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Many people my wife’s and my age have shared the experience we enjoyed recently on a Saturday evening: a handsome young man, well established in his business field, greeted his successful, beautifully attired bride at the altar as they calmly repeated their wedding vows without the fear and trembling that my generation almost universally experienced under the same circumstances. The difference? The couple’s seven additional years of age – and their accompanying financial stability—were enough to supply both the bride and groom with the steadiness so lacking in so many of the weddings of earlier generations.
Eleanor Barkhorn wrote in an article for The Atlantic that the average age for Americans getting married increased by seven years from 1960 to 2013.1 Ms. Barkhorn quoted an academic survey saying that college-educated women have largely benefitted from marrying later. Specifically, she explained that the average income for women who attended college and married after the age of thirty earn fifty-six percent more than women with college degrees who married before age twenty.
While brides and grooms may marry more comfortably when tenure is tolled and assets accounted, success brings its own perils to the pulpit.
“Divorce attorneys have a special name for financially comfortable couples who marry without any planning ahead of their vows,” explains Kevin Gibbs, an Anaheim attorney who is Board-Certified as a Family Law Specialist in California.
“We call them ‘Inventory.’ You might consider them more confident at their weddings, but family law attorneys know that their confidence is often a stone castle built on a foundation of sand.”
What kind of planning does Gibbs recommend for the well-shod marrieds-to-be?
“There are two answers to this question,” explains Mr. Gibbs. “If the couple has concerns about both their assets and their income in the event of a divorce, then they need to talk about a Premarital Agreement, or a PMA. These allow for an agreement that will address both who owns what and who pays whom if there is a disparity between their incomes.”
“However,” Kevin goes on, “A trust can allocate and specify who owns which assets just as well as a PMA, so if there isn’t any concern about income disparity, a trust will usually suffice.” Gibbs smiles before he adds, “And the father-in-law doesn’t get testy about why a groom is generating a document to cheat his little princess. Instead, his new son-in-law becomes a prince who is doing right by the Apple of Daddy’s eye by setting up a trust to protect her.”
Given a choice between a document which smacks of heavy self-interest (like a Premarital Agreement) or a document which carries the image of a new in-law who worries about his or her duties to the clan (such as a Trust), many advisors recommend foregoing the PMA in favor of a trust for the protection of the assets of both the bride and the groom.
“I’ve never had a couple argue about setting up a trust to protect their assets. They simply sign-off on a document that has three accounts listed for yours, mine and ours,” notes Attorney Gibbs. “On the other hand, there’s always a little extra tension energy in the air on signing day for a PMA. Some people need the PMA, but most well-heeled clients can get by with just a well-written trust.”
Well-heeled or barefoot—couples who come to their wedding with their assets already properly managed will be much more likely to live happily ever after than those who leap before they have looked.
When Trustees finish their work distributing trust assets, they often utter the same comment about the problems they encountered managing a trust: “Nobody knows what to do as a trustee until the job is almost over. It would be nice to know before the job begins.”
The complete answer to this question calls for the template of a textbook. But Tina Fey, late of Saturday Night Live, unknowingly gave the simple answer about the trustee’s job when she described a leader: “In most cases being a good boss means hiring talented people and then getting out of their way.”
The trustee’s job is to be the “Boss” who seeks out and supervises the experts who conduct the administration of the trust. This role involves finding and directing the most competent people available to manage the requirements found in the terms for the instrument known as a trust.
For most trusts, the management team which the trustee will need includes an appraiser, an accountant, an attorney, and a financial advisor. John Aust, PhD., of CP Appraisers in Orange, who has taught Appraisal Classes at Santiago Canyon College for over twenty-five years, describes the trustee’s team as a
“Support Group for the Trustee.”
“The smarter the trustee,” Aust explains, “the more likely she is to start out as more of a recruiter than a manager.” Dr. Aust quotes Warren Buffet when he explains how a trustee approaches composing a management team: “The wise man does in the beginning what a fool does in the end.”
Often, when parents who die have left a trust with one of their children as a successor trustee, that successor has never managed a trust before. “Finding a team of advisors is not a challenge,” Professor Aust explains, “but finding a team of competent advisors is a roll of the dice without some experienced help.”
Dr. Aust recommends a simple checklist for the start-up trustee:
In selecting an Accountant, be certain to retain a CPA who has experience with filing Estate Tax Returns, also known as Form 706. These are sometimes needed even for estates well below the taxable level known as the Exemption Equivalent, which in 2016 is $5,450,000.00.
The Trust’s attorney should have experience with both Probate and Trust administration, since some estates will have assets both in and out of a trust, explains Dr. Aust. “If an asset is outside of the trust,” Aust notes, “the Attorney often needs to know how to steer that asset through Probate. “
Appraisers need more than just a license or a degree in finance, explains the professor. “Anticipate that an appraiser is basically a professional witness to the value of the assets,” states Aust. “The trustee needs to work with someone whose numbers are not just professionally correct; they need to be defensible in court by someone who won’t be intimidated by that prospect.”
Finally, the financial advisor should have both the personal professional financial experience with probate and trust administration and a strong financial organization to back up the advisor’s efforts. “The best advisor in the world still needs to have a strong back room to support the job of allocating assets after the original trustees have died,” advises Dr. Aust.
Asked to give a final summary of the job of a trustee, Dr. Aust replied by quoting the Taoist philosopher Lao Tzu:
“A leader is best when people barely know he exists, when his work is done, his aim fulfilled, they will say: we did it ourselves.”
Tina Fey, Warren Buffet, and Lao Tzu all appear to agree with Dr. Aust about a trustee’s job: Start out in the beginning by finding the right people, be close to invisible, and let the experts do their work.
Estate planning attorneys typically find out that their clients have entered into a reverse mortgage twenty seconds after the indebted client or clients have died. The typical situation involves a telephone call to ask the lawyer why Dad’s home is going into foreclosure “so soon after he died.”
The conversation typically then continues: “I don’t think Dad knew that the bank would go into this attack mode so soon after his passing. It hasn’t given us time to react.” Or, another common response: “ Things didn’t happen this quickly when my husband’s parents passed.”
There is a different reason for each of these reactions. First, Dad had to have known about the immediate need to react when he died with a reverse mortgage. According to Howard Platte, the Branch Manager of the North Orange County Gem Mortgage office, “The process of obtaining a reverse mortgage involves a counseling session that explains, in great detail, the requirements following the death of the borrower. Basically, every borrower is told in intentional detail that a house which is collateralized with a reverse mortgage, no matter who the lender is, has a basic requirement at death: either the loan is paid off, or the house must be sold to pay off the debt.”
Platte believes that the second reaction to a foreclosure on a Reverse Mortgage – that the fast foreclosure didn’t happen when another person died– is probably accurate. He explains “Most likely the other family member who had an easier time at death owned the home in trust. When that occurs, the lender is more likely to be able to talk to the heirs of the deceased home owner. That trust can make all the difference, because if the lender is not able to talk to anyone, the foreclosure will follow.”
One of the principal problems with slowing down the process of foreclosure at the death of an owner of a home outside of a trust with a reverse mortgage stems from the fact that too many lenders are unwilling to deal with the heirs of the deceased home owners unless the heirs of the deceased owner have been issued paperwork from the probate court to indicate that they are authorized to talk for the deceased family member’s estate.
“Since lots of family members wait a few weeks to contact the mortgage company, and because it then takes some more time to get the letters from the Court,” explains Platte, “the lenders will often start the foreclosure before the probate has given the authority to the family members to talk to the mortgage company.”
The frustrated heirs are frequently left in the lurch once the foreclosure process on the homes outside of the trust begins.
“We have seen the advantage of trusts owning homes first hand,” Platte continues, “and it just doesn’t make sense to add problems to the ability of family members to administer their parents’ estates. A trust owning a home that has a reverse mortgage will normally allow the family to save time and money on the passing of the title to the next generation, and in some cases it simply saves the house from foreclosure.”
When a family considers the ability to avoid the foreclosure which may follow the death of a parent whose home has a reverse mortgage, and then adds in the increased cost of probate fees for the home, as well as the increased time of probate administration which may accompany the home passing by will instead of by trust, along with the fact that probate administration can take up to three to four times as long as trust administration, the decision appears almost self apparent.
“I don’t know why home owners with reverse mortgages, or even just traditional home loans, would consider not having a trust to hold their homes,” admits Platte. “Everything in our experience points to the logic of trust ownership.”
Children often face a great many challenges following the death of a parent. Unfortunately, one issue often is not apparent to the offspring when Mom and Dad are gone: the insurance which the folks had for half a century for the family home needs a check-up as soon as the kids can make it happen.
For many families, this insurance review never occurs; the house gets sold before any issues arise and nobody is ever the wiser about the inadequate insurance coverage. Sadly, an all too frequent occurrence following the death of a homeowner before the home gets sold is the advent of the uninvited house guest.
“Sometimes teenagers find out the house is empty and they throw a party,” explains Gary Remland of Remland Insurance in Orange. “Or it might be a professional who wants to get Mom’s jewels or the family computer.Whoever it is, the tragedy is that a family which just experienced the loss of a loved one may well be facing an uninsured loss if the kids don’t let the insurance agent know that the home is no longer owner occupied.”
The remedy for the empty home following the parents’ deaths is to meet with the insurance agent to advise him or her of the changed status of the living arrangements. The agent needs to be aware of whether the home is going to be occupied by one of the children of the deceased as an interim security measure, to keep the teens at bay, whether the home will be rented for either a short term or for a long term lessee, or whether the home will no longer be occupied at all.
“Any change in who lives in the home needs to be addressed by the insurance agent to make sure that the homeowner’s policy will cover the different circumstances,” says Agent Remland, “since every policy that is written gets its rates and coverage issued based on the facts given to the agent at the time of the purchase of the policy. If the facts– the occupancy of the home– change, then the coverage may be either reduced or even eliminated.”
Most people who are serving as trustees for a late parent’s home use an attorney’s office to assist in the administration of the trust estate, so that these matters are handled by people who have dealt with the issues before. For those trustees who do the administration on their own, it is vital to review a number of critical insurance issues from the outset. In addition to the problems of a homeowner’s policy which was intended to insure a house which the homeowner lived in, Remland explains other concerns that the trustee should address.
Any change in who lives in the home needs to be addressed by the insurance agent to make sure that the homeowner’s policy will cover the different circumstances
“It is crucial to be certain that the trust is listed as an additional insured under the homeowner’s policy,” Remland suggests, “and doing that is very simple. What gets complex is what happens if there is damage to the home when the ownership is not properly listed on the declaration page of the policy.”
Beyond the “additional insured” provision in the insurance policy, it is also highly advisable for the original trust to provide terms for flexibility for the management of the family home after the parents’ deaths. For example, many of the trusts which face administration do not allow for any treatment of the home beyond either a provision for immediately either selling or for distributing it to a beneficiary. During downturns in the real estate market, it is often an advantage for a trustee to have more latitude in the steps which he or she can take in handling the home.
Some trustees save the beneficiaries from a distress sale price by either renting the home for a period of time to allow the price to recover, or by allowing one of the children of the deceased to live in the home for that same recovery period. In either instance, the trustee needs to be certain of two factors: first, that the trust allows such an occupation, and second, that the trustee has contacted the insurance agent for the home owner policy to be certain that the coverage continues during the administration of the trust.
Back in the 1980’s and 1990’s, when most of us first did our living trusts, Estate Attorneys and Accountants chanted the praises of dividing our estates into two or three parts when the first spouse died.
What we were told then was right: the best way to avoid probate and at the same time reduce or eliminate Estate Taxes was to slice the trust in two at the first death to take advantage of the $600,000.00 that each partner in a marriage could pass on to children without any tax bill to pay.
For most people, that eliminated the possibility of an estate tax. Now, in 2015, the Tax Code allows each spouse–alone– to pass $5,430,000.00: more than nine times the tax free estate that earlier rules allowed. This is great, but what about our trusts that say the surviving spouse still must divide the trust in two, when the combined assets the survivor owns has may be only 10% of the tax free amount (the “Exemption”) for one person?
Quite simply, the exemption is so high that most people will not want their trusts to require a division at the first death (although there may be some rare situations where it still makes sense). For those folks, there is an option which you might call the “Wait and See” alternative for living trusts. The American Tax Relief Act of 2012 (ATRA) allows a choice between spouses when it comes to estate taxes called “Portability.”
Basically, the surviving spouse has the option to not do an immediate division of the estate at the first death, but instead, to file an Estate Tax Return and “elect” to apply the unused Exemption of the deceased spouse at a later time if it is needed due to changes such as fluctuations in either the amount of their estate or the amount of the tax free amount allowed in the Tax Code.
This is great news, since we really don’t want to have to file a second tax return every year for the “Split” trust which the division at first death creates. Instead, we want to just preserve the ability to use the tax free exemption that our deceased partner had when she or he died in case we need it later. Why make our trust more complicated if we don’t need to?
But beware of two things: first, we need to change our trusts to allow this “option” by having it modified to permit the surviving spouse to not divide the trust in half at the first death; and second, we need to have our attorney modify the document to allow the trustee to file an estate tax return (Form 706)even if no tax is due so that the surviving spouse can make the “Portability Election.”
And remember: if you don’t make this election by filing the Estate Tax Return within 9 months after your spouse dies, then you lose the Option unless you have already requested an automatic 6-month extension of time to file on Form 4768. If you wait until after the 9 months pass to file the election, the Option is not available.
Some advisors feel the completion of a portability election for smaller estates is not necessary. However, remember two factors: first, an estate may grow unexpectedly following the first death, and second, Congress could change the amount of Estate Tax Free assets we are allowed to pass tax-free when we die. The Portability Election is an easy option to protect our heirs from either possibility.
In California, the Department of Health Services (DHS) operates under a regulation that changes the common law character of joint tenancy. This regulation, known as 22 CCR 50960.12 [DHS 12], effectively overhauled the legal concept of the Right of Survivorship previously practiced under California Common Law.
Under the Right of Survivorship, which existed in joint tenancy definitions before California even became a state, if a person owned property with a someone who was joint tenant instead of a tenant in common, the first person’s death caused the rights of that deceased in that property to die with him or her, making his or her interest pass to the other owner or owners instantly at the moment of his or her death with no requirement of a will, a trust, a deed, or probate. The death wiped out the ownership interest of the deceased joint tenant, and the interests of the other owner or owners immediately increased without any actions required on their parts.
In other words, a one-half owner of a property who survived the death of a joint tenant would have expected to become the full owner of that property after the other joint tenant died, without any creditors having the ability to attack the property through the deceased’s estate unless they had previously filed a lien against the property. The amazing thing is that DHS has published materials that make it appear that its one regulation is the “law of California,” which clearly it is not. It is a single rule of one solitary agency. Unfortunately, as often happens with ill-conceived laws, the effects of DHS 12 have reached beyond their intended consequences.
Consider the impact on Robert, an 80+ year-old man who felt concern over the plight of a long-term friend, Harry. Harry had home problems, so Robert, who had a large debt-free home that was paid off, let Harry move into his home. The two widowers enjoyed the arrangement, since it meant that they both had someone to talk to in the morning.
Robert wanted to avoid the cost of a will or a trust, so he found a computer program at a stationery store and printed out a new deed for his home which named Robert’s son Frank and Robert’s friend Harry as joint tenants with him on his property. Robert’s goal was to have his property automatically pass at the time of his death under Section 13050 of the Probate Code to both his friend Harry, and to his son Frank. Robert planned to have Harry own the home jointly with Frank as survivors after Robert died; the next step was for Frank to receive the home by Right of Survivorship from Harry when Harry died.
If Robert had talked to Harry about his plan, he would have learned that Harry had already started to feel the effects of Alzheimer’s disease, and would not outlive Robert. Harry spent two years in a long-term care center, sponsored by Medi-Cal, and died owing a significant sum to the state. After Harry’s death DHS filed a lien against Robert’s property (without his knowledge) for the funds spent on Harry’s stay at the center.
When Robert died his son Frank received the home by Right of Survivorship, subject to the lien from the state. The result did not affect the rights of the Nursing Home debtor, Harry; instead, it was the legal rights of the survivor Robert, which were violated.
It is important to remember that Harry had never contributed financially to the cost of Robert’s home. In fact, he had never paid rent to Robert, and he had never paid any of the additional costs of running the household that came from his living with Robert. Robert’s generosity had been a wonderful impulse, but he should have asked an advisor about whether the step of putting his friend on his home as a joint tenant was the best way to help his friend. Joint tenancy has always carried multiple tax and control problems for estate planning that make it inefficient; the DHS 12 provisions that eliminate the effects of the Right of Survivorship make it far too dangerous to use for senior planning purposes.