Decanting: How To Fix A Trust That Isn’t Getting Better With Age

What Does It Mean to “Decant” a Trust?

Wine lovers know that the term “decant” means to pour wine from one container into another to open up the aromas and flavors of the wine. In the world of irrevocable trusts, “decant” refers to the transfer of some or all of the property held in an existing trust into a brand new trust with different and more favorable terms.

When Does It Make Sense to Decant a Trust?

Decanting a trust makes sense under a myriad of different circumstances, including when you’d like to:

• Tweak the trustee provisions to clarify who can or cannot serve as the trustee.
• Expand or limit the powers of the trustee.
• Convert a trust that terminates when a beneficiary reaches a certain age into a lifetime trust.
• Change a support trust into a full discretionary trust to protect the trust assets from the beneficiary’s creditors.
• Clarify ambiguous provisions or drafting errors in the existing trust.
• Change the governing law or trust situs to a less taxing or more beneficiary friendly state.
• Add, modify, or remove powers of appointment for tax or other reasons.
• Merge similar trusts into a single trust for the same beneficiary.
• Create separate trusts from a single trust to address the differing needs of multiple beneficiaries.
• Provide for and protect a special needs beneficiary.

What is the Process for Decanting a Trust?

Decanting must be allowed under applicable state case law or statutory law. Aside from this, the trust agreement may contain specific instructions with regard to when or how a trust may be decanted.

Once it is determined that a trust can and should be decanted, the next step is for the trustee to create the new trust agreement with the desired provisions. The trustee must then transfer some or all of the property from the existing trust into the new trust. Any assets remaining in the existing trust will continue to be administered under its terms; and, an empty trust will be terminated.

WARNING: Decanting is Not the Only Solution to Fix a Broken Trust

While decanting may work under certain circumstances, fortunately, it is not the only way to fix a “broken” irrevocable trust. Our firm can help you evaluate options available to fix your broken trust and determine which method will work the best for your situation. If you have a trust that has turned to vinegar and isn’t what you want it to be, call our office now.

Filippi Law Firm, P.C., provides legal services in estate planning, probate, trust administration, trust litigation, and personal bankruptcy in the greater Sacramento area, with a focus in Rocklin, Roseville, Lincoln, and Granite Bay. Give us a call at (916) 333-7910 or fill out the contact form to get in touch with our office. Consultations are free, and they can be done over the phone, via Zoom, or in person at our office in Rocklin. Prepare for your future and work with the best estate planning attorneys today.

What Happens to My Estate If I Am in Bankruptcy When I Die?

A will enables you to leave specific instructions about who you would like to receive your money and property and how you would like for it to be given away when you die. However, your debts must be paid before your beneficiaries will receive a dime. As a result, if you are in bankruptcy when you pass away, your beneficiaries will receive only what is left of your life savings and property when the bankruptcy case concludes.

Individual debtors typically file for Chapter 7 (liquidation) or Chapter 13 (repayment plan) bankruptcy. If you pass away during a Chapter 7 bankruptcy, the bankruptcy case will proceed without much of an interruption because your direct participation is very limited. The bankruptcy trustee will sell your property (including your interest in property you own jointly with your spouse that’s non-exempt, and in community property states, all property acquired during the marriage) to obtain cash that can be used to pay off your creditors (though certain property is exempt because it is necessary for living and working, such as motor vehicles, clothing, household goods, and retirement savings accounts). At the conclusion of the bankruptcy case, any remaining money or property can go through the probate process and be transferred to the beneficiaries of your will.

A Chapter 13 bankruptcy involves a repayment plan that typically lasts from three to five years, so you, as the debtor, must actively participate in the plan by making those payments. If you are in the midst of a Chapter 13 bankruptcy when you pass away, your bankruptcy trustee and your survivors usually must petition the court for instructions about what to do next. Typically, there are several possible courses of action. They can: (1) request that the case be dismissed, enabling your creditors to seek repayment of debts in a probate proceeding; (2) petition for a hardship discharge, eliminating the obligation to continue to repay the debt even though the repayment plan was not completed; (3) request the case to be converted to a Chapter 7 bankruptcy filing so the estate can be liquidated (converted to cash) until the debts are discharged; or (4) continue the case as a Chapter 13 bankruptcy, with your heirs attempting to complete the repayment plan. Although the bankruptcy trustee and survivors can request a certain course of action, the court will ultimately decide what is in the best interests of all the parties involved.

Solutions

• If you want to protect your savings and property against potential future creditors, you may want to consider transferring them to an irrevocable trust. You will not be able to easily amend or cancel the trust, but because you no longer own any of the property or money in the trust and have no right to change its terms, the assets in the trust cannot be used to pay off creditors, even if you file for bankruptcy in the future. As a result, your assets will remain available for future distribution to your beneficiaries. But beware that this strategy won’t work if you transfer away savings and property to knowingly avoid debt. It is important to implement this strategy proactively, long before any financial problems leading to bankruptcy arise. This is because you must disclose to the bankruptcy trustee any transfers made within two years before filing, and the trustee will review the transfer to evaluate whether it should be undone, making that property or money available to your creditors.

What Happens If One of My Beneficiaries Is in Bankruptcy When I Die?

If you die within 180 days after your beneficiary files for bankruptcy, your beneficiary must disclose the inheritance to the bankruptcy trustee. In a Chapter 7 bankruptcy case, unless the property is exempt, the trustee is free to take the inheritance to pay off your beneficiary’s creditors. If the beneficiary has filed a Chapter 13 bankruptcy, the value of the inheritance (except for any exempt property or money) will be added to the amount that the beneficiary has to repay creditors under the repayment plan, i.e., it will be used to increase the amount of the payments your beneficiary must make under the repayment plan.

Solutions

• You are free to amend your will to revoke all gifts to a beneficiary who has filed bankruptcy (or may do so) to avoid having your hard-earned money and prized belongings used to pay off creditors rather than be distributed to the beneficiary. Alternatively, you could include a provision in the will stating that no part of your estate is to be used to benefit a creditor of any beneficiary. Many people dislike this option, however, because they do not want to effectively disinherit someone (often, a child) they want to benefit from their estate.
• One of the best ways to prevent your life savings and property from being used to pay off a beneficiary’s creditors is to create a revocable living trust. You can transfer ownership of the money or property to the trust and retain complete control and enjoyment over your property during your lifetime. Because the trust owns the property, not the beneficiary, and the beneficiary has no legal claim to the trust assets during your life because the trust can be revoked at any time prior to your death, it will not be considered part of the beneficiary’s bankruptcy estate.
• In addition, money and property held in a trust with a valid spendthrift provision specifying that the beneficiary cannot transfer his or her interest in the trust and has no control over it typically cannot be used to pay off the beneficiary’s creditors in bankruptcy. After your death, your beneficiary can receive distributions, i.e., gifts from the trust, according to the terms of the trust, as long as they are purely at the trustee’s discretion or for certain specific purposes, such as health, education, support, or maintenance. However, any amounts that are distributed prior to bankruptcy or within 180 days after the bankruptcy petition is filed can become part of the beneficiary’s bankruptcy estate and used to pay off creditors.
• A standalone retirement trust can be used to protect the funds held in your Individual Retirement Account (IRA) from being taken by creditors if your beneficiary files for bankruptcy after your death. Because inherited IRAs are not protected in bankruptcy proceedings like the IRA of the debtor, it is necessary to provide additional protection through the use of a trust. The trust is funded from your IRA upon your death. Because the trust is irrevocable, those funds are protected from the beneficiary’s creditors. A bonus is that the IRA assets will continue to grow tax-deferred within the trust, with some very limited exceptions due to the recent passing of the SECURE Act.

We Can Help You Plan Ahead

It is impossible to know what the future holds: Those who are prospering today may encounter severe money problems tomorrow. It is crucial not to wait until you or your family members or loved ones are experiencing financial troubles, or even the prospect of bankruptcy, to take action to protect your life savings, heirlooms, and other property you have worked so hard to accumulate. We can design an estate plan that will help protect your property and money —and your children or loved ones’ inheritance. Call us today to create or update your estate plan to ensure that your property is protected from creditors’ claims—whether or not you or a loved one eventually file for bankruptcy.

Filippi Law Firm, P.C., provides legal services in estate planning, probate, trust administration, trust litigation, and business law in the greater Sacramento area, with a focus in Rocklin, Roseville, Lincoln, and Granite Bay. Give us a call at (916) 333-7910 or fill out the contact form to get in touch with our office. Consultations are free, and they can be done over the phone, via Zoom, or in person at our office in Rocklin. Prepare for your future and work with the best estate planning attorneys today.

The Key Takeaways

• You can be trustee of your own revocable living trust. If you are married, your spouse can be co-trustee along with you.
• Most irrevocable trusts do not allow you to be trustee.
• Even though you may be allowed to be your own trustee on your trust, you may not be the best choice for a variety of reasons.
• You can choose an adult child, trusted friend or a professional or corporate trustee.
• Naming someone else to be co-trustee with you helps them become familiar with your trust, allows them to learn firsthand how you want the trust to operate, and lets you evaluate the co-trustee’s abilities.

Who Can Be Your Trustee

If you have a revocable living trust, you can be your own trustee. If you are married, your spouse can be a trustee with you. This way, if either of you become incapacitated or die, the other can continue to handle your financial affairs without interruption. Most married couples who own assets together, especially those who have been married for some time, are usually co-trustees. However, you will be required to name a successor trustee to take over once you and your spouse pass on, or become incapacitated.

You don’t have to be your own trustee. Some people choose an adult son or daughter, a trusted friend or another relative. Some like having the experience and investment skills of a professional or corporate trustee (e.g., a bank trust department or trust company), but that will of course come at a cost for their services. Naming someone else as trustee or co-trustee with you does not mean you lose control. The trustee you name must follow the instructions in your trust and report to you. You can even replace your trustee should you change your mind.

When to Consider a Professional or Corporate Trustee

You may be elderly, widowed, or in declining health and have no children or other trusted relatives living nearby. Or your candidates may not have the time or ability to manage your trust. You may simply not have the time, desire or experience to manage your investments by yourself. Also, certain irrevocable trusts will not allow you to be trustee due to restrictions in the tax laws. In these situations, a professional or corporate trustee may be exactly what you need: they have the experience, time and resources to manage your trust and help you meet your investment goals.

What You Need to Know

Professional or corporate trustees will charge a fee to manage your trust, but generally the fee is quite reasonable, especially when you consider their experience, the services provided, and the investment returns that a professional trustee can deliver.

Actions to Consider

• Honestly evaluate if you are the best choice to be your own trustee. Someone else may truly do a better job than you, especially in investing your assets.
• Name someone to be co-trustee with you now. This would eliminate the time a successor would need to become knowledgeable about your trust, your assets, and the needs and personalities of your beneficiaries. It would also let you evaluate if the co-trustee is the right choice to manage the trust in your absence.
• Evaluate your trustee candidates carefully and realistically.
• If you are considering a professional or corporate trustee, talk to several. Compare their services, investment returns, and fees.

Working with an estate planning attorney will make this selection process easier. We can help you select, educate, and advise your successor trustees so they will have support and know what to do next to carry out your wishes. Give us a call today.

Filippi Law Firm, P.C., provides legal services in estate planning, probate, trust administration, trust litigation, and personal bankruptcy in the greater Sacramento area, with a focus in Rocklin, Roseville, Lincoln, and Granite Bay. Give us a call at (916) 333-7910 or fill out the contact form to get in touch with our office. Consultations are free, and they can be done over the phone, via Zoom, or in person at our office in Rocklin. Prepare for your future and work with the best estate planning attorneys today.

What Is Required for a Handwritten Will to Be Legally Recognized?

Typically, a typed-out will is valid if it is : (1) in writing; (2) signed by the testator, i.e., the person making the will; and (3) signed by at least two witnesses who saw the testator sign the will or acknowledge the signature on the will. In contrast, in the states that recognize a handwritten or holographic will, it will be valid if the important or material parts of the will are in the testator’s handwriting (i.e., not typed out) and it is signed by the testator, even if it is not witnessed. Some states also require a handwritten will to be dated, and others require clear and convincing evidence that the testator intended the document to be a will and not just notes about what he or she would have liked to include in a will. Still, others require witnesses to establish that the handwriting and signature are, in fact, those of the testator. In all instances—for a written or hand-written will—the testator must have testamentary capacity (i.e., the mental capacity to sign the will, including knowledge of what they owned and who their family members and beneficiaries were) and testamentary intent (i.e., the knowledge that what they were signing a document intended to be a will).

Is a Handwritten Will Really Easier and Less Expensive?

At first glance, it may appear that a handwritten will is the easiest and cheapest way to dispose of your money and possessions when you pass away. However, this may not be the case for several reasons:

• Lengthy and expensive probate process. Like other wills, a handwritten will must be admitted to and accepted by the probate court after death before it takes effect. Although you may save the initial legal fees of having an estate planning attorney draft a will and/or trust, handwritten wills are notorious for resulting in complicated, expensive, and public probate proceedings and legal challenges—just as in the case of Aretha Franklin’s handwritten will. There may be questions about whether the handwritten document was intended to be a will or if it was just your thoughts about what you ultimately would like to include in a will. Also, although what you write in your will may seem very clear to you, others may not understand what you intended. In addition, some heirs may question whether the handwriting is actually yours—meaning that witnesses or even a handwriting expert must be called to verify it. This will cost extra money and time.

Having an experienced estate planning attorney draft a will that is properly executed (i.e., signed by you and witnessed by others) will facilitate a smoother probate process, avoiding the unnecessary expenses that so often arise when a will is handwritten. Further, the probate process can be avoided altogether if you create a trust. When you create a revocable living trust, you transfer your money and property to the trust for the benefit of beneficiaries you choose. Because the trust owns your property at your death, probate is not required to transfer ownership to your beneficiaries when you die. A trustee that you select will manage the property and funds you place in the trust and will transfer them to your beneficiaries in the way you have directed without court involvement or delays.

• Inadequate expression of intentions. Many people know who they would like to receive certain items, but they may not know the best way to clearly express it so that it will hold up in the probate proceeding. They also may not think of everything that the will should address: For example, who will care for your children if something happens to you, or what will happen if the person your will names to receive your property dies at the same time or before you? What will happen to the money or property you have set aside for your children if you die when your children are still minors? These are only a few of the issues that an experienced attorney can help you address in a professionally drafted will or trust.

• Moving to a state that does not recognize handwritten wills. If there is a chance you may move, it is important to remember that about half of the states do not allow handwritten wills. A few will recognize a handwritten will that is legally valid in the state in which it was made, but most will not. If you relocate to one of these states and do not have a will that is valid in that state, it will be the same as if you had died without a will. Your money and property will go to the heirs specified by the state’s “intestacy” laws—which may not be the people you would have chosen.

We Can Help Ensure Your Wishes Are Carried Out

A handwritten will may appear to be the easiest and least costly way to make sure the people you want to have your money and property when you pass away receive it. It may indeed be easier and cheaper for you—but not necessarily for your family members and loved ones. Instead, it may result in months or even years of court proceedings, will contests, and damage to family relationships. We can help you draft a will or trust that will ensure that your wishes are fulfilled and prevent unnecessary stress for your grieving family and loved ones.

Please call us today to set up a meeting so we can create an estate plan that will address all of your goals.

Filippi Law Firm, P.C., provides legal services in estate planning, probate, trust administration, trust litigation, and personal bankruptcy in the greater Sacramento area, with a focus in Rocklin, Roseville, Lincoln, and Granite Bay. Give us a call at (916) 333-7910 or fill out the contact form to get in touch with our office. Consultations are free, and they can be done over the phone, via Zoom, or in person at our office in Rocklin. Prepare for your future and work with the best estate planning attorneys today.

What Is a Medical Power of Attorney?

A medical power of attorney, also known as a healthcare power of attorney, is a legal document that enables you to name someone to act as your agent, that is, a person who can make decisions on your behalf. Your agent has a duty to make decisions that you would have made if you had been capable of making them to the extent that the agent knows your wishes. Although most states do not allow one of your healthcare providers to serve as your agent, you are free to choose another mentally competent adult. A medical power of attorney must be in writing and signed before witnesses and/or a notary, depending upon your state’s law. Some states further prohibit your healthcare providers and those who may inherit from you from serving as witnesses. The medical power of attorney will only come into effect if you are unable to communicate your wishes.

What Does Your Agent Need to Know?

Once you have decided who will act as your agent, it is very important to have a serious and honest conversation with that person to help them understand your goals and priorities for your health care, as well as the values you want your agent to follow in making decisions on your behalf. It is also important to provide information that is crucial for your agent to know in order to make decisions regarding your care, preferably in writing.

Preferred providers. You should provide the name, phone number, and address of the doctor you would like to be your attending physician, as well as other physicians and healthcare providers you would prefer to treat you if necessary. Likewise, if there are any physicians or providers you do not wish to treat you, you can furnish a list of those providers as well.

Medical conditions. You should make sure your agent knows about any medical conditions that may impact your care. For example, if you have a medical condition that may cause or appear similar to psychiatric symptoms, you can instruct your agent to have your physician rule out those medical conditions prior to authorizing psychiatric care or treatment.

Treatment and medical history. If you have had surgeries or other medical procedures, give your agent a list of them and the dates they occurred.

Medications. You should provide your agent with a list of all the medications you are taking. Further, if you want your agent to refuse to authorize certain medicines, you should specify that wish.

Allergies. If you have allergies, particularly to medications or foods, provide them to your agent.

Religious beliefs. It is very important to communicate with your agent about your spiritual beliefs and values. These beliefs may affect your choices about the extent or aggressiveness of medical care you would like to receive, whether you would like a chaplain to be part of your medical team, or if there are any religious customs or rites you would like to observe.

Let Us Help You Prepare for the Future

Although it is not a pleasant topic to contemplate, it is an unfortunate reality that we may eventually need someone else to make decisions regarding our healthcare. If you already have a medical power of attorney in place, it is important to review it annually. As experienced estate planning attorneys, we can help you put a comprehensive plan in place to ensure not only that you will receive the medical care you desire, but also that your finances are properly managed and your family members are provided for and protected. Please contact us today to set up a meeting. You may be surprised at the peace of mind you can gain by knowing that you are prepared for whatever the future holds.

Filippi Law Firm, P.C., provides legal services in estate planning, probate, trust administration, trust litigation, and personal bankruptcy in the greater Sacramento area, with a focus in Rocklin, Roseville, Lincoln, and Granite Bay. Give us a call at (916) 333-7910 or fill out the contact form to get in touch with our office. Consultations are free, and they can be done over the phone, via Zoom, or in person at our office in Rocklin.