Though statistics vary, it is generally thought that around 30-40% of marriages in the U.S. end in divorce. Obviously people don't get married with the goal of legally separating in the future, it is a possibility that should be considered. For those who are already married or couples contemplating marriage, understanding how property is divided and distributed in a divorce in Hawaii is an integral part of estate planning.
In this post, we will review how property is categorized and divided by the court during a divorce. In Hussey v. Hussey (1994), the Hawaii Intermediate Court of Appeals provided three classifications of property, which are as follows: Premarital Separate Property: This is property owned by each spouse prior to their marriage/cohabitation. When two people marry, this property becomes either "Marital Separate Property" or "Marital Partnership Property". Marital Separate Property: This property is owned by one or both of the spouses at the time of divorce and can be described as follows. A. All property that was excluded from the marital partnership by an agreement in conformity with the Hawaii Uniform Premarital Agreement Act. B. All property that was excluded from the marital partnership by a valid contract, such as a post-nuptial agreement. C. All property that... 1. Was acquired by the spouse-owner during the marriage by gift or inheritance, 2. Was expressly classified by the donee/heir-spouse-owner as his or her separate property; AND 3. After acquisition, was maintained by itself and/or sources other than one or both of the spouses and funded by sources other than marital partnership income or property. Marital Partnership Property: All property that is not Marital Separate Property. These classifications are important to understand because they are the starting point in determining what property is available to be divided between the spouses. Marital Partnership Property is the property is available to be divided and distributed between the spouses at the discretion of the court. On the other hand, Marital Separate Property cannot be distributed to the non-owner spouse or used to "offset" any award of Marital Partnership Property to the other spouse. It has, in effect, been excluded from the marital partnership. However, the court may take into consideration the amount of Marital Separate Property each spouse has and "alter" the final distribution of the Marital Partnership Property based on the "respective separate conditions of the spouses." This is within the court's discretion and equitable powers. For soon-to-be wed or married couples, understanding how property is classified in divorce proceedings highlights the importance of having a premarital agreement or post-nuptial agreement so that Marital Separate Property is clearly defined. For gifts and inheritances to be classified as Marital Separate Property all the above-mentioned conditions must be met. If a spouse does not expressly state the gift or inheritance is separate property or uses marital assets or efforts to maintain the gift or inheritance, that gift or inheritance will be likely be classified as Marital Partnership Property and divided accordingly. Among the many bills that were considered and passed in the 2012 Hawaii legislative session was a law that would allow spouses and reciprocal beneficiaries (RBs) to place real property in a trust AND be extended the creditor protection afforded by holding property as tenants by the entirety. Thus, spouses and RBs may preserve their creditor protection while taking advantage of the benefits of placing their real property into a trust.
For those unfamiliar with the concept of tenancy by the entirety, it is a form of concurrent property ownership. The other types are tenants in common and joint tenancy. Tenancy by the entirety is a form of ownership that is available only to spouses or reciprocal beneficiaries. The main benefit of holding property as tenants by the entirety is that a creditor of an individual spouse or RB cannot attach and sell the real property interest of the debtor spouse. However, this creditor protection is not available against a couple's joint creditors. In the 2012 legislative session, HB 2623 added a few new subsections to Hawaii Revised Statutes Section 509-2. Prior to this bill passing and being signed into law, two people who held real property as tenants by the entirety and wanted to create separate trusts would need to break the tenancy by the entirety ownership and convey their interests into their respective trusts as tenants in common, thereby losing the creditor protection. However, HB 2623 now states that real property held by spouses or RBs in equal shares as tenants in common in their respective trusts shall be treated as if the real property (or its proceeds) are held as tenants by the entirety. These new additions to Hawaii Revised Statutes Section 509-2 states that this creditor protection shall continue even after first of the couple passes away. This is also true if a court in any proper jurisdiction holds a trust to be invalid while the couple is still alive. Of course, if spouses divorce or reciprocal beneficiaries terminate their legal relationship, the tenancy by the entirety is severed and the real property will be held as tenants in common. To gain the creditor protection for real property held in trust, certain requirements must be met and specific language needs to be inserted into the conveyance deed. In general, holding real property in tenancy by the entirety is preferable, but of course, it depends on the situation and as well as future considerations. Consult with an attorney to explore whether this extension of tenancy by the entirety for Hawaii trusts is right for you. So you have a new baby on the way or perhaps already have several little ones underfoot. There are a multitude of things that you're likely worrying about as new or recent parents and estate planning is probably not one of them. However, discussing and making a few key decisions on the outset can help protect your family and children's interests in the years to come.
Nominating a guardian and conservator via a Will: A guardian and conservator are necessary for minor children because they cannot legally make decisions for themselves or own property in their individual name. In the event a minor child becomes orphaned and no guardian and conservator has been nominated by the deceased parents, then it is possible that relatives (e.g. the child's maternal and paternal grandparents or uncles and aunties) may engage in a lengthy legal battle to decide who will be legally responsible for the child and control the child's inheritance. This can be avoided by having the parents nominate a guardian and conservator for their minor children through a Will. Hawaii law also allows parents to make a nomination via a "signed writing", but it is safer to nominate a guardian and conservator through a properly drafted and signed Will. However, if the minor child is at least 14 years old, the minor may nominate her own guardian and conservator. The court will strongly consider the minor child's preference and determine whether the child's nomination is the best interests of the child. Choosing who will be a guardian and conservator for a child is a difficult decisions and can sometimes hurt the feelings of those who weren't selected. However, this isn't a valid reason to not take action. Even if new parents are not completely certain about their choices for a guardian and conservator, it is better to have those selections initially memorialized in a Will. Providing some guidance on the parents' preferences is better than having none at all, which is something that could lead to a Hawaii court making inappropriate appointments. Of course, circumstances change and parents may reconsider their selections, but they can always revise their Wills at a later date to reflect those changes. Creating a Trust: At the very minimum, new parents should have Wills drafted that nominate a guardian and conservator for their minor children as discussed above. However, creating and funding a Trust will allow parents to exert greater control over how and when property will be distributed to their children. For example, the trust terms may state that the trustee should partial distributions to the child when he reaches 25 years of age, 30 years of age and 35 years of age. This is in contrast to the legal requirement that a custodian under the Hawaii Uniform Transfers to Minors Act or a court-appointed conservator relinquish control of the property when the child reaches either 18 or 21 years of age. And since a child may lack the maturity or money management skills to handle property at 18 or 21, a trust can leave the property in the hands of a capable trustee to be managed and also extend the distribution timeline. Trusts become an even more important tool if the minor children have special needs or disabilities. A Trust can be used to ensure that a child will continue to receive public assistance and medical benefits and also provide proper management of any property or assets that they may receive. Life insurance: Life insurance is a powerful estate planning tool that should not be overlooked by new parents. At the most basic level, life insurance proceeds can be used as income replacement in the event a working parent passes away. Stay-at-home parents should also purchase life insurance to help cover childcare costs if they pass away. The insurance proceeds can help sustain a family as everyone recovers and plans for the future. However, in the best case scenario where there isn't a need for a death payout, life insurance can also be a great investment vehicle for a family since whole and universal life insurance policies can build cash value and earn interest over time. Parents of all ages and income levels should strongly consider purchasing life insurance policies that are within their individual budget and a good fit for their current family situations. Furthermore, naming a Trust as a beneficiary of a life insurance policy will allow the proceeds to be managed and distributed to your spouse and children according to your wishes. Gifting property is a valuable estate planning tool, especially for those who wish to reduce their taxable estate. In this post, we'll review some of the basics of gifting and the federal gift tax. The federal government taxes gifts to prevent people from transferring all their wealth and money tax-free before they die, thereby escaping any estate taxes.
What is a gift? A gift is any transfer of property, made directly or indirectly, from one individual to another where the individual receives nothing or less than full market value in return. Furthermore, a gift must be a "present interest", which is "an unrestricted right to the immediate use, possession, or enjoyment of property or income from property." Examples of gifts may be selling something at less than full market value or making an interest-free/reduced interest loan. Generally speaking, any gift is a taxable gift. However, there are exceptions such as:
Are gifts considered income by the donee? Generally speaking, no. The donee does not report any gifts received on his income tax return. However, any income produced by the gift after it is received by the donee is considered earned income and must be reported. What is the annual gift tax exclusion? The annual gift tax exclusion is the amount of property a donor can transfer to an individual that will not require the donor to pay tax on the gift. In 2012, the exclusion amount is $13,000. You can apply the exclusion to each donee. For example, if you have five children, you can make separate $13,000 gifts to each of them. What is gift splitting? For married couples, a gift made by one spouse can by considered made by both spouses equally. To split a gift, each spouse must file separate gift tax returns to show that gift-splitting was elected. For example, if the wife gave $26,000 of her own funds to her niece, the husband can elect to split the gift on his tax return so that the gift is considered to be $13,000 from the wife and $13,000 from the husband. What is the basis of a gift? If a gift is not cash, generally speaking, the donor's holding period and basis will be assumed by the donee. Therefore, the donor should provide any and all information associated with the non-cash gift (e.g. date property was acquired, adjusted cost basis and fair market value at time of transfer) to the donee so the donee will know what taxes may be due if the property is later sold by the donee. Does Hawaii impose a state gift tax? Simply put, nope! What are the benefits of making gifts? First, it reduces your taxable estate. The current federal estate tax exemption is $5.12 million, but may be reduced depending on what Congress does, if anything, in the coming months. Making gifts can be a way to reduce your estate to below the exemption amount so that no estate tax will be incurred. Second, it shifts potential taxable income to an individual who may be in a lower tax bracket then yourself. In an earlier article we reviewed various duties that are imposed upon a trustee. In this post, we will discuss some of the possible grounds that may merit the removal of a trustee in Hawaii. Generally speaking, there are no grounds for the automatic removal of a trustee and a court has wide latitude when considering the removal of a trustee. The court will consider each situation on a case-by-case basis. However, there are instances when a trustee's acts are so egregious that they provide a court with ample reason to remove the trustee. The following are some of the grounds that may lead to a trustee's removal:
Failure to obey a court order. A court may order a trustee to do some administrative task (e.g. pay taxes or make distributions to a beneficiary or complete an accounting). If a trustee willfully ignores a direct order from the court regarding some aspect of a trust's administration, a strong argument could be made for the removal of that trustee. Failure to follow the terms of the trust instrument. If the trustee disregards the terms of the trust and manages the trust as he sees fit, the court will likely consider removing the trustee since the trust is not being administered as the settlor had intended. For example, if the trustee distributes trust property that is not in accordance with the trust's terms or fails to make investments as directed or makes prohibited investments, removal may be warranted even if the size of the trust estate has grown under the trustee's management. In this instance, the removal is not based upon the performance of the trust assets under the trustee's direction, but rather the fact that the trustee was not administering the trust as the settlor had envisioned. Failure or refusal to act. As mentioned in the earlier post, a trustee may simply, for whatever reason, fail to act. A trustee's failure to act may result in the wasting or dissipation of trust assets, which the trustee could be held personally liable. Even if no harm is done to the trust estate from the trustee's inaction, the trustee may still be removed if it can be shown that he ignored repeated requests by the beneficiaries for the trustee to act and administer the trust. Co-mingling of trust property with personal assets. If a trustee co-mingles the trust's assets with her own, even if it was a honest mistake, the court may find cause to remove the trustee. The separation of trust assets from personal assets is a fundamental duty since it affects the security of the trust property. Failure to account. If a trustee fails to provide an accounting to a trust beneficiary due to inadvertence with no malicious intent, the court would likely not remove a trustee for that reason alone. However, if the trustee's actions (or inaction) were meant to hide the true state of affairs with the trust, then the court may have reason to remove the trustee. Trustee takes trust property for own use. If a trustee appropriates trust property for her own use and was not authorized to do so per the trust's terms, then the trustee may be removed by the court. Even if the use of the property was an honest mistake, the court has an obligation to ensure the preservation of trust property. Restitution will likely be ordered by the court, but this remedy would only be to ensure the trust is made whole and would not be enough to counter the removal. Hostility between trustee and beneficiary. While we've mainly talked about what may constitute grounds for removing a trustee in Hawaii, the fact that a beneficiary may not get along with a trustee is NOT a valid basis for removal. Disagreements or incompatibility between a trustee and beneficiary are frequently cited as reasons for removal, but a court will usually not take action if the trustee is administering the trust properly. However, if the hostility has escalated to a point where it affects the trust's administration or it has led the trustee to engage in vindictive acts, then a court may be persuaded to remove the trustee. Hawaii Revised Statutes Chapter 572C was enacted in 1997 and codifies the reciprocal beneficiary laws in Hawaii. The reciprocal beneficiary statutes seek to provide some of the legal rights and benefits that are only available to married couples to people who legally prohibited from marrying. Some of these rights include having the standing to sue for wrongful death and other tort claims, rights to workers' compensation benefits, receive payments of wages on the death of an employee, family leave, health insurance, property rights, hospital visitation, healthcare decision-making and inheritance rights.
In terms of estate planning, when a person dies intestate (i.e. without a Will), a reciprocal beneficiary has the same inheritance rights as a surviving spouse. In the event a person does have a Will, but perhaps leaves little or nothing to the surviving reciprocal beneficiary, the survivor can opt to take an "elective share", which is a percentage of the combined estates of the decedent and surviving reciprocal beneficiary. This percentage depends on the length of time the couple were registered as reciprocal beneficiaries and increases the longer they were together. Reciprocal beneficiaries may also hold property as tenants by the entirety. Tenancy by the entirety is a form of concurrent property ownership that affords a couple who holds property as tenants by the entirety additional creditor protection. A creditor of one of the reciprocal beneficiaries may not attach and sell the property interest of the debtor reciprocal beneficiary. However, a joint creditor of both reciprocal beneficiaries may do so. With respect to healthcare decision-making, a reciprocal beneficiary is considered to be an "interested person" and is on equal footing with an adult child, parent or sibling of the patient (Hawaii Revised Statutes Section 327E-2). Therefore, a reciprocal beneficiary will have a say in healthcare decision-making if the patient does not have an advance health care directive. When a person no longer has the ability to make healthcare decisions for himself and does not have a guardian or an advance health care directive, the designation of a surrogate may be necessary. In Hawaii, the Uniform Health-Care Decisions Act (Modified) (codified under Hawaii Revised Statutes Chapter 327E) governs advance health care directives and outlines a process for designating a surrogate decision-maker (a.k.a health care proxy). In the U.S., only approximately 1/3 of the population has an advance health care directive.
The easiest way for a surrogate to be appointed is for a patient to do it herself. Under Hawaii Revised Statutes Section 327E-5(a), a patient may simply tell a healthcare provider that she wants a particular individual to be (or not be) her surrogate. The surrogate may then make decisions on the patient's behalf if the patient is determined to lack capacity to make her own decisions. If a patient is determined to be incapacitated, the primary physician (or the physician's designee) must make reasonable efforts to tell the patient she lack decisional capacity to provide informed consent or refuse medical treatment. The physician then must make reasonable efforts to locate as many interested persons as possible and the physician may rely on those interested persons to locate other interested persons to inform them of the patient's condition. As an aside, Hawaii Revised Statutes Section 327E-2 defines "interested person" as the patient's spouse, a reciprocal beneficiary, adult child, the patient's parents, adult child or adult grandchild or any person who has shown special care for the patient and is familiar with the patient's personal values. Some states have legislated which interested person has priority to act as the patient's surrogate, but Hawaii's surrogate law is somewhat unique. Hawaii Revised Statutes Section 327E-5 states that interested persons shall reach a consensus on who shall be the surrogate to make healthcare decisions on behalf of the patient. The surrogate should be a person who has a close relationship with the patient and knows the patient's wishes about healthcare decisions. While it's ideal when the patient's family and/or friends are in complete harmony, disagreements are sometimes inevitable. If even one interested person does not agree with the selection of the surrogate, any of the interested persons may go to court and petition for a guardianship. Doing so will delay the ability to address the patient's condition since a contested guardianship proceeding is not a quick or inexpensive process. Furthermore, an interested person may still go to court to seek a guardianship even after a surrogate has been selected if any of the interested persons disagrees with the decision of the surrogate. In other words, although a person may have been designated as a surrogate by all interested persons, the surrogate does not have the absolute final say on health care decisions for the patient. In effect, consensus must be reached by all interested persons for decision-making. This consensus decision-making system works if all interested persons agree on a surrogate and the decisions the surrogate makes, but if not, going to court to obtain a guardianship, a proceeding which will likely be contentious and expensive, is the unattractive alternative. Given the distinct possibility that not all interested persons may agree on a course of action, it is difficult to overstate the value of having an advance health care directive that names an agent to act on your behalf and provides clear health care and end-of-life instructions that reflect your own desires and wishes. When someone first learns that he or she has been named as a trustee of a trust, they may feel a sense of pride or flattery. However, being a trustee is often times an unenviable position to be in. Yes, a trustee is afforded power and control of trust assets, but "With great power comes great responsibility." This adage is particularly applicable to trustees since their authority is tempered by a myriad of responsibilities and duties. A trustee is not an authoritarian or dictator (even though some act like they are), but instead are more akin to an administrator. The trustee must never forget that, at the end of the day, the trust beneficiaries wield the true power since they are the ones the trustee must answer to.
The trustee-beneficiary relationship begins with the simple fact that a trustee is a fiduciary. The law imposes legal duties on trustees, some of which will be discussed below. In Hawaii, Hawaii Revised Statutes Section 560:7 outlines the statutory duties and liabilities of a trustee. According to Hawaii Revised Statutes Section 560:7-302, when dealing with trust assets, a trustee must act with the care of a prudent person. However, if a trustee has special skills or expertise or made representations that he or she possesses special skills or expertise, the trustee is obligated to use those skills. Consequently, a trustee with special skills may also be held to a higher standard if something goes awry. For example, if a trustee is a financial advisor, but makes highly questionable investments, he or she may be held personally liable for any losses resulting from those failed investments. Without question though, all trustees must exercise reasonable care and skill. When examining a trustee's actions, the court will usually consider the trustee's decision in the context of the facts and circumstances at the time the decision was made. Hawaii Revised Statutes Section 560:7-303 states that a trustee has a continuing duty to keep beneficiaries informed of the trust's administration and to provide the beneficiaries with, at the very minimum, an annual accounting. A trustee also has a duty to provide beneficiaries with a copy of the terms of the trust that pertain to and affect a beneficiary's interest in the trust and information regarding the trust's assets. In addition to these statutory duties, trustees must also be cognizant of these well-recognized duties and responsibilities: Duty to Administer Trust Expeditiously: What often times gets a trustee into trouble is a failure to act. Or, if the trustee does act, he or she only does so intermittently. The trustee's inaction may not have any malicious intent or motive, but could simply be a byproduct of dealing with their own busy lives. However, being preoccupied is not an acceptable reason for a trustee to sit on their duties and responsibilities or not put forth a reasonable effort to administer the trust. The trustee must actively participate in the trust's administration because beneficiaries (especially if they're discontent) may not be so understanding about delays. Duty of Loyalty: Generally speaking, a trustee cannot have their interests conflict with those of the trust (e.g. engaging in business that competes with the trust). A trustee is also prohibited from transacting business with the trust where the trustee may benefit directly or indirectly. A common violation occurs when a trustee borrows or embezzles trust funds. This mainly happens when there is a lack of oversight or supervision over the trustee. Duty to Keep Trust Property Separate: A trustee should never, under any circumstances, commingle trust property with his or her personal property or with any other property not owned by the trust. This has a practical application because accounting for the trust property is simplified when trust investments and cash are kept in separate trust accounts. Duty to Make Trust Property Productive: A trustee has a duty to invest trust property to produce income for the beneficiaries. For example, if the trust owns real property that has the potential to be rented out, the trustee has a duty to find tenants that would pay fair market value to live there. A trustee should not leave the property vacant merely because it would be less of an administrative burden. Duty to Avoid Conflict of Interest: A trustee can neither use trust property for their own personal gain nor be part of an transaction that the trustee has an interest adverse to a beneficiary. If a trustee is derelict in adhering to any of the aforementioned duties (and others that are not covered in this post), they leave themselves vulnerable to dealing with malcontent beneficiaries and, possibly, a lawsuit filed by the aforementioned malcontent beneficiaries. If you are a trustee in Hawaii and feel overwhelmed or unsure about what to do, contact a Hawaii estate planning attorney who can advise you on fulfilling your trustee duties and responsibilities. A "power of attorney" is a legal document in which a person (the "principal") appoints another as his or her "attorney-in-fact". The attorney-in-fact has the authority to do those acts that are specified in the power of attorney. The terms of a power of attorney can be drafted to give the attorney-in-fact the authority to act for the principal in a broad range of circumstances. This is called a "general power of attorney". On the other hand, the power of attorney may be narrowly drafted and only apply to a specific set of situations (e.g. executing real estate documents). This is called a "special power of attorney". In Hawaii, Hawaii Revised Statutes Chapter 551D embodies the Uniform Durable Power of Attorney Act, which provides guidance on how a power of attorney should be treated.
While the differences between a "general power of attorney" and "special power of attorney" refer to the scope of authority given to the attorney-in-fact, when a power of attorney becomes effective and when it terminates are also important distinctions to consider. Regular Power of Attorney: Generally speaking, a power of attorney ceases to become effective when the principal becomes incapacitated. A power of attorney can also be given a termination date (e.g. authority terminates one year after signing). However, a power of attorney can remain effective and survive the principal's incapacity if it contains language that makes it "durable". Durable Power of Attorney: A durable power of attorney is effective immediately, but the main distinction is that it remains effective even upon the principal's incapacity. A durable power of attorney must contain language that states that it will not terminate upon the principal's incapacity. Durable Springing Power of Attorney: A "springing" power of attorney only becomes effective upon the occurrence of an event, usually when the principal is deemed incapacitated. Therefore, an attorney-in-fact usually cannot use the power of attorney unless is is accompanied by a physician's letter or court order attesting to the principal's incapacity. "Limited" or "Special" Power of Attorney: A power of attorney can be modified and tailored to a give a person authority to only act in a particular situation. A limited or special power of attorney can limit the time the authority is effective and restrict the authority bestowed upon the agent. An example would be giving a person a special power of attorney to sign documents for a real estate transaction. A power of attorney is revoked upon the death of the principal, but it can also be revoked by giving notice to the attorney-in-fact. It is generally sound practice to have a written revocation drafted and given to the attorney-in-fact and any institutions that may have been given a copy of the power of attorney. It is important to note that under Hawaii Revised Statutes Section 551D-4(a), the death of a principal does not revoke or terminate the authority of an attorney-in-fact who does not have actual notice of the principal's death. Therefore, if an attorney-in-fact acts after the principal's death, but he or she does not have actual knowledge of the principal's death, the attorney-in-fact's act will bind the principal's successors-in-interest. As you have probably surmised, a power of attorney is a powerful document that has the potential to be easily abused. In Hawaii, as elsewhere, there has been an increase of financial abuse involving powers of attorney. Given Hawaii's large and growing elderly population, people must be vigilant about such exploitation and cautious about who they themselves select as their attorney-in-fact. At the same time, a power of attorney does have its limitations. In Hawaii, there is no statutory requirement that anyone or any institution accept a power of attorney. For example, banks in Hawaii sometimes prefer that their forms be used if the power of attorney presented does not have language that they are comfortable with. Still, a power of attorney is an essential document in any estate plan because it can be used as a cost-effective alternative to a conservatorship and serves as a useful backup document in the event non-trust assets require management. |
AuthorSamuel K.L. Suen is an attorney based in Honolulu, Hawaii specializing in estate planning, probate, conservatorship and guardianship matters. Archives
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