1. Probate Avoidance. Regardless of whether there an estate tax or not, the probate fees on most estates averages 5 to 6% of the total value of the estate not including any loans on the property. For example, if you own a $1.5 million home at death and there is a $900,000 loan on the property, the statutory probate fees are calculated on $1.5 million, not the $600,000 of equity. The combined probate fees in California on an estate that is $1.5 million, for example, is close to $50,000 when the probate referee fees, possible Bond Services fees and all the court filing fees are added in.
Not only are the statutory fees relatively high compared to a trust administration (typically 1-1.5 %), a probate case doesn't cover things such as changing ownership of retirement accounts, managing distributions from life insurance policies, etc. And the probate process in California usually takes 15 to 24 months in most California Probate courts (and that is if the estate is fairly simple). And one of the things that most people probably don't even realize is that when a probate action is filed, the deceased person's entire estate is now open to public disclosure. All court filed documents are readily accessible by anyone who searches.
2. Creditor Protection for Beneficiaries. In a properly drafted revocable trust, the Grantor can have provisions protecting their loved ones from future divorcing spouses, lawsuits, debts from a failed business venture, bankruptcy, or other types of creditors. The way in which we do this for most of our clients is either by setting up a QTIP trust, a Bypass trust or a Clayton Election (which includes both a QTIP and a Bypass trust) for a surviving spouse or a continuing trust with special creditor protection provisions for other types of beneficiaries such as children.
Marital trusts such as QTIP trusts and Bypass trusts can protect the deceased spouse’s property by later creditors of a surviving spouse such as a new spouse who later divorces the surviving spouse, a lawsuit litigant, a bankruptcy trustee or other creditor. The main reason is because this was the deceased spouse’s property that is left for the benefit of the surviving spouse during the lifetime of the surviving spouse. The best result would be for the surviving spouse to resign as Trustee of either of these types of trusts in the face of a creditor threat and appoint an independent Trustee to take their place.
For continuing trusts for children, each trust can be set up so that each child has no demand right against the Trustee. The second component to the creditor protection is who the Trustee is. Obviously, an Independent Trustee will have much greater power to protect the assets inside the trust for the beneficiary after the Grantor dies, however there are several options to allow greater flexibility and control for the beneficiary of a continuing trust.
One such option is to allow the beneficiary to serve as a Co-Trustee with the Independent Trustee. Another is to allow the beneficiary to act as a Management Trustee and have an Independent Trustee act as Distribution Trustee. A third option is to allow the beneficiary to serve as his or her own Trustee at a stated age, with the proviso that if a creditor threat ever materialized, the Beneficiary Trustee should either resign and appoint an Independent Trustee to serve or they should step down as Distribution Trustee and only serve as the Management Trustee of the assets (and appoint an Independent Distribution Trustee).
The trust can also be crafted with cascading provisions to benefit grandchildren or other beneficiaries when the primary beneficiary of a continuing trust passes away. Additionally, the beneficiary can be given a limited power of appointment, a general power of appointment or no power of appointment at all. This not only allows the Grantor to control who the remainder beneficiaries of the assets are but also can potentially be used for estate tax planning purposes (under current law) and if President Trump changes our tax system to a capital gains regime, it could likely be used in a similar fashion as well through the trust document.
3. Contingent Distribution Planning for Your Estate. Beneficiary designation forms on bank accounts, brokerage accounts or retirement accounts can often not fully account for your alternate distribution desires.
For example, where you have a large retirement account and you’ve listed your spouse as the primary beneficiary and your children as contingent beneficiaries, there may be an unintended consequence if one of your children should predecease you, become incapacitated, or later become a special-needs beneficiary.
Another unintended consequence of children inheriting as a contingent beneficiary on a retirement account is that there's no protection from a future divorce that child may have, a bankruptcy, lawsuit or other creditor problem. In fact, the U.S. Supreme Court decided in 2014 in the Clark case that the beneficiary of an IRA that was stretched-out over the beneficiary’s life expectancy for income tax protection was not protected from that beneficiary’s creditors. The bankruptcy creditors were handed that inherited IRA in the Clark case.
The better way to protect the beneficiary of a large retirement account is to create a stand-alone Retirement Protector Trust™ that ensures that the stretch-out for the beneficiary’s life expectancy occurs (through the Trustee of the trust) and that the principal of the account is protected from the beneficiary’s divorcing spouse, lawsuits, a future bankruptcy or other types of creditors. It is also better contingency planning because if a beneficiary of the trust passes away prematurely and there is a remaining balance in the retirement account for that beneficiary, it can be inherited by a contingent beneficiary named in the trust document.
Other accounts or assets that can also be problematic for beneficiary contingency planning are partnership, LLC or corporate interests.
4. Private Incapacity Planning for the Trust Grantor. I think it's safe to say that in most cases, a person would not want their family to have to drag them down to the courthouse for a conservatorship hearing to determine their capacity to act in their own best financial interests should that issue ever arise. If a client has no estate plan in place, that's exactly what their family and the state of California will need to do.
Revocable trusts can be designed with specific revisions to determine privately whether or not the Grantor of the trust still has the requisite capacity to act in their own best financial interest. Some common provisions for this private determination of incapacity are (a) determination by an attending physician, (b) determination by two independent license physicians or (c) determination of capacity by an incapacity panel of the client’s selection (by majority or unanimous vote).
5. Planning for a Percentage (%) of the Estate to Go to Specific People. This allows for precise distribution of the trust estate when it's unclear what exactly will be owned in the trust at the time of the death of the Grantor later on down the road. For example, if you wanted to leave 50% of your estate to your grandchildren and it's possible your children may have additional children in the future, a class gift could be given to all of the members of the “class” of your grandchildren. The gift could be made to a “common trust” for the benefit of those grandchildren until the youngest grandchild reaches a certain age or it could be broken apart into separate shares for each grandchild then alive at the time of the your death.
Because we don't know what types of assets or the values of those assets down the road when the you pass away, it's best to use percentages in a trust to accommodate your wishes. This would be next to impossible to do on each and every asset with any real predictability (since you would likely need to regularly update your beneficiary statements at each financial institution if you were to leave one asset to one child and another asset to the other child). Additionally, if you ever became incapacitated, you could not update you bank, brokerage, real estate, life insurance or retirement account beneficiaries to accommodate the fluctuations or changes in value of each asset in your desire to be fair.
6. Planning for Unknown Circumstances that May Affect Your Beneficiaries in the Future. Special provisions such as the use of a Trust Protector or including Special Needs Trust provisions for a Trustee to utilize later may well significantly help beneficiaries in the future if something unexpected happens to the beneficiary or in the estate or gift tax laws. Or what if you ran down on assets owning only a home and a little in retirement and bank assets. If incapacitated, there could be little that could be done to plan for government benefits in advance without spending the entire estate down to qualify. Yet if the right trust provisions appear in the trust and Power of Attorney document, the greater the flexibility to help an incapacitated Grantor resulting often in a much greater quality of life.
7. Prevention of a Young or Immature Beneficiary from Inheriting/Having Control Too Soon. We've all seen cases where somebody that was too young or immature inherited a lot of money and either blew it all in a short period of time or hurt themselves with the money with drugs and alcohol. Making sure there are specific safeguards to protect a young beneficiary are critical to the estate planning process.
One way to ensure this happens is to have a revocable trust plan in place that has provisions to protect a beneficiary not only from outside creditor threats (as mentioned in number two above) but also to protect them from themselves by having a Trustee other than the beneficiary in place at least until a stated age. Many of my clients typically choose between 25 and 35 years of age, but on occasion some pick a later age or they do not allow the beneficiary to serve as a Trustee or they only allow them to serve as a Co-Trustee at a stated age.
For more information on effective and strategic estate planning, see my books Safeguarding the Nest, Second Edition; Estate Planning Secrets of the Affluent; and Protection Your Children’s IRA Inheritance. To schedule a private planning strategy meeting with me or to discuss updating your existing estate plan, contact Lisa Logee at (760) 448-2220.