A few days ago, I was explaining the concept of “funding” of trusts to some clients who were new to the world of estate planning and I was struck by the fact that what I had always thought were easy concepts to understand caused a lot of confusion to my clients and their understanding of how trusts 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 causing trusts to become the new “owner” of those accounts. This article hopes to shed light on these two seemingly simple (or so I thought!) concepts – revocable living trusts and trust funding.
We’ve heard people use the word trusts in different settings and under different circumstances. Many people 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) or testamentary (i.e. those that become effective upon the death of an individual). All testamentary trusts are automatically irrevocable but living trusts can be either revocable or irrevocable. The person(s) setting up these trusts are interchangeably called Grantor(s), Trustor(s) or Settlor(s) of trusts.
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 or RLTs or Will substitutes. These RLTs allow a Grantor to set up the trust and retain full control of the trust assets by also being appointed as Trustee of the trusts. The Grantor can also enjoy the full benefits of the trust assets as a beneficiary. There are several benefits for setting up a RLT the most important one of which is that they are meant to avoid probate (i.e. court supervised process) upon death which is often considered to be ridden with hassle in some states. In contrast, Irrevocable Living Trusts are more difficult to be changed once set up. In this case, the Grantor transfers assets into an irrevocable trust by assignment, sale, gift or loan, then typically gives up control over the assets. The primary benefits of irrevocable trusts are that assets are removed from the Grantor’s estate upon his or her death thereby avoiding estate taxes; and these assets are protected from both the Grantor’s creditors as well as the creditors & 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 a RLT, a General Durable Power of Attorney and Advanced Healthcare Directive. For more information on the benefits of a RLT, check out our earlier posts on this subject1.
When it comes to “funding” trusts though, it is important to note that this term of art has to do with 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 visual imagery may help provide a better understanding how RLTs2 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 set-up. 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 5 bank accounts each at a different bank and you want to continue to bank at these 5 banks, then you can open 5 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 more often than not, it will have a new account number. Depending on the type of trust you are setting up (revocable or irrevocable), the account will either be associated to your social security number or have its own separate tax identification number or EIN# for income tax reporting going forward. This process of funding may involve several back and forth communications with institutions and can sometimes be challenging especially when a representative may be unfamiliar with trusts. This is when your choice of law firm become important so the firm can work with you and the representatives to see this process through to the end.
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 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 a 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
Depending on how a business is structured (LLC, S Corp., C Corp.), a Grantor-owner’s interest could be assigned to the RLT
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 a relatively straightforward process and may be handled the Grantor on his or her own, it is always better to do so under the guidance and counsel of the drafting attorney or let the drafting attorney’s office handle the funding process for an extra fee to ensure things get done correctly and time efficiently. Once all of the assets are either moved into the trust or named as a beneficiary of asset, then going forward, it becomes very easy to administer and manage these trusts because any new account that is opened or property purchased can be made directly by the trust.
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, located at https://estateelderplanning.com/2018/02/26/legal-tip-of-the-week-22518/
2 Our focus in this article is mainly on addressing funding challenges with Revocable Living Trusts and only briefly discussed Irrevocable Living Trusts in passing.
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:
- Introduce the will into court for probate
- Notify the next of kin and the beneficiaries
- Locate all assets
- Identify all debts and obligations
- Pay the obligations in the order of priority
- Filing income and/or estate tax returns, where applicable
- Distribute the remainder to the beneficiaries
- 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. 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.
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.
 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.
There are several reasons why it is important to have an estate plan. However, by far, one of the overarching reasons people have told us why they want an estate plan in place is because they want to see their loved ones inherit the full benefit of their hard-earned assets, in a smooth hassle-free manner.
When you pass away, it is the job of the Executor (after he or she gets appointed by the Court) to marshal up all of the assets in the estate, pay off all debts and expenses before distributing the remaining assets in accordance with your Will. To do this, the Executor needs to know what assets you owned at the time of your death.
A good estate plan will include a separate list of assets which the Executor can then refer to and use to make sure the beneficiaries receive what is due and owing to them. If your estate plan does not have such a list, you run the risk of certain assets going unclaimed and subsequently escheated over to the State.
Example, John dies in 2017 and his brother Bill is the named Executor. Bill starts searching through all of John’s desks, drawers and filing cabinets to see what, if any, documentation he can find about John’s assets. During his search, he uncovers bank account statements from Wells Fargo, so he contacts Wells Fargo to inform them of his brother’s death and has the accounts turned over to an Estate account. From this account, Bill uses to pay for John’s funeral and other expenses/debts before distributing the rest of the money to John’s children.
What Bill did not know, however, is that John also had an account with Bank of America that was worth $25,000. John had requested these statements to be sent to him online so there was no record of this account among John’s paperwork. Moreover, John had last used the account in 2015, so in 2018, after three years of inactivity, Bank of America, per its internal policies and state rules, turned over the account to the state.
Once the state has unclaimed property, the owner has a limited amount of time to claim the property before the state can claim the property for itself. Each state has its own rules as to how long owners have to reclaim his or her property. According to the New Jersey Department of Treasury, approximately 1 in every 10 individuals, has unclaimed property. Common examples include unpaid life insurance benefits, forgotten bank accounts, utility deposits and unused rebate cards.
In this case, if Bill never learns of the Bank of America account (or if he does not learn of it in time to claim the money for the Estate), then John’s children will be out of luck.
A good estate planning firm should offer as part of their fee, an asset list that incorporates every single asset/account you own along with recommendations on how to retitle ownership into trusts (should you decide to establish one or more) as well as how to properly update your beneficiary designations. These firms would also be mindful of overseas assets that are particularly susceptible to escaping the notice of an otherwise diligent Executor. Not all estate planning law firms offer detailed spreadsheets prepared in conjunction with the estate plan. Therefore, it is extremely important when choosing a law firm to assist with your estate plan to not only pick one that specializes in estate planning but can also offer these important (yet hidden) value-adds as a normal and commonplace part of its overall fee package. Ultimately, a good law firm’s objectives must be aligned with your own and which can help set up a proper estate plan for you to ensure your loved ones inherit the full benefit of your hard-earned assets.
 As a fun exercise, check out this link to see if you or a loved one may have unclaimed property right now that may have escheated to New Jersey State: https://unclaimedfunds.nj.gov/app/claim-search
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.
How this program may help ensure your estate plan will never let you & your family down at the critical moment
We hear it all the time when talking about estate plans—“I already have an estate plan in place, so I don’t have to worry.” But there are a few major things people don’t realize about estate planning that can put them at risk of not being prepared when the time comes. Plans need to be constantly updated, monitored and maintained on an ongoing basis. What was set up many years ago may not necessarily be current today. Asset changes, law updates and family changes can cause a well designed plan to fail when the time comes to “test” the plan much later.
If your plan includes Revocable Living Trusts (“RLT”) that were established to avoid probate, then were the trusts fully funded (i.e. were the relevant accounts titled to the name of the trust)? If you had planned for your beneficiaries to inherit in trust upon your (or your spouse’s) death, were beneficiary designation forms updated to make the trust(s) a beneficiary? We advised you during your signing that your asset spreadsheet should be updated by you every year, but do you understand when the documents themselves must be changed by the law firm? To ensure the documents work properly, you will need to keep in mind the changes in the law, purchases of new assets, changes in family structure such as marriage or divorce, births or deaths, relocations of your fiduciaries, and more. If you met with your attorney to draft and sign documents, received a nice looking binder filled with those vital documents, but then put it away in a safe place never to be thought of again during your lifetime, you may be at risk that your documents won’t accomplish what was originally intended. Failing to address critical life or asset changes by updating your new documents will jeopardize the entire plan you put in place. The number one reason estate plans fail is because they are out of date.1
Many good estate planning attorneys are concerned about how to ensure clients’ objectives are fulfilled and how to address ongoing updates long after the representation with the client has ended—we’ve joined an exclusive group of firms who have come up with an answer! We understand that your estate plan isn’t completed when you sign your documents and leave our office; rather, your estate plan is completed when your heirs are able to carry out your wishes set forth in the documents after you are gone. Therefore, we, as your estate planners, need to be available to you on an ongoing basis and remain involved throughout your lifetime to ensure that we maintain the integrity of your plan. This is why we are offering our Annual Membership Program (or AMP) to continue to take on the responsibility of monitoring and tailoring the plans that we have set up for you for the duration of your lifetime.
So if you are an existing client of ours and you created an estate plan with us, consider calling us so we can explain the benefits of AMP and how it can ensure that your plan still functions the way you intended. Additionally, please join us at our office on February 6th, 2020 at 6:00 pm for an AMP workshop where you can get more details of this program and find out how it can help you achieve peace of mind for you and your loved ones. But if you haven’t created your estate plan as yet—we hope you will choose us as your estate planning firm, as we will not only prepare superior quality documents but also stand behind our plans long after they are first created.
1. Bonazzoli, V. E. (2017). How an ordinary lawyer creates and sustains an extraordinary client care program. Parker, CO: Outskirts Press.
Leona Helmsley, a hotel owner and real-estate investor known by many as “The Queen of Mean,” died in 2007, leaving behind over $4 billion in assets. At first, it would seem like she did everything to leave her estate organized the way one is supposed to; she left a 14-page Will behind with little ambiguity as to how her sizable assets would be divided upon her death, neatly packaged into individual testamentary trusts for her grandkids to be set up after her death and to be paid out over time. And yet, the final Court ruling did not conclude until earlier this year in 2019—a full 12 years since her passing—due to various disputes by disgruntled beneficiaries.1 She had a Will, so why did the probate process take so long?
The answer comes back not only to the unusual size of her Estate, but also to the language of Mrs. Helmsley’s Last Will and Testament. While it was explicit in reflecting who would receive what amount of money and how, her intentions guiding such declarations were less clear. She had disinherited two of her four grandchildren, and yet her Will’s only mention of them was as follows:
“I have not made any provisions in this Will for my grandson CRAIG PANZIRER or my granddaughter MEEGAN PANZIRER for reasons which are known to them.” 2
This declaration was in stark contrast to the $12 million dollars left to her dog, Trouble, who she wished to have buried beside her (an impossibility due to New York State laws barring animals from being interred alongside human remains). This significant apparent inequity in pay-outs caused a foreseeable Will contest by the disinherited heirs, leading to a Court settlement on this issue in 2008.3 It’s possible that despite what she thought were clear instructions to disinherit her grandchildren, the lack of clearly laid out reasons for their omission and the large bequest to her pet opened up questions on the testator’s state of mind which ultimately resulted in a favorable outcome for the disinherited grandchildren.
Better foresight by Mrs. Helmsley and her drafting attorney of an inevitable Will contest and the Court’s possible ruling in favor of family members over pets may have prevented this situation. While Mrs. Helmsley’s Will was probated in New York, both New York and New Jersey allow Wills to be contested due to incapacity or undue influence even if there is a standard no-contest provision written into the Will. Full disclosure in a Will or better yet, setting up a Revocable Living Trust to ensure the courts are not involved, may have avoided this lengthy legal battle. Furthermore, a Revocable Living Trust would have kept all this messy family drama out of the public eye.
Of course, that’s not all there is to say regarding Leona Helmsley’s Will and the Estate Administration that followed; even at the end of probate, there was another issue regarding Executor compensation that was only finalized this past August. This matter was brought before the Court in 2016, and finally in 2019 the Court awarded $100 million to be divided equally between four Executors, with an additional $6.25 million to be paid to the Estate of the fifth Executor. This was over the objections of New York Attorney General’s office, which claimed that the compensation was an exorbitant amount and suggested it be cut by as much as 90 percent, based on a third party expert evaluation.
The Court upheld the Executors’ request for the $100 million fee, explaining that their efforts could not be accurately measured by an hourly compensation and that these Executors faced extensive challenges in dealing with the administration of the Estate. This decision resulted in fees paid to the Executors five times more than the original individual bequests included in the Will.
Was this decision in line with Mrs. Helmsley’s intentions? Most likely not. Generally, statutory laws dictate how much an Executor is entitled to as compensation out of the Estate barring any specific provisions about this in the Will. Therefore, if you have thoughts on how you would like your Executors to be compensated for their work, or if you would like to provide flexibility in their fees that the law does not, a specialized estate planning attorney can advise you on the best way to include such considerations in your Will.
Leona Helmsley’s Will, though it encompasses more assets than most of us are likely to have in our lifetimes, illustrates several of the nuanced challenges faced when writing a Will. Sandor Frankel, the attorney who drafted her Will, had nearly 40 years of litigation experience, but he was not an estate planning lawyer. This outcome for Mrs. Helmsley’s estate highlights the importance of working with a specialized Estate Planning lawyer who understands how to effectively deter Will contests and draft documents with the end goal of avoiding court intervention. Ensure that your Estate does not face these challenges after your passing by drafting your Will with a lawyer who understands how to plan for the needs of your unique situation.