Trust & Estate Planning Law

ESTATE PLANNING FOR PETS: WHAT WILL HAPPEN TO YOUR BELOVED PETS AFTER YOU DIE?

My friends and clients know that I bring my dog, Chelsea, to work with me almost every day.

If you, too, love your pets, your estate plan must include provisions for their care if you become incapacitated and after your death.  If you do not adequately provide for your pets’ care, chances are they will be dumped at the local pound.

Over the years, we have heard of numerous high profile people, such as Leona Helmsley, who have established multi-million dollar trusts for their pets’ care.  Although this is probably overkill for most of us, California, along with 38 other states, has enacted legislation which recognizes pet trusts.  The California law allows courts to liberally construe pet trusts with the goal of carrying out the settlor’s intent – that is, the law requires the courts to do its best to figure out the intentions of the person who set up the trust and give them the benefit of the doubt if it’s not clear what the person intended.  Moreover, courts are authorized to consider all relevant evidence of the settlor’s intent.

How a Pet Trust Works

Pet trusts are really not much different than a trust established for a minor child.  A pet trust should name a guardian to care for the pet and should name a trustee who will be responsible for managing the funds in the trust and distributing those funds for the care and maintenance of your pet.  The trust should clearly set forth how the funds should be spent, including:

• Types of food;
• Grooming;
• Walks and playtime;
• Boarding when the guardian goes on vacation;
• Routine medical care;
• Allergies;
• The extent to which medical care should be given in the event of a serious injury or illness;
• Whether you want your pet to be euthanized in the event of terminal illness or critical injury; and
• Whether you want your pet cremated or buried upon its death.

You should also consider providing an annual stipend to the caregiver for as long as your pet lives.  This is an added incentive for the guardian to take good care of your pet and ensure that it remains healthy.

It’s also important to include a provision for how the funds remaining in the trust should be distributed after your pet dies.  Because of the possibility of a conflict of interest, it’s usually best to leave the remainder of the funds in the trust to a family member or a charity rather than to the pet’s guardian.

What if I Don’t Have a Someone Who Is Willing to Act as Guardian of My Pet?

Before appointing a guardian for your pet, it’s best to talk to each of the prospects.  If no one will agree to act as the guardian, you should consider contacting a pet rescue organization that has a “no kill” policy and which is committed to finding good homes for pets.  Your estate plan can direct the trustee or executor to deliver your pet to this organization if you become permanently incapacitated or after you die.

What if the Money Runs Out Before My Pet Dies?

The pet trust should include a provision addressing what should be done if your pet lives so long that the funds in the trust run out.  It’s hard to believe that the guardian might not have bonded with your pet and be willing to continue caring for it long after the trust funds run out.  But if that’s the case, the trust should direct the guardian to deliver your pet to a “no kill” animal rescue.

Getting Legal Help

Not all states recognize pet trusts; therefore, you should speak with an estate planning attorney in your state to find out whether they are permitted in your state.  Additionally, a qualified estate planning attorney can explain the tax implications of a pet trust and assist you in setting up a trust that will ensure that your pet is cared for according to your wishes.

All the best,

Picking a Trustee in California Estate Planning - New Guide

Today I published a new guide, Picking Your Trustee in California: A Guide for High Net Worth Individuals. It springs from 20+ years of focusing exclusively on California probate law, estate planning, and gift-planning law.

By now, for better or worse, I've just about seen it all:

* Trustees who can’t manage money

* Trustees who can’t meet deadlines

* Trustees whose commitment peters out too soon, and even

* Trustees who embezzle funds (and, wouldn’t you know it, rationalize the stealing)

Whatever the cause, the effects of choosing a poor trustee can be dire. Family members become resentful and estranged. Savings built up over a lifetime are poured into avoidable expenses. And the estate plan is not realized.

The good news is that with the right trustee, your estate plan has a much better chance of coming off without a hitch. In the new 13 page guide we put out today, I outline the “job description” of a trustee in California, and common mistakes to avoid.

At the end is a worksheet to help individuals with high net worth  pick someone who will do a good job.

While we like to think of a trust as taking care of all your estate planning concerns, it’s actually the trustee who has to carry out the orders. Choosing a trustee is not just bestowing an honor, it’s assigning a real job. There will be forms to fill out, letters to write and bills to pay. Trustees have a special duty to always act in the best interests of the estate and beneficiaries, and not intentionally do anything or make any decisions that could harm them.

Some people automatically pick the oldest child in a family, or a family friend to do the job. That person might have the right temperament and skills, but it’s wise to think through the choice. A bad trustee might delay distributing the assets, fail to account for assets, or otherwise mismanage the estate. A really bad one might even embezzle.

In this guide I go through several options when making choices, including the idea of hiring a professional trustee for a fee. Whatever choice you make, take time to think it through. That’s where an estate planning attorney can be a big help.

Your turn

Do you have experiences or questions to share about picking a trustee? Please use the comments area below to contribute.

Download the free 13 page guide

Download the free guide here on our website or visit www.calprobate.com/picking-trustee-in-CA

Contact us

For more information, please contact us in our Palo Alto, California office at (650) 325-8276 or visit calprobate.com

All the best,

The $4 Billion Dollar Question – Will Congress Renew the 2009 Estate Tax Exemption and Apply it Retroactively?

In March, 2010, oil tycoon Dan Duncan died leaving an estate valued at approximately $9 billion.  Had Mr. Duncan died three months earlier, his heirs would have been required to pay over half his estate to the U.S. government in the form of estate taxes.

Lapse of 2009 Estate Tax Exemption

Due to a loop hole in the law, the estate tax exemption lapsed on January 1, 2010.  In 2009, the estate tax exemption was $3.5 million per person ($7 million per couple) with an assessment rate of 45%.  There has been speculation that Congress may renew the 2009 estate tax exemption and assessment rate and apply it retroactively to January 1, 2010.  However, a retroactive estate tax seems less and less likely with each passing day as Congress focuses on other issues such as, healthcare reform, the Gulf oil spill, and financial reform.   So, it seems that the heirs of the wealthy who die in 2010 will retain billions of dollars rather than being required to pay those monies to the government in the form of estate taxes.

What Happens in 2011? 

The estate tax automatically reboots on January 1, 2011 at the exemption rate of $1 million per person ($2 million per couple) and an assessment rate of 55% (maximum).  So, while 2010 will be the most lucrative year for the heirs of wealthy decedents, 2011 will be the most expensive. 

What about Capital Gains Taxes?

If Dan Duncan’s heirs or the heirs of any other wealthy decedents sell assets they inherited, they will be required to pay capital gains tax on the profit – the difference between the original cost of the asset and its market value when sold.  As of the writing of this article, federal capital gains tax is capped at 15%.

Getting Legal Help

It’s important to strategically plan and build flexibility into your estate plan in order to maximize asset protection and minimize exposure to tax liability.  A knowledgeable and experienced estate planning attorney can assist you in formulating an estate plan that will accomplish these goals while best serving your individual needs and the needs of your heirs and beneficiaries.

All the best,

Planning for an Adult Child with a Substance Abuse Problem

This delicate but important topic does not often receive the due attention it deserves. However, there could be some serious personal consequences if a person with substance abuse issues suddenly inherits $20,000 – or $2,000,000 - and can do with it as he or she pleases, especially if there is no parental supervision in place. In essence, this could be as severe as a death sentence.

There are ways to address this matter. The first obstacle to overcome is to be completely honest with yourself about your adult child’s situation and addictions. Don’t imagine that the trauma of your passing will “cure” any preexisting problems with substance abuse.

One of the most important steps to take is to not make this adult child the trustee of your trust (or the executor of your estate); that should be a “given.” Choose a neutral trustee who can, without fail, withhold distributions of funds until it is appropriate; even if the adult child should come knocking on the door in the middle of the night looking for some extra cash for “rent.” Some might think this is too harsh and they establish monthly distributions to their adult child, but this can also be too much for a person in their position to handle. It is generally best to restrict access to cash and assets as much as possible and set up certain controls.

You can empower your trustee to only distribute funds if, and only if, the adult child is showing no signs of addiction and if they pass periodic or random drug tests given by a third-party.

No doubt this will put the trustee in a difficult position, so don’t choose someone who already has an emotional relationship with the adult child. At the same time, don’t succumb to the fear that your adult child will never be able to control their substance abuse issues. You can set up your estate to provide funds for counseling or drug treatment, or to permit the trustee to make additional distributions upon successful completion of appropriate milestones (think of it as the carrot at the end of a stick). If an adult child fails to pass a drug test or complete a rehabilitation program, you can set up your estate plan to stop all further distributions forever, for a finite time or until the person can pass a drug test consistently.

Problems can come in other forms, too, so don’t think that your estate only needs protection from a person with a history of drug abuse. Persons with money management issues, gambling addictions or financially-controlling spouses may benefit from the restrictions you plan now with your trustee. Again, the key is to be open and honest with yourself about your adult child’s situation and to plan for the time when you won’t be around to give encouragement or “tough love.”

A solid estate plan with some restrictive measures in place can literally save a person’s life, so don’t put off a decision that is as important to you as it will be for those you leave behind. A knowledgeable and experienced estate planning lawyer can help you set up a thoughtful and generous inheritance plan for those you love most.

All the best,

Does Your Teenager Have a Medical Power of Attorney?

Parents think that they always have the right to receive information about their children, even after they turn eighteen.  Unfortunately, the law says otherwise.  Once a child reaches age 18, s/he is considered an adult.  In the context of medical care and access to medical records, this means that a parent has no say and no rights - not even the right to have the doctor tell them what is wrong with their child.  The good news is that there is a way to ensure that you can make important medical decisions for your child in the event s/he is unable to do so.

What is a Medical Power of Attorney?

A medical power of attorney, known as a durable power of attorney for healthcare or an advance health care directive in some states, allows a person to nominate someone to make medical decisions in the event he becomes so ill or incapacitated that he cannot make decisions for himself.  Once a child reaches 18 regardless of whether he is still living at home or is on his own, should have a medical power of attorney which names a trusted person to oversee his medical care and make decisions for him.

In most instances, it’s best that the child name one or both parents as attorney-in-fact (called a  "health care proxy", a "health care agent", or a "health care surrogate" in some states).  But it may be advisable for a child to name another close relative or friend, too.  The point is to ensure that in the event of a medical emergency a trusted person has the authority to work and consult with the doctors and other health care professionals to ensure that the child gets the appropriate medical care in accordance with his or her wishes and personal beliefs.

It’s also important that your child express his or her specific wishes for the medical treatment in the event of terminal illness or major injury regarding:

• Use of life saving or heroic measures; and

• Provision of nutrition and hydration.

What Happens if My Child Does Not Have a Medical Power of Attorney?

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) prohibits hospitals and health care professionals from releasing medical information to third parties without the patient's consent.  This includes the patient's parents if s/he is 18 or older.  This means that if your child is seriously injured or is stricken with a serious illness, the doctors will be unable to discuss his or her medical condition with you, unless you have a medical power of attorney.  Moreover, in most states you will have no authority to direct the medical care and treatment your child receives.

What about Financial Decisions?

Your child should also sign a durable power of attorney for financial decisions.  This is especially important if your child has moved away from home and is no longer fully dependent on you for his or her support.  A durable power of attorney for financial decisions gives you the authority to access your child's bank accounts so you can pay your child’s bills and handle other financial matters which may arise while your child is incapacitated.

Should My Child Sign an Anatomical Gift Declaration?

Many states allow people to designate whether they wish to be an organ donor on their driver’s license.  Even if you live in one of these states, it’s advisable to have your child sign an anatomical gift declaration.  By signing an anatomical gift declaration, your child will be able to specify which organs he or she wishes to donate and which ones he or she doesn’t wish to donate.

Getting Legal Help

As unpleasant as it may be to think about the possibility of your child being seriously injured or becoming gravely ill, it’s a much worse thought to be unable to get information about your child’s condition or to make important medical decisions for your child in an emergency situation.  The best way to avoid being shut out of your child’s medical care is to have him or her sign a medical power of attorney along with the other documents discussed in this article.  A qualified estate planning attorney can answer all your questions about these documents and can draft them for your child

All the best,

Leaving the House to the Children

I have many clients in the Palo Alto area who would like to pass their homes on to their children as part of their estate plans.  One client (“Mildred”) who lives in Atherton purchased her house in the early 1970’s for about $180,000.  It’s now worth over $3.5 million and is mortgage-free.  Mildred is a widow and has 3 adult children. 

Mildred wants her estate to pass to her children in equal shares, but she wants her youngest “Suzie” to have the house.  Suzie has lived with Mildred for several years and has taken care of her, so she thinks it would be “fair” if Suzie were to be able to stay in the house and buy out her siblings.

Mildred’s property taxes are about $2,700 per year.  She knows that if her residence passes to her children, they get to keep her property tax rate under “proposition 13” (transfers of a personal residence from a parent to a child are exempt from increases in property taxes).

Sounds simple, right?  Not quite.

First of all, the house is Mildred’s primary asset.  If Suzie inherits it, Mildred doesn’t have other assets that can be used to “equalize” the estate.  That either means that Suzie ends up with an asset worth $3.5 million and her 2 brothers end up with nothing, or Suzie needs to figure out how to buy out her brothers – in order to do that, Suzie would have to come up with approximately $2,333,333 (2/3 of $3.5 million).

Mildred’s first idea was that “all 3 of them can own it together”.  In my experience, that seldom works.  Few people are willing to wait years and years for their inheritance.

Mildred’s second idea was that “well, Suzie can just get a mortgage and buy her brothers out”.  Frankly, that doesn’t work either – first of all, she’d need to qualify for a $2.3 million dollar loan … that works out to a loan payment of over $11,000 per month.  If you assume that most lenders want at least a 2:1 or 3:1 ratio of salary to loan payment, that means Suzie would need to be earning at least $22,000 to $33,000 per month ($264,000 to $396,000 per year). 

Let’s just make it clear that Suzie’s not earning anything close to that.  And then there’s the income tax issue … only the first $1 million of a home mortgage is deductible on your income tax return.

A good estate planning lawyer won’t just blindly set up a plan that’s bound to fail.  The solution depends on a number of factors, and each situation is unique.  For example, in Mildred’s case she talked to the children.  They all agreed that Suzie should be able to stay in the house, but that they did not want to wait “years” after their mother’s death for their inheritance.  Because Mildred is relatively young and in good health, she qualified for a sizable life insurance policy.  Since the “kids” are the ones who would benefit from the policy, they agreed to make the annual premium payments.  They are also the owners of the policy, so Mildred is not using up any of her lifetime gifting exclusion. 

This might not be the correct solution for everyone, but it worked well in this situation.

All the best,

Estate Planning When Young Children are Involved

Kids change everything. Parents are used to that, but not all parents know what changes they need to make in their estate planning to protect their kids. Depending on the children’s ages, different considerations in estate planning may need to come into play.

And remember:  it’s better to have an imperfect plan in place than no plan at all – it’s better to have 90% of “something” than 100% of “nothing” in place.

If something were to happen to happen to both parents, your children must be looked after.  If you have not named a guardian for your children, it could be disastrous. This step is important, and it should not wait. Even if you change your minds about who should be the guardian for your children, you can change the children’s guardian by updating your wills.

Plan for the almost-worst-case scenario. Imagine a tragic accident that takes the life of one parent and leaves the other incapacitated. If a guardian is only named in a will, then it does the children no good because it has no legal effect. Plan for appointing a guardian in case you are disabled.  In many states, including California, you can appoint a “stand-by” guardian for your children.  If you aren’t sure of how to do this talk to your estate planning lawyer.

Good parenting skills and good money management don’t always come in the same package.  You should think about dividing the duties. It is often better to have one guardian solely in charge of the children’s well-being (a “guardian of the person”) and another in charge of the money that’s been set aside to care for them (a “guardian of the estate”).

Regardless of who you name as guardian, make sure that person knows your wishes and is educated about your children. Make sure the person you’ve chosen is willing to take on the responsibilities. Unfortunately, I’ve seen situations where the people who were named guardians never knew it until the children were nearly at their doorsteps. Ask permission and educate the guardian about important preferences you may have, such as religion, parenting philosophy, and disciplinary beliefs. 

All the best,

Estate Planning for High Net Worth Estates

Failure to craft a solid and thoughtful estate plan can have disastrous tax consequences for families with significant assets.

Chances are, you don’t think of yourself as having a high net worth estate.  That’s one of the curiosities that seems to come with living in Silicon Valley.  And yet, practically anyone who owns a house in Palo Alto, Los Altos, Portola Valley, Atherton, Woodside, or Menlo Park runs the risk of having estate taxes decimate their estate.

Why?  Because beginning on January 1, 2011, an individual will only be able to pass along $1,000,000 ($2 million for couples) to his or her heirs free of estate taxes.  If your estate is worth more than that, it will be subject to estate taxes of as much as 55%.

So, for example, if you’re married and own a house worth $1.5 million, an IRA or 401k worth $500,000, and have a $1,000,000 life insurance policy, your estate is worth $3 million for estate tax purposes (a common misconception is that IRAs, 401ks, and life insurance don’t count for estate taxes.  While these assets avoid probate and while life insurance is income tax free, they are part of your estate for estate tax purposes).  Your estate tax rate on that extra $1 million is 49% - that is, $490,000!

Simple planning (the use of an “A-B Trust” also called a “Bypass Trust” or a “Credit Shelter Trust”) can reduce that amount to $200,000.  More advanced planning may be able to eliminate it entirely.

Oh, and by the way, if your taxable estate is worth $3 million, your tax will be approximately $945,000 without planning.

Bottom line:  You run the risk of losing a very high percentage of your assets to the federal government upon your death unless you have planned carefully to minimize estate taxes. Your intended heirs may be left with bequests of a far lower value than you intended.

All the best,

what happens when the owner of a password-protected account dies?

Your estate plan needs to deal with all of the password-protected accounts you’ve established.  If it doesn’t, your heirs might not know how to access important information that they’ll need to settle your estate.  And if you keep your friends’ contact information on line, they might not be able to contact the people who care about you.

 According to a recent study by HSBC Direct, 49% of the online population conducts most of its banking via the Internet.  And many people have opted to “go paperless” for their routine bills – telephone bill, newspaper, utilities, etc. – or for their stock brokerage accounts and other financial data.

How would your heirs find out what your passwords are?  Have you developed a plan for sharing them with the people who need to know them?  Have you developed a plan to keep the list up-to-date?

If not, now's the time to begin!

All the best,

Facing Dishonesty in an Executor or Trustee

Most people assume that the person they have named as their executor or trustee is honest and would never take advantage of the position of trust they’ve been placed in – that they would never embezzle, cause unnecessary delays in the distribution of the assets, fail to account for assets, or otherwise mismanage the estate.

Unfortunately, in many cases, they would be wrong. A local probate court judge recently stated that many of the cases he’s hearing these days deal with a dishonest executor or trustee (he also said that another “hotbed” of estate litigation deals with co-trustees who cannot get along with each other – but that’s a topic for another day).

.Believe it or not, here’s a question someone had the audacity to ask me just a few days ago:  “[I am the trustee of a California trust.] The trust is large by my standards, plenty to cover all expenses and have a lot left over. There are only 2 beneficiaries, the trustee [me] and one other relative. [I] could use a few bucks right away! Or maybe a loan? Who would know?

Would you want this person as your trustee? Should the standard of conduct be “who would know”?

If you are still unconvinced - or even neutral - about the fact that embezzlement, mismanagement, unnecessary delays or asset omissions happen with any regularity, take a moment to digest this small sampling of true stories about dishonest executors and trustees:

In New Jersey, a brother and sister were named executors in their mother’s will. The brother refused to sign a tax return and began making unreasonable requests to which the sister could not agree. After several years, the brother was arrested on three federal indictments – two for embezzling over $400,000 and one for obstruction of justice (all relating to their mother’s estate). The brother pleaded guilty to tax evasion and to a felony charge of stealing from the estate.. Now the sister doesn’t know if her share of the estate will be seized to pay for the fines, penalties and interest on unpaid taxes tied to the estate (because, of course, the brother has no money left).

When their father died, one son was left as trustee of their father’s trust.  He was supposed to manage the trust on behalf of himself, his brother and his sister. The siblings trusted their brother with the role at first, but soon realized that too many facts were not being revealed to them in a timely fashion. The siblings never saw a copy of the trust their father left, and the only funds the siblings received were from the sale of their father’s home. However, the sale did not bring in much money because their brother, the trustee, had failed to pay the mortgage for months.  The house was on the verge of foreclosure when it was sold (unbeknownst to the other siblings) - the house had to be sold under extreme conditions and for far less than its fair market value. Other high-dollar assets belonging to their father were repossessed because the trustee failed to make timely loan payments on them. Now the brother and sister are left wondering if it’s worth taking any actions against the trustee to recoup the lost funds. 

Executors and trustees have a legal responsibility to act with honesty and impartiality on behalf of the estate’s beneficiaries, but sometimes this concept is lost on those tasked with these responsibilities.

When people face the need to name an executor or trustee in their will or trust, they sometimes feel the need to name their oldest child, regardless of that child’s ability to perform the needed tasks. I’ve actually had people tell me they don’t really trust the person they’re thinking of naming because s/he has had serious drug or mental problems in the past or because the person is “terrible at managing money.”  This is not a person who should be named as an executor or trustee!!! Other people take drastic actions like naming all their children as executors so no one feels left out.

Naming a child as the executor or trustee because s/he is “the oldest” is a poor reason to name that child to manage one’s money and other assets.  There are highly competent professionals who can be named instead. If you don’t know how to find these professional fiduciaries, ask me for assistance - if you are my client, I would be pleased to help you find a competent professional trustee.

All the best,