal year, heirs would face estate tax of 50%(?) after the exemption of $1.5M. If the house was sold at $2M, wouldn’t the tax be $250K?</p>

54

<p>^Yes, in that scenario, the estate tax would be $250,000 (I believe the rate returns to %55 if nothing is done). But the point is, if the house is sold before the death of the owner, the estate would be reduced by $150,000 due to the capital gains paid. And then the heirs would owe half of $350,000 after the exemption, but it still leaves them with a smaller estate to distribute. In the first case, 1.75 million and in the second, 1.675, so $75,000 less. Obviously, there could be lots of circumstances in which it would be more beneficial to sell the house before passing on.</p>

55

<p>If you have property (stocks, real estate) valued at 3 million dollars. If the basis is 1 million dollars and you sold it all you would have capital gains to pay on 2 million. At 15% that would be $300,000. If you die a day later, you now have property worth 2.7 million dollars. You’d pay in 2011, 55% of everything over 1 million dollars to the federal government. So the taxes would be 55% of 1.7 million or 935,000. </p>

<p>If they go back to the original stepped up basis and the heirs sell everything, there would be minimal to no capital gains (depending on how long they take to sell and the rise in value) but the heirs would still pay substantial estate taxes no matter what. </p>

<p>On a $3 million dollar estate, the taxes in 2011 (assuming no revision to the law) would be 55% of 2 million or 1.1 million dollars. </p>

<p>If there are two children dividing the estate equally, the government gets more than the kids. That’s just not right no matter what your politics.</p>

56

<p>Ah, I was assuming heirs took the distribution sooner taking advantage of the life time gift exemption. If they took the house 10 years before the death and it was worth $1M. Appreciated to $2M in 10 years. If they sold it then, they would owe capital gains tax $150K.If they inherited the house at that point worth $2M, they’d be paying $250K estate tax.</p>

57

<p>Just clarifying some points:</p>

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<li><p>I would be the last person to pretend to dictate, or even suggest, to others what’s appropriate for their own situations. Individual assets, family relationships, states of residence, and current age of beneficiaries, all combine to make each person’s/couple’s estate idiosyncratic. Hundreds of permutations are possible. I have only general caveats that are worth considering, in my experience:</p></li>
<li><p>Despite the popularity of trusts, particularly in certain States, trusts are not a universal panacea or a legal prophylactic, in themselves, preventing opposition or litigation. **Nor does the existence of a trust in itself ensure distribution of benefits to beneficiaries. <a href=“‘Heirs%20won’t%20have%20to%20go%20through%20Probate;%20trust%20distributions%20will%20be%20immediate%20&%20clean.’”>/b</a> This is crucial to understand. The terms of the trust, the length of the (revocable) trust, the nature of the property being held in trust (including legal restrictions/liabilities pertinent to that property), ages of beneficiaries, the neutrality of the trustee, and more, all impact the efficiency, or even neglect, of implementation and the assumption of what beneficiaries will and will not receive, and when (if ever) they will receive it.</p></li>
<li><p>Advantages of a trust can be equalled by, or even surpassed by, disadvantages. That is, they ‘universally’ advantage the trustor(s), in that Probate time and Probate publicity is avoided. Additionally there is other flexibility with regard to a trust instrument that makes it very attractive **for the trustor.<a href=“Quite%20a%20bit%20of%20flexibility.”>/b</a> But the second half of the equation is obviously your beneficiaries. You won’t be around to hear about the headaches that you or your lawyer did not anticipate, but isn’t the purpose of your providing for your heirs the assumption that they will indeed receive what you leave them? An instrument is only ideal or “preferred” if both/all parties are favorably affected. Way too many people make assumptions about trusts that later turn out not to be true, because they (a) fail in consumer ‘due diligence’ when shopping for lawyers (b) are overly optimistic about administration by an ‘insider’ (beneficiary relative) (c) assume that even a well-checked-out lawyer needs no oversight/questioning regarding the trust instrument being drawn up. </p></li>
</ul>

<p>Regarding the latter, this is where the benefactors need to spend probably as much time on the legal instrument as the lawyer. The lawyer doesn’t know your family or other benficiaries. Doesn’t know the dynamics; doesn’t know your personal priorities. The lawyer has to do the research; you have to do the thinking. The lawyer should be planning from a legal perspective; you should be planning from a personal perspective. If that means lots of codicils to your trust (for personal property distributions, for example), and how those codicils are worded (and then reviewed with the lawyer), then that’s what you must do. If it means lots of ‘if/then’ clauses worked out in live conversations with your attorney, then that’s what you must do.</p>

<p>IOW, any trust that is in the least bit complex and/or involves several heirs, can be expensive if it is to be done with greater (not perfect) assurance that your wishes will be carried out. (That is just a qualification on the popular assumption that “trusts save money.”) Trusts done on-the-cheap do definitely save the trustor money. But they may cost your beneficiaries enormous sums depending on ownership complexities and trustee relationships, if the trustors were in denial about relationships or ignorant about complexities.</p>

<p>Two of the most non-static factors are real property (and its liabilities) and taxation. A trust will not “ensure” that your beneficiaries are protected from these variables just by virtue of your estate being in a trust instead of in a will. A life-long family residence is not commercial property. A State with serious budget liabilities (and a concomitant motivation to levy taxes & enforce collections), and/or which has been affected severely by declines in property values, may have a future impact on your beneficiaries, an impact not prevented by your estate being held in trust instead of in a will. Add to that unforeseeable legislation involving estates, taxes, property transfers, and the liquidation of real property by part owners, and you see how non-absolute a trust might be.</p>

<p>There is no civil recourse against a volatile, arbitrary, prejudiced, or incompetent trustee. There is no automatic protection in the law for beneficiaries who are victimized by such a trustee unless those beneficiaries have funds to represent themselves. I.m.o., this is highly unconstitutional, as it invites and even ratifies exploitation, but it is a situation which exists nevertheless. This imposes on the benefactors a practical obligation to avoid such an outcome with a combination of time spent considering the instrument and its contents, weighing pros/cons of disposing of some property prior to death if possible (such as putting aside litigation funds for beneficiaries should the trustee prove unreliable), etc.</p>

<p>I don’t know enough about estate law to know whether a possible contingency is a secondary trustee which would be assigned if any/all/a majority of beneficiaries can make a showing that the trustee has failed in fiduciary & administrative responsibliities. For example, we can make such an affirmative showing in our case: it’s clear, it’s documented or documentable that she has abridged her duties as set out in State law. But what good does that do? Where is our secondary (more removed, or Independent) trustee built into the trust? There isn’t one! That is a different situation from that of an alternative trustee in the case of death/incapacity of the first one. Because State law does not provide paid recourse to powerless beneficiaries, trustors need to somehow anticipate compromises to their trust.</p>

<p>Probably – again I’m not a lawyer – but probably what could be written into the trust are even more particular responsibilities of the trustee than are required by general State law, which is way too “generic” and fuzzy for my taste. IOW, State law “requires” the trustee to keep detailed records, but in order to get that enforced, the beneficiaries have to spend their own money to hire a private lawyer! So it seems to me that a trustor might want to designate that X trustee provide these detailed records to designated Independent Party (such as a specific legal or accounting firm, or a specific personal designee), with the wording of that right in the trust.</p>

<p>Just remember, all you prospective trustors, Secrecy and Privacy (what you cherish in a trust) also means lack of accountability. There are no public instruments to protect your beneficiaries. Plan for this.</p>

58

<p>^ Shortening what epiphany just said, it’s OK to tell your lawyer “structure the Trust so assets can be distributed to heirs within two years of my death.” </p>

<p>[signed] In year 16 with my Dad’s bypass Trust … and down to five lawyers, finally.</p>

59

<p>There’s some real wisdom in epiphany’s posts, and some real non-wisdom, too.</p>

<p>Creating these trusts is part of my business, but believe me I raise all of these issues with my clients. And tell the the sad story of one of my uncles, who fought with his siblings their entire adult lives over their parents’ trust, until finally they all became too senile to fight any more, and the trust was still in place.</p>

<p>Still, there are valid reasons to keep assets in trust, especially for very wealthy families. In many states, when assets come out of trust, they can be exposed to claims of a divorcing spouse or a shady business partner. (A wealthy person who trusts his children’s spouses is a rare, rare thing. And don’t even ask how many wealthy people trust their teenage or 20-something kids to find trustworthy spouses.) If there is real estate people want to keep in the family, it is much, much easier to do that with a trust than with common ownership among siblings. Even if you are a professional driver on a closed course, you shouldn’t be trying that one! And if you are the sort of family that can benefit from generation-skipping trusts, you are the sort of family that is going to be keeping trusts in existence for a long time.</p>

<p>That said, epiphany is right that trust drafters rarely succeed in anticipating all the issues that arise. They DO have to know their client’s family dynamics – I spend lots of time on that – but no one can project family dynamics 40 years into the future. Most trusts have several outs for such things. Usually, when trusts are created when one spouse dies, the surviving spouse can change how they are allocated at the second death (unless the surviving spouse isn’t the parent of the beneficiaries in the next generation). And it’s possible to build a lot of flexibility into a trust. But it’s true that the more flexibility there is, the more you need trustees you can trust. </p>

<p>Banks and other professional trustees, in my experience, do an excellent, good-faith, down-the-middle job, and provide complete transparency. And do not fight (much) when the beneficiaries want to change trustees. But they cost an arm and a leg.</p>

<p>There is tons of civil recourse, by the way, for trustee incompetence and arbitrariness. It is true, though, that beneficiaries may have to fund their own litigation to claim it. But courts have lots of power to muck around in trusts to protect the beneficiaries, and it’s probably easier to get a good resolution in this area than in most other areas of the law.</p>

60

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<p>Care to share those “tons of civil recourse”? Just FYI, I just got off the phone with the county (again, today). They reiterated, for example, that the $50K in property taxes suddenly due on the portion of the property owned by the 3 college students is not up for extension in deadline. Thus, even if “recourse” is available, I doubt that can happen within 3 days from now. when the Supplemental and Adjusted bills come due. (Unless one of those recourses is some emergency injunction.)</p>

<p>The three college students are being assessed 73% of the new taxes since the death of their grandmother in '06, according to what the assessor told me today. Charming.</p>

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<p>My point exactly, and why I specified above that setting aside funds, or the ability to liquidate assets, can be a prudent move for trustors. Again, a criminal defendant need not fund his own defense. He will be provided representation of some kind even if he is a pauper. Not so for beneficiaries of a trust, even if minors.</p>

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<p>Again, where is this evident that “courts” can do this without the thousands of dollars needed to pay attorney retainers, by college students already on financial aid?</p>