Executor Anxiety: What if the Estate Doesn’t Sell?

There is often confusion about the role of the Executor/Successor Trustee who manages the family’s estate after the death of a parent. An article in The New York Times underscores the uncertainty and anxiety that an Executor may be experiencing. An “Executor” carries out a person’s Will (common in New York because Probate is more workable there), whereas most California people will have a Trust, so the person doing all these tasks is the “Successor Trustee”. Anxiety is not uncommon—none of us has trained for this role, and we don’t normally bring any experience to the job.

 

In the article, one person is the Executor of her mother’s estate. The sale of her house and its belongings will be divided equally among the surviving children. The Executor had the home’s furnishings appraised and is preparing them for sale. She’s concerned that if the furnishings don’t sell, as Executor, she will be responsible for the shortfalls.

Fiduciary duties: Acting in the best interest of the beneficiaries

An Executor is legally responsible for sorting out the finances of the person who died, generally making sure debts and taxes are paid. What’s left is distributed among the heirs. As an Executor, you can’t act against the interests of any of the beneficiaries—these are your fiduciary commitments.

According to these fiduciary duties, you can’t sell assets for less than fair market value without agreement of the beneficiaries. Your job is to settle the financial affairs and divide the assets in accordance with the Will. It’s not your job to pay your siblings if the estate is ultimately not as valuable as everyone seems to think. You are expected to make prudent decisions about how you liquidate it.

 

What’s “prudent” can be a matter of supply and demand

“What’s prudent is going to depend on the nature of the assets,” said Douglas F. Allen, Jr., a trusts and estates attorney in the Manhattan office of the law firm Seyfarth Shaw. If the estate has a valuable 19th-century armoire and you sell it at a yard sale, your siblings could hold you responsible for being careless with their inheritance. Your job is to figure out how to appraise it and find the best venue to sell it, whether that’s at an auction or through an antiques dealer. If the piece appraises for a modest sum, you may decide to sell it at an estate sale. If it sells for far less than the appraised value, then it was only worth that much—it’s a matter of supply and demand. If it’s perceived as just a hulking piece of furniture in the marketplace, then the estate is responsible for the cost of disposing of it. 

A reality check: No one seems to want old bulky furniture

I recently helped a friend downsize. They sold the estate where they had lived for 30 years. They had a home full of beautiful things, including dishes, silver and antique furniture. All of these items were expensive and in excellent condition. We tried all of the online sales sites and didn’t get as much as a nibble. No one wants this stuff, including her own children. So while they may have paid a lot of money for these items, they were virtually worthless in today’s marketplace. They only have value when someone wants them.

When it comes to real estate, partner with a broker you can trust

Decide whether to list property as-is or spend money from the estate on upgrades, repairs and staging. If the broker suggests listing it for $750,000, but it sells for $700,000, then that’s all the money you have to split up, minus whatever expenses you incurred for staging, repairs and broker fees, according to Robert D. Steele, a partner at the Manhattan law firm Schwartz Sladkus Reich Greenberg Atlas, where he is head of the firm’s trusts and estates department.

Have these conversations now

To avoid a conflict among your siblings, start the conversation now, before any heirlooms are sold or divided up. Do some research to understand the local market value. Explain the process and whatever guidelines have been laid out in the Will. For heirlooms that have sentimental but limited monetary value, split these up now to avoid turmoil at what will undoubtedly be a difficult time.

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This article is based on an article in The New York Times by Ronda Kaysen.

 

 

You, Your Trust and Taxes

We talk a lot about Living Trusts as an important part of estate planning. What we don’t talk about is a Trust and your taxes. But if you’re creating a Trust, thinking about transferring property, or naming a Successor Trustee, taxes are an important consideration. This is about your, your Trust and your taxes.

A Living Trust is typically a Revocable Trust, meaning that the person who’s creating it, the Grantor, may add or remove the Trust’s assets and beneficiaries at any time. The Grantor may even terminate or revoke the Trust at any time. Many people want to know about the tax implications of a Trust before they move forward with creating one.

The Trust is in the Grantor’s name and will be recorded in his taxes

Because the Trust is in the Grantor’s name, he remains entitled to receive the income and the principal of the Trust during his lifetime. As a result, the IRS still taxes the Grantor on the Trust’s income. Because this is still in the Grantor’s name, it uses his social security number to establish investments and bank accounts, so all of the Trust’s income is recorded on the Grantor’s tax return. It is not necessary to have a separate tax return for the Trust because everything is still in one person’s name—the Grantor’s.

Having a Trust means your heirs will avoid Probate

However, while the Grantor is taxed on the Trust income, the Trust’s assets are legally held by the Trust, which will survive the Grantor’s death. For this reason, the assets in the Trust do not need to go through the Probate process when the Grantor dies. This is one of the reasons we encourage everyone to create a Living Trust. You will be sparing your heirs the expense and the time-consuming process of going through Probate.

Special circumstances during Grantor’s life

If the Grantor becomes mentally incapacitated, the Successor Trustee designated in the Trust documents may choose to obtain a separate tax ID number for the Trust. This number is called a “Federal Tax ID Number”, an “Employer Identification Number”, or an “EIN”.

A Successor Trust may choose to obtain an EIN for the Trust in order to limit his own liability for the Trust’s income tax or to help fulfill his fiduciary duties. If the Trust is using an EIN, a separate tax return for the Trust will be required for each year. The Trust’s taxes will be filed on Form 1041 and would be filed by the same date as personal taxes. If it’s a simple estate, this may not be necessary. But even in straightforward situations, it often takes a year or more to settle the estate. There are cases where the Grantor is not incapacitated, and still may choose to establish an EIN for the Trust.

If the Grantor has complex personal taxes and would prefer not to report the income and losses of the Trust on his own tax return. He would still pay taxes on the income of the Trust but he would be paying those taxes under the Trusts EIN number.

In my own case, my parents lived into their 90s, and were active and healthy until the last year or so. We realized that there was some urgency in their signing their Trust, Powers of Attorney, Advance Healthcare Directives and Do Not Resuscitate Orders with their doctors while they still had testamentary capacity. They died within six months of each other, and my brother, the Successor Trustee, stepped up and managed their estate. It was very straightforward, but it still took more than a year to settle our parents’ estate. He established an EIN for the Trust and dealt with endless paperwork and bills that kept trickling in from Social Security, Medicare and miscellaneous providers.

Living Trust tax after Grantor’s death

After the Grantor’s death, the Trust remains in place and continues to hold legal ownership of all the Trust’s assets. If you’re the Successor Trustee, the Trust holds all of the assets that you inherit and you will be responsible for dividing among your family members, as per the Trust. The tax implications impact the outcome of both the Grantor and the beneficiaries.

• The Grantor’s final tax return is filed by the Trustee or Executor of the Grantor’s Estate, and it declares all the income earned by the Grantor through the Grantor’s death.
• However, any income earned by the Trust assets or principal after the date of the Grantor’s death is reported in a separate tax return for the Trust.

After death, the Trust converts from a Revocable to an Irrevocable Trust

The requirement that the Trust files its own tax return is a result of the Trust changing from a Revocable Trust during the Grantor’s life to an Irrevocable Trust upon the Grantor’s death. This makes perfect sense because it was Revocable before death—meaning that the Grantor can revoke, or make changes to the assets and beneficiaries. After death, of course, the Grantor can no longer make changes. The result: The Trust must file its own tax return each year.

What about estate taxes?

Thanks to changes in the estate tax laws, only those estates worth more than $11.4 million will owe federal estate taxes. This leaves most of us out, yet here in the affluent Bay Area, this extends to an increasing number of people.

California Document Preparers assists our clients in the preparation of Living Trusts. Our Living Trust portfolio includes a Power of Attorney and Advance Healthcare Directive. Most of our clients are surprised at how easy it is. Schedule an appointment today by contacting us at one of our three Bay Area offices. Our dedicated team is helpful, compassionate and affordable.

When their father died, Allison was surprised to learn that she had been named Successor Trustee of the family Trust. It seemed like a stretch—her brother, Oliver, was a banker, and her sister, Zoe, a lawyer. She, on the other hand, was a wife and mother with an unused elementary education degree. “Why would Dad name me Trustee?” Allison wondered. She had no qualifications and wouldn’t know a Trust from a greeting card. Both of her siblings were far more qualified for this role.

Their father had named Allison as the Trustee because he trusted her

Zoe and Oliver suggested that their father may have felt that Allison had the time to devote to the Trust’s administration and would rely on her siblings for help. But there was a likelier reason. “Allison was always Dad’s favorite. He trusted her. I am not sure he always trusted us.” Allison remained anxious about the new role that she had inherited. She had just started working as a substitute teacher and needed the money, with her kids headed off to college.

“As the administrator, you do get paid from the Trust.” Zoe told her. “Perhaps the fee will be sufficient to cover your lost income, and it’s not a full-time job, so you can still work. Track your hours and we can decide what’s reasonable.”

As usual, Allison was skeptical of advice from her brother and sister “Unfortunately, what may be reasonable to me may not be reasonable to you. I’m going to be facing a big learning curve, and to make this realistic, I need to be able to charge for the time that I spend researching and learning what I need to do. It might be more economical to just hire a professional.”

“Don’t do that,” Oliver said. “They’re expensive and that fee will eat into our income. Let’s agree on a reasonable hourly rate.” Allison promised to talk to her husband and make a decision that was right for her family. Her domineering siblings had always tried to interfere with her decisions and it clearly wasn’t going to stop with their father’s death. “I don’t want to get so bogged down with this that I can’t take care of my family and my job.”

When it comes to Trusts and inheritance, family conflicts have a way of surfacing

The selection of a Trustee is an important, and often difficult, decision. As the previous scenario illustrates, longtime family conflicts have a way of surfacing—especially when there’s money involved. Selecting a family member as Trustee can alleviate Trustee fees, if that person agrees to waive the right to be compensated.

But volatile family situations can make Trust administration difficult. While appointing a third party, such as a trusted friend, a financial adviser or a fiduciary may sustain a fee, it does circumvent family politics. If it’s a complex Trust, a professional trustee may be better qualified to administer it.

It’s a Trustee’s job to administer the Trust according to the instructions set forth in the legal document. They may include monitoring investments, assessing property and other resources, managing the sale of assets, paying taxes, making distributions to beneficiaries, complying with reporting and accounting requirements and responding to beneficiary requests for information. If the Trust is a simple one, these tasks can be managed fairly easily without a significant commitment of time. For more complex Trusts, however, settling the estate can become very time consuming.

Under California law, if a Trust does not specifically identify a fee for trust administration, a trustee is entitled to “reasonable compensation” that may be set by a probate court or the approval of the beneficiaries.

The Trustee’s fee is considered taxable income

Because the fee is taxable, a Trustee who is also a beneficiary may choose to waive payment of a Trust administration fee. An inheritance passed on through a Trust is generally tax-free. In addition, by waiving a fee, more resources remain in the Trust, gaining interest or otherwise accumulating value while the estate is being settled—and if it’s a complex estate, it can take a significant amount of time.

Trust administration requires careful documentation

Trust administration requires careful documentation. It means creating descriptions of tasks performed and saving receipts for administrative expenses. When it comes to naming a Successor Trustee, the primary consideration should be focused on that child, friend or professional who will ensure that the Trust is administered impartially for all, in accordance with the grantor’s instructions.

In our case, their father well may have appointed Allison for a very good reason. While he knew that Oliver and Zoe were far more qualified to be dealing with legal and financial records, he wasn’t convinced that they would be honest and impartial in distributing his estate among the three children. But he knew he could trust Allison to do what was right.

Is creating a Living Trust one of your plans for the New Year? Contact California Document Preparers at one of our three Bay Area offices today to schedule an appointment. We’re helpful, compassionate and affordable.

Naming a Successor Trustee: A Lesson from Doris Duke and Her Butler

When our Living Trust clients get to the part about naming a Successor Trustee, it means they’re nearly finished. They’ll quickly write down the name of their brilliant scientist daughter who lives in Boston whom they rarely see or their dreamy artist son who lives right here in the Bay Area. The reality is that neither of these people is likely to be a good choice.

Successor Trustee can be a demanding, time-consuming job

A successor Trustee is the person who will assume control of your Living Trust after your death or when you’re unable to continue with your responsibilities. It’s up to the Successor Trustee to distribute the estate according to the terms of the Trust. This is a big responsibility, and depending on the complexity and size of the estate, it can be demanding and time consuming. There are always financial reports to review, so the person you appoint should be adept at dealing with numbers. He/she must be able to interact with not only all of the family members, but bankers, CPAs and insurance agents. The Successor Trustee should be someone who has the time and patience to deal with the often-unexpected details that will surface as your estate is closed.

A classic example of naming a really bad Successor Trustee: Doris Duke and her butler

Let’s take a look a Doris Duke. Born on November 22, 1912, Doris Duke was the only child of James Buchanan Duke, a founder of the American Tobacco Company and Duke Energy Company and a benefactor of Duke University. Duke was dubbed “the richest girl in the world” by the media. When she died in her Beverly Hills home at the age of 80 in 1993, with a net worth of nearly $1 billion, she left the majority of her estate to the Doris Duke Charitable Foundation.

Semiliterate butler responsible for managing a $1B estate

Duke apparently led a lonely life and had disinherited her only child, a daughter, several years before her death, yet she had befriended her butler, Bernard Lafferty. When she died, she left the Irish-born Lafferty $5 million and made him a co-executor of her estate, which included administering her Foundation. Lafferty had little formal education and was semiliterate, but quickly developed an appetite for nice things and spent lavishly. He also abused alcohol and drugs.

Not unexpectedly, the daughter contested the will, and after more than two years of legal battles, they reached a $65 million settlement with Lafferty and the estate. Importantly, a seven-member board was appointed to oversee the Foundation, which supports the arts, environmental efforts, education and other causes.

There is some irony here. Duke had left her semiliterate butler to make decisions about how nearly $1B of her money was to be spent on charitable causes. There are now seven experienced people making these decisions for the Foundation. While most of us don’t have huge estates that we’ll be leaving to our heirs, there is nonetheless a fair amount of complexity. Think about this as you name your Successor Trustee.

California Document Preparers assists our clients with the preparation of their Living Trusts. We’re available by phone and email to answer questions and walk you through every step of the process. Call one of our three Bay Area offices today to make an appointment.