Do You Have the Right Kind of Trust?
I have written extensively about the importance of creating a living trust (sometimes called an inter vivos trust) as a centerpiece of your estate plan. A living trust provides numerous benefits including allowing your loved ones to swiftly and privately manage your affairs, in the event of your incapacity or demise, without the assistance of the probate court.
Recently I was contacted by old friends who thought it might be time to review and update the trustee designations in their trust. Over the years, I had spoken many times to these friends about the importance of a having a living trust. These friends had repeatedly assured me that they had a living trust (created before they knew me) and had arranged everything many years earlier. I had even helped these friends when they functioned as trustees of another trust and so they were familiar with the operations of a trust and how it was administered. So imagine my surprise when I reviewed their plan and discovered that my friends’ trust was not a living trust, but rather a testamentary trust, or a trust created by a last will and testament.
The differences between a living trust and a testamentary trust are significant. Since it is created by a will, a testamentary trust only comes into existence through a probate proceeding. A testamentary trust thus requires that your executor apply to the probate court to create the testamentary trust. The probate (and trust) estate is then subject to the extensive costs of probate (generally 4% to 8% of the gross value) as well as the mandatory notice periods that require a probate proceeding to remain open for at least eight to twelve months. In many cases, a testamentary trust is the worst of both worlds because the creator will incur the additional expenses of creating a more complex document and force his or her beneficiaries to wade through the probate process. Moreover, the testamentary trust is only created upon your death and therefore does nothing to help manage your affairs if you become incompetent.
Time and time again I encounter clients who assumed that they had created a fully functional estate plan only to discover when it was too late that the plan was deficient. Frequently these mistakes are by “do it yourselfers” but sometimes the deficiencies arise from simply not reviewing an attorney-created plan for numerous years. When was the last time you reviewed your estate plan? Does it operate in the most efficient manner? Does it include sufficient contingency options to deal with the variety of problems we face in life? If you don’t know, now is a good time to review your plan with a professional.
Your Mother Always Said: Don't Leave a Mess!
I was contacted by a young woman in her early 30s after the passing of her beloved grandmother. She described herself as grandma’s favorite and the only member of her family that grandma would trust to administer her estate. Grandma had left a car, an apartment complex and a home full of possessions. And while grandma has no minor children, she is the sole means of financial support for two minor grandchildren who have lost their parents. The young woman searched high and low but cannot find grandma’s Will. The young woman believed that the Will may be in a safe deposit box, but until she is appointed administrator, the bank will not allow her access to the box.
We commenced a probate proceeding only to discover that the young woman’s cousin has filed a competing petition. The young woman confided in me that her cousin was ‘troubled’ and probably stole many of grandma’s possessions. But the cousin has filed a competing petition for probate and to the young woman’s surprise she was being wrongly accused of improper conduct. She returned to grandma’s residence only to discover that the locks have been changed and the car was gone. The tenants refused to pay rent because they didn’t know who was in charge, the support payments to the minor child stopped and chaos ensues.
After several hearings the court appointed a professional special administrator to open the safe-deposit box but unfortunately, it contained no estate planning documents. Without a Will, the two relatives had equal standing and the probate court was forced to sort through the competing allegations of misconduct. In the end, neither the young woman nor her cousin were allowed to serve and the court appoints a stranger—an independent attorney who served as a professional fiduciary. The battle between the relatives had resulted in months of delay, thousands of dollars in legal fees and probable financial losses associated with the disrupted tenants.
Much of these problems could have been avoided if grandma had simply taken the proper steps to protect her Will. As explained in a recent Wall Street Journal story, survivors can face numerous problems when a deceased family member fails to organize her affairs and leave them in a manner that can be readily accessed by the survivors. In addition to lost Wills, heirs can lose financial accounts if they are not located and timely claimed. I have seen thousands of dollars in stock certificates stuffed in drawers which could have easily been discarded but for the actions of an alert administrator.
The lesson learned from these tales is timeless: don’t leave a mess!
Parents Should Review Guardian Nominations Annually.
A fundamental principle in life is that things change; as our society becomes more interconnected and technologically advanced, the speed of change seems only to hasten. In response to this change, most of us regularly conduct annual reviews of important areas in our lives. For instance, most large employers review employees annually; many people schedule the traditional annual physical; and most financial advisors recommend annual portfolio reviews. But one area most people neglect a regular review is arguably the one most important: a review of guardianship nominations for their minor children.
The recent loss of musician Michael Jackson has focused attention on this most important issue. Upon his death, there were a number of individuals who could have had standing or a desire to serve as guardian to Mr. Jackson’s children, including Debbie Rowe, his ex-wife and mother to two of the children, his parents and his numerous siblings. Without instructions to the probate court, all of these parties could have petitioned to serve as the guardians. If more than one had petitioned the probate court for the appointment, the matter could have been highly contentious and resulted in an extended legal battle.
Fortunately, Mr. Jackson’s advanced planning prevented the stress and trauma associated with such court proceedings. In his Will, Mr. Jackson designated his mother as guardian for his children and named Diana Ross as a back-up guardian. Mr. Jackson’s decision to nominate these individuals appeared to facilitate the settlement, which was approved by the probate court on August 3, 2009. According to an article in the Los Angeles Times, “Neither side made any demands that were rejected, the source said, and the arrangement was agreed to without contentious negotiation.” In short, Mr. Jackson’s plan appeared to have worked as it should have and his children will be raised by Katherine Jackson, the guardian he designated in his Last Will and Testament.
In selecting guardians, most people designate those individuals they believe will best be capable of raising their children in their absence. But as time passes, circumstances change: couples divorce; parents age; and people relocate. When was the last time you reviewed the guardians for your minor children? Are you still close to the guardians? Do you still believe that they share your values? Are your nominees still healthy and capable of raising your minor children? If you cannot remember the last time you reviewed your guardian nominations, or who you nominated, it is time to review your estate plan.
