Rev. Proc. 2017-34
This revenue procedure provides a simplified method for certain taxpayers to obtain an extension of time under § 301.9100-3 of the Procedure and Administration Regulations to make a “portability” election under § 2010(c)(5)(A) of the Internal Revenue Code (Code). (See https://www.irs.gov/pub/irs-drop/rp-17-34.pdf .)
https://www.nytimes.com/2017/02/18/your-money/taxes/once-again-the-estate-tax-may-die.html?_r=0From February 19, 2017, New York Times.
See this article from California Advocates for Nursing Home Reform (www.canhr.org): http://www.canhr.org/factsheets/medi-cal_fs/html/fs_medcal_overview.htm
#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? Does your document have powers dealing with dementia or Alzheimer’s?
#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 Or are these beneficiary designations out of date?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? Has the size of your estate changed drastically since your documents 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 have it reviewed in light of the upcoming, 2017 tax changes to be enacted by the Republican Congress and signed by President Trump, including the possibility of repeal of estate tax and the uncertainty of what will happen to stepped up cost basis on death and the uncertainty of gift tax and generation skipping transfer tax.
Copyright by James J. Phillips 1/1/17
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 who will “manage my estate” or “take care of my beneficiaries” or “settle my estate.” In reality, a trustee performs very specialized, complicated functions.
The trustee must prudently invest assets, consider distribution requests, keep accurate records, file tax returns, account and report to the beneficiaries, and carefully weigh often complex legal and tax issues. The trustee must obey strict, legal duties for the benefit of your beneficiaries, being financially liable to them if the trustee violates those fiduciary duties.
Being trustee is usually a time-consuming, frequently thankless job. Trustees often feel “overworked, underpaid, and underappreciated.”
Keep in mind that, 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 any 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.
In California, there are four possible choices for trustee:
- A family member;
- A trusted friend;
- A corporate trust department;
- A California 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 January 2017
All California competent adults should consider signing a California Advance Health Care Directive. 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.
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.
Included in this document can be your wishes on such matters as:
- Whether and when you want so-called “heroic measures” used to prolong your life if you were in a terminal condition;
- 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;
- Whether you wish to be an organ donor and, if so, for what purposes you want the donations;
- Whether and when nutrition may be withheld if you were terminal or in a coma;
- Whether you prefer home health care versus nursing home care, as long as home health care were appropriate;
- 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;
- Who should have visitation rights with you;
- What treatments you want (and don’t want) if you develop dementia or Alzheimer’s disease and lose the capacity for meaningful interactions.
- Whether you prefer to be buried or cremated;
- Who should be in charge of arranging your funeral or memorial service or celebration of life or party (and which of these you prefer);
- Whether your religious beliefs are to be considered;
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 January 2017
Under California law, trustee compensation must be “reasonable” if there are no criteria or other guidelines set forth in the trust. (Probate Code section 15681.) Often, trusts simply say that the trustee is entitled to “reasonable compensation” without any definition or any guidelines to help determine the amount of trustee compensation. In those cases, California law provides for the following guidelines to consider when determining or approving trustee compensation (California Rule of Court 7.776):
- The gross income of the trust.
- The success or failure of the trustee’s administration.
- Whether the trustee possessed unusual skill, expertise, or experience.
- The amount of time spent by the trustee in performance of trustee duties.
- The custom and practice in the community.
- The charges of corporate trustees for trusts of similar size and complexity.
Applying these legal guidelines to each case requires application of the fact and circumstances of each case, as well as case law and the practices of the local courts. Strategy is often involved in asserting or opposing trustee compensation claims.
In contrast, a living trust can be drafted to specify the amount of trustee compensation and define the amount in different ways, such as by allowing compensation at a set hourly rate or, as was the case under prior law, by allowing compensation based on a percentage of the trust for each year of service (such as 1% annually or 1% of the first $1M and less than that above $1M).
Copyright James J Phillips January 2017
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:
- 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.
- 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.
- 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.
- 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.
- 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.
- The trustee must keep control of and preserve the trust property.
- The trustee has a duty to make the trust property productive under the circumstances and in furtherance of the purpose of the trust.
- The trustee has a duty to take reasonable steps to enforce claims that are part of the trust property.
- The trustee has a duty to take reasonable steps to defend actions that may result in a loss to the trust.
- The trustee has a duty not to delegate to others the performance of acts that the trustee can reasonably be required personally to perform.
- 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.
- The trustee must file all required tax returns and pay all required debts and taxes.
- 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.
James J. Phillips Copyright January 2017
In planning how to have your financial affairs managed by others if you become unable to manage your financial affairs, it’s not enough simply to have a revocable living trust because there are many financial transactions that legally cannot be handled by the trustee of your living trust. For example, if you become unable to serve as trustee due to illness, your successor trustee cannot do any of the following as trustee:
- Prosecute or defend a personal injury lawsuit;
- Invest in or withdraw money from your IRA, 401(k), or pension plans;
- Sign your income tax returns or represent you in tax disputes;
- Engage in Medi-Cal planning;
- Gain possession of those of your assets not titled in the name of your trust; etc.
Hence, a durable general power of attorney is an essential part of a Californian’s estate plan. In a durable general power of attorney, you authorize another person to act as your agent (also known as your attorney-in-fact) in the event that you become substantially unable to manage your financial affairs or substantially unable to resist the fraud or undue influence of others.
Some additional examples of powers that can be specified in a durable general power of attorney include:
- The power to engage in gift giving in order to reduce possible estate taxes on your death;
- The power to continue any pattern of charitable giving or pattern of gifting to your family that you want to continue if you became ill;
- The power to engage in so-called Medi-Cal planning;
- The power to amend the estate tax portions of your living trust (to give flexibility to your documents in the event that, while you were incompetent and unable to amend your trust yourself, Congress changes the estate tax provisions from what you anticipated in how your trust was written);
- The power to create a special needs trust in your living trust for any beneficiary who becomes disabled and in need of a special needs trust at a time when you were not competent to amend your trust;
- The power to transfer your assets to your living trust;
- The power to invest, manage, and make withdrawals from your IRA, 401(k), annuities, and pension plans; etc.
Similar to your living trust, your durable general power of attorney should make clear whom you wish to serve in role of managing your financial affairs, whom the alternates are, how (and under what circumstances) that person can be removed, and to whom that person must account, report, and consult.
Coordinating the terms of your durable general power of attorney and living trust protects yourself in the event you become seriously ill.
Copyright James J. Phillips January 2017