Planes, Trains, and Automobiles- In or Out of a Revocable Living Trust?

You can play the video in the embedded viewer by clicking on it, or

you can play the video fill size in its own window by clicking below (RECOMMENDED): 

Planes, Trains, and Automobiles Should Normally Be In Your Revocable Living Trust

In the video above, I discuss a recent MSN.com article entitled "Five Items to Leave Out of Your Revocable Living Trust."  (the article link is already broken, but there is an image in the video, and you can also view the article online here (last accessed 1/18/2025); you will have to scroll down past the first few articles). 

The author writes as follows:

         "Vehicles. Whether it’s a ’63 Corvette, Harley chopper or prop plane, all that’s required to pass it on is a simple written instruction to transfer the title to a beneficiary. In a trust, you’re exposed to lawsuits over accidents that involved the vehicle." 

Generally, I disagree. Vehemently.

In the video, I discuss the following:

1. Articles, publications, seminars, and presentations should never be construed as legal advice

2.  The author suggests that only a simple written instruction is necessary to transfer a title to a beneficiary, which statement is misleading or incorrect.

3.  Beneficiary and Transfer on Death Designations may sometimes work to avoid probate, but they have limitations and risks, and do not constitute a 'plan' to avoid probate (see links below).  

4. The liability issue raised by the author makes no sense for most revocable living trusts settled in most states.

5. The author assumes that the only purpose of a revocable living trust is to avoid probate, which is untrue, and assets outside of a trust do not serve and may impair lifetime planning benefits of a trust:

• Consistent and competent lifetime management of assets is a lifetime planning objective best accomplished with a trust.

• Guardianship avoidance is a lifetime planning objective best accomplished with a trust.

• Protection of assets from a court-appointed guardian is a lifetime planning objective that can only be accomplished with a trust.

• Aging in Place Planning is a lifetime planning objective that can only be accomplished with a trust.

I acknowledge in the video that there are always exceptions, and that the author may not have actually been considering revocable living trusts when drafting the article, but generally I disagrees with the headline and conclusion of the author regarding planes, trains, and automobiles. 

Consider additionally the following: 

• Beware Direct Transfer Designations (TODs and PODs);
• Aging in Place Planning Heightens Necessity of Trust Funding;
• Beware Direct Transfer Designations (TODs and PODs)- Part II: Ohio Transfer of Death Designation Affidavit (TODDA) for Real Estate- Lapse of Insurance Coverage;
• Beware Direct Transfer Designations (TODs and PODs)- Part III- Transfer on Death Deed for Real Estate Results in Loss of Insurance Coverage and Impairment of Asset Value.   

I urge you to attend an "Aging in Place Planning" presentation by signing up for an upcoming live webinar.  You can find these periodically on my blog or on the events page of the firm's Facebook page.  You don't need to wait, however, for a scheduled event; there is a recorded version available here: https://bit.ly/Aging-in-Place-Workshop.  You might also consider inviting your children and trusted advisors to attend.

 

Pandemic Pets, Pet Companionship, and Estate Planning Considerations

Pet companionship took on new meaning and importance during the pandemic as lock-downs, quarantines, social distancing, and social isolation impacted nearly everyone. For many, life trapped in a home would be unbearable and unthinkable without pet companions.  This blog has previously discussed how important pets are to some, and how important it is to consider pets in estate planning. 

An unanticipated effect of the pandemic has been a surge in interest for fostering and adopting abandoned pets. Although unanticipated, this effect is not surprising given the lack of social human interaction during stay-at-home orders, and subsequent social distancing. Regardless, the renewed focus on pets and pet companionship is welcome and important. 

There are at least seven quantifiable benefits to pet owners, including aging owners and owners with special needs:

1. Reducing Isolation and Loneliness; 
2. Lowering Stress and Anxiety; 
3. Improving Fitness; 
4. Increasing Social Interaction and Connection to the Community;
5. Improving Cardiovascular Health; 
6. Reducing Depression Risk, and;
7. Providing Routine and a Sense of Purpose.

Isolation

Isolation and loneliness are among the considerations for those planning to age in place. Seniors and persons with disabilities may experience feelings of isolation and loneliness if they spend a lot of time at home, sometimes because they lack mobility, security, or just comfort leaving home.  Isolation and loneliness are major risk factors for depression and increase the risk of heart disease, arthritis, diabetes, and dementia. 

Experts at the Centers for Disease Control and Prevention (CDC) agree; pet companionship eases loneliness and isolation. 

Stress and Anxiety

Relieving feelings of loneliness and isolation are not the only emotional and mental health benefits of pet ownership.  Research has shown that simply petting a dog lowers the stress hormone cortisol , while the social interaction between people and their pets actually increases levels of the feel-good hormones oxytocin and serotonin.  Oxytocin is the same hormone that bonds mothers to babies.   A University of Utah study found that even spending time near a pet can reduce stress levels and nervousness. 

The companionship of a pet can be particularly beneficial for reducing anxiety for a persons with disabilities or impairments.  In fact, an astonishing 84 percent of post-traumatic stress disorder patients paired with a service dog reported a significant reduction in symptoms, and 40 percent were able to decrease their medications, according to a recent survey.

Fitness

A pet increases opportunities for exercise. A daily exercise routine and physical activity can improve mobility the ability to perform activities of daily living.  Shelter dogs have been used for animal-assisted therapies to encourage physical activity for residents of nursing homes and assisted living facilities. A study published in Clinical Nursing Research found that people who walked with shelter dogs were more likely to go for a walk than those who walked with a human companion and even walked faster and for longer distances! 

Community

Programs that allow residents of assisted living facilities to spend time with a pet encourage interaction among the residents and give them something to look forward to.  

Pet care offers opportunities for  interaction with others, such as vets, groomers, pet care retail staff, and other pet owners.  Most folks that serve in the pet care industry are, themselves, pet lovers, which creates a community that is naturally sharing, caring, and helpful.  Pet walkers often follow a regime which affords them  insight into the routine of other owners.  A pet owner may notice that another pet owner is suddenly absent, or might observe another owner struggling physically and offer help.  

Pets can help persons with autism improve social skills by facilitating social connections with others, inspiring the person to work harder on communication skills and teaching compassion.

Cardiovascular Health

According to the American Heart Association, pet ownership is associated with lower blood pressure and lower heart rate during mental stress. A University of Utah study found that just the presence of a companion dog is associated with lower cardiovascular responses during stress. The CDC lists decreased blood pressure and reduced cholesterol levels as two benefits of pet ownership. 

Depression

The Research Center for Human/Animal Interaction has found that dog owners are less likely to suffer  depression. Animal-assisted activities and therapy have been used successfully with patients struggling with depression, loneliness, and mental illness and can reduce the symptoms of depression. The effects are particularly apparent with seniors.

Purpose

Pet care invites structure and scheduling, establishing a beneficial routine, and lots of older adults who own a pet say that their pets provide a sense of purpose and help them enjoy life.

For more information how to incorporate pet care into your estate plan, consider the following article:  Ohio Pet Trusts.

Source: Rebecca H. Miller, Pandemic Pets and Pet Companionship: Seven Benefits/Considerations for Care Coordination and Estate Planning, Chambliss Law, May 5, 2021. 

Article: Philip Seymour Hoffman’s $12 Million Estate Planning Mistake

Attorney John M. Goralka has written an excellent article for Kiplinger, entitled, Philip Seymour Hoffman’s $12 Million Estate Planning Mistake.   The article teases, "A few moves could have saved the loved ones of actor Philip Seymour Hoffman a lot of money. Even if you don’t have a $35 million estate, like Hoffman’s, there are some things you could learn from it."  Attorney Goralka is correct.

The article: 

Philip Seymour Hoffman was one of my favorite actors. He starred in Charlie Wilson's War, Hunger Games, Pirate Radio and many more major movies. His roles covered a wide range, from a priest in Doubt to a coach of the Oakland A's in Moneyball, which evidenced his unique ability as an actor.

The lack of planning results in his estate owing estate tax of approximately $12 million. If Philip had married Mimi, his family would have saved approximately $12 million and paid no estate tax whatsoever.

Philip also stipulated that funds were to be used for his kids to visit major metropolitan areas for the express purpose of providing his children with access to the arts. This is an example of an incentive provision or trust to help motivate his kids to become the adults that Philip wanted them to become.

The use of a will requires probate, resulting in delays, additional costs and public proceedings. For example, the probate costs for “ordinary services” in California, where I’m based, amount to largely statutory fees, resulting in approximately $376,000 for the first $25 million in estate value and an additional "reasonable amount" to be determined by the court for the remaining $10 million of estate value if that probate is based in California. Those fees are based upon the gross value of the assets without any reduction for liens, selling costs or mortgages. In addition to the statutory fees for ordinary services, extraordinary fees are paid for services related to the sale of real property or a business, tax matters, debt collection or negotiation.

Additional costs for a "living probate" or guardianship for each of the three children may also be required. In California, this typically would require a court appearance and fees every two years until they each turn 18. Fees can be substantial and will vary based widely upon the circumstances and needs of the minor child and the value, type and number of assets involved. They would receive any share of assets to be distributed to them at that time. Not a good age to receive significant wealth. Complete access to funds may result in his kids becoming the trust fund kids Philip hoped to avoid.

An average probate in California without litigation or other issues takes between nine months and 1.5 years. Philip's probate will almost certainly take longer due to the size and complexity. After the probate is completed, Philip's estate will be at risk after distribution to Mimi if she is sued, challenged by her creditors or even in a later divorce if she remarries. That legacy may also be reduced by a second estate tax on her death.

Philip could have provided for Mimi with a Personal Asset Trust, which would help protect her from divorce, lawsuits by predators or fortune hunters, creditors and even a second estate tax imposed on Mimi when she dies.

The original article is available here.  

Trust Can be Reformed to Change Beneficiaries

Can a trust be reformed to add beneficiaries where the trust as originally drafted fails to include beneficiaries?  According to a recent Florida trust case, a  trust can be reformed to add a residual beneficiary clause. 

In Megiel-Rollo v. Megiel, 2015 Fla. App. LEXIS 5601 (Fla. Dist. Ct. App. 2d Dist. Apr. 17, 2015), the decedent had prepared a will naming her three children as equal beneficiaries.  Some years later, the decedent prepared a revocable trust.  She also deeded her real property to the trust.  The trust, however, failed to name any beneficiaries of the trust upon the death of the decedent.  The trust, instead, stated that, upon the death of the settlor, the corpus should pass according to a "Schedule of Beneficial Interests," which was supposed to be prepared and attached to the trust.  At the time of death, no Schedule of Beneficial Interests was located.  

Of course, it not uncommon for documents (wills, trusts, beneficiary designations, and the like) and attachments to come up missing after death.  The case presents an object lesson why one should not rely upon attachments or schedules to nominate fiduciaries or beneficiaries, and should instead incorporate both in the body of the instrument, and further, why it is important to ensure the integrity of the instrument through time.  For more information regarding this aspect of planning, go here (the link will take you to series of articles regaring planning protection or vaulting).  

In this case, a dispute arose among the three children of the decedent, with two claiming that the decedent intended to name the two of them as the sole heirs, with the third child contending that the trust was void and/or could not be reformed.  Under the third child's contention, the trust would be split into three equal shares for the children. In support of the claim of the two, the drafting attorney filed an affidavit admitting that he had made a mistake and should have prepared the Schedule of Beneficial Interest naming only two the decedent's children as the beneficiaries of the trust.  Based on this affidavit and other information, the two children argued for trust reformation.

The Florida Trust Code, as of 2007, contains a trust reformation provision that allows a trust to be reformed to correct a mistake, Section 736.0415:

Upon application of a settlor or any interested person, the court may reform the terms of a trust, even if unambiguous, to conform the terms to the settlor's intent if it is proved by clear and convincing evidence that both the accomplishment of the settlor's intent and the terms of the trust were affected by a mistake of fact or law, whether in expression or inducement. In determining the settlor's original intent, the court may consider evidence relevant to the settlor's intent even though the evidence contradicts an apparent plain meaning of the trust instrument.

The third child argued that the trust itself failed under the "merger" doctrine, which requires that a trust have some separation of interests in the corpus.  The Court rejected this argument (internal citation omitted: 

[t]he failure of the Trust instrument to designate any remainder beneficiaries would ordinarily result in a merger is correct as far as it goes. "In order to sustain a trust entity, there must be a separation between the legal and equitable interests of the trust. If there is no separation of these interests, the doctrine of merger may apply and the trust be terminated." "If the designation of beneficiaries is deemed too indefinite for enforcement of the provisions of a trust, the usual result is that the trust is void and 'the designated trustee holds the corpus under a resulting trust in favor of the estate of the settlor.'" Based on these general principles, we agree with Sharon that--absent reformation--the failure of the Trust to designate any remainder beneficiaries would have the result that upon the Decedent's death, then Denise, as successor trustee, would hold the Trust assets upon a resulting trust for the benefit of the Decedent's estate.

The Court. then permitted the requested reformation of the trust: 

It is beyond argument that the statutory reference to "a mistake of fact or law" is not limited by any qualifiers. The broad scope of the language used in the statute is inconsistent with the notion that reformation is available to correct some mistakes in a trust, i.e., "simple scrivener's error," but not others. "[W]hen the language of the statute is clear and unambiguous and conveys a clear and definite meaning, . . . the statute must be given its plain and obvious meaning.

Giving the statutory language of section 736.0415 its plain and ordinary meaning compels the conclusion that the remedy of reformation of the Trust is available to correct the alleged drafting error resulting from the omission to prepare and incorporate into the Trust the contemplated Schedule of Beneficial Interests. The absence of any language of limitation in the statute--other than the requirement of proof by the heightened standard of clear and convincing evidence--is additional evidence that  the legislature did not intend the construction of the statute for which Sharon contends. For this court to read such a limitation into the statute would amount to judicial legislation of the sort in which we will not indulge.

The case should comfort those that worry that their wishes may not be accurately or completely expressed in their estate planning documents.  On the other hand, others may be worried that their expressed wishes may be changed by family, friends, or advisers after their death.  Of course, proper planning, and  continued efforts to support the plan will reduce or eliminate such risks.

Married Couples Should Reconsider Home Ownership In Trust

A narrowly divided Ohio Supreme Court has ruled that the transfer of a home between spouses prior to Medicaid eligibility is an improper transfer and is subject to the community spouse resource allowance (CSRA) cap.  Estate of Atkinson v. Ohio Department of Job and Family Services (Ohio, No. 2013–1773, Aug. 26, 2015). More particularly, the decision means that home ownership in a revocable trust is not without consequence when applying for Medicaid.  

The facts of the case present what was "garden variety" conduct of a client before applying for Medicaid.  In 2000, Marcella Atkinson and her husband transferred their home into a revocable living trust. In April of 2011, Mrs. Atkinson entered a nursing home and soon applied for Medicaid benefits. In August 2011, following Medicaid’s “snapshot” of the couple’s assets, the home was removed from the trust and placed in Mrs. Atkinson's name. The next day, Mrs. Atkinson transferred the house to her husband. Most attorneys counselled clients regarding such a procedure, and many county caseworkers told applicants of these steps, seemingly necessary to avail the community spouse of the exemption available to the family home.

It is important to know what the "snapshot"  means;  the "snapshot date" is the day on which the ill spouse enters either a hospital or a long-term care facility in which s/he then stays for at least 30 days. This is called the "snapshot" date because Medicaid is taking a picture of the couple's assets as of this date. 

The State in Atkinson, however, determined an improper transfer had occurred and imposed a penalty period.  Mrs. Atkinson passed away, and her estate appealed to court, arguing that under federal and state statutes a spouse is not ineligible from receiving Medicaid for transferring a home to the other spouse, and that an institutionalized spouse may transfer unlimited assets to the community spouse between the date the spouse is institutionalized and the date that the spouse's Medicaid eligibility is determined. The estate lost at both the trial court and the Ohio Court of Appeals, and the estate appealed.  

In a 4-3 decision, the Supreme Court of Ohio ruled that transfers between spouses are not

unlimited after the snapshot date and before Medicaid eligibility and that such transfers are proper only up to the amount that fully funds the CSRA. The snapshot date is the first day of institutionalization The court rejected the estate’s reliance on the Sixth Circuit Court of Appeals’ holding in Hughes v. McCarthy (6th Cir., No. 12-3765, Oct. 25, 2013) that an annuity purchased by a community spouse before a Medicaid eligibility determination is not an improper transfer, finding that the purchase of annuities are subject to special rules and “not applicable under these facts.”  The court remanded the case for review of the penalty imposed because the Medicaid agency may have applied the wrong statute.  “Neither federal nor state law,” the court wrote, “supports the agency's confiscation, after the CSRA has been set, of the entire amount of transferred assets, some or all of which may have already been allocated to the community spouse on the snapshot date.”

A dissent joined by three justices states that “What this family did is and was permitted by state and federal law. . .  the home is explicitly excluded from the definition of 'resources' for purposes of establishing the CSRA.” [emphasis in original].  The dissent reads in part:

It is clear that the law treats the marital home very carefully to prevent spousal impoverishment at the end of life. And that is the public policy we should be embracing. Based on the plain language of the federal statutes and the Ohio Administrative Code, as well as the holding of the United States Court of Appeals for the Sixth Circuit in Hughes v. McCarthy, 734 F.3d 473, I would hold that the transfer of the home between spouses prior to Medicaid eligibility being established is not an improper transfer and is not subject to the CSRA cap.

The case has significant implications for routine planning using a revocable trust.  Typically, a marital couple would convey the home to the revocable trust in order to accomplish objectives best accomplished with the trust.  Now, the transfer to the trust is problematic, because the home could not be transferred to a community spouse after a spouse enters an institution.

The ill effect is not necessarilly loss of the home; since the home is illiquid it would not be spent down.  The community spouse's CSRA, however, which represents the maximum amount of resources permitted the community spouse from the countable assets, currently $119,220.00, would be compromised, and possibly lost.  The ill effect would be the community spouse being forced to spend down the liquid assets that would otherwise keep him or her from impoverishment.   

Although the ill effect might be avoided if the need for long term care follows a possible event triggering the need, such as when a person suffers from dementia, there is never a guarantee that a person won't suffer an immediate catastrophic event, such as an automobile accident, stroke, aneurysm, heart attack, adverse drug reaction, complication to a routine medical procedure, fall, or the like.  In these cases a couple may be rendered powerless to improve their situation, and the home value will remain a countable asset.  

Our office is recommending that couples consider preparing a deed transferring the property from the trustees of the trust to the spouses/grantors of the trust, holding the property in a joint tenancy with full rights of survivorship, and employing a Transfer On Death Affidavit conveying the property at the death of the survivor to the trustee of the trust.  This strategy avoids probate, and confers to the home the other benefits of the trust at death (e.g., asset protection planning for your beneficiaries, equitable or proportional distribution of assets, private management, and the like).  

The obvious adverse consequence of this tactic is the home is no longer protected in the same way from guardianship.  A trust avoids guardianship by 1) identifying an alternate decision-maker and thereby eliminating the need for a guardian, 2) removing the incentive for hostile or predatory guardianship by removing assets from the guardianship estate, and 3) setting forth a procedure for appointment of a successor decision-maker with your personal physician empowered to decide issues of competency or capacity rather than reliance upon governmental or judicial determinations.  With the home removed from the protection of the trust, it might remain an incentive for a hostile guardian.

The nature of the home as an asset, and particularly the need of the community spouse to live in the home, however, should make the guardianship risk acceptable; it is unlikely a guardian will be able to obtain permission to sell a home when there is a spouse requiring the home as a residence.  In most cases, the relatively small risk must be balanced against the ill effect of a potential future need for Medicaid. 

Clients and advisers should take this risk seriously because the need for long-term care is inherently unpredictable, and the risk cannot be easily discounted.  The cost, too, of long-term care is unpredictable.  Medicare does not, typically, pay for long-term care.  Only long-term care insurance (preferably a policy that leverages a death benefit for long-term care benefits) or a robust financial plan can buttress your assets in meeting the cost of long-term care. 

To read the article discussing the oral arguments, which took place over a year before the Supreme Court's decision, go here.

For the full text of this decision, click here.

This blog post was originally published here.

170 Million Pages Why You Should Avoid Probate

"You can learn a lot about people from their wills.

You can see who was happily married and who was disappointed in their families. You can see who prized brevity and who parceled out every item as if handled by a loquacious auctioneer with lambskin gloves. 

Death may come for us all, but it doesn't necessarily still our voices." 

So begins an excellent article by Todd Leopold, writer for CNN, entitled, "Paul Revere, J.P Morgan wills among millions now online." 

The article continues:

"There's always emotion involved when someone's writing a will," said Jennifer Utley, senior manager of research at Ancestry, the genealogy company. "People make really interesting statements on how much they left people."

Ancestry has now made it much easier to research old wills, whether they're from your family or someone of historical import. The company's website, Ancestry.com, has more than 170 million pages of wills and probate records available, legal records that until recently had been accessible only offline.

Historically significant, no doubt.  These records, culled from probate courts and legal archives serve as an important object lesson; your Will is a public record.  Once filed with a probate court, it is available to anyone, and with the movement to online public records, will one day be online. If you value the privacy of your most intimate thoughts, desires, and emotions, plan your estate to avoid probate.

 

Payments from Special Needs Trust Causes Section 8 Ineligibility

Special Needs Trusts (SNT's) are generally designed to prevent beneficiaries from losing their Medicaid and Social Security eligibility.  These trusts are not without challenges and possible disadvantages.  In resolving  Social Security and Medicaid issues, SNTs often sacrifice other opportunities.  HUD's Section 8 housing assistance program, for example, has no language in its rules that expressly recognizes and protects SNTs.  A federal district court recently held that a local housing authority properly counted payments from a SNT as income when it determined that a Section 8 beneficiary was no longer eligible for a housing voucher.  DeCambre v. Brookline Housing Authority (D.Mass., No. 14-13425-WGY, March 25, 2015).

Kimberly DeCambre is the beneficiary of a court-established first-party special needs trust that was funded with the proceeds from a $330,000 personal injury settlement.  Ms. DeCambre receives Supplemental Security Income (SSI) and Medicaid due to a variety of serious medical conditions, and she also received a Section 8 housing voucher.  In fall 2013, the Brookline Housing Authority (BHA), the local agency that administers Ms. DeCambre's housing voucher, informed Ms. DeCambre that she was no longer eligible for Section 8 because the trust had disbursed more than $60,000 during the year for her car, phone, Internet, veterinary care for her pets and travel expenses.   A hearing officer upheld the BHA's decision.

Ms. DeCambre filed suit against the BHA in state court and her claims were removed to federal court.  Ms. DeCambre claimed that the BHA violated her civil rights by counting the payments from the trust as income and by discriminating against her due to her disability.  She also raised several due process claims.  Instead of hearing arguments on Ms. DeCambre's request for a preliminary injunction, the parties agreed to a case stated hearing to resolve Ms. DeCambre's underlying claims. At this hearing, Ms. DeCambre posited that it was improper to treat the distributions from the trust as income when, according to Department of Housing and Urban Development (HUD) rules,  the same payments would not be considered income had she simply taken the settlement as a lump sum outside of a trust.   

The U.S. District Court for the District of Massachusetts reversed, ruling that the BHA properly terminated Ms. DeCambre's Section 8 benefits.  Although sympathizing with trust beneficiaries who have difficulty  retaining Section 8 benefits, the court determined that it is "unable to find any regulatory support for DeCambre's argument that her Trust expenditures must be excluded from annual income and that her Trust corpus remained a lump-sum settlement.  To the extent BHA treated DeCambre's expenditures as spending from an irrevocable trust, rather than from a personal settlement fund, the Court holds that their determination was a reasonable one." The court also ruled that Ms. DeCambre's due process claims failed because she did not have a property interest in Section 8 benefits and was afforded ample hearings.  The court concluded that Ms. DeCambre was not discriminated against due to her disability because HUD treats special needs trust and non-special needs trust beneficiaries equally when it comes to income attribution.

To read the full text of the court's decision in this case, click here. 

To read a previous article regarding the complexities involved in crafting SNTs, click here and here.

Questions to Ask Before Serving as Trustee

Being asked to serve as the trustee of the trust of a family member is a great honor. It means that the family member trusts your judgment and is willing to put the welfare of the beneficiary or beneficiaries in your hands. 

But being a trustee is also a great responsibility. You need to accept your responsibility fully informed and with your eyes wide open. Here are six questions to ask before saying "yes":

• May I read the trust? The trust document is your instruction manual. It tells you what you should do with the funds or other property you will be entrusted to manage. Make sure you read it and understand it. Ask the drafting attorney any questions you may have.

• What are the goals of the grantor (the person creating the trust)? Unfortunately, many trusts say little or nothing about their purpose. They give the trustee considerable discretion about how to spend trust funds with little or no guidance. Often the trusts say that the trustee may distribute principal for the benefit of the surviving spouse or children for their "health, education, maintenance and support." Is this a limitation, meaning you can't pay for a yacht (despite arguments from the son that he needs it for his mental health)? Or is it a mandate that you pay to support the surviving spouse even if he could work and it means depleting the funds before they pass to the next generation? How are you to balance the needs of current and future beneficiaries? It is important that you ask the grantor while you can. It may even be useful if the trust’s creator can put her intentions in writing in the form of a letter or memorandum addressed to you.

• How much help will I receive? As trustee, will you be on your own or working with a co-trustee? If working with one or more co-trustees, how will you divide up the duties? If the co-trustee is a professional or an institution, such as a bank or trust company, will it take responsibility for investments, accounting and tax issues, and simply consult with you on questions about distributions? If you do not have a professional co-trustee, can you hire attorneys, accountants and investment advisors as needed to make sure you operate the trust properly?

• How long will my responsibilities last? Are you being asked to take this duty on until the youngest minor child reaches age 25, in other words for a clearly limited amount of time, or for an indefinite period that could last the rest of your life? In either case, under what terms can you resign? Do you name your successor, does the trust  or does someone else?

• What is my liability? Generally trustees are relieved of liability in the trust document unless they are grossly negligent or intentionally violate their responsibilities. In addition, professional trustees are generally held to a higher standard than family members or friends. What this means is that you won't be held liable if for instance you get professional help with the trust investments and the investments happen to drop in value. However, if you use your neighbor who is a financial planner as your adviser without checking to see if he has run afoul of the applicable licensing agencies, and he pockets the trust funds, you may be held liable. A well-respected Massachusetts attorney who served as trustee on many trusts used a friend as an investment adviser who put the trust funds in risky investments just before the 2008-2009 stock market crash. The attorney was held personally liable and suspended from the practice of law. So, be careful and read what the trust says in terms of relieving you of personal liability.

• Will I be compensated? Often family members and friends choose to serve as trustees without compensation. If the duties are especially demanding, however, it is appropriate for trustees to be paid for service. The question, then, is how much. Professionals generally charge an annual fee of 1 to 2 percent of assets in the trust. So, the annual fee for a trust holding $1 million would be $10,000. Institutions and professionals generally charge a higher percentage for  smaller trusts and a lower percentage for larger trusts. If you are performing all of the work for a trust, including investments, distributions and accounting, it would be inappropriate to charge a similar fee. If, however, you are paying others to perform these functions or are acting as co-trustee with a professional trustee, charging this much may be seen as inappropriate. A typical fee in such a case is a quarter of what the professional trustee charges, or .25 percent (often referred to by financial professionals as 25 basis points). In any case, it's important for you to read what the trust says about trustee compensation and discuss the issue with the grantor.

If after getting answers to all these questions you feel comfortable serving as trustee, you should accept the role. It is an honor to be asked and you will provide a great service to the grantor and beneficiaries.

For a list of things to do after being appointed a trustee, click here.

For more on the different kinds of trusts, click here.

Good News for Trusts that Manage Real Estate

In the recent Frank Aragona Trust case, 142 T.C. No. 9 (2014), the US Tax Court reached a taxpayer favorable decision, one that benefits trusts that materially participate in real estate business activities.  For years, the IRS has steadfastly refused to allow trusts to deduct net operating losses related to real estate activities against other ordinary income unrelated to the real estate; based on the so-called “passive activity loss” limitations.  Now, it may be possible for such trusts to deduct the losses associated with the real estate against other profitable activities to reduce income taxes.

Frank Aragona formed a trust In 1979, naming himself as the grantor and trustee and with his five children as beneficiaries. Frank Aragona passed away in 1981 and he was succeeded as trustee by six trustees. One of the trustees was an independent trustee and Frank Aragona's children comprised the other five trustees. Two of the five children had very little involvement with the trust or the business of the trust. Three of the five children worked full time for a limited liability company (LLC) that was wholly owned by the trust. This LLC managed most of the trust's rental real estate properties. It employed several people in addition to Frank Aragona's children including a controller, leasing agents, maintenance workers, and accounting clerks. In addition to receiving a trustee fee, the three children who were employed by the wholly-owned limited liability also received wages from the limited liability company.

During 2005 and 2006, the Frank Aragona Trust incurred substantial losses from its rental real estate properties. The trust also reported gains from its other (non-rental) real estate activities. In the Tax Court, the IRS argued that the trust's rental real estate activities were passive because a trust is incapable of materially participating in rental real estate activities. Alternatively, the IRS argued that even if a trust could materially participate in rental real estate activities, in the Aragona case, the court should disregard the activities of the three trustees who also work for trust's wholly-owned LLC because these trustees performed their activities as employees of the LLC and not in their duties as trustees. The trust contended that it could materially participate in its rental real estate activities, and that the activities of the three trustees who were also employed by the wholly-owned limited liability company should not be disregarded.

The material participation exception applies when more than one-half of the personal services performed in trades or businesses by the taxpayer are performed in real-property trades or businesses where the taxpayer materially participates and performs more than 750 hours of services during the year in real-property trades or businesses in which the taxpayer materially participates.

More than ten years ago, in Mattie K. Carter Trust v. United States, 256 F. Supp.2d 536 (N.D. Tex. 2003), a Texas district court held that the material participation of a trust in ranch operations should be determined by reference to the persons and agents who conducted the ranch's business on the trust's behalf, including the trustee.  According to the court, in determining whether the trust materially participated in the real estate activities, the trust's non-trustee's fiduciaries, employees, and agents should be considered.

In the years since the Mattie K. Carter Trust case, the IRS has issued a series of rulings in which it disagreed with the holding of the case and stated that only a trustee could be considered in making the determination.  Further, according to the IRS, if the trustee is also an employee of the underlying business, a taxpayer could only consider the time spent by the trustee in his duties as a trustee, and not in his duties as an employee.

Prior to 2012, the issue did not garner much attention because it only affected those trusts involved in rental real estate activities whose operations incurred losses.  However, with the recent enactment of the 3.8% Net Investment Income Tax, this issue has become a hot-button issue among tax practitioners.  Material participation is important in the context of the 3.8% Medicare tax because under §1411, "net investment income" includes income from a "passive activity (within the meaning of section 469) with respect to the taxpayer." Therefore, all rental real estate activities conducted through a trust or estate will not have to be concerned with the material participation rules.

    

The Tax Court held that, “[a] trust is capable of performing personal services [because …] services performed by individual trustees on behalf of the trust may be considered personal services performed by the trust.”  The Tax Court rejected the IRS’s argument that a trust is incapable of providing personal services, reasoning that, “[I]f the trustees are individuals, and they work on a trade or business as part of their trustee duties, their work can be considered ‘work performed by an individual in connection with a trade or business.’”

    

Also, the Tax Court rejected the IRS’s argument the work of certain trustees as employees of an LLC that managed most of the Trust’s rental real estate properties – which was wholly owned by the Trust – should not count because such work was performed as employees and not as trustees.  The Tax Court counted the work of the trustees which they performed as employees of the Trust’s wholly owned LLC because, “trustees are not relieved of their duties of loyalty to beneficiaries by conducting activities through a corporation wholly owned by the trust.”

The Tax Court did not, however, “decide whether the activities of the trust’s nontrustee employees should be disregarded.”

Given that the IRS expressly disregards the work of non trustee employees towards the material participation test, what is certain is that trusts can count the work of their trustees (even if performed as employees of a corporation wholly owned by the same trust).  Work performed by trustees as employees of a corporation that is unrelated to the trust might not count.

The Frank Aragona Trust decision is good news for those ongoing trusts that actively manage real properties as a business and have income tax losses in such activities. It may now be possible for such losses to be deducted against other activities.  

While the case resolves some uncertainties it does not resolve all uncertainties, most importantly whether to include the activities of trust employees who are not themselves trustees towards satisfaction of the material participation requirement.

Sources: Estate Planning: Good news for trusts that manage real estate

               Tax Court Gives Taxpayer a Victory in Frank Aragona Trust Case -- But Doesn't Go All the Way

A Walk on the Wild Side of Estate Planning

Reed performing at the
Hop Farm Festival in Kent, 2011
http://en.wikipedia.org/wiki/Lou_Reed

Danielle and Andy Mayoras wonder, in an article written for Crain's Wealth, why Lou Reed, late lead singer and guitarist of The Velvet Underground, a musician and songwriter with a successful solo career, "would be so careless with his estate plan."  According to the article, probate filings available to the public paint a vivid picture of Lou Reed's estate:

Recent filings with the Surrogate's Court in Manhattan show that Reed's estate has already earned more than $20 million since he passed away from liver disease at the age of 71, on Oct. 27. This is only the income that Reed's estate has brought in since his death, primarily from royalties.

The executors filed a report recently with the court, listing the income and providing an updated inventory of estate assets. There is other property worth around $10 million in Reed's estate. Reed's wife and his sister are the primary beneficiaries, along with a half million dollars set aside for the care of Reed's 93-year old mother. Reed's widow and his sister receive 75 percent and 25 percent, respectively, of the residue, while all of the personal property and almost $9 million worth of real estate in New York will go to his widow alone.

Reed relied on a 34-page will he signed in April 2012.  Apparently Reed was aware he was suffering from liver disease, and he signed his will a year-and-a-half before he passed. 

The article continues:

Why would someone with assets worth tens of millions rely on a will, instead of a revocable living trust, if not even more sophisticated estate planning?  

That's the question that doesn't appear to have a good answer.  If Reed had used a revocable living trust, and transferred his assets into the trust during his life, then all of this information would have been kept private. That's a key difference between wills and trusts. Wills have to pass through probate court (called Surrogate's Court in New York), which is a public process. Trusts, when used the right way, avoid probate court entirely. 

While most people don't have to worry about the press leaking details of their financial worth, everyone should strive to avoid probate court. On top of being public, it's also expensive, stressful, time-consuming, and more prone to fighting.  

It's much easier for disgruntled family members to file will challenges in probate court, as opposed to a trust that is administered privately, outside of court. In fact, trusts can even help you when you are alive by addressing who and how your assets are managed if you are no longer able to do so. Wills can't help with that.

The The authors conclude that Lou Reed should have updated his plan to include a revocable living trust, thereby protecting his family's privacy, and avoiding the aggravation of probate court:

It's a lesson for everyone … even those who don't have more than $30 million. So let Reed stick to walking on the wild side when it comes to estate planning. Talk to your loved ones about the benefits of a revocable living trust.

To read the whole article, click here.