Estate Planning Tips and Tricks
The primary goal of estate planning is to see that your assets will be managed and distributed according to your desires during your life and after your death. There are a number of estate-planning tools, but the most common tools are the last will and testament (“will”) and the revocable trust. The main difference between a will and a trust is that a will requires court involvement through probate proceedings to be effective, and a will alone does virtually nothing to provide for the management of assets during life. In contrast, a trust avoids court proceedings, including guardianship proceedings during life and probate proceedings after death, and can provide for the management and disposition of one’s assets during life if one becomes incompetent. Irrevocable trusts can also provide assets protections and tax reduction.
II. PURPOSE AND INTENT: Trusts are established for a number of reasons, which might include one or more of the following:
A. Avoiding Probate:
1. Probate. “Probate” refers to the court proceeding required to transfer the assets of a decedent which do not pass directly by law or contract. To avoid probate, you should use non-probate forms of ownership which allow your assets to pass to beneficiaries by operation of law or under a contract.
a) By operation of law. This category includes assets held by two or more persons in joint tenancy (which includes a “right of survivorship”) and property held by married couples as community property with a right of survivorship, as well as accounts and securities held with a beneficiary designation, such as “in trust for” or “payable on death to.”
b) Under the terms of a contract. This includes various contracts that permit the designation of one or more beneficiaries, such as life insurance, retirement accounts (including IRAs, Keogh accounts, and qualified plan benefits), other retirement benefits, annuities, and some buy-sell agreements related to business entities.
2. Tools. A will does NOT alleviate the need for probate. A will may clarify and simplify probate, but it is of very limited value until it is probated. Probate proceedings vary from state to state, but similar rules apply in most states. A revocable trust can replace a will with respect to the postmortem distribution of the trust’s assets after the settlor’s death. Assets held under a properly drafted revocable trust are not subject to administration in probate upon the death of a settlor or trustee.
3. Importance of Ownership Designations. An effective estate plan requires that ownership and beneficiary-designation documents are consistent with the plan. Far too often, a person’s ownership and beneficiary-designation documents are inconsistent with his or her will or trust and with his or her true objectives. For example, you cannot own a home in joint tenancy with one person (which passes title at death by operation of law) and leave that same home to someone else in your will (which only affects property subject to probate). Similarly, you cannot designate one person as a beneficiary under a life insurance policy (which passes the proceeds by contract) and expect that person to share with siblings or to use the insurance proceeds to pay off debts or pay funeral expenses.
B. Avoiding Guardianship Proceedings: During the settlor’s lifetime, a revocable trust can provide that the successor trustee will manage the assets and provide for the care of the settlor when the settlor becomes incapacitated or incompetent. After the settlor’s death, the trustee can be directed to retain funds for beneficiaries who are minors or incompetent. This can make the judicial appointment of a guardian of the estate (conservator) unnecessary.
C. Asset Consolidation: Trusts can be used as a device to consolidate all types of assets. A trust can be the owner of assets and can be designated as the beneficiary of death-time transfers, including distributions under IRA accounts, wills, life insurance policies, and so forth. The trust can specifically or generally direct how these assets should be allocated and distributed.
D. Property Management: A non-settlor trustee can manage the trust assets when the settlor cannot, or does not want to. The selection of a trustee or successor trustee is very important and the trustee chosen must have the skills necessary to administer the trust assets.
1. The choice of who will serve as the successor trustee is usually between a family member or a corporate fiduciary. There are advantages and disadvantages that the Settlor should consider before making a decision.
2. An individual trustee may lack the management skills necessary to administer the estate, but may have a better knowledge of the Settlor’s desires and expectations; on the other hand, the individual trustee’s personal relationship with the beneficiaries may make it difficult to discharge his duties impartially. The choice of who will serve as the successor trustee should be carefully considered by any person desiring to create a trust.
E. Transfer-Tax Savings: Trusts can be drafted to reduce transfer taxes, including gift, estate and generation-skipping taxes.
F. Privacy: Assets that are not subject to probate administration will not be listed or recorded in the inventory or final distribution, both of which are public records.
G. Asset Protection: Nevada’s spendthrift trust laws permit a trust to be exempt from the claims of the creditors of a trust beneficiary, even if the beneficiary is the trust’s settlor. The assets in a discretionary spendthrift trust can also be available to supplement public-assistance benefits, such as Medicaid or SSI, without disqualifying a beneficiary from receiving such public-assistance benefits.
III. TRUST OVERVIEW
A. Parties to a Trust
1. Settlor – the settlor (sometimes called a grantor or trustor) is the person who creates the trust and establishes its terms.
2. Trustee – the person, bank, or trust company who has been entrusted with the trust assets and holds legal title to them. The trustee is the person that administers the trust.
3. Beneficiary – a person or entity (e.g., charity) for whose benefit the trust assets are being held by the trustee. Most trusts have multiple beneficiaries, including one or more lifetime beneficiaries, as well as one or more remainder beneficiaries.
4. Multiple parties – There can be one or more settlors, trustees, and/or beneficiaries to a Trust, and the same person can usually be a settlor, a trustee, and a beneficiary of the same Trust.
B. Creation. No particular or specific words are required to create a trust; the term “trust” is not required. Required Elements:
1. Intent to create a trust;
2. Identifiable beneficiary(s); and
3. Assets – property transferred to the trust.
C. Trustee Appointment. A trustee has authority to act as trustee as soon as they have complied with the terms of the document regarding their appointment. Because different trusts have different requirements, it is impossible to outline all specific requirements in this memo.
1. As a general rule however, to become trustee, a person will:
a) Sign a “Certificate of Incumbency”1 indicating that they are the incumbent (i.e., acting) trustee and declaring that they are willing to follow the terms of the trust instrument.
b) Attach to the Certificate of Incumbency a copy of: (a) the predecessor’s death certificate; (b) the predecessor’s resignation; or (c) declarations from a physician stating that the predecessor is incapacitated to the point that he or she can no longer act as trustee.
c) Have the certificate of incumbency recorded in the county in which the trust is considered located (often referred to in the documents as the “situs” of the trust) and in each county in which real property owned by the trust is located.
2. A trustee can, if they choose, have their appointment confirmed by the probate court, but normally this formal court proceeding is not necessary. On the other hand, if there is a dispute as to the trustee’s appointment or qualifications, or if challenges by beneficiaries are anticipated, court confirmation and a trust administration proceeding in the probate court may be appropriate.
IV. BASIC TRUST STRUCTURE: The goal of a trust is to provide the trustee with clear instructions relating to the settlor’s intent with respect to the management of trust assets and distributions from the income and principal of the trust. One of the pitfalls in trust drafting is an odd structure that makes it hard for the trustee to find the instructions the trustee is looking for. Here is a suggested outline for all trusts:
A. Identification. The first section of the trust should clearly identify the key parties, including the settlor, the trustee, the beneficiaries, and alternate trustees and beneficiaries. Some trusts will also designate investment advisors and trust protectors.
B. Intent. The second section of the trust should state the intent of the trust and direct the trustee and any court having jurisdiction over the trust to construe the trust in a manner consistent with that intent.
C. Distributions. The trust will usually contain directives regarding distributions, which can be mandatory or discretionary or some combination of both. Many trusts will contain several sections relating to distributions. For example, a revocable trust established by a couple might contain one section regarding distributions while both settlors are living, another section regarding distributions after one settlor has died, and another section regarding distributions after both settlors are deceased. Some trusts will have yet another section where distributions shift from discretionary to mandatory based on a triggering event, such as a beneficiary’s reaching a certain age or graduating from college.
D. Trust Administration. One section of the trust should be devoted to the details of trust administration. Among other things, the trust should clearly state the procedure for the succession of trustees and other advisors, the ability to modify the document and who possesses that ability, and the basic rules regarding the trustee’s duties and beneficiaries’ rights, particularly with respect to accountings. The trustee’s powers and the powers of other advisors should also be identified. To avoid ambiguity and to eliminate unnecessary repetition, key terms should be defined.
V. FUNDAMENTAL ISSUES
A. Trust Funding: A trust requires assets, and the most common reason for a trust to fail is for lack of assets. A trust affects only those assets transferred to the trust or its trustee. While selecting the proper estate planning tools is important, it is just as important to make sure those tools are properly used. The transfer of assets to a trust is referred to as “funding” the entity, and that is just as important as the formation of the entity itself.
1. Real Property: Real property must be transferred by a deed or other conveyance recognized under the laws of the state in which the property is located. While signing a deed is essential, recording the deed is not usually required if the deed is to the trustee of a revocable Trust, but competent legal counsel should be consulted.
2. Personal Property: Personal property is easily transferred to a trustee by a written assignment. It is particularly important that “titled” or “documented” property, such as vehicles, stocks, and credit union accounts, be transferred in a way that will be recognized under state law.
3. Nominees: If, for purposes of convenience, a trustee desires to have title to Trust property registered in the name of a nominee, a holding agreement can be executed if authorized under the Trust document. The settlor of a revocable Trust may wish to be a nominee to allow Trusts to remain in his own name. The nominee could also be a specially created partnership for the purpose of achieving some degree of anonymity or of simplifying transfers of Trust property.
4. Pour-Over Will: A pour-over Will is recommended to capture any assets that may inadvertently remain outside the trust.
B. Trust Accountings: The duty of a trustee to account depends primarily on the terms of the trust instrument.
1. Nevada law permits beneficiaries to demand an accounting. However, the technical language is a bit troublesome because some courts may (and actually have) interpreted the statutes to restrict certain beneficiary’s from demanding an accounting.
2. A well-drafted trust can address the trustee’s duty to account, and should specifically declare when and to whom accountings are required.
3. Completely removing the trustee’s duty to account is an invitation for abuse, embezzlement, and imprudence.
C. Dispositive Provisions: It is important that the trustee know how distributions from the trust are to be made. To accomplish this, the dispositive provisions must be clearly drafted without ambiguity. Questions that must be addressed in drafting the dispositive provisions include:
1. Whether distributions are mandatory or discretionary.
2. Whether distributions are continuing (and for how long) or lump sum.
3. Whether distributions are to be paid from trust’s income or to be paid from the trust’s principal.
4. Which distributions are triggered by an event, which distributions may only apply if certain conditions are met, and which distributions may be negated under specified circumstances.
D. Administrative Provisions: A well-written trust will include guidelines for the trustee that will help avoid ambiguities and disputes.
1. Generally: Much of a trust will often consist of “boilerplate” provisions. Certain basic provisions should not be overlooked. The technical provisions can usually be classified into two categories: fiduciary powers and administrative provisions.
2. Trustee’s Powers: Trustees should be given the powers of investment and sale and powers related to the disposition of the trust’s assets. The trustee should have powers concerning the distribution of income and principal to the beneficiaries as well as the power to employ agents or attorneys. The simplest way to give very broad powers to the trustee is to incorporate by reference statutory powers
3. Title to Trust Assets: A revocable living trust should permit title to be held in various ways. When two settlors are serving as co-trustees, they should be permitted to open accounts where only one signature is required on checks, withdrawals, and other transfer documents.
4. Sales; Investments: A provision might permit flexibility with respect to sales, purchases, and investments. Most stock brokers can provide the language they might require in order to issue stock to the trustee.
5. Loans: The trustee should usually be permitted to borrow money and encumber trust property. If the trustee opens a securities account or buys stock on margin, most stock brokers require language specifically permitting such transactions.
6. Separate Trusts: Under current income tax law, it is sometimes advantageous to establish a separate trust for each beneficiary, rather than administer separate shares under a single trust. This can be very important in situations where the trust owns stock in a Subchapter S corporation.
7. Release of Trustee’s Powers: Certain powers of a trustee might invalidate tax-saving provisions of a trust, and a provision should he included which permits the trustee to release the power and provides for someone else to exercise that power.
8. Distribution to Young Beneficiaries Many trusts provide for young beneficiaries, either as primary or contingent beneficiaries, and to avoid guardianship proceedings for trust distributions, the trustee might be authorized to retain such distributions until a beneficiary attains a particular age.
9. Creditors: A trustee should be authorized (in some cases required) to pay the claims against the settlor or the settlor’s estate. In order to satisfy the settlor’s creditors, the trust might include language authorizing the Trustee to guarantee the debt of the settlor.
10. Tax Planning: If estate-tax reduction is a prime objective, consider including provisions which authorize or direct the trustee to help save taxes for the trust or its beneficiaries. If a tax election will favor one beneficiary over another, the trust might give the trustee direction as to how to make the decision.
11. Trustees: The trust should not only identify successor trustees, but it should clearly outline when and how a successor trustee takes over the trust. For example, the trust may require the successor trustee to take over the administration of the trust assets in the event of the Settlor’s incapacity. The trust should explain how incapacity is determined, (usually by the written statements of one or two qualified physicians.)
12. Spendthrift Trusts: All trusts should include a spendthrift provision in order to prevent frustration of the trust’s purposes that can occur when a beneficiary’s interest can be used as collateral on a loan, attached by a creditor, or otherwise anticipated.
13. Revocation and Amendment: The provisions relating to the revocation and amendment of the trust should be unambiguous. In cases where a credit-shelter trust is used, the surviving spouse must not be given the power to revoke or amend the credit-shelter trust.
14. No-Contest Clause: Most people want to avoid disputes over the settlement of their estates, and a trust should contain a no-contest provision to discourage trust-related litigation. A no-contest clause can be drafted to reduce or eliminate the share of a “contesting beneficiary”.
a) A frequent problem with no-contest clauses is that courts will often find that a beneficiary has not violated the provision if such beneficiary’s negative conduct is not specifically prohibited. Therefore, a no-contest should be as specific as possible.
b) Another problem is that the word “contest” implies a challenge of the trust’s validity, and other negative behavior that falls short of a formal “contest” may be disregarded by the court. Perhaps the courts might be more willing to reduce or eliminate a distribution to a beneficiary if the distribution is conditioned on the beneficiary’s not engaging in any negative conduct, and we recommend making a detailed list of “prohibited conduct” that can include a legal contest, but would also include harassing the trustee, asserting claims to trust assets, and obstructing the trustee’s efforts to do his or her job.
15. Delay of Distribution. A trust might give the trustee the power to defer distributions when it is in the best interest of the beneficiary, such as when there are substance-abuse problems and claims from lawsuits, divorces, tax-enforcement proceedings, etc.
VI. DRAFTING AROUND QUIRKS IN NEVADA LAW
A. Statutory Fiduciary Powers: While it is common practice to enumerate a number of powers, Nevada practitioners frequently include a provision that gives the trustee statutory fiduciary powers that are not part of the trust unless specifically incorporated into the trust by reference. “In addition to other powers granted herein and by law, the Trustee shall have all of the powers set forth in Sections 163.265 through 163.410 of the Nevada Revised Statutes which are incorporated herein by this reference.” While such powers may duplicate powers already given in the trust, many title companies, banks, and other institutions frequently ask if the statutory powers have been incorporated into the trust, and it is nice to be able to say that they have. These powers are inherent in trusts created on October 1, 2009 or later.
B. Rule against Perpetuities: Nevada law now permits trusts to endure up to 365 years, but the 21-year rule applies unless a longer period is expressly elected. The applicable statutes are found at NRS 111.103 et seq.
C. HIPAA: Our local probate court has recently seen an increased number of cases involving the release of private medical information because of the impact of the federal Health Insurance Portability and Accountability Act (“HIPAA”). The problem arises when a successor trustee needs to discuss with health care providers the mental and/or physical capacity of the Trustee or of each Settlor. Consider including a provision that allows the Trustee authority to receive privileged health information.
D. Vacancy in the Office of Trustee: Nevada courts are often burdened with decisions relating to the appointment of a trustee when the documents are silent as to the situation in which there is no longer any acting trustee nor a successor trustee. Consider including language in the Trust that specifies what is to happen when this situation occurs. Options may include authorizing the Settlor to name a trustee, authorizing the resigning Trustee to name the successor Trustee, and/or authorizing a majority of the beneficiaries to name a successor Trustee.
E. Formal Acceptance of Trusteeship: Nevada law does not specify the process of having a successor Trustee assume the trusteeship. A “certificate of incumbency” can serve to provide written notice to financial institutions, title companies, and others that there has been a change in fiduciary. The “Certificate of Incumbency” may be titled something else, such as “Affidavit of Successor Trustee.”
1. The certificate of incumbency should contain a statement setting forth the circumstances and Trust provisions that entitle the Trustee to act and a declaration that the Trustee agrees to be bound by the terms of Trust.
2. One of the following should be attached to the Certificate of Incumbency:
a) A certified copy of the death certificate of the predecessor Trustee; or
b) The written resignation of the predecessor Trustee; or
c) The written declaration of the person who has the power to remove the Trustee, stating the change being made with a reference to the specific trust provision that authorizes or requires the change of Trustee; or
d) A certificate in writing by two licensed medical doctors or a certified copy of a Court order declaring that the predecessor Trustee has become incapacitated.
F. Guardian for Testator: Nevada law allows a guardian to be nominated in any document, but the court cannot waive bond for a guardian unless the nomination is in the Will.
G. Separate Memorandum: Nevada law permits the Testator to make a separate list of tangible personal property to be distributed at the Testator’s death, but when there is a trust, it makes sense to omit it from the pour-over Will and to provide for such distributions in the trust.
NOTE: This memo provides general information only and does not contain legal, accounting, or tax advice. For brevity, this memo is oversimplified and should not be relied on for any particular situation.
- In some states, this is referred to as an “Affidavit of Successor Trustee”, but the function and purpose are the same.
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