Death and Taxes Blog

A few weeks ago, I posted (here) about obtaining lender approval when placing property into a living trust. I then received an interesting e-mail from reader Richard Barid of the Savannah, Georgia law firm of Smith Barid, LLC. Mr. Barid pointed me to a portion of the US Code (12USC1701j-3(d)(8), which can be found here) that seems to indicate lender approval isn't needed. To quote the relevant parts of 1701j-3 (the emphasis added is mine):

(a)(1) the term “due-on-sale clause” means a contract provision which authorizes a lender, at its option, to declare due and payable sums secured by the lender’s security instrument if all or any part of the property, or an interest therein, securing the real property loan is sold or transferred without the lender’s prior written consent;

(b)(2) Except as otherwise provided in subsection (d) of this section, the exercise by the lender of its option pursuant to such a clause shall be exclusively governed by the terms of the loan contract, and all rights and remedies of the lender and the borrower shall be fixed and governed by the contract.

(d) With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon... (8) a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property
[.]

Mr. Barid adds that it's still a good idea to talk to a client's lender, for professional courtesy and to avoid surprises.

I sometimes get calls from people who have lost a spouse, asking to have a meeting about "probate." In most cases, these meetings don't involve much in the way of probate work; instead, they focus on planning for the widow or widower.

A well-drafted estate planning document for a married person discusses two scenarios:

-you die first (predecease your spouse); or -you die second (your spouse predeceases you).

And, of course, where your property goes when you die depends on which of these scenarios actually occurs. Most married people leave everything to their spouse in some way, shape or form -- they have a Will and/or living trust with the spouse as sole beneficiary, or have otherwise arranged to have their property pass to their spouse at death (via beneficiary designation or joint tenancy).

That's fine, but when one spouse passes away, it's a good time to update the survivor's estate plan. Maybe your children are older, and can handle their inheritance outright. Maybe there are new beneficiaries (like grandchildren or charities). Another reason to update: it's a good time to take stock of what you own, and how. If you want to try and avoid probate, now is the time to plan in order to do that. It's also a good time to involve a financial planner, who can organize your assets and help you figure out what you have (and don't have). This is especially important if the surviving spouse wasn't previously involved in the family's finances.

My wife introduced me to The Juggle, The Wall Street Journal's blog about "choices and tradeoffs people make as they juggle work and family." It's interesting stuff to read -- especially the comments -- although, of course, no conclusions are ever reached. This past week had two good posts related to estate planning:

1. Add This to the Financial Juggle: Your Parents' Retirement

2. Planning for the Worst-Case Scenario

As I said last time, most trust funding is fairly easy but tedious. One exception: trust funding with real estate, which is tedious but not so easy. Why is that?

What we're trying to do in funding a living trust with real estate is to transfer ownership of the real estate to the trustee (or trustees -- in the case of many married couples, who own real estate jointly or as tenants by the entirety, the goal is to put one-half of the real estate into each spouse's living trust). This gets complicated because lots of entities besides the owners have an interest in their real estate. Such as...

1. Lender(s). Every mortgage I've ever seen includes a provision saying that the entire loan amount comes due upon a "transfer" of the underlying real estate. That language is intended to prevent you from selling a house but not paying off the mortgage. Obviously, there's no real concern with transferring a house from yourself individually to yourself as trustee, but in order to avoid problems, it's necessary to get lender approval for the transfer. This is made more difficult by the fact that most people employed by lenders don't understand what a living trust is, or what you are trying to do by transferring real estate to it. So you or your attorney will have to do some explaining.

2. Insurance folks. The insurance companies that provide your homeowners insurance and title insurance should be alerted to the fact that ownership of the real estate has changed.

Typically, I contact the lender, find out what they need to give their approval, and then submit it. Once approval is obtained, then the appropriate deeds conveying the property into trust are recorded. Then the insurance companies should be contacted with the information about the transfer.

A couple of years ago (here) I wrote generally about trust funding. Now I'd like to share some of the basics of how the funding process actually works for a living trust.

You start by making a list of your assets -- house, retirement accounts, non-retirement accounts, insurance, etc. The idea is that all of these assets are owned by or will pass to your living trust at the time of your death (note: there are some cases where you may not want retirement accounts to pass to your living trust, but that's beyond the scope of this post).

You will notice that I said "owned by or will pass." Basically, we're doing two different things:

1. Changing ownership of certain assets, like real estate and non-retirement accounts (investment accounts and bank accounts). The trustee immediately becomes the owner of these assets (note that the trustee of a living trust is usually the person who created the trust).

2. Changing beneficiary designations of certain assets, like insurance and retirement accounts. When the person who established the trust dies, the assets flow into the trust.

Most trust funding is pretty easy to do, but rather tedious. For re-titling non-retirement accounts, you just tell the entity how the accounts should be re-titled (your attorney can tell you "the magic words"). Typically, it would be something like a switch from "Joel A. Schoenmeyer" as owner to "Joel A. Schoenmeyer, as Trustee of the Joel A. Schoenmeyer Trust dated January 18, 2003." Beneficiary designations are changed in a somewhat similar way, without reference to the current trustee (since he or she probably won't be around when the grantor dies).

The most difficult part of trust funding involves real estate, which I'll discuss next time.

Sometimes it seems like estate planners just invent terms and acronyms to confuse people. One of these cases involves a grantor trust, sometimes called an "intentionally defective grantor trust" or an IDGT.

So what's the deal with these things?

Basically, the term "grantor trust" relates to the taxation of a trust's income. Who pays the tax? If a trust is a grantor trust, then the grantor pays the tax (otherwise, the trust and/or its beneficiaries must have to pay the tax).

The grantor trust rules can be found here in the Internal Revenue Code (the "Code").

Estate planners use the grantor trust rules to take advantage of inconsistencies in the Code. In this case, the inconsistency is that you can set up a trust that is owned by you for income tax purposes (you pay the income tax) but not owned by you for estate tax purposes (the trust assets aren't includable in your estate).

Why would you want to do this? Because being viewed as the owner of a trust you set up means that you can pay the trust's income tax without such payments being considered an additional gift to the trust.

A revocable or living trust of which the grantor is acting as trustee will always be a grantor trust. The tax advantage discussed above is focused on irrevocable trusts (such as insurance trusts or gift trusts). Usually the goal of such trusts is to make sure that the grantor (i.e. the person who set up the trust) DOESN'T have any ownership interest in the trust. But there are certain provisions that can be included so the grantor can pay the trust's taxes. The term "intentionally defective" is misleading, since I don't think it's possible for a draftsperson to include grantor trust provisions by mistake (a more typical problem involves an inexperienced draftsperson who screws up the estate tax benefit by allowing the grantor to retain too much ownership interest in the trust).

I think the most typical provision used to make a trust a grantor trust involves giving a grantor "power to reacquire the trust corpus by substituting other property of an equivalent value" under Section 675(4)(d).

George A. Smith IV disappeared from a cruise ship in 2005, while on his honeymoon. His body has never been found, but he is presumed dead. His wife, Jennifer Hagel Smith, filed a wrongful death claim against the cruise line (Royal Caribbean). Ms. Smith has reached a settlement with Royal Caribbean, which (according to this article) would "net the estate more than $1 million and give her access to shipboard data and witness statements that presumably would shed more light on what happened on the cruise ship." However, the settlement needs to be approved by a probate judge, and Mr. Smith's parents appear ready to contest the settlement.

My concern is with the fact that all parties want the hearing on the settlement agreement to be closed to the public. Here's Ms. Smith's attorney, Douglas Brown:

"We're in a situation where we're going to have to explain the pros and cons of the settlement to the court," Brown said. "You do not want Royal Caribbean to know all of your reasoning for why you might not think your case is strong in the event you are going to have to turn around and sue them."

I understand his point, but the courts are a public resource, paid for by the public. The parties get the ability to resolve their disputes at very little cost (court fees tend to be very low), but in a public proceeding. You shouldn't get the advantages of the court system while also eliminating the inconveniences, no matter how rich or important you think you are.

It can be a pain to have a last name like Schoenmeyer -- you have to get used to having your name pronounced in all different ways (my least favorite: "Shoe-in-my-ear"). But there is one surprising advantage: I'm easy to find. I note this only because yesterday's Wall Street Journal contains an article (here) about the very real problem encountered by folks with common names like Smith and Jones.

How does this relate to estate planning and probate? Well, it's important that the people named in your documents can be located if something happens to you. (It's especially important in the case of powers of attorney, which may be needed at a moment's notice.) If you are in a coma, and have named John Smith of Chicago, Illinois as your agent, with no further descriptive information, then you've got a problem.

I typically ask for names and contact information for all family members, as well as for all non-family members named in a client's documents. And, in most cases, if there's confusion about someone's identity, I try to provide more information in the documents themselves.

This morning I've been reviewing the current Will of a new client. The Will contains maybe 50 bequests of specific property, things like furniture, furnishings, and jewelry. My new client wants to change the Will (which was only executed last year) because some of her beneficiaries have died, and because she wants to remove and add others. With a Will, this must be done in a new document (a new Will or a codicil).

Dealing with tangible personal property is much easier if it's done within the context of a living trust:

1. As part of the living trust process, we assign the client's tangible personal property to the trust.

2. The trust includes a provision allowing the client to leave a written direction, telling where specific items will be distributed upon his death. The trust also contains a default provision for items not listed in the written direction.

3. Because the written direction is not part of the Will, it isn't subject to the execution formalities of a Will. The above written direction can be changed as often as the client wishes, by the client (so no attorney involvement is needed) -- it's really just a note, left with the client's other important papers.

Article 1: A nice summary of how small estate affidavits work in Illinois, by attorney (and CPA) Stephen A. Frost.

Article 2: A Forbes article -- complete with annoying ads! -- on an executor's duties, and how to choose one.

One of the most common mistakes an attorney can make in probate is to fail to give notice once an estate has been opened. Notice always should be given to creditors under §18-3 of the Illinois Probate Act. But two types of additional notice typically need to be given to people with an interest in the estate:

1. If the decedent died with a Will which is then admitted to probate, the decedent's heirs and legatees have to receive notice of the Will's admission to probate and their right to contest admission. They also have to get a copy of the Petition that was filed in the case, and a copy of the order admitting the Will to probate. A similar notice has to be given if the Will is denied admission to probate. See §6-10 of the Illinois Probate Act and Illinois Supreme Court Rule 108.

2. If, like most Illinois estates, the estate is under independent (as opposed to supervised) administration, notice has to be given to heirs and legatees. This notice contains an explanation of rights in independent admininstration, and a petition to terminate independent administration. The form of the notice can be found in Illinois Supreme Court Rule 110.

I think the notice provisions cause confusion because they appear in the Supreme Court Rules, which isn't where you would expect to find probate requirements.