Caring for the Truly Needy with Trusts
Parents and individuals with elderly loved ones occasionally have more than the usual health, education, maintenance, and reasonable support (aka “HEMS”) issues in terms of planning for the future. I was a babysitter for a number of years for a young girl stricken with severe cerebral palsy. Her parents were in their late 40s\’/early 50\’s. Mom stayed at home and Dad owned a small business. I always wondered what her parents would do if her father suddenly lost his small business or if something, heaven forbid, happened to him. Certain types of trusts provide a unique way of planning for scenarios just like that. They’re called “Special Needs Trusts” and are carefully drafted to ensure that the special needs of loved ones such as disabled children, parents, or the elderly are properly cared for. You may be thinking that the government provides benefits, and wondering about the value of these instruments. Well, as many disabled individuals, elderly, and their family members can tell you, government benefits are rarely sufficient en toto to cover all of the expenditures and provide a quality of life that was provided when one or both parents’ or family members’ income supplemented those benefits. So Special Needs Trusts provide a way to truly provide for those who will not be able to provide for themselves because of disability or infirmity. However, as mentioned, these trusts must be drafted carefully so as not to create a situation where your loved one suddenly becomes ineligible for government benefits because of an increased income. Certain benefit programs are need-based and income from a Special Needs Trust may result in disqualifying your loved one from the program. Again, this doesn’t happen just to the disabled, but folks receiving Medicare and certain Veteran’s benefits are also affected. So the good news is your attorney has a way, with a Special Needs Trust to help you provide for a disabled or elderly loved one. The caveat is that your attorney must be mindful of the needs-based benefit programs that can turn a good supplemental plan into a plan made of quicksand.
Thanks But No Thanks: The Benefits of Disclaiming Aunt Val\’s Gift
Occasionally, a person may receive a gift under a will or a trust that they think would be more appropriate for their descendants. In these situations – and if the trust is drafted appropriately – the person usually has a legal right to say, “Thanks, but no thanks,” to the gift. At that point, the gift then “passes” to the person’s descendant(s) or beneficiary(ies). This means that the law will consider that initial recipient dead, i.e., having “predeceased” the testator, with respect to that particular gift and, as a result, the proposed recipient’s descendants take the gift. Why would you disclaim a gift? You don’t need the gift but your descendants might. For example, if Grandpa passes away leaving his house to your father, but Dad has his own home and a retirement condo, Dad may decide that you – a young professional with student loans – may benefit from owning the home more than Dad. So, Dad says in a writing that appropriately describes the gift and is delivered to the appropriate party, “Thanks, but no thanks. I, Dad, am unequivocally and expressly refusing the house … bequeathed to me by my father …” Once Dad’s disclaimer is accepted, if you\’re the only child, then you get the house. If you have siblings, then, generally, you will need to determine with your siblings how best to divide the interest in the house. You can’t afford the responsibility. If you and your partner are urbane empty-nesters, perfectly content with your 2-bedroom city dwelling, do you want the 4-bedroom home in the suburbs that Aunt Val left you with all the maintenance and tax bills that come with it? Probably not. However, your adopted daughter who now has newborn twins and a 3-year-old could probably use the extra space. So you say in writing, “Thanks but no thanks” to Aunt Val’s lush suburban family home. You want to avoid creditors. If you refuse a gift, a creditor claim cannot attach to your interest in the gift because under the law you never had any interest in the gift once your disclaimer is accepted. However, the area of the law using disclaimers as a way to avoid creditors is rapidly closing this loophole, so creditor claim avoidance probably isn’t the most prudent use of this testamentary mechanism. Disclaimers, simple at first blush, are like most legal tools – devilish in the details. If you’re considering disclaiming a gift, below are a few points to discuss with your attorney: Whether or not the property will be completely yours if it is currently held in joint tenancy with you and 2 other tenants; The irrevocability of disclaiming; Your action to date regarding the interest in the property; and Tax implications, which should be considered sooner rather than later. In the world of wills, trusts, and estate planning, the intent of the testator is a cardinal rule. Yet, sometimes the intent of the testator and the needs of the heirs conflict. Using a disclaimer may help resolve that conflict.
Who Takes the Eggs? ART and Estate Planning Considerations
As technology’s digits crawl through the nooks and crannies of our physical world and cyberspace, the legal consequences and questions emerging keep even us non-IP lawyers quite busy. Considering assisted reproductive technology (\”ART\”), family law was the premier practice area for getting caught in ART\’s web. Few lawyers realized the effects ART would have on estate planning and, even as the effects became clear, only a fraction of states passed laws providing legal guidance. Fortunately, Illinois is a state that considered ART in its laws and included laws for in vitro fertilization in the Parentage Act. Additionally, the Probate Act states that children born after a parent’s death (“posthumous” children) are to be considered having been born during the parent’s lifetime. So, what does all this technolegalese mean? Well, in terms of inheritance and/or estate planning laws, it means conversations should be had between Illinois spouses if conception is a challenge or an impossibility for one or both spouses.* The conversations are necessary because of 2 vital estate planning tools often used by couples, Health Care Powers of Attorney (“HCPOA”) and Property Powers of Attorney (“PPOA”), which can also provide instruction for ART cases. Yes, lawyers love acronyms. In Illinois, a posthumous child born via ART typically emerges in 1 of 3 ways: Use of frozen sperm; Use of a frozen embryo; or Use of a frozen egg. Furthermore, obtaining frozen sperm or eggs may not only occur after incapacity but also may occur after death, which is when estate planning mechanisms are triggered. When creating an estate plan, couples usually consider a bunch of “what ifs,” e.g., “what if I become disabled while we’re still in the “prime” of our lives and haven’t had kids yet?” A HCPOA is a tool that requires making those decisions but, consequently, eases the fears associated with the “what ifs.” Accordingly, when considering ART, a HCPOA could, for example, authorize the implantation of frozen sperm or eggs. Of course, other considerations would naturally follow, such as, how one abled-parent and one disabled parent would raise a child. Still, ART combined with the law creates a reasonable and protected possibility for having a family, when that likelihood, outside of adoption, didn’t exist before. Another equally interesting issue relates to the PPOA. But, you say, “That’s about property.” Yes, it is. In a 1993 California decision, Hecht v. Superior Court, which is used by several states, the Court determined that frozen genetic reproductive material, such as sperm and eggs, is property for the purpose of leaving a gift in a will (aka “devise”). Here, you might think the conversation would be easy – women can leave their eggs to their partners; but, not so fast. What if the eggs are frozen, then the relationship is legally dissolved, the donor spouse remarries, and then passes away? Who gets the eggs if the second spouse doesn’t want any (more) kids? She could disclaim them and pass them to her descendants or siblings; that would be interesting. The future brothers and sisters of the former partner? Should the reproductive material be destroyed? Who do you think should get the eggs? * The term “spouses” and \”partners\” are interchanged in this context because the terms are synonymous in Illinois law.
3 Reasons for Essential Family Talks and How to Manage Them, Despite Science-Fiction and Poker
Lawyers are no different from other groups when it comes to disagreeing with each other and, in fact, are probably worse. So while attending a recent seminar on trusts and estate planning, I was pleasantly surprised when my colleagues and I all agreed on one thing: People don’t like having the conversations needed for drafting adequate trusts and planning for the future, especially Baby Boomers and young couples. For example, a friend once told me that he and his wife hadn’t revisited the issue of guardianship for 13 years because it created such a stir the first time. Understandable. What man wants to tell his wife that instead of his mother-in-law, he’d rather have the kids raised by Darth Vader? Disclaimer: My friend did not say that about his wife’s mother. Baby Boomers don’t like talking about this issue because we cannot fathom that the world will continue to exist without us. Similarly, young couples, especially young parents, tend to believe that they are the world. Why not? Still, conversations about retirement and the Golden Years are essential and should be had a lot sooner than the appearance of the first strand of grey. How can we lawyers help if the conversations are sidestepped? Well, we try to provide compelling reasons for having these important chats, such as the following: If you’re a couple in your 20s or 30s the world is at your feet and you should do what you can to protect your world. Have you thought about your values and who in your families, outside of your partner, most accurately reflects those values? When you take vacations without the children and/or pets are you comfortable that your values are supported or do the children need reeling back in when returning from 3 weeks with Grandma? Perhaps you should gently suggest that Uncle Bob or Aunt Carol help Grandma out a few evenings. However, if Grandma rebukes the suggestion by playing the “grandparent trump card”: “I’m a grandparent and can do what I want for my grandchildren,” tell Uncle Bob or somebody to be at Grandma’s a few times a week. When Grandma huffs, blame it on a lawyer. Leaving the healthcare debate for another time, if you’re a Baby Boomer, you probably know that medical wonders abound to provide you or your parents with the physiological retirement deserved. Have you found a way to ensure that when their knees need replacing, Mom or Dad will be able to recuperate in the manner to which they’ve become accustomed without sacrificing your lifestyle or their independence? If, when approaching the subject, they start moaning about you deserting them and them living out their final moments with cold mashed potatoes and a checkerboard, suggest interviewing in-home, part-time caregivers and a cruise that gives AARP members discounts. If that doesn’t work, blame the cold potatoes on a lawyer. If you are a small business owner, your business may be your most valuable asset. When you are ready to release the reigns, at least a little bit, are you and your family comfortable with your individual successor or the successor management? Maybe one family member knows the business inside out and the other family member has no clue but 2 people are needed to run it. Update your business plan and bring the other family member in on management selection of neutral parties. If he or she doesn’t want to be involved from that perspective, blame the million-dollar IPO that the family member got locked out of on an accountant.
Do You Have a Sub-Clicker?
Loved ones typically leave beautiful, sentimental gifts behind, so we often think of bequests as tangible, personal or real property. However, other assets can be gifted, too – digital assets. In this context, digital assets are not intellectual property, such as copyrights or patents, but instead are items purchased and/or stored online or stored by some other electronic means that really take up no physical space per se. Consider this blog for a second – it’s not tangible, though reading it might result in numerous tangible benefits. Yet, even though this blog isn’t touchable, it’s something that I put effort into; something you accessed; and something that is “stored” on my website, which is stored on a chip somewhere in California and on my laptop chip in Illinois. Additionally, on those chips are zeroes and ones, not words, sentences, and paragraphs like you see here. Now, many people have blogs, not only professionals, but laypersons and parents, who are uber professionals, in my opinion. You may have a blog, or a Facebook/Meta page, a Flickr account, email somewhere, or other digital assets. Most folks do. Nevertheless, if a person were to become temporarily or permanently incapacitated, would there be anyone designated to manage those intangibles? More importantly, would they want their intangible, yet significant, account such as Facebook to be kept alive as a memorial? Would they want to assign someone as their sub-Tweeter? While most of us don’t have large rooms in our homes designed as libraries, several thousand people own some kind of e-book reader and millions own computers. What should they do with all that knowledge and (hopefully) good writing? Likewise, millions own digital music, but how many of us know how to transfer that music without violating copyright laws? These questions beg an even larger question – does your account allow you to transfer these assets and, if so, what would your trustee or executor have to show to access the account? If the file was paid for and non-musical, it is probably likely that you have a right to transfer. However, what if, in fact, the file was music, or what if it wasn’t paid for but just a free and cool (showing my vintage here) expression of your life experience. Who actually owns it, i.e., who is the rightful transferor? Well, I suggest taking these 3 steps: Create a document, listing all of your digital accounts, usernames, and pass codes. Give that document to a couple of “digital trustees”; not Aunt Gemma who doesn’t know how to use e-mail yet (and yes, there are aunts and uncles like that), and on the flipside, not to the friend who loses the text – another digital asset – you just sent them and never shows up on time. Research your accounts so you know your rights and the rights of your loved ones. Okay, an attorney could handle number 3 and include it in your will or trust, when the time is right. Still, I hope this encourages thought about one of the most important fingerprints we and one we often forget about, until our FB photo shows at the bottom of our Google search results, that is.
Why There\’s a \”Trust\” in Trustee, Part 2
In Part 1 of this series, I discussed why one should be careful in selecting a trustee. Family members are often considered the most trustworthy with respect to family matters, so people typically select them as trustees. However, this endearing gesture can cause serious problems later: Trust assets could be inadvertently wiped out. A trustee is usually responsible for managing the trust assets. If the trust is significant, the trustee should either have the required financial investment background or the ability to wisely choose someone with the needed background to act as the trust investment advisor. If the trustee is not well informed about investment matters relevant to the trust assets and does not employ someone who is, then the trust funds could dissipate leaving the terms of the trust unfulfilled, and probably one or more displeased beneficiaries. This last point is particularly important if the trust isn’t large, but the beneficiaries depend on its income for health and educational support, for example. Valid claims could go unanswered; or a trust claim could be ignored. The trustee is responsible for responding to or initiating litigation on behalf of the trust. So if a long lost family member who would have been provided for had their whereabouts been known, emerges claiming they should receive under the trust, the trustee should properly address that claim. If the trustee is a family member, however, the problem becomes one of bias against that claim because a valid claim could dilute the current beneficiaries’ shares, possibly including the trustee’s share. Another problem is that it takes time to respond to these claims, time that a family member may not have. Equally important is a trust may have a claim that needs to be litigated. But, if the trustee does not recognize the claim issue, a potential financial award for the beneficiaries may go unnoticed. Co-trustees don’t always agree. While the grantor may have gotten along well with both individuals, when it comes time to make a distribution decision or another decision involving the trust, the co-trustees may not see eye-to-eye and both could have valid perspectives. This type of disagreement starts many long-term family arguments resulting in costly court battles. If nothing else, by choosing a corporate fiduciary, the family will be at peace with each other and at war with someone else. Trust administration responsibilities are time consuming and numerous. The following is an incomplete list of trustee duties: Distributing beneficiary shares Providing a regular accounting to beneficiaries Paying debts, taxes, fees and expenses associated with the trust administration Giving notice to guardians or legal representatives of beneficiaries who are minors or incapacitated Executing documents required for trust administration Settling claims against the trust, not just from possible beneficiaries but from estate creditors Buying insurance for trust assets Perhaps now you’re thinking that a Last Will and Testament may circumvent this “trustee” matter, but that\’s not necessarily true. A Will’s executor or “personal representative” often has the same responsibilities as a trustee. So, establishing a Will not only requires delegation to the executor some of the responsibilities above, but in Illinois, it also entails more costs and more time because of probate. Therefore, it is critical to resist the urge to select a family member as a trustee – or executor – without first giving the decision the thought and discussion it deserves.
Why There\’s a \”Trust\” in Trustee, Part 1 of 2
Trust and Estates 101: No trust will fail because it doesn’t have a trustee. Thus, if a trust creator (\”settlor\” or \”grantor\”) doesn’t designate a trustee but has a beneficiary, the court will appoint a trustee for the beneficiary. Why? Because the beneficiary must be able to hold someone accountable in court if the terms of the trust aren’t met. So, the trustee has an obligation to the beneficiary or, in legal terms, the trustee is in a fiduciary relationship with the beneficiary. As a fiduciary, the trustee is held to a high standard of duty to the trust and primary beneficiaries. A trustee must act wisely with respect to the trust assets, managing them to both preserve and, if possible, grow the assets. The trustee can\’t use the assets for their own benefit, even if they are also a beneficiary, without consent from the other beneficiary or beneficiaries. Additionally, the trustee can\’t give the beneficiary’s rights to receive the assets to someone else unless the terms say otherwise. Example: If the Trust terms say only Beneficiary Barbara can receive a Trust distribution, Collector Carter shouldn\’t receive a distribution without a court order. The right to receive that distribution belongs to Barbara only. Finally, if the trust has multiple beneficiaries, the trustee can\’t favor one beneficiary’s needs over the other unless, again, the trust dictates such. This is one reason why, occasionally, bank trustees (\”corporate fiduciaries\”) are often preferred over close friends or family members. And it\’s also why family members sometimes refuse to act – they don\’t want to subject themselves to a potential lawsuit. Therefore, a trustee should be someone the settlor thinks will be loyal to the terms of the trust and not compromised by a relationship with a beneficiary, or a creditor for that matter. This is also why considerable thought should be given to who you name as trustee. Part 2
11 Truths about Trusts, Part 2 of 2
In Part 1, of this series, I explained how disclosing information about legal services benefits clients, namely by helping you save money. For me and my colleagues, the benefit comes in happy clients, more clients, and less stress. So, to continue gently pulling back Mr. Wizard’s curtain, the following are the last 6 of the 11 truths. Trusts are for old folks with lots of money. Truth: Trusts are also for young folks who have loved ones they want to protect, e.g., new partners, newlyweds, and children. My trust will not be affected if I move to another state. Truth: It depends. The document itself is not really affected unless it specifies a choice of law, and most do. This may be problematic because if you’re no longer in the state where the trust was created, the judge may consider it a jurisdictional problem. However, this can be easily remedied by amending the trust to reflect your current residency. Still, you might want to consider the valuation of the asset distribution with respect to state estate and gift taxes. Another challenge may also arise if you’ve moved from an equitable distribution state, like Illinois, to a community property state. Bank or corporate trustees are generally unnecessary. Fact: Bank or corporate trustees are generally very necessary for 2 reasons. First, they can be considered a neutral party so that if family members question a particular distribution term of the trust, the dispute is with someone outside the family, which helps maintain family harmony. Second, institutional trustees are often more financially savvy than family members. Now, there is, of course, a cost to having this peace of mind. Yet, small banks may be more willing to assist families with small trusts. (Thank you to my colleague, Ray Prather of Prather Ebner LLC.) Having an attorney review my DIY trust is unnecessary because the entities holding the assets determine its legitimacy. Truth: Yes, the banks and other entities that are asset-holders have the final ‘say-so’. But if they say, “Yes,” are they really correct? Consider this: Your trust only provides for your named children. The bank says the trust is valid and technically it is. Then later, you adopt or have another child but you don’t change the trust. The later child will be at the mercy of the trustee and the court. Attorneys are trained to ask questions related to these types of situations, which you may not consider when writing the trust yourself. You’ve already saved yourself money by drafting the document yourself. Allowing an attorney to review it in earnest, not just take your list through an auto-checklist like an auto-car-wash will also save your family money and potential heartache. Wills must go through probate. Truth. Most wills do go through probate. On the other hand, in Illinois, if the estate is less than $100,000, it is considered a small estate and in certain circumstances, probate may be waived. Moreover, if you have a trust with a pour-over will, irrespective of the size of your estate, probate may also be avoided. A trust should list all of the client’s assets. Truth. A trust should not detail every asset but only those assets listing title owner as the trust are covered by the trust.
11 Truths about Trusts, Part 1 of 2
Colleagues who bemoan the online legal services world are sometimes criticized by those in the online world for trying to keep the “Wizard” behind the curtain, so to speak. The criticism, which I agree with, is that clients are served better when they can understand what Mr. Wizard, Esq. is actually doing and saying. Yet, even my online colleagues can be a tad overly zealous in encouraging DIY applications. So to temper the curtain yanking but also shed sunlight on Mr. Wizard’s machinations, this 2-part series will provide a few truths about trusts, so let’s click our heels and get started: Attorneys charge more for trusts because we’ll never see clients again after creating the trusts for you, whereas wills keep you and your family coming back at least for probate, which generates big fees. Fact: Attorneys often charge more for trusts because it’s more work. We do see you again because life events such as divorces, re-marriages, and births often require a redesignation of beneficiaries at the least. Sometimes, we see you again because the IRS will inevitably change the tax code in a way that affects your trust. We will also see your beneficiaries if we are designated to administer the trust assets. So, the fees associated with creating a trust are not compensating for the loss of probate fees, they are compensation for the real work that is associated with creating, monitoring, and/or administering a trust. Provisions for tax benefits placed in wills can provide the same results as most trusts. Plus, tax savings in trusts are generally for the wealthy. Fact: True; provisions that save taxes can be placed in a will. However, a properly drafted, stand-alone will must be probated and probate fees will bite into the tax savings. Also, even if it is a small bite, heirs will still have to wait until the claims period ends – 6 months in Illinois – before receiving their distribution. With a trust, there is no probate. Still, while tax savings trusts are generally more applicable to the wealthy, who needs to ensure that they receive the benefits of tax savings and the distribution and sooner rather than later – wealthy beneficiaries or beneficiaries who are below the highest tax bracket? I cast my vote for those who need the money for college tuition, medical bills, or a mortgage payment. The trustee is not the owner of the trust assets because the relationship between trust, trustee, and beneficiary is a legal fiction. Fact: The trustee is the legal owner of the trust assets. With a “self-settled trust,\” the grantor (trust creator) can be the trustee and beneficiary, if the designation is proper under state law. Some grantors are comfortable with a different trustee and don’t require a self-settled trust; some are not. However, if the grantor and trustee are different persons, the grantor can hold the trustee legally accountable if the trustee does not comply with the trust terms. Some colleagues call the relationship as “legal fiction” and it could be interpreted that way. But, consider this: If your home is subject to a mortgage, can the bank come in and tell you what color to paint your walls or that you can’t tear down a wall or put in a closet? No. Similarly, if your house is subject to a trust you created and your son is trustee, he cannot tell you to move or paint the house blue, unless you give him that authority in the trust. Only attorneys can create trusts. Truth: A trust is a legally binding agreement. A legally binding agreement generally requires 2 parties who intend to enter into a mutually beneficial exchange, an offer of benefit, and acceptance of the offer. The parties are not required to be attorneys. Caveat: Agreements can be challenged by parties to the agreement or by intended third party beneficiaries, and that is why attorneys should usually be consulted when creating a trust. Those who say that a trust cannot be challenged by third parties are not considering what is legally referred to as “remaindermen,” and what folks like you and I call “grandkids.” A trust is needed only when a great deal of money is at stake. Truth: A trust is needed especially if a limited amount of income at stake, in case you become incapacitated, even temporarily. If you’re a trustee, with a back-up (\”successor\”) trustee, and you become temporarily incapacitated, the successor trustee will manage the trust until you recover. If you don’t have a trust, your family will have to petition probate court to have you declared incapacitated and appoint someone to look after your financial affairs and possibly a guardian until you recover. This process costs money that will be probably taken out of your limited income.
Taking the \”Estate\” Out of \”Estate Planning\”
People hearing the term, “estate planning” or even “legacy planning,” often wince, squirm, and cringe unless they are within a very fortunate income tax bracket. However, not one to be deterred, when I receive the rolling eyes or blank stare, I reach into my “unraveling legalese” briefcase and offer the following clarification: Your “estate” is anything you own. It doesn’t have to be a million-dollar home or a 1967 Aston Martin. It can include the 150 classic jazz LPs that belonged to your father, your grandmother’s wedding ring, or you and your spouse’s stubs to the Blackhawks 2010 championship. The goodwill created in your small business is also part of your estate, your legacy. Additionally, included are contracts in which you’ve assigned rights to be effectuated at a certain time, i.e., life insurance. Note, however, that though life insurance is a component of your entire estate, it is not part of your probate estate. Estate planning is the process by which everything you own and will likely own or inherit, as well as your liabilities and obligations, is considered to determine how best to transfer your possessions to your heirs and/or intended beneficiaries. If you own a home, a retirement account, life insurance, have one or more dependents and a dog, deciding on who gets what and why is the process of estate planning. Estate planning is not limited to considering how beneficiaries can inherit tax-free or how one can use the current state and federal tax laws to the advantage of your living trust beneficiaries. Estate planning also includes anticipating scenarios such as ensuring that the needs of dependents or a partner with special challenges is provided for and providing for special beneficiaries who may not yet be born. Hence, estate planning is just planning for your future. It is not a tool merely for the wealthy; estate planning is a tool for the wise.