Trust Week, Day Three: Funding

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

- Unknown

In order for a trust to be effective, that trust must be funded. In this context, “funding” means that the grantor must transfer some amount of property into the trust. Any property that is not owned by a trust will not be controlled by the trust’s terms. So, what do you need to do to fund your trust?

Sometimes, funding a trust means transferring land to the trustee. To accomplish this, the grantor will need to execute a deed transferring the land. In some states, this deed will say “to (Name of Trustee) as Trustee of the (Name of Trust) Trust.” Some states will allow language like, “to the (Name of Trust) Trust.”

Other times, funding a trust will involve changing title on your CD’s or investment accounts. This will involve contacting your investment company or bank and informing them of your intentions regarding the accounts you hold there. Many investment companies will have departments devoted entirely to making sure trusts contain the necessary language and making sure the necessary title changes get made. Often, the grantor will need to sign an authorization for the trustee as well as a change of title.

Finally, funding a trust might be as simple as listing an asset on the schedule of assets at the end of the trust. Assets that this approach would work for would include assets that don’t require a title to own like antique furniture or a coin collection. Other assets that might fit this category could include foreign currencies or precious metals.

If you are considering creating a trust, make sure to ask your attorney about how your trust will get funded. Failure to fund a trust is the single most common mistake a grantor can make and the error that is the most fatal to a newly created trust.

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Lawyer Joke of the Day:

Five signs you need a new lawyer:

5. He tells you his last good case was of Budweiser.

Trust Week, Day Two: Types of Trusts

When people ask me why it’s so hard to trust people, I ask them why it’s so hard to keep a promise.

- Unknown

Last time, we talked about what a trust is and some of the things a trust can do. We mentioned a few reasons for why you might create a trust. At the end, I indicated that there were many different types of trusts; I’d like to spend some time today talking about the many different varieties.

There are two basic categories under which trusts fall: revocable and irrevocable. When someone creates a revocable trust, they retain the power to change or cancel that trust at any time and for any reason. Retaining that power allows the grantor to change their mind about how the trust works, what the conditions placed on the beneficiaries should be, and even whether to use a trust at all. If such a trust is revoked, the property is returned to the grantor and he is returned to the position he was in prior to creating the trust, generally speaking. In my list of six essential estate planning documents, the second item listed is typically written as a revocable trust.

An irrevocable trust is one that, once created and signed, cannot be changed or cancelled. It is a permanent creation and will continue its existence until all of its terms and conditions are completed and satisfied. Sometimes, revocable trusts become irrevocable upon the occurrence of certain events such as the incapacity or death of the grantor.

The revocability of a trust is typically what determines its usefulness. A revocable trust allows the grantor to use a trust to design an estate plan that provides a great deal of flexibility. So much so, that many estate planners utilize a revocable trust where a will has previously been the standard. This is especially attractive because using a trust instead of a will eliminates the need for probate on the assets within the trust.

However, by creating an irrevocable trust, the grantor can shelter assets from creditors or from estate taxes. For example, an irrevocable life insurance trust owns a life insurance policy on the grantor’s life, but protects the proceeds from estate tax for the benefit of the grantor’s chosen beneficiaries. Irrevocable trusts are often used in planning for end-of-life concerns like long-term care. Caution must be used, however, because placing property into an irrevocable trust constitutes a gift that may be subject to federal and state gift taxes if not done correctly.

There are many other ways to describe types of trusts:

• A testamentary trust is created within a will. It does not shield assets from probate or from estate tax, but it does help define what, when, and how the grantor’s heirs receive their inheritance.

• A special needs trust or supplementary needs trust provides support to a disabled or aging individual. Such a trust can be created in a way that allows the beneficiary to receive federal and state support along with support from the trust. Someone familiar with those requirements can tell you more about the necessary terms.

• As mentioned before, an irrevocable life insurance trust owns a life insurance policy on the grantor. With careful drafting, the grantor can pay the premiums on that policy while still protecting the insurance proceeds from estate and inheritance taxes.

These examples are just a scratch on the surface of the types of trusts that exist. Some of them require so much explanation that they would require at least one full blog of their own. Within the myriad types of trusts, there are even more numerous clauses and terms that are used. Later this week, we’ll touch on some of the more common trust terms. (I know, it’s not fair to pique your interests so much. You’ll just have to find a way to contain your excitement.)

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Lawyer Joke of the Day:

Q: When lawyers die, why don't vultures eat them?
A: Even a vulture has taste.

Trust Week, Day One: Intro & Basics

The man who trusts men will make fewer mistakes than he who distrusts them.

- Camillo di Cavour

Put simply, a trust is a contract between two parties that is made for the benefit of a third party. There are three main parties involved in the creation of a trust: the grantor, the trustee, and the beneficiary. The grantor is the person who creates the trust. The trustee is the person whom the grantor appoints to manage the trust. The beneficiary is the person who – wait for it – benefits from the trust. But you didn’t come here to be told something you already know. Let’s talk about how a trust operates.

A grantor creates a trust when he transfers property to the trustee who promises to hold that property for the beneficiary. The property can be cash, personal property, or land. The property is no longer owned by the grantor; it is owned in the name of the trust. When the trustee acts, it is as if the trust took that action. A trust can do almost anything an individual can do, including run a business, hold real estate, and invest cash and hold securities.

The grantor has a great deal of control over what the trustee does. This allows the grantor to create a trust for many purposes. Creating a trust will allow the grantor to provide for a disabled child or elderly parent. A trust can be used to create a scholarship fund or to protect assets from creditors of the grantor or beneficiary. But perhaps the most common reason for the creation of a trust is to avoid the costs associated with probate.

Because a trust is a contract, its terms control the behavior of the trustee regardless of whether the grantor is still living. The trust property is not subject to probate because it is no longer owned by the grantor and is instead owned by the trust. Certain trust provisions can even help save on estate taxes when needed.

As you can probably tell, trusts are too complicated to discuss in just one blog post. There are many different kinds and special rules depending on what the trust’s purpose is. To find out more about trusts, you can contact us by phone at (712) 737-3885 or by e-mail.

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Lawyer Joke of the Day:

A golfer hooked his tee shot over a hill and onto the next fairway. Walking toward his ball, he saw a man lying on the ground, groaning with pain.

"I'm an attorney," the wincing man said, "and this is going to cost you $5000."

"I'm sorry, I'm really sorry," the concerned golfer replied. "But I did yell 'fore'."

"I'll take it," the attorney said.

First Annual 'Trust Week'

The Discovery Channel has an annual event that is near and dear to all lawyers' hearts: Shark Week. Every single show during the entire week is devoted to studying lawyers in their natural environment. Get it? Lawyers? Shark Week? It's funny. No, really...

This week, we're starting our own annual event. I'm calling it 'Trust Week' and dedicating every blog for the whole week to discussing elements of trusts or trust planning. I hope the posts this week are informative and at least a little bit fun to read. Stay tuned for our first 'Trust Week' post later this morning!

Three Questions About Probate: Finale

“All happy families resemble one another, but each unhappy family is unhappy in its own way”

- Ambrose Bierce

How much will probate cost?

Inevitably, this is the question everyone wants to know the answer to. Sometimes this is even the first question I get asked when someone sits down across my desk. It’s a tough question to answer and it can be a tough answer to hear.

The cost of probate is often determined based on the total value of the estate. Some lawyers will use the value of the inventory as the base number. Others will use the amount reported on the estate tax return. In Iowa, state statute limits attorneys to charging no more than 2% of the total value of the estate.

Some of my avid readers may have a bit of sticker shock thinking about 2% of the total probate estate. On a $1,000,000 estate, the fee would be $20,000. There are a number of reasons for setting a fee in this manner. At the outset, it is often difficult to determine just how much work will be involved in completing the probate process. Sometimes, when large families are involved, the amount of communications required to keep the heirs apprised of the process can be a substantial cost to the attorney. Other times, the attorney gets involved with settling claims made by third-parties like charities or in interpreting what the deceased meant by the terms in his will.

Because of these unknowns, attorneys are forced to estimate their costs, determine the amount of profit they need to stay afloat and try to stay competitive all at once. However, regardless of your attorney’s method of choice, always remember that the fee charged should be negotiated between you and your attorney at the time you choose to hire him. You may be able to negotiate for administrative costs (i.e. cost of publishing notice, postage, etc.) or even court costs, if the process is simple enough.

I hope you've enjoyed our little discussion of some of the basics of probate. If you'd like to learn more, please do not hesitate to contact our office by phone or e-mail.

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Lawyer Joke of the Day:

Q: What is the one word that can make a lawyer smile?

A: Fees!

Three Questions About Probate: Part Two

“He neither drank, smoked, nor rode a bicycle. Living frugally, saving his money, he died early, surrounded by greedy relatives. It was a great lesson to me.”

- John Barrymore

Today we continue our discussion of the three main questions I get from heirs and executors. Question two:

What happens during probate?

I like the way the ABA talks about probate in its book Guide to Wills and Estates, Third Edition. They describe probate as having six main phases. Each of these phases is necessary before the terms of a will are fully carried out. Here is my take on those six phases:

1. Open the Estate: Typically, when an individual dies, that person’s family tracks down a copy of his or her will and seeks the help of an attorney in deciding what the next step should be. If they hire that attorney, he or she will work with the executor to give the will its full effect. This involves filing a probate petition with the district court and giving notice to the creditors of the deceased.
2. Collecting the Estate’s Assets: Once the probate case has been opened, the family begins compiling a list of the deceased person’s assets. The myriad assets and their values are listed in the probate inventory and submitted to the court.
3. Management of Assets: Sometimes a probate occurs at a time when the deceased was scheduled to receive income. Other times, the probate process takes a long time to complete. In these situations, the executor must manage the estate’s assets. If income is received, it should be accounted for and saved or possibly invested.
4. Handling Taxes: An estate is subject to several different types of taxes. The ones most people think of are the “death taxes.” This includes federal estate taxes and state inheritance taxes. Under the new law that was passed in December 2010, the current estate tax is capped at 35% and only applies to individual estates worth over $5 million. Inheritance taxes vary from state to state and often change year to year. These taxes are imposed based on the heirs’ relationship to the deceased. An estate is also subject to income taxes if that estate should receive income before it is closed. In that instance, the executor will need to file an income tax return for the estate to report its income and potentially pay the resulting taxes.
5. Closing the Estate: Finally, after all the necessary notices have been given, the estate can be closed. Completing this phase typically requires filing lots of forms and getting a final order back from the court indicating that all necessary steps have been followed and the executor can distribute the assets. In Iowa, the executor files a final report showing how the property is passing to the heirs.
6. Distributing the Assets: Finally, after all five other phases are completed, the executor may distribute the assets of the deceased to his or her heirs.

Probate involves a lot of steps and requires a certain level of expertise or familiarity with the process to be efficient at it. It is always smart to seek the assistance of an attorney in the event that you are appointed as executor of a loved one’s estate. Contact us by phone or e-mail to see how we can help you through the probate process.

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Lawyer Joke of the Day:

Nugent needed legal advice, so he walked into the office of Gregory, Ellis and Gregory. Nugent sat down at the desk of the senior member of the firm.

"If you're not in really bad trouble, I'll take the case," said Gregory. "If you're in a real jam and want to get out of it, my partner will handle it.

“If, on the other hand, you're not involved and want to get in trouble, my son, who just graduated from law school, will take it!"

Three Questions About Probate: Part One

“Death is not the end. There remains the litigation over the estate.”

- Ambrose Bierce

The death of a loved one is a difficult time in anyone’s life. Being thrust into the role of executor can sometimes feel overwhelming. At my initial meeting with an executor of an estate, I often find that the best place to start is to answer the the three questions that are the subject of my next three blogs. First:

What is probate?

“Probate” can be used in two different ways. As a noun, “probate” means the judicial process of validating a will. A will must be submitted to the courts to make sure first that it is valid, second that its terms are legal, and third that its terms are carried out. As a verb, “probate” is the procedural steps an executor takes to settle an estate. Taking these steps is known as probating the will.

You may have noticed that one thing is consistent in both of these definitions: a will. In order to use the term “probate,” the deceased person must have prepared a will. If there is no will, it is not probate. There is still a procedure for distributing the estate, however. That procedure is called administration, and we’ll talk about it more on Friday.

Probating a will can take several different forms. If people know anything about probate, they almost always know about the judicial proceeding. This, however, is not always the most appropriate means of probating an estate. An estate with a low total value and no debts might qualify for a simple procedure called “small estate administration.” In Iowa, the maximum value for small estate administration is $100,000.

In even smaller estates, an affidavit can suffice in place of the probate process. To utilize this method, the estate must have a value of less than $25,000 and cannot include real property. The waiting period required before an estate can be closed is forty (40) days.

Choosing an inappropriate or improper method of dealing with your estate can be fatal. Always seek the advice of an attorney when dealing with a complex issue like probate.

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Lawyer Joke of the Day:

"You seem to be in some distress," said the kindly judge to the witness. "Is anything the matter?"

"Well, your Honor," said the witness, "I swore to tell the truth, the whole truth and nothing but the truth, but every time I try, some lawyer objects."