Grantor vs Non-Grantor Trusts

I received a call a couple of days ago from previous clients who asked whether or not they needed to get a tax number for their trust.  They did not understand that as their trust was a revocable trust (also known as a grantor trust) meaning they had full control of trust assets, their social security numbers were automatically the tax identification numbers for the trust and any trust income should be filed on the grantors' 1040. Only when a trust is or becomes irrevocable (or is known as a non-grantor trust) do the trustees acquire a separate tax identification number and file a 1041 as long as the irrevocable trust is in existence.

Gifts To Grandchildren

Gifts given to grandchildren by grandparents can be a great blessing.  Kelly Greene wrote an article in the Wall Street Journal September 14, 2012, titled "Are You Coddling Your Grandkids?"  In her article, Ms. Greene indicates five ways to give to a grandchild something and at the same time not creating a sense of entitlement from a grandchild.
First, Ms. Greene says you must, "Pare your gifts to offset the pain."  In other words, don't give to the extent that you jeopardize your own financial care.
Second, Ms. Greene say you might consider making a gift a loan rather than an outright gift.  If the loan is handled properly, it might be a good way to help the grandchild and at the same time allowing them to make their own way in the world.
Third, Ms. Greene says a grandparent can create teaching moments.  Gifting stock or investments rather than cash can be a way of teaching grandchildren the value of money as an example.
Fourth, Ms. Greene says it is a good idea to delay a grandchild's gratification.  Gifting money at certain dates or events rather than on a regular basis can help grandchildren rely on their own resources first.
Fifth, Ms. Greene counsels to practice equality.  One of the most common reasons for litigation between family members if perceived favoritism. 
As you choose to gift assets, it is wise to take into account the feelings of family members and how said gifts will affect them in the long run.

Choosing The Right Fiduciary--Trustee, Agent, Personal Representative

In an article written September 10, 2012, by Jeanne Skowronski of the Wall Street Journal, Ms. Skowronski writes about the importance of choosing the right trustee to serve as the fiduciary of your estate.  Ms. Skowronski talks about four questions which she feels should be asked in deciding who should serve as fiduciary.  She asks:




- How large and complex are the assets in the trust?
- Can anyone in your family do the job?
- How are the relationships between your beneficiaries?
- Have you explored other options?




Here at Hughes Estate Group, we emphasize the great importance of choosing the right individual or entity to serve as the fiduciary of a person's estate.  We ask a series of questions in order to help you determine the best fiduciaries for your estate plan. 




We feel there should be much more deliberation in determining who should serve than simply naming your first born child for example or even the child most able to handle finances.  The relationships between siblings and many other issues also hold great bearing on who should be named as the individual or individuals to take care of your affairs at your incapacity or death. It is important to ask the right questions in deciding who should serve as trustee of your trust, or agent of your power of attorney, or personal representative of your will or estate. 

New Year's Resolution

At the beginning of this new year, we at Hughes Estate Group wish all a happy and successful year.  We would encourage everyone to set a goal for this year to either get an estate plan in place (if a plan is not in place) or review and update any existing estate plan (if a plan does exist).  Death is something we will all experience.  Ensuring the smooth transition of one's estate to beloved beneficiaries is one of the best gifts a person can give his or her family.

When Is A Power of Appointment Used?

Generally a power of apointment is used in estate planning.  For example, a donor may want to give authority to a fiduciary/donee to apoint assets in the fiduciary/donee's discretion to an incapacitated beneficiary.  A power of appointment can be included in a power of attorney, a will, or a trust.  Where a donor does not want to give a fiduciary a power of appointment, it is important to make that desire clear in estate planning documents in order to avoid an IRA argument that the assets the fiduciary is simply managing as a fiduciary are actually part of the fiduciary's estate for estate or gift tax purposes.

Power of Appointment Types

There are two types of powers of appointment:  a general power of appointment and a limited (special) power of appointment.  Each of these types of powers carries different and significant tax implications.

General Power of Appointment:
In a general power of appointment the donor gives the donee authority to appoint (transfer) the donor's rights, assets, or items to anyone the donee wishes, including the donee himself.  Potential adverse tax consequences accrue to a donee who possesses a general power of appointment: the rights, assets, or items which the donee has power to appoint are considered the donee's property for gift and estate tax purposes.

Limited (Special) Power of Appointment:
In a limited (special) power of appointment the donor limits the donee's authority to appoint (transfer) the donor's rights, assets, or items.  The authority may be limited in various ways.  For example, the donee may be limited in regard the the persons to whom he or she can appoint assets; or the donee may be limited in regard to the times at which he or she can appoint assets; or the donee may be limited in regard to the purposes for which he or she can appoint assets (for instance, the health, education, maintenance, or support of the appointee).  In certain circumstances the donee possessing a limited power of appointment and the appointee may be the same person.  With a limited (special) power of appointment, the Internal Revenue Service usually does not consider the rights, assets, or items subject to appointment to be owned by the donee in determining the donee's own gift and estate taxes.  In estate planning, generally a limited (special) power of appointment is preferred over a general power of appointment.

Power of Appointment

Parties involved with a power of appointment are:
"Donor" is the person who creates a power of appointment.  The donor is usually the owner of rights, assets, or items being ultimately appointed by the donee.
"Donee" or "holder" refers to the person who possesses a power of appointment--who has been named to appoint or transfer all or a portion of an owner's rights, assets, or items.
"Appointee" is the person who receives the rights, assets, or items as a result of the power of appointment being exercised.
"Taker in Default" is the person who receives the rights, assets, or items if the power of appointment is not exercised.

General Definition:
A "power of appointment" is a unique power given to a donee (holder) by a donor to distribute the donor's rights, assets, or items usually at the donor's death to appointees.  A donee of a power of appointment is different than a personal representative or trustee.  A donee of a power of appointment does not have the responsibility of managing a person's estate or trust assets.  Rather, the donee has the authority to appoint the donor's rights, assets, or items to appointees.  There are two types of powers of appointment: a general power of appointment and a limited (special) power of appointment.  Each of these types of powers carries different and significant tax implications.

Inheriting Retirement Accounts

Transferring a retirement account to beneficiaries upon your death is complicated and if it is not done right can have adverse control and tax consequences.

For example, one issue most people do not consider is minor beneficiaries of retirement accounts. By law, if a child is a minor, the child cannot inherit assets of any kind until said child becomes an adult. If estate planning is not done, the state laws and the retirement agreement default policies will dictate how the minor child will receive the retirement account upon adulthood. The parents will lose the control of how the minor child receives retirement account funds.

Another example is whether or not the retirement agreement policies allow the retirement to pass to beneficiaries per stirpes (to the children of a specific deceased beneficiary) or per capita (to all the issue of one generation) if the estate becomes the beneficiary. If estate planning is not done, the retirement agreement default policies will apply, which might not agree with your planning preferences.

A final example deals with coordinating a retirement account with a trust (which usually gives a person the most control in how assets are distributed to individuals). In coordinating a retirement account with a trust, there are funding issues that can botch up a beneficiary's chance to roll over or stretch a retirement account if the funding is done wrong.

These are just a few examples of issues that effect the transfer of retirement accounts to beneficiaries. It is to a person's advantage to consider the complexities of retirement accounts with an expert estate planning attorney to ensure their retirement accounts get to their beneficiaries in the best possible way.

Here are a few Wall Street Journal articles regarding retirement accounts:
Trust as Beneficiary of IRA Is a Polular Strategy
What a Gift: How to Name a Minor Your IRA Beneficiary
Inherited IRAs: a Sweet Deal

Definition of the Week: Grantor

Grantor: A grantor is a person "granting" or transferring assets to a trust. Some practitioners and state statutes use the word "settlor" or "trustor" or "maker" or "creator." At Hughes Estate Group, we use the word used by the Internal Revenue Service, the tax courts, and most state courts: "grantor."

Definition of the Week: Trustee

Trustee: The trustee is the person who manages and distributes trust assets for the benefit of beneficiaries.

Moving To A New State With Estate Documents In Place

If you have estate documents (wills, trusts, powers of attorney, etc.) and you move to a new state, it is always good to have an estate planning attorney in the new state review your documents. A general rule of thumb is wills and trusts will less likely need to be amended with a move to a new state. Powers of attorney, especially health care, will more likely need to be amended to meet the new state's requirements.

Definition of the Week: Simple Distribution Plan

Simple Distribution Plan: A simple distribution plan calls for immediate distribution of assets to your beneficiaries at your death. A simple distribution plan is relatively easy to draft and can sometimes be done without a trust. Because it is easier to prepare, a simple distribution plan is less expensive than a complex distribution plan.

Basic Stages of Life

There are three basic stages of life. Different estate documents are used for each stage of life.

The first stage of life is when an individual is alive and mentally competent. At this point in a person's life, not estate documents are necessary. However, this is the time an individual should put estate documents in place for the next two stages of life.

The second stage of life is when an individual is alive and mentally incapacitated. At this point, powers of attorney can be used to establish authority and begin acting for a person in the second stage of life. If powers of attorney have not been created, an individual seeking authority to act for a mentally incapacitated person must petition a court for that authority in a guardianship/conservatorship proceeding.

The third stage of life is when an individual dies. Once someone dies, the powers of attorney or a guardianship/conservatorship ends. At the point of death, trusts and/or wills are then used to establish authority and distribute a deceased person's estate to beneficiaries. If there is not a properly funded trust or there is only a will or there is no will at all, most likely authority to act on behalf of a deceased person must be sought through the probate court.

Definition of the Week: Complex Distribution Plan

Complex Distribution Plan: A complex distribution plan requires at your death that your assets be distributed over time, in certain amounts, or under certain conditions. A complex distribution plan is generally more difficult and time consuming to draft than a simple distribution plan. A complex distribution plan requires use of a trust. A complex distribution plan is more expensive to prepare than a simple distribution plan. Hundreds of reasons exist for Complex Distribution Plans.

Definition of the Week: Fiduciary/Fiduciaries

Fiduciary/Fiduciaries: A fiduciary is an entity or person who manages your affairs if you are incapacitated or deceased. The word fiduciary is a general term referring to agents, personal representatives, or trustees.

The Basic Stages of Life

There are three basic stages of life when contemplating estate planning.

1. Individual is alive and mentally competent



2. Individual is alive and mentally incapacitated



3. Individual has died

Each of these stages is handled differently.

Individual is alive and mentally competent
When an individual is alive and mentally competent, estate planning documents can be in place, but most likely the documents are sleeping (or not being used) during this stage of life.

Individual is alive and mentally incapacitated
When an individual is alive but mentally incapacitated, there are certain estate documents that if prepared ahead of time allow family members to step in and begin acting on behalf of the incapacitated individual. The kind of documents that might be prepared for this stage of life are:

• health care power of attorney



• medical directive (pull-the-plug)



• health care directive



• financial power of attorney



• do not resuscitate (In Utah, an individual can only obtain a DNR by contacting a physician and filling out the DNR with the physician.)

If these documents are not in place before an individual becomes incapacitated, family members will go to court to obtain conservatorship or guardianship appointment in order to act for an incapacitated person.

Individual has died
When an individual has died, any powers of attorney used during incapacity becomes void and family members must turn to any will or trust that has been established to deal with this stage. If an individual has prepared a trust and/or will, family members can begin the process of accessing assets, paying bills, and distributing assets to the beneficiaries of the deceased person. If the person dies without estate documents in place, most likely the family members will need to go through probate to obtain authority to access and distribute any property of the deceased person.

In contemplating estate planning, it is important to be aware of the three stages of life and prepare for each stage.

Michael Jackson's Estate Distributions

Michael Jackson's estate has made enough money since his death to pay off large amounts of debt due at his death and still distribute about 30M to his children and their mother. Unnamed charities have also begun receiving portions of the estate assets.

Here is a good article regarding this event.

Foreign Citizen Named as Trustee of Trust

A recent question from a client has prompted this blog. The client asked whether a sibling who lived in another country could serve as the trustee of the client's trust.

Issue: Authority of a Canadian citizen as the duly-appointed trustee of a trust, created pursuant to U.S. and Utah law, to access the trust's Zions Bank account.

Hypothetical Scenario:

• U.S. Citizen and Utah resident--John Smith--creates a revocable trust: "The John Smith Revocable Trust, dated 12/10/2010" ("Trust").



• John Smith goes through the process of setting up a Zions Bank account owned by the Trust. Zions Bank secures for its records a certified copy of the Trust, and the account is set up using John Smith's social security number (the Trust being revocable and John Smith being the grantor and original trustee).



• On Zion's Bank records the account is listed as owned by "The John Smith Revocable Trust, dated 12/10/2010."



• The Trust names John's sister--Mary Smith, a Canadian citizen (not dual U.S./Canadian--only Canadian)--as the successor trustee upon John's death. (We can state without hesitation that nothing in the Utah Probate Code prohibits a foreign citizen from acting as a trustee of a domestic trust.)



• John dies.



• Mary Smith files an SS4, securing a TIN for John Smith's now irrevocable Trust.



• Mary Smith comes into a Zions Bank branch with a Canadian Passport and other identifying documents and the IRS letter showing the TIN, and asks to access the $100,000 Trust account.



• Zions Bank (1) examines the Trust on record to ensure Mary Smith is named as the successor trustee, (2) secures copies of Mary Smith's identification, and (3) confirms or secures a copy of the TIN for the now irrevocable Trust.

Questions:

• Given the above facts, can Mary Smith, as a Canadian citizen, manage the Zions Bank account, withdrawing and distributing funds as necessary and required under the Trust?



• What other procedures would Zions Bank require in this situation to allow Mary Smith to access the Trust account?



• Is there anything in banking law or Zions Bank policies and procedures generally that prohibits a foreign citizen from serving as trustee of a domestic trust?

Answer:
Mary Smith, as a Canadian citizen, can manage the Zions Bank account, withdraw and distribute funds as necessary and required under the Trust after doing the following:

• Fill out a W-8ECI to establish tax residency. (W-8ECI and Instructions)



• Give Zions Bank contact information.



• Prove identity (e.g. passport).

The Real Pain Of Being The Executor Of An Estate

The Wall Street Journal has an article in today's paper regarding the responsibilities an estate executor. It is more work than glory. We encourage parents to involve their executor child in the beginning stages of estate planning to completion and maintaining the estate plan so that the child executor will be as prepared as possible for the inevitable responsibility of executing the estate. Here is the full article for your review.

Protecting a Child From Him or Herself

The Wall Street Journal has an interesting article today regarding children who are not good with money then receiving an inheritance. The article explains ways of protecting that "spendthrift" child from blowing their inheritance. The full article can be read here.

We are experienced in "spendthrift" issues. Check out our website here.