What to Know if You Are the Executor

The executor of an estate has an important job. He or she has been entrusted to follow the wishes of the deceased, and it is important that the executor understands the expectations set in the will, understands the law in the presiding state, and is able to adhere to both as much as possible.

The executor has eight main tasks:

  1. Introduce the will into court for probate
  2. Notify the next of kin and the beneficiaries
  3. Locate all assets
  4. Identify all debts and obligations
  5. Pay the obligations in the order of priority
  6. Filing income and/or estate tax returns, where applicable
  7. Distribute the remainder to the beneficiaries
  8. Close the estate

How to Introduce the Will

Every county has a procedure for introducing the will into the local surrogate’s court.

Typically, the executor must provide the original will, an official death certificate, the required information about the deceased, the names and address of the next of kin and the beneficiaries, and the required identification information about the executor.

If the court accepts all the documents, then it will issue the Letters Testamentary and the Executor Short Certificates. This documentation establishes that the executor can act on behalf of the estate, and it will be needed when interacting with different fiduciaries or institutions on behalf of the estate.

Notify the Next of Kin and the Beneficiaries

Once the court accepts the will into probate, the executor must notify the next of kin and the beneficiaries. The executor must also make a copy of the will available to them upon request.

New Jersey requires that notice be sent through certified mail. New Jersey also has a time limit for notifying beneficiaries. The clock starts once the will has been accepted into probate.

An attorney can help make sure that the executor meets any statutory deadlines. An attorney can also help if a beneficiary’s address is unknown or cannot be found.

Once the necessary parties have been noticed, the executor must turn over to the court proof that the beneficiaries received proper notice and that they received the notice in time.

Locate all Assets

The executor must find all assets that the decedent owned. If these are probate assets, the executor must get control of them so they can be used to pay off the decedent’s debts. The rest can be distributed in accordance with the will.

Unless the decedent had prepared his or her estate planning documents through a specialized estate planning firm that prepared a comprehensive asset spreadsheet as part of the estate plan, it is hard to know what the decedent owned or how to get control of it. Moreover, the decedent could have lived in different states or countries having different assets in different places. Sometimes, the custodian of the property is not cooperative. An attorney can be helpful if you are having trouble locating the decedent’s assets or getting estate assets released.

Identify All Debts and Obligations

New Jersey has specific rules about the order of priority when it comes to paying the decedent’s debts. It is important that the executor pays the bills in the correct order because if the funds run out, and the executor paid lower priority bills before higher priority bills, the creditor could sue the executor for its loss.  Additionally, the executor has to be aware of whether or not federal or state death taxes are due from the estate and must review the will to see who (the estate or the individual beneficiaries) are responsible for payment.

In New Jersey, the costs of the administration are one of the higher priority bills, which includes any attorney’s fees and the executor’s commission. New Jersey also regulates how much the executor is allowed to be paid based on the size of the estate. If the estate is large or difficult to manage, it may make sense to hire an attorney to help with the administration and ensure that the proper procedures are followed.

Filing Income Tax Returns, Where Applicable

Depending on how long the estate will be kept open, the executor has a duty to report all income earned by the estate during this time. The deadline for this filing is based on either a calendar year or a fiscal year and must be reported on a Form 1041. NJ no longer has an estate tax, but if the worldwide assets of a decedent are greater than the exemption, or if the decedent was a NY resident with significant assets, then a federal estate tax return or NY state estate tax return may be due. Finally, where the estate assets are below the threshold, there may still be a need to file an estate tax return to elect portability.[1] In these cases, it is extremely important that the executor review the will carefully to see who can pay the taxes—the individual beneficiaries or the estate out of the residue.

Distributing the Remainder to the Beneficiaries

Once the bills have been paid, the executor is to distribute the rest of the assets in accordance with the will. Not all gifts to beneficiaries have the same priority. There is a difference between an equal distribution of estate residue to the children of the decedent and giving specific assets/bequests to specific beneficiaries.

It is important that the executor understands the difference and correctly distributes the assets, or else he or she can be held personally liable for any mistakes.

This is especially important when the executor is one of the beneficiaries. The executor has the ability to make decisions on behalf of the estate including liquidating assets and distributing the cash, he or she must act in accordance with the will. The executor cannot use his or her position to unfairly distribute assets or disadvantage another beneficiary. An attorney representing the estate can also act as a check to make sure the executor is not exceeding his or her authority. New Jersey also requires paperwork be completed before the distributions to the beneficiaries. This involves securing releases from all beneficiaries to avoid personal liability for the executor for nonpayment of taxes or for making distributions to beneficiaries with outstanding child support obligation subject to wage garnishment. An attorney can help prepare all of the needed forms and make sure everything is properly accounted for and signed.

Closing the Estate

Once the bills have been paid and the assets have been distributed, the executor should file any outstanding estate or inheritance tax paperwork, where applicable, and then close the estate by filing a final court filing.

Closing the estate is important because if the estate is left open, then the executor is still personally liable should any new creditors emerge or if any beneficiaries complain after accepting his or her share.

Final Remarks

An estate administration will take at least nine months from the decedent’s death until the estate can be closed. In some cases, the administration can take much longer, potentially years depending on the size of the estate, the number of beneficiaries involved, the location of the assets, or any complications that arise along the way (for example. if there is confusion as to ownership of any assets or if any provisions in the will are unclear).

An attorney can help the executor by ensuring the proper procedures are filed, that the required paperwork is completed and submitted, and by acting as a buffer between the executor and the next of kin, beneficiaries, or the fiduciaries and institutions involved. All of this can ultimately help save the executor time and stress during what will be a difficult situation.

 

 

 

[1] Portability refers to the act of taking over a deceased spouse’s unused exemption which is to be added to the surviving spouse’s exemption.

Inheritance Planning: Stark Differences between U.S. Beneficiary & Indian Nominee Rights!

Certain persons of Indian descent, their progeny and spouses could qualify to register as Overseas Citizens of India giving them permanent residence rights among other things.  Similarly in the United States, qualified individuals may acquire lawful permanent status in many ways including via employment or through family connections.  Lawful permanent residents are popularly known as green card holders.  Inheritance laws apply equally to citizens and permanent residents in these two countries.  Recently, a few of us (accounting and legal professionals) from both India and the US, were researching inheritance planning issues related to “Overseas Citizens of India” and discovered significant differences in the United States and India when it comes to the succession of bank accounts from a deceased account holder to his or her ultimate beneficiaries.  We will discuss these differences in this article as they apply to citizens and permanent residents.

On the US side:

Probate vs. Non-probate accounts: In the US, an account can be a probate asset or a non-probate asset, depending on how it is set up.

A probate account is an account owned in the sole name of the individual account holder, with no beneficiary designation(s) attached to it. Upon death, the probate account goes through the probate process, which is the legal route by which these accounts make their way through the Last Will & Testament (“Will”) of the deceased account holder (“decedent”) over to the beneficiaries named in the Will. Where there is no Will, the account has to pass through the intestacy laws of the State in which the decedent resided and the beneficiaries (or heirs) of the decedent are determined by State law. In either case, the probate process involves court supervision or oversight.

By contrast, if the account is non-probate, then it does not go through the same channels and instead the account passes directly to the beneficiary or beneficiaries by operation of law, by contract or by trust. Joint accounts, or accounts with a “Transfer on Death or TOD” beneficiary or a “Payable on Death or POD” beneficiary[1], life insurance policies or retirement accounts with beneficiary designations or assets inside of a Revocable or Irrevocable trust, are all considered non-probate assets.  Except in limited circumstances (typically in matters of public policy, state law etc.), once an individual is named as a beneficiary of an account or is joint account holder with another, this individual becomes the legal owner of the account and inherits the account automatically – outside of the court system.

Therefore, in the US, upon on the death of an individual, things are relatively straightforward (especially if there is a Will in place).  All probate assets in the name of the decedent pass into an estate account that is set up by the Executor named in the Will. To open the estate account, the Executor will need to appear at his or her bank of choice armed with a Death Certificate, photo ID, a Tax Identification Number or TIN# (in lieu of the decedent’s Social Security Number for taxes), and a Letters Testamentary (or Appointment Letter) procured from the Court.  Similarly, if there was no Will, the same process is followed except that the individual stepping forward to serve – now called the Administrator – has to post a bond to secure the estate assets (as an insurance for the ultimate beneficiaries) before he or she can obtain the Letters of Administration from the Court.

It is pertinent to note that in either case, Courts as well as the banks do not proceed without first obtaining proper documentation from the individual stepping forward to serve and banks will likely be subject to liability if they fail to obtain the necessary documentation.  More importantly, it is unheard of for banks and other institutions to transfer probate assets of a decedent directly to an account belonging to the Executor/Administrator.  These accounts must be transferred to the estate account of the decedent and held there until the estate administration formalities are completed, including payment of any taxes/debts or other obligations of the estate, before money passes to the beneficiaries.

On the India side:

A bank/financial account can be held individually or jointly.  Joint accounts can be held: ‘either or survivor’, ‘anyone or survivor’ or ‘former or survivor.’  Account holders are also often referred to as First Holder and Second Holder where if the first holder dies, the second holder automatically receives the beneficial interest in the account.  However, all accounts (including those that are individually owned) can have nominee designations.  Unlike the US where a nominee designation would be treated as a beneficiary designation, the person named as the nominee receives payment from the bank only “as a trustee of the legal heirs of the deceased depositor, i.e. such payment to him shall not affect the right or claim which any person may have against the survivor(s)/nominee to whom the payment is made.” [2]

So here is where things can get quite tricky, and often messy, when the nominee designations don’t match up to either the beneficiaries listed under the Will or, the account holder dies intestate i.e., where there is no Will, when the nominee designations do not reflect the lawful heirs of the estate.

Let’s start with what a bank is instructed to do –  in an effort to alleviate the “tortuous procedures …[that] caused considerable distress” to family members upon the death of a deceased account holder, the RBI or Reserve Bank of India issued a circular stating that where accounts have a valid nomination, the bank has to follow a 3-step protocol, before paying out the balance directly to the survivor(s)/nominee, with full discharge of any liability against the bank for making such payments.

The three steps outlined were that the bank:

  • exercise due care and caution as to the identity of the survivor(s)/nominee and valid proof of demise of the accountholder;
  • make sure that there was no court order restricting the Bank/institution from making such payment; and
  • makes it clear to survivor(s)/nominee that payment is being made to him or her only as a trustee of the funds and that valid beneficiaries to the funds could have a claim against the survivor(s)/nominee.

But interestingly, there is also some indication to suggest that if banks insists that the survivor(s)/nominee produce legal documentation like the succession certification, Letter of administration or probate etc., or ask for him or her to obtain a bond, that would actually “invite serious supervisory disapproval”[3].  Where there are no nominee designations, the bank is “advised to adopt a simplified procedure for prepayment to legal heir(s)…keeping in view the imperative need to avoid inconvenience and undue hardship to the common person.”[4]

It follows that if the nominee designation does not match the Will of the succession rights of the beneficiary, then the legal heir’s only option is to fight it out in court.  In an article on the subject, S.S, Rana & Company cite Supreme Court cases where the Court has held that the nominee is only a custodian of the account[5].  Moreover, Section 72 of the Companies Act, 2013, states that while the nominee shall become entitled to all the rights in the shares and debentures of the company immediately upon the death of the shareholder, the rightful ownership of shares remains with the legal heir and not the nominees[6]. Courts in India have time and again reiterated that the legal heir is the ultimate, rightful owner of the property of a deceased individual, a nominee (pursuant to a nomination given by the deceased during his / her lifetime) would act only as a trustee on behalf of the rightful legal heir(s), and hold such property until the matter of succession or inheritance is decided and implemented. Even in the case of a minor being a nominee and not a legal heir, the natural or legal guardian acting on behalf of such minor nominee has to act as Trustee on behalf of the legal heirs.

Complexities increase where there is no testamentary instrument, and the personal law of the decedent provides a certain set of rules/guidelines for devolution of the estate on the legal heirs.  For example, in the case of a Hindu male, Class 1 heirs (mother, children, grandson of his predeceased son and so on) who get priority over his assets, leave out the father, who is not considered an immediate legal heir and therefore has no right to his son’s assets[7].

Some exceptions to the above are in the case of life insurance or Relief/Savings Bonds where the nominee is also considered the beneficial owner and therefore entitled to the proceeds of the policy or the bonds.

Solution for both countries

It is imperative for anyone with assets located both in India and overseas to execute a well thought succession plan. One must aim at erasing confusion over the nominees and his/or legatees/beneficiaries. One must not only consider setting up a Will (in all countries where applicable) clearly delineating the various beneficiaries under the Will but also to methodically and systematically go through every single account and align nominee designations in accordance with the Will. Nomination and Will must be in harmony.

Those who are US citizens/residents should understand the contrasts that exist in the two countries where a beneficiary designation trumps the Will in almost every case in the United States whereas it follows a completely different treatment in India.  The easiest way to ensure a smooth and a seamless transition to your loved ones in India, is to ensure that the nominee designations mirror your intention, irrespective of a Will being made, listing the true and intended beneficiary of the account.

Our goal as planners and professional advisors is to guide families to pass on their wealth to the intended beneficiaries in a clear and hassle-free manner. This means keeping families out of the judicial system and not have legal heirs bring a court action to assert his or her lawful claim over the estate assets against an unscrupulous nominee.  Unfortunately, in its efforts to make things stress-free for grieving families, the Indian banking system may have inadvertently made it more difficult for lawful beneficiaries to claim what may have been theirs.

 

Contributing Authors:

Poorvi Chothani, Esq. is the founder and managing partner of LawQuest, an employment and immigration boutique law firm. Poorvi, a graduate of University of Pennsylvania, is admitted to the bar in India and the USA and is a registered and practicing solicitor, England and Wales.

Sujatha R. Krishnaswamy is a Chartered Accountant & MBA from Georgia Tech.  She is also the co-founder of Crestworth Management Partners Pvt. Ltd., management consultants & tax advisors, based in Bangalore, with a special focus on Indian and U.S. taxation for individuals.

Roopa P. Doraswamy, B.A., L.L.B (Hons), J.D., is a Co-Founder at Flywork Innovations Pvt. Ltd, a SaaS enabled marketplace for legal and compliance.  She is a graduate of National Law School of India University (NLSIU) Bangalore and Northeastern University School of Law, Boston

Sushma Nagaraj, B.A., L.L.B from Bangalore University, India is a qualified lawyer in India who manages an independent private law practice.  Her specialty is in the areas of estate, trust and property laws in India.

Rekha V. Rao, J.D. from the Elisabeth Haub School of Law at Pace University is the principal and founding member of Rao Legal Group, LLC.  She is licensed to practice in New York and New Jersey and has developed her firm’s niche in the areas of estate planning, estate & trust administration, elder law, guardianship, and special needs planning.

Priya Gidwani is the CFO and founding member of Rainmaker. As a CFO with emerging, growth and mid-market companies, Priya’s experience spans everything from helping to launch start-up enterprises to managing finance for mid-size companies. Priya also has significant experience of working in the US with companies like Siebel Systems Inc. and Providian Financial Corporation. Priya is a Chartered Accountant from India and holds a Master’s degree in Accounting from Illinois State University.

 

[1] Note that not all bank accounts have or offer a POD or TOD designation but if it does (part of the contract), then such accounts will pass directly to the named beneficiary or beneficiaries and bypass probate

[2] Settlement of Claims in respect of deceased depositors – Simplification of Procedure; RBI/2004-05/490, DBOD. No. Leg. BC. 95/09.07.005/2004-05, 2(A)(2.1)(c),

https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=2284&Mode=0#:~:text=Banks%20are%20advised%20to%20settle,(s)%2C%20to%20the%20bank’s [emphasis added]

[3]  Id. at 2(A)(2.2).

[4] Id. at 2(B)(2.3)

[5] In its article, Legal heir or Nominee? Who is the rightful owner?, some cases cited to are: Shalkti Yezdani v. Jayanand Janat Salgaonkar, Smt. Sarbati Devi and Anr. V. Smt. Usha Devi, Uma Sehgal and Ors. vs. Dwarka Dass Sehgal And Ors etc.,

https://s3.amazonaws.com/documents.lexology.com/6edb5a5b-1308-4947-bfac-5f69d1f58278.pdf?AWSAccessKeyId=AKIAVYILUYJ754JTDY6T&Expires=1650889871&Signature=dfN8XJOf4BRwSKqO3v4VdBueUbE%3D

[6] Id.

[7] Wrong Nominee and right nominee for bank A/cs, FDs, mutual funds, financial assets by Pragati Kapoor & Preeti Motiani, ET Online (2021), https://economictimes.indiatimes.com/wealth/legal/will/wrong-nominee-and-right-nominee-for-bank-a/cs-fds-mutual-funds-financial-assets/articleshow/85396026.cms?from=mdr

New Jersey’s Intestate Share Title 3B:5-3: Intestate share of decedent’s surviving spouse or domestic partner

The intestate share of the surviving spouse or domestic partner is:

a) The entire intestate estate if:

  1. No descendant or parent of the decedent survives the decedent; or
  2. All of the decedent’s surviving descendants are also descendants of the surviving spouse or domestic partner, and there is no other descendant of the surviving spouse or domestic partner who survives the decedent.

b) The first 25% of the intestate estate, but not less than $50,000.00 nor more than $200,000.00, plus three-fourths of any balance of the intestate estate, if no descendant of the decedent survives the decedent, but a parent of the decedent survives the decedent.

c) The first 25% of the intestate estate, but not less than $50,000.00 nor more than $200,000.00, plus one-half of the balance of the intestate estate:

  1. If all of the decedent’s surviving descendants are also descendants of the surviving spouse or domestic partner and the surviving spouse or domestic partner has one or more surviving descendants who are not descendants of the decedent; or
  2. If one or more of the decedent’s surviving descendants is not a descendant of the surviving spouse or domestic partner.

 

IN PLAIN ENGLISH

If your spouse or domestic partner dies without a Will, then

  • You, as the surviving spouse, can inherit the entire estate only if you and the decedent had children together, and these children were the only children from that marriage (and there were no other children from other marriages or relationships).
  • If you are the surviving spouse, and you and the decedent had NO CHILDREN together AND if the decedent’s PARENTS are still alive, then you are entitled to get the first 25% of the decedent’s estate up to the first $50K and 75% of the remaining balance. The decedent’s parents get the rest!
  • If you are the surviving spouse, and you and the decedent HAD CHILDREN/DESCENDANTS FROM OTHER MARRIAGES OR RELATIONSHIPS who are alive, then you are entitled to get the first 25% of the decedent’s estate up to the first $50K and 50% of the remaining balance. The other children get the rest!

 

TAKEAWAYS

  • Understand the difference between probate assets and non-probate assets (check out our website for our blog posts about that) and know that the intestate estate only deals with probate assets.
  • If you are (1) newly married; (2) do not have children; or (3) have a blended family, get yourself a Will now!!

Estate Planning Is Not Just for the Wealthy!

We have this saying here at Rao Legal Group (RLG): It does not matter whether you have $10K or $10M – if you have anything of value that you would like to pass on to someone, then you need to have your proper foundational documents in place to formalize your intentions. A cornerstone of foundational documents is your Will, an important element that determines what happens to your assets upon death. The Will can answer important questions such as:

  • What will you leave for your children or your favorite charity?
  • Who should take care of your minor children if you are not around?
  • What do you want your funeral arrangements to include?
  • How will your estate taxes be paid?

Unfortunately, more than half of the adults in the United States do not have a Will, which means when those individuals die, their assets (provided they were solvent) are distributed based on the laws of the state where they lived. There will be no consideration for what the person wanted during their lifetime.

Consider this hypothetical (but not uncommon) scenario:

Bill has no children and intends to leave his estate to his brother, Tom. Bill dies unexpectedly and never executed a Will or established a Trust during his lifetime. According to the laws of his state, Bill’s estate goes to his estranged wife, Susie, whom he had not spoken to in the past three years, but from whom he had not legally divorced.

Tom hires a lawyer and goes to court, but there is nothing the Court can do to help Tom because the law is on Susie’s side.

Bill did not get around to setting up his Will, because he did not expect to die when he did.  Unfortunately, many people die unexpectedly, highlighting the need for a Will. What we hear often from clients who come to us to assist them with probating the estate of a loved one is that the decedent (the person who died) had planned to set up his or her Will but never got around to it. If Bill had created his estate plan, Tom would have avoided the unnecessary emotional and financial stress of dealing with litigation against Susie and would have received his inheritance, as his brother wished.

Many people also have the misconception that they do not need a Will because their estates are “straightforward,” in that their assets will automatically pass to their loved ones because they don’t have estranged wives or children from a prior relationship. But even for these individuals, having a Will is preferable than to dying intestate (without a Will). With a Will, you can name an executor or guardian of your choice; you can ensure that your assets pass to your spouse or children in trust instead of outright, which is invaluable if you have concerns about remarriage or spendthrift children; and you can clearly identify who must pay the estate taxes and how the distributions should be made to your loved ones. To put it simply, a Will makes it easy for the people handling your estate to know exactly what your wishes are.

When there is no Will, then you die “intestate,” and the laws of intestacy of that state control what happens to your assets. This means that someone will have to be appointed as the administrator (not Executor) of the estate, who will then need to get bonded before he or she can start doing the same work as the Executor, making the process lengthier and more expensive.

By creating a valid Will, you can make it easier and less expensive for your heirs to inherit your estate, and you can ensure that the right people become beneficiaries.

In conclusion: Estate Planning is not for just the wealthy. It is nothing more than the act of getting “what you have” over to “who you want to inherit.”  We at RLG will help you formalize those intentions to give you peace of mind, knowing that your wishes are being carried out properly and in a seamless manner.

My aunt named me “POD” beneficiary of a bank account before she died, but the bank refuses to give me the money!

Decedent had a bank account in her own name worth $50K. She named her nephew as a “Payable On Death” or POD beneficiary of this account, unbeknownst to her spouse and children. He was her favorite nephew, who’d cared for her a lot during her lifetime, and she had hoped he could quietly liquidate the funds upon her death and use the funds to pay back some of his college fees.

Little did she know, this little act of love would cause so many adverse ramifications, and the series of events that unfolded next were nothing short of a nightmare for the poor nephew.

The nephew was dealt a nightmare because New Jersey imposes an inheritance tax for assets more than $500 passing to all non-Class A beneficiaries. The nephew in this case would be a Class D beneficiary, who would be required to pay a 15% tax on the amount passing to him, minus the $500 exemption.

Worse, the bank would put a freeze on the account until he was able to produce a waiver from the State of NJ Tax Branch, and the only way to secure this waiver would be if the Executor of the Estate (or Administrator, if there was no Will) files a NJ Inheritance Tax Return (ITR) with the Tax Branch reporting the distributions from the estate. All of this must be accomplished within eight months of the date of death. NOTE: There is a blanket waiver that allows the nephew to receive 50% of the assets in the account (i.e. $25K) immediately, but he would have to wait for the balance after the estate administration was completed and final waivers issued.

Had the aunt consulted with an estate planning attorney before her death, she would have learned that gifting during her lifetime would have no gift tax ramifications in New Jersey (NJ does not have a gift tax), and apart for a minor reporting requirement on a Form 709 to report gifts over $15K per year, she could have effectively transferred the funds over to her nephew achieving the very objective she was trying to accomplish. Better even, if she had paid the college directly with the amount, it would not have been deemed a gift at all.

It is critical to consult with an attorney before making significant decisions to ensure that these choices do not morph out of control and cause unintended consequences that could have easily been avoided.

Revocable Trusts – Common Misconceptions

A few days ago, I was explaining the concept of “funding” to clients who were new to the world of estate planning, and I was struck by the fact that what I’d always thought were commonly understood concepts were actually the cause of significant gaps in the clients’ understanding of what trusts do and how they operate. The two main areas of confusion appear to be in: 1) figuring out exactly how trusts differ from wills; and 2) the mechanics of how accounts are transferred into trusts, which make the trust the “new owner” of those accounts. This article hopes to shed light on these two seemingly simple (or so I thought!) concepts: trusts and trust funding.

We’ve heard people use the word trusts in different settings and under different circumstances. Many mistakenly believe that all trusts offer asset protection. However, not all trusts are made equal – trusts can either be living (i.e. inter-vivos trusts set up during the lifetime of the Settlor or Grantor) or testamentary (i.e. those that become effective upon the death of an individual). All testamentary trusts are irrevocable, but living trusts can be revocable or irrevocable.

Living trusts are typically stand-alone entities that become effective immediately upon the signing of the trust agreement. Those that are revocable are called Revocable Living Trusts, RLTs, or Will substitutes. These RLTs allow a Grantor (also called a Settlor or Trustor) to set up the trust and retain full control of the trust assets as a Trustee, while enjoying the full benefits of the trust assets as a beneficiary. There are several benefits for setting up an RLT, but more notably, RLTs are meant to avoid probate upon death and the associated hassle-ridden probate process in some states.

In contrast, Irrevocable Living Trusts cannot be changed once established. The Grantor transfers assets into trust by assignment, sale, gift, or loan, and then completely gives up control over the assets. The two main benefits of irrevocable trusts are: 1) assets are removed from the Grantor’s estate upon his or her death, thereby avoiding estate taxes; and 2) assets are protected from both the Grantor’s creditors as well as the creditors and predators of the beneficiaries. Properly designed trusts may even escape Medicaid recovery and preserve assets for the Grantor’s ultimate beneficiaries should the Grantor be receiving public benefits. Regardless of which irrevocable trust is used, these trusts are typically sophisticated planning techniques established as part of an individual or married couple’s advanced planning. They should always accompany a robust foundational plan complete with a Will and/or an RLT, a General Durable Power of Attorney, and Advanced Healthcare Directive. For more information on the benefits of an RLT, check out our earlier posts on this subject.[1]

When it comes to “funding” trusts though, it is important to note that this term of art refers the act of transferring accounts into the trust or retitling assets into the name of the trusts and has nothing to do with refinancing or getting loans to trusts. The following comparison may help provide a better understanding of how RLTs[2] actually “receive” assets.

If you think of your trust as a cookie jar, then our firm would work with you to take your cookie jar from concept to design to setup. Once you sign the trust agreement, your cookie jar is now ready to be filled with assets or “cookies.” And because your trust is like your alter-ego, it can do almost anything you can do. This means that if you have five bank accounts, each at a different bank, and you want to continue to bank at these five banks, then you can open five trust accounts at these banks. Our office would then provide you with the necessary documentation you need to present to your bank representative, who will then open a new trust account and give you a new account number. Depending on the type of trust you are setting up (revocable or irrevocable), the account will either be associated with your social security number or have its own separate tax identification number (or EIN#) for income tax reporting moving forward. This process of funding may involve several back-and-forth communications with institutions and can sometimes be challenging, especially if the bank representative is unfamiliar with trusts. This is when your choice of law firm becomes critical, so the firm can coordinate with you and the institutions to see this process through to the end. Our hope is that as trusts become more and more mainstream, funding becomes less daunting on Grantors, who can then leave their organized estates to their loved ones in a smooth manner, completely free of the probate process.

This article would not be considered complete if we did not address funding in connection with real property, businesses, and accounts with beneficiary designations. Here is a quick synopsis of how these assets are funded:

  • REAL PROPERTY: Real property must undergo a title change (i.e. the deed needs to reflect the new owner as the trust) in order for this to properly avoid probate. This deed must be recorded at the county clerk’s office just like any other deed. So long as the property is being transferred into an RLT, and the Grantor continues to reside in the property, a lender holding mortgage to the property cannot trigger the due on sale clause as the Grantor is protected by statute.
  • BUSINESSES: Depending on how a business is structured (LLC, S Corp., C Corp.), a Grantor-owner’s interest could be assigned to the RLT.
  • ACCOUNTS: Accounts passing by beneficiary designations, typically retirement accounts, life insurance policies. and/or brokerage and investment accounts with beneficiaries, must be amended to ensure the RLT (or its subtrusts for the various beneficiaries) is the primary beneficiary of these accounts.

While funding is relatively straightforward and may be handled by the Grantor on his or her own, it is always best to do so under the guidance and counsel of the drafting attorney (or even let the drafting attorney’s office handle the funding process for an extra fee) to ensure the transition is completely correctly and efficiently.

 

[1] Benefits of Revocable Living Trusts: https://estateelderplanning.com/2020/09/01/why-revocable-living-trusts-should-not-be-getting-such-a-bad-rap-in-new-jersey/ and Revocable Living Trusts Misunderstood: https://estateelderplanning.com/2018/02/26/legal-tip-of-the-week-22518/

[2] Our focus in this article is to address funding challenges with Revocable Living Trusts and only briefly discusses Irrevocable Living Trusts in passing.

Using Long-Term Care Riders in Estate Planning

For those that reach age 65, estimates show these individuals have a 70% chance of needing long-term care. To protect the assets individuals hope to leave behind to loved ones, one could consider adding an indemnity Long-Term Care (LTC) rider to their life insurance policy.
Though this approach may not work for everyone. Click the link below to learn more from Nationwide about LTC riders while held in an irrevocable life insurance trust.
Source: Nationwide “Using Long-Term Care Riders in Estate Planning”