This is the second of two articles on reviewing a trust. In this one, discuss how we evaluate a living trust agreement, and how that differs from developing an estate plan.
My team and I examine dozens of things when we evaluate a trust document. To give you an idea, a few of them are:
- Does the trust agreement confirm to third-parties that a married trustor/trustee has authority to act when his/her spouse cannot (if desired by client)?
- Does the trust agreement include provisions to alter distributions to a surviving spouse in the event of remarriage after the death of the first spouse?
- Does the trust agreement include a common trust provision when one or more of the primary beneficiaries has not yet graduated from college?
- Does the trust agreement give the trustee of a continuing trust an appropriate amount of flexibility to make disproportionate distributions based upon the relative needs of the beneficiaries?
- Does the trust agreement set up continuing trusts for the beneficiaries, which are tailored to the needs of each trust beneficiary?
Is there evidence that the trust is properly funded? An unfunded or partially funded revocable living trust does not avoid probate. Great care must be taken to ensure that all necessary assets held by the trustor individually are either retitled to the trust, or that the trust is considered as an appropriate “designated beneficiary.”
The difference between evaluation of a trust and creating an estate plan
In trust reviews, my intention is to provide you with an objective analysis of the document, and nothing more. Still, my review may be very beneficial to you because your estate plan will eventually be interpreted by attorneys and financial professionals that you do not know. So it is far better to identify ambiguities or omissions in your estate plan while you are alive and healthy than when you are not.
When I am hired for estate planning, I conduct an in-depth "discovery" process that includes:
Gathering personal and financial information
First I need to review your personal data and your financial information, and discuss a potential plan to meet your goals and objectives. I need to learn about your family and how the various members handle money. I understand that this is sensitive information, something not always easy to talk about. I am not shocked by any characters lurking in your family tree – we all have our fair share of them!
Discussing goals and values
You have built up a large estate, and you probably have very specific wishes that you want someone to carry out. Before I can recommend any course of action, we need to meet in person so that I can learn about you, your values, what you are trying to accomplish and, maybe most importantly, what you want to avoid. When I am creating a plan for both spouses, it is an absolute requirement that both spouses meet with me.
Focus areas in an estate planning engagement
Here are a few of the many questions I ask the first time we get together to discuss your estate plan. The following is not a complete list - it is a sampling:
- Did you have any prior marriages?
- Have you signed any pre- or post-marriage contracts?
- Do you have an “umbrella” liability insurance policy?
- If any children are under 18, have you decided who would be their guardians?
- Do you have any business interests?
- Do you wish to leave money or assets to charitable or religious causes?
- Are you concerned about providing for your grandchildren’s education?
- Do you wish to prevent anyone from receiving a portion of your estate?
- Do you wish to make any provisions in your estate plan for your pets?
The more I understand about your circumstances, the better I can educate you about your choices and guide you so that your family members won’t need to make stressful decisions in trying times. You will have the peace of mind of knowing that you have “done right” by your family.
All the best,
This article is part of our series of articles on the risks and rewards of buying U.S. real estate as a non resident alien.
Accountants know a lot about keeping track of your money, but estate planning isn’t their primary job. By working with an attorney experienced in international estate planning law, you can get all your questions answered and gain peace of mind that your loved ones will not face a snarl of tax issues down the road.
If you own property outside of the United States, it’s even more important to have a network of experts to call upon when you have an issue. Not all countries recognize trusts and other tools that work here. To reduce or eliminate tax liability, you may need to choose an appropriate ownership structure. Keep in mind that the net tax savings will vary depending on the ownership structure as well as individual circumstances.
Ownership structures include:
- Pass through entity (limited liability company or partnership)
- U.S. corporation
- Foreign corporation
- Foreign trust
- Real estate holding company
Not all of these structures will avoid U.S. estate and gift tax liability and some provide better income tax benefits than others. It is important that you seek competent legal advice before you purchase U.S. real property (or as soon afterward as possible).
Examples provided in our guides and here on this blog help illustrate this point:
All the best,
This is the first of two articles on reviewing a trust. In this one I address whether a Palo Alto family with a living trust should have the creator of the trust do the review, or find a different attorney to take a fresh look.
Q: We live in Palo Alto, California and in the 90s our family chose a Burlingame estate planning attorney to establish a living trust. Now we are trying to verify if the attorney who drew it up really is trustworthy and experienced with living trusts. We need a trust review. Specifically:
- Is it better to go to the same attorney for this "check up" or someone new?
- Since we are asking for a trust review, would the fees be much lower than if we were starting from scratch?
A: You were smart to use an estate planning attorney instead of using off-the-shelf forms or packages from a self-service legal website. You are smart to check and update your living trust, too. Circumstances can change alot in a short time. In fact, it is a good idea to do a trust review and update your trust every three to five years.
Vetting estate planning attorneys using Avvo
I am glad to hear that you are vetting estate planning attorneys before hiring anyone. One way to check out a lawyer is to look on Avvo. Search for "estate planning" in the Palo Alto area and see which lawyers' names appear with high Avvo ratings. See if they've answered questions and read the answers to see what you think of their approach.
Checking out attorneys using the State Bar website
Also check out the State Bar website. Use the "Advanced Search" feature and the "Additional Search Criteria" to find a specialist in Estate Planning law. Less than 1% of all California lawyers are certified as specialists in Estate Planning. In order to be certified, a lawyer has to pass a specialized bar exam and meet rigorous experience requirements.
Also, check out these individuals' websites to see what their approach is to estate planning to see if you think the "chemistry" will be right.
What you can expect to pay
You get what you pay for! If price is your most important criterion, then skip all of the above and just phone lawyers until you find the one with the lowest price. Just remember, if they don't do it right, it cannot be corrected after you die or become incompetent.
Depending on the complexities of your situation (and whether you're married or single, have children who need to be protected, etc.), an experienced attorney's fees will be anywhere from $2,000 to $10,000. As a very rough rule of thumb, figure out your net worth and multiply by 0.10% to 0.25%. That usually approximates the complexity of your estate and the cost of planning for it properly.
For example, if you have an estate worth $3 million dollars, you should expect to pay between $3,000 and $7,500... a little less if your situation is really "plain vanilla"; a little more if it's complex.
Look for the next article on trust reviews
In the next article on trust reviews, tentatively titled "How is Review of a Living Trust Different from Estate Planning?" I'll show an example of what we examine when we do a trust review, and how a trust review differs from creating an estate plan.
Getting legal help
If you are currently working with a highly qualified estate planning attorney that you are comfortable with, it is probably best to continue working with him or her. On the other hand, if you have doubts about the advice you are getting or the experience you have working with the person, it's time to look elsewhere.
All the best,
A stack of forms can’t “know” the nuances of your situation. Work with an attorney experienced in international estate planning to craft a plan that fits your unique circumstances. Protect your loved ones and assets by examining your options now »
This fictional example is drawn from our guide Buying U.S. Real Estate When Your Child Studies in America.
Hiro Sasaki, 19, will be a freshman at Stanford this fall (Class of 2015). Hiro’s parents, Emiko and Dai Sasaki of Tokyo, are looking to purchase a place for Hiro to live. They want to do everything they can to help him succeed, and that means providing a study environment free of the distractions common in a dormitory.
$675,000 cash for Palo Alto townhouse
The Sasakis identify a townhouse in Palo Alto listed for $675,000. It’s close enough for Hiro to bike to campus. Dai pays the listing price in cash, putting the title in his name.
Dai reads online about the importance of having a revocable living trust in the U.S. Dai has seen those online legal programs where it is possible to purchase do-it-yourself-forms. To Dai it seems like a good option. He uses a do-it-yourself form to establish the trust.
Establishing trust does not lower Sasakis' tax liability
Unfortunately, while a revocable living trust is useful for avoiding probate, it does not lower his tax liability. Dai still has only a $60,000 exemption. So if something happened to Dai, his family will have a massive estate tax bill – in the neighborhood of $142,800.
The online legal program where Dai purchased his form wouldn’t “know” about the unique circumstances he is in. And despite diligently completing the form he downloaded, he is about where he started off with respect to his tax liability.
A minor car accident in Tokyo gets Dai thinking again. He realizes he has not protected his loved ones from a big tax bill, should anything happen. He finds a Bay Area attorney experienced in international estate planning, and gets a sound plan in place.
This example is made up, but it's true that a stack of forms can’t “know” the nuances of your situation. If your situation is anything like the one described here, consider working with an attorney experienced in international estate planning to craft a plan that fits your unique circumstances.
All the best,
This article is part of our series on Buying U.S. Real Estate When Your Child Studies in America
Trend: more NRAs purchasing in college areas
The June 29, 2011 article “U.S. is Top Choice for Real Estate Investors,” in Generation America, has some interesting facts and figures from a survey was conducted by the National Association of Realtors as part of its 2011 Profile of International Home Buying Activity.
Among the survey’s findings (paraphrasing): real estate in the U.S. is the top destination for foreign buyers; the number of foreign exchange students at U.S. colleges and universities has increased the demand for real estate by foreign buyers; and some foreign families are purchasing U.S. properties in college areas so their child has a place to live.
The president of the National Association of Realtors observes that, "the U.S. has always been a desirable place to own property and make profitable investments. In recent years, we have seen more and more foreign buyers coming here to take advantage of low prices and plentiful inventory."
Why putting off estate planning is especially risky for NRAs
No one likes to think about dying someday. Some people even consider it bad luck to discuss death. But family members who have come to the United States from elsewhere may find U.S. tax law quite different than what they were used to.
It’s important to set aside our emotions and consider a key fact: Federal estate and gift tax laws impose onerous restrictions on non-citizens (even if you have a “green card”).
- Outright gifts during your lifetime to a non-U.S. citizen spouse – including making him or her joint owner of certain assets – can trigger gift tax problems immediately.
- A non-resident non-citizen with no green card who bought a $1.5 million house with cash, intending to leave it to one of his children through a will or trust could trigger an estate tax of $495,000. With advice from the right expert, she could avoid that tax bill.
- Likewise, gifts at death to a non-citizen spouse may not qualify for the “unlimited marital deduction.” Your unsuspecting widow or widower may be forced to pay hundreds of thousands of dollars in estate taxes shortly after your death.
- If an investor buys a $1.5 million property in U.S. and dies owning it without ever having put it in a trust, the probate cost alone could be as much as $28,000. If that investor also happens to be a non-resident alien, the estate taxes could be $495,000.
Taking steps to protect your loved ones and your assets
Even if your estate is modest, the tax effects of poor planning on NRAs can be devastating. Choosing the right lawyer takes an investment of time and money, and it is a wise investment. We can set up documentation, write any complex agreements, and take other steps to help protect you. But you need to take the first step: contacting us. Protect your loved ones and your assets by examining your options now. Call +1 650 325 8276 or get started at our website »
All the best,
Presenting our newest guide on international estate planning
We've just posted a new international estate planning guide, Buying U.S. Real Estate When Your Child Studies in America. (Note: If you get value from it, would you please recommend it to others on Facebook, Twitter, or other places you're connected to friends and family? Thank you!)
In my 20+ years as an estate planning attorney, I've found that most families – and perhaps especially nonresident aliens (NRAs) – want straight talk when it comes to legal and financial matters. And in this guide I've tried to dispense with legalese and give you exactly what the title says.
Don't "fly in the dark"
Too many parents “fly in the dark” when it comes to securing the financial future of their loved ones. As someone who works on estate tax and probate issues with NRA families, I hear heart breaking stories of families having to pay dearly during painful times, just because they never found a trusted advisor to ensure they keep all the assets they deserve.
Five fictional examples illustrate key issues NRAs face
In this guide (as well as a previous guide, U.S. Gift Tax and Estate Tax Planning for Non-Residents and Non-Citizens), you'll find examples of nonresident aliens from several countries facing key questions, issues and choices. The examples are made up, but if your situation is anything like ones presented, you could probably use help from an experienced international estate planning attorney.
Comparing your options
Unfortunately, with the way that most international estate planning lawyers present themselves to the world, it seems like we’re all the same. In reality, each lawyer does have certain qualifications.
Some might be experts at tax law, or in working with corporations or with debt collection, or a whole variety of different things…but are they really providing what you, the family person, wants and needs?
Protect your loved ones and your assets by examining your options now
I hope this free guide and checklist opens your eyes to the importance of setting up your plan. My team and I can set up documentation, write any complex agreements, and take other steps to help protect you. But you need to take the first step: contacting us! Please call +1 650 325 8276 or get started using a simple form here at our website.
All the best,
Everyone with a high net worth should put together an estate plan. Here is an example showing how people with complex financial circumstances benefit from finding the right legal advisor. For more examples, see my latest guide and checklist.
Meet Sanjay and Ling, U.S. residents with young children born in the U.S.
Meet Sanjay and Ling, young, bright, hard working professionals. They don’t think of themselves as rich, but they have substantial savings. They want to make sure their two young children are cared for if anything bad happened. They are not U.S. citizens, but their children were born in the U.S.
An experienced estate planning attorney will know which laws apply. And by establishing a long-term relationship, the attorney can help Sanjay and Ling update their plan as their family grows, as their finances change, and as they move to new places. They will also counsel fiduciaries in connection with carrying out legal responsibilities - whether they are personal representatives, trustees, or guardians.
If their proposed guardians don’t live in the U.S., the kids are at risk of having the Court not permit them to be taken out of the U.S. – or at least there might be a protracted guardianship dispute/case. There are also issues with making sure the kids have passports that permit them to travel with someone other than their parents.
How does the attorney know what Sanjay and Lin want?
First he or she works with the couple to gather personal data and financial information. This is their estate plan, so the attorney needs to review personal data and financial information, and discuss a potential plan to meet their goals and objectives. The attorney needs to learn about their family and how the various members handle money. This is sensitive information, something not always easy to talk about. But an experienced estate planning attorney won't be shocked by any characters lurking in the family tree – everyone has them!
Both spouses meet a few times with the attorney to discuss goals, values, and -- maybe most importantly -- what they want to avoid. In the process, Sanjay and Ling discover that they have very specific wishes they want someone to carry out were something to happen. The attorney listens carefully and prepares the appropriate strategy and documents.
Few estate planning lawyers have the knowledge and expertise to avoid the pitfalls in these situations
Sanjay and Ling are made up people. But if your circumstances are anything like their, I do recommend that you retain an attorney familiar with helping non citizens and non residents.
Also, here are guides I've published that might help you:
All the best,
Everyone with a high net worth should put together an estate plan. Some may be straightforward, while others will be complex. Here is one example (there are others in my newest guide) of a person with relatively complex financial circumstances, who would benefit from hiring an experienced estate planning attorney.
Meet Barry, the Silicon Valley entrepreneur
Barry is an entrepreneur in his 50s. He is not a U.S. citizen, but he has a green card. He owns real estate here, plus stock in U.S. companies, and lots of expensive stuff in his home -- cars, antiques, etc. He also has assets in South America and Europe.
Barry wants a little bit of his estate to go to his children (who are already doing well on their own), most to go to his grandchildren, and nothing to go to his ex-wife.
A good estate planning attorney will know the applicable laws, both domestic and foreign, that apply to Barry’s situation. His estate plan can be structured so that his grandchildren don’t get control the money until they are old enough to handle it.
The planner will go through several years of tax returns to see how Barry is handling his finances now, what he paid for the properties and what they are worth today. In addition to minimizing estate taxes, the plan will minimize capital gains taxes and property taxes.
Few estate planning lawyers have the knowledge and expertise to avoid the pitfalls in these situations
There is a great deal that must be considered in international estate planning and there are no easy answers or simple solutions. That is why Barry avoided the cookie cutter approach to estate planning -- the one offered by using pre-printed forms. He did make an investment -- top shelf legal guidance is not cheap -- and got a handsome return.
Getting a plan tailored to your needs
Barry is a made up person. But if your circumstances are anything like his, I do recommend that you retain an attorney familiar with helping non citizens and non residents.
Guides I've published that might help you:
All the best,
A test worth millions
Currently, U.S. citizens enjoy a $5 million exemption from both estate and gift taxes (at least in 2011 and 2012). But many non-citizens are limited to an estate and gift tax exemption of only $60,000. The key question is where the non-citizen considers home or “domicile” to be.
Determining your home country
If a non-citizen does not consider the U.S. to be his home country, he can only claim a $60,000 lifetime estate and gift tax exemption. To determine where a non-citizen’s home is located for estate and gift tax purposes, the IRS uses a “facts and circumstances” test. The test includes many factors, including review of:
- Your Visa status
- Locations and values of other residences (real property)
- Where your family members and close friends live
- Where your personal property is located - especially valuable items like fine art, currency, cash, stocks, and bank accounts
- The location of your business interests
- Where you are registered to vote
- Where you are licensed to drive
- Where your primary residence is
- Where you intend to be buried
Non-resident alien status
If a person is neither a citizen of the U.S. nor considered to be domiciled in the U.S. (a non-resident alien or “NRA”) for gift and estate tax purposes, then the only assets which would be subject to U.S. gift and estate taxes are those situated in the United States.
As an attorney experienced in international estate planning law, I can help you determine whether you are subject to U.S. estate and gift tax laws.
Call me at (650) 325-8276 or download my new guide, U.S. Gift Tax and Estate Tax Planning for Non-Residents and Non-Citizens >>
All the best,
If you or your spouse is not a U.S. citizen, it’s essential that you inform your estate planning advisors and discuss the implications. The federal estate tax laws impose several onerous restrictions on non-citizens, so if citizenship is an option, now may be the time to take the plunge.
Marital Deduction Restricted
For most couples, the unlimited marital deduction is a key estate planning tool. It allows you to transfer any amount of property to your spouse, through lifetime gifts or bequests at death, free of gift and estate taxes. Eventually, these assets will be taxed as part of the recipient spouse’s estate.
Congress was concerned, however, that a non-citizen surviving spouse might leave the country with the assets and they would escape taxation altogether. To avoid this situation, it provided that when a surviving spouse is a non-citizen, the marital deduction is unavailable unless the assets are placed in a special trust called a Qualified Domestic Trust (QDOT). Assets the non-citizen spouse receives outright — including jointly owned property, life insurance proceeds and retirement benefits — are taxable immediately unless the non-citizen spouse creates his or her own QDOT to hold the assets.
QDOT Has Many Rules
The purpose of a QDOT is to ensure that, when a citizen’s estate escapes taxation by virtue of the marital deduction, the United States ultimately collects taxes on the non-citizen spouse’s estate. To qualify, therefore, a trust must:
- Have at least one trustee who is an individual U.S. citizen or a domestic corporation (for example, a bank or trust company),
- Require the trustee to approve all principal distributions,
- Be designated as a QDOT by an election on the citizen spouse’s federal estate tax return, and
- Retain enough property in the U.S. to cover any estate tax payable at the noncitizen spouse’s death.
In addition, if the QDOT assets are worth more than $2 million, the U.S. Trustee must be a domestic bank or, alternatively, the individual U.S. Trustee must furnish the IRS with a bond or letter of credit in an amount equal to 65% of the QDOT’s value.
QDOT Provides Limited Benefits
Even though you can preserve the marital deduction with a QDOT, non-citizen spouses are still at a big disadvantage. Most couples’ estate plans include a marital trust, which provides for the surviving spouse and is sheltered from tax in the decedent’s estate by the unlimited marital deduction. A surviving spouse who’s a citizen can receive distributions of both income and principal from a marital trust without negative tax consequences. He or she can even deplete the marital trust and avoid estate taxes on the assets by spending them or giving them away using the annual gift tax exclusion. When the surviving spouse dies, assets remaining in the marital trust are taxed as part of his or her estate, but they can be sheltered from tax by the surviving spouse’s estate tax exemption.
With a QDOT, it’s a different story. Although a QDOT can distribute income tax-free, distributions of principal to the non-citizen spouse are subject to estate tax (except in cases of hardship, which is not clearly defined in the Internal Revenue Code or regulations). The amount of tax is the additional federal estate tax that would have been imposed on the citizen spouse’s estate if it had been increased by the amount of the distribution. The non-citizen spouse can’t avoid estate tax by spending the principal or giving it away.
In addition, when the non-citizen spouse dies, assets remaining in the QDOT will also be taxed as if they had been included in the citizen spouse’s estate. That means the non-citizen spouse can’t shelter the QDOT assets from estate tax using his or her estate tax exemption.
Sharing the Wealth More Difficult
A basic estate planning principle is that each spouse should have assets in his or her own name roughly equal to the federal estate tax exemption. The reason for this is to avoid wasting either spouse’s exemption. (There may be asset protection benefits as well.)
Here’s an example: Bob is married to Graciela, who is not a U.S. citizen. Bob owns $3 million in assets, but Graciela has no assets in her name. Graciela predeceases Bob. When Bob dies, the excess of the $3 million over his federal estate tax exemption ($1.5 million in 2005; $2 million in 2006, 2007, & 2008; $3.5 million in 2009; and back down to $1 million in 2011) is subject to estate tax. If the assets had been divided equally between them, Graciela could have used her share to fund a bypass trust for Bob’s benefit. The $1.5 million placed in the bypass trust would be sheltered from estate tax by Graciela’s exemption and would not be included in Bob’s estate when he dies. Bob’s share of the assets would be sheltered from tax by his estate tax exemption. But because Graciela isn’t a citizen, equalizing the assets between the couple would have been problematic.
Ordinarily, when one spouse owns a disproportionate share of the wealth, the simple solution is for that spouse to transfer assets to the other spouse tax-free under the unlimited marital deduction. The solution isn’t so simple, however, when the transferee-spouse is a non-citizen. Because the unlimited marital deduction is unavailable, the transfer would be subject to gift tax. In 2010, there is a $133,000 annual gift tax exclusion (indexed annually for inflation) for gifts to a non-citizen spouse, but it could take many years to build up that spouse’s estate to an amount that equals the federal estate tax exemption (especially as the exemption rises). If the non-citizen spouse dies before that happens, then all or a portion of his or her federal estate tax exemption may be wasted.
Citizenship has its advantages
As you can see, there are significant estate planning advantages to becoming a U.S. citizen. Attaining citizenship can be time-consuming, so if you or your spouse has been putting it off, consider consulting an immigration attorney and beginning the process as soon as possible.
All the best,