Category Archives: Living Trusts

Who Gets the Life Insurance and How?

Dear Liza: My mother passed away recently and had everything, including her checking, savings, etc., in a living trust.  But one of her other insurance policies had my deceased father listed as beneficiary.  The insurance company is telling me the proceeds from that insurance policy needs to go thru probate.  The policy is worth $10,000.  She also has a will naming her children as inheriting her estate. Does my mother’s trust trump her will? 
Here’s my quick answer: no–your mother’s trust does NOT override her will, but they usually work together.  (I can’t bring myself to use the word ‘trump’ anymore in this context.)  But neither one controls who gets that insurance money or how it is transferred. Here’s why:
  1.  Your mother created a living trust to hold her biggest assets to avoid probate. That’s good.
  2. Your mother created a will also. That’s also good because not everything a person owns is usually placed in a living trust. A will is always done in a comprehensive estate plan.
  3. Usually, the kind of will your mother created would be a ‘pour-over’ will, which says that anything your mother owned in her own name at her death should be transferred/pour-over into her living trust after her death. This doesn’t avoid probate, but it means that, in the end (after a probate, if that’s necessary), the trust will determine who inherits.
  4. Life insurance, though, is transferred at death by beneficiary forms.  The forms dictate who inherits that asset, not the will OR the trust.
  5. Your mother named your father as a beneficiary, but he died first. So, the company is telling you that your mother’s estate is the default beneficiary. That’s typical.
  6. Assets owned by your mother’s estate will go through probate, but only if they exceed your state’s small estate limit. In California, where I practice, that’s $150,000. It is less in other states. You need to find out what it is in your state. If you lived in California, and that was the only asset you needed to transfer outside of the trust, you wouldn’t need to go through probate, you’d be able to use a Small Estate’s Affidavit. Here’s a Nolo article that will help you learn how to use that process in your state.

Hope that helps.

Reducing Capital Gains: Step-up in Basis, The Basics

Dear Liza: My parents a house in 1995. They put the house in a trust in 1998 with me and my 2 brothers as beneficiaries. My dad passed away in 2007 and my mom in 2015. The house is now for sale . I’m not sure what the tax basis should be. That is a really good question, because, as I’m pretty sure you already know, the difference between the basis of the house and the sale price of the house will determine whether or not you and your 2 brothers are going to owe capital gains taxes on the sale of the house.

Just to review: capital gains taxes are due on the difference between an asset’s basis and its sale price. So, for example, if you buy a share of stock for $10/share and you sell that stock for $110/share, you would owe capital gains on that $100 of gain. Where I practice, in California, we estimate capital gains to be about 33% (federal top rate of 23.8%, plus 13.3% California top income tax rate), so you’d owe about $33/share, worse case scenario.

Assets that you inherit at death get what’s called a step-up in basis. If your mother, for example, had bought that same stock at $10/share, but hadn’t sold it during her lifetime, you and your brothers will inherit that stock at what it was worth the day she died. If that was $110/share, and you then sold those shares for $110/share, you’d owe no capital gains taxes at all.

Houses, like stocks, also receive a step-up in basis at death. But I can’t actually tell you what the basis in your mother’s house would be because I don’t know enough of the facts. The answer depends on what kind of living trust they had, and that also can depend on where they lived.

If your mother and father had a living trust that held the entire house in one revocable trust for your mother’s benefit, you and your siblings will inherit that house at its value on your mother’s date of death.  Since you are selling it two years after her death you need an appraisal to document its value on your mother’s date of death.  If you didn’t get one when she died, you can still get one that looks at the value in 2015, it will just cost more to get. That 2015 value will be your basis.

For example, if the house was appraised at $350,000 in 2015, and you are selling it for $450,000, you will have to pay capital gains on that $100,000 of gain.

If your mother and father, however, had what’s called an “A/B” trust, in which your father’s assets were placed in an irrevocable trust for your mother’s benefit (usually called a “Bypass Trust” or a “Credit Trust”), then the portion of the house held in that trust will not receive a second step up in basis at your mother’s death, and you’ll have to pay capital gains on the gain from 2007 until now.

For example, if, when your father died, the house was appraised at $200,000, and, as is common, half of the house was held in the Bypass Trust, and you are selling it now for $450,000, you are going to have to pay more in capital gains than you would if all of the house was in a revocable trust. Here’s how it works:

Half of the house was held in the Bypass Trust and has a basis of $100,000 (because the house was worth $ 200,000 in 2007, when your father died). Upon sale, that half of the house had a basis of $100,000 ($200,000/2) and realized $125,000 of gain ($225,000 – $100,000). The other half of the house, which was in your Mom’s revocable trust, gets a full step up, so has a basis of $175,000 ($350,000/2). That half of the house realized gain of $50,000 ($225,000-$175,000). So, you and your siblings will owe capital gains on $175,000 ($125,000 from your Dad’s trust plus $50,000 from your Mom’s trust).

As you can see, the kind of trust your parents had will greatly affect the capital gains taxes you and your brothers will owe upon sale. So, first step, figure out what kind of trust they had. Next step, consult with an accountant.

 

We refinanced. Did our house get taken out of the trust?

Dear Liza:  We are a married couple in our 40s with 2 kids with a living trust. Our primary residence is a part of the trust. We refinanced our primary residence a couple of months ago. We are not sure whether our house was pulled out of the trust during the refinance. Is there a way to find out whether the house is still part of the trust or not? If the house is out of the trust how do we get the house back into the trust? Often, when people refinance a house that is held in their living trust, their lender requires them to take the house out of the trust, get the new loan, then transfer the house back into the trust. I’ve been told by loan officers that this is because they want to check your individual credit ratings.
This is not always required, it depends on the lender. Sometimes you can get a new loan without going through the out of the trust/back into the trust shuffle.  But if it is required, the loan officer will often create and record the deed transferring the house out of the trust so that you can qualify for the new loan (and they can get paid).  If they transfer it out, they should transfer it back in.  But often, that last step, transferring the house back into the trust, doesn’t happen. This is by far the most common reason that I find that clients end up with houses not in the trust.
To find out if your house is in your trust, you will need to get a copy of the last recorded deed. You can get that at your county’s recorder office. Many counties will let you order this online. Here is a handy website that lists all of the County recorder offices in California. If you go to Legal Consumer.com, you can find your local country registrar in any state, just by typing in your zipcode.
If our house is not held by your trust, you’ll need to record a deed transferring it back in. A lawyer can do this, but so can a title officer. You might consider going back to the title company where you signed the loan papers and ask them to record a deed transferring your property back in.

Trust Tax ID Numbers and Other Basics of Trust Administration

 

Dear Liza: My mother recently died and I am the Trustee of her trust. She left everything to me and my brother, equally.  I live far away from California, where she lived. My brother lives in her house. The bank told me that I need to get a tax identification number for my mother’s trust, is that true? Also, I’m worried that my brother is going to take her furniture and other things in the house before I have the chance to get there. I really don’t know where to start or how to get help. So, first things first. Yes, you DO need to get a tax identification number for your mother’s trust now that she’s died. That’s because now her trust is irrevocable, and, until you distribute the trust property to yourself and your brother, any income earned by the trust during this interim period needs to be reported under this new tax identification number, which is called an ‘EIN’ (employee identification number). You can apply for it online at this website. I’ve written about how to do this on Legal Consumer, which offers national probate information, organized by zip code–click on the article about how to get a tax id number.

Next, you, as Trustee, are responsible for gathering and protecting the trust’s assets until they are distributed to the beneficiaries. That’s the legal answer — but in real life, this can be tricky, especially when you are far away and you two are the only beneficiaries. I would advise seeing how cooperative your brother will be — after all, he benefits from having the house clean and sold for a good price. Ultimately, if he won’t cooperate and you can’t get him to move out, you should seek to have him removed by the local law enforcement authority, but I would hope it doesn’t come to that.

Finally, in terms of getting help, I’d advise you go find an estate planning attorney to advise you on your duties as Trustee. If there are trust assets other than that house, you can use trust money to pay for this advice, and it will be well worth it, since you have to do the job properly or risk personal liability. Nolo has a lawyer directory that should be helpful here.

Should We Create a Living Trust?

houseDear Liza: We are a married couple in our early and mid 30s with a one year old son living in Southern California. I have been looking at setting up a trust and/or will for our little family but not sure what is needed in our scenario. My husband and I each own a home in our name (bought before we got married). 

 My husband and I plan to create a living trust for each of us and transfer the property in our respective name into the trust to avoid probate and create a will for everything else. Since both properties still have outstanding mortgage, how do we go about changing the title to a trust and will the lender allow this? Is the living trust the best way to go about with estate planning or do we need to look at another type of trust? Aside from the two properties, what else should be included in the trust? Do we need to create an ILIT for the life insurance policy to avoid estate tax and inheritance tax? What is the exemption limit in California? It sounds like you are thinking about all the right things (and on your way to owning a real estate empire). Yes, a living trust is a great idea for your family for these three reasons:
  1. A living trust will allow you to transfer your assets to your son without a probate proceeding.
  2. A living trust will allow you to set up a trust for your one-year old son so that an adult can manage his inheritance until your son is an adult.
  3. The transfer of your properties into a living trust will not affect your mortgage–there’s federal legislation that says such a transfer does not trigger any due on sale clause. Your lender doesn’t need to be notified, you just record a deed transferring your property to the trust.

You probably don’t need an insurance trust. That’s what people use to exclude the value of their insurance payouts from their taxable estate. But today’s exemption levels ($5.43 million in 2015) are so high, that most of us won’t have to pay any estate tax, even if our life insurance policies are included in our taxable estates.

When does a Will Make Sense?


pot of goldDear Liza: A friend of mine is considering a living trust.  The only property he has is a coin collection maybe worth around $15,000.  He has an adult daughter who he doesn’t communicate with and does not want her to get anything.  He would like to leave the collection to me.  Is a living trust a good way to go listing me as the trustee or the beneficiary?  Or is doing a Will just as good? If the only property that your friend has is a coin collection, a simple Will should accomplish his goals.  A Will allows your friend to clearly state who should receive that collection upon his death. Assuming that $15,000 falls below the probate threshold in his state (called the “Small Estates Limit”), no probate would be required upon his death to transfer the collection to you. A living trust is just a way to avoid probate, but really serves no purpose in an estate that’s below the probate limit anyway. To determine the probate threshold in your friend’s state, start here.

Amending a Survivor’s Trust

grandfather-506348_640Dear Liza: My parents have a revocable Trust that is very outdated and we want to make amendments to it. I understand most of the Trust but am having trouble with the Survivors Trust. I was surprised to see that upon the death of one spouse a Survivors Trust may be established. Is this really a necessary part of a Trust. Isn’t being the Co Trustee basically the same thing? A Survivor’s Trust is often created for tax planning. It’s common.  Many living trusts, especially those drafted prior to 2012 (when tax laws changed) are designed to minimize the estate tax at the second death. Trusts like that typically divide the trust estate into two trusts when the first spouse dies: one trust holds the decedent’s assets and is often called the Bypass Trust (or the Credit Trust); the other trust holds the survivor’s assets, and is called the Survivor’s Trust. Usually, the survivor can use assets in both trusts, but, to the extent that they don’t use up all the money in the Bypass Trust, that money passes estate tax free to the beneficiaries.  If your parents don’t have more than $10 million (like MOST people), their trust can most likely be simplified to just hold all of the assets in one, revocable trust after the first death. This trust is still often called the Survivor’s Trust. But this is all completely separate from who manages the trust, whatever it is called. That person is the successor Trustee, or, if appointed during your parents’ lifetimes, a co-Trustee. If you are helping your parents take care of their finances, and they’d like to help them manage their affairs, they can appoint you to serve with them now as a co-Trustee, or even resign, and let you take over as sole Trustee now.

How to Store That Plan

punch-402558_640Dear Liza: I’ve just completed my estate planning documents using the latest edition of WillMaker Plus, including the will, health care documents, power of attorney, final arrangements, etc. I think all totaled it comes to over 65 pages. I’d like to leave all the documents well-organized so they’re not just a pile of papers that would overwhelm the executor. I’d like to put the documents in a three-ring binder with a table of contents and tabbed for the different sections. Is it legal to hole-punch these documents, either before or after they’re singed and notarized? Would that vary by state? I have never heard of any law that would invalidate documents that were otherwise valid because there are physical holes in the paper. Sometimes my clients make a copy of their documents, hole punch those, and put the copy in a binder, then put the originals in a safe deposit box or safe in their house. It’s great that you are trying to make things easier on your loved ones. Here’s a few other things you could put in the binder: a list of your passwords to online accounts; a list of your accounts, life insurance policies, and other assets; contact information for your heirs and beneficiaries; and a list of people that you work with, if any, such as tax preparers and financial advisors.

Do I Need a Special Needs Trust for a Son on SSDI?

Disability symbolDear Liza:
I have an adult son who is developmentally disabled. He is able to work and receives Social Security Disability Insurance as well as Medicare. Does he need a Special Needs Trust?

I love it when someone asks me a question with a clear answer! Here, the answer is probably not. Your son receives Social Security Disability Insurance (SSDI), which is a benefit that he receives because he was able to work and pay into the Social Security system. This is not a needs-based program like Supplemental Security Income (SSI), which people receive when they are permanently and severely disabled and qualify for this assistance because their resources are limited.  Medicare is an age-based health insurance program, so it’s not needs based either.

Special Needs Trusts are designed to allow parents (and others) to create a trust for the benefit of someone on SSI that can be used to supplement this government benefit without disqualifying someone from the program (and from Medicaid programs, which offer health insurance to those who qualify for SSI). If your son is not going to need SSI in the future, and will continue to receive SSDI and Medicare, then a Special Needs Trust won’t be necessary to protect his ability to continue to receive those benefits. That being said, of course, it still sounds like you need to leave him assets in a trust, with a Trustee who can manage resources for his benefit. This trust, however, does not need to meet the stringent requirements of a Special Needs Trust.

To read more about Special Needs Trusts and the differences between SSDI and SSI, take a look at Special Needs Trusts (Nolo, 5th edition).

Avoiding a Lump Sum Inheritance

pot of goldDear Liza My father wants to leave some of his assets to my brother and sister, however neither of them is particularly adept at handling money and he doesn’t want to hand them a large, lump sum. Can a Will stipulate that they receive payments on a predetermined basis, almost like an allowance? If not, can this be accomplished through another vehicle?

Your father isn’t the only parent worried about leaving money outright to kids.  He has a few options. Your father can leave money in his Will to a trust for the benefit of your brother and sister, and specify how the money is to be distributed to them. The trust itself is a part of the Will.  Leaving money in a trust by way of a Will is called a “testamentary trust,” because the trust is established after your father dies. This will require a probate proceeding in most states.

Alternatively, your father can create a trust now, and in that trust he can distribute assets to trusts for your siblings as well. This will accomplish the same result, but avoid a probate proceeding at your father’s death. Lastly, your father could, in a Will or a trust, instruct the executor or Trustee to purchase an annuity for your siblings upon his death, that pays out a certain amount of money over a certain period of time, or, he could purchase an annuity like that during his lifetime, to be paid upon his death.