Trusts Archives - Skeen Law

What Will Happen To Your Kids If You Pass Away?

Your children are important to you. You will spend a good part of your life sacrificing and caring for them. But, what will happen to them when you are gone?

Typically, when people think of Estate Planning, they think of wills and property, probate and money, burials and wakes. As a parent, however, you should be thinking about your children, and custody, and guardians, and trusts, and caring for their future if you are not around.

Who Gets the Children?

A married person generally assumes that his or her spouse will care for the children if the married person dies. However, with the many complicated family situations that exist today, nothing should be taken for granted. If a mother passes away, the natural or adoptive father has a right to custody of the children, even if he does not live with the family. If the father dies, the mother gets custody.

For example, Joan and Henry have been married for 10 years. Joan has two children by a previous marriage to Frank. They are Bill, 12 years old, and Susan, 11 years old. Joan and Henry have three children together- 7, 8 and 9 years old. If Joan dies, Bill and Susan will pack their bags, leave the brothers and sisters they have grown up with, and go live with Frank.

In another case, Suzy divorced Sam and took their two children with her. If she dies, Sam gets the children back, and may get control of all the money and property Suzy leaves behind.

On the other hand, a married couple may die in the same accident leaving their children with no parents. Similarly, a widow or widower may pass on, leaving the children orphaned. If the parent or parents have not planned ahead, the grandparents are first in line for custody, then uncles and aunts and other relatives.

A recent case in San Antonio involved an orphaned child we’ll call Billy. Billy’s paternal grandfather lives in California. Billy’s paternal grandmother lives in San Antonio. Billy’s maternal grandparents live in Idaho. They all want custody.

Billy now has a lawyer (called an attorney ad litem). The lawyer’s job is to help the judge find out who is best qualified and suited to take care of Billy. The lawyer had to visit each grandparent, with a professional social worker or family counselor in tow, and make recommendations to the judge. The cost of the trips, the lawyer’s fees, the payments for the counselor, the court costs, and other expenses will all come out of Billy’s inheritance.

Billy’s parents could have kept this situation from arising by designating a guardian for Billy in their wills. The will of the last parent to die takes precedence, but with foresight, the two parents would be in agreement as to who the guardian would be.

Who Gets the Money and Property?

The person who gets custody of the children is called the Guardian of the Person. The person who gets custody of the children’s money and property is called the Guardian of the Estate. They are usually the same person.

A natural parent who becomes Guardian of the Person has the legal right to be Guardian of the Estate. However, there are ways to prevent them from managing the bulk of the estate.

Let’s look at Suzy again. Her ex-husband will get custody of the children. He will also be Guardian of the Estate. Suzy, however, was a hard worker and smart lady. In her will, she set up a trust for her children and named her Uncle Patrick as the Trustee. Sam gets the children, but the money goes to the trust. Uncle Patrick is there to make sure that the children are well cared for.

Parents of older children are often concerned with the money management abilities of their children and the children’s spouses. A trust, created in their parent’s will, can provide a means of professional management of the parent’s assets. The trust can be established in the will naming a reliable individual or bank as Trustee. This would ensure that the assets are used in the manner the parent desires.

Left Out in the Cold

Finally, consider the case of Harry and Dotty. Harry married as a young man and had children. He divorced and lost contact with his children. Later, he remarries to Wanda.

Although they did not have children together, Wanda had a small daughter, Dotty. Harry raises Dotty as his own, but does not adopt her. When Dotty is eight years old, Wanda dies with a will leaving her entire estate to Harry.

Harry and Dotty were very close. When Dotty is 14, Harry dies without a will. His entire estate goes to his children by his first marriage. Dotty inherits nothing from Harry. Not a dime. Not even her mother’s jewelry. Not even her grandmother’s china. Nothing.

Planning Ahead

Estate Planning is, as you can see, more involved and more important for parents. Parents have to plan where the money and property goes. More important, however, parents must plan for their children’s future. A few minutes now can prevent years of heartache later. Are your children worth those few minutes?

Is It Too Late for a Durable Power of Attorney?

I recently got a call from John who was concerned about his mother, Susan. She had been forgetting to pay her bills and had recently suffered a bad fall. John realized that his mother would increasingly need his help in the coming days and months, yet he had no legal authority to do so. John wanted to know if I could help his mother get a Durable Power of Attorney in place. I told John that it may be too late.

Powers of Attorney can only be signed while you still have the capacity to understand what you’re signing and that you’re giving someone the power to handle your finances without court supervision. In fact, you must have more capacity to sign a Power of Attorney (contractual) than you must have to sign a Last Will (testamentary). Once you no longer have this capacity, you cannot sign a Durable Power of Attorney. And that’s good public policy, right? We don’t want people who don’t understand what they are signing to give away management of their financial affairs to another.

Whether or not you have capacity to sign documents often turns on the facts. Factors like your current health, medical history, and recent behavior should be taken into account. If you have advanced dementia or Alzheimer’s and live in a nursing home, it’s likely too late. However, if you have recently been diagnosed, and have “good” days and “bad” days, it may not be too late. One possibility is to wait for a “good” day and schedule an appointment with your general physician on the same day as an appointment with your Estate Planning attorney. Have your physician conduct a Mental Status Exam, which involves asking you a series of questions to test your competency. Take the findings of that exam to your attorney on that very same day, and ask to sign a Durable Power of Attorney. Your attorney will likely review the exam results and may spend some time talking to you and asking you questions to be sure for themselves that you are competent to sign. While this course of action is a possibility, many attorneys will not be open to preparing a Power of Attorney when your competency is even in question.

Of course, the best and easiest time to sign a Durable Power of Attorney is before you actually need it. Before you start forgetting things, before any kind of diagnosis. If you do not have one in place, you should take care of that immediately. Having one prevents an embarrassing and expensive Guardianship proceeding that’s required if you can’t handle your own finances down the road. The simple and inexpensive Durable Power of Attorney can save you and your loved ones so much heartache.

What is a Trust?

Trusts are used in estate planning for various purposes, including: to provide tax reduction benefits, to hold property for a person until he or she is mature enough to manage it, to hold property for distribution only for specific purposes, to protect property from the claims of a beneficiary’s creditor, to protect property from the claims of an estranged spouse of a beneficiary, to provide for the management of property with distributions for a beneficiary’s long term support, and for any other reason that the grantor desires. The trust agreement drafter writes the agreement with the grantor’s intentions in mind.

A trust is a form of contract. The person who creates the trust, the grantor (also sometimes referred to as “settlor” and “trustor”), requests another person, the Trustee, to hold property for the benefit of a third person, the beneficiary. A trust is usually set out in a Will or trust agreement and is not restricted to any particular terms or language. In fact, a provision in Mary’s Will which states, “I leave $50,000 to my brother, John, to use to educate my niece, Nancy” creates a trust upon Mary’s death where Mary is the grantor, John is the trustee and Nancy is the beneficiary. If the Will or other document which describes the trust relationship leaves out the Trustee’s powers, as in Mary’s Will, or other convenient provisions, then Texas law as found in the Texas Property Code provides those powers or provisions. For example, if the Will or other document does not provide for an alternate person to serve as Trustee if John cannot, then the Texas Property Code includes provisions for the appointment of a successor trustee. If terms are left out of the trust agreement or if the terms as set out in the trust agreement are ambiguous, then the beneficiaries may apply to a state court to determine what the grantor intended. Although trust agreements can be as simple as one statement, most trust agreements include all of the provisions necessary to manage the trust.

A Trust generally:

• Names the grantor. The grantor is the person who creates the trust. Mary, who included the above provision in her Will leaving $50,000 to her brother, John, to use to educate her niece, Nancy, is the grantor.

• Names the Trustee. The Trustee is the person who will hold the property put into the trust, manage the property and distribute income and principal as set forth in the trust. In the above example, John is the Trustee.

• Identifies the beneficiaries. The beneficiaries are the persons for whose benefit the trust assets are held. The trust can benefit only one person, such as “my niece, Nancy” or can benefit a group of people, such as “all of my children” or “all of my descendants.” < Must be funded. The grantor must contribute some property and at least $1, to the trust in order for the trust to exist.

• Provides for distributions. The trust agreement provides when and for what reason the Trustee will distribute the property to the beneficiaries. For example, the trust can provide that the Trustee will hold the property and reinvest the property and the income from the property, making no distributions until the beneficiary is a certain age, e.g. 25, and then the trust terminates and all of the property is distributed to the beneficiary. More commonly, the trust agreement will provide that some distributions can be made prior to the termination of the trust. For example, the trust can provide that all income earned on the assets in the trust will be distributed to the beneficiary. The trust may provide that the Trustee will distribute the income only if the beneficiary needs it for his education or for his health needs. The trust can provide that income is distributed but that principal is not distributed. The trust can provide that income and principal may be distributed if the beneficiary needs it. The distribution provisions are the ones that outline the beneficiary’s rights in the trust assets. These trust agreement provisions are the most important provisions of the agreement and reflect the desires of the grantor regarding how the trust property shall flow to the beneficiary. Generally, income generated by trust property is ordinary income for federal tax purposes and generally includes interest, dividends, and rents. There are actually some distinctions between trust accounting income and taxable income, but this is a helpful shorthand reference. Principal is the trust property transferred to the trust and all appreciation in that property. Generally, capital gains are considered part of principal.

• Identifies the Trustee’s powers. The trust usually includes a list of the powers that the Trustee has relating to managing the trust. Generally, these powers are in addition to any powers granted to Trustees under state law. For example, the grantor may want to give the Trustee the power to loan money (a trust asset) to the beneficiary.

• Includes a spendthrift clause. Frequently, trusts include a spendthrift clause which provides that the beneficiary cannot pledge the assets of the trust as collateral on a loan nor can he assign his right to receive income from the trust. This provision protects the assets in the trust from the claims of creditors of the beneficiary.

What is the difference between Revocable and Irrevocable Trusts?

Trusts can also be revocable and irrevocable. A revocable trust is a trust which the grantor (the person who creates the trust) can amend, cancel or revoke at any time. An irrevocable trust cannot be cancelled, revoked or even amended after it is made. Since testamentary trusts are not created until the grantor has died, they are irrevocable upon the grantor’s death. Prior to the grantor’s death, they have not gone into effect, so the grantor could change his Will or Revocable Living Trust to change the provisions of a testamentary trust or to eliminate it completely. For example, the grantor could change his Will to provide “I leave $50,000 to John to hold for the benefit of my niece, Nancy, to be held until she is 25 years old.” Under the change, John cannot use the money to pay for Nancy’s education, and he must turn over all the trust assets to Nancy when she reaches 25 years of age.

The Unseen Dangers of Giving your House to your Kids Today

I recently met with a couple in my office from Fair Oaks Ranch, Texas. They have three children and they want as few assets as possible to be frozen and tied up in the probate process upon their death. They were considering transferring their home, and all of their other real estate, to their children right now, so that their children would not have to go through probate. I told them that there are several important tax consequences to consider when donating assets to your heirs while you are alive.

1. Depending on the size of your gifts, you could trigger the 40% estate tax.

2. Depending on the value of your real estate at the time of your death, you could leave your children with a hefty tax bill.

3. You may not qualify for Medicaid benefits if you go into the nursing home.

Transferring your assets to your heirs as gifts during your lifetime can affect the tax on your estate and the tax owed by your heirs. Make sure to work with an estate planning attorney with an excellent working knowledge of the practical effects of the property laws, trust code, Medicaid eligibility manual, and the tax code. If you have specific questions regarding these issues, contact me at (210)202-1141 or register for an upcoming educational seminar on my website.