Real Life | Examining the different forms of estate anatomy
Last time we learned to be estate-administration experts, right? So, we’d better find out what Loved One’s documents, the lawyers and the judges are talking about, to become experts at dealing with them too. If you’re among the many who already know, do hang in to see if there’s something new for you, or that you might teach me.
Let’s examine estate anatomy more over this and the next two or three dialogues, starting with some of the not-so-routine entities and forms of ownership.
Met a nice “personal trust” lately? They’re quite popular, all around the neighborhood. When you create a trust, you are “settlor,” or “grantor.” They’re legal entities, separate from the person’s other assets, invented specifically and deliberately to be separate for tax and various legal reasons. Therefore, they bypass the probate estate, escaping the drudgery and expense of inventorying everything, filing, jousting with the bureaucracy and public record of Loved One’s business. But, regardless of whether one’s trusts are revocable (settlor or grantor can amend or terminate) or irrevocable (cast in stone forever), intervivos (exists during life) or testamentary (exists only at death), they partner with the estate.
Some trusts, usually created by families for charitable purposes, are called “foundations.” Trustees are called directors, executive managers or officers.
Trusts can do anything that their grantors legally empowered them to do and specified in the trust documents. They can’t do anything that isn’t. Trusts can own the assets or can be at-death legatees for them, can be responsible to pay estate expenses and have their own beneficiaries. Among the main reasons that people create personal trusts, they can “pour over” assets to, or segregate assets from, the estate, usually to minimize taxes. They can retain assets for wise and sophisticated trustees to manage long-term for the beneficiaries’ benefit.
Irrevocable intervivos trusts, and revocable ones that have become irrevocable and continue after death, or take effect at time of death or incapacity, are tax-paying entities and therefore must file separate income tax returns under their own tax-filing numbers.
But, beware: Lest we hasten to avail ourselves and our beneficiaries of the advantages of irrevocability and later regret it, let’s remember that we can’t amend or change an irrevocable trust, even though our wishes or circumstances likely will change over our lives’ many remaining years. We need a bright specialist attorney to draft enough flexibility into it, without destroying its independence.
Protect your assets
Like estate personal representatives, trust fiduciaries must adhere to fiduciary law, lofty ethics and performance. Trusts have their own fiduciaries, but, sensibly, often they and PRs are one and the same people, banks or law firms serving in both roles.
Anyone want to blow away your long-and-hard-built business or professional firm? Protect it carefully and profitably in the estate plan!
An unincorporated sole proprietorship is like any other estate asset. But there are additional considerations. For instance, how to reach a credible and factually supportable valuation when the “going concern” value (“goodwill”) evaporates because the operator died or became incapacitated? Or, what if the key employee, without whom the business would collapse, wants to buy the business from the estate in order to remain employed but won’t even want to continue working there if the heir (via the estate) takes over? Or maybe there’s a preemptive, funded buyout agreement between the decedent and that key employee.
A business owner or professional practitioner who is in business with someone else owns a share of that business entity. It’s a conventional simple partnership, limited liability corporation (LLC), professional association (PA) or professional corporation (PC), stock corporation or nonstock corporation. These business entities stand separately and on their own. Like irrevocable trusts, they are separate, tax-filing entities, although some “pass through” their tax liabilities to the owners.
The shares of ownership in the enterprise are estate or trust assets if the trust owns them. The beneficiaries want their money, and many want to take over the business or firm even though the surviving owners don’t want them. You guessed it: Owning a share of one’s business creates potentially conflictive issues and relationships, because for some time after death and during legally declared incompetence, the estate or the trust “stands in the deceased owner’s shoes” in effect. The fiduciaries must work with the surviving business shareowners. Their decisions must favor the enterprise’s interests wherever feasible, often in conflict with the family’s, estate’s or trust’s interests.
Understandably, surviving owners and the deceased’s heirs (usually the widow and/or children) can conflict when forced to work with each other as a result of the death or incapacity.
In the case of a conventional partnership business entity, things can be even more weird, because technically, a partnership is dissolved automatically upon a partner’s death. Legally, the business entity ceases to exist. “Now, what?” becomes the overwhelming issue for all the surviving partners and the estate.
The task of determining a supportable valuation for the business is daunting, especially if the deceased owned a minority share and if the enterprise’s future is doubtful because the deceased was its key person.
Alternatively, everyone will benefit if the estate or trust can negotiate an alternative arrangement, such as a buyout. Better yet, early in the shareholders’ business lives together, well-counseled business and professional firms foresightedly prevent these horrors by creating share buy-out agreements dictating and funding (almost always via life insurance) the disposition of owners’ shares at death or incapacity.
As you can see, PRs and administrators have a lot of work to do in dealing with personal trusts and business/professional entities, even if they aren’t part of the probate estate.
Titling assets
Should assets be titled in “joint ownership” or “tenancy in common”? If you, your corporation, trust, foundation, partnership, LLC or PA share ownership of an asset with someone else or with another entity, then chances are that the ownership title is either “joint” or “in common.” In joint ownership, frequently found in financial, real estate and durable goods assets, you and the other owner(s) literally are “groupies,” and no one’s share is identifiable within the unit. At death, the share automatically passes to the surviving owner(s), literally bypassing the probate estate, but the PR still must include it in the valuation, accounting and tax filings. The home that you own with your spouse likely is in this group of assets, under the special label of “tenancy by the entirety.”
As if invented just to confuse you, “tenancy in common” is very different. Here, your share is separable from the others, does not automatically transfer to the other owners and is probatable. It is subject to your testamentary instructions, regardless of your fellow owners’ interests. That’s why not many assets are titled to tenants in common.
Many folks make a big mistake by titling their assets, especially bank accounts, jointly with a family member to assure availability in case of incapacity or death. The joint owner’s creditors and cyber hackers, therefore, are invited to grab the assets. That’s how innocent Mary’s vengeful daughter-in-law won her bank account in the divorce judgment.
Further, the joint owner is legally responsible for all of the asset’s unpaid liabilities and taxes.
Ironically, the right titling is so simple: Just add Other Person to the bank account as an authorized user, and place other assets in a simple, standard-language personal trust giving Other Person full powers as a trustee.
Next time, more expert powers for you.
This story was originally published March 21, 2015 at 12:00 AM with the headline "Real Life | Examining the different forms of estate anatomy ."