Death and Taxes - The Blog

Probating a Lost Will

The probate of a Will is supposed to begin with the filing of the original Will with the county clerk's office.  But what if you can't find the original Will?  Then you've got problems.  But luckily, you also have a couple of good Illinois resources for dealing with this situation (although registration is required for both):

Janet's L. Grove's article in the October 2005 issue of the ISBA Trusts and Estate Section newsletter

Helen Gunnarsson's article in the October 2006 Illinois Bar Journal

If you are seeking to probate a lost Will in Illinois, you need to overcome the presumption that the lost Will was revoked by the person who created it (the "testator").  But how do you prove a negative (that the testator DIDN'T revoke the Will)?  Ms. Grove indicates that good evidence would include the following:

(1) continued strong relations between the testator and the beneficiaries,

(2) declarations by the testator of an unchanged attitude concerning the dispositions in the will, and

(3) possession of or access to the will by an adverse party.

If you are able to overcome the presumption of revocation, you aren't done -- now you have to prove that (a) the lost Will was a valid Will (i.e. properly executed) and (b) the contents of the lost Will (what did it say?).

For a Florida take on this issue, check out Juan Antunez's post here.  Professor Beyer discusses Texas law and lost Wills here.

Storing a Client's Will

Helen W. Gunnarsson has the cover article in this month's Illinois Bar Journal, and the title is "Should You Store Your Client's Will?"  (registration may be required for non-members)

The article gives a nice overview of the issues involved with handling old Wills.  The problem is that some attorneys -- in particular, solo practitioners and small firm attorneys -- agreed to hold original Wills for their estate planning clients.  Often this is done by the attorneys in hopes that more legal work would arise in the future (either in terms of changes to the Will, or when the Will "matures" and a probate is needed).  There's a view -- mentioned by Ms. Gunnarsson -- that this line of thinking is either unethical or morally repugnant.  I would agree with that, but then again, I don't hold original documents for my clients.  I don't safekeep documents for the same reasons I don't sell real estate (or Mary Kay products or Beanie Babies) on the side: it's not my job, and it detracts from my job.  As a lawyer, do you really want to compare yourself to attorney/babysitter/agent/bodyguard/unauthorized biographer/realtor/cobbler Lionel Hutz?

Of course, many attorneys choose not to store their clients' Wills, but wind up inheriting these types of documents from old school attorneys (many of whom did offer this service).  Now the question is, what do I do with all of these documents?  The article offers a few suggestions, like using skip tracers or checking the internet Social Security Death Index, but this can take a lot of time and/or money.  The newest idea is proposed legislation that establishes a central Will repository, which is used in a number of other states. 

Living Trust Schemes and Probate Myths

I don't know what consumeraffairs.com is, but yesterday they put up an interesting post about Pennsylvania's attempt to crack down on living trust schemes (it's available here).   These schemes often involve attempts to sell (most older) people high-priced estate planning documents and annuity products.  (Unfortunately, consumeraffairs.com's affiliation with Google means that the page on which this article appears features ads from... people selling living trust schemes.  Ouch!)

The sales pitches for these schemes usually involve a lot of wild comments about the evils of probate, and how it must be avoided at all costs.  Unfortunately, as Deirdre R. Wheatley-Liss reports today on her You and Yours Blawg, myths about probate aren't limited to scammers -- even mainstream newspapers sometimes get into the act.

Living trusts can do a lot of nice things, but they are not for everyone.  What I try to do here and when I meet with clients is to discuss thoroughly the positives and negatives of living trusts and simple Wills. 

Wills vs. Living Trusts: Now or Later

This article by Texas attorney Ronald Lipman is a really nice summary of the advantages and disadvantages of living trusts (especially compared to Wills).  I've started explaining the costs associated with the two documents in terms of timing:

A living trust has immediate costs -- you pay a little extra now, both in terms of attorney's fees and in terms of work you have to do (transferring assets by changing title and beneficiary designations). 

A Will has future costs, which must be paid when you die -- basically, the attorney's fees and court costs associated with probate (including the cost of having your executor transfer assets to the estate and to your beneficiaries).

Which is better for you, a living trust plan or a plain old Will?  That's going to depend on your assessment of the above costs.  The actual fees are pretty easy to break down, but the intangible costs are more difficult to consider -- when we talk about transfers of assets during lifetime, we're really talking about questions like:

Do you have time to transfer your assets to your living trust?

Do you have the ability to make these transfers yourself (or can someone else, like your financial planner, help with the transfers)?

Can you devote your attention to these transfers, to make sure that nothing is forgotten, and that all assets get placed into the trust?

Do you mind the "hassle" of making these transfers, and the added complexity that a living trust gives to your life?

Answers to these questions will vary among different individuals, which is why a living trust may be a bad idea for one client (an 85-year-old who hates complexity and doesn't want the hassle of asset transfers) and a very good idea for another (a 55-year-old with time and interest to spare on the transfers).

Incentive Trusts

Sunday's New York Times had a nice article on incentive trusts.  The idea of an incentive trust is to make distributions from your trust to a beneficiary contingent upon the beneficiary doing (or not doing) something.  Incentive trusts can be based on things like:

-Educational accomplishments
    *the better your grades, the more money you get
    *you get money when you graduate from college or university

-Family accomplishments
    *you get money if you get married
    *you get money if you have a child

-Job accomplishments
    *you get money if you hold a full-time job
    *you get money equal to the salary you receive at your job

-"Substance Abuse" accomplishments
    *you get money only if you pass a drug test or complete drug rehab

The major knocks on incentive trusts are (1) they seem like a desperate way for a deceased person to seek control over his or her beneficiaries from beyond the grave and (2) inflexibility.  I think careful drafting can provide solutions to both of these problems.  When I've set up incentive trusts for clients in the past, I've tried to spend a lot of time determining my clients' real goals and walking them through various scenarios.  After doing so, most clients will decide to limit their use of incentives to provisions that represent their core values.  In other words, we can probably figure out a way to encourage your child to get a good education, but it may not be wise to require the child to attend your alma mater.

Trust Distributions, Part 2: Total Return Trusts

On Tuesday, I talked about the traditional way of structuring trust distributions (in terms of income and principal).  Because of the tension this creates between income beneficiaries and remaindermen (and the resultant headaches for trustees), practitioners and others in the estate planning community proposed a new idea: the total return trust.  Illinois' Trusts and Trustees Act now includes a provision for a total return trust (760 ILCS 5/5.3), including a procedure for converting a traditional "income and principal" trust into a total return trust.

How does a total return trust work? Essentially, income is deemed to be a percentage of the net fair market value of the trust's assets (for example, 4%).  If a trust contains $1,000,000, then the income beneficiary would be entitled to $40,000 per year from the trust (regardless of whether the "income" of the trust for purposes of the Principal and Income Act is $4,000 or $100,000).

The major benefit of the total return trust is that the trustee is no longer conflicted about investments -- he or she has the clear task of investing trust assets in a way that maximizes the fair market value of the trust assets, since this maximization will benefit all beneficiaries.

Trust Distributions, Part 1: Income and Principal

Most ongoing trusts contain language that allows beneficiaries to obtain money from the trust based on certain criteria.  Historically, trust property (and a beneficiary's right to it) has been described in terms of income and principal.  For instance, a beneficiary might have the right to all income from the trust; upon this beneficiary's death, a remainder beneficiary may receive the entire principal of the trust.

Because of the above, it's important to understand what is meant when we talk about income and principal.  The Illinois Principal and Income Act (755 ILCS 15/1 et seq.) (the "Act") defines these terms as follows:

Principal is the property which has been set aside by the owner or the person legally empowered so that it is held in trust eventually to be delivered to a remainderman, while the income is in the meantime taken or received by or held for accumulation for an income beneficiary.

Income is the return in money or property derived from the use of principal....

The Act goes on to explain which types of property constitute income and which constitute principal.  For instance, stock dividends are considered principal, while cash dividends and interest received are considered income.  The trustee is also obligated to distinguish between income and principal in the handling of trust expenses (some expenses are allocated to income, and some to principal).

As you may have guessed, there can be a fair amount of tension between a trust beneficiary with a current right to income and a remainder beneficiary.  The former wants to maximize trust income while the latter wants to grow the principal of the trust.  This tension became greater in the 1990's, with the run-up in tech stocks -- many of these stocks paid no cash dividends, but were experiencing huge jumps in share price.  As a result, tech stocks were hated by income beneficiaries and loved by remainder beneficiaries.  The opposite was true of bonds, which didn't appreciate much but which produced a fair amount of income.

Tomorrow I'll talk about a potential solution to the income beneficiary vs. remainder beneficiary fight.

Planning for an Inheritance

Kelly Spors has an interesting article in today's Wall Street Journal entitled "Don't count on getting an inheritance" -- it's available online here.  The title says it all -- for purposes of your financial planning, there are simply too many "ifs" involved in accounting for a potential inheritance.  The safer approach is to be conservative in your calculations; the safest (and sanest) approach is to view an inheritance as a windfall (i.e. somebody else's money), and to exclude it from your financial planning. 

Corporate Trustee Succession and Trust Administration

One of the advantages of a trust is that the trust document should (if drafted correctly) resolve most questions of trust administration.  When a trust beneficiary asks me "does the trust allow me to do X," I can usually answer their question by reviewing the provisions in the document. 

For instance: what if the beneficiary wants to remove the current trustee of the trust (a corporation) and designate another corporation as trustee?  Most trust documents will tell exactly who has the power to remove a trustee and/or to name a successor trustee.  Typically, this is a power vested in the beneficiary or the trustee itself. 

If the beneficiary does have a removal power, the issue becomes one of procedure -- how is the current trustee removed and a new trustee appointed?  This question relates to what the trust document requires as well as what the current and new trustee need.  (For instance, before accepting the job, a new trustee will usually want the beneficiary to sign a formal approval the previous trustee's actions.)

What if the trust document doesn't allow the beneficiary to remove a trustee or appoint a successor?  In that case, the trustee can sometimes be prevailed upon to step down and name another trustee to do the job -- most trustees (corporate trustees especially) don't like conflict, or an unhappy beneficiary.

Bill Frist and Blind Trusts

Senate Majority Leader Bill Frist has recently been criticized for potential conflicts of interest with respect to his ownership of stock in HCA Inc.  Mr. Frist has tried to defend himself by stating that no conflict existed because the stock was placed in a blind trust.

Mr. Frist's position has two problems:

1. According to this article, Mr. Frist may have also owned shares of HCA outside of the blind trust.

2. More importantly, Mr. Frist's blind trust wasn't actually blind.  A blind trust can be defined as a trust in which the beneficiaries do not know the nature of the property held in the trust, and have no involvement in or knowledge of trustee decision-making.  It appears that Mr. Frist's trust met neither part of this definition.

To begin with, the idea that someone can claim to be the beneficiary of a blind trust, while also being aware of what property is in the trust, is laughable.  (Baseball commissioner Bud Selig made a similar claim a few years ago, arguing that his ownership of the Milwaukee Brewers in a blind trust eliminated any potential conflict of interest with his job as commish.  As usual, Mr. Selig was wrong.)

If you know that your trust holds shares in GM, then you as a politician may be tempted to take positions that benefit GM, regardless of whether you are making actual trustee decisions to sell or buy the stock.  In a true blind trust scenario, a person transfers cash to a trustee, who then decides how to invest such cash.  The beneficiary doesn't know whether the trust holds GM stock or HCA stock or bonds or mutual funds, so any conflict of interest is avoided.

Furthermore, it appears that Mr. Frist and his brother had knowledge of and involvement in trust decision-making:

Kathleen Clark, a government ethics expert at the Washington University in St. Louis School of Law, said she doesn't believe the Senate trusts or the Tennessee trust insulated Frist from a conflict because the senator or his brother were advised of transactions and could influence decisions.

"What I find most appalling is the Senate calls it a qualified blind trust when it's not blind," Clark said. "Since the Senate says it's OK, the Senate has made it a political question. It's up to the voter. But there's no doubt it's a conflict of interest."