Who should be trustee of your living trust?

In selecting a successor trustee for a living trust, people often gloss over the complications involved and think in terms of such broad generalizations as “manage my estate” or “take care of my beneficiaries” or “settle my estate.” In reality, a trustee performs very specialized functions.

The trustee must prudently invest assets, consider distribution requests, keep accurate records, file tax returns, account to the beneficiaries, and carefully weigh often complex legal and tax issues. The trustee must obey strict duties for the benefit of your beneficiaries, being financially liable to them if the trustee violates those duties. Also, being trustee is usually a time-consuming, frequently thankless job.

For living trusts, a trustee is needed for at least three separate situations:

  • First, who serves as trustee for you if you became incompetent?
  • Second, who serves as trustee upon your death to administer and distribute your trust?
  • Third, who serves as trustee of ongoing trusts created on your death for your beneficiaries?

In each of those three contexts, successor trustees should be named.

The personal attributes of the trustee should be of paramount importance in the selection process. A trust that works for tax purposes will be of little benefit if an imprudently selected trustee dissipates the trust assets through poor administration.

There are four possible choices for trustee:

  • A family member;
  •  A trusted friend;
  •  A corporate trust department;
  •  A private fiduciary.

As discussed below, each choice has advantages and disadvantages. Factors to consider include: reliability, integrity, and financial responsibility; willingness and ability to devote time to the job of trustee; relationship to the beneficiaries; personal dynamics among the beneficiaries; judgment, experience, impartiality, and potential for conflict of interest; and the size and type of trust assets.

Unlike an “outsider,” a family member knows you and the personalities involved. A family member may also serve for free, although my experience is they usually are paid.  However, there can be significant disadvantages to having a family member as trustee. The family member may lack experience in the crucial functions performed by a trustee. The family member trustee may be subject to pressure or influence by beneficiaries. Throwing a family member in the middle of family hostilities by naming him or her as trustee could become a ticking time bomb that eventually may explode. Will the family member tirelessly withstand the beneficiary who is constantly asking for funds?  Will the family member resist the temptation to play favorites among beneficiaries? The very intimacy that seems to make a family member an ideal choice can be a burden and disadvantage sometimes. Also, conflicts of interest may arise when the family member is both a trustee and a co-owner of trust property or a beneficiary.

In considering a trusted friend as an option, be mindful that being a trustee for someone else’s trust is time-intensive and can entail a high degree of personal liability. A friend should not be expected to serve as trustee for free. As with a family member, the trusted friend probably is inexperienced in trust administration and will require assistance from a lawyer, an accountant, and possibly a financial advisor.

A corporate trust department employs individuals with specialized training and experience in all the diverse areas involved in trust management and administration. A trust department employs lawyers, tax specialists, investment professionals, and trust administrators. This team of individuals should possess a higher degree of knowledge across all these areas than almost any one individual. A corporate trustee provides neutral and objective supervision, treating all beneficiaries in the same way. Corporate trustees also have the accounting and record keeping capabilities required for trust administration. They can provide accounting which distinguishes between principal and income and can track investment information, such as cost basis and current yield.  Certainly, a corporate trustee will charge a fee for serving. That fee should be compared against the fee charged by an individual trustee plus the accountant and attorney’s fees incurred by the individual trustee.

In California, another option involves nominating a California private fiduciary as trustee. As with corporate trustees, private fiduciaries could be interviewed, with their potential services and fees described. (See Professional Fiduciary Association of California’s web page http://www.pfac-pro.org  and Department of Consumer Affairs Professional Fiduciaries Website  http://www.fiduciary.ca.gov.)

Your trustee is bound by several legal duties, including the duty to be prudent, the duty of loyalty, and the duty of impartiality. Other duties include the duty to identify and collect property, to protect property, to account to your beneficiaries, to delegate wisely, and to carry out the purposes of your trust. These are complicated duties. A trustee can be held personally liable for losses that occur if such a fiduciary duty is violated.

In selecting a trustee, ask yourself these questions: (1) Is the trustee capable of handling the types of assets that will be held in the trust?; (2) Is the trustee capable of, and inclined to, resolve problems that may arise with the trust and its beneficiaries?; (3) Is the trustee capable of managing the trust investments?; (4) Will the trustee be able to devote the time and attention needed to avoid problems?; (5) How well will the trustee get along with the beneficiaries? Will there be hostility or antagonism between the trustee and a beneficiary?; (6) Is the trustee capable of communicating with the beneficiaries?; (7) Will the trustee’s greed prevent proper trust administration?; (8) Will the beneficiaries respect and accept the trustee?; (9) Is the trustee capable of understanding and fulfilling the fiduciary duties and responsibil­ities of trusteeship?; (10) Is the proposed trustee likely to suffer major personal problems (health, family, or financial)?; (11) Do the beneficiaries have inflated ideas of their financial needs?  If so, can the trustee handle them?; and (12) What compensation may the trustee receive?

Some clients prefer the option of the successor trustee working in conjunction with special trustees. For example, if you nominate a corporate trust department or California private fiduciary as trustee, you could nominate as special trustees the individuals in your life whose judgment you trust. Those individuals could be given many powers over the trustee. For example, the special trustees could nominate the trust department or private fiduciary to serve as trustee, fire that trustee, and replace it with another trust department or private fiduciary as trustee. The special trustees could be entitled to regular accountings and status reports.  You could also require the trustee to confer with the special trustees prior to any significant changes to the trust assets. Special trustees could even be given a veto power over the trustee’s proposed actions.   (You can also use this special trustee concept when your trustee is a family member or friend.)

Copyright James J. Phillips March 2016




2016 Review of Your Existing Estate Plan: Top 10 Things to Review

#10. Under your existing estate planning documents, who will be charge of your financial affairs if you become ill? Who did you name as your successor trustee and as your attorneys-in-fact under your durable general power of attorney? Has your opinion changed since the time that your trust and power of attorney were signed?

#9. Under your existing advance health care directive, who will be your health care advocate if you become unable to give informed consent to medical decisions? Who did you name as the alternates? Has your opinion changed since the time that your advance health care directive was signed? Did your document state your wishes about “heroic measures,” home health care, organ donation, burial/cremation, and who will be in charge of your memorial service/funeral?

#8. Are your “after income tax” (or “income tax deferred”) assets titled to your living trust? Do you have assets titled in joint tenancy that really should be held in your living trust? Are your assets titled correctly for tax purposes and for avoiding probate?

#7. Do the primary and secondary beneficiary designations of your IRAs, SEP/IRAs, 401(k), 403(b), pension plans, and other income tax deferred assets correctly state who is to inherit those “pre-income tax” assets? Or are these beneficiary designations out of date?

#6. Under your existing living trust and will, who will inherit your estate? How, when, and what will your beneficiaries inherit? Have your inheritance wishes changed since the time that your living trust and will were signed?

#5.  Have the life circumstances of your beneficiaries changed dramatically from the time that your estate documents were signed? Since the date that your estate documents were signed, have you changed your opinion as to what is best for your beneficiaries? For example, since the date that your living trust and will were signed:

  • has a beneficiary’s financial responsibility or trustworthiness changed?
  • has a beneficiary’s health become a concern to you?
  • is a beneficiary now on Medi-Cal or other important government benefits?
  • is a beneficiary’s marriage now of concern to you?
  • have hostilities or conflicts developed involving a beneficiary that warrant changes to your trust and will?
  • if you have minor children, is your designed guardian for them still correct?

#4.  What is your plan for payment of your future home health care or long term care, if needed? If you want your estate to have the option to have California pay for your skilled nursing care under the Medi-Cal program, then your durable general power of attorney should be reviewed and updated if it does not include so-called “Medi-Cal planning power” in it. Should there be changes to your assets to make yourself more “self-insured” for home health care or long term care? Should you consider long term care and home health care insurance?

#3. Does the current assessed value (not fair market value) on your California property tax bill of all of your California real property exceed $1,000,000? If so, then your estate plan should be reviewed to avoid a possible increase in real property taxes on your death (as there is a limit on how much real property can be inherited by your children without triggering an increase in property taxes).

#2.  Has your health or financial or family situation or your wishes changed significantly from the time that your estate documents were signed? If so, review your estate documents to make sure that they will still accurately reflect your wishes.

#1 MOST IMPORTANT REASON TO REVIEW YOUR ESTATE PLAN is to improve and simplify your estate plan due to new estate tax laws. Washington recently replaced the uncertainty of the Bush era estate tax laws with generous estate tax laws, gift tax laws, and generation skipping transfer tax laws. You can still leave an unlimited inheritance to your surviving spouse (who is a U.S. citizen). But the amount that you can now leave without estate tax to others has increased to $5,450,000 for persons dying in 2016 (indexed to increase with inflation after 2016).

For a surviving spouse, there is now a planning option to increase his/her $5,450,000 estate tax exemption by the estate tax exemption of the deceased spouse. For example, with proper planning, it is possible for a widow who inherits everything from her husband to inherit (via what is called “portability”) her husband’s estate tax exemption, leaving her with an estate tax exemption of $10,900,000 (so long as she does not remarry and so long as she files the required federal estate tax return IRS form 706).

Hence, married couples whose living trust was written before 2012 may have trust provisions that are far more complicated than needed now under current estate tax laws. Note that the estate tax exemption used to be $600,000 in 1997, $675,000 in 2001, $1,500,000 in 2005, and $3,500,000 in 2009. These lower estate tax free amounts often lead to complicated bypass trust type living trusts in order to save estate taxes. For many couples, those bypass trusts may no longer be needed (unless they are used for “control” purposes or to save property taxes).

The amount that you can leave without federal gift tax now equals the same estate tax exemption amount, including the so-called “portability” rules applying to a surviving spouse. The current annual gift tax exemption is $14,000. The amount that you can leave without generation skipping transfer tax is also $5,450,000 in 2016, but without the “portability” benefits for a surviving spouse.

Copyright by James J. Phillips 1/10/2016

Living Trusts and Avoiding Probate

For those new to estate planning, there can be great misunderstanding as to what your living trust will own. Often, people think that a living trust will own “all my assets.” Some think that a living trust avoids probate (“no matter what”).

Legally, however, a living trust rarely owns all of your assets. For example, a living trust will never be the owner of your IRA, SEP IRA, 401(k), 403(b),  or other pension plan. Instead, you (the individual) must be the owner, with those you name as your primary or secondary beneficiaries inheriting on your death. If you become unable to manage your financial affairs, these income tax sensitive assets should be managed by your durable general power of attorney (not the trustee of your living trust).

In California estate plans, the living trust is normally created to own your “after income tax” assets, such as your real estate, bank accounts, stock (not held in an IRA or pension plan), etc.  But in order for the trust to own these assets, and thereby avoid probate, the legal title to the assets should be registered properly in the name of the trustee of the trust, with the name and date of the trust included.

Hence, simply writing a living trust does not place your home, cash, and stock in the trust. Rather for those assets to be held in the trust (and to receive the tax and probate avoidance and control benefits of the trust), you need:

  1. The deed recorded to change from your name to the proper name of the trust.
  2. The stock certificate or stock account changed from your name to the proper name of the trust.
  3. The bank accounts changed from your name to the proper name of the trust.

Too often, probate is required on death because such “after income tax” assets were not titled (or registered) in the name of the living trust.

And sometimes probate is required on IRA, SEP IRA, 401(k), 403(b),  or other pension plan because either the person never named a beneficiary for those “pre-income tax” assets or because all of those who were named were deceased.

A thoughtful California living trust plan normally includes all of the following:

  1. The living trust (with assets to be owned by it actually transferred properly to the trustee of the trust).
  2. A durable general power of attorney for management of non-trust assets, such as IRA, SEP IRA, 401(k), 403(b),  or other pension plans.
  3. Change of beneficiary forms completed on IRA, SEP IRA, 401(k), 403(b),  or other pension plan, as well as life insurance and annuities.
  4. An advance health care directive.
  5. A so-called “pour over will.”
  6. A letter of instruction and advice.

Copyright James J. Phillips 11/28/15

Parents helping young adult children with important legal, tax, and investment needs

Often overlooked by parents are important legal needs of their young adult children (18 years and older). For example:

  • Once 18, who will make medical decisions for the then adult child if the child becomes unable to give informed consent to medical decisions? Avoid the problems of the Terri Schiavo case and avoid a court conservatorship of the person by having your young adult child (18 or older) sign an Advance Health Care Directive.
  • Once 18, who will manage the then adult child’s financial affairs if the child becomes unable to sign what is needed? Avoid a court conservatorship of the estate by having your adult child sign a durable general power of attorney.
  • Who would manage and inherit whatever assets the young adult owns? Avoid the cost and uncertainty of a court probate proceeding by having your child sign a will (and, if appropriate, a living trust or TOD/POD accounts).
  • Who should own the car that the child drives? Consult with your casualty insurance broker and compare the additional cost of insurance with just your child being the sole owner of the car with the benefits of reducing your exposure by you not being the owner of the car that your child drives (especially if your plan is to have your child own that car “when the time is right”).
  • What liability insurance should the parent have on that car (if the parent decides to own that car) and how much of a liability umbrella policy should the parent have? Consult with your  casualty insurance broker to protect your estate, as your estate can be liable for damages caused by your child’s operation of your car.
  • What liability insurance should the child have? Consult with your casualty insurance broker.
  • Help your adult child obtain and maintain proper health insurance coverage, especially once the child leaves your health insurance policy.
  • Introduce your child to a certified public account and good investment advisor who can teach your child the wisdom of tax and investment planning.

Who is in charge of a California probate when there is no will? Who will be the administrator?

California law dictates who has priority to serve as administrator of your probate estate if you died without a will and with a California estate large enough to require a California probate.

In such cases, a person in the following relation to the decedent is entitled to appointment as the California administrator in the following order of priority:

  1. Surviving spouse or registered domestic partner
  2. Children
  3. Grandchildren
  4. Other descendants
  5. Parents
  6. Brothers and sisters
  7. Descendants of brothers and sisters
  8. Grandparents
  9. Descendants of grandparents
  10. Children of a predeceased spouse or domestic partner
  11. Other descendants of a predeceased spouse or domestic partner
  12. Other next of kin
  13. Parents of a predeceased spouse or domestic partner
  14. Descendants of parents of a predeceased spouse or domestic partner
  15. Conservator or guardian of the decedent
  16. Public administrator
  17. Creditors
  18. Any other person (i.e. friends)

(See Probate Code Section 8461 and the exceptions at 8462-8469.)

And what appears above also applies in a probate if the decedent had a will but failed to name an executor who was able to serve as executor.

Of course, these statutory rules do not apply if the decedent had a will that nominated an executor who would be willing and able to act. Nor should these rules apply if the decedent’s assets were titled properly in a living trust and with proper beneficiary designation (to avoid probate).


What are a trustee’s duties and potential liabilities?

Being trustee can be a thankless job, one with lots of stress and the risk of personal liability.

California law places the following legal duties upon the trustee of an incompetent or deceased person’s trust:

  1. The trustee has a duty to administer the trust solely in the interest of the beneficiaries. If a trust has two or more beneficiaries, the trustee has a duty to deal impartially with them and shall act impartially in investing and managing the trust property, taking into account any differing interests of the beneficiaries.
  2. The trustee must administer the trust according to the terms of the trust. In doing so, the trustee must use the care, skill, prudence, and diligence of a prudent person.
  3. The trustee must invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust, using reasonable care, skill, and caution.
  4. The trustee has a duty to keep the beneficiaries of the trust reasonably informed of the trust and its administration. This includes duties of rendering proper trust accountings.
  5. The trustee has a duty not to use or deal with trust property for the trustee’s own profit or for any other purpose unconnected with the trust, nor take part in any transaction in which the trustee has an interest adverse to the beneficiary.
  6. The trustee must keep control of and preserve the trust property.
  7. The trustee has a duty to make the trust property productive under the circumstances and in furtherance of the purpose of the trust.
  8. The trustee has a duty to take reasonable steps to enforce claims that are part of the trust property.
  9. The trustee has a duty to take reasonable steps to defend actions that may result in a loss to the trust.
  10. The trustee has a duty not to delegate to others the performance of acts that the trustee can reasonably be required personally to perform.
  11. The trustee has a duty to apply the full extent of the trustee’s skills. If the person who created the trust relied on the trustee’s representations of having special skills, the trustee is held to the standard of the skills represented.
  12. The trustee must file all required tax returns and pay all required debts and taxes.
  13. The trustee must not receive improper compensation.

With a trustee’s duties comes the risk of liability. A trustee who violates any of the above duties can not only be removed as trustee, but also can be held personally liable. This risk of a trustee being liable extends to certain improper actions taken by a trustee’s agent or by a trustee’s co-trustee or by a trustee’s predecessor trustee.

When I meet a new client who is to act as trustee of someone else’s trust, I often find the right time to say these three phases: “You will be overworked; You will be under-appreciated; and You will be under paid.”

The job of the trustee’s attorney is to advise the trustee of how the law applies to their trust and to protect the trustee from harm and to assist the trustee in the successful and efficient administration of trust.

Without an attorney educating and advising a trustee, the trustee would never know the risks and potential liabilities of the trusteeship. No matter how intelligent a trustee is, and how much common sense a trustee has, a trustee would never know what the law requires of the trustee (and where the law places the trustee at personal risk) without proper legal representation.

Copyright 2015 James J. Phillips

Importance and Use of California Advance Health Care Directive

All California competent adults should consider signing a California Advance Health Care Directive.

In the aftermath of the Terri Schiavo case, most people recognize how important this estate planning document is to protect yourself and your loved ones.

In this document, you empower someone to make medical decisions for you if you become unable to give informed consent to your medical decisions. You name your first choice and your alternate choices.

Included in this document can be your wishes on such matters as:

1. Whether and when you want so-called “heroic measures” used to prolong your life if you were in a terminal condition;

2. Whether you want your health care agent’s authority to start now or only when you are unable to make health care decisions for yourself;

3. Whether you wish to be an organ donor and, if so, for what purposes you want the donations;

4. Whether and when nutrition and hydration may be withheld if you were terminal;

5. Whether you prefer home health care versus nursing home care, as long as home health care were appropriate;

6. Whether you prefer to be told the truth or whether you prefer not be told the details of your condition, especially if the news is bad;

7. Whether you prefer to be buried or cremated or whether you prefer for your health care agent to decide;

8. Whether your religious beliefs are to be considered;

9. Who should have visitation rights with you; and

10. What treatments you want (and don’t want) if you develop dementia or Alzheimer’s disease and lose the capacity for meaningful interactions.

Copies of your California Advance Health Care Directive should be given to your nominated agents, doctors, hospitals, and all health care providers.

Seriously ill patients may also want to confer with their physician about a POLST form (Physician Orders for Life-Sustaining Treatment). A POLST form states what kind of medical treatment patients want towards the end of their lives. Printed on bright pink paper, and signed by both a doctor and the patient, POLST helps give seriously ill patients more control over their end-of-life care. For more information, see: http://capolst.org/polst-for-healthcare-providers/forms/

Copyright James J. Phillips 3/24/15


Your family tree: its due process importance in estate administration, trust administration, and conservatorships

Due process and California law requires that your closest blood relatives* be notified by the person in charge of your estate if you died or became incompetent in each of these California contexts:

1. If probate is required because you died without a will, your administrator must notify your heirs*, as your heirs are those who would inherit. In some case where your spouse died before you and you had no children or descendants who survive you, this can include your spouse’s children (i.e., your stepchildren) or your spouse’s relatives.

2. Your heirs must also be notified if there is a probate of your will, even if your will does not leave your estate to your heirs and even if your executor is not an heir. In some case where your spouse died before you and you had no children or descendants who survive you, this can also include your spouse’s children (i.e., your stepchildren) or your spouse’s relatives.

3. And your heirs even have to notified by the trustee of your living trust, even if your living trust leaves nothing to your heirs.

4. If a conservatorship of your person or estate is required due to your incompetency, your heirs must be notified (even if you would not want them notified).

But what if no one knows the name or location of your children or your siblings or your niece and nephews or your cousins or your closest blood relatives? What if you kept as secret a child born outside of wedlock? What if you were estranged from some of your closest relatives? What if your administrator or executor or trustee or conservator cannot identify your heirs?

This can lead to the costly searches and delay, stress, and uncertainty.

This can be very problematic in cases where the person who is incompetent or died:

  • Was estranged from the family.
  • Kept as a secret the existence of a child born out of wedlock.
  • Had no spouse and no offspring, but had step children or in-laws from a deceased spouse.
  • Had as closest relatives persons whose existence was unknown by others.
  • Had a child who was “adopted out.”

California law expects the person in charge of your estate to attempt to identify and locate your heirs with:(1) Inquiry of the relatives, friends, acquaintances, and employers; (2) Review of appropriate city telephone directories and directory assistance; and (3)Search of the real and personal property indexes in the recorder’s and assessor’s offices for the county where the person was last known or believed to reside. (See California Rule of Court 7.52; Probate Code Sections 1206, 1821, 6402, and 16061.7.)

Just imagine how difficult this would be if you keep the identity and location of your relatives a secret. For this reason, consider placing the names and last known address of your heirs* with your original will and trust and other estate planning documents in your safe deposit box. And consider giving a copy to your estate planning attorney.

*Your heirs are often your closest blood relatives, such as your spouse or registered domestic partner and:

A. Your children and the offspring of any deceased children.

B. If none, your parents.

C. If none, the descendants of your parents.

D. If none, your grandparents or, if none, the descendants of your grandparents.

E. If none, the descendants of your predeceased spouse may be included.

F. If none, your next of kin.