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What to Do When a Trustee Mismanages Trust Assets

Whenever money is involved, problems are bound to arise. Add to the mix that in trust law, the legal owner of property (the trustee) is different from the person whom the property is actually intended for (the beneficiary). So it’s not surprising that there are often conflicts between the beneficiaries and trustees of a trust.

One of the most common complaints is made by beneficiaries who feel that trustees are not property managing the assets in the trust. What to do if you find yourself in this situation?

Well, first of all, let’s further examine some reasons why this might happen. One thing to keep in mind is that serving as a trustee of a trust is a time-consuming and often-times, difficult job. Thus, the trustee might simply be doing a sloppy job or may not be the most well-qualified person to handle these assets in the trust. Another common scenario is the fact that the trustee might have a vested interest in the assets as well.

Take this (common) scenario: often times, the person who originally owned the assets and created the trust (the grantor) will leave the assets to the beneficiary, but only up to a point. For example, the beneficiary may only be allowed access to the trust assets on an as-needed basis, and perhaps only for the beneficiary’s lifetime. Once the beneficiary passes away though, the trust assets may go to someone else, possibly someone in the trustee’s family. If this is the case, then you can see why the trustee would be stingy in withholding money from the beneficiary. After all, the more assets that remain in the trust upon the beneficiary’s death, the more there is left for the next beneficiary of the trust.

The point is, there are many reasons why a trustee and beneficiary may not see eye-to-eye on how to manage the trust assets. The good news for beneficiaries is that there are a number of safeguards in place to make sure that trustees are doing their job properly.

First of all, the trustee owes the beneficiary fiduciary duties of due care and loyalty. This simply means that the law recognizes that the trustee has a special relationship to the beneficiary, and imposes a heightened sense of responsibility that the trustee owes to the beneficiary. By law, the trustee must act a reasonable person would and must act in the best interest of the beneficiary.

This next point will vary slightly among states, but generally the trustee also has a duty to invest the trust assets in order to have the trust produce reasonable income. States will vary in terms of what it means to reasonably invest trust property. For example, some states require that the trustee simply invest the trust assets in any type of “safe” investment, such as government bonds. Other states require that the trustee invest the money as a reasonably prudent person would. Still other states require that the trust portfolio as a whole must be invested in a prudent manner, which allows the trustee to diversify the investments.

Additionally, trustees must keep beneficiaries fully informed about what is going on with the trust. They are obligated to provide beneficiaries periodic accountings of the trust income and expenses. If the trustee does not provide this accounting, beneficiaries may go to court and order the trustee to produce the necessary documents.

So these are some of the safeguards and leveraging points you have in your arsenal if you find yourself as a beneficiary who has been slighted by the trustee. I also want to point out that in these situations, emotions are often running high and the first instinct may be to file a lawsuit. But suing can be an intense and laborious process, so I would like to offer some other possibilities for effectively dealing with these situations:

1. It may help to simply (and politely) ask the trustee to step down. In fact, the trust document often times provides for this very situation. The trust creator usually names, in the trust document, alternative and/or successor trustees in case the current trustee no longer performs.

Additionally, the trustee may even welcome this opportunity to step down. As I mentioned earlier, acting as a trustee is a lot of work. For large estates, acting as a trustee can even be a full-time job. Furthermore, acting as a trustee is not a position that most trustees even asked to do, but rather, were requested to do so by the grantor. And in return for all their hard work, the trustee is often not paid anything at all, or just some small monetary compensation as stated in the trust document. Therefore, all it could take would be to just ask the trustee to step down and let someone else do the hard work.

2. If that doesn’t work, then you may want to try private negotiations with the trustee to reach common ground on how you both think the trust assets should be managed. In fact, this may not be as terrible as most beneficiaries imagine it to be. For one thing, the trustee probably had a close relationship to the trust grantor, the very person who is leaving you his or her assets. Thus, as a beneficiary, you probably already have something huge in common with the trustee: some kind of close, personal or familial, relationship with the trust grantor.

Additionally, it may help to keep in mind that there was a reason the trust grantor chose this specific person to act as trustee. The grantor must have trusted and imparted this enormous responsibility to the trustee for a reason, and whether those reasons are well founded or not, you may want to at least consider them.

I understand that due to the nature of money and close relationships mixing together, tensions can run high in these situations. But there are many legal safeguards in place that protect you as the beneficiary. Additionally, you may have more in common with the trustee than you think, and in the end, preserving all the personal relationships involved may be worth more than the money itself.

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Posthumous Birth Laws, In Vitro Fertilization, and other Legal Quandaries

Some of the trickiest areas of law deal with a subject that is by nature nebulous and fuzzy – the measurement of human life.  When does it end?  When does it begin?  And how can laws be crafted around these boundaries, which are different for every person?  Sometimes the law attempts to force these grey areas into arbitrary categories.  Most of the time though, the laws simply don’t make sense.

Take, for example, an area of law that is recently receiving a lot of attention- posthumous birth laws.  Posthumous birth is when a child is born after the death of a parent, usually the father.  A person born in such circumstances is called a “posthumous child” or a “posthumously born person”.  The laws covering posthumous birth tend to focus on issues like property inheritance and the child’s legal status.  The question is usually: are posthumous children entitled to receive distributions from the father’s estate?

Now, laws covering this issue are already difficult to navigate.  Each state’s posthumous birth laws vary widely, and there seems to be no golden standard to refer to.  The issue gets further compounded by advances in reproductive technology, namely, in vitro fertilization.

We are presently seeing more and more children being conceived through in vitro fertilization.  But what happens when the father passes away before the child is even conceived?  This situation was not previously a legal issue before the advent of in vitro fertilization technology, and courts are struggling to reach a consensus on the issue.

State laws do generally agree that if the father dies during his wife’s pregnancy, the child is entitled to receive benefits such as federal funding and inheritance rights from the father.  However, if the father dies before conception, the child will not be entitled to benefits.

But does this make any sense at all?  Is a donor not a father?  It appears that the law has difficulty defining when the parent-child relationship actually begins.  To give courts some credit though, we are dealing with new technological frontiers and uncharted territory.  Courts faced similar difficulties with the phenomenon of abortion- cases involving abortion are notorious for arguing over the intricacies of when human life begins.

What perplexes me most is this: while the law is having difficulties dealing with real-live situations, there are several areas of law that use hypothetical, impossible situations as actual legal standards.  These quandaries are known as “legal fictions”, and they are abundant particularly in instances dealing with human deaths and births, and of course, property distribution.

To illustrate, here are some of the more commonly known (and ridiculed) legal fictions:

  • The Fertile Octogenarian:  The law assumes that women can bear children even into their golden years, such as 80+ years old.  This law applies in situations involving the property of transfer under the perpetually-hated rule against perpetuities.  (A fertile 80-year old may actually become a possibility given the momentum of reproductive advancements.  Is it desirable though?  That’s another question.)
  • The Unborn Widow:  This fiction says that a man can marry a woman who has not even been born yet.  This idea applies to transfers of property that are conditioned upon the death of the man’s wife.  Such transfers are invalidated because of the possibility of the man marrying the unborn widow.
  • The Precocious Toddler:  This one states that some persons might be fertile at birth or early stages of life.  (I foresee a future debate over Prop. 8,043,932: marriage between the Precocious ones and the Fertiles).

What is the world coming to?  Or rather, what is the law turning the world into?  In my opinion, laws do not need to imagine every conceivable situation and should instead focus on the ones that are actually happening.

So, back to a possible solution for the posthumous birth issue.  Ok, maybe not a solution, but as a suggestion, perhaps the legal implications need to be worked out more thoroughly before the technology is birthed, so to speak.  The legal implications of any new reproductive technology should be anticipated during the technology’s “conception” stages.  The legal process has always struggled to keep pace with technology.  And something needs to be done about that.

In other words, perhaps we need to see more interaction between researchers and legal experts.  This is especially true when dealing with issues like reproduction and parenthood, and, (altogether now), property distribution.  Or better yet, maybe we need more people who are trained in both scientific research and legal issues.  Sounds rough, but it is possible.  After all, the internet is making people smarter, right?

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Why We Need to Be Careful With the 2010 Estate Tax Law Changes

“This is a good year to die.” I’m sorry for the bluntness, but if you’ve heard about the changes in the estate tax law for this year of 2010, you’ve probably stumbled upon this phrase as well. After all, the gist of the estate tax law is that for anyone who dies this year, regardless of the amount of wealth he or she leaves behind, his or her estate will not be charged the normally-dreaded estate tax. But I’m here to argue that actually, in terms of paying for estate taxes, it’s really not such a good year to pass away. In theory, a repeal of the estate tax sounds like it would be a good thing, but I believe that because the legislation was so poorly drafted, the estate tax repeal just ends up creating a lot of confusion and problems.

First, an overview of what the estate tax law is, and what changes were made to it this year. Normally when people pass away, the IRS will tax whatever assets they leave behind (the estate tax). However, the estate tax only applies to people whose wealth, at the time of their death, exceeds a certain amount. This amount varies year by year. In some years it’s as low as one million dollars, in other years, you have to leave behind 3.5 million dollars or more in order for your estate to be taxed. Additionally, the tax percentage varies year by year as well, although on average it can be around 50% of your total estate.

For this year only, Congress has eliminated the estate tax altogether. You can see why, for tax reasons, this seems like an enticing year to die. Especially for someone who leaves behind a large estate, saving 50% of it from taxes can mean A LOT to beneficiaries and heirs. However, that’s not the only change to the estate tax law this year. In order to offset this loss in revenue for the IRS, Congress changed the step-up in basis rules too.

Basically the step-up in basis is relevant to a tax that you must pay when you sell an asset and its value has appreciated from the time you bought it (the capital gains tax). The amount that is taxed is determined by the difference between what you received for the asset when you sold it, minus what you paid for initially. The initial amount you paid for the asset is called the “basis,” and it’s good to have a high basis so that eventually the capital gains tax will be less for you.

Normally when a beneficiary receives an asset from a deceased person, the beneficiary’s basis for the asset will be “stepped up” to the value of the asset at the time the beneficiary received the asset. The alternative would be that the basis of the asset would remain the same for the beneficiary as it was for the deceased (ie, the amount the deceased paid for the asset). But the IRS chooses to wipe the slate clean, and presumably the value of the asset at the time the beneficiary receives it will be higher than the amount the deceased paid for it, hence the basis is “stepped up.”

But this year if a beneficiary sells an asset he inherited, the basis for that asset will remain the same as the deceased’s basis for the asset (subject to a few exceptions, described here and here). Thus, the basis is not “stepped up” and presumably the beneficiary will be paying a higher capital gains tax on the sold asset.

Still though, up to this point, the estate tax repeal sounds generally beneficial to taxpayers. So what was I talking about in the beginning? Well, I believe there are a few things to be concerned about:

1. Problems with the language in your existing trust documents.

Many trust plans try to avoid the estate tax as much as possible. To that extent, trust documents often use language referring to the estate tax when deciding how to allocate assets upon death. For example, language in trust documents often have the trust creator leaving behind to one entity the “maximum amount that can be given free of the estate tax.” In a normal year, this would mean that the trust creator intends to give an amount equal to the amount exempt from the estate tax (so typically, amounts varying from one million dollars to 3.5 million dollars).

However, under this year when there is no estate tax, that amount is essentially limitless! With this language, the trust creator is essentially giving away his entire estate, when he probably thought he was only giving away up to a certain dollar limit. This then creates the unintended consequence of all of the deceased’s assets being left to potentially only one person, and nothing left at all to other persons named in the trust document.

Therefore, if you have an estate plan already in place, it’s probably a good idea this year to have your attorney take another look at your documents to make sure they still reflect your original intent. Any language reflecting something different (such as in the example given above), can be patched up by your attorney writing up a simple amendment or codicil.

2. Do I have a stepped-up basis or not?

Another problem with the changes in the estate tax law this year is that it actually isn’t very clear how the basis rules will apply. For example, let’s take a beneficiary who receives an asset this year from the deceased’s estate. The beneficiary will want to sell the asset at a time that minimizes the capital gains tax. The question is, if the beneficiary sells the asset in 2011, do the basis rules of 2010 or 2011 apply? As it is written, the law is ambiguous on this matter and most estate planning attorneys will not have a clear answer to this question until 2011 finally rolls around.

3. Retroactivity issues…finding out that you really weren’t home-free after all.

Finally, for all the changes in estate tax law we’ve been through this year, and the amount of time we’ve spent trying to make sense of them, it could very well turn out that Congress decides to add a retroactive estate tax anyway. The problem is that we don’t know if: 1) it is even constitutional for Congress to enact a retroactive tax such as this, and 2) even if it is legal, we don’t know if Congress will ever get around to it. If Congress does try to enact a retroactive estate tax, one thing that is almost certain is that beneficiaries who inherited from large estates this year will put up a fight in the courts, which will delay the resolution of this question for that much longer. Since we are already well into September, and 2011 is just around the corner, the thinking now in most circles is that Congress will probably not enact a retroactive estate tax (see article here). But since no one really thought Congress would allow the repeal of the estate tax to go forward this year, who can really predict the actions of Congress anymore?

In Conclusion

I don’t mean to be a downer, but I believe that a closer look at the estate tax law in 2010 shows that this is a case of something sounding too good to be true. In the end, it’s the clients who suffer when attorneys can’t provide them with clear guidance or in the worst case scenarios, when their assets are distributed in ways they had never intended. How did this come about though? For one thing, it’s just too radical of a change to completely get rid of the estate tax for one year. As a result, most people did not think Congress would seriously go through with these changes, and I’m sure there are many estate planners out there who did not plan for this contingency. Furthermore, even if Congress was content with allowing these changes to go forward, the legislation could have been much better drafted to avoid the ambiguities that we are now faced with. In any cases, the nightmare (as I believe it to be) is hopefully almost over. 2011 will be an interesting year to watch to see if things in the estate planning world can finally go back to “normal.”

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Estate Planning Procrastination Rampant

If you could make sure that all your money, property, and other important belongings were given to exactly the right people, wouldn’t you do it?  The question seems like a no-brainer but the reality is that the majority of Americans do not do this!

A 2008 study found that 58% of Americans do not have a will.  I find this number to be shocking.  I know that death and dying is an unwelcome topic, however dying without a will is a really bad idea.  This holds true whether you are worth millions or a lot less.  Wills, trusts, and other estate planning tools give you the power to decide how to distribute your estate.

When an individual dies without a will (or when they have an incomplete will), their estate goes through intestacy, which basically means the state decides how your estate will be distributed.  This is especially risky if you have step or adopted children as some state’s do not allow an adopted or stepchild to inherit in intestacy, or those non-biological children inherit less.

A recent article I read outlines the top 9 excuses for people gave for not making any type of estate plan:

(1)I don’t see a need for an estate plan

(2)I don’t plan on dying

(3)I don’t plan on dying – at least not soon

(4)I don’t want to pay for it

(5)I don’t want to spend the time

(6)I don’t want to talk about my family

(7)I don’t want to talk about my money

(8)I don’t want to ruin my kids

(9)I don’t trust my kids

As you can see, some of these excuses are just avoiding the inevitable.  One of the beauties of estate planning is that you have the ability to change the majority of your plan as situations change.  Without an estate plan, you are putting your finances and property at the mercy of a judge who has no idea what you and your family are like.

Last Will and TestamentA recent LegalMatch study found that the majority of people interested in preparing for their future were more interested in overall estate planning than drafting a single will or trust.  These findings make sense in that those individuals that are thinking about wills and estate planning are really trying to maximize the benefits and thus are creating more complicated schemes than just a will or trust; and those individuals who are not are in the majority and doing nothing to plan.   In addition to the ability to specifically provide for your family and loved ones, there are tremendous tax benefits to creating a will and/or trust.

It is not necessarily that I think everyone needs to embrace their own death.  Rather, I am advocating for embracing the lives you will leave on your death.  Estate planning is such a powerful tool and for all the time that people spend worrying about money and their families in their lives they should take a little time and worry about them after they die too.

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Peace When You’re Dead? Pipe Dream, Just a Pipe Dream…

The hallmark of any good relationship is communication.  Home is where the heart is.  Of all the things in the world that can go wrong, the one thing that you should always be able to rely on is your family.  You can always trust the ones you love.

All great sentiments, truly, they really are.  They’re clichéd, but nice nonetheless.  Sucks though that they don’t always hold up to the reality of life.  Even though none of this applies to me, as my family and life as a blogger are both perfect.  There’s a reason why half of all marriages end in divorce and why every time most people hear of the prospect of having to endure another annual family reunion at Bennigan’s causes them to hightail it to the corner store to pick up a case of Jack.

will dispute catDon’t get me wrong, I’m sure everyone loves their family, in theory.  But there are just so many things that can cause a person to want to break off all ties with them.  Forgetting to pick up groceries, annoying grooming habits, obnoxious personalities, not shutting your bedroom door at night after coming in when you’ve specifically told them that the noise from the outside will keep you up and you have to get up early the next day…

Anyway, not all disputes end with a broken home, most are trivial matters that are usually resolved with a simple conversation or, at most, a jagged bread knife.  However, if I were a betting man (which according to the judge, I’m no longer allowed to be) I’d put my lifesavings on money being the main culprit in tearing families apart.  And in no situation is this truism more apparent then when it comes to wills.

Recent statistics from LegalMatch show approximately a third of all disputes involving wills come from clients asserting claims that they should’ve been a recipient in a person’s will.  Half of the cases involve heirs attempting to protect their interests against another party trying to take their interests away.  The values in these cases vary widely from a few thousand dollars to sometimes a few million dollars.

But what makes these cases difficult to resolve is that in nearly 40 percent of them no formal will was ever written, leaving the family to squabble over their loved one’s estate amongst themselves.  However, even though written wills exist in the majority of these disputes, the same issues still arise.

Sounds pretty grim, huh?  What’s a person to do, especially if you are the one who’s will such a future conflict may be concerning?  The most obvious solution is to try and talk everything out among the people involved.  Whether it’s your will or not, it’s always good to clear things up between those you love.  Because chances are unless your last name is Cleaver, your family probably isn’t perfect and there’s a lot of things that fester because they go unsaid – usually resulting in a beautifully tragic emotional explosion.

The other thing you can do is hire a good estate lawyer to write a tight and clear will.  Though it’s true in this day and age it seems like anyone can sue for anything regardless of how frivolous, a clean unambiguously written document still holds a lot of sway with the courts.  This means a well-written will not only ensures that the person leaving behind his estate gets the security of knowing his last wishes will be carried out to his liking, but that there would be less chance for those looking to modify those wishes to be successful at it.

Either that or you can just do what you want with your money now and leave those money-grubbing descendents weeping.

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