The Use of Insurance

Insurance is an important part of any estate plan. Those with small to medium sized estates, a life insurance policy is an important part of a financial or estate plan

How to Avoid a "Dry" Trust

Many clients who spend good money to an attorney to have a trust prepared sometimes don't consider the next step, which is funding their trust. A trust is essentially a useless piece of paper unless it is funded. "Funding" comes about when property is transferred into the name of the trust, or in those cases when a trust purchases property in the same way that a person might purchase an asset, such as a house or an insurance policy. An unfunded trust is also called a "dry" trust.

For example, if you establish a trust to hold some of your property, like your house, the name on the deed must show the trust as the owner. If John Doe and Jane Doe own property as joint tenants with right of survivorship, the deed existing before the trust is created might (for example) state their name as follows: "John Doe and Jane Doe, husband and wife, as joint tenants."

After the trust is drafted naming the house as part of the trust property, this couple would fund the trust by placing this real property in the name of the trust. For example, the deed might show the following transfer: "John Doe and Jane Doe, husband and wife, as joint tenants, hereby grant all of their right, title and interest in the following property to John Doe and Jane Doe, as trustees of The Doe 2008 Living Trust." By doing this, John Doe and Jane Doe may control the property as permitted by the conditions set forth in their trust agreement. Oftentimes, the trust agreement will permit the trustees of a living trust to control the property in the same manner as if they owned the property outright, at least when both spouses are living.

However, the bad news: If a trust is not funded properly, it is possible that a probate will need to be opened, just to either fund the trust, or to transfer the property. Either way, this couple would need to employ an attorney and engage in unnecessary costs, when a simple transfer deed would have done the trick.

California has an exception, which would require the filing of a petition with the probate court in an effort to receive a judicial determination that the property should have been transferred into the trust (this is called a Heggstad petition). However, this is a relatively new procedure, and in light of the attorney fees which would be involved, it is also another example of an unnecessary cost. Also, Heggstad petitions do not always work, so the petitioner might not only have the added expense of filing the petition, but also may not prevail in court.

The moral, of course, is to properly fund a trust in the beginning. Doing this will save much effort, time and money in the long run.

How Does a Financial Planner Enter the Mix?

The Emotional Side of Estate Planning

There is a definite emotional side to planning your estate. Although I always advise my own clients to regularly update their plans, I (ahem!) realized that my own plan was significantly outdated. As I prepared my own trust I felt the pit in my own stomach, thinking about my own demise.

Yes, attorneys are sometimes the last to take their own advice.

But I am very glad that I put myself through this. It made me sensitive to the procrastination I see in my own clients and especially prospective clients, who have yet to take the plunge. I can now say: I've been there...

How do we deal with this? How do we get over our initial feelings of uncertainty and, even fear of acting? First, remember this: While "emergency" plans are sometimes necessary, estate planning is really for healthy people! The best time to plan is when you are under no emergency or peril.

Second, we do not plan for ourselves, as much as much as we plan for our loved ones. Many estate planning issues are designed to benefit those who we love. Therefore, think of estate planning as a gift to your children and heirs, and try not to think of it as drudgery.

Third, it is generally very dangerous to do this without the assistance of an attorney. While legal forms and do-it-yourself programs and websites abound, you get what you pay for in estate planning.

And if you do it wrong, or if you do it incorrectly, there are rarely second chances.

I know a family who engaged in some do-it-yourself planning, and gifted parental property to the children to avoid probate. When mom passed away, guess what? They probably at first thought that they were saving some "bucks" on attorney fees, but as a result they owed thousands in capital gains taxes. A properly prepared trust might have avoided this result.

So, while there is certainly an emotional component to planning your estate, think of it as a business transaction -- to avoid the costs of probate, to reduce the sometimes inevitable tax burden, and especially for your own peace of mind.

Texas: Surety Not Liable for Counsel Fees in Excess of Bond

In the recent case of Colonial American Casualty and Surety Co. v. Scherer, -- S.W.3d --, 2007 WL 135969 (2007), a Texas appellate court ruled that a surety issuing an administrator's bond was not liable for attorney's fees in excess of the stated penal amount on the face of the bond. In that case, the stated penal sum was $30,000.

This case has some significance to California because while the Texas appellate court was applying Texas law, and was interpreting the language of the specific bond, the court cited numerous California cases in reaching its decision.

But yet a California court would probably still use a somewhat different approach given that the Bond and Undertaking Law [Cal. Code of Civil Procedure § 995.010] establishes a regime for asserting claims against bonds given in a proceeding, which would include probate matters. No matter what the bond provides there are avenues for seeking counsel fees from a surety on a "proceeding bond" if the surety fails to honor a claim in a timely manner [see Cal. Code of Civil Procedure § 996.480].

1031 Exchange Problems

http://www.montecitojournal.net/archive/13/8/783/

http://www.scbar.org/pdf/SCL/Sep01/tharpe.pdf

Wolves in Experts' Clothing

California Governor Arnold Schwarzenegger has signed a bill making it more difficult to engage in reverse mortgage scams. Under Senate Bill 1609, reverse mortgage applicants will be required to receive independent advice concerning the pros and cons of the loan from an independent counseling agency. The agency would not have an interest in the loan transaction.

According to a September 6, 2006 Oakland Tribune article written by Becky Bartindale, the idea for the law came from a real-live incident of loan fraud:

The idea behind Senate Bill 1609 came from Shirley Hochhausen, managing attorney for Community Legal Services in East Palo Alto, as part of Simitian's annual "There Ought to be a Law" contest. Hochhausen proposed the measure after seeing too many clients such as Johnny Damon, 66, who is now at risk of losing his East Palo Alto home of 34 years.

Damon, who worked as a cement finisher for the city of Palo Alto, was sold a $200,000 reverse mortgage last September. Damon bought his home for about $50,000 in 1977, and it is now worth about $700,000.

But according to a lawsuit filed last month, the brokerage company arranged a traditional mortgage, unbeknownst to Damon.

So instead of receiving the income he was counting on, the suit alleges, Damon was stuck with monthly loan payments he cannot afford, and the president of the brokerage company absconded with $190,000 in loan proceeds.

Hat tip to Prof. Beyer for bringing this to my attention. Also, Julia Wei of the Dirtlaw Blog posted a good analysis of this statute on her blog.