Who Decides What Happens To My Remains Anyway? (March 2014)

WHO DECIDES WHAT HAPPENS TO MY REMAINS ANYWAY?

–THE NEW 2013 HAWAII LAW

By

Ethan R. Okura

“Thou know’st ’tis common; all that lives must die,

Passing through nature to eternity.”

-William Shakespeare (Hamlet)

            Death.  This is a difficult topic to think about.  Most of us spend most of our lives enjoying work, hobbies, friends and family.  We engage in diversions to avoid thinking about this inevitability.  And yet, this is a bridge that we all must cross someday.  Some of us are meticulous planners and dictate exactly what should happen upon our passing, such as where to hold a funeral service, what type of food to serve, what pictures to display, and even what type of music will be played.  While most of estate planning is usually focused on what happens to your financial estate after you pass away, today I want to discuss what happens to your physical estate—your body and its final honors as it is laid to rest.

One of the biggest decisions is whether to be buried or cremated.  Although there is no right or wrong answer to this question, there are many factors that can influence your decision on this matter.  Religious beliefs, financial resources, ecological concerns, and family traditions are all important considerations.  However, once you’ve decided how to dispose of your remains and what type of memorial service you would like to have held on your behalf, how do you make sure that your wishes are carried out after you are gone?

In the past, you could indicate your wishes as to the treatment of your remains in an Advanced Health Care Directive or in a Last Will and Testament.  However, those documents were not designed primarily for that purpose and there wasn’t a good system in place to ensure that your wishes would be carried out.  The Advanced Health Care Directive is primarily a document that lets you designate an agent to make health care decisions for you in the event of your incapacity and it also lets you make your end of life decisions—such as whether or not to pull the plug or receive tube-feeding.  The Last Will and Testament is primarily for the purpose of naming your Personal Representative (formerly known as an Executor) and designating who should inherit your property or become the guardians of your minor children.  In addition, there wasn’t a clear rule about who has the right to ultimately decide about your body’s fate.

Last year, the Hawaii State Legislature passed a new law called the “Disposition of Remains Act.”  According to the new law, a person over age 18 may specify the location, manner, and conditions of disposing of their remains in a Will, in a pre-need funeral contract, or in a written, signed, and notarized document.  Under the law, these written directions take precedence over any other person’s wishes or directions—including your surviving spouse or children.

If you don’t specify how you want your remains to be disposed of, you can appoint someone to make those decisions for you in your Will or in a separate document that identifies who you are naming to fill that role.  In the event that you don’t specify whom you would like to have authority to make decisions about your remains, the law gives priority to your surviving spouse, partner, or reciprocal beneficiary, if you were married, in a civil union, or in a reciprocal beneficiary relationship when you passed away.  If not, the majority of your children would have the right to make such decisions.  The law goes on to name your parents, and then your siblings if they happen to be surviving, and then more remote family members or other legal representatives.

An interesting point is that the law goes so far as to point out that if your named representative, or family member who has priority under the law, is charged with murder or manslaughter in connection with your death, then their right to decide about the disposition of your remains is forfeited.

This new law is especially helpful for the funeral homes who were often stuck in a situation where they had conflicting instructions from different family members and didn’t know who to listen to, or had to deal with the body of someone who had no close family members and didn’t have instructions at all as to what to do.

If you haven’t taken care of specifying how you would like your memory to be honored and what to do with you remains, you should see an expert estate planning specialist attorney right away to update or create your estate plan including what your wishes are regarding the disposition of your remains.

© OKURA & ASSOCIATES, 2014




Giving Away Your Home? –Beware Part II: (January 2014)

GIVING AWAY YOUR HOME? –BEWARE Part II:

USE AN IRREVOCABLE TRUST

 By

Ethan R. Okura

Last month I wrote about the pitfalls of giving your home away without protecting yourself. We came to the conclusion that if you think you have 5 years of good health when you can still live at home before you might need nursing home care, it can be a good idea to transfer your home to your children or other loved ones while keeping a life estate for yourself (and for your spouse) so that you can’t be kicked out of your home.

I left you with a teaser saying that I’d reveal to you why giving your home to an irrevocable trust for the benefit of your heirs (while keeping a life estate) is better than giving your home directly to your loved ones.  Many people are frightened by the idea of an irrevocable trust. Just the word “Irrevocable” can sound so intimidating. It sounds so permanent and unchangeable. They fear that once they transfer the home to the irrevocable trust, they’ll lose all control over their home and they’ll never be able to sell it.  There are a lot of myths about irrevocable trusts and most people—even many lawyers—don’t accurately understand them.

For example, I had one client come into my office and bring me a copy of their “irrevocable trust” that another lawyer made for them. He had told the client that this would work to start the 5 year lookback clock ticking in order to qualify for Medicaid for nursing home costs and yet protect his home. When I looked at the client’s “irrevocable trust”, it was nothing more than a standard revocable living trust, which the lawyer had made an amendment to changing it to be irrevocable.  Although it did become an irrevocable trust at that point in time, which meant it could no longer be amended or canceled, it did NOT protect his home for Medicaid planning purposes and did not start the 5 year period for lookback purposes. Why? Because the revocable living trust said that the client is the trustee and the primary beneficiary of the trust during his lifetime. Just because the lawyer amended it to make it irrevocable—so the client couldn’t make any more amendments—did not mean that it was an irrevocable trust that would work for Medicaid planning.  If you are the beneficiary of any trust, whether revocable or irrevocable, any amounts that could be distributed to you from that trust will be considered your available resources for Medicaid qualification purposes.

So what is the advantage of using a properly drafted Irrevocable Trust for Medicaid asset protection purposes?  One reason is asset protection for your beneficiaries.  If you just give you home 1/3 each to your three children and keep a life estate, they can’t kick you out of your house, but they could sell their 1/3 share of the inheritance (future use/ownership of your home) to a stranger, or they could have their share taken away from them by a divorcing spouse or by a creditor in a lawsuit or bankruptcy.  This is probably not your intention.

Another reason is that you can designate who (other than yourself or your spouse) can be the trustee to manage the assets for the beneficiaries.  Let’s say that you have three children, all of whom you would like to inherit equally from you after you pass away, but only one whom you would trust to have control of your finances or of your home while you are living.  You can name your most trusted child as trustee, knowing that the rascal beneficiary can’t do any mischief with your assets as the trustee has complete control of the irrevocable trust’s share of the home (or other assets).  If you don’t trust any of the children because they might all try to cheat each other, you could name your best friend or a local bank to be the trustee and know that your wishes would be carried out during the rest of your life—even if you become incompetent—and also after your death.

Finally, if you ever wanted some of your assets back, it can be tricky to get them back once you’ve given them away. If you give directly to your children or other beneficiaries, they might not be willing to give your home back to you even if you ask nicely. However, with an irrevocable trust you haven’t given it to the children yet, you’ve only given it away to the trust.  Even though the trust is irrevocable, you can still have the right to make assets come out of the trust before you pass away and go to other beneficiaries than you originally intended. Yes, you can do this even though the trust is irrevocable and can’t be amended—but only if the irrevocable trust is created properly with very flexible language from the beginning.  Of course, you may not be the beneficiary to receive the assets directly from the trust, but you can make it all come out of the trust and go to your most trusted child or best friend…and if you ask them nicely, they’re more likely to be willing to give those assets back to you.

Although it sounds unusual, we have perfected the drafting of an irrevocable trust for Medicaid asset protection purposes.  Our clients can get their assets out of the trust and to any trusted beneficiary while still alive.  Another unusual feature we offer is the ability for the client to rent out their home while in the nursing home and having the irrevocable trust receive the rental income for the benefit of the family (or to maintain the home) instead of it all going to the client and then having to be paid to the nursing home (which is the case if the client keeps a life estate in the traditional way).

The message to take home today is that you do not need to be afraid of an irrevocable trust if it has been prepared by a clever attorney who builds a lot of flexibility into your plan.  Our irrevocable trust for nursing home Medicaid asset protection is our most popular estate plan.  When clients learn how powerful it really is and what can be done with it, they usually decide that it’s the best plan for them—especially if they were already planning on giving away their home or other assets.

  

© OKURA & ASSOCIATES, 2013




Giving Away Your Home? –Beware Part I (December 2013)

GIVING AWAY YOUR HOME? –BEWARE

 By

Ethan R. Okura

 

We all know that the possibility of incurring disastrous Nursing Home costs is the biggest threat to most people’s estates today.  Now that we have an exemption of $5.25 million from estate taxes, only the wealthiest 0.14% of Americans will pay this tax. In other words, 99.86% of us don’t have to worry about the estate tax anymore. What about probate?  You may have heard horror stories from the 1980s about probate costs eating up half of the estate.  Well, the probate process has been streamlined.  We now have informal probate procedures.  The actual cost of probate now usually amounts to only about 1% of the estate value.  So the real danger is the rising cost of nursing and health care.

By now, most of my readers know that the Medicaid government assistance program will pay health care costs for people who are impoverished, and that Medicaid can cover your nursing home costs when you run out of money.  You may have also heard that if you do receive Medicaid benefits for long term care costs, the State of Hawaii will put a lien on your home so that when you pass away they can recover back from the value of your house every penny they’ve spent on your care. What’s the solution?

A lot of people think that the best thing to do is to give their home away to their children or other loved ones 5 years before they might need nursing home care so that they can still qualify for Medicaid benefits and the State can’t put a lien on their property. However, doing this could put you at risk.  What if you give your home to your son and he later kicks you out of your own home?  Even if you have a good relationship with your child, is it possible that your daughter-in-law or son-in-law could be the one to kick you out of your house after giving the home to your child?

Here’s a sad but true story of one local couple who gave their home away without legally protecting themselves adequately.  They had only one son and knew they wanted to leave their house to him when they passed away. They didn’t want him to have any trouble with probate when they died so they went to a lawyer and signed a deed transferring the house to their son while they were still living. A few years later, the son and their daughter-in-law got into a terrible car accident and both passed away—the son first, and then his wife second! Neither of them had a will or a trust.  According to the laws of the State of Hawaii, when the son died, the house went to his wife. When she died shortly after him from the same car accident, HER parents inherited the house. She was from Europe and her parents lived in Germany. When the lawyer called to tell her parents that they inherited a house from their daughter in Hawaii, they said “We don’t need a house in Hawaii” and they SOLD THE HOME keeping the proceeds! This left the local couple homeless in their old age.  This was totally unexpected, but it’s the kind of thing that could happen if you give your home away without protecting yourself.

If you are sure you want to give your home away to a loved one, we usually recommend that you keep a “Life Estate” or the right to live in, use, control, and rent out your home for the rest of your life.  This provides you with several benefits:  1) Nobody can kick you out of your house; 2) You can keep your homeowner’s exemption for county property taxes; 3) It avoids probate because you’ve already transferred the remainder interest to your loved one during life; 4) Your heirs get a stepped-up basis on your home when they inherit it from you after you pass away; 5) If you go to a nursing home and Medicaid puts a lien on your Life Estate, as long as you don’t sell your home during your lifetime, we can get the Attorney General’s office to remove the lien after you pass away without your heirs paying back one red cent!

So you might think that giving away your home to your children or other intended heirs while keeping a life estate for yourself is the best thing to do to plan ahead in protecting your assets from nursing home costs, but next month I’ll reveal to you why giving your home to an irrevocable trust for the benefit of your heirs (while keeping a life estate) is better than giving your home directly to your loved ones.

Before implementing any of these strategies, go see an attorney who specializes in Medicaid Planning to protect assets from nursing home costs to make sure that it’s the best thing to do in your situation.

 

 

© OKURA & ASSOCIATES, 2013




Tax Identification Numbers (September 2013)

TAX IDENTIFICATION NUMBERS

By

Ethan R. Okura

Back in June, I wrote an article on how Obamacare affects the income taxes that trusts pay.  It’s a very complicated subject (taxes always seem to be, don’t they?) and my quick summary of how it works may have left you with more questions about how trusts are taxed than you had before you read the article.  Today I’m going to explain how Tax Identification Numbers work, both for Trusts and for other business entities.

Generally, your personal Tax Identification Number (TIN) is the same as your Social Security Number (SSN). That’s the number you use to file your personal income taxes every year.  Individuals who work or invest in the US, and/or are required to report or file taxes in the US, but who are not eligible to receive a Social Security Number, need to apply for an Individual Taxpayer Identification Number (ITIN).

Another type of Tax Identification Number, intended exclusively for businesses, is an Employer Identification Number (EIN).  All Corporations and Partnerships are required to have an EIN.  When you own a business as a Sole Proprietor, you may elect to use your Social Security Number to report all the income and expenses of your business on Schedule C of your personal Income tax Return, but if you have any employees, you must obtain an EIN.  Some Sole Proprietors choose to use an EIN instead of their SSN—even if they don’t have employees—to help reduce the possibility of identity theft or because their bank requires an EIN in order to open a business checking account.

An LLC is a very flexible type of business entity.  The owner(s) of an LLC can file IRS Form 8832 to elect to have the LLC treated as a C-Corporation or an S-Corporation for tax purposes, in which case it would need an EIN.  If no such election is made, an LLC with a single owner is disregarded for Income tax purposes, and the owner reports the income and expenses of the LLC on his own tax return the same way a Sole Proprietor would, so no EIN is needed.  When an LLC has two or more owners and no Form 8832 election is made, then it’s treated as a partnership for Income tax purposes and the LLC must obtain an EIN.

Well, what about Trusts?   In general, an Irrevocable Trust (one that cannot be amended or cancelled) requires the Trustee to obtain a separate Tax Identification Number (in the form of an EIN).  However, if it qualifies as a “Grantor Trust”, then the Trustee may use the Grantor’s Social Security Number instead of obtaining an EIN.  The Grantor, sometimes called the Settlor or Trustor, is the creator of the trust who put assets into it.  The Internal Revenue Code §§671-679 define when a trust is to be treated as a “Grantor Trust” for income tax purposes, and it all depends on the terms of the trust.  All Revocable Trusts are Grantor Trusts.  Some Irrevocable Trusts can also be Grantor Trusts.  If it is a Grantor Trust, you may use the Grantor’s SSN or you may choose to use an EIN for the Trust’s tax reporting requirements.

It gets a little more complicated when you have multiple Grantors for one trust, but Treasury Regulation §1.671-4 clarifies:  When you have a husband and wife who are both Grantors of a Grantor Trust (revocable or irrevocable), they may pick either the husband’s or the wife’s SSN to use for reporting trust income as long as they are filing their personal income taxes jointly.  If the Grantors are a married couple who are filing separately, or if the Grantors are not a married couple, then the Trust must obtain its own EIN.

Tax rules can be very complicated so be sure to get competent advice from a professional who is experienced in this area of law.  The Law Offices of Okura & Associates can help you with obtaining an EIN for your trust or business if you need one.

 

© OKURA & ASSOCIATES, 2013




How To Title Real Estate: LLC, Revocable Trust, Personal Name? (July 2013)

HOW TO TITLE REAL ESTATE:

LLC, Revocable Trust, Personal Name?

By

Ethan R. Okura

For many people—especially in Hawaii—real estate is the most valuable investment they own and the largest part of their estate.  There is so much advice and mis-information floating around about what is the best way to own real property.  Today I will talk about different entities and tenancies and how each applies to owning different types of real estate.

Your Home:  First, let’s look at your personal residence.  Generally, having your home owned by a revocable living trust is highly recommended. In this case, when you pass away your heirs can avoid going to court for probate. The trustee can transfer the title of your residence to your designated beneficiaries without getting a judge involved.  If you own your residence in your personal name, then when you pass away, your heirs will have to go to probate court to transfer the property from your name to theirs. Anytime we get a court involved, the legal fees and time required grow exponentially. It’s much easier and cheaper to set up a trust now than to go through probate later.

You may have heard that owning the property in “joint tenancy” or with a “transfer on death deed” will do the job and avoid probate. It depends. Although we don’t expect it to happen, if you name your spouse or children as joint tenants or as beneficiaries in a transfer on death deed, it’s possible that your beneficiary (or one of them) may pass away before you, which could throw off your distribution plan. For example, in your trust you might designate that if your daughter dies before you, her children would inherit her share of your property. However, with joint tenancy, your other children would inherit instead of her kids.  Also, if all your joint owners or your transfer on death beneficiaries pass away before you, then the property will still go through probate!  In addition, by adding someone to the title as a joint owner, you open yourself up to lawsuits fro any of their creditors. Any liabilities of your joint tenancy owners could be satisfied from your residence, possibly kicking you out of your home!

We used to sometimes recommend that married couples (or those in Civil Unions) consider weighing the benefits of the revocable trust against owning as Tenants by the Entirety, which can provide some limited creditor protection if only one spouse gets sued. However, we can now have our property owned as Tenants by the Entirety while in a revocable living trust. Hawaii is one of only two states that I am aware of (the other is Illinois) which currently allows this unique and new twist on protecting your home from both creditors and probate. If you set up your revocable trust before July 2012 or your lawyer didn’t set up your trust to provide Tenancy by the Entirety protection, you should strongly consider updating your plan to include this protection.

Finally, if you have a lot of equity in your home, we might even recommend an asset protection trust, which can protect your home from your creditors 2 years after it has been transferred into this trust.

Rental Property:  Your rental property should be owned in an LLC. An LLC is a Limited Liability Company. Rental real estate is a great tool to build wealth and generate income, but it also comes with liabilities. Tenants or their visitors can sue you (as the owner) for any injuries they sustain while on your property.  If you own your rental property in an LLC instead of personally, then they must sue the LLC instead which can protect your savings, residence, and other personal assets from being lost in that law suit. If you have substantial equity in more than one rental, you might want to set up separate LLCs for each rental property that you own.  If you are the only owner of the LLC, by default, the LLC will be treated as a disregarded entity by the IRS and you will not need to file a separate tax return for the LLC (for married couples filing jointly, this disregarded entity status only applies in Community Property states.  Because Hawaii is not a Community Property state, the couple will be required to file a partnership tax return). When it’s a disregarded entity, you can claim the same profits and losses on your tax return as you would if you owned it directly without the LLC. We usually do not recommend that you own rental properties in a limited partnership as that can limit your tax losses and write-offs.

Vacant Land and Vacation Homes:   Vacant land and vacation homes can be owned in your Revocable Trust or your Asset Protection Trust, just like your primary residence. If you are not renting them, you do not need to put them in an LLC because they’re not likely to generate any liability. For all types of real property, we never recommend that you own them in your C-Corporation or S-Corporation. Although corporations also provide liability protection like LLCs, they have different tax rules and you lose out on a lot of tax benefits by owning real property in a Corporation.

 

© OKURA & ASSOCIATES, 2013




How Does Income Tax Work With My Trust? (June 2013)

HOW DOES INCOME TAX WORK WITH MY TRUST?

By

 Ethan R. Okura

Last month after writing my article on Medicaid planning techniques, we received a message from a concerned client who is worried about higher income tax rates, the new 3.8% Medicare (sometimes called Obamacare) Surtax, and in light of these developments, whether a trust is still the right solution for his family’s needs. Perhaps he read a Forbes magazine article with an alarming title “Tax Hikes Hit Trusts Hard, Beneficiaries Pull Money Out.”  In my January article I described the Estate and Gift Tax changes brought about by the American Taxpayer Relief Act of 2012 (ATRA).  Let me now touch on some of the income tax changes, how trusts are taxed, and why a trust is still a better choice for most people.

Tax Changes

1) New Income Tax Rates – Back in July of 2001, the Bush tax cuts lowered most of our income tax rates. The highest federal income tax bracket for the past decade has been taxed at a rate of 35%. After ATRA, there is a new higher tax bracket at a 39.6% rate for individuals earning $400,000+ per year or married couples earning $450,000+ per year.

2) Social Security Tax Hike – There is a 2% increase in the employee’s portion of Social Security payroll tax totaling 6.2% now. This comes out of your paycheck before you see it.

3) Capital Gains Tax Increase – Whenever you sell property at a profit (real estate, cars, stocks, mutual funds, personal property), the profit is called a capital gain, and there is a tax on that gain which is considered income. The maximum federal capital gains tax rate is being increased from 15% to 20% for individuals with taxable income over $400,000 and married couples with taxable income over $450,000.

4) Obamacare/Medicare Tax – There are two parts to this tax. The first involves an additional 0.9% payroll tax (in addition to the 2.9% that you and your employer already pay) on earned income over $200,000 for individuals and over $250,000 for married couples filing jointly. The second part is a 3.8% surtax on net investment income to the extent that it exceeds modified adjusted gross income of $250,000 for individuals or $250,000 for couples. This second part is a little tricky to understand, but the way to calculate it is to determine how much of your income is net investment income (i.e., not earned income), then subtract $200,000 (or $250,000 if married filing jointly) from your modified adjusted gross income. Compare the result with your net investment income. You will owe the 3.8% surtax on the lesser of the two numbers. If you have over $200,000 in earned income and some investment income, you will end up paying both the 0.9% extra payroll tax and the 3.8% surtax on investment income.

5) How The Changes Apply to Trusts – The highest income tax rate of 39.6% applies to a trust that earns and retains income of only $11,950 for the tax year. However, this is not a new, drastic change. In 2012, the highest income tax rate for trusts was 35% for trusts that earned and retained $11,650 for the tax year. The higher 20% Capital Gains Tax rate applies to trusts earning and retaining more than $11,950 in income. The 3.8% Medicare Surtax applies to trusts with undistributed net investment income in excess of the dollar amount that starts the highest trust tax bracket ($11,950 for 2013).

How Trusts Are Taxed

For US Federal Income Tax purposes, your trust will likely be taxed as either a Grantor Trust or a Complex Trust. Every Revocable Living Trust is a Grantor Trust. A Grantor Trust generally does not have to file its own tax returns as all of the income from the trust can be claimed on the Grantor’s (trust creator’s) tax return.  Most standard Irrevocable Trusts are complex Trusts. A complex trust can pay taxes on its own income; or, if the trustee can distribute any taxable income to the trust beneficiaries, the trust can issue a K-1 form to beneficiaries so that the beneficiaries can include the income on their own tax returns rather than having the trust pay the income taxes. However, we can also create an Irrevocable Trust as a Grantor Trust where the income of the trust is taxed to the grantor or creator of the trust. Most of our clients with irrevocable trusts have grantor trust status.

What To Do About Trusts Given New Tax Laws

If you have a Grantor Trust (Revocable or Irrevocable), then the trust income tax thresholds do not apply. The grantor’s own income tax brackets will be relevant when determining taxes owed on trust income. For a Non-Grantor Irrevocable Trust (complex trust), if the trustee distributes all trust income to the beneficiaries, the beneficiaries will claim the income on their own tax returns and their individual tax rates apply instead of the higher tax rate at low income amounts for trusts. So although these new laws mean higher taxes for high income earners, there’s no need to be concerned just because you have a trust.

© OKURA & ASSOCIATES, 2013




QUESTION: Will a Revocable Living Trust protect my assets from lawsuits? (Sep 2012)

ANSWER:      Ethan R. Okura, Attorney Specializing in Estate Planning (Trusts, Wills, Medicaid Planning & Probate).  No, a revocable living trust will not protect your assets from lawsuits.  You can cancel your revocable trust and get assets out of the trust at any time.  Therefore, your creditors (people to whom you owe money) can also get assets out of your revocable trust.  An irrevocable trust (one that you cannot change or cancel) can protect your assets from lawsuits.  Generally, if you put assets into an irrevocable trust, and the trust can distribute assets back to you, then those assets are not protected from your creditors.  This was decided by the Hawaii Supreme Court in 1955 in a case called Cooke Trust Co. v. Lords.  Also, if you already are in debt or have a lawsuit against you, your existing creditors can reach assets you put into an irrevocable trust by proving that it was a “fraudulent conveyance.”  If you use it properly, an irrevocable trust can protect assets from both your future creditors and the creditors of the persons you name as beneficiaries of the trust.

In July 2011, the State Legislature amended the “Hawai‘i Permitted Transfers in Trusts Act”, which allows a person to create an Irrevocable Trust that names herself as a beneficiary and have those assets protected from her creditors and lawsuits against her. You have to wait two years after transferring an asset to the trust in order to gain that protection, and the fraudulent conveyance rules still apply so you can’t transfer assets to an asset protection trust after someone has a claim against you and still protect those assets.




Understanding Revocable Living Trusts (April 2012)

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)

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)

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.”