CRUMMEY TRUSTS

·         What is a Crummey Trust?

Generally speaking, monetary gifts to minors are subject to parental or guardian control until the minor’s age of majority.  In order to delay the transfer of control to the child until after the age of 18, the funds must be placed in trust.  However, the annual gift exclusion ($13,000 per individual and $26,000 per married couple as of 2012) from gift tax is only applied to gifts of which the minor has a current interest.  Normally, a gift into a trust that comes under control of the beneficiary at a future date does not constitute a current interest and is not taxable.

A Crummey Trust offers the beneficiary a window of time, usually 30 days, to take immediate control of the gift in the trust.  The amount the beneficiary can take control of only applies to the current gift – an amount no greater than the annual exclusion amount – not the entire trust.  If the recipient fails to withdraw the gift during the 30 day window, the gift becomes part of the trust, and is subject to the conditions of the trust.   However, since the recipient had the opportunity to receive the funds outside of the trust, the gift is deemed to be a current interest, subjecting it to the annual gift tax exclusion.

The expectation by the minor of continued future annual gifts under the trust (or the expectation of the withholding of such future gifts if the minor withdraws the funds from the trust) may motivate the recipient minor to leave the funds in the trust and not withdraw them.

·         What purpose does a Crummey Trust serve?

A Crummey Trust is used to obtain the annual gift tax exclusion through an irrevocable trust.

For illustrative purposes, the following hypothetical is helpful:

Cliff is a wealthy doctor who would like to gift money to his teen aged children, Theo and Denise.  Rather than give the money to his children outright, which would be considered imprudent given their teenager immaturity, Cliff decides to create a Crummey Trust so that he can take advantage of the annual gift tax exclusion while simultaneously keeping the trust in control of the money.  Cliff appoints Clair to become the trustee of his children’s' Crummey Trusts by giving her $13,000 to hold in trust for Theo and $13,000 to hold in trust for Denise. Each year thereafter, Cliff gives Clair $13,000 for Theo's trust and $13,000 for Denise's trust. By gifting the money through a Crummey Trust, Cliff avoids having to pay gift tax for these contributions. Also, Cliff does not have to worry about his children quickly frittering away the money because the trust will restrict when distributions are made.

·         Who is the intended beneficiary of a Crummey Trust?

Minor children are the intended beneficiary of a Crummey Trust.

·         Are there ongoing requirements to a Crummey Trust?

Yes. Each time someone gifts money to the trust, notice needs to be given to the beneficiary informing them of their ability to withdraw all or some of the contribution from the trust within a certain number of days. There is no definitive rule on the period of time the mirror has the power to withdraw, although the IRS has allowed the annual exclusion for periods as short as 15 days.

For explanation purposes, presume that on March 1, 2012 Cliff donates $13,000 to each child's Crummey Trust. Thereafter, Clair as the trustee gives notice to Theo and Denise that they may withdraw all or some of this $13,000 from the trust within 30 days. While each child has the ability to withdraw the $13,000, it is highly unlikely that either child would do so because this will strongly discourage Cliff from ever donating money again to the child's Crummey Trust. Regardless, once those 30 days have elapsed, namely come April 1, 2012, the $13,000 for each child becomes the property of each child’s respective Crummey Trust.

·         Is a Crummey Trust irrevocable?

Yes. A Crummey Trust is irrevocable. Thus, once a person creates a Crummey Trust, they cannot later revoke it. This is an exception to the rule that most trusts written in California referred to as "living trusts" can be revoked.

·         How much does it cost to write a Crummey Trust?

There is no mandatory minimum or maximum attorney fee to draft a Crummey Trust. However, if the fee is over $2,500, then you are probably being overcharged. Conversely, if the attorney fee is under $500, then your attorney probably has no idea what he or she is doing.

·         In light of the attorney fee, can you write your own Crummey Trust?

Yes, California law explicitly says that you may act as your own lawyer. However, given the technicalities associated with a Crummey Trust, it is not a document a lay person should attempt to prepare. In fact, few legal documents should ever be prepared without the assistance of an attorney. 

ESTATE PLANNING FOR YOUR SECURITIES

Transfer on death registration lets you name someone to inherit your stocks, bonds or mutual funds in your brokerage account(s) without probate. It works very much like a payable on death bank account. You register your ownership either with your stockbroker or financial adviser and make a request to take ownership in what's called a “beneficiary form.” This form will show your ownership and will also show the name of your beneficiary. To be clear, after you have registered ownership this way, the beneficiary has no rights to the stock as long as you are alive. You are free to sell or give away your stock, name a different beneficiary or close the account all together. But on your death, the beneficiary can claim the securities without probate simply by providing proof of your death and some identification to the broker or transfer agent.

The benefits of using a transfer on death registration are:

·         It is easy to create;

·         Designation of a beneficiary costs little to nothing;

·         It is easy for the beneficiary to claim the securities after the original owner dies.

The only downside to using this method is your broker’s policies might not allow you to name an alternate beneficiary – but check with your broker first.

If you have a brokerage account, or more than one as many people do, you should contact your broker or financial advisor for instructions. Most likely the broker will send you a form on which you will name one or more beneficiaries to inherit the stocks in your account at your death. From then on, the account will be listed in your name with the beneficiaries like this “Mary Doe T.O.D. Jim Doe.”

If you want to name more than one beneficiary for your transfer on death designation, just name all the beneficiaries on the form. Each will inherit an equal share of your stocks unless you specify otherwise. However, you can leave the beneficiaries unequal shares if the stockbroker or transfer agent’s policies allows it (check with your advisor).

It your broker’s policies allow it, name an alternate beneficiary.  If the primary T.O.D. beneficiary dies before you do, the alternate will inherit.

Instead of using a transfer on death registration, it is easy to put your security assets into your Revocable Living Trust by registering your stocks, bonds and mutual funds as trustee of your living trust. All brokers and mutual fund companies will help you. It's even easier if you set up accounts to consolidate all your investments at a big investment company such as Charles Schwab or Fidelity. You can put your entire account into the living trust and then automatically buy and sell securities in the name of the trustee. Once your account is in the trustee’s name, all securities in the account are then held in trust. That means you can use your living trust to leave all the contents of the account to a specific beneficiary. If you want to leave stock to different beneficiaries, you can either establish more than one brokerage account or leave the contents of a single account to more than one beneficiary to be owned together.

But always consider transfer on death registration before registering stocks, bonds or mutual funds in the name of your living trust.

For more information, visit my website at RudolphLegal.com.

APPOINTING A GUARDIAN FOR YOUR MINOR CHILDREN

A question that every parent contemplates in the wee hours of the night is “who will raise my children if I am gone?”  You can stop worrying if you provide for the guardianship of your children now.

If you die leaving minor children and the other parent survives you, the other parent will most likely raise and support them.  If the other parent is not living, your minor children will require a guardian.

A guardian is an individual who is appointed by the court to take custody of minor children.  The guardian is required by law to provide for the minor’s health, education, maintenance and support.

You may appoint a guardian for your minor children in your will. If you do not have a will, or do not appoint a guardian, then the court will make the selection of a guardian for you. Since the court may appoint someone you do not want raising your children, it is very important to appoint a guardian in you will.  Also, it is important that each parent have a will nominating the same guardian.  If both parents pass away at the same time, there should not be conflicting nominations for guardian in their respective wills. It can happen especially if the parents are not married or together in another sense.  If this happens, it can lead to a court battle over the conflicting nominations and result in the court nominating someone other than who you want raising you children.

However, it is easy to assume responsibility for this important decision as a part of your estate planning.  As an experienced estate planning attorney, I can help you include this in your estate plan so you will have peace of mind that your children will be raised by who you want raising them in the event you and the other parent die.

When determining who you want to raise your children, you may wish to look first to your family, such as brothers, sisters, or cousins. You may also wish to consider friends with children in the same age range as your children. You should always consult with the proposed guardian to ensure that the person is agreeable to assuming this significant and important responsibility.

If you are designating a husband and wife to serve as co-guardians, you should specify that both of them are to serve only if they are still married to each other at the time of the appointment.

If both parents die, your minor children may be left with substantial property interests that need management and protection. You may wish to consider whether you want the same person to care for your children and manage their property interests.

In loving families, it is often the same person that is appointed as guardian and the trustee of the trust for the minor's benefit.  As your estate planning attorney, I can help you determine who should be appointed as guardian and/or trustee.

It is usually a good idea that upon the death of you and your spouse, a trust be established for your minor children. The trustee should be encouraged to make generous distributions to assist the guardian, including the provision of funds to pay for any necessary expansion of the guardian’s home to accommodate your children.

And it is always a good idea to tell the proposed guardians that they are named in your Will, Living Trust or other estate planning documents even after you have discussed this issue with them.

For more information on appointing a guardian, go to my website at RudolphLegal.com.

CALIFORNIA COMMUNITY PROPERTY LAW

Spouses and domestic partners must consider California Community Property law because these laws impose limitations on the transfer of marital property or domestic partnership property when making a distribution of assets in their estate plan. While many people associate “community property” with divorce or dissolution of a domestic partnership, community property also plays an important role in estate planning.

·         What is community property in California?

Community property is all property acquired by a California resident during marriage or the domestic partnership that is not the separate property of either spouse or domestic partner.

·         What is separate property in California?

Separate property is all property owned before marriage or the registering of the domestic partners and all property acquired during the marriage or domestic partnership that is acquired by one spouse or partner by way of gift or inheritance.

·         What states are community property states?

The community property states are California, Arizona, Louisiana, Nevada, New Mexico, Texas, Washington, Idaho and Wisconsin. Alaska has an optional community property system.

·         Can a spouse or domestic partner alter the characterization of property during the marriage or domestic partnership?

A spouse or domestic partner can change the characterization of property during the marriage or partnership from community to separate property, separate to community property or the separate of one spouse or domestic partner to separate of another.  This is called “transmutation.”  A transmutation of real or personal property is only valid if it is made in writing by an express declaration that is consented to or accepted by the spouse or partner whose interest is unfavorably affected.  The requirement of a written instrument only applies to transmutations that occurred after 1984.

·         Does community property include real and personal property?

Community property includes both real and personal property.  Community property law applies to the personal residence of the spouses or partners as well as to the Picasso painting hanging in living room.

·         Is a real property (a house) purchased before marriage or domestic partnership community property?

A home purchased before marriage or the domestic partnership will most likely be considered the separate property of the spouse or partner that purchased the home.  However, the home may be considered partial community property if the mortgage payments, taxes, maintenance, etc., were made with community property earnings, like the wages earned by the spouse or partner that came along after the home was purchased.

·         Is a business owned prior to marriage or domestic partnership but operated during the marriage or partnership community property?

A business brought into the marriage or partnership before the marriage or registration and then operated after, will usually be considered both community and separate property.  Since the business was brought into the marriage it starts out as separate property, but marital or partnership efforts will likely be expended on it, thus creating a portion of it that is community property.  There are arithmetic formulas that help determine what percentage of the business is community property and what percentage is separate property.  An experienced estate planning attorney can help you with this.

·         How does community and separate property relate to estate planning?

Generally speaking, each spouse or partner may give away 50% of the couple’s community property and 100% of their separate property (they may not give away any of the other spouse’s separate property).

Community property considerations are an important part of anyone’s estate plan because a person cannot give away property they do not own.  One spouse or partner may not give away the entire primary residence if the other spouse or partner objects.  Thus, that spouse or partner could only give away 50% of the residence to the beneficiary of their choice. However, because separate property is exclusively owned by one spouse or partner, that spouse or partner may give away that entire separate property asset regardless of the objections of other spouse or partner.

Most couples usually leave their entire estate to the surviving spouse or partner and then to their children.  The situations in which community property plays a large part in estate planning often involves blended families. Since a blended family may have children from prior marriages or partnerships, it is often the case that a spouse or partner would not want to leave anything to a non-biological child. As a result, spouses or partners need to determine each asset’s community or separate property status in order to properly distribute those assets through their estate plan – especially when children from a prior marriage or partnership are involved.   An experienced estate planning attorney can help.

HOLDING TITLE TO REAL PROPERTY IN CALIFORNIA

There are many different ways for people to hold title to property in California.  You should always consult with an attorney before deciding on how to hold title to California real property.

California real property can be held by people as a sole owner or as a co-owner with another person.  Co-ownership of California real property involves two or more persons or entities acquiring and holding title together.

Sole Ownership by Person or Entity

·         A Single Person

Property would be held as an individual who is not and has never been legally married.  Example: Jane Doe, a single woman.

·         An Unmarried Person

Property would be held as an individual, who was married at one time but is now legally divorced; or an individual, having been a registered domestic partnership at one time, but the partnership is now legally dissolved.  Example: Jane Doe, an unmarried woman.

·         A Married Person or Registered Domestic Partner as their Sole and Separate Property

Property would be held this way when a married individual or registered domestic partner desires to purchase and hold title to California real property solely in his or her name.  The spouse or registered domestic partner must generally consent to this by executing and recorded a Quit Claim Deed for the property in question.  Example: Jane Doe, a married woman, as her sole and separate property or Jane Doe, a registered domestic partner, as her sole and separate property.

A Legal Entity

Examples of entities that can hold title to property are:

• Corporations
• General partnerships
• Limited partnerships
• Limited liability companies
• Other legal entities

Example: XYZ Managing Corporation, a California Corporation.

Co-Ownership by Person or Entity

·         Community Property

California Civil Code defines community property as property acquired by a husband and wife, or registered domestic partners, together or by a husband or wife, or registered domestic partners, individually during the marriage.  Real estate acquired and held by a married person or registered domestic partners is deemed to be community property of the husband and wife, or both partners, unless otherwise stated and agreed to in writing by the spouse or partner who will not be on title.

The husband and wife, or registered domestic partners, both have the right to dispose of one-half of the community property under community property law.  The one-half of the community property will automatically go to the surviving spouse if the deceased spouse did not otherwise disposed of the community property to someone other than his or her spouse.  Example: John Doe and Jane Doe, as husband and wife as community property.

·         Community Property with Rights of Survivorship

Community property of a husband and wife, or registered domestic partners, when expressly declared on title to be community property with rights of survivorship, shall, upon the death of one of the spouses, or registered domestic partners, pass to the survivor without going through probate.  Example: John Doe and Jane Doe, as husband and wife as community property with rights of survivorship.

·         Joint Tenancy

California Civil Code defines joint tenancy as a joint interest owned by two or more persons in equal shares.  Title is usually taken as joint tenancy when the real property is acquired.  However, joint tenancy can also be created by a transfer that expressly declares the interest in the real property to be joint tenancy.

The most important benefit of joint tenancy is the right of survivorship.  Title to real property will immediately pass to the surviving joint tenant upon the death of a joint tenant without the need to go through probate.  Any two or more people may hold title as joint tenants and they do not need to be married or registered domestic partners to hold title this way (and gain the benefit of right of survivorship).  Example: John Doe and Jane Roe, as joint tenants.

·         Tenants in Common (TIC)

Individuals or entities may acquire an undivided percentage interest in a specific piece of real property with each tenant-in-common holding a different percentage ownership in the real property.  There is no right of survivorship, and a tenant-in-common’s interest will not automatically avoid probate by right of survivorship unless held in Trust or some other method that would avoid probate.  Example: Jane Doe, a single woman, as to an undivided 50% interest, as tenants-in-common.

·         Title Holding Trust (THT)

Real estate in California can be acquired and held by a Title Holding Trust or Land Trust.  Legal and equitable title to the California real property is bought and held by the Trustee of the Title Holding Trust.  The Title Holding Trust holds the property on behalf of the beneficiary of the trust.  The beneficiary retains control over the trust and has total power of direction over the trust.  The trustee cannot act without explicit written authorization and direction from the beneficiary or beneficiaries.   Example: Trust Financial Services, LLC, as Trustee, of THT Trust No. 12 3456.

The above is a summary of the more common ways to acquire and hold real property in California.  It is provided for general informational purposes only and should not be relied upon for legal advice.  There are significant legal and tax implications depending on how you choose to hold title to real property.  You should consult with a legal advisor before making any decisions on how you or you and your spouse or partner (or you and another individual) will hold title to real property in California.

A POUR-OVER WILL

WHAT IS A POUR-OVER WILL?

A pour-over will is a will used in connection with a trust.  A pour-over will is like any other will, except that the primary beneficiary is the testator's living trust.  The pour-over will transfers assets to the trust to ensure these assets will be subject to the distribution plan set up in the trust.  This kind of will “pours” any property the deceased owned at the time of his death that was not already accounted for in the trust into the deceased’s trust.

Other benefits of a pour-over will:

• It distributes tangible personal property, such as furniture, jewelry, clothing, etc., to the testator's beneficiaries who are not already beneficiaries of the decedent’s trust;
• It nominates a guardian for the testator's minor children;
• It revokes prior wills;
• It can include other provisions, such as tax allocation clauses.

Does a pour-over will go through probate?  That depends on the value of the assets that are in the pour-over will.  If the probate assets add to up to more than $100,000, probate is required.  If the amount does not exceed $100,000, the assets can be transferred to the trust as authorized by California Probate Code section 13100, and avoid probate.

If an individual dies with a living trust, but without a pour-over will, it can lead to two different distribution plans; one for the assets in the trust, and another for the assets not in the trust that may be required to go through probate.  In some cases the two distribution plans might be alike because the beneficiaries of the trust are the same people who will inherit through intestate succession.  However, if the beneficiaries are not the same, the assets could be distributed to different people.  For example, if the trust left all assets to a charitable organization, and the decedent did not have a pour-over will any assets not in the trust would not go to the charity, but instead would be distributed to the testator's relatives under intestate succession.

Whenever a trust is used, it is essential to also have a pour-over will in place to properly transfer your property which was not held by the trust when you pass away.

For more information on pour-over wills and other estate planning devices, go to our website at Rudolphlegal.com.