California Estate Planning Practice Blog

The Importance of Your Schedule A

Have you set up a living trust? Yes? Great! Now does your living trust have a Schedule A? Yes? Even better!

Next question -- does the Schedule A provide an up-to-date listing of all assets that are titled or vested in your living trust?

Does it include all real estate (real property) you own? Does it include all bank accounts that your attorney advised you to vest into your living trust? Does it list all corporations or other business interests that you may own? Does it include all manner of other financial products that you may own including bonds, stocks and annuities for which the living trust is to own?

Your Schedule A plays two very important roles in your estate plan.

First, it provides written evidence of your intent to vest the listed assets into your living trust. If, for some reason, an asset is not actually vested in your living trust, there are provisions within California law where an attorney can obtain a court order absent probate to have that wayward asset vested in your trust by court order. It is called an Heggstad Petition named after the case law that provides the legal authority.

Second, it provides a map of where the successor trustee is to go to locate your assets if you become incapacitated or pass away.  If you have additional assets beyond what should be in your living trust, you will want to include this information in your estate planning materials to again assist the successor trustee.

If this all sounds like legal mumbo jumbo, be sure to consult with your own attorney about these things and ensure that your Schedule A is up-to-date along with the rest of your estate plan.

Insurance Policies and Your Living Trust

One of things that you should do when you have executed a living trust is to talk to your insurance agent or carrier. Have a conversation with your agent or carrier about whether your state requires that your insurance agent or carrier name your living trust as an additional insured on your insurance policies affecting your home and other real property that is vested in your living trust.

When I set up my own living trust, I had a conversation with my State Farm agent. She wanted the name of the trust, the names of the trustees and the date the trust was created. She updated my homeowner's, earthquake and umbrella liability policies to name the trust as an additional insured.

In addition to the home and other real property, if, for some reason, you are vesting vehicles into the living trust, please double check with your insurance agent about any requirements concerning vehicles and your existing insurance policies covering those vehicles.

While this is not legal advice, see disclaimer on the side bar, you should talk to your own attorney and your insurance agent to confirm what may or may not be applicable in your situation involving your own living trust.

Suze Orman Says Get a Living Trust.

In O Magazine (O for Oprah), Suze Orman gives excellent financial advice each month. This month she addressed Financial 'I Dos' and Don'ts and explained how a Living Trust can help blended families with their estate planning.

A reader wrote a question about being "remarried for two years ... how can I protect my children's right to inherit what's mine?"

Suze's answer was, "First, set up a revocable living trust that spells out how you want your property disbursed at your death. " She went on to explain how living trusts work and how it can be beneficial in a blended family.

Remember, whatever assets you bring into a marriage are considered your separate property assets so long as you keep them separate. These separate property assets can be devised to someone other than your spouse like your kids.

So set up a Living Trust for these separate property assets. And set up another Living Trust for your community property assets.

That said, if you have more wealth that you think a Living Trust isn't enough or suitable for you, talk to an estate planning attorney to explore advanced estate planning options.

3 Easy Grounds for Attacking a Trust.

Revocable Living Trusts and other estate planning documents can be attacked on three basic grounds:

1. Undue influence
2. Lack of formality
3. Lack of capacity

Undue influence refers to whether someone unduly influenced the person who created the trust in some fashion.

Lack of formality deals with the structure of the document itself. Was it properly prepared, notarized, etc.?

Lack of capacity is whether the person had a basic knowledge and understanding of the trust, knew what they were signing and knew the objects of their bounty among other factors.

Sure, I am explaining this at the simplest level, but you get the idea. So, don't accompany your mother to her lawyer's office, ask the lawyer to draft a trust giving you everything omitting your sisters and taking the document home and making handwritten changes on it. You'd be well on your way to a nice contest.

No Contest Clauses.

Trust litigation appears to be the new era. 

I was at a meeting today where the featured speaker spoke solely about no contest clauses. He started his presentation by stating that trust litigation was the last bastion to be kept safe from the reaches of litigation attorneys. He felt that the flood gates has opened with respects to trust litigation.

And so it began his discussion of no contest clauses. He said the following in a nice nutshell that I jotted down to pass along:

1. Don't cut anyone out completely. Even if you hate them, you'd hate them even more if they successfully contested your trust or other estate plan. I agree. Give them a gift.

2. All trust amendments must contain another no contest clause so that the existing no contest clause in the trust also applies to the amendment.

3. Protect collateral documents that are a part of your estate plan by including those in your no contest clause.

4. Mention the troublesome beneficiaries in your trust so the court can ascertain your intent and why you are cutting them off.

5. Make your intent clear as a settlor or the person who created the trust. Videos, letters, etc. can help your successor trustee fight your trust in court after you pass away.

6. Be creative with your no contest clause. Creativity can make it easier to enforce as the court will likely have never seen the language before and may rule in your favor especially if you are foreseeing a trust contest.

Don't be too alarmed though. Most families are pretty happy. Most parents want to leave everything to each of their children equally. If this is your case, there is no reason to have anything other than a straightforward no contest clause. But if you are concerned, talk to your attorney and make sure your attorney understands the issues.

Got Kids?

I was at MyGym today with my toddler. The staff was wearing Got Kids? t-shirts. Cute.

I say got kids? Get a Living Trust.

You will want to set up a Living Trust to name a successor trustee to privately manage your minor children's money in the event both mom and dad pass away before the kids are old enough to manage an inheritance. This is doubly important if you have a child from a previous relationship. I am almost positive that you would not want your former spouse/lover to handle your child's money until he or she turns of age and would rather choose someone closer to you to manage such an inheritance instead.

In a Living Trust, you control what happens to your children's inheritance.

You nominate individuals or corporations to serve as the money manager (successor trustee). You state the provisions important to you for monetary distributions. You select whether they should be mandatory or discretionary with respects to income and principal. You guide how the money should be distributed.

For instance, you can give very broad, discretionary powers for the successor trustee to make choices as if he or she were the child's parent. Or you could restrict it to say that your child can get an allowance each month, a car when he or she turns 17 and half (and a Toyota, not Ferrari), that college expenses can be paid for for only 5 years as to avoid a perpetual student.

You also state how long the funds are held in trust. You decide at what age your child must reach before the trust can be terminated and the remainder of the funds (corpus) can be distributed.

My recommendation if you have very young children is to keep your trust provisions very broad and tighten them as your children grow older once you have a sense of what kind of individuals they are. My personal philosophy is that it is easier to restrict a trust than to make it less restrictive as time goes on.

Be Sure You Trust Your Trustee.

Every Living Trust needs a successor trustee to continue to manage the assets in there when you pass away.

If you have many kids, say more than two, consider not naming any of your children as successor trustees. Name a trusted financial advisor, name a life-long friend, name another relative or name a corporate trustee to manage the trust to ensure that your wishes will be carried out.

Trusts contests are rarer than Will contests. I think it is mostly because Living Trusts are much more private and harder to get ahold of. Wills are public documents once probate is opened. So anyone can see your Will at that point. But a Living Trust and the fact it exists can be harder for people to see/find. Also, people think that a Living Trust cannot be contested. It can be, but there are laws to follow.

Anyway, I was reviewing a Living Trust for a potential contest this morning. It was quite amazing as the person who passed away had 9 children. The person died over 10 years ago leaving two homes. The person named a daughter to act as successor trustee. Not an iota has been distributed to any of the 9 children or other beneficiaries named in the Living Trust since the person died. The two homes are still in the trust, but the successor trustee was using the homes for other purposes. After a little research, I also noted that the "attorney" who prepared the trust and was supposedly assisting the successor trustee with routine trust administration was, in fact, disbarred. Meaning he's not an attorney licensed to practice law in California.

Nice mess.

Your lesson: if you have many kids, name someone other than your kids to act as successor trustee. If you are at loss at who to nominate, open the dialogue with your attorney or other trusted professional.

Living Trusts for $400!

I see this ad in my local newspaper all the time. Living Trusts and then a ridiculously low price... like $400. Be careful. This is for a Living Trust.  Period.

That's it.

Nothing else.

No Certification of Trust, no pour-over Will, no Durable Power of Attorney, no Advance Health Care Directive, no deed transfer, no review of your assets, no binder, no notarization of all documents.

They don't even copy the signed/executed documents for their own files in case you misplace the originals. I had to call one of those places two weeks ago to see if they had a copy of a certain document that my client was sure was prepared by that office. The other documents were prepared by that office, but they didn't keep copies.

Furthermore, if you only have a Living Trust prepared, do not be fooled that you have completed your estate planning.

A Durable Power of Attorney and Advance Health Care Directives are very important. These two documents allow your loved ones to help manage your affairs along with what's in your Living Trust if are not aging well and find that you need assistance.

A Living Trust May Avoid a Conservatorship.

A Living Trust can be used to hold title to your real property. Also, in a Living Trust, you appoint a Successor Trustee to manage your Living Trust in the event you are unable to do so by reason of death, incapacity or personal choice.

If you become incapacitated, your Successor Trustee will be able to privately manage your assets in your Living Trust in accordance with your instructions you have provided in the Living Trust.

Thus, a properly prepared and funded Trust can enable you to avoid a conservatorship proceeding over your estate. Compared with the cost of a conservatorship proceeding, a Trust can be very attractive.

Sounds so simple, you know.

A conservatorship is a guardian over an adult. It is very costly and time-consuming. It can also be very scary to the individual placed in the conservatorship. You become a conservatee and lose control over your assets.

But if you have the your largest asset, your home, in your Living Trust then it can be managed by your chosen loved one. Also, if you have a Durable Power of Attorney in Place and Advance Health Care Directive -- all potential reasons to obtain a conservatorship will have been addressed.

Estate planning is truly important.

Cross References:

For more information about conservatorships, read the Guardians for Profit series reported by the Los Angeles Times.

Tax Implications of a Living Trust.

All things involving taxes and your Living Trust. A rambling of thoughts...

1. A Living Trust will not protect your assets from creditors. So if you owe the IRS money, they can attach assets in your Living Trust.
   
2. California does not have inheritance tax so your beneficiaries who inherit from your Living Trust will owe no taxes.
   
3. If your total estate is less than the Federal Tax Exemption, which is at $2million for 2006, no federal estate taxes will be owed by your estate after you pass away. So, in other words, your estate may very well pass tax free to your beneficiaries.
   
4. Your Living Trust beneficiaries will also receive the new stepped-up basis of market value of any real property and stocks in your Living Trust. This means that the real property and stocks will be valued at the day you pass away rather than the day you acquired them for capital gain taxes.
   
5. If your Living Trust contains real property in which you are giving to your children, they will have the same property tax basis as you so long as they apply for the parent-to-child exclusion for reassessment in property taxes. This must be done within 3 years of the transfer from the Living Trust to your child. This means that your children will not face an increase in property taxes on your property when they inherit it.

Cross-References:

Read my post on March 11 about Living Trusts and Asset Protection.

Read my post on February 15 for a definition of real property.

Read my post on January 22 for an explanation of stepped up basis.