6 Tips on How to Handle the Responsibility and Potential Liability of Being a Trustee (Part 1) by Rob Cohen

Trusts are popular estate planning tools to ensure that families and assets are taken care of when someone passes away. Whether it’s providing for children, endowing charities, or managing real estate, those who create trusts have specific wishes that they expect to be followed, and they expect the trustee to carry out their plans.

But, being a trustee can be a thankless job, not to mention one that can thrust a person with good intentions into the cross hairs of litigation. Courts are filling to over-capacity with cases against trustees, and the matters can get quite complex.

If you are asked to be a trustee, first understand that someone held you in very high esteem and had confidence that you could oversee his or her legacy and assets. Second, be sure you know what being a trustee entails. It can get very complex, very fast.

With this in mind, here are a few tips that might help make your trustee-ship progress more smoothly.

1) Read the trust. Seems pretty basic, but you might be surprised at the level of detail and complexity contained within a trust. The trustee is obligated to administer the trust strictly by its terms. Not all trusts are the same; if possible, read the document with an attorney familiar with trust administration.

2) Keep track of your time. Some trusts are specific as to how much the trustee is to be paid (e.g., a fixed fee or percentage of the value of the assets). But some trusts, especially those drafted several years ago, may permit the trustee to receive “reasonable” compensation. What is reasonable? Ask 10 people and you’ll get 10 different answers. To avoid possible confusion or challenges, track your hours spent acting as trustee. If there is a dispute as to the trustee’s compensation, at least you’ll be able to demonstrate the actual time spent on trust matters.

3) Provide annual accountings. Every year, be sure to provide the beneficiaries with clear written accountings, which explain the income and expenses of the trust. Why is this important? First, it is required by statute. Second, once the accounting is served on the beneficiaries, the statute of limitations begins to run on claims challenging the accounting. If you don’t serve the accounting, the statute of limitations to file a challenge doesn’t start and you can be on the hook for a long time.

To continue reading: BEING A TRUSTEE IS A THANKLESS JOB: Six Tips on How to Handle the Responsibility and Potential Liability (Part 2)

For more information speak with our Trust Attorney in Los Angeles today.

Removing Assets from your Estate to Reduce the Estate Tax

Removing assets from your estate is a great way to reduce estate taxes before you die.

So, spend some and enjoy it!

Also, you probably know whom you want to have your assets after you die. If you can afford it, why not give them some assets now and save estate taxes? It can be very satisfying to see the results of your gifts– something you can’t do if you keep everything until you die. Appreciating assets are usually best to give, because the asset and future appreciation will be out of your estate.

Assets you give away keep your cost basis (what you paid), so the recipients may have to pay capital gains tax when they sell. But the top capital gains rate is only 15% (assets held at least 12 months). That’s a lot less than estate taxes (45-46%) if you keep the assets until you die.

Some of the most commonly-used strategies to remove assets from estates are explained below. Note that these are all irrevocable, so you can’t change your mind later.

  1. Tax-Free Gifts
  2. Irrevocable Life Insurance Trust (ILIT)
  3. Qualified Personal Residence Trust (QPRT)
  4. Grantor Retained Annuity Trust (GRAT) and Grantor Retained Unitrust (GRUT)
  5. Family Limited Partnership (FLP) and Limited Liability Company (LLC)
  6. Charitable Remainder Trust (CRT)
  7. Charitable Lead Trust (CLT)
  8. Buying Life Insurance

Detailed explanations of each of these strategies for removing assets from your estate will be explained in the upcoming blog entries.  For questions on reducing your estate tax, please contact our experienced Estate Planning Attorney in Woodland Hills.

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Understanding Estate Taxes: Net Value, Reduction/Elimination and Exemptions

Signing of tax exemptions for 2014 FIFA World ...

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How is the net value of my estate determined?

To determine the current net value, add your assets, then subtract your debts. Include your home, business interests, bank accounts, investments, personal property, IRAs, retirement plans and death benefits from your life insurance.

How can I reduce or eliminate my estate taxes?

In the simplest terms, there are three ways:

1. If you are married, use both estate tax exemptions

2. Remove assets from your estate before you die

3. Buy life insurance to replace assets given to charity and/or pay any remaining estate taxes

Using Both Exemptions

If your spouse is a U.S. citizen, you can leave him or her an unlimited amount when you die with no estate tax. But this can be a tax trap, because it wastes an exemption.

Let’s say, for example, that Bob and Sue together have a net estate of $4 million and they both die in 2006. Bob dies first. He leaves everything to Sue, so no estate taxes are due then. When Sue dies, her estate of $4 million uses her $2 million exemption. The tax bill on the remaining $2 million is $920,000! ($900,000 in 2007 and 2008.)

But if, instead, Bob and Sue plan ahead, they can use both their exemptions and pay no estate taxes. A tax planning provision in their living trust splits their $4 million estate into two trusts of $2 million each. When Bob dies, his trust uses his $2 million exemption. When Sue dies, her trust uses her $2 million exemption. This reduces their taxable estate to $0, so the full $4 million can go to their loved ones.

This planning can also be done in a will, but you would not avoid probate or enjoy the other benefits of a living trust.  Speak with an experienced Estate Planning Attorney in Los Angeles today to plan for your estate taxes.

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Understanding Living Trusts: How You Can Avoid Probate, Save Taxes and More FAQ

In this blog series, we will be going through frequently asked questions regarding various aspects of estate planning including living trusts, probate, taxes and more.

I have a will. Why would I want a living trust?

Contrary to what you’ve probably heard, a will may not be the best plan for you and your family – primarily because a will does not avoid probate when you die. A will must be verified by the probate court before it can be enforced.  Also, because a will can only go into effect after you die, it provides no protection if you become physically or mentally incapacitated. So the court could easily take control of your assets before you die – a concern of millions of older Americans and their families.

Fortunately, there is a simple and proven alternative to a will–the revocable living trust. It avoids probate, and lets you keep control of your assets while you are living – even if you become incapacitated – and after you die.

What is probate?

Probate is the legal process through which the court sees that, when you die, your debts are paid and your assets are distributed according to your will. If you don’t have a valid will, your assets are distributed according to state law.

What’s so bad about probate?

It can be expensive. Legal/executor fees and other costs must be paid before your assets can be fully distributed to your heirs. If you own property in other states, your family could face multiple probates, each one according to the laws in that state. Because these costs can vary widely, be sure to get an estimate.

It takes time, usually nine months to two years, but often longer. During part of this time, assets are usually frozen so an accurate inventory can be taken. Nothing can be distributed or sold without court and/or executor approval. If your family needs money to live on, they must request a living allowance, which may be denied.

Your family has no privacy. Probate is a public process, so any “interested party” can see what you owned and who you owed. The process “invites” disgruntled heirs to contest your will and can expose your family to unscrupulous solicitors.

Your family has no control. The probate process determines how much it will cost, how long it will take, and what information is made public.

For additional questions about trust law, speak with our experienced Estate Planning Attorney in Los Angeles today.

Continue to: Understanding Living Trusts: How You Can Avoid Probate, Save Taxes and More FAQ (Part 2)


Additional Observations on the Gift Tax, State Estate Taxes and the Portability Provision

Increased Gift Tax Applicable Exclusion Amount

From 2001-2010, the applicable exclusion amount for gift tax purposes has been $1 million.  The 2010 Tax Act increases this to $5 million, or $10 million per married couple.  This change provides an unprecedented opportunity to move substantial amounts of wealth out of individuals’ estates.  There are several techniques that individuals can use to leverage this $5 million applicable exclusion amount and move considerably more wealth out of their estates.

To illustrate, individuals can now make gifts of $5 million to asset protection trusts, move all growth in such wealth out of their estates, provide a significant amount of asset protection for such assets, and the transferor may continue to be a discretionary beneficiary of such trusts, without any gift tax being assessed.

In addition, the increased gift tax applicable exclusion amount increases the amount of assets that individuals can transfer via an installment sale to a dynasty/grantor trust.  Under this estate planning technique, individuals can now make an initial gift of as much as $5 million ($10 million per married couple) to a dynasty trust, and then transfer as much as $45 million ($90 million for a married couple) to such dynasty trust in exchange for an installment note.  This technique works especially well for family businesses that are expected to grow significantly in value over time.

Given the fact that the Act will sunset without further Congressional action in 2012, we are advising clients that it would be prudent to implement estate planning techniques utilizing lifetime gifts before the December 31, 2012 sunset date.  Significantly, the Act preserves a favorable tax environment for making gifts by preserving the 35 percent gift tax rate for two more years.  Now that the threat of a gift tax increase to 55 percent beginning in 2011 has been averted, some individuals may be interested in postponing planned gifts in anticipation of the rate hike.

State Estate Taxes

Another blast from the past is back: the state death tax credit.  Many states have separate estate tax regimes with lower applicable exclusion amounts than the federal applicable exclusion amount.  When the credit was abolished, most states eliminated these symbiotic taxes.  It remains to be seen; however, which states will re-implement their own death taxes.  All states had benefited from these taxes by collecting revenues that would otherwise go to the federal government.  Yet, under the new estate tax rules, it appears that very few estates would be taxable.  It may be critical that the estate plans of individuals living in or owning property located in such states address such estate tax exposure.

Portability

One of the more notable provisions contained within the Act is the “portability” provision, which provides in general terms that if one spouse does not fully utilize his/her entire $5 million applicable exclusion amount, the unused portion can be used by the surviving spouse’s estate.  The significance of this is dramatic in terms of estate planning.  The entire concept of equalizing estates of husband and wife to the tax advantage of each spouse’s unified credit has been made unnecessary for tax purposes.  This provision is intended to avoid the need for credit shelter trusts in estate planning documents. Unfortunately, both spouses must die before 2013 in order to benefit from the portability provision.

However, credit shelter trusts continue to provide significant additional benefits beyond just the use of each spouse’s applicable exclusion amounts. These include the following:

     

  • Ensuring that assets contained in the credit shelter trust pass to children of the couple and not to any new spouse of the surviving spouse.
  • Ensuring that appreciation on the assets contained within the credit shelter trust, which may exceed the applicable exclusion amount at the surviving spouse’s death, are not subject to estate tax at that time.
  • Protection of assets in the credit shelter trust from creditors of the surviving spouse, including any marital claims of future spouses.
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Given the fact that the portability provision will sunset in 2012, as well as for the reasons stated above, we are advising clients to continue to use estate plans that incorporate credit shelter trusts.

Continue reading blog series:

What’s NOT in The 2010 Tax Act
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