If you are serving as executor or trustee for a loved one’s estate/trust, you have duties, including filing and paying taxes.  This is serious stuff, because if you goof up, you can be held personally liable for the taxes, interest, and penalties.

We are providing an overview of executor and trustee tax duties, but you definitely need to meet with a qualified probate – trust settlement attorney to get good advice, regarding your individual situation.

The 1040

As executor or trustee, you will be responsible for filing the decedent’s final 1040.  If your loved one died anytime in 2011, the final tax return will be for the tax year ending December 31, 2011.  If you loved one dies anytime in 2012, the final tax return will be for the tax year ending December 31, 2012.

As you might expect, the returns are due April 15^th of the year following death and you use the decedent’s social security number.

The 1041

If the trust or estate has any income from that date of death until the trust or estate is closed, a 1041 must be filed.

The 1041 is due April 15^th of the year following death and you use the EIN number assigned to the estate.

The 706

If the estate is large and exceeds any remaining applicable unified credit amount (which was $5 million in 2011, is $5.12 million in 2012, and will be $1 million in 2013) or you want to maintain eligibility for portability, a federal estate tax return (706) must be filed.

The 706 is due 9 months after the date of death (and can be extended for an additional 6 months.)  Use the estate EIN number to file.

As of this writing, California does not have a state inheritance tax or state estate tax, but you would be wise to consult with a qualified probate – trust settlement attorney (estate planning attorney) to determine the current state of the law and how it applies to the trust or estate you’re handling.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

You may (or may not) have heard about “portability” and the ability for both a husband and wife to use their full federal estate tax credits, without trust planning.  Don’t be so sure.

You absolutely still need trust planning and here’s why.

Why You Need Trust Planning

The trust we’re discussing is usually included in a revocable living trust.  (It can be included in a will, but will-based planning has pitfalls and trusts have virtually no pitfalls.)

This planning is called “credit shelter trust” planning or “AB trust” planning.  It’s a good idea for all married couples, who have revocable living trust planning, to include credit shelter/AB trust planning.

Why?

1. To pay the least federal estate and generation-skipping tax possible.

1. To provide asset protect for trust assets, so they can’t be taken by your spouse’s or children’s creditors (bankruptcy, lawsuit, malpractice, divorce, and the like.)

Why You Can NOT Count on Portability

There are four reasons you cannot count on portability and still need credit shelter/AB trust planning.

1.  Portability ends December 31, 2012.  Unless both you and your spouse are going to die before then, portability won’t work for you.

2.  Portability requires that the executor/trustee (of the first spouse to die) file a federal estate tax return; this isn’t typically done unless there is a taxable estate and if the marriage is a second or third marriage, the executor/trustee may not cooperate.

3.  Portability provides absolutely NO asset protection.

4.  Portability is riddled with pitfalls and, likely, to have fallout litigation.

If you’re married and doing trust-based estate planning, be sure to include a credit shelter/AB trust; despite portability rules, you still need a trust.  A qualified estate planning attorney can help you.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

A life insurance trust both owns and is the beneficiary of a life insurance policy.  Why would you need a life insurance trust?  Why, to save gobs and gobs (and more gobs) of money.  The main purpose of life insurance trusts is to avoid paying federal estate taxes and generation skipping taxes on the proceeds.

Here’s how the taxes work:

If you own a life insurance policy at your death, the proceeds are taxed in your estate for federal tax purposes (and for generation skipping tax purposes, if your designated beneficiary is of your grandchildren’s generation or younger.)

If your life insurance proceeds are taxed for federal estate tax purposes, your family could lose up to 60% of the proceeds.  That’s shocking.

What’s even more shocking is that if the life insurance proceeds are also subject to the generation skipping tax, your family could lose up to 90% of the proceeds (federal estate and generation skipping tax combined.)  That’s incredibly shocking.

However, the federal estate tax and generation skipping tax can be avoided:

Have a life insurance trust own (and be the beneficiary of) your life insurance.  If you don’t own it or have any rights to the policy, it can’t be taxed in your estate.

As a “bonus,” the trust shares you create for your beneficiaries in the life insurance trust have asset protection; this means the assets cannot be taken by divorcing spouses, bankruptcy creditors, or in other lawsuits.

Consult with a qualified estate planning attorney about a life insurance trust, as part of your comprehensive estate plan.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

You’ll like the answer to this one; you maintain control over all of the assets you put in your revocable living trust.  Unless you specify otherwise, you remain in full control as both the trustee and beneficiary of your trust.

You decide which assets are funded into the trust; you decide how your trust assets are managed; and, you decide how your trust assets are invested.  You can take assets out of the trust and you can put assets into the trust.  You maintain full control and can make these changes, so long as you are alive and well.

Should you become incapacitated or die, you maintain control by leaving explicit instructions as to when you will be deemed to be incapacitated, who is to step into your shoes, and what they are supposed to do.  If you’re married or in a domestic partnership, you may choose to name your significant other as a co-trustee and co-beneficiary.

Living with a trust is so easy, you may forget that you have one.  You file your normal 1040 income tax return, using your own social security number.  You sign your checks and pay bills just as you always have.  The only reminder you have is when you receive a bank or financial statement and see that it’s addressed to you as a trustee, not an individual.

Because the trust is so easy to live with, remember to keep your assets titled in the name of your trust, including new assets. For example, if you open a new investment account, title it in the name of your trust.  If you refinance your house, be sure the house gets re-funded into the trust.  Your estate planning attorney will draft the appropriate deeds.

If you have any questions about staying in control or creating a living trust, consult with a qualified estate planning attorney.  You’ll like what you hear; having a trust actually gives you more control than if you don’t have one.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

Because your estate plan, specifically, your living trust, will only work if loved ones and trusted helpers know about it, you do need to tell them that you have a living trust.  Let your loved ones and trusted helpers know that you’ve engaged in the estate planning process and show them where you keep your living trust and other estate planning documents.  In addition, it’s a good idea to give copies of your estate planning documents to the appropriate trusted helpers.

You may be wondering, “Who are my trusted helpers?”  “Trusted helpers” is a term that encompasses all those professionals or loved ones who assist you.  For example, your successor trustees of your living trust, agents named under both financial and health care powers of attorney, guardians to raise minor children, and the executor named in your will are all trusted helpers.

Be sure to discuss the role of successor trustee (and other trusted helper positions) with those you’d like to name in your living trust and other estate planning documents.  Explain the duties, responsibilities, and time commitment of the job; your estate planning attorney can provide assistance if you need it.  Be certain your potential trusted helper understands and is willing and able to take on the responsibilities.

Then, show your successor trustee (and other trusted helpers) where you keep your estate planning documents and provide them with a copy.  Each time you update your estate plan, be sure that the trusted helpers receive the update.

In addition, your banker, financial advisor, and insurance professional should know that you have a living trust so that your assets are properly funded.  In general, non-retirement assets (i.e. non-qualified assets) should have the title changed from your name to the name of your trust; beneficiary designation assets should have the beneficiary changed to the name of your living trust.  Consult with a qualified estate planning attorney to determine the specific funding pattern that should be executed in your individual situation.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

Is your will typed on legal sized paper?  And, we do mean “typed.”  Have you had more children since your will was drafted?  Are your children now adults?  Has the executor you’ve named in your will died or become incapacitated?  Have you moved to a new state?  Have you accumulated more assets?  If there is even one “yes” to the above questions, consult with a qualified estate planning attorney.  If your will and other estate planning documents were executed before the advent of computers, they’re stale, need to be updated and, likely, won’t work.

What’s the cost of an estate plan that does work?  It may be difficult to put a tangible price on a plan that doesn’t work, what are the real life costs of having your assets go to the wrong people at your death, the wrong people raising your children, having all of your beneficiary’s inheritance seized by creditors or a divorcing spouse, or having the public, including nosey neighbors, know your financial assets, debts, beneficiary contact information, and executor name.

Those are bad things that can happen if you’re will isn’t up to date; here are more bad things that can happen if your other documents are up-to-date or don’t exist:

• If you don’t have an up-to-date trust, the inheritances you give may fuel an addiction or disqualify a beneficiary from receiving governmental assistance.
• Your assets may go through probate.
• The court may take over your finances and health care decisions.
• You may be hooked up to life support machines for years and years.
• You may not get the medical attention you want.

If your estate plan is so old that it’s typed on legal sized paper or, even if it’s just three to five years old, consult with a qualified estate planning attorney.  See what an up-to-date estate plan, including a will, revocable living trust, financial power of attorney, health care power of attorney, HIPAA release, living will, and organ donation authorization can do for you and your family.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

Trying to go it alone practicing law rarely yields positive results.  In fact, amateur estate planning wreaks havoc.  If you don’t have an up-to-date, comprehensive estate plan, consult with a qualified estate planning attorney.  If you don’t, the following may be the result.

• Jane and Michael are do-it-yourselfers; they do their own plumbing, taxes, and estate planning.  They own all of their assets jointly and when Michael dies in a fishing accident, Jane inherits all of the assets outright.  After a period of mourning, Jane remarries and re-titles in joint names with her new husband, Frank.  Jane dies of cancer and Frank inherits all of the assets that were formerly Jane and Michael’s; their children get nothing.  Consultation with a qualified estate planning attorney could have prevented the disinheritance of Jane and Michael’s children. 

• Rheta fills out legal forms she downloaded from the internet.  She names her brother, Johnny, in trusted helper positions and signs the documents.  When Rheta is seriously injured in a car accident, she is unable to manage her assets; Johnny is suffering from severe depression stemming from a divorce, and he is unable to serve.  There are no contingent trusted helpers named, so a conservatorship process is required.  This drains Rheta’s bank account and a stranger, a local attorney, is named as her conservator. 

• Sally downloads estate planning documents from LegalZoom for her Uncle Robert.  She has Robert sign the documents and proceeds to try to fund his trust, but no financial institutions will transfer assets into the trust because they are unsure of its validity.  Robert dies and the trust is unfunded; therefore, probate is guaranteed; probate is very expensive in California.  In addition, Robert’s will was not executed properly and was, therefore, invalid.  His estate plan failed totally.

Practicing law and, specifically, estate planning is not an amateur sport.  Get a solid, comprehensive, and legally valid in place by consulting with a qualified estate planning attorney.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

We all need to keep costs down and being concerned about estate planning legal fees is completely normal.  Everyone is concerned about fees; you are not alone.  Here are 5 pieces of insider information that will likely make you feel more comfortable about estate planning fees.

• Consider Overall Costs:  In the long run, getting good legal advice will almost always cost less than do-it-yourself kits and downloadable forms.  This is because most home-made estate plans don’t work.  What will it cost if your plan doesn’t work, your children are accidently disinherited, or all of your spouse’s inheritance is taken in a lawsuit?

• All Legal Fees are Disclosed Upfront:  All legal fees will be disclosed upfront, in writing.

• Estate Planning Fees are Often Fixed:  Most estate planning fees are fixed, not hourly.  This means that you know exactly what you’ll pay and there is no monthly pinprick of hourly billing.  In a fixed fee relationship, you can call or email your estate planning attorney and not worry about receiving a $75 bill.

• Tax Related Fees are Tax Deductible:  Any legal fees associated with saving taxes or tax planning are 100% tax deductible.  Your attorney will give you a receipt, indicating applicable tax deductibility.

• Chat Upfront with Your Attorney:  Don’t be shy about discussing fees; always be upfront with your attorney.  He or she may be able to accommodate your financial limits by offering credit card billing, installment payments, or bundled legal services.

“Unbundled legal services” means that your estate planning attorney provides legal advice and estate planning documents on an individual topic.  For example, perhaps you execute powers of attorney to get your estate planning started.  You can come back the next month, or so, to execute a will.

While a comprehensive estate plan is best and what your estate planning attorney wants to provide, it’s better to have something in place and build over time than to have nothing in place at all.

If you’re concerned about estate planning fees, chat with your estate planning attorney.  You may be happily surprised and find a fee plan that works for you.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

In part one of this article, LegalZoom Sued Over Invalid Will, we discussed that with the help of his niece, Katherine Webster, Anthony J. Ferrantino, signed a will and revocable living trust downloaded from LegalZoom.  The will was not executed properly; and, therefore, was not legally valid; and, financial institutions wouldn’t recognize the legal validity of the trust so they refused to transfer Ferrantino’s assets into the trust.  The trust remained unfunded at his death, costing the estate thousands of dollars.

“LegalZoom preys on people when they’re at their most vulnerable, when they are of advanced age or poor health and need a will or a living trust,” adds San Francisco elder abuse attorney and lead counsel in this case, Kathryn Stebner.

Webster, Ferrantino’s executor, is suing LegalZoom in a class action suit:

“Nowhere in the [company's] manual do defendants explain that using LegalZoom is not the same as using an attorney and that its documents are only ‘customized’ to the extent that the LegalZoom computer program inputs your name and identifying information, but not tailored to your specific circumstances,” the lawsuit states;“the customer service representatives are not lawyers and cannot by law provide legal advice.”

LegalZoom advertises that you don’t need an attorney because its documents are legally binding and reliable.  However, Ferrantino’s documents were neither legally binding nor reliable, resulting costs of thousands of dollars.

“LegalZoom’s business is based on nurturing the false sense of security that people do not need to hire a traditional attorney,” says San Francisco attorney Robert Arns, one of Webster’s attorneys, who filed the suit.

The next time you see those LegalZoom commercials, think of Anthony J. Ferrantino and the 3,000 other people who bought legal documents such as a will, trust, or power of attorney.  If you want your estate plan to work, consult with a qualified estate planning attorney.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

You’ve likely heard of LegalZoom, offering to sell a will, trust, or other legal documents; perhaps, you’ve seen their advertisements on television.  LegalZoom is the big name online seller of legal forms, including estate planning documents.   They have been sued again and are currently the defendant in a class action (i.e. large group of plaintiffs) in California, accused of deceptive business practices and practicing law without a license.

Facts of the Case Main Case

Katherine Webster helped her uncle, Anthony J. Ferrantino, execute a living trust and will provided by LegalZoom, thinking that these documents would be legally valid because LegalZoom advertised as them as such.  Furthermore, Webster thought if there were any difficulties with the documents, LegalZoom would resolve them through their satisfaction guaranteed promise.

Ferrantino signed the LegalZoom documents, but these documents were not accepted by financial institutions as legally valid; so, legal institutions refused to transfer his assets into his trust.  Webster sought help from LegalZoom when their legal documents were not honored, to no avail.  Ferrantino’s trust remained unfunded at his death in 2007.

At Ferrantino’s death, Webster hired an estate planning attorney who reviewed the documents, to find that the will had not been properly witnessed and was therefore legally invalid.  The attorney petitioned the court to allow post-mortem trust funding; then, had to convince financial institutions to transfer the assets to the trust.  This cost the estate thousands of dollars.

Webster filed suit, on May 27, 2010, in the Los Angeles Superior Court; she filed a class action suit, representing about 3,000 Californians who had purchased estate planning documents from LegalZoom.

Webster charged that she and other LegalZoom customers relied on misleading statements that LegalZoom:

• Carefully reviews customer documents;
• Guarantees 100% service satisfaction;
• Service and documents are of the same quality as those prepared by an attorney; and,
• Documents are effective and dependable.

Please continue reading to learn more at part 2 of 2, LegalZoom Sued Over Invalid Will.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.