This is part of a letter written by famous comedian George Carlin, shortly after his wife died…

Remember; spend some time with your loved ones, because they are not going to be around forever.

Life is not measured by the number of breaths we take, but by the moments that take our breath away.

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Guidelines for Successor Trustees

These Guidelines are designed as an aid to those of you who have been entrusted to serve as successor trustee(s).  It is not possible to answer all of your potential questions.  However, we hope to answer those which will come up with some regularity.

You may have assumed the duties as successor trustee either because of the incapacity or death of the primary trustee(s).  Therefore, these Guidelines are divided into two groups.  The following discusses what to do upon the death of the Settlor(s) of a Trust.

Succession Because of Death

If you have assumed the duties of successor trustee because of the death of one or more of the original trustees, your task is as follows:

1.  Locate all of the assets of the Trust.  If the Settlors have been maintaining the Asset Inventory section of their Family Trust Portfolio, this should be a simple matter.

2.  Determine whether a Credit Shelter Trust is to be created and, if so, obtain from the IRS (Form SS-4) a tax ID number for the Credit Shelter Trust upon the death of the first spouse, and retitle the appropriate assets into the Credit Shelter Trust under that trust’s tax ID number.   Assistance from an attorney and/or accountant is recommended to make sure this aspect of settlement is done properly.

3.  File the annual form 1041  (trust tax return) with the Internal Revenue Service.  This form requires you to show the income of the trust, its expenses, and the manner in which the income was distributed.  If the income has all been distributed, the trust will pay no tax, and this return is merely an information return. This form has a number of lines, but you will not be using most of the lines. With some guidance from your CPA or attorney, you should be able to complete the form.

4.  Verify the date of death value of all assets.  This value will become the new tax basis for the assets, and therefore, it is very important.

5.  Determine whether or not all of the real estate owned by the Settlor(s) has been transferred to the Trust.  Check for copies of recorded Deeds in the Family Trust Portfolio or check with the County Recorder’ office.

6.  Determine the expenses of last illness, taxes due and owing, funeral expenses and debts of the Settlor(s).  The funds of the Trust must first be used to pay these items.

7.  Once you are sure that all of the expenses have been paid, distribute the trust assets.  Make sure you have allowed for any income tax due and payable on the last year’s income of the Settlor(s).  You may be responsible for any shortage of these funds.  It is not uncommon to make a partial distribution of funds initially, with a final distribution once all expenses have been paid.

8.  Depending on the size of the estate, a Federal Estate Tax Return must be filed.  Because of the complexity of this return, we suggest you employ an attorney or accountant to assist you.

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These Guidelines are designed as an aid to those of you who have been entrusted to serve as successor trustee(s).  It is not possible to answer all of your potential questions.  However, we hope to answer those which will come up with some regularity.

You may have assumed the duties as successor trustee either because of the incapacity or death of the primary trustee(s).  Therefore, these Guidelines are divided into two groups.  Following is a discussion of the steps you should take if assuming responsibilities as a result of incapacity of the Trust’s Settlor or Original Trustee.

Succession Due to Incapacity

If you have taken on the primary trustee responsibilities because of the incapacity of the primary trustee(s), you should take care of the following items:

1.  Locate all of the trust assets and make certain that title to the assets have been transferred into the name of the trust.  If there are assets which have yet to be transferred into the trust, the person or persons holding a Durable Power of Attorney can complete the transfers.  Since a Power of Attorney is no longer effective after the death of the Principal, it is important not to delay this step.

2.  Determine the needs of the Settlor or Settlors.  It will be your responsibility to manage their funds, and to take care of their financial needs to the extent the funds of the trust permit.

3.  If long term nursing home placement is a possibility, consider whether or not it may be advisable to “gift” trust assets to someone other than the Settlor.

4.  Provide an annual account to the beneficiaries of the Trust which tells them what funds were in the trust, how much income the trust had, and how that income was spent.

5.  File the annual form 1040 of the Settlor(s) with the Internal Revenue Service.

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It is not uncommon for supporters of living trusts as a means for distributing one’s estate to compare the often high cost of probate to the cost of creating a Revocable Living Trust.  Depending on the state you live in and the complexities of your estate, Probate can consume anywhere from 4% to 10% or more of your gross estate, (before debts are paid), based on a comprehensive study by AARP.  A decent Revocable Living Trust  might run from $1,200 to $2,500 more or less.  It seems clear that the cost of setting up a living trust is much less than the cost of allowing your estate to go through probate.   But, is that the only measure of cost you should compare?

Some would argue that a Living Trust should be managed by a professional, or corporate trustee and they charge fees commensurate with executors fees for a Will going through Probate.  There can be many reasons why the services of a corporate trustee would be preferable to using a family member,  however, in most cases, trusted family members can and do successfully settle trust estates without undue complication.

Unless the Settlor pre-determines the fees that may be charged by an individual or professional for managing and settling a Trust,  a typical trust will usually allow for “Reasonable Compensation by a Trustee”.   Reasonable compensation is often a standard approach since the courts have essentially defined that term to be the fees usually and customarily charged by professional corporate trustees in the geographic area where the Settlor died, or where the Trust administration is to take place.  It varies a little from here to there but is generally around .75% to 1.75% of assets under management on an annual basis (if the trust is managed for beneficiaries over time as opposed to being all distributed outright).

There can be additional fees associated with real estate commissions, brokerage fees to liquidate real estate or stocks, tax preparation fees from an accountant… all of which can generally apply anyway whether you are dealing with a Probate or a Trust.   The key expense items that usually are not part of a Living Trust’s settlement are court costs and attorneys fees.

Here is something important to note… most successor trustees who are beneficiaries DO NOT charge any Trustee Fee (maybe just reimbursement for out of pocket expenses)… The reason being that trustee fees are taxable to them… inheritance is not.  Sometimes taking a fee is warranted by a beneficiary who is acting as a Successor Trustee,  but it usually the exception more than the rule.

The bottom line is that a properly prepared and funded living trust, even if administered by a Successor Trustee who is a paid Corporate Trustee, should still be significantly more economical than the cost of Probate Administration in most cases.  In the wider analysis, the comparison of costs should not be the only factor looked at.  You should also look at the length of time each method will take, the likelyhood of any heirs who might seek to contest your wishes, and the short and long term needs of the beneficiaries.

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In a recent post we talked about the limits of insurance coverage available for bank deposits in the event your bank, thrift, savings and loan or credit union were to fail.  The government “rescue” or “Bail-out” plan passed in early October increased the insurance limits from $100,000 to $250,000.

Our earlier blog was specifically focused on the amount of insurance available to folks who have their accounts titled in the name of a Revocable Living Trust.  You may recall in that blog, that the amount of insurance was calculated somewhat differently.

The insurance coverage for Living Trust owned accounts was calculated first by multiplying the number of Creators, or “Settlors” of the Trust times $100,000.  Then multiplying that number by the number of “Qualifying Beneficiaries”, to come up with your total insurance.

E.g.  If the Trust has a husband and a wife as the (2) creators or “Settlors” of the Trust, the first calculation is 2 x $100,000 = $200,000.  If the husband and wife have 3 children named as Successor Beneficiaries of the Trust, then the second part of the calculation is $200,000 x 3 (qualifying beneficiaries) = $600,000 TOTAL AMOUNT OF INSURANCE COVERAGE.  With the higher insurance limits passed in early October, these calculations will change as follows:

Under the new law the calculation will use the higher insurance limit of $250,000, and would therefore look something like this:

First calculation:  2 x $250,000 = $500,000

Second Calculation:  $500,000 x 3 (children as qualifying beneficiaries) = $1,500,000 TOTAL AMOUNT OF INSURANCE COVERAGE.

In addition, you may recall that there were two additional conditions imposed in order to qualify for the full amount of insurance as calculated above.

1. The beneficies of your trust had to be “Qualified beneficiaries” , meaning the spouse, child, grandchild, parent or sibling of a Settlor.
2. The beneficiaries names must be listed on your account paperwork kept at the bank.

The new law eliminates the use and definition of “Qualifying Beneficiary” so that now if you have a friend, relative such as Aunts, Uncles or Cousins, or even a charity, for example, named as a beneficiary of your trust, that the full additional $250,000 worth of insurance coverage for each such name listed will be available.

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With all the buzz over reverse mortgages (RM’s) in the past couple years, I was surprised to learn that the first reverse mortgage was completed in Portland, Maine in 1961. The concept evolved until 1989 when RM’s went mainstream with HUD selecting 50 lenders by lottery to make the first FHA-insured reverse mortgages.  Even though reverse mortgage’s have now been around for a couple decades or more, they have become increasingly important vehicles for providing increased financial security and improving the quality of life for seniors.  These special loans are available to homeowners age 62 or older, which allows them to pull cash out of their home without making mortgage payments.  Unlike a traditional home loan where you borrow a lump sum and make payments to the bank, the reverse mortgage gives you the lump sum (tax-free) and the interest adds to the initial principal and only has to be re-paid to the bank upon the borrowers death or if the borrower decides to sell the home.  This has the intended effect of giving older Americans more income or assets to use to enjoy family and friends, explore special interests, cultivate new skills or just live life to the fullest. 

Sometimes our retirement years can present special challenges, and often people find themselves in need of extra income just to keep up.  Fortunately tools like the reverse mortgage have been developed to tap into the equity in our homes that often seemed locked away and unavailable.

How much can you get?  Usually in the neighborhood of 40% to 60% of your home’s value.  There are four factors that go into determining the amount available:

1. The value of the home
2. The number and ages of the homeowners
3. The interest rate offered
4. The maximum allowable loan limit as determined by the average values of homes in your county and the limits of the backing agency such as FHA

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During the early summer of 2008, largely as a result of predatory lending practices and reckless borrowing by homeowners, the US Banking system is under significant pressure. The US Senate Banking Committee has identified 90 banks, S&L’s or Thrifts as having marginal reserves to stay in business. One of the biggest US Thrifts, IndyMac Bank, has recently failed and has been seized by Regulators. IndyMac depositors are understandably anxious and many have made a run on the bank to get their deposits out, which was the final straw in the Thrifts collapse. The good news for depositors is that their accounts are insured up to a point. In general, an individual or couple is insured for up to $100,000 for all of their accounts, perhaps more depending on how you hold title to multiple accounts at one institution. But what about accounts owned in the name of a Revocable Living Trust?

The Federal Deposit Insurance Corporation has it’s own rules that pertain to insurance coverage’s for various types of accounts. Their rules for Trusts can sometimes be confusing. We cannot give you any absolute advice on how much insurance is available under FDIC rules. In addition, the FDIC does not generally review individual trusts and tell you how much insurance would be available. What we can do is include here the general rules put out by the FDIC, and give you some questions to pose to your bank for an idea from them on how much insurance is provided. If you cannot get clarification to your satisfaction, you can be absolutely assured of complete protection if you keep no more than $100,000 in the name of your trust in any one bank.

The following information was obtained from the Federal Deposit Insurance Corporation (FDIC) as it relates to Bank and Savings & Loan deposits and how they are insured upon retitling into the name of a trust. [Read more →]

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The concerns over the high costs and long delays associated with Probate are often central to the discussions over why living trusts are far superior to wills as estate planning tools, even for relatively small estates. For strictly probate avoidance purposes however, a living trust may not always be needed. Most states have a minimum asset threshold before probate becomes mandatory, and for those falling under the line, a formal probate is not usually required. For example if you live in California and your estate holds no real estate and the total value of your assets is less than 100,000, then your estate will probably not need to go through probate. This threshold is usually much lower in other states though, often in the neighborhood of $20,000 to $50,000. If this is your situation, then you should at least create a will with an attorney and consider making individual beneficiary designations for your accounts at the bank.

Most of us would agree that probate should be avoided if at all possible. This is not, however the only reason a living trust surpasses a will. In my opinion, the only true benefit of having a will is having a plan in place for the distribution of your assets at death. This is all a will can do for you but is only half a plan. A better plan also has a strategy for dealing with; your incapacity, the care and support of minor children and/or grandchildren, beneficiaries with special needs, or beneficiaries with severe lack of financial acumen or maturity. Remember that a will can only go into effect after you die and cannot help you in these important areas.

Suppose you and your spouse bought a home. If you are like most of us, you need two incomes to be able to pay the mortgage. Then suppose that your spouse gets in a terrible accident that leaves him or her incapacitated. They can’t work any longer so their income stops. A will won’t help you because your spouse is not dead. Your life insurance policy won’t help you for the same reason. You decide you need to sell the house but both spouses are on title and any sale or refinance of your property will require both signatures. If your spouse is incapacitated, then you are likely to have to go to court and spend $5,000 to $10,000 to have your spouse declared legally incapacitated and have the court appoint a conservator. Then, the judge will let you know if you may or may not sell the house, and what you may or may not do with the proceeds. A properly prepared living trust will allow you to almost immediately take the actions you feel are in the best interest of you and your spouse, without interference from the courts.

Providing for your children is usually the most important goal of your estate plan. Do you have children who are minors or not yet mature enough to handle the estate you are about to leave to them? In most states if you have a will, or use the generic will that the state imposes when you don’t, your children must receive their inheritance when they turn 18. Do they have the maturity and experience at that age to be good stewards of your estate? With a living trust you can set a more appropriate age for them to have access to or manage your estate (e.g. age 25 or later). You can even set parameters for them to earn the right to receive or manage their inheritance. During the ‘maturation’ years, your trustee is empowered to provide for your children’s health, education and welfare. If minor children survive you, a will generally leads to a strict court-ordered and supervised guardianship of your estate until your children turn 18. These arrangements are costly and restrictive, and again, your children must receive your entire estate at age 18. With a living trust there is no need for the court to get involved. Your trust would stipulate how and for whose benefit your assets were to be used, and would grant full legal power and authority for your trustee to carry out your wishes.

Remember to use a qualified attorney to make sure your will or trust is properly prepared. Avoid generic ‘do it yourself’ kits and form books. They can’t and don’t address every family’s unique needs and can be disastrous in the end.

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