Disclaimer Trusts

General

            You have been named as Trustee for a Disclaimer Trust.  A Disclaimer Trust is a trust that is provided for in a person’s will or revocable trust.  The beneficiary is the decedent’s surviving spouse.  However, whether the trust comes into existence depends on an election that the decedent’s spouse makes after the decedent’s death.  This election is called a “Disclaimer.” If the decedent’s spouse does not execute a Disclaimer, the Disclaimer Trust never gets set up and usually the decedent’s assets go outright to the surviving spouse.

            The reason for providing for the option of a Disclaimer Trust is to minimize estate taxes.  Estate taxes are supposed to be a tax on the rich.  So both the federal estate tax and the Minnesota estate tax laws, provide that if the estate is under a certain amount (the “Exemption Amount”), it is not subject to estate tax. 

            Each person has an Exemption Amount.  Federal estate tax law has a concept called “portability” that allows the surviving spouse to use the decedent’s Exemption Amount as well as the surviving spouse’s when the surviving spouse dies. So Disclaimer Trusts are not needed to avoid federal estate taxes.  However, Minnesota tax law does not have the portability concept.  The Disclaimer Trust is a substitute.

            To try to preserve the decedent’s Exemption Amount, the surviving spouse executes a Disclaimer for assets up to decedent’s Exemption Amount.  Those assets then go into the Disclaimer Trust and on the death of the surviving spouse go where the Disclaimer Trust provides that they go.  However, these assets are not taxed because they count for tax purposes as coming from the decedent, not the surviving spouse. What this usually means is that on the death of the surviving spouse all the assets in the Disclaimer Trust plus up to the Exemption Amount in the estate of the surviving spouse go to the family without paying Minnesota estate taxes.

            However, since the surviving spouse is the beneficiary of the Disclaimer Trust during the surviving spouse’s life time, the assets in the Disclaimer Trust are still available to be used to take care of the surviving spouse.  By executing the Disclaimer to fund the Disclaimer Trust, the surviving spouse subjects those assets to control by the Trust but does not absolutely give up having the assets available to take care of the surviving spouse.  

            The following are the normal duties and powers of a Trustee.

General Duties of a Trustee

Duty of Loyalty: A trustee must administer the trust solely in the interest of the beneficiaries, both life time and ultimate beneficiaries (the ultimate beneficiaries are called “Remaindermen”).

Duty to Collect and Protect Trust Property: A trustee has the duty of obtaining possession of the trust property without unnecessary delay.  Once having obtained the trust property, a trustee must act as a prudent person in preserving the trust property. 

Duty to Earmark Trust Property: The trustee must earmark the trust property by properly identifying the property as trust property.

Duty Not to Mingle Trust Funds with Trustee=s Own: The trustee must keep all trust property separate from the trustee=s own property.

Duty Not to Delegate without Care: A trustee may delegate to any person any trust function that a prudent person of comparable skill could properly delegate under the circumstances.  However, the trustee must exercise reasonable care, skill and caution in selecting an agent, establishing the scope and terms of the delegation and must periodically review the agent=s actions. 

Duty of Impartiality: A trustee has a duty to deal with both the life time beneficiary and the Remaindermen impartially.  The trust property must produce a reasonable income while being reserved for the Remaindermen.

Duty to Inform and Account to the Beneficiaries: The trustee is under a duty to the life time and Remaindermen beneficiaries to give them upon their request at reasonable times complete and accurate information as to the nature and amount of the trust property, and to permit them or a person duly authorized by them to inspect the subject matter of the trust and the accounts and vouchers and other documents relating to the trust.

Normally, this will result in the Trust preparing an Inventory of the assets in the Trust at the beginning of the Trust Administration.  Periodic accountings showing where the money is being spent, income being received and assets still on hand may be required depending on how long the trust lasts.  At the end of the Trust Administration, the trustee should prepare and furnish the beneficiaries with a Final Account.

Other Duties:  The Trustee also has the obligation to file any necessary income or estate tax returns.  The Trustee has to pay the bills of the Trust and the trust document may require payment of beneficiary’s bills.

General Powers of a Trustee

Specific Powers:  The specific powers given to a trustee are listed in the trust and in Minn. Stat. ' 501C.0809-0817.

Discretion as Trustee: The trust agreement may give the Trustee discretionary power.  This allows the Trustee to determine whether to distribute income or principal and how principal shall be invested.

Trustee=s Power to Resign: Any trustee may resign at any time by delivering a written resignation to the remaining Trustees, with the resignation becoming effective 30 days following its delivery.

Signing Your Name: In transacting business, it is important to make clear that the Trustee acts as trustee, not as a person. The best way to do this is for the Trustee to sign as follows:

Trust of John Smith

under Agreement dated 1/1/2001

by Jane Smith, Trustee

Alternatively, if the document is already clear that it is the trust that is involved, the Trustee would sign:

Jane Smith, Trustee

Specific Issues for Disclaimer Trustee

            Any time there is a lifetime beneficiary and Remaindermen, there is a conflict of duties for the Trustee.  This is especially true if, as is often true of Disclaimer Trusts, the life time beneficiary is to be paid any income.  Should the assets be invested so as to produce more income or more appreciation?  Should the trustee pay a given bill for the benefit of the life time beneficiary or save the money for the Remaindermen?

            This conflict of duties makes it most important that the Trustee keep good communication going with all beneficiaries and, if at all possible, operate by consensus.  Documenting consent by all is always prudent.  If it is not possible to operate by consensus, it may be worthwhile to ask for court approval of controversial actions.

            Since the point of the Disclaimer Trust is to minimize estate taxes, administering the trust so that the surviving spouse’s assets are kept below the Minnesota Exemption Amount can provide some guidance on how to resolve the conflict of duties.   Often the Remaindermen are also children of the surviving spouse and may help make the conflict of duties more apparent than real.  However, with families that have unresolved issues or a second marriage, the conflict of duties may be very real.

1/Forms/Wills/DisclaimerInstructTrustee

What is probate?

Periodically I have a client who says to me, “Since I have a will, my estate does not have to go through probate, right?”  The answer is, “No, your estate may still have to go through probate.”

The word probate comes from the Latin word “probare” which means “to prove,” or “to test”  It is a process that we go through to make sure that bills of the decedent are paid and the heirs/devisees get clear title to the remaining assets.  Having a will just instructs us what to do with the assets.  It does not avoid the process.  If there are liquid assets worth over $50,000 or real estate solely in the name of the decedent, then there will be a probate proceeding.

It is possible to avoid probate.  Common mechanisms for doing this are (i) to own property in joint tenancy with right of survivorship, (ii) name a beneficiary on an account or insurance policy, (iii) make a stock or stock brokerage account TOD (transfer on death) or an bank account or bond POD (pay or payable on death) or (iv) use a TODD (transfer on death deed) for real property.  For all assets subject to such mechanisms, the will is irrelevant.  What the title paperwork says to do will be what happens.  By using such mechanisms, you have converted what would otherwise be a probate asset (governed by the will) into a non probate asset.

However, the ability to do anything very complex using such mechanisms is limited.  It is difficult to protect people from themselves or deal with minors or plan for multiple contingencies with non probate mechanisms.  Also since even with these mechanisms there may be bills that have to be paid, getting co-operation among the people getting assets to get the bills paid may be very difficult and more expensive than a simple probate.  The best mechanism to avoid probate and still deal with such issues is to create a revocable trust (commonly called a living trust) during your lifetime and put your assets in that trust.  While you are alive, you are usually the trustee and the beneficiary.  On your death we follow the directions in the trust but you have the same flexibility that you have with a will for leaving complex instructions and gifts in trust.  After your death we do this through a trust administration, not a probate. In New York, California and Florida the difference between a trust administration and a probate is huge.  In Minnesota, the differences are small but there still are differences.

Glick. "Jest Is For All." Bench & Bar of Minnesota Mar. 2015: 4. Print.

Which is better: to do a transfer on death deed or convey property to relatives during your life time?

The difficulty in comparing these two procedures is that each is designed to address a different issue.  In the following discussion the person who currently owns the property is called “grantor” and the person to whom the property would be transferred is called “grantee.”

Transfer on Death Deed

The principal purpose of a Transfer on Death Deed is to avoid probate. 

A transfer on death deed is a conditional conveyance of real property with the conveyance only taking effect upon the grantor’s death.  Once the grantor passes away, the property is transferred to the grantee by filing an affidavit with the county.  It is possible to do a transfer on death deed that takes effect only on the death of both joint owners.  It is also possible to have more than one grantee.

Advantages of a transfer on death deed are that the conveyance can be revoked; the grantor maintains complete control of the property during the grantor’s lifetime; and the property is transferred to the grantee without the need for a probate proceeding.  

In addition, the property passes to the grantee with a “stepped up” basis which is equal to the value of the property as to the date of death of the grantor.  If the property is sold at that time, the tax obligation to the grantee will be little or none. Since the grantee has no interest in the property until the grantor dies, if the grantee gets into financial difficulty, the grantee’s creditors cannot attach the property until after the grantor dies.  If the grantor knows about the financial difficulty, the grantor can revoke the transfer on death deed and make other arrangements that would protect the grantee from the grantee’s creditors.

The big disadvantage of a transfer on death deed is that it cannot be used to avoid paying for the cost of nursing home care.  As the conveyance of the property only occurs upon the death of the grantor, the county may consider the homestead an available asset and force the sale of the property if the grantor is no longer living in the home or the county may assert a claim against the homestead upon the death of the surviving spouse of the joint grantors.

Medical Assistance Planning/Transfer of Property

The principal reason people consider transferring property outright is usually medical assistance planning.

In order to protect property from being sold to pay for nursing home care or avoid a medical assistance claim from being asserted upon death, the property must be transferred to the grantee outright and more than five years must pass before any application is made for medical assistance on behalf of the grantor.  This 5 year period is called a “look back” period.  Any application made before the expiration of the 60 months–even by one day–will trigger the Medical Assistance ineligibility rules. During the ineligibility, the grantor must pay for the grantor’s own care.  The county can also require that the value of the asset transferred be transferred back.

The main advantage of transferring title to a grantee now is that, if the grantor satisfies the five year look back period, the property will pass to the grantee or grantees without being subject to a medical assistance claim. 

There are several disadvantages to putting someone in title to assets now.   The main concerns are as follows: 

1. After the time the deed is signed, the grantor no longer owns the property. Instead, the grantee owns it.  Each grantee has a right to sell or transfer his/her share of the property.

2. Even if the grantor does not put the grantee’s spouses in title, under real estate law, for any sale or mortgage, the grantee’s spouse will have to sign the documents. So, if the grantee decides to mortgage or put a lien on the property for some purpose, such as to fund repairs or improvements, the lender is going to require that not only the grantee, but also the grantee’s spouse, sign the mortgage or lien.

3. If the grantor wants to sell or refinance the property, the grantor must have the cooperation of all the grantees and their spouses.  Legally any proceeds are not the grantor’s but belong to the grantees.

4. Because the grantee owns the home, creditors of the grantee can attach the grantee’s interest and force a sale of the home.  Any proceeds that would otherwise have gone to the grantee go to the creditor.

5. If the grantor retains a life estate in the property, then a portion of the property is subject to Medical Assistance claims.  In order to avoid the County arguing that the grantor retained a life estate in the property, the grantor would have to pay rent for the grantor’s use on the property.

6. Since the grantor no longer owns the property, the grantee has more control over the decision of whether the grantor is healthy enough to continue living in the property.

7. If one of the grantees dies without a will, the grantee’s heirs will inherit that interest. If that heir is married, then the spouse of the heir would have to consent to any sale or mortgage.

8. ALL GIFTS made during the look back period count in the Medical Assistance calculation. So if  a grantor gives his/her children the grantor’s $250,000 house and sometime next year the grantor gives one of the children $20,000 to help with their unexpected financial problems, Medicaid will use $270,000 in calculating the grantor’s ineligibility during the overlapping look back periods.

9. If a grantor has a mortgage on the house and it has a due on sale clause (almost all mortgages do), the grantor’s lender has the right to call in the loan if the grantor transfers an interest without the bank’s permission.  That includes an outright gift of the house to relatives but not a transfer on death deed.

10. There are gift tax consequences if the grantor gives property worth more than the annual exclusion amount in any one year (currently $14,000).  Since everyone has a lifetime/death exemption of over 5 million dollars, the grantor may not have to pay a gift tax but the grantor still has to file a gift tax return.

11. If the house is gifted to the grantee without any retained interest in the grantor, there will be a carryover of tax basis to the grantee instead of a stepped up basis as would have been the case had the grantor died owning the property.  Between Federal and State taxes, that tax could be more than 20% of the gain in the home.  Depending on how much the property has increased in value while the grantor has owned it (the amount of the gain), it may not be advisable to do the gift. 

12. The grantee will not be eligible for the income tax exclusion for a primary residence when the grantee sells it if the grantee does not live in the house.

13. Although in Minnesota property that is gifted to one spouse is considered non marital property in the event of divorce, it is possible for the other spouse to make a claim against non marital property if that spouse has a need for assets or income.  This idea of non marital property is also not accepted in all states.  So, if a grantee gets a divorce, the property may be considered in making the property settlement, and the house may possibly be awarded to the grantee’s spouse.

You may also want to look at our page that discusses Medical Assistance and Homestead Property.

If I or my spouse goes on Medical Assistance, will we have to sell our home?

It is very common for clients to call and be worried that if they or their spouse has to go into a nursing home, the County will take their home away from them.  This is not the way Medical Assistance works.

First, the County does not take assets away from people who apply for Medical Assistance.  What the County does is say that it will not start paying bills for nursing home care until certain income and asset criteria are met. 

Second, the rules for what an applicant can keep classify a homestead as exempt as long as one of the spouses resides there. As long as you or your spouse is living in the home or has a reasonable expectation that you can return to the home, the County cannot force the sale of the home.    

However, when neither of you is living in the home, then the County can force a sale.  Also, if one of you has been living in the house and dies while the other is in the nursing home or after the other has already died, the County also can assert a lien against the home to pay for expenses the County has incurred for either of your care.  

Should I put my home in a living trust?

Part of the motivation for doing a living trust is usually to avoid probate.  Leaving the house outside the trust can defeat this purpose. 

However, a homestead in Minnesota is exempt from claims of the owner’s creditors up to a dollar amount established by Minn. Stat. S 510.02.  As of July 1, 2014 this exemption amount is $390,000.  Also the homestead is exempt from claims by Medical Assistance as long as the owner or the spouse is residing in the home.  Putting the home in a living trust destroys these benefits.

If the home is owned as joint tenants with rights of survivorship by a married couple, it is fine to leave the home outside the trust as long as both are alive.  On the death of the first it will transfer to the survivor without requiring a probate. 

But what to do if the spouse dies or a single individual owns the home.  In this situation, the answer may be a Transfer of Death Deed (TODD).  If the owner or tenancy owners file a TODD, then the home will be transferred on death to the persons named as grantees in the TODD without requiring a probate.  So the home can be left outside the trust but probate is still avoided.

TODD’s are not as flexible as trusts and so naming people as grantees is sometimes not advisable.  But the trust can be the entity named as the grantee of a TODD and then all the benefits of the Trust’s flexibility are available and probate is still avoided.

What is a Supplemental Needs Trust?

A ”Supplemental Needs Trust” is a trust established and funded by a third party to provide for the supplemental needs of a disabled person while allowing the beneficiary to maintain eligibility for various “needs based” government programs.

Many disabled people can qualify for various programs like Supplemental Social Security and Medical Assistance, which exist in order to provide a basic level of societal support.  However most of these support programs are “needs based,” meaning if you have too much income or too many assets, you cannot qualify for the programs. 

The income and asset limitations used to create a problem for parents and other relatives of disabled children who wanted to pass money or assets to those children in their wills.  If the disabled child received the gift, the child was disqualified from government benefits until the money or assets were spent down.  Many felt that this was unfair, as a non-disabled child receiving the same gift would be free to use the gift to supplement their lifestyle.

As a result, both Minnesota and the federal government passed Supplemental Needs Trust statutes allowing a third party to establish a trust for a disabled person without causing the disabled person to lose benefit eligibility.  The disabled person is then allowed to use the trust’s funds to provide for expenditures that the publicly funded programs would not pay.

Nearly anyone besides the disabled person or the disabled person’s spouse can create a Supplemental Needs Trust for a disabled person.  This trust can be set up in a will (called a testamentary trust) or outside the will.  In practice, it is generally preferred that the trust is created while the person funding it is alive because this provides greater flexibility in the trust, protection against potential changes in the law, and the ability for others to then place funds into the trust.

It is important to remember that a Supplemental Needs Trust may not be funded with money already legally owned by the disabled person, even if they have not yet received it.  However, in such a case, there are slightly different options available (for example, a Special Needs Trust).

A Supplemental Needs Trust must be irrevocable and solely for the benefit of the disabled person.  The money cannot be distributed directly to the disabled person.  Distributions can only be made by the trustee purchasing items or services directly from a third party on behalf of the disabled person.  The money in the trust may not be used to replace or duplicate money that a governmental program would otherwise provide.  If the disabled person receives Supplemental Social Security, the money cannot be used for shelter or food.  Use for clothing may also be problematic. 

Establishing a Supplemental Needs Trust is relatively easy for an adult who has been certified as disabled.  However, the same process can be more difficult for young children and others who have not yet received disability certification.  In such a case, it is possible to obtain a review process through the state to get an equivalent certification or have two professionals who have examined the person certify that the person meets the social security disability standard. 

If the beneficiary is 65 or older and has to go into a nursing home for an extended period, the trust will no longer protect the assets.  Most Supplemental Needs Trusts contain provisions that terminate the trust at that point.  On termination of the trust, the trust can provide where the remaining money or assets are distributed.

If you are interested in creating a Supplemental Needs Trust, or discussing your other financial planning options, please contact Tarrant & Liska.