Posts By: Gene Osofsky

Q. My wife and I have missed a few home mortgage payments this year, and we are behind in our property taxes. I heard there is a program that might help us out. Do you know anything about it? We don’t want to lose our home.

A. Yes. In California, the program is called the California Mortgage Relief Program, and it uses federal Homeowner Assistance Funds to help homeowners get caught up on past-due housing payments and property taxes. The great thing about the program is that it is absolutely free to participate, and if you qualify – believe it or not – you do not have to repay the funds! Its purpose is to help homeowners impacted by Covid 19 to catch up on their home related expenses, whether it be mortgage delinquencies or past due property taxes.

For those eligible, it provides grants of up to $80,000 to reinstate past-due mortgages on homes, condos or even permanently affixed manufactured homes, and grants of up to $20,000 to help pay delinquent property taxes.

Eligibility is determined as follows:

1) You must be behind on two or more mortgage payments as of June 30, 2022, and remain delinquent;

2) You must have fallen behind on property taxes before May 31, 2002, and they remain unpaid;

3) Your household combined income for all household members over age 18 must be at or below an amount which is 150% of the Area Media Income. This threshold is actually quite generous: to qualify in Alameda County, a single person household must have annual income that is less than $149,000, and for a two-person household, annual income less than $171,400.

4) You experienced a Qualified Financial Hardship related to COVID-19 after January 21, 2020: the hardship could have begun before that date, if it continued after that date. Hardships would include loss of income, medical expenses increased utility costs, food expenses, etc. The criteria is very broad. Note: documentation is not required to show a hardship. Applicants must verify hardship by signing statement as part of the application, so it is – in a very real sense – self certifying.

Even folks with reverse mortgages, who are potentially delinquent because they have missed property tax payments, can apply for relief under this program.

You can either apply online by going to the California Mortgage Relief Website, or by calling the Program Contact Center at 1-888-840-2594 for assistance, or for a referral to a HUD certified housing counselor. California is committed to making sure that all qualifying homeowners get full access to this grant program, and it is noteworthy that the application, itself, is available in 6 different languages: English, Spanish, Chinese, Korean, Vietnamese, and Tagalog.

Note: if you previously applied and were denied, you should reapply. Reason: in June, 2022, the Relief Program expanded its eligibility requirements and it now encourages applicants who were previously denied to reapply if they now meet the updated eligibility requirements. Further, there may be more eligibility expansions as of January 1, 2023. So don’t let a previous denial discourage you from reapplying.

Good wishes on accessing the program to catch up on your mortgage and property taxes.

Posts By: Gene Osofsky

Q. I recently heard the term “Springing” Power of Attorney, but I am not sure what that means. Can you shed any light on this?

A. Sure. Broadly speaking, there are two general categories of financial Powers of Attorney: (1) those that are immediately effective upon signing by the principal, and (2) those that are only effective upon the happening of a future event, typically the incapacity of the principal.  Attorneys generally call the latter a “Springing” Power Of Attorney, because they do not become effective, or “spring into life,” until the happening of that future event. Which form a client might choose will depend upon the client’s circumstances.

Typically, a client who is healthy and younger would usually prefer a power of attorney that only springs into life in the future, when, and if, he or she is no longer able to manage his or her own financial affairs. Until that event, the client – whom we often call the “principal”— calls his own shots and only he, himself, can enter into transactions that legally bind him.

By contrast, a principal who is up in years and/or sees illness or incapacity on the near horizon, may opt to sign a Power of Attorney (“POA”) that is immediately effective, so as to dispense with the procedural requirement and corresponding delay necessary to establish the requisite incapacity that would make the POA effective, and thereby empower the designated Agent to act for the Principal.

How is incapacity determined?  Many Springing POA’s recite that incapacity is determined when two (2) physicians who have examined the principal write a letter reciting that the principal is incapable of managing his or her own financial affairs, usually due to cognitive decline, dementia or similar impairments.  Note: Notwithstanding that common requirement, I prefer to recite in POA’s that I prepare that only one (1) physician need so opine, and here’s why: Very often the need to establish incapacity in this context arises when the principal is residing in a nursing home or other long term care facility.  Typically, in that care setting, only one physician makes the rounds to check on each patient. To secure an evaluation and letter by a second physician in those circumstances can be very difficult and time consuming.

Another option for some clients is to begin with a Springing POA, but as the years pass, and they decide they no longer wish to manage their own financial affairs, to sign a simple form reciting that the POA is now immediately effective. That signed form would then be kept together with the POA and handled as a single document, so that it is apparent to all who review it that the principal has opted to make the POA immediately effective. The other alternative, of course, is to rewrite the POA entirely so as to render it immediately effective going forward. The latter would be the preferred alternative for simplicity, as then all relevant information is in a single document.

Know that, whichever form you choose initially, you are not forever bound by that decision. So long as you are competent, you can always revoke and revise your POA to make it fit your changing life circumstances.

Posts By: Gene Osofsky

Q. My wife and I are concerned that our adult children might be held financially responsible for our care in the event we run out of our own resources. Our children are good kids, but they have their own financial responsibilities, including putting their own kids through college. Can you shed any light on this?

A. Sure. This topic has generated some discussion in the news, prompted by a court case out of the State of Pennsylvania. In that case, a son was held liable for his mother’s unpaid nursing home bill of about $93,000, even when the mother had an application for Medicaid (which we call “Medi-Cal” in California) pending. The case sent shivers throughout the country, and elder law attorneys have expressed concern that this case could signal a new wave of claims by nursing homes and assisted-living facilities to recover unpaid bills.

For now, the good news is that the statutes in California seem to disfavor claims of this nature. While statutes are on the books which – on their face – would seem to permit children to be held responsible for the costs of their parents’ care, yet California carves out a huge exception to this potential liability: if the parent is an “applicant for” or “a recipient of ” Medi-Cal, SSI, or other public benefits, then no claim of any kind can be made against a parent or other relative to recover the cost of care. Welfare & Institutions Code § 12350. In short, the law in California appears very unlike that in Pennsylvania, which apparently did not include a similar exception.

Since a parent in need would most likely “apply” for some kind of public benefit and would thereby become an “applicant” and thus protected by the statute cited above, it would be an unlikely scenario where a child would have financial responsibility for his parent’s care. Indeed, I could not find any reported case decision in California which imposed such liability, absent egregious fact patterns involving extreme neglect of a parent amounting to elder abuse. Note that the statute refers to the parent being an “applicant” for public benefits, and does not seem to require that the parent actually “qualify” for same. Still, the law is developing in this area and specific fact patterns have yet to be adjudicated by courts.

For best protection, the best way to ensure that your children do not find themselves on the financial hook is to ensure that you and your wife have a plan in place to pay for your own long-term care. That plan might include setting aside sufficient assets to cover that cost, relying upon long-term care insurance (if you qualify and can afford it), or by making a timely application for a Medi-Cal subsidy when appropriate. In this regard, you may know from one of my recent articles that Medi-Cal has recently relaxed the resource caps, so that persons of more middle class means may now qualify for benefits: Under these recent changes, the “Ill Spouse” is now permitted to have up to $130,000 in savings or other resources, while the “At-Home Spouse” is allowed another $137,400 of his/her own savings and resources, for the new combined resource allowance of $267,400 for a married couple (in 2022).

Further, for those with even more savings or other countable resources, know that there are lawful strategies to accelerate Medi-Cal eligibility while still preserving assets, but these require strict compliance with Medi-Cal rules. In this regard, Medi-Cal planning is similar to tax planning in which the wealthy engage. However, these strategies should only be employed under the supervision of an elder law attorney with special expertise in Medi-Cal planning, or they could backfire. For example: gifts to children — if handled incorrectly — could actually prevent a parent from qualifying for a Medi-Cal long term care subsidy.

Reference note: : For the basic premise that an Adult Child can be held to be financially responsible to support a parent in need, see CA Family Code § 4400–4405. But the above cited Welfare and Institutions Code 12350 substantially undermines that legal authority by carving out a hug exemption.

Posts By: Gene Osofsky

Q.  My wife and I hold title to her home as joint tenants, and most of our cash assets are in the form of two large IRA accounts and one big annuity. We have basic wills which leaves everything to the other and then on to our children. Our son suggested that our wills may not control what happens to our assets when one of us dies. Should we be concerned?

A. Perhaps, in the sense that you wills will not control what happens to your assets when one of you dies. Rather, the form of title will control as to your home, and the beneficiary designations on your IRA’s and annuity will control what happens to those assets. Here is the way it works:

Your Home: Since you and your wife hold title to your home in joint tenancy, when one of you dies the other will automatically become the owner by right of survivorship. The right of survivorship is the primary feature of joint tenancy.  In essence, the form of title overrides your wills.  It is only when the survivor later dies that his or her will may control who ultimately gets the home. While many couples in California do hold their home in joint tenancy, it is often not the best form of co-ownership. One principal reason:  it does not optimize the tax benefits that go along with holding title as ”community property” where the home has appreciated significantly in value since the time of purchase. Often, holding your home in a “Living Trust” may be the best option.

Your IRA Accounts: Each of your IRA accounts will, upon the death of the IRA owner, go to the primary beneficiary named in the account agreement signed when you created your IRA’s.  Presumably, the primary beneficiary for each of you is the other spouse and, if deceased, your children. However, the pattern of distribution very much depends upon who you designated as primary and contingent beneficiaries when you created your accounts. It is always wise to periodically review these designations and retain in your permanent file a copy of the documentation you signed when you created your accounts. As a lawyer, I have been involved in at least one case where the IRA custodian, a large brokerage firm, lost the paperwork on a very large IRA account, almost costing the designated beneficiary a six-figure tax bill because of the resulting delay in distribution. The IRS has strict rules about inherited IRA accounts, and these must be observed on a timely basis to avoid unnecessary tax. In particular, the rules have changed as to how long your beneficiaries may “stretch” their receipt of distributions.

Your Annuity: the person or persons to receive your annuity would, just like the IRA, depend upon who was named as the primary beneficiary and contingent beneficiaries on the annuity contract, itself.  The same would be true if you owned any other insurance products or policies. Where you have designated named individuals to be primary or contingent beneficiaries, the contract or policy controls and not your will or trust.

In view of the above, whenever clients come in to see us for estate planning, we always urge a review of all beneficiary designations associated with IRA and other retirement accounts, as well as annuities and other insurance products.  Where appropriate, the beneficiary designations can then be modified, so that the plan design accomplishes the clients’ goals and everything works together.  In many cases, the clients choose to name their Living Trust as the contingent beneficiary of these contracts and policies, so that the plan of distribution integrates with that created in their trust.

Posts By: Gene Osofsky

Q. My wife and I have been following the news about the recently signed Inflation Reduction Act, and there seems to be significant benefits for seniors on Medicare. Can you provide more information?

A. Sure. The recently signed Inflation Reduction Act has been considered by many as a blockbuster piece of legislation, perhaps one of the most important during the Biden Administration, and perhaps the most sweeping in terms of Medicare prescription drug reforms since inception of the Medicare Part D Program. Here is a kind of “bullet point” summary:

The ACT Caps Medicare Part D Out-Of-Pocket Costs at $2,000 per Year

Seniors and others with Medicare Part D coverage will see their out-of-pocket prescription drug costs capped at $2,000 per year, beginning in the year 2025. The good news is that this cost-cap will apply to both persons enrolled in stand-alone prescription drug plans (“PDPs”), as well as those in Medicare Advantage Drug Plans (“MA-PDs”). Further, in 2025, a new monthly cost sharing policy will allow people to spread their out-of-pocket costs throughout the year, if they wish. This option will also be available to those on the Extra Help Program.

Further, Commencing in 2023, Insulin costs for those on Medicare will be capped at $35 per month, without a deductible. And, for plan years 2024 through 2029, the annual premium growth for Part D Coverage will be limited to 6%.

The ACT Lowers Prescription Drug Prices

For the very first time since the Part D Program was created, the program will be required to negotiate prices with drug manufacturers of certain high-cost prescription drugs covered under either Part D or Part B. Though these negotiated prices will be phased in, the requirement that prices be negotiated is expected to deliver significant savings for people on Medicare, and to the Medicare program itself.

Commencing in the year 2023, the ACT also requires prescription drug manufacturers to rebate excess charges to the government if they increase the price of a drug covered under the Part D or Part B Programs above the inflation rate. The obvious purpose of this provision is to discourage pharmaceutical manufacturers from making large price hikes. The Act Expands the Medicare Part D Extra Help Program

Commencing in the year 2024, the ACT expands the full Part D low income subsidy (a.k.a., the “Extra Help” program) to people with incomes below 150% of the federal poverty level (“FPL”) ($20,385 per year for a single person in the year 2022). Folks with incomes between 135% and 150% of the FPL, who previously had only a partial subsidy, will now have a full subsidy with lower co-pays and no deductibles. These changes, alone, are expected to provide significant additional financial support to the more than 400,000 low income people who currently only have partial subsidies and for thousands more who are eligible but not currently enrolled.

The ACT Expands No Cost Coverage of Vaccines

Commencing in 2023, individuals on Medicare will receive all recommended vaccines without cost-sharing, and the same will be true for persons on Medicaid (known as ‘Medi-Cal’ in California).

The ACT Enhances Premium Assistance For Those with Marketplace Coverage

The ACT extends the enhanced premium tax credit for Affordable Care Act Marketplace coverage for 3 years (through 2025), providing additional cost savings for older adults who are not yet eligible for Medicare. With the subsidies, it is estimated that over 80% of enrollees in marketplace plans in the 55 to 64 age-range will now be eligible for a plan with monthly premiums of only $50, or less.

These out-of-pocket cost caps and other innovations should greatly help folks with chronic conditions who otherwise face high drug costs, as well as seniors and the disabled on fixed incomes, who will then be protected from catastrophic costs for their medication.

Official Summary of Law

Posts By: Gene Osofsky

Q.  I have a Living Trust. I am the original trustee and my children are the successor trustees.  Do you have any thoughts about easing the transition of trustee duties from me to my children when the management of my finances has become too much for me?

A. Yes. It is important for that transition to be as seamless as possible, so that your assets can be managed and bills paid without delay. Here are some suggestions:

1) Simplify Succession “Trigger”: Take a look at your trust to determine what triggers the change of trustees from you to your children. Typically, it may be the written determination by one, or perhaps two, physicians, reciting your inability to handle your financial affairs.  If your trust requires a letter from two physicians, I suggest changing that requirement to only one. Reason:  If you are then residing in a nursing home, where patient care is typically monitored by one physician, it may be difficult to arrange an evaluation for this purpose by a second physician. Reducing the requirement to only one doctor may save your children much grief with medical logistics.

(2) HIPAA Release.  Make sure that your trust, or related document, provides a HIPAA privacy release authorizing your doctor to disclose information about your ability to manage your affairs.  Absent a privacy release, some physicians may be reluctant to write a letter regarding your capacity.

(3) Add Co-Trustee. At some point, consider adding one of your children as a co-trustee and recite in your trust, or in an amendment to your trust, that any single trustee has the power to write checks or take other action on behalf of the trust. This would then authorize your child to gradually take over more responsibility for managing trust assets without a formal certification of your incapacity. Doing so sooner than later also allows you the opportunity to watch your child perform his or her duty, and afford you the opportunity to provide pointers to him based upon your years of accumulated wisdom.

(4) Consider Resignation.  Alternatively, when you feel that managing your trust has become too much for you, you might consider the proactive approach of resigning. A formal resignation triggers the succession of trustee duties to your child without a formal finding of incapacity. It, too, can accomplish a smooth transition without the need for doctors’ letters.

(5) Minimize Successor Liability.  To encourage a successor trustee to step into the shoes of the predecessor, recite in your trust that the successor is not responsible for any acts or omissions of his predecessor.  You might also recite that whoever is serving as trustee is not liable for any action taken in good faith. These two protective clauses would help induce your designated nominee to assume his duties when appropriate, whether that successor is one of your children or the trust department of your favorite bank.

(6) Inform Your Bank: Make sure that your financial custodians have your list of successors on file, so that when they step forward to assume their duties their identity is known to the bank. You might even introduce your nominees to your bank officers, and suggest that they take a sample signature and make note of the child’s address and driver’s license.

By taking some or all of the above steps, you will have taken proactive steps toward a seamless transition of trustees when the time comes.

Posts By: Gene Osofsky

Q.  My husband and I are concerned about how to keep our trust up to date in light of changing tax law and changing family circumstances.  What if we are too ill to make changes ourselves. Any thoughts on how we can handle these concerns?                                                

A. With the ever-changing tax landscape, and changes over time in family circumstances, keeping your trust up-to-date can be challenging. Here are some techniques to keep your trust flexible to help deal with change, even where you are unable to do so yourself. You may wish to include one or more in your estate plan:

1) Use a Power Of Attorney: delegate authority to a trusted agent to amend your trust as tax laws and family circumstances warrant. Your agent would typically act only if you were unable to do so yourself.   To be valid, this power must be expressly stated in a Durable Power Of Attorney (“DPOA”) and reciprocal provisions must also be in your trust. Unfortunately, this dual requirement is too often overlooked, resulting in an ineffective delegation of authority.

2) Use a Trust Protector: an emerging mechanism involves naming an Trust Protector (“TP”) in your trust in order to update your trust as need requires. The TP would be independent of your trustee, who would handle normal trust administration.  By contrast, the TP would act like a “super trustee”: he would have the power to replace the trustee, modify administrative provisions and even change the ultimate disposition of trust assets in order to meet your stated objectives. Unlike the trustee, who would have a fiduciary duty to act according to the existing provisions of the trust, the TP could modify or override those provisions to comply with changing law and your expressed intent. The TP must be someone who is not a beneficiary under your estate plan, but in whom you have a high degree of trust.  Unlike the agent acting under a DPOA, the TP could even make some changes to your trust after your death if necessary to meet your stated goals, e.g. tax avoidance.

3) Include Disclaimer Provisions: a disclaimer is the right to decline a bequest, so that it goes to the next person in line, typically one’s children. Disclaimers can be very effective in postmortem tax planning, especially as a technique to remove future appreciation from one’s taxable estate.   Example: assume that a married couple has a combined community property estate valued at just under the current Federal Estate Tax Exemption amount ($12.06 Million/each for persons dying in 2022–2025, but which is likely to revert to a much lower number after 2025, when the current exemption ‘sunsets’).  

Upon husband’s death, assume their estate plan directs that all goes to wife as the surviving spouse.  If she reasonably anticipates future appreciation, it is likely that–upon her later demise–the value of her estate will then be above the amount that can escape estate tax.  If, however, upon her husband’s death she makes a timely disclaimer of a portion of her “inheritance”, so that a portion “skips” her and goes immediately to their children, the appreciation attributable to the disclaimed assets will then be owned by their children and will escape estate tax at the wife’s later death. 

In larger estates, this technique can potentially save a significant amount of tax upon the surviving spouse’s later demise. For more modest estates, since the disclaimed assets “skip over” the surviving spouse and pass directly to the children or other designated successor beneficiaries, it can save the time and expense of a second estate or trust administration upon the surviving spouse’s death. Its use can also accelerate the children’s inheritance. The good news is that the decision as to whether, and to what extent, a disclaimer should be exercised can be made up until 9 months after the first spouse’s death, providing time for reflection. However, if not exercised by that deadline, it then lapses. In our view, appropriate disclaimer provisions should be included in every estate plan.

4) Permit Decanting: Decanting is a term borrowed from wine vintners, and in the trust world it refers to modifying an existing trust to get rid of unwanted provisions (i.e., “sediment”, for vintners), by “pouring” the good provisions into a new trust that is free of the unwanted provisions.  In 2019, California became one of a growing number of states to adopt the Uniform Trust Decanting Act, which now allows a trustee to make changes to a trust without initiating a judicial proceeding, upon notice to, and usually with the consent of, the trust beneficiaries. Decanting can be implemented so long as the trust does not expressly prohibit this technique. Changes via decanting can even be made, in many cases, after the death of the original creator(s) of the trust. Here are some examples of its application: to create a Special Needs Trust to hold the share of a beneficiary then on public benefits; to comply with changes in the tax code; to address changes in family circumstances, etc. For more, see articles on our website for both non-lawyers and for lawyers

5) Include a Power of Appointment: A Power of Appointment (“POA”) is a power held by a designated individual, usually the surviving spouse, in a couple’s joint trust, to take another look at the plan design and modify it as the power holder feels is then appropriate, typically some time after the death of the first spouse. The survivor can then re-arrange the distribution of trust assets, and add or delete beneficiaries, as he/she feels circumstances then require. It can be very useful when family circumstances have changed since the trust was originally created, for example by deaths, births, divorces or other changes in relationships (whether they be positive or negative).

It has been said that the only certainties in life are death and taxes.  I would add a third:  change. Make sure that your estate plan includes at least some mechanisms to deal with this “third rail” of estate planning.

Posts By: Gene Osofsky

Q. In connection with creating our estate planning documents, my husband and I would like to leave our children and grandchildren something more than just our money and assets. We would like to leave them a sense of our values. A friend mentioned something to us about an “Ethical Will”. Do you have any thoughts on this?

A. Yes. An Ethical Will is a statement in your own words expressing your values, hopes for the future, family history, emotions, and anything else that you would like to pass on to your loved ones. It deals with values, rather than with assets. It is really a very old concept: one of the earliest references is found in the Book of Genesis, chapter 49, where Jacob gathers his 12 children around him and gives them his charge for their futures.

Initially, Ethical Wills were transmitted orally, but eventually they were written down. Although an ethical will is not a legal document, it can be a valuable complement to legal documents. It can be an expression of love, a statement of personal or family history, a statement of lessons learned in life, a wish for the future of your loved ones, or anything else that you would like to pass on down as a personal legacy.

It is really a personal statement that carries your “voice” to future generations. It can be as simple as a one-page letter of love, or a novella length memoir detailing your life experiences.

In our family, we actually went a step further and videotaped my grandmother over a number of sittings, a project that ultimately took approximately 2 years to complete. We began with her earliest memories of growing up in Europe and covered all the history forward, all in her own voice. At times she broke into song, especially when our young children toddled into the room. That videotape, since turned into a DVD for preservation, is now a cherished family heirloom and each member of the family has a copy. We view it from time to time at family gatherings.

If you wish, your “Ethical Will” can be shared with your loved ones during your lifetime, and you might even add to it from time to time. It is your spiritual legacy which can live on long after your will or trust has been permanently filed away.

 

Posts By: Gene Osofsky

Q.  My wife and I had our Living Trust prepared back in the year 2008. I hear there have been changes in tax law since then which might affect us. Is it time to have our trust reviewed? 

A.  You refer to the Tax Cuts and Jobs Act,” (“TCJA”) signed by former President Trump on 12/22/2017, which has temporarily enlarged the current estate tax exemption to over $12 million per person for those dying between 2018 and 2025. It also permits a married couple to effectively double their exemption even without special estate tax planning, provided they so elect by filing a timely Estate Tax Return Form 706 after the death of the first spouse. Unless Congress votes to extend that TCJA before 2026, when it is otherwise scheduled to “sunset”, the estate tax for persons dying thereafter will likely return to the prior exemption, which was approximately $5,250,000 (plus increases for inflation) under the American Taxpayer Relief Act signed by former President Obama.

By comparison, when you created your own trust, the estate tax exemption was much smaller and special tax planning was required to minimize estate taxes. At that time, your attorney probably recommended a form of trust which was tailored to the lower estate tax exemption, namely a Living Trust with a Bypass Sub-Trust built into it. This Bypass Sub-Trust is also known as a “B Trust,” an Exemption Trust, a Family Trust, and a Credit Shelter Trust.

Bypass Trusts typically require that, on the death of the first spouse, a share of the couple’s assets be transferred into an irrevocable sub-trust called the “Bypass Trust”, rather than to the survivor directly. This is to preserve the first spouse’s estate tax exemption for later use at the survivor’s death.  Without the Bypass, the first spouse’s exemption would be lost and all trust assets at the survivor’s death would be sheltered by only the survivor’s one exemption and the excess (if any) was exposed to an estate tax at a rate as high as 55%. Understandably, couples went to great lengths to avoid that tax.

The typical Bypass Trust was not, however, without its problems: (1) the survivor typically lost the right to make any changes in the Bypass portion even if family circumstances have changed, (2) the survivor’s access to the assets in the Bypass portion was usually restricted, (3) the Bypass trust could interfere with applying for a Medi-Cal long-term care subsidy, (4) the assets in the Bypass portion usually do not qualify for a 2nd date-of-death “step-up” in tax basis upon the later death of the surviving spouse, with increased exposure to a later capital gains tax  when and if the ultimate recipients (usually the children) opt to sell the appreciating asset(s), and (5) the Bypass Trust usually required separate accounting and income tax returns during the life time of the survivor.  Surviving spouses usually found the restrictions burdensome.

Two important new developments arrived with the new law: (a) as of 2018, the amount of the estate tax exemption has now increased to over $12 Million per person, and is annually adjusted for inflation, and (b) the unused portion of the first spouse’s full exemption can now be preserved for use by the second spouse even without the use of the restrictive Bypass Trust, effectively doubling the exemption for most couples.

In view of these new developments, couples with Bypass Trusts created for estate tax purposes under old tax law should have their trusts reviewed and, where appropriate, consider eliminating the mandatory funding feature at the first spouse’s death. Instead, they might now consider plans which give the survivor the option of doing postmortem planning after the first death, e.g. by funding a portion of trust assets into an optional Disclaimer Trust. The Disclaimer Trust would then operate as a tax-saving Bypass Trust if that later appeared necessary due to the increase in value of the couple’s estate. 

An exception to the above recommendation:  The use of the mandatory Bypass Trust can still be useful for non-tax purposes, e.g. in situations involving second marriages. Here, each spouse usually wishes to provide financial security for the survivor, but also wishes to preserve a portion of assets for his/her own children. Under these circumstances, a Bypass Trust can still help these couples achieve their estate planning goals.

 

Posts By: Gene Osofsky

Q. My mother recently died. Her home, bank accounts and other assets were held in a Living Trust. Her financial advisor said we should now see a lawyer to help with trust administration. What? I thought if you had a Living Trust that there was little or nothing to do following the death of the trust-maker? Is that not so? 

A. Your mother’s financial advisor is correct. One of the most common misconceptions among those who have established a Living Trust is that there is little or nothing to do following the death of the trust-maker. In fact, depending upon the nature of the assets, there is often quite a bit to do.

Think of it this way: many people create Living Trusts in order to avoid a formal probate proceeding, which many people correctly understand to be a cumbersome, time-consuming process overseen by a judge in court. By comparison, administering a trust following death involves many of the same processes, except that it is controlled by a trustee in an out-of-court process called trust administration. A probate is a public proceeding, while administering a trust is typically private. Still, even with trust administration there are things to do and laws to follow.

While everyone’s situation is different, here is a partial list of things that need to be done during a typical trust administration:

Prepare formal, written notice to beneficiaries and heirs in legal format

Identify and protect decedent’s assets

Give formal notice to agencies: Medi-Cal, FTB, IRS

Prepare trust accounting, if required by the terms of the trust or work with Accountant undertaking that task

Obtain appraisals: for tax purposes and for distribution purposes

Lodge decedent’s Will with the Court in the County of Decedent’s Domicile

Ascertain and pay creditors

Deal with any Medi-Cal Estate Recovery Claim for benefits received by the Decedent

Resolve disputes among beneficiaries

Take title to real property in trustee’s name

Upon distribution, re-transfer title to beneficiaries

Assist with Non-Pro Rata Distribution of Home or selected assets where appropriate

Where necessary, arrange interim funding from special lender to assist with Non-Pro Rata Distributions

Deal with Property Tax Issues, such as “Prop 13” & recently enacted “Prop 19”

Sell real property where appropriate

Handle sub-trust funding if required by the trust

File fiduciary income tax returns, if sufficient income or work with Accountant undertaking that task

Assist accountant to file estate tax returns for larger estates or to elect portability for the surviving spouse

Arrange care for pets

Sometimes there are problems with a trust which need to be corrected by either (1) seeking a  court order to modify the trust, or (2) via the recently enacted Decanting Act, wherein some changes may now be handled by an out-of-court process. One example of the need for change might involve a trust prepared years ago, when tax laws were different, which should now be revised to comport with new tax law.  Another example: where a trust leaves assets to a beneficiary who is now disabled and receiving public benefits (such as SSI and Medi-Cal), and whose bequest should, instead, now go into a Special Needs Trust for his benefit so as not to disturb the continuation of those benefits.

While the rules regarding trust administration are generally more relaxed than those governing a probate proceeding, nevertheless it is wise for the successor trustee to consult with an attorney knowledgeable in these matters so that he or she can be properly advised and avoid tripping over legal requirements. Remember: the successor trustee typically has a fiduciary duty to honor the terms of the trust, comply with relevant law, and deal fairly with the designated beneficiaries.

We recommend that all successor trustees seek appropriate legal guidance so that they discharge their duties lawfully, minimize family disputes and avoid creating liability for themselves.

 

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