Before It's Too Late ~ Eric Gullotta

Eric Gullotta Eric S. Gullotta, JD, CPA, MS (Tax) specialies in estate planning and taxation law. His office is located at 232 West Napa Street, Suite A, in Sonoma. Contact him at 938.7234 or visit Gullottalaw.com.

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Keep your trust out of court

Posted on February 27, 2014 by Eric Gullotta

I have two matters in my office right now that are headed to court. What’s worse, both of these cases originate from the same trust. Not because someone is suing the estate, not because they failed to do estate planning, but because the estate planning they did do was poor. The family had a trust and in fact, this trust was drafted by an attorney. But it was inadequate.

This trust wasn’t drafted by me — hopefully you guessed that by now. This trust came to my office via the trustee who was charged with administering the trust. She is the granddaughter of the original settlor (the person who created the trust). When her grandfather passed away, my client had no idea what the trust said or really, what to do as the trustee.

As I read the trust I realized that there were some problems. The first was that the trust called for distributions of a few hundred dollars per month to four different beneficiaries rather than an all-out distribution of the assets. Sometimes monthly distributions are proper, but in this case, all the beneficiaries were responsible adults and these monthly distributions weren’t necessary.

Why was this a problem? When you create a trust and provide for income distributions (say, $300 per month) the trust must remain active while those distributions are being made. This means trustee fees, accounting fees, and attorney’s fees. With today’s interest rates, trusts aren’t earning a lot and all of these costs and fees essentially “eat up” the trust principal and leave less to the beneficiaries.  This is not what I think the settlor intended.

This trust would basically eat itself alive over time. In other words, the costs of administering the trust are more than the trust makes in interest and dividends. Because this is not what the settlors wanted, we requested the court modify the trust so each beneficiary would get a lump sum instead of monthly distributions and thereby avoid the excessive fees we’ve been discussing. Unfortunately, asking the court to do anything is an expensive proposition. Not just because of the attorney’s fees but because of court costs and delays.

The next part of this trust involves a Special Needs Trust (SNT). This is a type of trust created for an individual with special needs who is receiving government financial assistance. Most government assistance is “means tested” which requires that the individual only have a certain amount of money or assets in order to receive the funds from the government. These trusts are designed so that the beneficiary with disabilities continues to receive government assistance and still has some of their inheritance around for unexpected expenses or just to make their lives a little better.

SNTs are very specific documents and state, very clearly, how and why the beneficiary can access the trust’s funds. In this case, the trust was poorly drafted and states that only the “income” from the trust can be used for the beneficiary. This means that only the interest and/or dividend income earned from approximately $80,000 will be available for the beneficiary. At today’s whopping 0.01 percent interest rates for savings and cash accounts, this works out to be $8 per year. I didn’t know the decedent but I am guessing that he didn’t want his grandson to get only $8 per year!

What’s worse, because of attorney’s fees, tax preparation fees and trustee fees, the trust income is actually negative each year and therefore this young man gets nothing! That is unless, we go to court and ask the court to allow distributions of the trust’s principal as well as the income. So here come more attorney’s fees and court costs that will eat into the trust and thus reduce its effectiveness.

When I researched the attorney who drafted this document, I found out he was a bankruptcy attorney and not an estate planner. Clearly, he did not have the experience to guide a client through these intricate details and it appears that incorrect decisions were made. He probably knew just enough to recommend a trust be prepared and that a SNT would be helpful. Had he been an experienced estate planner, he would have crafted the documents to not only accomplish the settlor’s goals but done so without involving the courts and costing his children and grandchildren unnecessary time and attorney fees.



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