Understanding Revocable Living Trusts (April 2012)

Published
by
Sanford Okura
on April 20, 2012
in Estate Planning and Trusts and Wills
. 0 Comments Tags: , .

UNDERSTANDING REVOCABLE LIVING TRUSTS

 

Trusts began in England in the Middle Ages. The Statute of Uses is a law enacted in 1536 under King Henry VIII. The Statute of Uses is the basis of trust law in England.  From England, the concept of trusts came to America with the colonists.  Thus, even though most of us have been hearing about trusts for only the last 10 or 20 years, trust law has been established for centuries.

A trust is created by a legal document which is usually called a “trust agreement.”  Many trust agreements are 20 to 40 pages long.  They can be shorter or longer.

There are 3 main roles that people play in a trust.  The person who puts his property into the trust is called the “Settlor,” because he is settling his affairs in regard to that property. In some trust documents, the Settlor is called the “Grantor” or “Trustor.”  The Settlor puts his property into the trust by giving it to a person who is called the “Trustee,” because he is being trusted by the Settlor.  The Trustee holds the legal title to the property and can sell the property, manage it and invest it.  However, the Trustee cannot take the property for himself or use it for himself.  The Trustee has a strict duty to take care of the property and to give it to or use it for a person who is called the “Beneficiary” because he benefits from the trust.

The Settlor and the Trustee both sign the Trust Agreement.  The trust becomes active or “funded” when the Settlor puts property into the name of the Trustee.  The property can be anything of value:  land, house, bank accounts, stocks and bonds, mutual funds, jewelry, etc.

The Trust Agreement usually gives the Trustee broad powers, so that the Trustee can do almost anything with the trust property.  The Trust Agreement also names the Beneficiaries and says how and when the Trustee is to give or “distribute” the property to the Beneficiaries.  Many trusts say that when the Settlor dies, the Trustee will distribute the trust property to the Settlor’s spouse or children.  Some trusts require the Trustee to give to the Beneficiaries whatever amount of money he decides is needed by the beneficiaries for their health, education, maintenance or support.  This kind of trust can be very useful when the beneficiaries are young children or for other reasons are not able to handle their own finances well.

Most of the trusts people have are “self-trusteed revocable living trusts.”  In this kind of trust, the Settlor gives property to himself as Trustee, to hold for the benefit of himself, the Beneficiary.  The same person is in all 3 roles.  As Trustee, he has full control of the trust property and can invest it and manage it himself.  He can also distribute to himself as Beneficiary any amount or all of the trust property at any time.  He has full control of the trust, has full use of the trust property and yet, technically, he doesn’t own the property – the trust does.  Therefore, if he dies, the property does not have to go to court for probate.  The Trust Agreement says who the next Trustee or “Successor Trustee” will be when the Settlor-Trustee-Beneficiary dies, and also says who the next Beneficiaries will be.  When the Settlor dies, the Successor Trustee gives the property to the Beneficiaries, without having to go to court for probate.

This kind of trust is called a Revocable Living Trust.  It is “Revocable” because the Settlor can “revoke” or cancel the trust at any time and take his property back; “Living” because it is created while the Settlor is living, as opposed to a “testamentary trust” which is created by a will when a person dies; “Trust” because the Trustee is being trusted to hold property for the Settlor.  In the future I will explain other kinds of trusts.

© OKURA & ASSOCIATES, 2012



The Hawaii Asset Protection Trust (September 2011)

Published
by
Sanford Okura
on September 16, 2011
in Trusts and Wills
. 0 Comments

HAWAII ASSET PROTECTION TRUST

By

Sanford K. Okura

         On July 1, 2011, the Hawai‘i Permitted Transfers in Trusts Act was amended. This is an important change in the law because you can now transfer assets to a trust and receive money from the trust and yet have the trust assets protected from lawsuits.

Under the new law, if you transfer property to an asset protection trust and you have no intent to “defraud, hinder or delay” the creditor, that property is safe from lawsuits. Even if you intend to defraud, hinder or delay the creditor, if the creditor’s claim arises after you transfer property to the trust, the property is safe from lawsuits two years after it is transferred. The protection from claims that arose before you transferred the property to the trust is unclear because there is a mistake in the way that provision was written. The property is not protected from claims of child support or alimony. Property that is transferred to the trust after marriage is not protected from property division in a divorce or dissolution of a civil union. Also, property that is transferred to the trust during the 30-day period before your marriage is not protected unless you give notice of the transfer to your future spouse.

Here are some other important things about the new law: The trust must be irrevocable. When you set up the trust, you can appoint a “trust advisor” who has the power to remove or appoint trustees and to direct or disapprove distributions from the trust. At least one trustee must be a person or a bank or a trust company in Hawai‘i. This means that your best friend could be either the trustee or the trust advisor. He can give you any amount of money you need at any time, and yet, if you are sued, the money and property still in the trust is safe. An asset protection trust can be attractive to anyone concerned about lawsuits.

Under the common law in the United States and England, it was not possible to set up a trust to protect yourself from lawsuits. If you set up a trust that could give money back to you and you put money or property in that trust, someone who won a lawsuit against you could go after the assets in that trust.

In 1989, the Cook Islands adopted the world’s first asset protection trust law, making it possible to set up a trust with a bank in the Cook Islands serving as trustee. Even though you put your own assets in the trust and the trustee could distribute money from the trust to you, the assets were protected from lawsuits. Other countries followed the Cook Islands. There are now probably more than 30 countries offering these trusts. These are called “offshore asset protection trusts.”

In 1997, Alaska became the first state in the U.S. to enact laws allowing asset protection trusts. Other states followed. In 2010, Hawai‘i became the 13th state to join this group. You do not have to go to a foreign country to set up these trusts, so these are called “domestic asset protection trusts.”

The law adopted by Hawai‘i in 2010 was not very helpful to someone who wanted to protect assets from lawsuits. States create asset protection trust laws so that they can attract trust business to their state. Hawai‘i was hoping that the law would encourage wealthy people on the Mainland (and in Hawai‘i) to move their money into trust accounts with Bank of Hawaii, First Hawaiian Bank and Central Pacific Bank. These are the three Hawai’i banks that act as trustees of trusts with large accounts. The 2010 law did not attract trust business to Hawai‘i. The Hawai‘i Legislature saw the problems and amended the law.

We do not yet know how well asset protection trusts will stand up in court. One thing is certain: we now have a better chance of protecting assets from lawsuits than we ever had before.



Beware of Trust Salesmen (November 2010)

Published
by
Sanford Okura
on November 21, 2010
in Trusts and Wills
. 0 Comments Tags: .

BEWARE OF TRUST SALESMEN

We were recently warned about a trust salesman committing fraud by saying that if you sign up with him, you would get a discount in legal fees from Okura & Associates.  We don’t even know this person, and have reported him to the police.

Some time ago I met with a brother and sister whose father had just passed away.  A man in Honolulu, who is not an attorney, had approached their father and sold him a trust.  When father became seriously ill, the children wanted to make sure the legal papers were in order.  They tried to phone the trust salesman.  His phone was disconnected.  Since they could not find him, they made an appointment with our law office to have their papers reviewed.

There were several problems with the trust. First, it was a trust appropriate for someone living in California, not in Hawaii.  Also, it was an A-B trust.  This couple had much less than $1,000,000 in assets and did not need an A-B Trust.  The trust was a joint trust, which I generally do not recommend.  Also, father owned vacant land which was never put into the trust. There had to be a probate. The family had to pay quite a bit more in legal fees than they would have if things had been set up correctly in the first place.

The problem is that a trust salesman cannot give the legal advice needed to set up an estate plan properly.  Even attorneys who are not knowledgeable sometimes set up a trust without properly transferring real estate to the trust, or without realizing the risk of loss to nursing home costs.  In this area of law, a little knowledge can be dangerous.

I saw another case in which a trust salesman sold A-B trusts to a married couple with over $2,000,000 in assets.  Because the husband was much older, the trust salesman had advised putting all of the real estate in the wife’s trust.  This advice would have prevented the trusts from saving estate taxes the way it was supposed to!  Our law office drafted new trusts for them, and advised them to split their assets between the two trusts, to reduce estate taxes.

Several years ago I was approached by a trust salesman who worked for a mainland company.  The trust salesman would find a customer and sell a trust.  He would send the information to the mainland, where the trust was prepared.  The mainland company would then send the trust papers to a Hawaii attorney for review.  The Hawaii attorney would approve the trust papers without even meeting with the customer.  The trust salesman would then take the trust papers to the customer to have them signed.  The trust salesman asked me if I would consider being one of the company’s review attorneys.  I contacted the Office of Disciplinary Counsel.  The Office of Disciplinary Counsel (called “ODC”) is the office which issues ethics opinions for attorneys and disciplines unethical attorneys.  I asked the ODC whether it would be ethical for me to be a review attorney for this company that sends out trust salesmen.  I received a detailed explanation of various possible ethical violations an attorney would be committing by being a review attorney for such a company.  I told the trust salesman that I could not be their review attorney.

An attorney who reviews documents for the trust salesman is likely being unethical by serving in that position.  If a trust salesman approaches you, my advice is to get his name and contact information and the name of the attorney (in case it is needed by investigators), and then send him away.  If an attorney or someone working for an attorney contacts you directly or by phone to get your business when you have not asked to be contacted, this is unethical behavior called “solicitation.” Mail advertising is allowed by attorneys if the envelope and letter say “Advertising Material.”



Funding Your Revocable Living Trust (September 2010)

Published
by
Sanford Okura
on September 17, 2010
in Trusts and Wills
. 0 Comments

If you have an existing estate plan, you are probably already familiar with the benefits of creating a Revocable Living Trust.  One of the biggest advantages of a Revocable Living Trust is the ability to avoid probate.  Probate is a court process when a person dies.  It can last for several months or longer depending on the size and complexity of the estate.  Probate is time consuming and can be costly.  In addition, probate proceedings are a matter of public record.  Anyone interested is free to view and copy any probate documents filed with the court.

In comparison, a Revocable Living Trust is not subject to probate.  The time it takes to settle the trust after your death will generally be much shorter than the time it would take to probate your estate.  The trust is private since it does not need to be filed with the court.  A Revocable Living Trust avoids probate provided that the trust is properly “funded.”  To “fund” a trust is to transfer title of your assets into the name of your trust.  If you do not take the time to properly fund your Revocable Living Trust, any assets left out of the trust may need to be probated upon your death.  This does not mean that every asset you own should be placed in the name of your Revocable Living Trust.  In some situations, your estate planning attorney may advise you not to transfer certain assets to your trust.  It depends on the type of assets you own, who the owners are, and whether there is a beneficiary named.  Therefore, it is important to consult with a knowledgeable estate planning attorney before transferring any asset to your Revocable Living Trust to determine whether the transfer is in the best interests of your overall estate plan.

When your Revocable Living Trust is created, your estate planning attorney can assist you with funding your trust.  The attorney should provide you with detailed instructions on how to change title to any stocks, bonds, bank accounts, and other investments that you and your attorney determine should be placed in the name of your trust.  Transferring title to your Revocable Living Trust for these types of assets is relatively easy.  It can generally be done by submitting a written request to the financial institution holding the account.  Transferring title for real estate to your Revocable Living Trust usually requires more work.  Your attorney will need to prepare a conveyance document, such as a deed or assignment of lease, and record this document at the State of Hawaii Bureau of Conveyances.

Once you create a Revocable Living Trust, you may think that your estate plan is complete and that you have taken all necessary steps to protect your loved ones from probate.  This may be true if you have taken the time to properly fund your Revocable Living Trust.  Sometimes there is a problem when you buy property in your own name after the trust is created.  This is particularly important when you buy out-of-state real property.  Remember – any asset not titled in the name of your trust may need to be probated upon your death.  If your estate needs to be probated, you may assume that the probate will be filed in the state where you resided at the time of your death.  However, any out-of-state real property owned in your individual name will need to be probated in the state where the real property is located.  Therefore, if you own real property in two or more states in your individual name, you run the risk of having multiple probate proceedings in these states when you die.  This can result in significant delays and cost to your loved ones.  If you do acquire out-of-state real property and wish to transfer title to your Revocable Living Trust, you should consult with an attorney in that state.  Find someone who is experienced in preparing the conveyance documents needed to transfer title of the real property to your trust.



The Special Needs Trust

Published
by
Sanford Okura
on June 12, 2009
in Trusts and Wills
. 0 Comments Tags: , , .

THE SPECIAL NEEDS TRUST

Suppose you have a child with a disability.  Perhaps the child was born with a mental disability.  Perhaps he or she was born with a physical disability.  In some cases, the child may have been normal at birth, but later in life acquired a mental disability, or acquired a physical disability.  You love the child and want to provide the best possible care for your child.

Because of the disability, the child qualifies for government benefits.  Perhaps the child receives Medicaid benefits.  Medicaid is a joint federal and state program which provides important medical benefits.  Perhaps the child receives Supplemental Security Income, known as “SSI.”  SSI is a program of the Social Security Administration.  It provides cash payments to persons in need who are 65 years of age or older, blind, or with a disability.

In order to qualify for Medicaid or SSI, the person with the disability must have $2,000 or less in assets.  Also, there are certain income limits.  (Please understand that the usual poverty level income limits do not apply to someone in a nursing home who needs Medicaid help.  Even persons with large retirement income can qualify for Medicaid for nursing home costs with proper planning.)  You love your child, and want to provide for the care of your child, but if you do, the child may lose valuable Medicaid or SSI benefits.  This is where a Special Needs Trust can be very useful.

A Special Needs Trust is a kind of trust specially designed to provide for a person with a physical or mental disability.  The term “Special Needs Trust” is used in the United Kingdom and Ireland, as well as in the United States.  In the U.S., Special Needs Trusts are sometimes called Supplemental Needs Trusts.  Both terms mean the same thing.

A Special Needs Trust is used to provide financial help for a person with a disability who receives government benefits, or who may in the future need government benefits.  The trust can be set up by a father or mother, grandparent, aunt or uncle, or anyone else concerned about the person with a disability.  The person with the disability could be a minor child, an adult child, or even an elderly person in a nursing home.  The Special Needs Trust is written in such a way that the person with the disability will not lose Medicaid or SSI benefits.  The trust assets are not considered assets of the person with the disability, so he or she still has less than $2,000.  Yet, the Special Needs Trust can provide money for “special needs” or “supplemental needs” besides what Medicaid or SSI provides, without disqualifying the person from Medicaid or SSI benefits.

“Special needs” might include things like dental care, unreimbursable medical expenses, supplemental nursing care, recreation, cultural experiences, outings, travel, telephone, television, computer, reading and education.  The idea is that the special needs trust provides money for things or activities which make the person’s life more rich and enjoyable, without losing the government benefits.

Many times a parent has two or more children, of which one has a disability.  When the parent makes a will or trust, the parent may have been advised to leave everything to the healthy children so that the child with a disability is left out of an inheritance.  This is not necessary.  With a Special Needs Trust, the parent can leave an inheritance for both the healthy children and for the child with a disability.  The child with a disability can continue to enjoy government benefits, and also enjoy a richer life because of financial help from the Special Needs Trust.  When the child with the disability dies, the money remaining in the Special Needs Trust can then go to the healthy children, or if they are gone, to grandchildren.

With a special needs trust, the parent does not have to feel guilty about disinheriting a child with a disability.

© OKURA & ASSOCIATES, 2009

 



© Okura & Associates, 2008