My dad has a simple probate-avoidance trust that was drawn up before my mother died. When she died three years ago, my father's lawyer suggested that he have the house appraised. I do not understand why this was necessary. Also, my father has just sold his home and is waiting for escrow to close. Does he need to change the trust or just delete the home from the list of trust assets?
Ron
Dear Ron,
When your father and mother bought their home, its "cost basis" was its purchase price, which may have been increased by the cost of any improvements your parents made to the property. If the home had been sold while both your parents were alive, the amount of capital gains tax due as a result of the sale would have been based on the difference between the sale price and the cost basis - your parents' profit from selling their home.
Upon your mother owned upon her death was subject to federal estate tax. Your father did not have to pay any tax to the IRS, because of your mother's unified credit, as well as the gift and estate tax marital deduction which allows anything passing to the surviving spouse to avoid estate tax altogether. But because your mother's assets were subject to estate tax, even though no tax was due, they received a "step-up" in cost basis to their value upon your mother's date of death. Not only that, but each of the assets your mother and father owned together as community property received a step-up in basis for the entire asset, not just your mother's half.
Your father's lawyer did the right thing. The reason to appraise the home upon your mother's death was to document the new cost basis. With the appraisal, your father's tax professional can determine the proper amount of capital gains tax due as a result of the sale of the home. There probably won't be any tax due at all. Your father can deduct the first $250,000 of capital gain above the value of the home upon your mother's death, as long as he resided in his home for two of the last five years.
It is unnecessary to make any changes to the trust unless the trust makes a specific gift of your parents' home that can no longer be fulfilled as a result of its sale. However, your father should invest the money he gets from selling the home in accounts titled within the trust so that this money will avoid probate upon his death.
Len & Rosie
Dear Len & Rosie,
My father refinanced the loan on his home and the finance company made him take the home out of his revocable trust. They failed to record a deed putting the home back into the trust after the loan paperwork was completed. My father died recently and now there is going to have to be a probate. Is there anything we can do? The finance company says that there isn't anything they can do about it.
Janet
Dear Janet,
The lender made your father remove his home from the trust because it wanted to be absolutely sure that no one had any claim to the property superior to their right to foreclose on the loan. Lenders do not have to do this. Most trusts allow the trustee to borrow against trust property. But lenders usually do not want to review trust documents to verify this, so your father had to de-fund his trust. This was completely routine.
When your father created his trust, he retained complete control over his property. As trustee, he was required to follow the terms of the trust, but he could do more or less whatever he wanted simply because the trust was for his sole benefit until his death. His one true responsibility with respect to his trust was to properly fund the trust so his assets would avoid probate. He failed. It is not the lender's fault, because it was not in charge of your father's estate plan. He was.
By default, your father's home now belongs to his probate estate and must to go probate. Fortunately, you have an alternative. The successor trustee of the trust can petition the court and ask for a court order declaring that your father's home still belongs to the trust. The argument goes something like this: "Your Honor (judges like to be called "Your Honor"), Dad never put his home back into the trust because nobody told him he had to. Give us a break. Please?"
When your father created his trust, he probably signed a "pour-over" will leaving his estate to the trust in case something like this happened. Since the home will wind up in the trust whether or not it goes through probate, the court should grant the order you want unless someone objects. Everybody wins. You win by saving time and probate fees. The court wins because it won't have to spend taxpayer money supervising an unnecessary probate. And the lawyer win too, because he or she will get paid for the additional work made necessary by your father's mistake.
Since there won't be a probate, this isn't as bad as it could be, but it will still cost money to fix. The lesson to learn is this: Make sure your trust is funded with your assets, or you'll cause problems for your children after your death.
Len & Rosie
Dear Len & Rosie,
Mother has passed away and my sisters and I are her co-executors and co-trustees. We were told by the bank that we are unable to open an estate account to access any of her funds unless we put the estate in probate. Why did we have to have a trust if the estate still has to go through probate? When my mother made her trust in 1989 she was assured that there would be no probate and that she wouldn't put her children through what she went through when my father died. Are there any banks that will honor the will and trust as she made them?
I don't want to ask her attorney because it costs so much. Where are my civil liberties if no matter what mother wanted done with her hard earned money, the court gets to make the final ruling? Why are lawyers telling people to set up living wills and trusts if they do not protect our personal rights?
Mimi
Dear Mimi,
It is difficult to say what went wrong without reviewing in detail your mother's trust, the assets she owned upon her death, and how these assets are titled. If the bank is saying that a probate is necessary, what must of happened was that your mother failed to fully fund her trust with her assets. Both she, and you, are likely victims of the "Living Trust Myth".
The Living Trust Myth, perpetrated by trust mills and some lawyers who don't do such a such a good job in advising their clients, comes down to this: "Now that I have a trust, everything will go to my children automatically when I die, and it will all be for free." This cannot be further from the truth. Creating a trust to avoid probate is usually a very good idea. It is easier, cheaper, and less time-consuming to administer a trust than it is to probate an estate in court. However, trusts are not automatic. They have to be properly funded and administered in order to work.
Your mother may not have retitled her accounts into the name of the trust. Anything titled solely in her name upon her death belongs to her probate estate, not her trust. If these assets are worth less than $100,000, then probate isn't necessary and you can collect her estate using small estate declarations prepared by an attorney or using a form supplied by the bank. Also, if the assets in your mother's estate are listed on the schedule of trust assets in the back of her trust, it's possible to obtain a court order declaring these assets to be in the trust without having to go through probate.
You need to consult with a trust and estates attorney to review your mother's estate and figure out what you need to do to straighten this out. It is going to cost money, but it is the only way that you and your sisters are going to be able to distribute your mother's assets.
The laws regarding probate and trusts exist not to thwart your civil liberties, but to protect the rights of each of us, including your mother, to pass our assets on to our chosen beneficiaries upon our deaths. Without the law, the guy down the street who shows up first with the biggest truck gets everything. Even though you do not want to deal with any attorneys (except us), you and your sisters need help.
Len & Rosie
Dear Len & Rosie,
My wife recently died and I am now the sole trustee of our A/B trust. I do not have to distribute the assets now, but I'd like to see some of my children receive their inheritance before I die.
Is there a way for me to distribute some of the assets in my wife's part of the trust before I die? Since the kids are the beneficiaries, can't I just give them their inheritance early?
Tim
Dear Tim,
The trust that you and your wife created together, an A/B trust, was designed to help your beneficiaries avoid having to pay federal estate after both you and your wife have died. As trustee, you are now supposed to transfer your wife's separate property and her half of the community property, with some limitations, into the B trust, frequently called the Bypass trust, Exemption trust, or Credit Shelter trust. When you die, the B trust property will pass to your beneficiaries free of federal estate tax.
The B trust became irrevocable upon your wife's death. It has to be in order to protect the B trust property from estate tax on your death. The B trust probably gives you all of the income earned by the B trust assets until your death, and it may also give you the right to spend trust principal on yourself if you do not have enough money for your own needs.
You can take trust principal from the B trust and give it to the trust beneficiaries who are supposed to inherit the trust after your death. But you cannot cherry pick which of your children will receive the money. The B trust is your wife's property, not yours. That means you have to treat all of the trust beneficiaries equally.
There are tax consequences to doing this. When you give B trust assets to your children, you are also giving away your lifetime right to income from these assets, and this gift may be subject to gift tax and may therefore reduce the amount of your assets that will pass free of estate tax when you die. Fortunately, you may be able to side-step tax problems by signing a disclaimer over whatever portion of your wife's assets that you want to give to your children now rather than upon your death.
What you should do is to review your trust with an attorney. You need legal help in funding the A and B trusts, and you need expert advice on how you can give money to your children now without causing tax problems for them after your death.
Len & Rosie
Dear Len & Rosie,
I have had a living trust since 1981. My estate is valued at approximately $1,600,000 and all but two small bank accounts are in the trust. My two sons will be the cotrustees after my death. They have asked me what their duties are, and if they need an attorney to carry out my wishes. Is it necessary that my sons hire my attorney, or even contact him? I was always under the impression that an attorney was required.
Diana
Dear Diana,
It appears that you have come down with a mild case of the living trust myth. Many people like you fall under the impression that all they need to do to avoid probate is to create a trust, and their children will be able to divide and distribute their assets without having to do anything difficult enough to require legal help. It's almost as if people believe that after they die, the trust fairy will slip recorded deeds, cashier's checks and completed tax returns under the pillows of their children.
Contrary to the myth, legal work is necessary to properly administer a trust. Administering a trust is cheaper and easier than probate, and quicker too, but it doesn't happen overnight. After you pass away, your sons will have to transfer all of the trust assets into their names as trustees, pay off your debts and taxes, and distribute the assets in the manner provided for within the trust. They'll have to record affidavits of death, obtain a taxpayer identification number for the trust, and submit Certifications of Trust to your financial institutions.
Property that isn't going to be sold has to be appraised. The trust beneficiaries are also entitled to an accounting, so your trustees will have to keep track of everything they do and should not lose any account statements, canceled checks, or receipts.
After your death, your sons do not have to hire your old lawyer. As cotrustees your sons may hire any lawyer they please. If they are the sole beneficiaries of your trust, they can probably skip the trust accounting and cut a lot of corners if they do not care to balance everything to the last penny. As long as your creditors are paid off no one will care. But in any event, your sons will need legal help to make sure they do it right and that they do not cut corners in a way that could cost them money.
Len & Rosie
Dear Len & Rosie,
My grandfather passed away in May, 2005. He had a revocable trust that included his home, worth about $850,000, and $45,000 in cash. My mother will inherit half of the trust, with the other half going to my brother and me. The man that put the trust together said that my brother and I should write a letter stating we don't want the house so our mother can inherit the entire home and be able to avoid taxes when it's sold. This sounds strange to me and I was wondering if this is true? I was also wondering if there are any other options?
Donny
Dear Donny,
It's clear that the "man who put the trust together" is not an attorney. Or if he is, he hasn't done a very good job explaining things. He is asking you and your brother to sign a document called a "disclaimer", which is a legal means of refusing an inheritance. If you and your brother disclaim your share of your grandfather's home, then it will be distributed from the trust as if you had died before him. If the trust says that your mother gets everything if you and your brother die first, then she will wind up with the entire property.
If and when the home is sold, capital gains tax will be due on the increase in the value of the home since your grandfather's death. If your mother owns the home and lives there for at least two years, she can deduct up to $250,000 of this profit from capital gains tax. But if you and your brother do not live in the home, your half of the home will not qualify for this deduction, costing you capital gains tax when the home is sold.
A disclaimer signed by you and your brother could also save your family thousands of dollars of property tax. The portion of the home going to your mother will not be reassessed because of the parent-to-child transfer reassessment exclusion created by Proposition 58. But the half going to you and your brother will be reassessed. While there is a grandparent-to-grandchild transfer reassessment exclusion, it would apply only if the parent in the middle was already deceased upon your grandfather's death. If you and your brother's half of the home is reassessed, you could easily pay an additional five thousand dollars in property tax. Each year.
If you are going to sell the home soon, don't bother disclaiming the property. The extra tax due won't be enough to make it worthwhile. But if your family plans on hanging on to the home, you should talk to a trusts and estates attorney about a disclaimer as soon as possible. You can disclaim the home only within nine months of your grandfather's death, so you need to act soon. But whatever you do, do not simply write a letter saying you do not want the home. Disclaimers are more complicated than you think and you should never sign one without the advice of an attorney.
Len & Rosie
Dear Len & Rosie,
My dad died one year ago and my mother died just six weeks ago. They made a trust for their grandchildren (my four-year-old daughter and her two twelve-year-old cousins). My parents chose to have a fiduciary administer the trust since the three kids cannot work together. My brother has asked for an accounting of the trust, but the fiduciary says there's nothing written in the trust saying he has to give the beneficiaries an accounting. Is this legal? Who is responsible for overseeing the fiduciary? The trustee has an attorney. I believe that both the attorney and the fiduciary are honest people, but there is a lot of money involved and I don't trust anyone that much.
Robin
Dear Robin,
Your family may be getting the wool pulled over your eyes. The beneficiaries of a trust who are presently entitled to distributions from the trust (the grandchildren) are entitled to an annual accounting. The fiduciary has got it backwards. Unless the trust specifically says the beneficiaries do not get an accounting, then he has to do one.
It is very unlikely that your parents' trust waives the accounting. The only good reason an estate planning attorney would add such a provision to a trust is if the children are so horrible that the parents do not want them to be able to make any fuss at all. And even then, waiving the accounting within a trust document is usually a bad idea, because the accounting is one of the few ways that beneficiaries can protect themselves from trustees who may not be so trustworthy.
In many happy cases, the trustee and the beneficiaries can sit around the kitchen table and hash things out on their own. This quick and dirty approach to trust administration works well, as long as the trustee has a lawyer and does the necessary work to make sure that the bills and taxes are paid, and gets the trust property appraised to establish its new cost basis for capital gains purposes.
But it's not up to the trustee to decide when to cut corners. And in this case, the beneficiaries are too young to decide that they don't need to be told what happens to their inheritance. Your brother is on the right track. The two of you should request an accounting on behalf of your children, or an explanation in writing as to why you aren't going to get one. If it sounds like a lame excuse, hire an attorney to protect your children's rights.
Len & Rosie
Dear Len & Rosie,
I am a successor trustee for a trust. One of the original trustees passed away. Nothing can be distributed until the surviving spouse passes away. The trust was funded with the all of their assets, and it's a fairly large estate. There are three trusts involved, a Survivor's trust, a Martial trust, and an Exempt trust. Now the attorney is telling us the assets have to be split up among the three trusts. He didn't seem to know why. He says we can determine which assets go into which trust. Can you explain the rationale behind all of this?
Norm
Dear Norm,
The trust is an A/B trust. The trust has to be divided up because the trust document says so, but there is a good reason for this. When the spouses created their trust, they were likely wealthy enough that an A/B trust was necessary to avoid or reduce the amount of federal estate tax due upon the surviving spouse's death.
The idea here is that all or a portion of the deceased spouse's trust assets are to be held within the B trust, which your trust refers to as the Exempt trust. Some trust documents name the B trust as the "credit shelter trust" or the "bypass" trust. No matter what it's named, the way the B trust works is that assets held within the B trust are not considered to be the property of the surviving spouse and won't be subject to federal estate tax after the surviving spouse dies.
The Marital trust, which is commonly referred to as the C trust, holds the portion of the dead spouse's assets that is greater than the amount that can be protected within the B trust. For a person dying in 2006 with an A/B trust, up to $2,000,000 can be held within the B trust. If it turns out that the dead spouse owned less than $2,000,000 in assets, there won't be a Marital trust because there's nothing to put into it.
The Survivor's trust, or the A trust, holds the survivor's separate property and his or her half of the community property. This is the only trust in an A/B trust that can be amended or revoked by the surviving spouse.
For the most part, the trustee can pick and choose which assets go into each trust, as long as the total value of the assets put into each trust are of the proper value. You do not have to divide the home equally between the A trust and B trust, for example. Lawyers refer to this as a "non pro rata split".
Depending on the circumstances, it may be a good idea to skip doing the A/B split, which you can do if all of the trust beneficiaries agree. It could be that the spouses have less than $2,000,000 in assets, making an A/B trust unnecessary to avoid estate tax. If this is the case, the surviving spouse should discuss this with his or her attorney.
Len & Rosie
Dear Len & Rosie,
My husband and I each have two children from prior marriages. He died in 2000, and our trust was divided into three trusts. One trust holds our separate property, including our home. When I die, half of this trust will go to one of my granddaughters and the other half will go to his children. Our family home is in this trust but it is getting way too big for me. Being on two acres, the home is too much for me to keep up. I would like to downsize to a smaller home in town. What do I do about the fact that half of my house is to be given to his girls upon my death? Do I have to cash them out at the time of the sale? Does the new house just take the place of the existing house?
Judi
Dear Judi,
You are more than likely the sole trustee of this trust containing what used to be the community property of you and your husband. As trustee, you have the power to invest the trust assets as you see fit. Your only limitation is that you owe a fiduciary duty to all of the trust beneficiaries. You may not invest their inheritance at the closest Indian casino.
Unless the trust prohibits you from selling the home, which is not very likely, there's nothing stopping you from downsizing your residence. You can sell the home and buy a new one anywhere you want. If you are age 55 or older and your new home is located within the same county and is of lesser or equal value as your old home, you can even carry over your Proposition 13 protected tax assessment to your new residence and save yourself a bundle on property tax.
You can invest any money left over after buying your new residence in any prudent investment, hopefully with the help of a financial advisor. Just make sure that your new home and the money left over are both titled in your name as the trustee of the trust so you will avoid probate on your death and your assets will be inherited by the right people.
You really should review your estate plan with an attorney. A lot of things have changed. For example, your health care power of attorney is no longer valid if you signed it prior to January 1, 1993. Your trust should also be revocable, as least as to your half if not your husband's, so you may want to consider making a few changes.
Len & Rosie
Len Tillem and Rosie McNichol are elder law attorneys. Contact them at 846 Broadway, Sonoma, CA 95476, by phone at (707) 996-4505, or on the Internet at www.lentillem.com. Len also answers legal questions each weekday, Noon-12:45 PM, and Sundays, 4-7 PM, on KGO Radio 810 AM.
