How to Series TRUSTS Telephone seminar:

Transcription

1 Missouri Bar How to Series TRUSTS Telephone seminar: M. Daniel Brown, J.D.- Moderator The Law Offices of Dan Brown, P.C. Debra K. Schuster, MHA, J.D. Debra K. Schuster & Associates E. Thad Taylor, J.D. Midwest Elder Law Firm

2 Why Would a Client Want a Trust? Avoidance of Probate Provides single repository for titling of assets Provides continuum of use During Grantor lifetime: While capable of handling own assets During incapacity After Grantor death Provides flexible, individualized manner of distribution of assets Over period of time, rather than outright, immediately at time of Grantor death For specific purposes

3 Why a Trust cont d Protective features: Against creditors Spendthrifts Beneficiaries with substance abuse, gambling, other lifestyle issues Divorce Privacy To provide for disabled or elderly beneficiaries Tax advantages (depending on type of trust) Blended Families

4 Requirements to Create a Trust Governing law - Missouri Uniform Trust Code (MUTC), to , RSMo (eff. 1/1/2005) Mo. Rev. Stat : 1) the settlor has capacity to create a trust; (2) the settlor indicates an intention to create the trust; (3) the trust has a definite beneficiary or is: (a) a charitable trust; (b) a trust for the care of an animal, as provided in section ; or (c) a trust for a non-charitable purpose, as provided in section ; (4) the trustee has duties to perform; and (5) the same person is not the sole trustee and sole beneficiary.

5 What is a Trust? Fiduciary relationship regarding property Between: Trustee holder of property titled in the trust (holds legal title) Beneficiary person for whom property is held (holds beneficial title) Fiduciary Standard Prudent Investor Act, Mo. Rev. Stat A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.

6 Formal Requirements Grantor (also referred to as Settlor, Trustor) person who creates the trust and sets forth the terms of the trust. Beneficiary Person(s), entity or animal that will immediately or eventually receive income and/or principal from or actual trust assets (i.e., real property) or the benefit of same. Trustee Person or entity that manages and administers trust assets and is accountable to the grantor and beneficiary/ies Res/Corpus Asset(s) funding the trust (depending upon type of trust, either immediately or upon death of grantor)

7 Duties of Trustee Administration: Good faith, in accordance with its terms and purposes and interests of the beneficiaries Loyalty: A trustee shall administer the trust solely in the interests of the beneficiaries Impartiality: If two or more beneficiaries, impartial administration, giving due regard to the beneficiaries respective interests Prudent administration: A trustee shall administer the trust as a prudent person would, by considering the purposes, terms, distributional requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution

8 Presentation to Client Identify who is the client Discuss client goals probate avoidance, minimization of tax, ensure provision of assets for spouse/partner, specified or disabled beneficiaries; charitable bequests; multi-generational legacy; encourage/discourage certain behavior Will vs. Trust Distribution and use of trust assets Explain interaction and relationship to other estate planning documents Advance Directives, Last Will and Testament Documents needed from client (to identify specific nature, ownership and extent of assets and liabilities)

9 Client presentation cont d Determine unique circumstances Pre-or antenuptial agreements Separation agreements, divorce decrees, on-going/future financial obligations Family owned/closely held businesses; restrictions on sale/use of stock and other assets Mineral, timber, water and other rights Easements/life estates/federal or other governmental land/water use rights Special needs persons Client is beneficiary of trust or other inheritance

10 Client presentation cont d Limitations of trusts Beneficiaries generally have the right to remove appointed trustee (in certain circumstances) Trustee may have differing views on application of judgment and discretion than Grantor; If all appointed trustees die or fail to act, court appointment or at least court involvement to correct lapse/vacancy may be necessary Trustee is held to fiduciary standard can be held liable for allowing assets to deteriorate (real property), waste, failure to monitor investments, taking unusual risks with investments, etc. and that these obligations are to the current and future beneficiaries Different types have different purposes Tax planning, Special needs, Asset protection one size does not fit all

11 Client Choices Purpose of trust Beneficiaries Conditions upon distributions Remote contingent beneficiaries Trustee Someone who is financially secure Fiscally responsible Will consult with professionals as needed Will follow terms of trust

12 Capacity Grantor (and Testator/Testatrix) must have Testamentary capacity to create/amend/revoke Last Will and Testament and Trust: Is free from undue influence, coercion, duress ( free will ) and of sound mind Understands the ordinary affairs of life Can understand the nature and extent of client s property Knows the natural objects of his/her bounty Understands the natural obligations to these individuals Lewis v. McCullough, 413 S.W.2d 499, 505 (Mo. 1967)

13 Types of Trusts Form: Testamentary vs. Living Trusts (Stand-alone document) Revocable vs. Irrevocable Missouri Statutes: Wills ; Trusts (MUTC)

14 Testamentary Trusts Created through a Last Will and Testament, upon the death of the Testator/Testatrix Is funded only upon death and may not come into being depending upon the terms of the document, i.e., if language creating trust is contingent upon certain circumstances Will must be filed with Probate Court in county in which Testator/Testatrix was domiciled or where real property is located Is often used with smaller estates; young families when there are minor children, to be established if a descendent is disabled; for a disabled spouse

15 Revocable Trusts Most common form of trust Created upon execution - hence a Living Trust ; under common law, to be established, funding required Can be amended, revoked at any time (per terms of the trust) Are considered Grantor trusts for tax purposes Grantor s SSN used to identify the trust Simplifies estate planning reduces possibility of titling or beneficiary designation errors Avoids probate Although Missouri law provides for registration of trusts ( RSMo 2014) in the "principal place of administration of a trust" where the trustee's usual place of business where the records pertaining to the trust are kept, registration is not the norm Pour Over Will should be simultaneously created

16 Revocable Trusts cont d Functions sequentially: During Grantor s lifetime While Grantor has capacity, Grantor is usually initial Trustee When Grantor is incapacitated, Successor Trustee then serves Upon Grantor s death If joint trust, may divide into Marital and Non-Marital Trusts for tax purposes Trustee (may be a different trustee than Disability Trustee) follows dispositive provisions regarding distribution of income, principal, handling of other assets titled in trust and administration of any subtrusts (if so provided) Trustee has authority as granted in the trust; If assets are not titled in the trust, there is no Pour-over Will or individual beneficiary designations made on specific assets, probate will be necessary (small or full estate)

17 Types of Revocable Trusts Individual and Joint Marital Trusts Qualified Spousal Trusts ( RSMo 2014) Minors Trusts Sprinkling Legacy/Dynasty Trusts Credit Shelter (A/B tax minimization trusts) Incentive Trusts Charitable Special Use Pet trusts, gun trusts, funeral trusts And many more

18 Special Situations Requiring Sophisticated Planning High value estates requiring extensive tax planning Clients who own substantial real estate Foreign investments/foreign company ownership Non-citizen spouses Family businesses/closely held corporations High value IRA/employee benefit plan ownership Large or many life insurance policies Charitable bequests High risk occupations/creditor protections/protection from judgments (tort actions)

19 Irrevocable Trusts Cannot be (easily) amended or revoked (but see, , 456.4A and 456.4B-411 RSMo 2014) Has distinct tax identification number because is separate taxable entity not Grantor s SSN much higher income tax rate than for an individual Usually used for protective purposes Creditor protection Asset protection Special Needs (public benefit eligibility) Tax (Crummy Trusts)

20 Supplemental (Special) Needs Trusts (SNTs) Applicable Law: 42 U.S.C. 1396p(d)(4)(A), 1396p(d)(4)(B), 1396p(d)(4)(C); RSMo 2014 Beneficiary must be adjudicated as disabled by the Social Security Administration SNTs can be created by Testamentary Trust or Irrevocable (stand-alone) trust. Congressional intent to enable a disabled individual to have funds preserved to enhance his/her quality of life while enabling them to receive public benefits.

21 Special (Supplemental) Needs Trusts Third party Special Needs Trusts ( SNT ) created through the estate plan of a third party (parent, grandparent, etc.); Self-settled Special Needs Trusts (d)(4)(a) trust Created with the assets of the disabled person inheritance, court judgment, settlement, public benefit back awards, certain types of income earned by disabled person; Pooled SNT Contain assets of a disabled individual that are managed by a non-profit; Sole Benefit SNT Funded by an elderly or disabled individual for the sole benefit for a child that is disabled or under 21 years of age.

22 Third Party SNTs Created through the estate plan of a parent or grandparent- any third party can create one for a disabled person Leaves a disabled person s inheritance or other funds to be used for the benefit of a disabled person to the Trustee of a SNT. Must be a discretionary support trust Tidrow v. Director, Missouri State Division of Family Services, 688 S.W.2d 9 (Mo. App. E.D. 1985) Trust must state that the intent is to supplement, not supplant, public assistance benefits for which the disabled beneficiary may be entitled; must have spendthrift provision and contingent beneficiaries must receive residual assets upon death of disabled beneficiary.

23 Self-settled (First Party) SNTs Authorized under OBRA U.S.C. 1396p(d)(4)(A) (referred to as d4a trusts). Is established by a parent, grandparent, legal guardian or a Court with the assets of a disabled individual under the age of 65. Funding mechanisms inheritance, contract/tort/personal injury awards or settlements

24 Features of Self-Settled SNTs Individual must be disabled per the then-current Social Security definition SNT must be created and at least partially funded before the SNT beneficiary attains age 65 Must be for sole benefit of SNT beneficiary; if Trust owns asset used by a family, i.e, a home, family members must pay pro-rata share Beneficiary cannot be trustee or dictate how funds are disbursed or expended; Trustee should calibrate distributions to beneficiary on basis of public benefits received. Must have a Medicaid pay-back provision to pay any remaining trust assets upon the death of the disabled beneficiary equal to the total Medicaid benefits paid on the person s behalf and to any other creditor who is due money for such individual s care, maintenance and support (after payment of Medicaid lien) ( RSMo 2014)

25 SNT considerations For 1 st party SNTs, if established by parents, CANNOT do so as Attorney-in-Fact for disabled child MUST be explicitly identified as parents in document Trustee must be familiar or consult with attorney familiar with the public benefits available to the disabled beneficiary and changes in applicable law, such as the 2010 Early Termination provisions promulgated by the SSA Program Operations Manual System SI (eff. 10/1/10): Requires that if SNT contains an early termination provision (before death of disabled beneficiary), State must be paid for benefits it paid on beneficiary s behalf and then any residual assets must be paid to beneficiary Allowable administrative expense paid from SNT prior to State lien repayment: State and Federal taxes due from trust as a result of early termination; and, Reasonable fees and administrative expenses associated with early termination

26 Pooled SNTs Administered by a non-profit, non-governmental entity Maintain separate accounts for each disabled beneficiary that pools trust accounts to maximize investment potential. Can administer both 1 st and 3 rd party SNTs- Testamentary, RLT and all SNTs can default to transferring administration to pooled trust if trustee cannot serve A Board serves as trustees for each SNT, with discretion to approve or deny requested expenditures; some allow family members to serve as Co-trustees Often require that after death of disabled beneficiary and payment of any Medicaid lien (for 1 st party trusts), a percentage of any remaining assets be given to non-profit for charitable purposes. Midwest Special Needs Trust Foundation, created by Missouri statute (2014); ARCare is pooled SNT in Kansas.

27 Testamentary SNTs Created through Last Will and Testament Is a 3 rd party SNT, so no Medicaid payback is required Can be created as a safety net for any beneficiary that may be or become disabled upon death of Testator/Testatrix Is the only manner in which an SNT for a spouse can be created.

28 SNTs -Administrative Considerations Family and beneficiary may have no experience handling/conceptualizing amount of money funding the trust Requests for goods may be unrealistic given need to preserve assets for lifetime of beneficiary Family may feel entitled to use of funds due to caregiving role and in situations involving 3 rd party tortfeasors, emotional toll of injury and dealing with needs of beneficiary Family/friends previously uninvolved with beneficiary wanting to help and seeking payment for services/goods they can provide Trustee must be firm in not conceding to every request to preserve assets, but be willing to consider beneficiary/family requests for items/services that will enhance beneficiary s quality of life

29 Interpersonal/Interdisciplinary Approach to Administration of SNTs Team approach- Attorney Trustee Beneficiary (if appropriate) Family member Financial investment professional Accountant Care manager/care Coordinator Social Worker/Counselor/Psychologist Multi-disciplinary approach for developing consistent process for decision-making; defusing conflict and removing appearance of subjective decision-making Involve beneficiary in decision- making process to promote as much independence and self-sufficiency as practicable