Trusts

Family Trustees: Very often, the Trustee of a Trust is a family member. There are many reasons to create a Trust, but most often all transactions are kept within a family. In those circumstances, the family member Trustee will often get paid nothing, or a nominal amount. The work is done out of love and affection.

Corporate Trustees: In other circumstances, however, there are no family members to act as Trustees. Alternatively, the entire point of the Trust may be to take the asset management and distribution out of the family’s discretion. In those circumstances, a corporate trustee may be the only solution.  

Minimum Balance: This solution, however, is not appropriate for every trust. Certain banks and some financial management companies provide Trustee services. Most banks, however, have a minimum balance below which they are not willing to manage the Trust. Chase, reportedly, has a $2MM dollar minimum trust balance. Other institutions may get involve with lower amounts (such as $500,000 trusts).

Fees: Annual trust management fees can range between 1-2% of the trust balance assets (this fee will cover administration, record keeping, and disbursements). In addition, the institution may charge a separate fee for the asset management services.

The information in this blog was adapted from

http://online.barrons.com/news/articles/SB51367578116875004693704580486391945783842

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship.

I frequently see clients with global ties. New York community is home to many multinational technology, finance, consulting, and other companies.  Frequently, skilled employees of these businesses have family ties overseas, or have worked for their companies in other countries. Workers often bring their families with them, to live and to study and to work in New York. Families like this, which are increasingly common in today’s world, require careful estate planning services, often from an international team of experts.

Hypothetical Family:

Imagine our hypothetical family owns a half-million dollar apartment in Moscow, a half-million dollar house in Queens and a half-million dollars worth of stocks in US brokerage accounts.  The family has lived in the US for two years.  All family members are dual Russian-US citizens.  Every summer the family goes back to Moscow for a month for the children to visit their grandparents, but spends the rest of the year in New York.  The family may one day return to the Russia or live in a third country, depending on where the company sends them next.

The Local Component

Because the family is living in New York, it is extremely important that the parents work with an estate planning attorney licensed to practice law in New York.  If either or both parents became disabled or die, a New York power of attorney (in the event of disability) or a well-drafted trust (in the event of disability or death) would help ensure the family is properly cared for.   Many families with this level of assets also plan ahead to avoid the difficulties of probate, typically through the use of a living trust.  Perhaps most importantly, the family should name guardians for their children in the event of their deaths, as a New York judge would ultimately decide who should serve as guardians.  Without instructions from parents, a judge may pick someone the parents would not have chosen.

So far, the family’s discussion with a New York attorney is similar to the discussion any typical New York family might have with their attorney.  However, the family’s ties to Russia add a layer of complexity.

Russian Estate Plans

Only a lawyer licensed to practice law in Russia is qualified to give advice about an estate plan in that country.  The ideal time for a family to create an estate plan for its overseas property is at the same time as when dealing with US property.

If the US and Russian lawyer are working on their respective pieces of the estate plan at the same time, the family would be wise to ask the two lawyers to coordinate.  Some potential reasons:

-Probate is aggravating, expensive, and time consuming enough in one country.  It would be unfortunate if the family ultimately had to go through the process in two countries, due to a lack of planning.  A conservative estimate would be $6,000 in legal fees per probate estate, per country. 

-Local counsel in Russia can properly advise on the formalities of Russian will execution.

 -If the family has overseas relatives, there is a chance it will inherit further overseas property    after drafting its estate plan.  This could exacerbate foreign estate tax and probate problems.     Planning ahead with Russian counsel would be wise.

EXECUTORSHIP/TRUSTEESHIP

The successor trustee of a living trust ensures that its terms are carried out after the death or disability of the settlor (the person who created the trust).  Typically this means distributing funds, maintaining accounts, ensuring children are financially cared for, etc.  Similarly, the executor of a will closes out the estate in probate, if probate is necessary.

In New York, an executor may be anyone who has attained the age of 18 years, is a resident of the United States, is not of unsound mind, is not an adjudged disabled person and has not been convicted of a felony. So for the family in question, it is important the executor appointed in any Will be a US resident, not a relative in Russia.

For different reasons, all successor trustees of a living trust should ideally be US residents.  Under IRS regulations, allowing a non-US resident to serve as trustee will cause the trust to be classified as a “foreign trust” and incur much more burdensome tax reporting obligations. 

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship.

If you have a loved one with a disability, their life can be significantly improved with additional funds (think of non-generic medicine, vacation, additional home care, specially outfitted car, etc).   Supplemental Needs Trusts are set up for people with disabilities. The purpose of this type of a Trust is to supplement, not to supplant the government benefits to which the beneficiary may be entitled. If drafted properly, the assets and income of these trusts are treated as “exempt” by the agencies providing means tested benefits.  

There are two main types of Supplemental Needs Trusts.

First Party Supplemental Needs Trust holds the property of the person with disability (usually the funds come from an inheritance or a personal injury settlement). There are very specific criteria about the creation and administration of this type of a Trust. The assets must come from a beneficiary who is under the age of 65. The beneficiary must be disabled, as defined in the Social Security Law. The Trust must be established by a parent, grandparent, legal guardian or court order. Finally, the Trust must contain a ‘payback’ provision: upon the beneficiary’s death, all remaining assets must be used to repay the state Medicaid program for any assistance provided.

Third Party Supplemental Needs Trust holds the property of a ‘third party’ – a parent, a grandparent, a relative or a friend of the disabled beneficiary. There are fewer restrictions about the creation of this Trust. The beneficiary must be disabled. However, there is no ‘payback’ requirement: upon the beneficiary’s death the remaining assets may be distributed to another person. In addition, just like with the First Party Supplemental Needs Trust, the drafting language must remain very precise. Many Supplemental Needs Trusts have been disqualified, and the assets were considered available to the beneficiary, because of the imprecise language used by the attorneys. See my previous post about a trust that was not considered a proper Special Needs Trust by a court. http://sverdlovlaw.com/lawyer/2015/04/07/Children/The-importance-of-Using-the-Proper-Language-When-Setting-up-a-Special-Needs-Trust_bl18479.htm

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship.

In the past, when the federal estate tax threshold was $1MM, most estate planners concentrated on reducing or eliminating the estate taxes. The goal was to transfer out of the estate as soon as possible.

Today’s estate tax threshold: Today, the individual federal estate tax threshold is $5.4MM. The New York State estate threshold is $3MM (and set to rise until 2019, when it will reach the federal threshold). For a couple, no federal estate taxes are anticipated until the estate reaches $10.8MM. As a result, for the vast majority of people, the focus has shifted to reducing income taxes.

Maximizing step up: In order to reduce income taxes, a plan has to be devised which maximizes the step up in basis (and avoids a step-down in basis). An outright transfer to an irrevocable trust takes out an asset from the estate (thus eliminating the future estate taxes), but at the same time this transfer may prevent an income tax benefit upon death.  The dilemma is whether to transfer the asset outright, to transfer it to a trust while retaining some indicia of ownership (thus retaining the asset in the estate), or to keep the asset in one’s name outright.

Example: Suppose you bought a building 10 years ago for $200,000. The building is currently worth $1.5MM. At the time of your demise, the building will likely be worth $3MM.

• If the building will be retained in your estate, there will likely not be any estate taxes or capital gains taxes for your heirs.

• If the building is transferred out of your estate during your life and later sold for $3MM by your heirs, they will likely have to pay federal capital gains taxes at 20% of $560,000.  Furthermore, New York State has a capital gains tax as well, with the maximum rate of 8.82%, for an additional tax of $246,960. Thus, the total taxes that will need to be paid by the heirs in New York on this property will be approximately $806,960!

There are methods of modifying trusts under the New York State law, even if the trusts are irrevocable. Your trust may need to be modified or decanted, in order to take advantage of the favorable income tax treatment achieved through the step up in basis.

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship.

Why estate planning: In general, there are many reasons why people engage in estate planning. Those include: death time tax mitigation, avoidance of probate, smooth transition of property at death, and making sure the deceased’s dispositive wishes are followed. Asset protection is an additional aspect of estate planning, which safeguards the assets from the risks they would otherwise be subject to.

What is asset protection: The goal of asset protection is generally to deter litigation. At the same time, the plan must be flexible enough to provide options to the client and to change over time in response to changing laws.  However, asset protection will not aid the client in the avoidance of taxes and it will not aid the client in the fraudulent hiding of assets.

Timing is crucial. There is no one particular planning tool that will aid every client in protecting the assets. Every situation is unique. The main lesson, however, applies to everyone: planning must be done in advance of litigation. Protecting or transferring assets after there are claims, may expose the client and the attorney to criminal and civil liability.

What one can be sued for: In general, one can never be sure what one will be sued for. If a person is a sole proprietor, then he can be sued for his business. If there is a corporation or an LLC, the corporate veil can be pierced. If one is a general partner, the partnership’s debts may cause personal issues. And generally, there is a “deep pocket syndrome” in America, where lawyers often base their analysis on whether the opposing party can pay a judgment.

Tools of asset protection: Gifting, joint ownership, insurance, corporations, family limited partnerships, domestic trusts, foreign trusts.

Result of asset protection: The client will divest himself of assets and still retain a degree of control over the property. As a result, if  / when in the future a cause of action accrues, there will be little incentive for the opposing side to sue, because there will be little or no assets to pursue.

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship.

Resident Trust: In general, a Trust is considered a Resident Trust and the Trustee must file New York State income tax, if the Trust was created by a New York State Testator or Grantor. What that means is if the property was being transferred to a Trust from a person who was domiciled in New York State, then the Trust is a Resident Trust and will be taxed according to New York State rules.

Exempt Resident Trust Exemption. New York will not tax the income from the Resident Trust if, during a particular year, it had no New York State domiciled trustees, the entire corpus of the Trust was located outside of New York and all income and gains of the trust were derived from sources outside of the State of New York. Thus, if the Trust has only intangible assets, such as stocks and bonds, and all the Trustees are domiciled outside of New York, the Trust will meet the exemption and will not be taxed based on New York State rules.

New York beneficiaries exemption . Unfortunately, even if the Trust qualifies for an exemption, all distributions from the Trust to New York resident beneficiaries will be taxed by the New York State. This tax can be avoided by either not distributing money from the Trust, or distributing money to other beneficiaries who are not New York residents.

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship.

A book (and soon to be a movie) Empty Mansions tells a story about Huguette Clark, a reclusive heiress to a copper mining fortune. Ms. Clark’s father, W.A. Clark, was the founder of Las Vegas and the copper king. His daughter spent the last 20 years of her life in a hospital, even though she was healthy.

During the last years of her life, she made large gifts to the people who were taking care of her – nurses, doctors, lawyers, accountants, etc. After her death, even though she wrote a Will and made it abundantly clear that she did not want her relatives to inherit any of her money, a long estate battle ensued. A lot of her charitable wishes cannot be carried out now because of the millions of dollars that went to lawyers, the unanticipated money that went to relatives, and the millions that had to be paid to the IRS.

There are many lessons from her (botched) estate planning that any good estate planning attorney will explain to a client:

1. Consider creating a trust and place assets in it during the creator’s life. Trusts are harder to challenge and the information in them is private.

2. Do not leave bequests to your accountant and your attorney in the will.

3. Get an independent doctor’s opinion about the competency of the person making the bequest.

4. Hire a competent accountant and a lawyer who understand the complexities and interplay of estate taxes, basis step up rules and charitable bequests. Estate planning is a very specialized area. A generalist attorney is unlikely to understand all the implications of one’s actions.

The information in this blog was adapted from

http://www.foxbusiness.com/personal-finance/2015/02/19/how-elderly-heiress-lost-her-300-million-fortune/

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship.