GTH Estate Planning Blog

Lars won't feel their estate planning is completed until he's updated his supplementary letter to Kyra, discussing a number of things not addressed in the formal documents. This is a notion that came out of a drinks-after-golf conversation he and lawyer friend Duncan had about ten years ago. Lars and Duncan both urge it upon their clients as a useful and partly pleasant exercise. [Editor's note: for a sample of such a letter see the "Dear Barbara" newsletter on the GTH website.]

Lars starts his letter with whom to call if something bad happens to him. It's mainly his CPA partner who is their alternate trustee and executor, and Duncan himself. It would be a little more logical for Lars to lay out their finances first and then say whom to call for guidance, but Lars wonders whether Kyra would feel intimidated by having to digest the complex situation before seeing she had help. This is no knock on Kyra; Lars knows she is smarter than he is, but he is a CPA and the one who has run their finances, and there is interplay with his rich uncle Nils's estate as well.

Next are the standard financial statements: a balance sheet of main assets and liabilities (with values assigned to each), and a list of income sources and amounts. For Kyra the main sources of income, if Lars died, would be withdrawals from his retirement plan, and distributions from trusts that Nils has established. She would be in good shape money-wise, particularly since she lives sensibly and is more interested in people, gardening and books than she is in buying things or taking pricey vacations.

The letter next gives some space to finances of their kids, particularly Nils's provision for them already, and a reminder of how they would inherit later in Lars and Kyra's own estate plan. They have already discussed how they want their kids to find their own careers and affordable lifestyles, but Lars inserts a reminder of this for good measure.

As Lars and Kyra wrap up their Living Trust with lawyer Duncan, there are several other documents to execute as well. The Living Trust is the main instrument for (eventually) allocating their estate. It seems odd to Kyra that they still need Wills, but Duncan explains theirs are "Pour-over" Wills that can be used to transfer to the Living Trust, upon a death, any assets not placed there during their lifetimes. It is ideal to make these conveyances while still living, to avoid probate of the assets, but as noted earlier Lars isn't in a hurry to do this.

There are also Durable Powers of Attorney for financial decisions, to allow continued management of matters outside the province of the Living Trust in the event of Lars or Kyra's disability. They name each other as first choice, with Lars's CPA partner and then Duncan as alternates. They must decide whether to give certain discretionary powers, such as the authority to continue making tax-saving gifts. The Attorney-in-Fact has no power, though, unless and until one of them is incapable. Incapacity is usually demonstrated by a letter from a physician, a sometimes awkward thing to get. For this reason some of Duncan's clients, particularly older ones, make the powers effective upon signing the Durable Power of Attorney, rather than awaiting disability. Lars and Kyra don't feel a need to give the authority immediately.

Our CPA friend Lars and wife Kyra have decided to put their children's inheritance in trust if it occurs before the kids are 45. So they need to name a trustee of these trusts-to-be.

Some of Lars's clients and friends have named the children themselves, in order of seeming maturity. One of Lars's children would be a pretty good candidate for this, but he doesn't think it's a good idea, at least at this point in the kids' lives. This would make her trustee of her own trust, and as a practical matter that would at least partly invalidate the idea and protection of her own trust. Second, with the trusts of her siblings, she would be in the awkward position of deciding how their money was invested and (more troubling) how much of it should be distributed to them. Third, a wise and experienced peer of Lars (luckily he has some) could help the kids learn how to handle money. Lars, being a CPA, has felt a need to convey financial responsibility to his family, and they're certainly better than average in that department, but there still would be some adjusting to do at the time of inheritance.

So whom to name as successor trustee?

If Lars and Kyra's kids inherited their estate now, it would be about a million and a half each. Of course they won't inherit until both of their parents are gone, but it could happen and the Living Trust would determine in what form they inherited. If it's outright, it will be exposed to the risks of a child's getting divorced, or sued, or deciding he or she didn't need to work. The kids are all in their twenties; a million plus at that age could distort their lives.

Lars and Kyra have discussed with lawyer friend Duncan a progression of alternatives for metering out money to heirs. Again, the most risky would be an outright gift of the mostly liquid estate. The real-seeming risk to Kyra is the divorce of a child. Two of the three are married and the third seems a likely prospect some day, so it's three marriages to consider.

What are the chances one could go bad? One of three could fail and they would still beat the averages. Money inherited directly is initially separate property but it can easily be made community, by an agreement that is common in young peoples' own estate planning, or by commingling funds. Community property is more at risk in a divorce than separate funds. So half an inheritance can be lost this way, after outright inheritance.

Another decision for Lars and Kyra in doing their Living Trust, is whether to leave anything to charity and if so, how much, and to what do-good recipient.

The whether isn't too tough for Lars and Kyra, although the dynamics of it are a little surprising to Lars. He is pretty sure that his wife is a more generous and loving person than he is, and more likely to end up in their Lutheran version of Heaven, whatever that looks like. But her love for their children and grandchildren, combined with her concept of money that Lars still hasn't quite psyched out, somehow eclipses most of her desire to leave a legacy for the general good. Maybe part of it is she's skeptical of how such a gift would actually be used. Lars somehow manages to be more idealistic than Kyra on the whole, even though she is a better person than he. He doesn't like it when older folks talk about the failings of the next generation; in fact he feels his kids are at least as good as he in the important aspects of life. And he doesn't think a modest gift to charity will affect his kids' lives, except to give them an example of giving. He often tells his clients hey, let's assume you give ten percent of your estate to charity, and your kids the rest. If it's a large estate, 90% of it is still a lot. Or if it isn't very much, then 90% of it still isn't very much.

Lars has learned in recent years of the benefits of a Living Trust vs. a Will: avoiding probate, keeping one's wishes private, and easing transition of management. He's sold on doing one this time as he and Kyra update their estate planning. He especially likes the privacy aspect, although his and Kyra's wishes aren't all that unconventional so it wouldn't be particularly embarrassing to have their Wills in the public record when they died. For now avoiding probate doesn't seem that important to Lars, as all their assets are in Washington so the probate process wouldn't be very cumbersome. He's giving up that benefit for starters, and so he and Kyra don't need to transfer titles of assets into the name of their Living Trust yet.

As for the terms of their Living Trust, Lars and Kyra have a fairly large estate so they want a structure that saves both of their estate tax exemptions for use when it all goes to the kids. Until recently the only way to preserve the exemption of the first estate was to leave Lars's share in trust for Kyra rather than giving it to her outright. In 2011 Congress enacted "portability," by which Kyra could inherit Lars's exemption even if she got his estate outright. But Lars sees this as a faulty approach.

As indicated earlier, the Trustor who establishes a Revocable Living Trust ordinarily serves as sole initial Trustee (as well as being sole beneficiary during his lifetime). That way, even though the Trustor gives title to his assets to the Living Trust, he retains sole control. If it is a couple establishing a Living Trust, then likewise the two of them usually start out as Co-Trustees.

Here, wealthy and elderly Nils has named nephew and CPA Lars as the Co-Trustee of Nils's Living Trust. Even though they are Co-Trustees with seemingly equal authority, their roles are radically different. Nils can really do anything he wants. He's accountable only to himself. If he makes a wrong move with his own money, who is going to sue him? He can take money out and waste it, or give it away. He can make dumb investments. The only person who can counter him is Lars, his Co-Trustee. And even then Nils could fire Lars as Co-Trustee, and amend the Revocable Living Trust to make himself (Nils) sole Trustee.

Lars on the other hand is a fiduciary, called upon to act responsibly with someone else's money. As we will see next week, this leads to an interesting contest between him and Nils.

Nils and nephew Lars are Co-Trustees of Nils's Revocable Living Trust. In that role they hold title to most of Nils's assets. Under statutory and common law and the written terms of the trust, they have authority over the assets pretty much the same as Nils would have if he owned the assets in his own name. It is a common misperception that if one puts an asset in a trust, then it can't be sold. That isn't so. In the trust Nils and Lars can sell and buy assets. They can also borrow money to help fund the assets of the trust. Sometimes a Trustor (the founder of a trust) restricts the power to borrow in the trust document, to reflect the Trustor's own philosophy of investing.

A trust agreement may give the Trustee the power to amend the trust itself. This might be limited to specific situations, for instance to conform to future tax requirements. A trust agreement might say the Trustee may modify the trust terms to accommodate the receipt of any stock in an S corporation, because only trusts with certain terms are qualified to own S corporation stock without serious tax problems. Or a Trustee might be authorized to amend in the event IRA or other retirement funds are received by the trust, since the terms of a trust affect the rate at which retirement funds must be withdrawn and taxed.

Avoiding the Court filing of a Will, by using a Living Trust as the primary instrument to allocate one's estate, doesn't just avoid probate costs. At the same time it gives privacy to one's wishes. Since his estate is large and allocated among his surviving spouse and a bunch of other relatives, Nils is glad to know that his designation of heirs will not be open to the public eye.

As noted earlier, Sylvia is legally entitled to be one of Nils's heirs when he dies. Under the Premarital Agreement, she gets the Washington house and a $2 million trust if Nils dies before she does (as is likely since she is younger). This obligation is reflected in Nils's Living Trust Agreement, before gifts to other heirs.

OK; let's get basic here. What is a Living Trust? It's a different way of doing one's Will and (eventually) transferring one's estate to heirs. It's partly a way of satisfying title companies.

If Nils had a Will and then died, Lars as Executor would file the Will, give certain required notices, Inventory the assets, pay the taxes and other costs, and finally transfer the assets to the heirs. The Will gives him the authority to do all this, but the world doesn't recognize his authority until he goes to Court, files the Will and the proper pleadings to start a probate, and is recognized by signature of the Judge or Commissioner there. The Will and Lars's appointment as Executor are then part of the public record. So when Lars signs and records a deed of Nils's residence to whomever has inherited it under the Will, or to someone who buys it from Nils's estate, title companies will see in the record not only the deed, but Lars's appointment as Executor, and willingly issue title insurance to the new owner.

A Living Trust is a different way of doing all this. Nils can sign a Living Trust Agreement that looks kind of like a Will. Then, if things are done right, Nils will transfer title to his assets to the Trustee of the Living Trust (now, while Nils is living). The Trustee thus has title. If Nils dies, the Trustee named in the Living Trust Agreement still has that title, and may transfer it to their heirs or sell it as part of the estate process. There is no Court filing, no probate. Avoiding the probate process can save estate costs, particularly with properties in certain states like California.

Nils has started a small commodities account with his broker step-nephew Sal. He didn't tell Lars about it at first, just opened it with some of the investment income that comes into his personal checking account. Lars is on all the accounts but this one, actually two now, the checking account and the commodities account.

Nils says he isn't trading commodities futures like Lars had seen a lot of in the late seventies. Nils is buying ETPs (Exchange-Traded Products), more a way of owning the commodities than of wagering on short-term price movements. Gold has certainly been a good thing to own lately (although maybe Nils is now getting in at the top).

Nils's talk of betting triggers several thoughts in Lars. He recalls reading that Wild Bill Hickok did a lot of drinking and gambling and womanizing, meeting his end while playing cards in the No. 10 Saloon in Deadwood, South Dakota. Sat for once without his back to the wall, and was shot in the back of the head. How Western-sounding is all that?! What caused him to look it up was his college buddies pointing out Lars had drawn Wild Bill's "Dead Man's Hand" in a late-night poker game in their fraternity. Both black aces and both black eights. The fifth card in the legendary hand is undetermined. They didn't have Google then; Lars had to check it out at the library.

The research in that story of Lars is probably more representative of his nature than the poker. He doesn't like to gamble. He and Kyra have gone to Las Vegas a couple of times with Nils, who enjoys playing craps until his allotted funds run out. Lars barely knows how to play blackjack. For him the trip is more a chance to stay in a nice hotel, have drinks and a first-rate dinner, and see a show. They saw Cirque Du Soleil there last time. Wonderful stuff. Lars didn't mind the expensive tickets; these actors (or whatever they were called) seemed more physically intelligent and deserving than most pro athletes.

It seems a little odd to Lars, when he pulls into Guy, that Nils is driving in from a different direction. But not all that odd, and surely not Lars's business.

It's the night of their monthly business dinner. Just the two of them, to keep on monitoring Nils's business affairs. They have a hearty and fairly expensive dinner, and drinks. Lars doesn't have a drink 'til the preset business is done at least; it's kind of an ethical point with him. Not that it would be all that morally wrong, but it might give an impression of being at less than his best for even this client.

Although he hasn't really ever articulated it, Lars likes the way the name of the restaurant (Guy) is both masculine-sounding and a little bit off grammatically or something like that. Why not Guy's? Kind of like Ruth's Chris - does that mean Ruth's son Chris? He's never investigated it and would just as soon not know.