Thursday, November 19, 2009

Why Good Documents Alone are Never Enough

I recently met with three brothers whose mother died this past spring. Their father had died in 2002. In 2000, their parents – who I’ll call Robert and Sandy Jones -- had completed an estate plan that included a joint revocable living trust. Most of their assets – which were comprised primarily of residential and commercial property worth approximately $1.25 million in 2000, plus a brokerage account worth about $150,000 – were “funded” to the trust by retitling the assets in the name of the revocable trust.

One can only assume what the Jones’ goals were, but experience tells me that there were probably two objectives:
probate avoidance and estate tax protection. In the end, neither objective was satisfied.

The first critical omission was the failure to properly apportion the assets funded into the joint trust between Mr. and Mrs. Jones. While joint revocable trusts are certainly valid in New York, to be fully effective the funded assets most be specifically allocated between the spouses. This is done by dividing the previously jointly-owned assets equally between the husband and the wife, and specifically identifying each spouse’s assets contributed to the trust on schedules appended to the trust. In this particular case, the schedules that were supposed to identify each spouse’s “portion” of trust assets were left blank.

When Mr. Jones died in 2002, Mrs. Jones probably assumed that since the trust already owned all the assets, there was nothing for her to do. She probably believed that her estate planning was a success, as she was able to avoid having to probate Mr. Jones’ estate since he owned no assets in his name alone. And, since the joint trust provided that upon her death, the trust assets would pass equally among the three sons as she desired, her estate planning was “done”.

Unfortunately, the absence of continued professional involvement with Mrs. Jones’ planning led to unintended results. Under the terms of the joint trust, upon Mr. Jones’ death “his” share of the trust assets was supposed to be funded into a “Family Trust” for Mrs. Jones’ benefit. Assuming a total estate value of $1.4 million in 2002, approximately $700,000 of assets – comprising one-half the interests in the real estate, plus one-half the assets in the brokerage account – should have been retitled in the name of the “Robert Jones Family Trust.” Mrs. Jones and her sons were to have been the Trustees of the Family Trust.

Between Mr. Jones’ death in 2002 and Mrs. Jones’ death in early 2009, Mrs. Jones acquired additional assets, including a vacation home in Florida. The newly acquired assets were titled in Mrs. Jones’ name alone, rather than to her “survivor’s trust” portion of the revocable trust. By the time of her death, her total estate – both the trust assets and the assets in her own name – were worth $1.8 million.

Since Mrs. Jones owned assets in her own name, the Jones’ three sons had to commence a probate proceeding in Orange County Surrogate Court to obtain “Letters Testamentary” that provided them with administrative control over Mrs. Jones’ investment and bank accounts, and most of the probate assets. However, because Mrs. Jones owned the Florida home in her name alone, there will need to be an “ancillary” probate proceeding in Florida, necessitating the hiring of a Florida attorney, and additional legal expense.

I had the sad duty of informing the Jones’ sons that, because their father’s Family Trust had not been funded at the time of his death in 2002, Mr. Jones’ estate exemption on the one-half of the trust assets that should have been allocated to the Family Trust was forfeited. Accordingly, the entire $1.8 million of assets owned by both the trust and in Mrs. Jones’ name at the time of her death are includable in Mrs. Jones’ taxable estate. Since New York’s estate tax exemption is capped at $1 million, the “extra” $800,000 that would otherwise have been owned in the Family Trust is fully taxable, resulting in a New York State estate tax obligation of approximately $85,200.

The moral of the story? Simply having good estate planning documents is not enough. Your estate planning must be regularly maintained and monitored to assure that all your goals can be satisfied both during your lifetime and after your death.

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