Tag: Trustee

Why You Need a Trust – Self – Sufficiency

One of the main purposes of setting up a Trust is self-sufficiency, meaning I and my loved ones are able to handle our own affairs, and do not need to rely upon a government organization or agency.

The way we do this is by putting it in “writing”, in a legal and regulatory manner, that will be accepted by the financial and governmental organizations.

With the present Covid-19 virus, it is more clear than ever that our government is overwhelmed and lacks the resources to take care of all those who need it. Courts are shut down or have significantly delayed and reduced services.

Thus the “Planning” in Estate Planning is the most important aspect. Preparing in advance for a probable and certain event is a no-brainer. We will all die. Real life experience tells us that more “goes wrong” than right, and that hoping for wining the lottery ticket is a fool’s errand.

If you have time and capability now, why wait for the stressful and frustrating emergency to materialize, requiring an “immediate resolution”, only to find that you must rely on the governmental system and “get in line” of a large backlog of others.

When you set up a Trust you designate a successor Trustee who will wind down your affairs upon death. It is advisable to transfer or relate as many assets (e.g. real estate, financial accounts, life insurance) to the Trust allowing for a complete bypass of the Probate Court process.

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What is a Pet Trust?

A Pet Trust is usually a Subtrust built into the regular Revocable Trust.

The Pet Trust can nominate its own set of Trustee(s) or depend on the parent or Revocable Trust’s Trustee(s).

The Pet Trust will usually be funded with a lump sum of money sufficient for the lifetime care of the Pets.

Other common provisions include designating a veterinarian, a request to keep your Pets together if more than one, and a designating Pet Sanctuary as fail-safe contingency.

An alternative to the Pet Trust involves gifting your pet to the preferred individual or organization along with a lump sum of money for the care.

Under California Law, a pet is considered the personal property of the owner.

For more information please contact the Law Offices of Hanlen J. Chang.

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Someone Just Died – What Now?

There are three scenarios upon the passing of an individual:

  1. With a Trust;
  2. With a Will;
  3. No Trust or Will.

Whatever the scenario, there are additional post death administrative tasks to handle.

Passing With a Trust

The most efficient and secure succession setup and mechanism is to have a Trust.

One major benefit is that it bypasses the need for Probate Court (more specifically explained below).

Of importance is understanding that assets have to be transferred into Trust before death and out of Trust after death.

Equally important is the before and after tax planning and management of the assets.

Common Post Death Trust Administration tasks include:

  • Inventorying, valuing, and managing trust assets;
  • Satisfying or resolving debts (e.g. mortgages, utilities, credit cards, auto loans..etc.);
  • Filing Tax Returns (sometimes outsourced to a CPA);
  • Trust asset distribution (including sub-trust funding if applicable);
  • Collecting and distributing assets outside of Trust where applicable.

Another Trust advantage is when a beneficiary is a Non-Resident Foreigner, bypassing delays, verification, and tax withholding by financial institutions or third parties.

Passing With a Will or No Will

Probate Court is required if you pass with a Will or No Will (“Intestate) and there is an asset worth more than $150,000.00 for which there is otherwise no succession mechanism (e.g. beneficiary designations).

For assets below $150,000.00 those items can be collected by an out of court small estates procedure on behalf of the successors-in-interest.

The Schedule of Probate Fees is as follows:

• 4% of the first 100,000 of the gross value of the probate estate
• 3% of the next $100,000
• 2% of the next $800,000
• 1% of the next $9 million

Both the executor (individual nominated in the Will) or administrator (individual appointed by the court) and the attorney are entitled to this fee. Thus, the Probate Fees when multiplied by two (2) can become costly when compared to a Trust setup where the settlor (person establish the trust) gets to set the Trustee fee according to her or his preference.

The executor or administrator will essentially handle the same functions as the Trustee but under court supervision and approval.

Another consideration and possible drawback includes the time lag for completing the Probate process, which could be anywhere from 1 year to 3 years.

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Naming a Foreign Relative as Trustee for a U.S. Trust

Introduction

In Metropolitan areas, such as the San Francisco Bay Area, it is common to have an estate planning client inquire about naming a foreign relative as Trustee or Co-Trustee.

Naming a Non-Resident Alien (“NRA”) relative as Trustee can cause the U.S. Trust to be re-characterized, for U.S. tax purposes, as a foreign trust due to the NRA’s exercise of substantial control of the Trustee powers.

If the goal is to maintain the Trust as a U.S. domiciled trust the requirements of Treas. Reg. Section 301.7701-7 of “court test” and “control test” must be satisfied.

Court Test

For this test to be satisfied a court within the United States must be able to exercise primary supervision over the administration of the Trust. There is a safe harbor if the following three requirements are met:

  • The trust instrument does not direct that the trust be administered outside the United States;
  • The trust in fact is administered exclusively in the United States;
  • The trust is not subject to an automatic migration provision described in Treas. Reg. Section 301.7701-7(c)(4)(ii).

Control Test

This test requires that one or more U.S. persons have the authority to control all substantial decisions of the trust. Treas. Reg. Section 301.7701-7(d)(1)(ii).

“Control” means “the power, by vote or otherwise, to make all of the substantial decisions of the trust, with no other person having the power to veto any of the substantial decisions.”

Tax Impact of Foreign Trust Status

Depending on the circumstances, capital gain realization may be imposed on the transfer of property to the “now foreign trust”, i.e. forced sale treatment.

One Year Period to Cure Unintended Loss of U.S. Trust Status

If a U.S. Trust becomes a Foreign Trust due to the nomination of a NRA Trustee, the Trust has 12 months from the date of cessation of U.S. Trust status to reassert U.S. status by satisfying the aforementioned requirements of the “court test” and “control test”.

Conclusion

While it is not impossible to have a NRA relative act as Co-Trustee, the NRA relative should never be nominated as sole acting Trustee.

Even if a NRA relative is nominated as Co-Trustee, the Trust terms must make clear that any tie breaking decision is made by the U.S. Co-Trustee.

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