Unfunded Trusts: Pitfalls for the Unwary

Posted on March 23, 2011 by Roger Billings

Funding the Trust is an essential but often overlooked step towards avoiding a lengthy and expensive probate.  Creating a trust instrument, with all of the appropriate instructions, provisos and expressions of intent, is worse than useless if no step is taken to fund the trust by transferring assets into the trust.  Even when attorneys draft the trust instrument, they have been known to assume that clients will take this important step without explaining to them the need and importance.  The trust consequently remains unfunded.

Saving
An unfunded trust is similar to a bank account with no money in it, but it is worse than that because of the increased potential for disputes.   If the distribution specified in a trust is different than the distribution of non-trust assets, chances are good that a fight will occur among the variously affected beneficiaries. Sometimes disputes are avoided because the distribution is the same in or out of the trust.  For example, if the decedent also left a will that states that all assets are to be transferred to the trust, then the distribution is the same whether the asset is in the trust or in the probate estate.  But even in that case a lengthy and expensive probate will be required to transfer the assets into the trust, an unnecessary waste.

Fortunately, funding is relatively simple and painless.  Transferring real estate may take more effort, but most attorneys who draft the trust instrument will also transfer the real estate as part of the estate plan.  The next posting here will summarize the steps for funding a trust.

In the meantime, it pays to remember that once the ink is dry on the trust instrument, the work of setting up a living trust is not yet done.  Assets still need to be transferred to the trust in order for the trust to be effective.

Creative Commons License photo credit: Ken Wilcox.

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Resolution: Keeping the Estate Plan Updated

Posted on December 22, 2010 by Roger Billings

President Harry S Truman

“You can always amend a big plan, but you can never expand a little one. I don’t believe in little plans. I believe in plans big enough to meet a situation which we can’t possibly foresee now.” Harry S. Truman

As the new year approaches, it is a good time to update estate plans , or at least plan to update them.  But the recent tax law changes may become an excuse to put those plans aside.  Harry Truman reminds us that future uncertainty is no excuse for procrastinating.
The new tax law does add to the uncertainty.  The act provides that individual income tax rates will remain at 10, 15, 25, 28, 33, and 35 percent, but only for two years. After two years rates, will increase respectively to 15, 28, 31, 36, and 39.6 percent. The estate tax will now apply only to those estates valued at more than $5 million and the tax rate will be 35% for the next two years. But after two years, unless Congress takes further action, all estates valued at $1 million or more will be taxed and the maximum rate jumps up to 55%.

An eleven page summary of the Act, together with analysis, charts and tips has been provided by CCH and is available here. Thanks go to the Wills, Trusts and Estates Prof Blog for bringing this summary to my attention.

Harry Truman criticized quick fixes and little plans. By creating further uncertainty, Congress has invited everyone to postpone their own long term planning as well. We might as well put off planning since we can’t predict what will happen two years from now, right? Wrong. Delaying personal estate planning simply passes problems on to heirs. I know, there is precedent for passing problems to grandchildren, but individually it is not difficult to have a big positive impact, particularly because incomplete, out of date, unfinished estate planning can create problems that far outweigh the effort required now. The temporary two year fix for estate tax and income tax rates is no excuse to put off updating estate plans during that time.

As the new year approaches, it is a good time to review existing estate plans. Pull out the documents. Determine if they still reflect current wishes. And if any of the following circumstances have arisen, it is time to take steps to update the existing plan.

  • Changes in Beneficiaries

Among the many possible reasons for changes here, if a beneficiary has become incapacitated, adding provisions for a special needs trust to an existing estate plan could be a great benefit.

  • Trustee Changes

If the trustee, guardian, administrator or other fiduciary has moved, passed away or has become unwilling to serve, a change is required.

  • Marital Status

It is surprising how frequently people fail to update their estate plans after divorce or marriage. The divorce or marriage of a beneficiary would also be a reason to make sure the plan is up-to-date.

  • A New or Family Business

Is there a possibility that family members will want to continue in the business? Business succession planning should be considered as part of the overall estate plan.

  • New Investments

Have you acquired property that needs to be added to a trust? Have you acquired property in another state? Updates may be needed.

  • Changes in the Law

Should this new act be a reason for updates? The Tax relief Act has introduced a change, known as portability of the estate tax exemption, which impacts the structure of existing trusts. Each person is entitled to a five million dollar exemption which can now be transferred for the benefit of the heirs of a surviving spouse without the necessity of bypass trusts (also known as AB trusts). There are other reasons for having a bypass trust besides estate taxes savings, so portability does not render bypass trusts useless by any means. Whether existing bypass trusts should be amended because of portability will vary on a case-by-case basis, so it is at least a subject on which further clarification should be sought from a qualified professional. In addition, a future post will address portability and the tax law changes in greater detail.

This is an intentionally brief discussion of updates.  More information is available here. 

Keeping an estate plan up-to-date is as small cost compared to the benefit it will provide to heirs in preventing future uncertainties and disputes that may arise after we are gone, when it is too late to act.

Creative Commons License photo credit: Chuck “Caveman” Coker

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The 2012 Tax Debate

Posted on December 16, 2010 by Roger Billings

Traveling stars
Creative Commons License photo credit: ` TheDreamSky 꿈꾸는 하늘

“Bright star, would I were steadfast as thou art.”  John Keats

Another two year patch.  By a lame duck Congress.  That is what  Obama’s tax deal is.  The proposal which has now passed the Senate and is currently before the House is posed to follow the patch of the past ten years known as the Bush tax cuts, or EGTRRA, which were passed in 2001. 

Former Republican Presidential candidate Mitt Romney opposes the current bill because there is a need for greater certainty in the tax laws.  After two years, if Congress does not act again, the tax rates will revert to the levels they were at in 2001, a big jump.  Romney argues that the benefit of keeping taxes low is lost because investors cannot predict if taxes will still be low after two years and therefore the lower taxes do not provide any real incentive to long-term investing. Instead, the next patch will be determined in a Presidential election year, perhaps by another lame duck Congress.  Few things can be more uncertain than what will happen then.

Romney Rolls Though Polk, Iowa
Creative Commons License photo credit: WEBN-TV

The author of the popular Tax Girl blog takes an opposite approach to uncertainty.  The pressing need for short term certainty outweighs all other considerations, even her own scruples that the Bush tax cuts are too low.  Once this stop-gap is passed, she reasons, then there will be time to carefully craft a long-term tax plan. 

This is an urgent matter, true, but it is only urgent because it has not been dealt with in the past ten years.  It is hard to see how the next two years will be any different.

Someone first came up with the idea to make the 2001 tax cuts temporary.  In a way, this was illusory.  Because Congress can change the tax laws at any time.  All laws passed by Congress are temporary and always have been.

Making the latest proposal good for only two years merely increases the chances that the issue will next be dealt with by another lame duck Congress, after a Presidential election, in 2012.  Is that the right time to next be dealing with this?  Probably not.

Until then, let’s do our tax and estate planning the same as always, knowing that change is the only thing we can count on.

King of The Castle..:O)
Creative Commons License photo credit: law_keven

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Seminar Next Week on Estate Administration for Professionals

Posted on December 9, 2010 by Roger Billings

A reminder that next week I will be presenting at a seminar hosted by NBI entitled “Estate Administration: Why Each Step is Important.” The detailed five page brochure on the seminar is available here.  My topics are Considerations for Collecting Assets, Preparing the Inventory, Handling Claims Against the Estate, and Ethical Challenges in Estate Administration.  The seminar will take place next Tuesday, December 14, 2010 at the Sheraton Grand Hotel in Sacramento. The seminar is designed as an overview of the California Estate Administration and Probate process, for attorneys, paralegals and other professionals. My fellow faculty members include John Palley, Jerilyn Paik, and Charles Kuntz.  It should be fun.  I will let you know how it goes.  And if you want to attend, there is still time to sign up.  If the room is full, we will arrange a larger room .  Go to the linked brochure for more information.

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Do the Wealthy Have a Patriotic Duty to Pay More Taxes?

Posted on December 8, 2010 by Roger Billings

Democrats are feeling betrayed by President Obama, while Republicans are gloating over the tax deal they struck with the President to extend the Bush era tax cuts for two years.  The deal also includes setting the estate tax exemption at $5 million for two years at a rate of 35%.  Jennifer Rubin of The Washington Post claims that Obama sold out the Left.  Taking a more conciliatory tone, Senator Reid reminds us that the President does not make law, Congress does, and that there is still work to be done on the tax deal.  

Meanwhile, I have been wondering about requests by rich Americans to increase their taxes.  One noted group, Wealth for the Common Good, consists of wealthy advocating higher taxes for the rich.  Just today, this organization issued a press release in response to the Obama deal.  The headline reads: “Millionaires Urge Rejection of Bush Tax Cuts for Rich.”  This organization has been widely reported on, here and here, for example.

Maybe it is my background as an estate planner helping people to avoid taxes on their wealth, but I can’t understand this desire to be taxed.  Didn’t the wealthy get wealthy by making as much money as possible?  Granted, Wealth for the Common Good only has a few hundred wealthy members. These people certainly do not represent anything like a majority of the wealthy.  But who is right?  Is there a patriotic duty to pay more taxes?

I am reminded of a surprising statement by a retired estate planning attorney, a respected member of the bar.  He recently told me that he consistently advised his clients to avoid estate planning that resulted in paying less in taxes.  He would tell his clients that paying tax is good, that our government needs the money.  I don’t think he ever advised anyone to actually make charitable contributions to the US Treasury, but he may just as well have done so. Everyone has a right to their opinion, but does this make sense?  Again, is there a patriotic duty to pay more taxes?

The law imposes no such duty.  That’s according to no less an authority than Justice Learned Hand.  Perhaps the most respected member of any of the United States Courts of Appeal, he was, in his time, widely considered the “tenth” member of the Supreme Court.  He wrote that there is no patriotic duty to pay more taxes than the law requires.  His exact words were: 

“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes.”  Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934), aff’d, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935).

The best way to answer this question of whether there is a patriotic duty to pay more taxes is with another question.  If Congress increases taxes on the wealthy, will those who have lobbied for more taxes take advantage of legal steps to avoid taxes or reduce their tax liability?  I expect so.  And who can blame them?  There is no duty to pay more taxes than the law requires. 

Fat Sam Creative Commons License photo credit: Randy Son Of Robert

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Suggestions on Giving Responsibly in Tough Times

Posted on November 29, 2010 by Roger Billings

Snow Berries
The holidays are traditionally a season of charitable giving, and, despite the economic tough times, that does not appear to have changed.  The Red Cross published a survey showing that 57% of Americans still plan to give between this Thanksgiving and New Year’s.  A majority of those surveyed believe that because of the economy it is even more important to give.  Charitable giving is also a critical element of many estate plans, but of the hundreds of thousands of charities, how to choose?

“Giving isn’t easy.”  That’s the motto of Givewell, an on-line charity evaluator.  Givewell provides a series of questionnaires for donors to answer to assist them in finding those charities that meet their giving goals.  Givewell also provides sets of questions for donors to ask charities about how their money is being used, and who or what it is benefitting.

Charity Navigator provides a simpler approach by posting several top ten lists on its home page, including the Top Ten Charities Worth Watching, and The Ten Highly Paid CEOs at Low-Rated Charities.  But Charity Navigator is undergoing its own struggle to clarify its mission.  As reported in the New York Times (registration required), Charity Navigator has been trying to move away from an emphasis on financial efficiency.  It takes very little administrative expense to give money away without regard for what good it is doing.  Conversely, it makes sense for charities to spend resources on planning how their money will be spent, getting involved in how it is spent, and following up on the results.  While such efforts would not score high on an efficiency rating that merely consists of a percentage of administrative costs per dollar received, the extra efforts may actually result in more effective use of money received. 

Of course, Charity Navigator’s goal of quantifying the success and failure of all charities is ultimately impossible.  The good the money is doing cannot be quantified, unless we are content with some narrow Utilitarian definition of doing good.  But I have to believe that accountability will help.  I believe we all will benefit if more donors use services like Charity Navigator and Givewell, and ask more questions. 

Wealth brings responsibility, which, in addition to wise financial and estate planning, also includes responsible giving.  Giving isn’t easy, but ‘tis the season.

Join American Red Cross 1939
Creative Commons License photo credits:  JoshuaDavisPhotography Nesster

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Family Finances and Thanksgiving Dinner Don’t Mix, But There May Be Some Other Time This Weekend to Bring Up These Important Topics

Posted on November 23, 2010 by Roger Billings


Estate planning is a gift.  Ideally, executing a will or trust is unselfish.  The intent is to benefit the heirs, while the planner gains peace of mind, but usually no financial benefit from the process.  Many parents consider a well-drafted estate plan and an organized estate as a last gift to their children.  Of course, many other parents never find the time to set things in order.  So if parents have not set up a plan, should the children ask their parents to get it done? 

This is territory where it is wise to tread softly.  It can be a real benefit to children when the parents’ assets are in a living trust and probate is avoided, and if an encouraging word leads to that result, it should be a good thing, as long as care is taken.  It hardly needs saying that in families where finances are not discussed, bringing up the subject of estate planning can feel even more taboo.  It combines the uncomfortable topics of parents’ finances plus anticipating the parents’ demise.  When handled inappropriately, such a discussion can leave a real bitter taste after a holiday get-together.  Thus in starting any discussions, take pains to be tactful and respectful.  In the article linked here, a financial planner has written a respectful open letter from himself to parents on behalf of their adult children, encouraging the parents to “engage in the process.”  The author encourages his readers to provide a copy of the letter to parents while gathering over the Thanksgiving weekend.

There are other pitfalls to avoid in this process, particularly undue influence, evidence of which could be used to prevent a child from inheriting his or her share.  Clearly, pressuring a parent to name a particular successor trustee or to disinherit a particular family member may create a case of undue influence.  But simply driving a parent to an appointment with an estate planning attorney can also be evidence of undue influence.  Further, some children may feel that because estate planning benefits the children and not the parents, the children should pay for the estate planning services.  But paying for the services may also be used as evidence of undue influence.  The best course in any effort by adult children to encourage their parents’ estate planning is to be sure that it is a joint effort by all of the children and potential beneficiaries.  Sometimes that is not possible.  But even in that case, communication among the children and parents about these important topics is a healthy process, something worth finding time for over the Thanksgiving weekend.  Just not during dinner.

Photo copyright Elizabeth Billings 2010

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