How to Avoid Estate Planning Icebergs

May 31, 2011

Antartica scene from Julia's Trip


Ever since sailors first explored the Northern and Southern Oceans, people have been fascinated by icebergs. 

Today, people travel thousands of mile to look at these magnificent floating blocks of ice. (The photos in this newsletter were taken by Julia during her trek 2009 to Antarctica.)  Icebergs are truly natural wonders. 

Still, no matter how breathtaking they may be, icebergs are a real danger to vessels navigating the seas that contain them. 

Only around 10% of an iceberg's volume breaks the water's surface which makes determining the iceberg's entire shape extremely difficult. Sailors must constantly monitor the horizon and use sonar to identify and avoid icebergs. The misidentification of an iceberg's underwater size and shape can place a ship in peril since simply brushing against an iceberg can puncture or tear a ship's hull. There is no wonder that smaller unassuming icebergs pose the greatest danger to vessels.

In estate planning, one of the most iceberg infested oceans is the administration of a Trust after the death of a Trustor (the person who created the Trust).  Here, the Trustee acts as a captain navigating the Northern or Southern Ocean, the vessel is the Trust and the Blue Icepassengers are the Trust beneficiaries. Like the ship captain, the Trustee must be vigilant in spotting potential icebergs in order to avoid placing him or herself, the Trust, and the Trust beneficiaries in harm's way.

Most Trust Agreements allow the Trustee to hire an experienced crew of attorneys, accountants, real estate agents, and the like to assist the Trustee in navigating these dangerous waters. However, some Trustees choose to go in it alone armed only with the hope that the waters contain no icebergs.
Why Hire A Crew?

There is a common misconception that professional services are unnecessary when administering a Trust at a Trustor's death. The belief is that the administration of a Trust is simple and without cost. Acting upon these misconceptions, well-intentioned Trustees begin collecting, transferring, and distributing assets without first consulting an attorney. In other instances, successor Trustees (the Trustee who takes over for the initial, now deceased, Trustee) believe wrongly that there is nothing for them to do. So they fail to do anything.

No matter the reasoning, failure to consult with an attorney at a Trustor's death can result in costs far in excess of that which would have been incurred had an attorney been consulted initially. Under California law, even a fully funded trust requires structure and formality when being administered.

Just like a ship captain would not venture into icy waters without help, neither should a Trustee attempt to undertake a Trust administration without assistance.
The Trustee's Responsibilities as Captain

Trusts can be administered without court involvement but they still need to be properly administered. Trustees owe fiduciary duties to the Trust beneficiaries. These fiduciary duties involve the collection, management, protection, and investment of Trust assets and the accumulation and distribution of income and principal pursuant to the Trust Agreement. Another important set of duties relate to tax matters.

The following are specific fiduciary duties:

a. To administer the Trust solely in the interest of the beneficiaries and to deal impartially with them

b. To keep beneficiaries reasonably informed of the Trust and its administration.

c. To take reasonable steps to take and keep control of trust property and to preserve the trust property and make it productive.

d. To avoid conflicts of interest between the Trustee and the Trust or a beneficiary.

e. To take reasonable steps to enforce claims of the Trust and to defend actions brought against the Trust.
Ice Flow
Though these duties may seem straight forward and even obvious, failure to properly carry out even a single duty could result in personal liability for the Trustee, no matter how well-intentioned. The cost to remedy the situation or to defend a legal action is far in excess of what it would have cost to hire professionals initially. The latter can be paid with Trust assets, often the defense of a bumbling Trustee cannot.


Estate Size Is Not An Accurate Indicator
Of The Work To Be Done

Often times a Trustee believes that since no estate or gift taxes are due, there is no work to be done or the work to be done should be simple. Unfortunately, this is not true. Under California law, the size of the deceased Trustor's estate has no bearing on the responsibilities of the Trustee, with limited exceptions. Like the Northern and Southern Oceans, Trust administration waters must always be navigated with the utmost care
Shortcuts Often Lead To Danger

It is not uncommon for the successor Trustee to look at the Trustee's duties and responsibilities as over burdensome and unnecessary. Trustees, in these situations, often believe a formal administration is unnecessary if all the beneficiaries "get along" and they all "agree" to a distribution plan. Though this scenario sounds nice and cost effective, and on occasions is true, the Trustee takes a major risk since only the Trustee could be held liable if something goes wrong in the administration. Being liable means, for the Trustee, he or she will have to use his or her own money to make the matter right again.

Similar to how a ship captain would never let the passengers pick the route of travel, a Trustee should not give way to the pressures of beneficiaries to take shortcuts. If a ship captain strikes an iceberg while traveling the passengers' route, the captain, not the passengers, is responsible for any injuries. The same is true for a Trustee. "The beneficiaries wanted/agreed to" is not a sufficient defense to a breach of the Trustee's duties.

Thus, it is in the Trustee's best interest to spend some trust funds, generally less than 1% of the Trust estate's value, on an attorney.
A Surviving Spouse Is Not Exempt
From Hiring A Professional Crew

Lavender IceAt the passing of a spouse, the last thing a surviving spouse typically wants to do is speak to his or her attorney. However, this is precisely what the surviving spouse should do within a few months of the deceased spouse's death.

The most common trust for a married couple is a joint living trust. However, there is a misconception that the death of the first Trustor spouse has no affect on the joint living trust. It often comes as a surprise to the surviving spouse that he or she must act in order to take advantage of the estate tax savings opportunities and inheritance protection afforded in the Trust. Moreover, the surviving spouse may owe fiduciary duties to the remainder beneficiaries of the Trust.

One of the primary reasons many surviving spouses do not contact their attorney is because there is a popular myth being spread that estate and gift tax planning is now unnecessary. The "logic" is that since the estate tax exemption amount has been increased to $5 million per person, nothing needs to be done. As with the previous misconceptions, a Trustee acting upon this belief may breach his or her fiduciary duties AND may cost the Trust beneficiaries many tax dollars.

For one, it is not uncommon for a living trust agreement to direct a division of Trust assets upon the first spouse's passing. A Trustee who does not complete the division may be liable to remainder beneficiaries or cause tax bills and fights as a result of breaching his or her fiduciary duties, especially if failure to divide results in estate taxes. Further, it becomes increasingly costly and time consuming to complete a division of Trust assets as time progresses.

Additionally, the $5 million estate tax exemption per person is a temporary law set to expire December 31, 2012. Currently there is no indication if Congress will change the estate tax exemption amount and if so, what the new amount will be. What we do know is that if Congress does not act prior to December 31, 2012, the estate tax exemption amount will be reduced to $1 million per spouse with an estate tax rate of 55%. Moreover, action by the survivor may be necessary to take advantage of the portability of the federal estate tax exemption (see our February newsletter). Therefore, it is important to contact an attorney or CPA to see if there are any tax savings that can be locked in before 2013 comes around.

Many times a surviving spouse will not need to take much, if any, action. In these cases, meeting with the attorney will serve more as an estate planning tune-up. The attorney can go over the survivor's estate planning documents to ensure they meet the survivor's needs and wishes. In addition, it is a good time to check to make sure all of the assets are in the Trust.
Hiring a Professional Crew May Even Be A Money Saver

Over the last several decades, many individuals established living trusts to avoid probate. In particular, individual looked to avoid the "cost of probate" which is the statutory fees of the attorney and personal representative as authorized by California law. Such fees are calculated as a percentage of the gross (not net) value of the assets in the estate . Currently, the fees are calculated as follows:

a. 4 percent of the first $100,000;

b. 3 percent of the amount between $100,000 and $200,000;

c. 2 percent of the amount between $200,000 and $1 million; and

d. 1 percent of the remaining balance (for most estates.)

Block of Blue IceBoth the attorney and the personal representative (or Executor) for the estate are paid according to this formula. This means an estate of $1 million would pay $23,000 to both the attorney and personal representative. There may also be additional fees in the event complications arise.

Avoiding the necessity and cost of probate does not mean administering a Trust is unnecessary or without cost. Quite the opposite. The important division and distribution procedures of a Trust are very similar to a probate procedure. Fortunately, this can all be completed without the Probate Court procedures. That is why there is far less expense than with a formal court probate.

Since administering a Trust is cheaper than probate proceedings, the resistance point experienced with Trustees is whether hiring professionals is worth it. It is true that generally no problems arise during an administration. However, the Trustee takes a major financial risk attempting to complete the Trust administration alone. A risk that can be greatly mitigated by hiring professionals to assist..


Bon Voyage

Trust administration can be a treacherous journey. There is no need for a Trustee to navigate these waters alone. Yes, there are costs to obtaining assistance but when compared with the potential cost and problems associated with administering a Trust alone, a Trustee is well advised to have professional guide him or her through this processes.


Please contact us with any questions regarding the estate planning icebergs we're pointed out and the professional crew available. We can be reached at 415.482.7555.




Julia Wald
The Law Offices of Julia Wald