All posts by Darlene Lopez

Capacity to Do What?

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”Mental capacity required to end one’s marriage is similar to the mental capacity required to begin the marriage; the threshold is low”.  In re Marriage of Greenway (2013) 217 Cal App 4th 628

 

Mom is not doing well and children are afraid that Step-Dad will take over Mom’s estate.  Mom has already made provisions for Step-Dad and the children don’t like it. The children are the successor trustees under the father’s irrevocable trust.  The trust says that Mom will be considered disabled if two doctors write an opinion that Mom cannot manage her financial affairs.  The trust also says that so long as Mom can remove and appoint trustees and that she has the right to amend the trust regarding her property; but it does not say anything about the mental capacity required to do any of that.  The children are talking to two doctors about getting an opinion that Mom cannot manage her financial affairs.

 

In the real world there are complex matters that require strong capacity and there are simple matters that require less capacity to make the appropriate decisions.  One of the major failings of trusts is that they seem to treat all situations with the same standard of capacity, i.e. you either can or cannot manage your financial affairs.

At outset the financial affair standard seems reasonable because after all isn’t a trust about managing and distributing property?  Maybe so, until Mom finds out that the children were successful in obtaining the doctors opinion and she no longer controls her property.  OR the children find out that one week before Mom passed away she amended her trust to leave her entire estate to her friend (maybe they deserved it).

Here are three gradients of capacity to consider:

  1. Act as Trustee – if you can’t manage your financial affairs then yes, you shouldn’t be a Trustee because that is what a Trustee does.
  2. Power to Appoint & Remove Trustees – even if you can’t manage your financial affairs you may still have the capacity to say who can.  So why would you have the same standard of capacity for both acting as Trustee and appointing or removing a Trustee?  Mom might not be able to serve as Trustee, but even with a lower mental capacity (but not incompetent), she could remove her rebellious children as Trustee and appoint different Trustees thwarting their effort to take over the trust.
  3. Amending or Revoking a Trust – California law has a capacity sliding scale depending upon the complexity of a trust amendment.  Some amendments are extremely complex and others are pretty simple. Simple amendments require only the capacity to execute a will.  Other complex amendments require greater capacity.  So why would you have the same standard of capacity for signing a simple amendment as acting as Trustee?  There may be complex emotions involved but changing trust distributions from say 50/50 to 60/40 is a simple amendment.

I have noticed in two recent cases that the trust became irrevocable when 2 doctors signed a statement that Mom was unable to manage her financial affairs.  This standard is a choice not a requirement; and so is allowing amendments after there has been a determination that Mom cannot manage her financial affairs.  All of these decisions are subject to the unpredictability of future human affairs.

  1. Amending or Revoking a Will – In a nutshell the capacity to execute a will requires: 1) that you know who your family is, 2) that you understand generally the nature and extent of your property, and 3) that you understand how the document you are going to sign changes the disposition of your estate, and 4) you are not delusional or hallucinating in a way that significantly impairs the decision to change the will.

 

Even if it’s impossible to predict every future situation we know one thing.  Mom and Dad worked hard, took risks and made sacrifices to build the estate.  So doesn’t it make sense that the trust is slanted in favor of Mom and Dad?

IRA Charitable Rollover Legislation is Permanent for 2016 and beyond!

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On December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes Act of 2015. Known as the IRA charitable rollover, this law has been reinstated for all of 2015 and will remain in effect for 2016 and beyond.

Who Qualifies?
If you are 70 1/2 or older, you are once again eligible to transfer any amount up to $100,000 from your IRA directly to a qualified charity.

Act now to take advantage of this great opportunity. An IRA charitable rollover gift can satisfy all or part of your IRA distribution requirement.

Here’s How it Works:
You must be 70 1/2 or older, on the day the gift is made.

  1. You must transfer any amount up to $100,000 directly from your IRA to one or more qualified charities. This opportunity only applies to IRAs and not to other types of retirement plans.
  2. The transfer will not generate taxable income or a tax deduction so you can still benefit, even if you do not itemize your tax deductions.
  3. No goods or services can be received by the donor in return for the rollover gift to qualify for tax-free treatment.

A Trust is Not Totally Private

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online-privacy-surveillance                                                                                                                                                 Advertisements have always touted privacy as a reason to establish a living trust.  And a trust is private when compared to a probate proceeding where there are public filings with the court that anyone can view including creditors and the IRS.  There are usually no corresponding public filings with the court for a trust unless there are problems with the trust.
                                                                                                                                                                Even for a trust with no problems persons named in the trust and relatives (including disinherited persons) will be able to obtain a copy of the trust in California and most other states. Likewise, beneficiaries of the trust will be able to find out the trust activities including all assets, income and expenses.  In fact, in California at least, beneficiaries are able to obtain an accounting back to the time a trustee has acted even retroactive to a period where the grantor was living.
                                                                                                                                                                If there is trust litigation then all trust information including the drafting attorney’s notes and testimony will be discovered.  In fact, in a highly contested trust matter you can expect that every little detail of the trust activity and assets will be revealed from the actual trust signing to amendments to the movement of assets.  Litigants are able to subpoena all of the information from the drafting attorney’s files, grantor’s records, trustee’s records, bank statements, checks, and brokerage records etc. All players touching the trust will have their deposition taken. When trust cases go to mediation, arbitration, or trial the judge expects that all of this information will be presented in an organized, cross referenced, and coherent manner. Anything filed with the court becomes available for public viewing and as time goes on more and more of the court files are becoming available on line.  Courts are very slow to “seal” the file.
                                                                                                                                                               So is a trust more private than a will and its corresponding probate proceeding?  Yes.  But can no one get information about the trust and its activities? No, there is always someone that can get trust information and sometimes it is exactly the person that you don’t want to see the information.

How Trust Expenses and Taxes are Paid

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Mom left a beautiful diamond ring to her daughter Jane. It was worth $75,000.00.  Jane was so happy to receive it and proudly showed it to all of her friends.  Then one day the Trustee of her mother’s trust called her and told her that she owed $37,500.00 for her share of the trust expenses.
                                                                                                                                                                   In your trust you can direct whether a gift will be subject to expenses or not.  So in this case, Mom could have directed that Jane would get the ring free of expenses or taxes and she would have received the ring without being responsible for contributing to those expenses of administration.  The expenses don’t go away they just get delegated elsewhere.
                                                                                                                                                                           Jack received a distribution of $50,000.00 from his Dad’s annuity.  He was happy and he took a vacation and spent all of the money.  Later the Trustee called him and said that his share of the expenses and taxes was $10,000.00 but Jack said that he didn’t have the money.  The Trustee then told Jack’s sister that she had to pay the $10,000.00 that Jack owed since he didn’t have it.
                                                                                                                                                                   Because the annuity was paid outside of the trust the Trustee had no control over what Jack did with it.  If the Trustee had control of the funds he would have deducted Jack’s share of expenses first and given him the rest.
                                                                                                                                                                         All trusts and estates will have expenses.  Some may owe taxes.  Some may get sued.  The possibilities are endless.  California law provides that all beneficiaries pay the expenses proportionately and according to what they receive.  Other states may provide that expenses are paid out the residuary.  However, all states provide that you can elect how the expenses/taxes are to be divided in your will or trust.

How to Stiff Your Kids (Unintentionally)

Jack and Jill were in a second marriage.  Each has 2 children from a previous marriage.  They don’t have any joint children.

Trusts are not a panacea. They take thought and forward thinking.  Joint trusts are typical in community property states such as California.  Many joint trusts provide for an equal distribution of assets even when there are children from different marriages.  When one spouse dies, many joint trusts divide up into revocable and irrevocable trusts.

Suppose Mary & Joe have a living trust.  Joe dies.  Mary’s property goes into a revocable trust and she can do whatever she wants.  Joe’s property goes into Joe’s irrevocable trust which says that his property will be divided equally among his and Mary’s children.

Then Mary decides that she is going to change her revocable trust to leave it all to her kids.  The result is that Mary’s kids will get all of Mary’s property and ½ of Joe’s property; while Joe’s kids get ½ of Joe’s property and none of Mary’s property.

It happens…