Oldest vs. Youngest - The Measuring Life

So, you've decided to delay the age at which your kids will receive their inheritance. For today, let's assume you want your children to inherit at age 25. Your estate planner puts your decision into your will and you put it out of your mind. Over the next five years, you begin to accumulate weath. You start an IRA or three and start an investment account with a financial advisor. One day your financial advisor asks if you have considered life insurance as part of you financial plan. You decide life insurance would be a strong addition and take the plunge. You make your testamentary trust the beneficiary of the policy and put that out of mind as well.

Now, assume you die before all of your children reach the age of 25. Your oldest two children are 27 and 25, so they are not beneficiaries of your testamentary trust, receiving their inheritance outright instead. Your youngest child is 21 and is therefore a beneficiary of the testamentary trust. Your life insurance pays $500,000 to that testamentary trust. Do you see the problem? The youngest child is, effectively, the only beneficiary of the life insurance policy because he is the only beneficiary of the testamentary trust. Since your older kids were above the age you set, they were never beneficiaries of the trust and have no claim to the insurance proceeds. They have been disinherited to the tune of $166,666.66 each.

How do we fix this situation? One effective way is to begin distributing your children's shares of your estate when the youngest child reaches the age of 25. This way, your older children remain beneficiaries past the age of 25. This minor inconvenience is easily justified in the situation described above; it ensures an additional $166,666.66 for the two older kids. Who could complain about that?

(Take note, though, that there are other ways around the problem. Stong drafting can allow you to make distributions to your children as they reach 25. The point is to make sure you don't end up disinheriting your kids through careless drafting.)

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Lawyer Joke of the Day:

Q: When a lawyer dies in the desert, why don't vultures eat his body?
A: Professional courtesy.

A Quick Hit on Life Insurance Trusts

Life insurance is a countable asset for both estate tax purposes and Medicaid/Title XIX purposes. Medicaid allows an applicant to own up to $1,500 of cash value in a life insurance policy. All other cash value increases the Medicaid penalty period. After death, the proceeds of a life insurance policy are included on an estate tax return if the policy was owned by the insured. This can result in significant estate tax consequences when the value of the estate exceeds the estate tax exemption.

However, a good estate planner can create an instrument which will avoid those taxes and protect your life insurance from Medicaid: a life insurance trust. A life insurance trust is irrevocable. This means that the person who is insured is not the owner. The trust acts as owner and beneficiary on the life insurance policy, meaning that the life insurance proceeds are completely outside the estate. Furthermore, since the life insurance trust is the owner of the policy, the cash value is not counted as an asset of a Medicaid applicant.

Life insurance trusts have many other purposes as well, including protection of business assets, with a separate fund of cash or pre-planning for funeral costs like in our Funeral Planning Trust. Ask your attorney if a life insurance trust is right for your estate plan.

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Lawyer Joke of the Day:

The New York Times, among other papers, recently published a new Hubble Space Telescope photograph of distant galaxies colliding.

Of course, astronomers have had pictures of colliding galaxies for quite some time now, but with the vastly improved resolution provided by the Hubble, you can actually see the lawyers rushing to the scene.

Trust Week, Day Five: Beneficiaries' Rights...and Wrongs

A man will fight harder for his interests than for his rights.

- Napoleon Bonaparte

We’ve talked a little this week about how and when to set up a trust. We’ve talked about grantors powers and trustees authority. We’ve talked about types of trusts. But we haven’t yet discussed the whole reason for creating a trust: the beneficiaries. If you don’t have any beneficiaries, then you don’t need a trust, right? The property isn’t being protected for or from anyone, because there is no one to claim it when the trust ends. Let’s look at some statements made by beneficiaries to find out their role where trusts are concerned.

“The trust is for my benefit, so I’m in charge.”

This couldn’t be farther from the truth. The trust is for your benefit, but it wouldn’t exist if the beneficiaries were supposed to be in charge. Beneficiaries are sometimes given special powers regarding election of a trustee, and they can remove a trustee in certain situations. But in no way do the beneficiaries have any right to dictate how trust property should be used or managed.

“Okay, so the trustee is in charge. That means I have to take what the trustee decides to give me.”

Once again, off the mark. The buck seldom stops with the trustee. In truth, the person in charge is the grantor. He or she created the trust by choosing what terms to include in the trust document. Sometimes that involves giving the trustee discretion. In many trusts, a beneficiary is given the right to request distributions from the trust. It is not uncommon for the grantor to require that a trustee make a minimum annual distribution to the beneficiaries. Always, always, always read the trust document to determine if the trustee is being fair. And remember, the trustee owes fiduciary duties to you as beneficiaries. If he violates those duties, he can be held liable.

“Nice! So, when the trustee does something I don’t like, I can sue him!”

You just keep missing the mark. You’re like a blindfolded orangutan firing a Civil War era rifle.

Sorry about that.

The trustee owes the beneficiaries certain fiduciary duties, but he or she still has a lot of latitude when it comes to managing the trust assets. Courts are hesitant to second guess business judgment of a trustee who is at least marginally familiar with managing the types of assets owned by the trust. However, if the trustee treats certain beneficiaries differently than others (without special instructions from the trust), or if he or she is mixing trust funds with personal funds, legal action could be used to force the trustee to comply with the duties of loyalty and prudence. Again, you can be certain that the trustee is doing his job if you check the terms in the trust document. And seek counsel from an attorney.

It’s been fun discussing trusts with you this week. Hopefully you’ve gained some understanding of what a trust is and how it might play an important role in your estate plan. If you have additional questions or would like to schedule a free initial consultation, give us a call or fire off an e-mail.

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Lawyer Joke of the Day:

Five signs you need a new lawyer:

3. When the prosecutors see who your lawyer is, they high-five each other.

Trust Week, Day Four: Trust Me, I'm Your Trustee

If trust were a living creature, it would be on the endangered species list.

- Unknown

Generally speaking, a trust cannot exist without three things: trust property, beneficiaries and a trustee. What happens if the trustee dies? What if the grantor forgot to choose a trustee? Fortunately, forgetting to appoint a trustee will not make a trust invalid. Many times, a court will intervene (if the beneficiaries ask nicely) and will appoint someone as trustee. As the saying goes, “A trust will not fail for want of a trustee.”

Wow. That ranks right up there with Biff Tannen’s, “Make like a tree and get out of here.”

You can assume that a court is not going to get involved with a contract matter like a trust if it does not have to. That means that the role of trustee must be pretty important. Practically, this makes sense. If the grantor wanted to delay or prevent the beneficiaries from taking full ownership in the property he placed in the trust, he would not want the trust to end just because the trustee didn’t exist. The question then becomes, “What does the trustee do that is so important?”

A trustee is a sort of custodian of the property that is placed into the trust. He or she holds legal title to the property while the beneficiaries hold future beneficial interests. As a result, the trustee is held to a fairly high standard of behavior. Essentially, he must manage the trust property in a way that benefits only the beneficiaries. He must also work for the benefit of all of the beneficiaries, rather than just one or a select few. He should deal with the trust property in the same way that he would deal with his own property. These duties are called the duty of loyalty, the duty of prudence, and the duty of impartiality.

There are many other duties imposed on a trustee that are related to the three main duties. A trustee must collect and protect trust property. He or she must earmark trust property as belonging to the trust and may not mingle his own personal funds with those of the trust. He must inform and account to the beneficiaries regarding activities involving trust property. In many states, the trustee must provide the beneficiaries with a copy of the trust document if it is requested.

A trustee has many duties, but also has a great deal of authority regarding the trust property. The trust document typically states what powers the trustee may exercise, but many powers held by the trustee are given by statutes. Iowa’s statute grants 32 separate and distinct powers to a trustee outside of the trust document. Fortunately, the grantor can limit the ways in which the trustee exercises those powers by imposing conditions. Plus, with the fiduciary duties outlined above, a trustee is somewhat limited in the way he or she exercises his authority regarding trust property.

Clearly a trustee plays a significant role in the operation and effectiveness of a trust. Selection of an appropriate trustee can make or break a trust’s effectiveness. Family relationships are often a very important consideration in choosing your trustee as well. If the trustee doesn’t like your kids, he won’t want to exercise his discretion in their favor when deciding whether to distribute income to them. On the other hand, a trustee with little to no experience managing money could cause the value of trust property to decrease substantially. With the help of an attorney or financial advisor, you can navigate these complex issues and choose the appropriate person to manage your trust for your beneficiaries.

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Lawyer Joke of the Day:

Five signs you need a new lawyer:

4. He picks the jury by playing “Duck-Duck-Goose.”