San Diego Estate Planning Blog: Creating Legacies

From the desk of Kristina Haymes, Estate Planning Attorney in beautiful San Diego (Del Mar/Carmel Valley area to be exact!)… but serving all of San Diego County and California (virtually)…

The question of the day is… Why Trusts Fail. 

Now, you may be saying to yourself, “I didn’t know trusts fail.”  How can a trust fail?  Well, this may be a dirty little secret in the estate planning industry… but Trusts can and do fail all the time.

But before we get into the reasons why a trust may fail, let’s talk briefly about what a trust is.

A Trust is a legal instrument and it has to have certain things: 1) a writing, 2) trust res (or property), 3) a Grantor (or the person making the Trust) has to have intent and capacity to make a trust and you need a Grantor, a Trustee (someone to manage the Trust) and a beneficiary of the Trust.

In California, if you own your own home, or any property (real as in real estate or personal (as in things) or cash or stock) over $100,000 then you will want to set up a Living Trust.

A Living Trust is a revocable trust (which means that the Grantor (or trustmaker) can revoke it, end it, change it, amend it – do whatever he or she wants with the Trust during his or her life.

In a separate post I will talk about why you would want to establish a Trust, but for now, let’s assume that you fully comprehend why it is critical to establish a trust.  If you are not convinced, see this blog post here on Why You Need a Living Trust.

Now that you understand it’s critical to have a Trust, you want to make sure that your Trust won’t fail!

Here are the top reasons why trusts fail…

1.  Trust is not fully funded!  Yikes!  For years estate planning attorneys were generating trusts for people and then sending them on their merry way with an instruction like, “now go out and fund your trust.”  What?

Yes, you like most people, would probably be saying what?  How on earth do I do that?  Well, the truth is, it is not that complicated, but it can be time consuming.  But if you are unfamiliar with the process, you may not have any idea where to start.  I know that when I first did a trust for myself (before I was an estate planning lawyer) we never executed the trust and we never transferred our home to the trust, so pretty much our trust was worthless!

Chances are that if you paid a very low fee for your trust, or you used an online service, then your trust is not fully funded.  And guess what?  If your trust is not fully funded, it’s likely to fail!

Why?  In order for a Trust to work, the Trust (the fictious entity that you created to hold your property) needs to actually own all of your assets. 

• So, you will sign a new deed, placing all of your real estate into your Trust. 
• You will change the ownership on all of your bank accounts and brokerage accounts. 
• You will have your stock certificates reissued in the name of your trust. 
• You may (this requires a thorough analysis) assign your business interest to your trust. 
• You will change the beneficiaries on your retirement accounts (but make sure you talk with your estate planning lawyer first because retirement accounts are tricky), and your life insurance policies.

Get the idea?  This is what is called “funding” your trust.  And unfortunately, most estate planning lawyers do not have a system in place to make sure their clients fully fund their trust.  The reality is that if there are significant assets owned outside your Trust, your Trust will not efficiently accomplish one of its primary purposes — which is to avoid an expensive, long drawn out, public probate court process.  Trust me when I say that you want to avoid probate if at all possible.

Moreover, maybe you’ll have an experience like I had, where assets that were supposed to be in the name of the trust weren’t and then the beneficiaries LOST control of the money!

You don’t want your money and your assets going to anyone other than the people you designate!

The good news is that if you work with me, our firm has a funding coordinator whose sole job is to make sure that your Trust is fully funded.  We will provide you with unlimited guidance and instructions, asset inventories, and the like, or you can pay us extra to do the funding for you.  It’s up to you, either way, we want to make sure your Trust will work when your loved ones need it to the most!

2.  The Law Has Changed

Another reason why a trust may fail is the law has changed.  Now, the Estate Tax is a perfect example of a significant change in the law.  The Estate Tax exemption (the amount you can passed to loved ones without paying tax) was gradually increasing from the year 2000 to 2009 (it reached an apex of $3.5 million in 2009).  Then, pursuant to a sunset provision, the estate tax was removed in 2010.  However, in its place, we have capital gains tax on a carry-over basis.  As a result, many people who  had created trusts in the early 2000s or even before, probably had a lawyer that gave them an “A-B Trust” based upon some type of fractional or pecuniary formula.  What this means in lay terms it that at the death of one spouse, the trust was split automatically into at least 2 sub-trusts.  However, if someone died in 2010, then the surviving spouse could have all of the assets go to the family, credit shelter trust, or — all of the assets go to the survivor’s trust.  And the end result could be the decedent’s estate tax exemption (which would be zero in 2010) is not preserved.  Additionally, if the decedent had assets that had appreciated significantly, the plan might not protect against the capital gains tax.

Bottom line is this old desing based upon a formula — fails!  it doesn’t minimize taxes, doesn’t preserve the exemption, and doesn’t accomplish one of the primary goals of a good trust.  So, if the law changes and you have not updated your plan — it won’t work.

Unfortunately, no one can predict the legal changes that may or may  not happen in the future.  A best practice right now — and one that we fully incorporate at Haymes Law Group — is to create trusts with great flexibility and with provisions that account for a situation where there is an estate tax, and a situation like that which we have in 2010 when there is no estate tax.  That way, unless there is a major overhaul in our estate tax system, you trust should work.

In addition, we value communication with our clients, and we will let you know if the law changes.  My firm is not based upon a one shot transaction — our goal is to be your trusted advisor for life.  So, I take my job of staying up to date on the latest legal developments seriously and endeavor to keep my clients informed on the current state of the law.

3.  Your Life Has Changed

The third reason why trusts fail is that your life has changed and your trust and other estate planning documents are not up to date.  Maybe you had another child.  Maybe you got divorced.  Maybe you got married!  Maybe you have a new job with a new retirement plan, or you bought a new house, or you moved.  Our lives change and your estate plan needs to change along with them.

You don’t want to die and have assets go to someone you no longer want.  Your choice of guardian or trustee may have changed.

Maybe your proposed guardian for your children died.  I had a client who had that happen to them.  Their dear brother passed away and he had been designated as the primary guardian for their children.  Make sure your plan is up to date!

We have a system in place to make sure your plan is regularly reviewed.

Hopefully, you now see and understand why trusts fail and what you can do to prevent your trust from failing.

We are here to serve you.

Create Legacies that Last,

Kristina Haymes

San Diego trust and estate attorney serving Del Mar, Solana Beach, Encinitas, Rancho Santa Fe, Carmel Valley, Penasquitos, Poway, Carlsbad, La Jolla, all of the San Diego County and all of California (virtually)

So, it’s been raining off and on all week here in beautiful San Diego and if you are asking yourself, what to do with the kiddos that are bouncing off the walls (I know mine have been with soccer practice cancelled all week)…. then, maybe it is the PERFECT Time for you to come to my free workshop at Pump It Up of Sorrento Valley….

We’re almost full, but have 3 spots left!!  So don’t delay, bring the family, pizza and refreshments will be served…

Get the info at www.krhess.com/events

Kristina Haymes

Del Mar, San Diego Estate Planning

Wills, Trusts, and Estate Planning

From the desk of Kristina R. Haymes, San Diego Estate Planning Lawyer…

October 13, 2010

*Fictitous names — stories are not tied to real people  -any similarity is a coincidence.  This blog does not provide legal advice, just general information.

Evelyn* lives in Del Mar and she is 86 and owns $10 million in real estate (even in today’s market).

Evelyn is a widow and has decided that she would like to drastically change her estate plan.  She had previously worked with a San Diego Estate Planning Attorney when her husband was alive.

Evelyn has now decided that she would like to disinherit one of her children and change some of the beneficiaries of her trust and will.

What can Evelyn do to ensure that her will, trust, and other key estate planning documents are not contested?

One thing Evelyn can do is videotape the signing of her estate planning documents.  Evelyn is in good health and has a sound mind, so a videotape would clearly demonstrate that she 1) was competent to make these changes, 2) was of sound mind, and 3) was not subject to undue influence.  Courts in California have found that such videotapes can establish “compelling evidence” that a testator (person who executes a will) or Trustor (Grantor or “trustmaker”) was fully capable of making these changes.  So, if one of Evelyn’s children decide to contest her trust or will, then, the estate would introduce the videotape as evidence that Evelyn was fully competent to make the changes.

If, however, Evelyn had alzheimers or had experienced some diminished mental capacity, then, a videotape could backfire and prove that she didn’t have the mental capacity to make changes to her estate plan.

So, be careful!  Videotaping can be a shield against estate challenges and it can be a sword destroying estate planning.

Another important strategy is to include no contest provisions in your will and trust.  California recently updated its law on which provisions will be enforced, making it more difficult to enforce no contest clauses.  Nevertheless, it cannot hurt to include such a provision.  No contest clauses generally provide that if a beneficiary challenges the validity of the will or trust, then, their right to inherit under the document goes away.

You challenge the will or trust and you are OUT.  As mentioned, California has made it more difficult to enforce such provisions, but if the technical requirements are met, they can be enforced.

After all, it is everyone’s right to give their property to whom they want, when they want, and in the manner they want — and that is precisely one of the goals of estate planning — to make that process as easy as possible.

Of course, if dealing with rational individuals, it is often better to discuss with the beneficiaries your plan and why you are doing things the way you are so they understand your thought process (and hopefully will be less likely to challenge your plan after you’re gone).  But the reality is that too often, people are not able to act rationally when it comes to issues of money, inheritance, and the emotional issues that are deeply connected to such things.  Too often a lifetime of hurts, or memories, or previously unresolved issues will rear their ugly head when a loved one dies.  And, also too often, people are not able to accept a parent’s decision to change their estate plan.  Sometimes, children if they knew of such changes would attempt to manipulate or coerce the parent into changing the plan.  Thus, there are often many valid reasons people have for not discussing their estate plan with the beneficiaries or changes they are making and why.

If you, like Evelyn, want to make significant changes to your San Diego estate plan, and you think it is highly likely that your changes will be unpopular with your beneficiaries (children, step-children, or other relatives), then, by all means call our office and we can assist you in making sure that your wishes are followed and can videotape your signing to protect against any future estate litigation.

I’m Kristina Haymes the owner of Haymes Law Group, and I am here to serve you and your family with all of your San Diego Estate Planning needs.  We are not like most law firms, and I invite you to take advantage of one of our 2 free monthly Family Wealth Planning Sessions where we can discuss your situation and how the personal attention of our law firm can serve your family’s estate planning needs.

Create Legacies and estate plans that work!

Kristina

Del Mar/Carmel Valley office for all your Trusts, Wills, and other San Diego Estate Planning needs