Should I create a Living Trust?

"Living Trust” is a term commonly used for a revocable trust that you establish during your lifetime.  It is called a Living Trust, in part, because you establish it during your lifetime (as opposed to a testamentary trust established in your will).  It is also called a Living Trust because you retain the power to change it any way you want (i.e. revocable as opposed to irrevocable).  So the trust lives and breathes with you.

Living Trusts have become very popular in part because certain populous states have expensive and cumbersome estate procedures.  If you establish a trust, the assets in the trust are distributed after your death through a process called Trust Administration, rather than through a process governed by the probate statutes.  This difference is a big advantage in states with expensive or cumbersome probate processes.  So, in those states, estate planning professional have put a lot of effort into drafting trust agreements .  Those estate planning professionals have then packaged up their forms and advertising material  and sold them to attorneys in other states.  So, if you get invited to a free breakfast, lunch or dinner with a promise that there will be a speaker about Living Trusts, that is what is going on.

Minnesota does not have a particularly cumbersome or expensive probate process.  In Minnesota, the reasons for creating such a trust include: (i) desiring not to have information about your affairs in a court file that can be accessed by others; (ii) owning real estate in more than one state; (iii) being willing to do some of the work ahead of time so that your loved ones have an easier time after you are gone; or (iv) wanting to plan for your disability.  However, there may be other actions that you can take that address these concerns.  So,  if you are a Minnesota resident, creating a Living Trust is a personal decision.  Since it takes some effort to establish and maintain the trust, you may legitimately decide that you do not want to create one.

If you have further questions about Living Trusts, we would be happy to answer your questions.

 

Why establish a trust?

Trusts are tools or mechanisms for addressing specific concerns.    Common reasons for establishing trusts include the following:

If you want to give money to someone but restrict how the money is spent, a trust can do that.  For instance, you can establish a trust for the benefit of a grandchild to fund education only.

If you are the parent of young children, you are going to want to build into your estate plan a trust to hold assets that you are bequeathing to those children in the event you die.  Children under the age of 18 cannot legally be in charge of their own money.  So, if you simply left assets outright to minor children, then either the asset would be required to be held in a bank account, or a statutory conservatorship would have to be established.  Holding money in a bank account means that there is no potential for any significant appreciation (and at today’s low interest rates, no potential for any significant income) and use of that money for the care and support of the minor would not be permitted without court approval.  Setting up a statutory conservatorship is relatively expensive and cumbersome compared to a trust administration.

Even if your child is over the age of 18, it may not be advisable to give a young adult unfettered access to the kind of assets that a 30/40/50 year old parent has accumulated over the parent’s lifetime.  Think of what you might have done if you suddenly had $200,000/500,000/1,000,000 at age 18.   The money being held in the trust will be invested and disbursed by the trustee.  So, if a trust mechanism is used, the assets are there to be used for the care and support of the young adult but your child has to get the trustee’s agreement on how the money is to be spent.  For instance, the trustee can agree that a car is a reasonable way to spend the money but not by purchasing a sports car.  Then, as your child matures, the trust restrictions can gradually be removed until at some age, the trust is gone and your child in charge of his/her own money.  The education that is provided to the child by this process can include how to invest the kind of money involved as well as how to spend it. 

If you have children by a previous relationship, you may have a desire to make sure your current spouse/ significant other has access to assets during his/her lifetime but also want to control where the assets do after the spouse/significant other’s death.  A trust is a way to accomplish both desires.

If you have a disabled relative, you may want to explore setting up a Supplemental Need Trust or Special Needs Trust.  These kinds of trusts allow the disabled person to qualify for needs based governmental benefits, while allowing the trust money to be used for things that the government will not pay for.  These extras can be important items like medical care or devices that the government will not pay for or enrichment , vacations and entertainment.

If you have a person to whom you want to leave money but you are concerned that they do not handle money well, or that they may be in a relationship that makes them vulnerable to pressure to use that money for someone else’s benefit or they have creditors who might claim the money, a trust can be used to protect that person.

If you have estate or gift tax issues, disclaimer trusts, marital/family trusts, irrevocable insurance trusts,  charitable remainder trusts, or charitable lead trusts can help you minimize or avoid estate or gift taxes.

If you have further questions, we would be happy to answer your questions.  You can visit our website for more information: www.tl-attorneys.com

If we get married, what will change with respect to our estate plan?

With the passage of the Marriage Equality Bill (H. F. No. 1054) this week, this is a very timely topic.  However, people regardless of gender often have little idea of the legal consequences of getting married.

The state and federal estate tax codes allow an unlimited transfer of property to spouse without the payment of estate taxes.  What the impact of the Minnesota statute will be for same sex marriages relating to Minnesota estate taxes is currently unclear.  Minnesota’s estate tax return currently refers to the Federal estate tax return.  Under the Defense of Marriage Act, federal law does not recognize state sanctioned same gender marriages.  There are two federal Supreme Court cases that are pending that may give more guidance and the state may move to disconnect the Minnesota Estate Tax Return from the federal one.  So, right now no one knows what the impact will be for estate taxes.

The impact on transfer of property under the probate code is clearer.  There are a series of probate statutes that provide for certain assets to go to surviving spouses.  Although no one has yet interpreted these statutes, the expectation would be that Minnesota statutes that refer to “surviving spouse” would now include same gender spouses. 

What follows is a description of some of the Minnesota probate statutes that use the words “surviving spouse.”  Obviously, these existing statutes also apply to marriages between a man and a woman.

Omitted Spouse.

Under Minn. Stat. § 524.2-301, if your will was written before you were married and was not written in contemplation of the marriage, the surviving spouse is entitled to receive as much as the spouse what have received if you died without a will under the intestate succession statues discussed below.

Elective Share.

By Minn. Stat. § 524.2-202, if you are a Minnesota resident, your surviving spouse, has a right to elect to receive a portion of your “augmented estate” if your spouse has not signed a consent to the estate plan.  This is sometimes called “electing to take against the will” although since the definition of augmented estate includes property that is transferred by beneficiary designations or joint ownership of property such non-probate transfers  are also “elected against” if this election is made. 

If you leave nothing to a spouse in your will or by naming them as a beneficiary or owning property as joint tenants, the surviving spouse can decide to elect to take this elective share instead.   The elective share starts at $50,000 and goes to 50% if you have been married 15 years or more.  

This election has to be made on the last to occur of (1) nine months after your death, or (2) six months after the probate of your will.  However if the elective share is to include all of your non-probate transfers to others, then the election must be made within 9 months of your death.

Needless to say proceeding under this statute can be complicated and I have not covered some provisions relating to Medical Assistance claims.  However, this is a very important right to consider if you are contemplating marriage.

Exempt Property Rights.

In addition to the right to an elective share, a spouse of a Minnesota resident has the following rights.  These assets are also exempt from the claims of creditors.

Homestead in your name alone.

If you have no descendants, the surviving spouse inherits your home.  If you have descendants, your surviving spouse gets a life estate in the home. Minn. Stat. § 524.2-402

Car and Personal Property.

A surviving spouse is entitled to one car of any value and $10,000 of personal property. Minn. Stat. § 524.2-403.

          Maintenance.

A surviving spouse can request a support allowance of up to $1,500 a month for 12 months if the estate is insolvent and up to $1,500 a month for 18 months if the estate is solvent.  This allowance is subject to income tax to the surviving spouse.  Minn. Stat. § 524.2-404.

Intestate Succession Statute.

If you died without a will, the Minnesota Intestate Succession Statue provides for how your property will be distributed.    The property that passes under the Intestate Succession Statute is in addition to the exemptions listed above.

Under Minn. Stat. § 524.2-102, if you are a Minnesota resident and have no descendants, or all of your surviving descendants are also descendants of the surviving spouse and there is no other descendant of the surviving spouse who survives you (i.e.no step children), then the surviving spouse gets the entire estate.

If you have descendants who are not the descendants of the surviving spouse or your spouse have descendants who are not your descendants, then the surviving spouse get the first $150,000 of the probate assets and  one-half of any balance of the intestate estate.

If you have assets where you have named beneficiaries, those are not governed by the intestate succession statute but go to the named beneficiaries.  Similarly, if you own property in joint tenancy.  So, if you own a cabin and house in joint tenancy with your surviving spouse, the joint tenant gets the cabin and house and then we apply these rules to your other assets.

For more information, please visit us at: www.tl-attorneys.com

What is a trust?

A trust is an artificial legal entity that is created to hold assets for someone or some purpose.    A trust can be established for any lawful purpose. To create a trust requires an agreement that sets out the terms of the trust, names the beneficiary or beneficiaries and names the trustee.  Creating a trust also requires that assets be placed in the name of the trust.  Any kinds of assets, including real estate, can be placed in trusts.  Unlike business  entities like companies or LLCs, trusts are not required to be registered with the Secretary of State.

The person who creates the trust is called the settlor, grantor or sometimes the trustor.  The person who has the power and responsibility to manage the assets in the trust is called the Trustee.  The persons for whose benefit the trust is created are called the beneficiaries.  If a person is not currently entitled to anything but might be entitled to something in the future, that person is called a contingent beneficiary or sometimes a residuary beneficiary.

In Minnesota, trusts have to terminate within the lifetime of people who are alive at the time the trust is created, plus 21 years (to deal with the minority of a future beneficiary).  This is called the Rule Against Perpetuities.  If the terms of a trust might result in a trust that violates the Rule Against Perpetuities, the result is that the trust is invalid.

There are many different kinds of trusts.  There are revocable trusts where someone, usually the settlor, retains the right to change the terms of the trust, including the right to terminate the trust.  There are irrevocable trusts in which no one has the right to change the terms or terminate the trust.  There are testamentary trusts that are contained in a will.  Testamentary trusts do not come into existence until assets are being distributed after the death of the settlor.  A trust may contain provisions for future trusts to be established.  A trust might start out as revocable but then on the death of the settlor turn into an irrevocable trust.  There are trusts that are used to avoid estate and gift taxes.  These trusts are usually irrevocable.  There are trusts that are used to make sure disabled beneficiaries are not disqualified for government benefits.  These trusts are called Supplemental Needs or Special Needs Trusts.

If you have further questions, about trusts you can check to see if another article on this blog addresses that question or you can contact us.

For more information, please visit us at: www.tl-attorneys.com

Should I add my children to the title to my home or cabin?

This is a big decision.  You should proceed very cautiously.    If you do this, you have a made a gift and you cannot unilaterally rescind the gift.  There may also be adverse tax consequences of trying to rescind the gift.  Other mechanisms may accomplish what you want with less risk or consequence to yourself.  For instance, if you just want to avoid probate, a Transfer on Death Deed  (“TODD”)accomplishes what you want without risk to yourself or creating any of the problems listed below.

                Practical Considerations

If you add your children to title, you no longer own your home or cabin alone.  Instead, your children own it with you.    If you sell the home or cabin, you no longer get 100% of the proceeds. 

The decision to sell or not sell the property is not only yours anymore.  If the children do not want to sell, you may have to bring an action to force a division of the property or a sale (This is called a “Partition Action”).  Unless you have reserved an interest as a life tenant, the children may be able to bring a Partition Action against you to force a sale.  In addition, your children’s creditors may take their interest away from them and then be able to force a sale of the property.  You may trust your children to co-operate with you but do you trust their creditors?

If you have a mortgage on the property and file a deed transferring title to your children without the lender’s permission, you will have violated the “due on sale” clause that is in most residential mortgages.  This means that the lender can decide to declare the full mortgage payable immediately and, if you do not pay them off, start foreclosure.

You no longer would be able to get a mortgage without having the children sign the mortgage.  If any of the children have a spouse, the spouse will have to sign the mortgage because of technical real estate rules.  (Even if the spouse is not in title by reason of the marriage the spouse may have some rights in any land owned by the child and so the mortgage company will require the spouse to sign the mortgage in order to make sure that the spouse cannot avoid the mortgage.)

Each person who owns an interest has a right to sell or transfer his/her share of the property.  Although it would be rare that a third party buyer would have an interest in purchasing less that the whole title, other relatives, spouses or a developer might.    These new owners could then bring a Partition Action to force a sale.

If you make your child a co-owner as a tenant in common or a joint tenant, then the child owns an “undivided” fractional interest in the property.    For instance, if it is just you and your child in title, each of you owns an undivided one-half interest. 

If you and your child own property as joint tenants and one of you dies, the whole property passes to the surviving joint tenant.  However,  if you add the child and do not specify that the child’s interest is as joint tenant, the child is considered a tenant in common.  If the child is a tenant in common and the child dies, the child’s interest is transferred to whomever the child leaves it to in the child’s will or to the child’s heirs at law if the child dies without a will.  That could be the child’s spouse.  A probate will also be required.

                Medical Assistance Consequences

If you have to go into a nursing home or need in-home care, putting your children in title may adversely affect your ability to get the government to pay for such care.  If you cannot afford to pay for the nursing home or your in-home care, the government will pay for it under Medical Assistance (“Medicaid”).  If you simply add your children to title, you have made a transfer for less than fair market value under the Medicaid rules.  One of the questions asked when you apply for Medicaid is whether there have been transfers for less than fair market value within the last 60 full month (five years ) period.  This 60 month period is called the “look back period.”   If you have made a transfer for less than fair market value within the look back period, you will not be eligible for Medicaid for a period of time determined by the value of what was given away.  (The calculation of the ineligibility period is the value of what was transferred divided by the average cost of semi-private nursing home care in the state (“SAPSNF) (currently around $5,000).) During any period of ineligibility you will have to pay for your own care.  The only way you can avoid this is to not apply for Medicaid for five years from the date of the gift or get the value of what you gave away returned to you by everyone to whom you gave assets.   All gifts made during the look back period count in this calculation.  So, if you give your children your $250,000 home and sometime next year you give one of the children $20,000 to help with an unexpected financial problem, Medicaid will use $270,000 in calculating your overlapping ineligibility periods and all that money has to be returned to you.

                Tax Consequences

There also are gift tax, estate tax and income tax consequences of adding your children to title.  Any gift of a remainder interest or a gift of more than $14,000 (for 2013) in any year to a person means that you have to file a gift tax return.  There is no gift tax currently in Minnesota and the federal exemption amount for gifts if $5,000,000 but you still must file a gift tax return.

If you do not retain a life estate or joint tenancy interest in your home or cabin, the interest that you gave away has a carryover tax basis to the children.  This means that they get the basis that you had in the interest you gave away.  If, instead you held the home or cabin until your death, the children get a basis based on the fair market value as of the date of your death.  Historically, getting the stepped up basis has been much more advantageous.  If your children then sell the house or cabin the difference between the sale price and the basis is capital gain and they have to pay income tax on the capital gain.  Between federal and state taxes, that tax could be more than 20% of the gain. 

If you do retain a life estate or joint tenancy interest in your home or cabin, you have not accomplished any avoidance of estate taxes.  Both termination of a life estate  or joint tenant interest result in inclusion of the property in the decedent’s estate for estate taxes.

If your home is sold during your lifetime, you get an income tax exclusion because it is the sale of a primary residence.  However, unless your children live in the home for at least two years after they became owners and before sale, they do not get this income tax exclusion.

Finally, in Minnesota property owned by a person that was gifted or inherited to that person is normally non marital property in the division of property between spouses in a divorce.  However, if your child used marital assets or income to pay for upkeep, at least a portion of the value will be marital.  Also, if the value of what would otherwise be a non marital asset is necessary for the support of the spouse, the court can require inclusion of non- marital property in the division of assets.  So, if one of your children gets a divorce after you put them in title, the home or cabin may be considered in the property settlement and the home or cabin may possibly be awarded to the spouse

For more information, visit us at: www.tl-attorneys.com

Should I sign a Power of Attorney?

If you are doing planning for what should happen if you became incapacitated, one of your options is to sign a document called a Power of Attorney.  If you sign a Power of Attorney, you give power to someone to act on your behalf.  You are called the “Principal.”  The person that you authorize to act on your behalf is called the “Attorney in Fact.”   In Minnesota, there is now a form that can be used called the Statutory Short Form Power of Attorney..

A Power of Attorney is a very powerful document.  This makes it both useful and dangerous.  You really must trust the person to who you are giving it. 

You read about the abuse of the Power of Attorney in the newspaper on a depressingly regular basis. People execute a Power of Attorney naming one or more of their children as Attorney in Fact, intending that the child will help them as they age.  The child then abuses the trust the parent placed in him or her and uses the parent’s money for the child’s own bills or pleasure.  Usually, this abuse is discovered after the fact and by then the money is usually irretrievably gone.  For this reason, police have started calling a Power of Attorney a “license to steal.”

You should not give a Power of Attorney to anyone you do not completely trust.  However, there are some actions you can take to try to protect yourself if you decide to give someone a Power of Attorney. 

First, in the Statutory Short Form Power of Attorney, you can name two people who have to act together.  If you do this, abuse of the Power of Attorney requires both named persons consent to the abuse. 

Second, you can require from the Attorney in Fact periodic explanations of the actions  the Attorney in Fact taken under the Power of Attorney (called an “Accounting”).  In the Statutory Short Form accountings can be required on a monthly, quarterly or annual basis. 

Third, you can provide that the accounting must be provided to persons in addition to yourself.  So, if all the children get accountings, the chance of one child inappropriately taking the money is lessened.  Providing that a neutral professional like your accountant be given the accounting can be even more effective, although the neutral will need to be compensated for their oversight.

Fourth, you can provide that the Attorney in Fact cannot transfer assets directly to themselves.  This restriction, however, is easy to circumvent by appearing to pay bills or using a straw payee.

None of these options are mutually exclusive.  You could use all of them.  However, it cannot be stressed too much that you really must trust anyone that you name as your Attorney in Fact.  There is no substitute for picking an honest Attorney in Fact.

Visit us at: www.tl-attorneys.com

Advanced Planning

Why Plan Ahead?

It is easy to put off doing death and disability planning.  First, there are so many other demands on your time, energy and money that are much more immediate.  Second, there is psychological resistance.  Thinking about death and disability is not pleasant.  Furthermore, it may not seem rational but planning for death or disability on some level almost seems like it might make the worst happen.  So, do you have to do death and disability planning?  The honest answer is no.  The problem is that you might not like the consequences. 

We get phone calls all the time from people who have waited until their loved one is very ill to try to arrange affairs.  This means that the requested documents have to be done on an emergency basis.  Time and energy that could be used to care for the ill or dying person is diverted into locating an attorney and getting tasks done.  Often, it is too late because the loved one really does not have capacity to execute the documents.  Doing things at the last moment also increases the chances of a challenge to what was done if someone in the family is unhappy with the decisions.  It also increases the likelihood that the challenge will be successful.

                                    Disability Consequences

So, what happens if you have not done advance planning for disability?  This means that you have not appointed anyone to make health care decisions and living arrangements for you under a Health Care Directive.  If you cannot speak for yourself, there is no one legally appointed to speak for you.  If there is a difference of opinion in your immediate family, if the health care professionals are not comfortable with the decision, or if you do not have a family or a legally recognized family, a petition must be brought before the probate court for the appointment of a guardian.  This will cost $1,500 to $2,000 even if there is no dispute as to who should be appointed.  It will also take 4 to 6 weeks.  Since you have not expressed a preference, the likelihood of a dispute is greater.  Nor have you given directions about your preferences for care or treatment.

If you have not done any disability advanced planning you also have not considered granting a power of attorney to, at least, your spouse so that your money can be accessed to pay bills. This means that a petition will have to be brought before the probate court for the appointment of a conservator.   The cost and delay is the same as for the petition for a guardian, even if there is no dispute as to who should be appointed.  Nor have you expressed a preference for who should be appointed.

                                    Death Consequences

If you die without a will, the legislature has written a statute that tells us what will happen to your probate assets (called the intestate succession statute).  The legislature has guessed that, unless there are step children, you want everything to go to your spouse.  If your family includes step children the probate assets will be split between your spouse and your children.  If you have no spouse or children, grandchildren etc., the probate assets will go your parents, if alive, your brothers and sisters or biological nieces and nephews and so on.  If this is what you want, fine.  If this is not what you want, you have to do a will, a trust or make other arrangements to change the distribution.  If you have not done advance planning, you also have thrown away the possibility of arranging things so that no probate will be needed.

If you are the parents of minor children it is very important that you do advance planning.  If you have not legally expressed a preference for who should raise your children if you and your spouse have died, the court has to make a decision without input from you. Very ugly litigation between relatives has been known to ensue.  It may be more difficult and expensive to get access to money that is needed to raise the children and the children will also get complete access to any money that is left when they turn eighteen (18).  Most parents prefer that their children be older than that before they get unfettered access to the money.

If you decide that you do want to do advance planning, we would be happy to assist you.  We are open to payment plans and our estate planning rates already contain a discount from our normal rate.  On the estate planning page of our website are two questionnaires that you can use to think through decisions that you need to make.  This allows you to be efficient in using our services.

http://www.tl-attorneys.com/Estate-Planning-Wills-Trusts/Personal-Info-Estate-Planning.pdf

http://www.tl-attorneys.com/Estate-Planning-Wills-Trusts/Financial-Info-Estate-Planning.pdf

For more information visit us at: www.tl-attorneys.com

Missing Assets or Documents

I periodically get phone calls from persons looking for a deceased relative’s will.  Sometimes they are calling because they found my name in their loved one’s papers.  Sometimes they are just calling attorneys in the neighborhood.  If I tell them that I do not have the will, they will ask if there is some central place that they can call or check.  Unfortunately, the answer is, “No.” 

The District Court in a County that the person resided (now or in the past) will hold people’s wills for the person.  There is a modest one time fee for this.  (Ramsey and Hennepin County’s charge $27).  The court does check to see if it has a will or a more recent will before opening a probate but that is not the same as a central place.  If someone deposited a will in Hennepin County District Court but died living in Ramsey County, the estate would probably be probated in Ramsey County and the Ramsey County Court would not find the Hennepin County will automatically.  Furthermore, there is no legal requirement that wills be deposited with the court and so few people actually do.

Nor is there any central place to find assets like insurance policies or bank accounts.  The best way to search for such assets is to look for statements or bills in the decedent’s papers.  Last year’s tax returns can also provide clues in the form of 1099s or listed income.

Once five years have passed, a bank, stock brokerage firm or company located in Minnesota will send any money for which they cannot find the owner to the State of Minnesota.  This is called “escheating”.  However, the money is not claimed by the State.  It is just held by the State.  This money can be claimed by the owner or the owner’s heirs.  The State of Minnesota site on which to search for escheated assets and to file a claim is http://mn.gov/commerce .  In other states search “unclaimed property in (state’s name).”  That should get you to the right site.