Category Archives: Estate Planning

Trust Basics

What is a trust?
A trust is a separate legal entity for holding and investing property. One or more persons (the “trustee”) holds property, usually real estate or investments, for the benefit of another or several other people (the “beneficiary”). The person who gives the property for the trust is known as the “donor” or “grantor.” The trustee holds legal title or interest and is responsible for managing, investing, and distributing the assets or property of the trust. The beneficiary holds an equitable or beneficial interest.

What are the benefits of establishing a trust?
Depending on your situation, there can be several advantages to establishing a trust. The most well known benefit is avoiding probate. That is, in a trust that terminates with the death of the donor, any property in the trust prior to the donor’s death passes immediately to the beneficiaries by the terms of the trust without requiring probate. This can save time and money for the beneficiaries. Certain trusts can also result in tax advantages both for the donor and the beneficiary. Or they may be used to protect property from creditors, to help the grantor qualify for Medicaid, or simply to provide for someone else to manage and invest property for the grantor and the named beneficiaries. Trusts are private documents and only those with a direct interest in the trust need know of trust assets and distribution. If well drafted, another advantage of trusts is their continuing effectiveness even if the donor dies or becomes incapacitated.

What kinds of trust are there?
There are several types of trusts, some of the more common of which are discussed below:

• Revocable Trust

A revocable trust is sometimes referred to as a “living” or “inter vivos” trust. Such a trust is created during the life of the donor rather than through a will. With a revocable trust, the donor maintains complete control over the trust and may amend, revoke, or terminate the trust at any time. So, the donor is able to reap the benefits of the trust arrangement while maintaining the ability to change the trust at any time prior to death. The disadvantage of a revocable trust is that the trust assets are countable to the donor for purposes of determining Medicaid eligibility and does not provide protection against creditors or in the event of a divorce.

• Irrevocable Trust

An irrevocable trust is created during the life of the donor, who thereafter may not change or amend the trust. Any property placed into the trust may only be distributed by the trustee as provided for in the trust instrument itself. For instance, the donor can provide that he or she will receive income earned on the trust property. An irrevocable trust that provides for the donor to retain the right to income only is a popular tool for Medicaid planning.

• Testamentary Trust

A testamentary trust is a trust created by a will. Such a trust has no power or effect until the will of the donor is probated upon his or her death. Although a testamentary trust will not avoid the need for probate and will become a public document as it is a part of the will, it can be useful in accomplishing other estate planning goals. For instance, the testamentary trust can be used to provide funds for the surviving spouse in a form that should neither be considered available nor have to be spent down if he or she should seek Medicaid eligibility to pay for long-term care.

• Supplemental Needs Trust

A supplemental needs trust can be created by the donor during life or as part of a will. Its purpose is to enable the donor to provide for the continuing care of a disabled spouse, child, relative or friend. The beneficiary of a well-drafted supplemental needs trust will have access to the trust assets for purposes other than those provided by public benefits programs. Thereby, the beneficiary will not lose eligibility for benefits such as Supplemental Security Income, Medicaid, and low-income housing.

How can I find out if I should have a trust?

As with all estate planning, anyone considering a trust should contact an attorney who is skilled and experienced in this area.  If you want to know more or want to discuss creating a trust, please contact us to set an appointment.

Inheriting a Vehicle

The Oregon DMV has fairly straight forward processes in place for inheriting a vehicle. There are four possible processes:

1. Title has Multiple Owners with Survivorship.
2. Title without Survivorship and Estate is not going to be Probated.
3. Title without Survivorship and Estate is currently being Probated.
4. Title without Survivorship and Estate has been Probated, but is now closed.

For details on these processes, the DMV has a document with links to additional help and forms. The document is here:

Call us for help with your estate planning or probate questions and needs.

Inheriting an IRA Account

IRA accounts are one of the many asset types that one can inherit that are fraught with peril for the unwary.  The inheritance and tax rules for IRA accounts are different for those who are the spouse of the decedent and those that are not.  Spouses can receive special tax status for inherited IRA account funds.

If you are not the spouse you cannot treat the IRA as your own.  The tax rules give several options for how a non-spouse can take distributions from the IRA account.  Despite what one may have read on the internet, you do not have to take the IRA as a lump sum distribution when it is inherited.  The tax rules allow beneficiaries to spread payments over several years.  This is important since IRA funds are not subject to income tax until they are distributed to the beneficiary.

If the person you are inheriting the IRA account from had a basis in that account, that basis will remain with the IRA.  Spouses have some flexibility as to how they treat the inherited IRA, but one must tread carefully.

As with all things related to taxes and IRS, the regulatory landscape is subject to change without notice.

Before accepting any distributions from an inherited IRA, you must talk to an experienced tax professional to insure that you maximize your inheritance and don’t find yourself in an ugly tax situation with the IRS.

Income Cap Trust in Oregon

The sole purpose of an Income Cap Trust is to qualify an individual for Medicaid assistance. When an elder has fixed income over a certain limit (in 2011 it is $2,022 a month gross income), the elder will be unable to qualify for Medicaid assistance. When the current average cost of assisted care is over $5,000 a month, the Medicaid limit would make it impossible for many elders to get assistance. When the gap between the Medicaid limit and the cost of care is so wide, many elders would be without a place to live. This is where an Income Cap Trust comes in.

The elder can create an Income Cap Trust to receive all of the elder’s fixed income. The trustee for the Trust would then use the income to pay the elder’s monthly expenses as required by Medicaid law. Such expenses include: personal needs allowance and maintenance; trust administrative costs; community spouse allowance; health insurance premiums; burial plans; incurred medical expenses; other reserves; and patient liability to care facility.

There are three parties to the Income Cap Trust – the grantor who signs the trust, the beneficiary who benefits from the trust, and the trustee who administers the trust. Usually the grantor and beneficiary are the same person. The beneficiary cannot be the trustee and usually the trustee is a family member or friend of the beneficiary.

To establish the Income Cap Trust, the legal document creating the trust is drafted by an elder law or estate planning attorney. The document is executed and the trustee deposits the income into a new bank account established by the trustee in the name of the Income Cap Trust. The trustee then pays expenses according to the budget prepared by the attorney and approved by the Medicaid case worker.

After the elder passes, any remaining funds in the trust will go to the state. Generally, however, there will be no funds remaining in the trust when the elder passes away.

Special Needs Trusts

A special needs trust holds assets, and possibly income, for the beneficiary’s quality of life expenses. The trust can be established by the beneficiary or by a third party, such as a relative. A third party trust can help to increase a beneficiary’s quality of life without disqualifying the beneficiary for Medicaid. The income from a special needs trust can be used for supplemental needs that include costs of hobbies, vacation trips, recreational activities and socialization programs, as well as augmenting training in vocational and independent living skills.

If the beneficiary is under the age of 65, the beneficiary can establish the special needs trust with their own funds and assets. If the beneficiary is 65 or older, the beneficiary cannot use their own assets and funds to establish the trust.

Special needs trusts are governed by strict rules that require careful planning and drafting by an attorney.

Family and friends can set up a special needs trust for loved ones receiving Medicaid. These trusts can be set up during the donor’s lifetime or at the donor’s death.

The beneficiary of a special needs trust cannot also be the trustee of the trust. A trusted individual or a professional trustee will need to be appointed as trustee. The trustee has a fiduciary duty to the beneficiary to manage the trust assets in a prudent manner for the benefit of the beneficiary. A common solution to the trustee liability problem is to have the trust administered and managed by a non-profit pooled trust.

Oregon Real Property Transfer on Death Act

The Oregon legislature has passed the Real Property Transfer on Death Act (SB 815), which is effective January 1, 2012. The Act is based on the Uniform Real Property Transfer on Death Act.

The purpose of the act is to provide a reliable and inexpensive probate-avoidance tool to allow an individual to execute and record a Transfer-on-Death Deed. When the owner dies, the act provides for the transfer of title to pass to the designated beneficiary. Beneficiaries must be specifically named and a class or group of beneficiaries cannot be designated as beneficiaries (such as “all my living children” etc.).

A Transfer-on-Death Deed is revocable at any time prior to the owner’s death and the owner retains exclusive control, ownership, and interest in the real estate up until the owner’s death. A designated beneficiary obtains no rights or ownership in the real estate prior to the death of the owner.

Upon the death of the owner, the real estate is transferred equally to the beneficiaries. The real estate property is transferred subject to all encumbrances, liens, and restrictions.

As with a will, the Owner must have “capacity” to execute a Transfer-on-Death Deed.

One of the potential problems created by Transfer-on-Death Deed is that it is likely that “due-on-sale” clauses found in mortgages and other loan documents will be triggered upon the death of the owner when title transfers to the beneficiaries. Lenders may not be willing to waive the due-on-sale provision resulting in the beneficiaries being forced to sell or refinance the property to pay off the debt or risk seeing the real estate going through a foreclosure sale.

Another issue to keep in mind is that there is an 18-month cloud on title following the death of the owner. Creditors and other claimants have 18 months to set aside the Transfer-on-Death Deed. If the owner’s estate has insufficient funds to pay off claims, those claimants and creditors can recover against the real estate. Other claimants can set aside the Transfer-on-Death Deed on the grounds of capacity, fraud, or undue influence. For these reasons, it may be very difficult for beneficiaries to sell the property during the 18 months following the owner’s death.

FinCEN Advisory Warns of Elder Abuse and Financial Exploitation

The Financial Crimes Enforcement Network has released an advisory to financial institutions regarding spotting and reporting on activities involving elder financial exploitation. FinCEN released the advisory because financial institutions may be uniquely positioned to observe such exploitation.

The following examples are “red flags” that may necessitate the filing of SAR reports:

Erratic or unusual banking transactions, or changes in banking patterns:

  • Frequent large withdrawals, including daily maximum currency withdrawals from an ATM;
  • Sudden Non-Sufficient Fund activity;
  • Uncharacteristic nonpayment for services, which may indicate a loss of funds or access to funds;
  • Debit transactions that are inconsistent for the elder;
  • Uncharacteristic attempts to wire large sums of money;
  • Closing of CDs or accounts without regard to penalties.

Interactions with customers or caregivers:

  • A caregiver or other individual shows excessive interest in the elder’s finances or assets, does not allow the elder to speak for himself, or is reluctant to leave the elder’s side during conversations;
  • The elder shows an unusual degree of fear or submissiveness toward a caregiver, or expresses a fear of eviction or nursing home placement if money is not given to a caretaker;
  • The financial institution is unable to speak directly with the elder, despite repeated attempts to contact him or her;
  • A new caretaker, relative, or friend suddenly begins conducting financial transactions on behalf of the elder without proper documentation;
  • The customer moves away from existing relationships and toward new associations with other “friends” or strangers;
  • The elderly individual’s financial management changes suddenly, such as through a change of power of attorney to a different family member or a new individual;
  • The elderly customer lacks knowledge about his or her financial status, or shows a sudden reluctance to discuss financial matters.

A SAR (Suspicious Activity Report) must be filed if a financial institution knows, suspects, or has reason to suspect that a transaction has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the financial institution knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction, the financial institution should then file a Suspicious Activity Report.  See, e.g., 31 CFR § 103.18(a) (future 31 CFR § 1020.320(a))