Category Archives: Trusts
Dear Liza: I want to name my minor grandchildren as beneficiaries of my IRA account. How do I do that? Can I use my Will? It’s a smart idea to name minors as beneficiaries of your IRAs. Since they are young, they’ll be able to withdraw that money slowly over their life expectancy, and only pay taxes on the amounts withdrawn. But you are also correct in understanding that minors need some kind of property guardian or custodian named to manage those assets for them until they are 18–since minors can only own a minimal amount of property.
So, how do you do it?
Don’t try and name beneficiaries in your Will. It won’t work. Your Will is a legal document that governs the distribution of many of your assets, but NOT your retirement accounts. Those will pass only by the beneficiary designations on file with the plan administrator.
Here are the ways that I would advise you to let them know what you want them to do:
You can just name the minor as a beneficiary. Then, if you die while that child is a minor, their parent will need to ask the probate court in their county to name a Property Guardian to manage that account until the child is 18. (The property guardian could be the parent.) In some states, if the IRA is small enough, no property guardian need be appointed, but that will vary state to state. This isn’t ideal, since going to court takes time and some money for filing fees and it ends when the child turns 18 (at which point the money is theirs to manage and spend).
Alternatively, you can name a custodian under your state’s Uniform Transfer to Minor’s Act, which will make that person the custodian for those assets up to a certain age (21 in many states: 25 in others). A beneficiary designation like this would read, “Alan Smith, as custodian for Jane Smith, under ___’s Uniform Transfer to Minors Act to age 25.” Custodial accounts are inexpensive and easy to open at banks and brokerage accounts and end at 21 or 25 (usually), which is older than 18.
Finally, you can name a trust created for that minor as the beneficiary. That way, the trust will manage the money for that child and can last as long as you’d like it to last. A designation like this would read, “Trust created for the benefit of Jane Smith, under the SMITH FAMILY TRUST, under Agreement dated _______.” Trusts can have whatever terms you’d like to use and can last as long as you’d like them to last. IRA withdrawal rules are complicated when a trust has more than one beneficiary, so it’ s not a do-it-yourself project. Their main disadvantage is cost — you’ll have to work with an attorney to draft them.
If the plan administrator doesn’t have a form that makes it easy to name a custodian or a trust, you can do it anyway. Just attach a beneficiary designation form to their form, and make sure that they provide you with confirmation that your wishes have been properly received.
Dear Liza: My long term domestic partner of 30 years and I were registered domestic partners for a few years and then she decided she wanted to be totally financially independent of me so we terminated the agreement last year. We are still together as a couple and live five minutes away from each other. Our intention is to leave everything we own to each other and have named each other as executors in our wills. She owns a house that she may or may not be selling but in general our estates are pretty modest. I am wondering since we are still a couple is there is an advantage in terms of avoiding probate in getting married versus doing a living trust? First, can I just say I love being able to have this conversation! Now, down to business. There’s a lot packed into your question. I’m going to answer on a general level, but I think it would be worth it for you and your partner to sit down with an accountant and an attorney and see how my advice addresses your particular concerns.
There are three key estate planning advantages to getting married for same sex couples now, but I wouldn’t frame it as a living trust versus marriage. That’s kind of apples and oranges. A living trust will still allow you to transfer your assets to each other without probate, regardless of whether or not you marry. But being married has two key federal and one state TAX advantage, all of which you’d realize with or without a living trust.
1. Married couples get a step up in basis when one spouse dies on all community property assets. That means that the surviving spouse won’t have to pay capital gains on any appreciated assets that she sells after the first death, other than any gain that happened after the death of the first spouse. For example, if your partner’s house has appreciated a lot since she bought it, and you marry and make that house community property, when one of you dies, that house would be valued at its date of death value, not the original purchase price.
2. Married couples get an unlimited marital deduction from federal estate and gift tax. That means that you and your spouse can give an unlimited amount of assets to each other, at death or during life, and no federal estate or gift tax will be due for those gifts. For those with modest estates (which are most of us) this isn’t as big a concern now that the federal estate and gift tax exemption is $5.25 million, but that number may be reduced by Congress in the future, and it is a benefit that only spouses receive. This, in fact, was the basis for Edie Windsor’s challenge to DOMA.
3. Married couples can pass real property to each other in California without a change in property tax rates. A transfer between spouses is an exception to Proposition 13′s reassessment requirement. Since you and your partner terminated your Registered Domestic Partnership, and it sounds like she purchased the property alone, her transfer of the house to you via a Will would trigger a change of ownership and reassessment for at least 1/2, if not all, of the property, depending on how she holds title at her death.
Dear Liza: My grandmother passed in May 2012 and left my mother and I as equal beneficiaries of her estate. The lawyer that we’ve been working with hasn’t been responsive to our questions or concerns. After eight months of working with him, it seems that not much has happened. My mother and I don’t feel that he is giving our case an appropriate amount of attention. Should we fire him? Probably. Certainly if you’re not happy with the care with which you have been treated you should at least have a candid discussion with your attorney about it. If you can’t come to a reasonable resolution of the issues, you absolutely have the right to seek other counsel. Your attorney is, after all, your attorney–and owes you a duty of loyatly and a duty to communicate adequately and keep you updated on the progress of the trust administration. If you do seek other counsel, you have the right to your client file as well. Good luck.
Dear Liza: My grandfather died in 2008. My mother is the first successor on the trust. We did all the post administration for the trust or so we thought. I recently read that my mother should have filed a deed to get the house placed into her name since that is what the trust called for. We have not done this. My question is the following…My mother wants the house to go to me, her son. What process would we have to do in order to get it from the trust to me? Your grandmother can file the deed she didn’t file after your grandfather died, getting the house into your grandmother’s name, as Trustee of the trust created by your grandfather. Once that’s done, her ability to give that house to you during her lifetime depends upon the terms of the trust your grandfather set up. She may be able to give it to you during her lifetime, in which case you will receive it at the value that it had in 2008, when your grandfather died. She may only be able to transfer it to you at her death, in which case you will inherit it at the value the house has at her death. She may not be able to give it to you at all, because, as you said, the terms of your grandfather’s trust became irrevocable at his death. I would advise you to see an estate planning attorney in your state to review your grandfather’s trust and advise your grandmother on the best strategy to accomplish her goals.
As for that mortgage, if you get the property transfer completed, you’ll have to request that the lender assume the loan in your own name, which they may or may not do, that depends on their calculations and your credit history.
Dear Liza, The only asset funding my Mother’s Trust is her primary residence. However, she recently moved from CA to live with me in WA. My sister would like to purchase the home but doesn’t have the full amount. She would pay a down payment of $150,000 which would assist with my Mother’s caregivers and in-home health care. The balance approx. $150,000-$200,000 would be recorded as a Deed of Trust naming the Trustee of the Trust as the beneficiary. Would this affect or invalidate the Trust in any way? I have to give you a sort of lawyerly answer on this one: probably this is just fine, but you should have an attorney take a look at the trust to make sure that your mother, as the grantor of the trust and current trustee of the trust, has the power to sell trust assets and the power to loan trust assets. A well-drafted trust would certainly permit this, but I’ve seen trusts that aren’t well drafted to be sure. Also, sales of assets between family members should be for fair market value (in other words, your sister should be willing to pay what a third-party buyer would be willing to pay). Otherwise, your mother would be making a taxable gift to your sister of the difference between that fair market value and the price she actually paid. Your mother should get the house appraised to document this value before the sale occurs. Finally, the interest rate on the loan must be at least the applicable federal rate (AFR) for loans of that sort in the month the loan is made (this is published monthly by the IRS.) If the loan’s interest is too low, the difference between that rate and the AFR is also considered a taxable gift from your mother to your sister.
Dear Liza: I am a 61 single retiree who has a single family home, an IRA, life insurance and a small pension. With my siblings as beneficiaries to these instruments. Is a living trust/will needed anyway? So, it’s true that if you have named beneficiaries for your IRA, life insurance and pension, those assets will go to those beneficiaries and your Will or Living Trust would have nothing to say about that part of your estate plan. But, here’s the thing–in most states you cannot name a beneficiary for a house. In those states, the only way to leave your house to certain people and avoid having to go through probate to do it, is to set up a living trust and transfer your house to that trust. Click here for a list of the states that do permit the transfer of a house by naming beneficiaries on a deed–called a transfer-on-death deed. Sadly, California is not one of them.
Dear Liza: I am divorced and own a second vacation cabin that I want my children to have when I die. Is there a way for me to retain rights, ownership and control while I am alive and of sound mind but pass the property to them when I die that doesn’t have a bunch of overwhelming taxes? Yes. Upon your death you can leave the kids the cabin either outright or in a trust. If you leave it to them outright, as tenants in common, each will own 1/2 and can leave their half to whomever they choose when they die. If you leave it to them in trust, you can control how it’s managed and how it would be transferred upon their deaths (as in maybe it has to go to their children or be sold to other family members.) The tax treatment of the gift is that it will go to them free of tax — if there’s a tax to pay, it falls on your estate, but they inherit what’s left free of tax. The capital gains tax basis on the property will be what it is on your date of death, so if they sell it someday, they’ll owe tax on the gain in value from your date of death to the date of sale. I don’t know what state you live in, but in California, where I practice, a gift from parent to children is also excluded from reassessment of property tax, so they get the property tax rate you were paying.
Dear Liza: I am trying to prepare a living trust on behalf of my father. He owns his home and vehicles outright and also has two bank accounts. I am the POD beneficiary of all of his accounts, as well as being a secondary signer on his checking and savings accounts. My confusion comes from not knowing what assets should be put in the living trust. Should it just be the home, since that has the highest value? Or should the cars and bank accounts also be included? Or can everything but the house be designated in the pour-over will that I also intend to create? Your father’s living trust has just one purpose: to allow his estate to avoid probate upon his death. If your father’s assets are owned by the trust, not by him, when he dies, then his estate won’t need to go through probate. Not all items are subject to probate, though: retirement accounts, life insurance policies and bank accounts with designated beneficiaries (that’s what a POD account is), go directly to the named beneficiary. Cars can be transferred via the DMV, and so don’t need to go through probate either. So, for your Dad, that leaves his house. You should transfer legal ownership of the house to his trust by filing a trust transfer deed with the county. When you record the deed, you’ll also need to file a Preliminary Change of Ownership Form (PCOR). This form tells the county assessor what kind of transfer just happened; the assessor wants to know if they can raise property taxes on that property, which they can’t, because a transfer to or from a living trust is NOT a change of ownership under Proposition 13. That pour-over Will is just a backup for your Dad. If he doesn’t transfer his house to the trust, and then dies, the Will says transfer whatever property he owned at death to this trust (that’s the pour-over part). But, if the value of that property is more than $150,000, you’ll need to go through probate to make the transfer. Put another way, the Will makes sure that all of your father’s assets get distributed as directed by the trust, but it won’t help his estate avoid probate first.