This is when incorporating a trust protector into your trust can really give you tremendous peace of mind.  We include a trust protector in nearly every trust we draft (i.e., regardless of whether it’s a living trust or a special needs trust).

The trust protector’s primary job is to keep a careful eye on your successor trustee.  The trust protector is usually given access to the trustee’s books and records.  They can even compel the trustee to provide an accounting or at least a summary of what’s being done with trust assets.  If the successor trustee is mismanaging funds, the trust protector can often terminate the trustee and, if the trust allows it, select a qualified replacement. 

Sometimes, we will even permit the trust protector to make important amendments to the trust.  For example, the trust protector can correct so-called “scrivener’s errors,” adjust the tax provisions of the trust to keep up with changes in the law, convert a general needs trust into a special needs trust (i.e., in case a typically achieving beneficiary becomes disabled), and ensure that any trust that receives retirement account benefits qualifies as a “designated beneficiary” under IRS rules. 

One of our favorite things to do with a trust protector is to involve them in the process of protecting our clients’ estates from ever ending up in the hands of a beneficiary’s creditors or former spouse. 

Of course, incorporating a trust protector is especially important when you have a beneficiary who is a minor or who has special needs.  That’s because a vulnerable beneficiary may not be able to ensure that their trustee is really doing the right thing, but their independent trust protector can.

Consider the following example.

Mary is elderly and would like to make sure that her son Adam, who has special needs, is cared for at home for as long a possible when she is gone. Mary establishes a special needs trust that will hold her home for Adam’s benefit.  She transfers enough money to the trust to make sure that the property is well kept and the bills are paid. Mary’s next closest relative, her niece Martha, does not want to serve as trustee of Adam’s trust because she does not want the added responsibility of managing the home. So Mary names John, a friend of hers who knows Adam and who runs a property management company, as the trustee instead. Although Mary trusts John, she decides to name Martha as a trust protector to review his yearly accounts, to make sure he charges the proper amount for his services, and to ensure that he keeps the property in good shape.

If someone you know needs a trust that actually works when it’s tested (i.e., even years after they pass away), please have them contact my office at 916.273.9040.  I’d be glad to help them make the right decisions about trustees and trust protectors.  It would be my pleasure to design a trust that fits their family and gives them meaningful peace of mind.

Fortunately, there are always other options for trustee, including a licensed professional fiduciary, a bank, or a qualified family member. 

Regardless of who is selected, the trustee must have some essential characteristics.  My colleague in the Academy of Special Needs Planners, Linda S. Durston, Ph.D., J.D., recently summed up these qualifications nicely:

Every trustee should have common sense and good business sense; be honest; be organized; know when to ask for the assistance of a certified financial planner (CFP), a certified public accountant (CPA) or an attorney; be physically and mentally capable of dealing with the legal, tax, investment, accounting and interpersonal issues that arise in the course of administration, and have time to handle those tasks.  A special needs trustee will also need to understand the beneficiary’s special needs, government benefit programs and the effects of distributions on public benefits eligibility.

There are some circusmtances where a trustee must have additional qualifications.  For example, here in Sacramento County (as well as in many other counties in California), we often must establish a Special Needs Trust by petitioning the Probate Court.  This typically happens after a litigation recovery by an incapacitated or a minor plaintiff, or after an inheritance by someone whose parents failed to incorporate special needs planning with their will or living trust.  In those instances, whoever serves as trustee must be bonded (i.e., for the amount held in trust, plus interest, plus the costs of recovering on the bond).  The trustee must also be prepared to account and report regularly to the court for all activities and expenditures on behalf of the trust.  These bonding/reporting requirements can be onerous, and not everyone has the personal credit rating or the experience to do what’s necessary to satisfy the court. 

So who is the best trustee of a Special Needs Trust?  If the trust is “court-established,” we’ll almost always have a professional trustee regardless of the dollar amount involved.  But when the trust can be established by someone other than a court, we sometimes consider a qualified family member.  This is especially true in smaller cases (i.e., those cases where the amount in trust is less than $100,000) or when it’s a parent trustee. 

Persons with disabilities should know that they will still fully benefit from their trust funds even though they cannot serve as trustee and may not have a qualified family member to help.  Professional trustees are used to hearing from beneficiaries.  Plus, by investing carefully, a professional trustee may more than pay for themselves. 

Serving as trustee of a Special Needs Trust is a tremendous responsibility.  If you are considering a Special Needs Trust in California, please contact our office for assistance.  We’ll help you make the right choices.

Not so fast.

In the absence of the death tax this year, there is a substitute tax system that is likely to collect more money from more people upon their deaths.  This one-year system will seriously impact the way they planned for their property to pass to their loved ones.  To make things even more complicated, most living trusts aren’t equipped to deal with the 2010 rules.

Anyone who didn’t plan with an attorney who prepared for this year’s issues should have their trust reviewed and quite possibly restated.

How Did We Get Here?

The 2010 rules were actually enacted in 2001.  That’s when President Bush signed a law that gradually reduced the maximum rate of the federal estate tax from 55% to 45%.  The law also gradually increased the amount of property that a person could pass free of federal estate tax from $675,000 per person in 2001 to $3.5 million per person in 2009.  This meant that, with planning, a married couple could pass up to $7 million free of federal estate tax if they both died in 2009.  This was a very good result.

But the fight against the death tax didn’t just decrease rates and increase the exemption over time.  It actually eliminated the tax entirely, but only for 2010.  To compensate for this one-year, death-tax vacation, Congress replaced the estate tax with a capital gains tax.

Here’s how it works.  When a person died before this year, all their assets would be valued at their fair market value as of the date of death.  This meant that when a surviving spouse or other heirs sold assets that had increased in value during the original owner’s life, they would not have to pay capital gains tax on any of that growth.  This tax-free revaluation on death is commonly referred to as a “step-up in basis.”  For many heirs this meant huge tax savings.

But in 2010 property that passes at death does not automatically receive this step-up in basis.  Instead, there are some credits that, if planned for correctly, will “step-up” some of the property.  Assets that do not take advantage of these credits will be subject to tax on the increase in value from the date the property was first acquired.  That could mean tens of thousands of dollars of tax liability!

How Does This Affect You Or Your Loved Ones?

You should know that the 2010 rules can affect you in two major ways.  First, if you are married, you must make sure that your property will be left according to your desires (i.e., not as dictated by Congress).  For more than 50 years it has been common to use a written mathematical formula to divide the assets of a married couple when the first spouse dies to maximize estate tax savings.  We call this “A-B” planning.  Formulas have also been used to provide funds for charitable causes and to benefit family and friends.  Almost all of these formulas depend on having an estate tax.  Now, in 2010 when there is no estate tax, the formulas will not work.  If your spouse is not your sole beneficiary (for example, if you have children from a prior marriage), the existing formula could cause your spouse to be disinherited (or at least receive less than you intended).  It’s that serious.

Second, as noted above, your trust must be designed correctly if it’s going to take advantage of certain tax credits availbable only in 2010.  In particular, the credits don’t apply for any children who inherit this year in so-called “lifetime trusts.”  The rules are also extremely tricky for any surviving spouse who wants to take full advantage of the credits.  If your trust doesn’t comply with the rules, Uncle Sam ends up the winner when your spouse or other heirs go to sell trust property (i.e., even decades later).

What Should You Do?

If you haven’t already done so, we encourage you to meet with us as soon as possible to review your estate plan and make any changes that are necessary for this law.  We need to ensure that your property is positioned to enjoy as much protection as possible.  It’s time to think differently to ensure that your wishes are fulfilled no matter what Congress throws at us this year.  Your plan should also be ready to deal with the return of the estate tax in 2011, which, for the time being, is scheduled at a 55% rate on every dollar over $1 million in your estate (including life insurance and retirement accounts).

For more information about 2010’s crazy rules, consider reading “Estate-Tax Repeal Means Some Spouses Are Left Out,” The Wall Street Journal (January 2, 2010) and “A Bizarre Year for the Estate Tax Will Require Extra Planning,” The New York Times (January 8, 2010).

That’s because, unlike a simple will, your living trust can protect you if you become too ill to manage your financial affairs. It can also save your loved ones from the expensive hassle of a probate after you die. If you’re married, your trust could be the key to making sure your spouse and your children don’t have to pay unnecessary taxes. Plus, the right kind of living trust can even protect the inheritance you leave to your loved ones from lawsuits, divorces, and other predators.

Unfortunately, many living trusts fail when they are tested by death or disability.

Primarily, this is because the public has been badly misled into thinking that one trust is just like another and that one lawyer is just like another.

Nothing could be further from the truth.

We know a Lexus is built better than a Yugo. It’s the same with a living trust. One that really protects your family is designed better than the one you could get from an online service, software, or your average, high-volume, document-selling lawyer.

Plus, just like that Lexus, your living trust must be properly operated and maintained for it to work when it’s needed. Think about it… can you buy a car, park it in your garage for 10 years, and then expect it to work correctly in an emergency? Of course not!

In the same way, a trust must be “serviced” so it stays up-to-date with the latest laws and planning techniques. The many rules and regulations that affect a living trust have changed dramatically in the last 10 years. Most trusts haven’t kept up.

And don’t forget that your family circumstances — financial and otherwise — are likely to change over time. Your trust must reflect life as it really is at the time you’ve got to rely on it.

Also, just like a car, your trust must be properly “fueled” to run. In other words, you’ve got to have the right assets properly titled in the name of your trust. Otherwise, the trust isn’t worth the paper on which it’s printed.

Fortunately, our clients’ estate plans do work when they’re needed. That’s because we customize each plan with the particular client’s circumstances in mind, keep in touch with them long after their documents are signed, don’t charge when they call us with questions about their living trusts, and have a system for making sure the right assets (the “fuel”) get in their trusts.

Our clients depend on us to be there for their loved ones when they get sick or pass away. That’s real peace of mind for them, and it’s great joy for us.

Having a living trust that actually protects you and the ones you love is the whole point. If it doesn’t do the job well, or if it’s a huge hassle, what message does that communicate to your loved ones? What does it say about your lawyer?

If you’d like to establish a living trust that really protects you and those you love, or if you’d like us to review an old trust to see if it needs updating, please contact us at 916.273.9040 or click here to see if we’d be a good fit for your needs. You and your family are worth doing it right!

Second, your best planning option will likely be a revocable living trust that takes care of you and your dependents while you are alive and then directs the share for your child with disabilities into their own special needs trust if you pass away. A correctly drafted special needs trust will not only preserve your child’s access to benefits, it will also ensure those needs that aren’t covered by government assistance are covered. If appropriate, your child will travel, experience cultural events, play sports, have better transportation, receive better care, and even have cable TV. Who can live without cable TV?

Third, don’t think that leaving everything to your typically achieving children will solve everything for you. Nothing causes more tension and destroys family relationships faster than forcing one set of children to take care of a sibling, especially one that requires particular care. A special needs trust can provide the structure for your whole family to live in harmony after you are gone. Plus, if you leave funds to your typical achievers expecting them to care for your other child, know they could lose that money in a divorce or lawsuit or to creditors. If they die before your child with special needs does, the money you leave them may go to their beneficiaries and be unavailable for the person with special needs.

Fourth, remember that other family members could also end up leaving money to your child with special needs. For example, if you died before your parents, any money they were planning to leave you could end up going under their plan (or by law) to your child. That’s likely to be just as risky as if you left the money to your children “free of trust.” In other words, make sure your parents (and other family members) know they should name your child’s special needs trust as the beneficiary and never give anything outright to the child.

Fifth, and this is where it can get pretty complicated, make sure that the special needs trust is designed to receive any income from qualified retirement accounts (e.g., IRAs and 401(k)s) and any proceeds from life insurance. There are some pretty hairy tax issues to work through, especially with respect to those IRAs and company retirement plans.

We do special needs planning in our office. Our goal is to make it as easy as possible for our clients, knowing that they (like any parent) have very busy lives. If you know someone with a child who has special needs, we would love to help. In addition to doing their vital estate planning, we can connect them to some great financial planners who specialize in ensuring that beneficiaries with special needs have what they need to thrive.

Many thanks to Jill Swett for helping me to raise awareness about this kind of planning, which is absolutely critical for parents of children with special needs. I am so grateful for such a wonderful client and for the opportunity to serve her family for years to come.

If you’d like to hear the audio, please Click Here To Listen. And, especially, if you know someone who has a beneficiary with special needs, please point them to this blog post or to our office at 916-273-9040 / wyattlegal.com.