Mr. & Mrs. William A. Sample
Estate Planning Review
July 28, 2011
Page 1 of 17
July 28, 2012
Mr. & Mrs. William A. Sample
123 Main Avenue
Cleveland, OH 44015
Re: The Estate Planning Documents Review for William and Mary Sample
Dear Bill & Mary:
Thank you for giving our firm the opportunity to review your current estate planning documents. This review has been limited to an analysis of the following estate planning documents:
RLT of William A. Sample, dated October 28, 1995, consisting of 13 typed pages.
Pour Over Will of William A. Sample, dated October 28, 1995, consisting of 4 typed pages.
Health Care Power of Attorney of William A. Sample, dated October 28, 1995, consisting of 8 typed pages.
Living Will of William A. Sample, dated October 28, 1995, consisting of 4 typed pages.
Introduction
This review is limited to only those documents that you have provided to us. Please note that the observations contained in this Estate Planning Review should not be construed as constituting legal advice. Additionally, the preparation of this analysis does not create an attorney-client relationship and our firm will not undertake to implement any of the recommendations contained in this analysis in the absence of a formal written engagement letter.
Description of Analysis
The review of an estate plan involves an examination of two separate but important issues. The first level of analysis is called the "Technical-Legal Review". During the Technical-Legal Review we are specifically checking for outdated, incorrect or inappropriate tax provisions that may result in an additional tax liability.
The second level of analysis is called a "Personal Counseling Review". Whether a particular planning strategy is appropriate for you or your family can only be determined after conducting a Personal Counseling Review Session.
Typically a thorough Personal Counseling Review Session would involve the following items:
An analysis of a client's planning goals and motivations;
Educating the attorney about the strengths and weaknesses of the family;
Counseling the client about including trust protections (divorce protection, creditor protection, remarriage protection, catastrophic illness protection and bloodline protection) for the benefit of their loved ones;
Counseling the client about different planning strategies that would meet their personal planning goals.
In the absence of conducting a Personal Counseling Review session, my analysis and comments will be limited to a Technical-Legal level of analysis.
If you are interested in a Personal Counseling Review Session, we would be happy to afford you this opportunity. In order to maximize the value of your Personal Counseling Review Session we encourage you to attend an educational workshop sponsored by our law firm to enhance your estate planning education. Please contact our firm for additional information about upcoming workshops.
Format and Language Choice
We have endeavored to write this trust review in simple English without reference to technical legal terms. We realize that some of the concepts described in this review may be confusing and we welcome the opportunity to answer any questions you may have once you read through this document.
Throughout this Trust Review, there will be a number of terms that we will use that we wanted to define at the outset. These terms are:
The person who creates the trust (i.e. yourself) is called either a “Trustmaker”, “Grantor”, “Settlor” or “Trustor”. The document I reviewed referred to the maker as a “Trustmaker”.
The person who is responsible for managing and investing the trust assets as well as making distributions of trust assets is referred to as Trustee. Typically, the Trustmaker also serves as the Trustee during their lifetime. When an initial Trustee becomes mentally incompetent or after they pass away, a person called a "Successor Trustee" will step in and replace the initial Trustee.
The person that receives distributions from the trust is called the beneficiary. Typically, during your lifetime, you are both the Trustmaker, the Initial Trustee and the Beneficiary. After you pass away (or if you become mentally incompetent) other people or family members may become beneficiaries.
We would suggest that you make notations in the margin or mark the pages you have questions about so that you may refer to them quickly at a later time.
Your Living Trust
The first document I reviewed was your Revocable Living Trust. There were several concerns I had that I will set forth below:
Your Lifetime Powers
When a person creates a living trust, they generally wish to continue to manage their assets, make their own investment decisions and decide how their assets will be used during their lifetime. It is important that these types of lifetime powers are clearly stated in the trust document to assure that you are able to maintain complete control over your assets. The lifetime powers stated in your document could be expanded upon to afford you a higher degree of control during your lifetime.
Power to Revoke or Amend
Over time, you will probably experience changes in your family or financial affairs. Certainly the law will change over time as well. These changes may give you reason to modify your trust. It will be important that you have the unrestricted ability to modify your trust. The language in your current trust could more clearly indicate that you have the ability to make modifications to your trust document.
Power to Control and Direct Financial Assets
It is generally presumed that when a person creates a living trust that they retain the ability to continue making financial and investment decisions over their assets. This presumption is not always correct. In order for you to have complete control over your financial assets, it will be important that the trust document clearly state that you have the power to control and direct payments. In the absence of this language, there is a risk that people in the financial world may be reluctant to accept your instructions as to how your assets are to be managed or invested. Modifying your trust document to more clearly define your ability to control and direct payments should greatly reduce, if not eliminate, this obstacle.
Spouse Not A Lifetime Trustee
When married couples prepare Living Trusts, they often will name each other as trustees on each others' trusts. Thus, both spouses are listed as Cotrustees with either spouse having the authority to manage assets in either trust. This provision is most common in first marriage situations and sometimes is present in second marriage situations. Your current trust document does not name both spouses as Cotrustees. You may wish to consider naming both spouses as Cotrustees. This may facilitate financial management of assets in both trusts.
Disability Instructions
An often overlooked issue in most living trusts is including instructions to your loved ones as to how you want your assets managed and used for your care and well being in the event you should become mentally incapacitated. We refer to this situation as a “disability”. As we use the term “disability”, we are referring more to a mental disability than a physical disability. This is an important issue that should be addressed in all estate plans. It has been our experience that the more detailed your instructions to your loved ones are, the higher the likelihood that your wishes will be carried out.
Currently there are no provisions in your living trust as to how your financial assets are to be used during a disability to take care of either yourself or your family. In the absence of any instructions in your documents there is a risk that the Probate Court may require a guardianship be created. For this reason, you may wish to include provisions that address this important issue
A trust should contain detailed instructions to guide your successor trustee as to the type of care you wish to receive in the event of your disability. Some typical Disability Instructions can include:
Whether you prefer to be taken care of at home or in a nursing facility;
If you prefer to be taken care of at home, is your trustee authorized to hire nurses, care givers and the like;
Whether it is important to maintain a high level of independence;
Whether you wish to have access to clergy, etc.
These instructions were not present in the document I reviewed.
Standards in Determining Disability
When a living trust contains instructions on how assets are to be managed in the event of a disability, it is important to identify who the people are that will have the authority to determine whether you are disabled. Your current trust is silent on this issue. In the absence of naming any individuals to make this decision, the Probate Court will make this determination. It has been our experience that most of our clients have been motivated to create their trust in part to avoid the Probate process. This can be avoided by amending your trust to include specific procedures for determining whether you are mentally competent.
Spouse as Sole Disability Trustee
Your current trust names your spouse as the sole trustee in the event of your disability. Although there is no legal reason not to name a spouse as your disability trustee, you may want to consider naming an additional trustee to assist the spouse in carrying out their duties.
It has been our experience that if one spouse becomes disabled, the healthy spouse tends to be kept very busy providing care for the disabled spouse. Additionally, providing care to a disabled spouse can be emotionally draining as well as very time consuming.
For this reason, many people have preferred to name additional trustees to provide assistance to the healthy spouse. You may wish to reconsider naming your spouse as the sole trustee on disability.
Administrative Trust Provisions
After the death of a Trustmaker there are a number of administrative actions that need to be performed. Typically, the winding down of a trust estate will require securing the valuation of trust assets, payment of debts, taxes and administrative expenses and finally the allocation of assets to the sub trusts or beneficiaries. This process could take between six to nine months.
During this time period it is often helpful to create an administrative trust prior to the assets being distributed. An administrative trust provides a convenient temporary holding area for the assets and greatly expedites the settlement process and reduces the settlement costs. Your trust document does not contain a provision for an administrative trust.
Irrevocability on Death
In 2002, the IRS issued new final regulations in relation to IRA's and Qualified Retirement Plans such as 401(k)'s, 403(b)'s and the like. These regulations affected the required amount a participant is required to withdraw from their IRA or other qualified retirement plan once they reach their required beginning date of age 70 ½. If a participant has named their trust as the primary beneficiary of their IRA or Retirement Plan, it is imperative that the trust contain a provision that states the trust shall become irrevocable upon the death of the participant.
If you think about this requirement, you might find yourself wondering how a person could ever revoke their trust after they have passed away. This appears to be an issue the IRS did not think through when they passed the final regulations. Nevertheless, the requirement is still there. Your current trust does not contain this statement.
The result is that if you have named your trust as the primary beneficiary of your IRA or qualified retirement plan, you may be required to take a larger a distribution from your plan on an annual basis. Additionally, after your death, your loved ones may be required to withdraw all of the proceeds in your plan. You may wish to consider adding this provision to your trust to enhance the flexibility of your estate planning.
Authority to Pay Taxes
An important part of settling an estate is filing the final tax returns. These returns could include income tax returns, estate tax returns or gift tax returns. In order for your successor trustee to be able to file these returns this power must be expressly granted to your successor trustee. Your current trust document does not grant this power.
Repeal of Federal Estate Taxes
Your trust does not include clear instructions on how to proceed in a year like 2010 when there was no Federal Estate Tax exemption amount in effect. Rather, your document provides that assets are to be distributed to various sub-trusts based on the amount of your available estate tax exemption. If there is no federal estate tax or exemption amount in place, your Trustee will not have clear direction as to what assets should be funded to the various sub-trusts.
I am concerned that should this situation occur, the Probate Court may be required to reform your trust so that it is consistent with federal law. This problem can be avoided by including new language in your trust that provides clear instructions to your Trustee as to how assets are to be distributed to the various sub-trusts in any year when the Federal Estate Tax is no longer in effect. This way, you can ensure that your intent is clearly reflected in writing, and is not dependent alone on federal tax law facts and figures that are currently in a state of flux and uncertainty.
Disclaimer Funding Process
Your trust document provides for a disclaimer funding provision. This means that the spouse is named as the primary beneficiary and all assets will pass to the spouse unless they refuse to accept (i.e. disclaim) the asset.
Funding the Family and Marital Trusts by disclaiming assets presents a number of potential problems. First, this method of Sub-Trust funding requires the spouse to have capacity. Thus if the accident that takes the first spouse's life leaves the surviving spouse incompetent, it may not be possible for the surviving spouse to disclaim the asset.
Second, utilizing disclaimers requires the surviving spouse to be aware of the need to disclaim. For purposes of this section, let’s assume the husband dies first, leaving his wife as the surviving spouse. Often, after the death of the first spouse, the surviving spouse does not receive proper legal counseling on this issue. As a result, she may unintentionally lose her right to disclaim or fail to exercise her right to disclaim before her right expires. Each of these scenarios would result in additional assets being taxed in the surviving spouse's estate upon her demise.
Third, funding the Marital and Family Trusts through the use of disclaimers provides no guarantee of bloodline protection, creditor protection or remarriage protection. If the surviving spouse does not exercise her right to disclaim, (which she is under no legal obligation to exercise) all of the deceased spouse's assets become the property of the surviving spouse. Not only are these assets included in the surviving spouse's estate for estate tax purposes, but they are also subject to being attached by future creditors of the surviving spouse.
Additionally, if the surviving spouse should remarry after the death of the first spouse, the assets are not protected against a later failed marriage nor does it automatically extinguish a replacement spouse's right to inherit assets from the surviving spouse.
Finally, if the Family Trust is funded by disclaiming assets, the surviving spouse loses her ability to modify the terms of the Family Trust. This flexibility may be important if a beneficiary should experience a divorce, lawsuit or serious medical disability after the death of the first spouse.
These problems can be eliminated by using a fractional share funding clause. This simply means that a percentage of each asset is transferred into each trust. You may wish to consider replacing the disclaimer funding clause with a fractional share funding clause. This method of funding would eliminate all of the problems outlined above.
State Estate Tax Provisions
Another tax issue to consider is the State Estate Tax. The current provisions in your trust do not provide any protection to reduce or defer the State Estate Tax. Thus, on the death of both spouses, there will be additional State Estate Taxes due on the assets that pass to your heirs. Language could be incorporated into your trust to reduce this tax liability.
Family Trust Provisions
After the death of the first spouse, the assets of the deceased spouse are held in a Family Trust for the benefit of the surviving spouse and possibly other family members. The terms Credit Shelter Trust, Bypass Trust, and "B" Trust, have all been used to refer to the Family Trust.
The Family Trust is created to maximize federal estate tax planning and to protect the spouse's inheritance form being attached by their creditors. By leaving assets to the Family Trust a married couple is able to utilize both of their estate tax exemptions and pass the greatest amount of assets to their heirs free from federal estate tax.