Orange County Estate Planning Lawyer BlogThe Lawyer Blogs shown below are topical articles written by attorney David L. Crockett on all of the areas of the law that he deals with. Many of these articles are based upon actual and typical situations encountered by Mr. Crockett's clients. New blogs are posted when Mr. Crockett encounters new situations that merit detailed explanations to his clients. There is practical advice and explanations that span the subjects of the probate, trust, real estate and tax laws and court procedures that frequently arise. Because Mr. Crockett is actively advising clients on (i) wills, trusts, taxes and estate planning; (ii) administration of trusts and probate estates; and (iii) litigation about estates and trusts, many of these articles cover and crossover between all three areas of practice. The articles contain information that a person forming a trust, or a trustee or an heir/beneficiary needs to be aware of. The Blogs are organized into topics listed on the left of this page. You can view the posts listed in each topic here.
Getting Money Out of a Trust
My Sister is the Trustee and She Refuses to Pay My Share
Trust terminology basics
A trust is created by a written document known as a declaration of trust, and is then funded by transfer of money into trust bank accounts and/or deeding or transferring of properties to the trust. The creator of the trust is known as the “Trustor” or the “Settlor.” Trusts are usually prepared by attorneys because each trust is custom for the situation and there are many types of trusts. The persons who are to receive money and property out of the trust are known as the “Beneficiaries.” The person or institution that takes care of the money and property of the trust is the “Trustee”. The trustee is bound by law to follow the directions contained in the declaration of trust.
Wills – Presumption of Fraud or Undue Influence Where Beneficiary is a Fiduciary or Care Giver
Wills benefiting the attorney or caregiver are suspect
Abuses in formation of wills and trusts
In California over the last few decades there have been some situations whereby attorneys or caregivers have had wills or trusts prepared that benefit them. There was a famous case of a 95-year-old lady whose will left the bulk of her fortune to the people taking care of her. It turns out that the people taking care of her, known as “care custodians” had the will prepared under suspicious circumstances such that the 95-year-old lady probably didn’t know what she was signing. This and other similar situations led to recent legislation to correct abuses.
Wills – No Contest Clauses
Cut out the heirs who challenge the will using No Contest Clauses
Challenges can occur
If a will or a trust does not make an equal division of the estate then an unhappy heir might want to make a challenge. The law does not require you to equally divide your estate equally amongst your children or to give anything to them for that matter. Most children or in some instances brothers or sisters where there are no children feel that they are entitled to an inheritance. Not everybody understands or believes that a person making a will or trust can leave his or her assets to anyone. This has led to litigation challenging the provisions of the will or trust.
Spendthrift Trust
BULLETPROOF YOUR KIDS’ INHERITANCE
What is a spendthrift trust?
A spendthrift trust is a trust that is created for the benefit of a person who is often unable to control his or her spending and gives an independent trustee full authority to make decisions as to how the trust funds may be spent for the benefit of the beneficiary. Spendthrift trust are often established when the beneficiary is too young, immature, or doesn’t have the mental capacity to manage their own money and wants to protect a beneficiary from the beneficiary’s own tendency to uncontrollably, imprudently —and usually rapidly— will exhaust assets.
Spendthrift trust – a simple example
This is best illustrated by a simple example. Mom & Dad set up a living trust for their children and put $500,000 principal into it to be held for the benefit of the children. Suppose one or more of the children has financial trouble and owes money to creditors. With a properly written spendthrift clause in the trust document, the creditors of the children cannot enforce their claims against the children’s share of the trust. The trustee of the trust still would be have discretion to pay money out to the children. People also can set up trusts to benefit themselves but those types of trust are subject to more limits on the spendthrift provisions.
General rule-transfers to creditors can be prohibited
California law generally allows a trust instrument to legally provide that a trust beneficiary’s interest in trust may not be transferred and may not be subject to enforcement of a creditor’s money judgment. Thus, in the $500,000 put into the trust in the above example, if the money is to be held in the trust until the children reach age 35, then before the children reach that age a creditor with a money judgment against the children cannot reach that money. However when a child reaches age 35 in the example and is entitled to his trust principal distribution, the child’s creditors can get a court order to have the child’s principal paid to the creditors to satisfy the judgment. Likewise, if the trust provides for discretionary payment of trust income to trust beneficiaries (as opposed to mandatory payment of income) then the children’s creditors cannot force the trust to pay the income to them.
Sale of Residence Gain Exclusion
Subtitle: Pull out tax free gain while downsizing
INCOME TAX “GAIN” CONCEPT
Under our system of federal and state income tax, if your personal residence is sold before death for more than what was paid for it then there is a capital gain. For example, if you purchased your home for $100,000 and sell it for $300,000 there would be a capital gain of $200,000. The capital gain is reported as income on your personal income tax return. Figure roughly a combined federal and state tax on the $200,000 gain of 1/3rd which would be $66,666.
EXCLUSION OF GAIN IF PERSONAL RESIDENCE
An individual may exclude up to $250,000 in gain and a married couple may exclude up the $500,000 on a joint return if the property was the “personal residence”. A personal residence is defined under the tax law as a residence used as your principal residence for periods aggregating two years (730 days) during the five years leading up to the sale. Thus, you don’t have to actually have to be living in the residence at the time of the sale if you meet the 2 year test. Short temporary absences and vacations are counted as part of the 730 days.
Taxation of Family Limited Partnerships
Partners pay tax on income earned even if it is not paid out to them
The taxation of Family Limited Partnerships should be carefully considered in advance of setting up and rolling out your new FLP.
FAMILY LIMITED PARTNERSHIP DEFINED
State laws have provisions allowing people to establish limited partnerships. Limited partnerships provide limited liability protection for the limited partners similar to the liability protection afforded corporation shareholders. The limited partnership is established by filing a form in the state in which it is being established and by the preparation of a limited partnership agreement which governs the ownership income and management of the partnership. The limited partnership agreement is custom prepared by the attorney forming the limited partnership and can have many variable aspects that need to be considered as part of the formation process.
A family limited partnership is legally no different from any other limited partnership except that it’s only members are family members. The term “family limited partnership” is something commonly used in the estate planning and asset protection field. A family limited partnership will have one or more general partners and one or more limited partners. Their respective roles are defined in the chart below:
Family Limited Partnerships FLP’S for Asset Protection
Purposes of Family Limited Partnerships
People form family limited partnerships (FLP’s) to (i) transfer ownership of properties or assets to family members while still maintaining control; (ii) to save on estate and gift taxes; (iv) to shift income from parents’ higher tax brackets to children’s lower tax brackets; (iii) to provide some asset protection against liabilities of the property or assets put into the limited partnership or (iv) to provide asset protection against creditors of the limited partners.
Typical example-an apartment building
A mom and dad own a 10 unit apartment building which is paid for and provides substantial cash flow income. They have 3 children and 1 of the children is heavily in debt and cannot handle money. They transfer the apartments into a FLP and the FLP agreement provides that the parents own 40% of the assets and income and the children own 60%. It is set up so that payment of income is discretionary with the parents who are the general partners. The FLP prevents any creditors of the building from going after the parents’ or the childrens’ individual assets outside of the FLP.
The FLP prevents any of the childrens’ creditors from forcing a payment of income to pay the children’s debts. The parents essentially still control the money flow and manage the property. There are many variations possible to this so the entire financial and legal picture needs to be gone into before jumping into any FLP.
Taxation of Irrevocable Trusts
Taxation of Irrevocable Trusts – Tax rates can be high on permanent trusts
IRREVOCABLE TRUST DEFINED
The term “irrevocable trust” is commonly used by estate lawyers and financial planners to describe a trust which is permanent and cannot be changed or revoked.
