Selecting a Trustee is not a decision that should be taken lightly. However, many people merely select a family friend or their eldest child without a second thought as to whether they are truly qualified and willing to handle the duties. In the context of Revocable Living Trusts, since the Grantor is usually the initial Trustee, the decisions that need to be made are usually in regards to who shall be the Successor Trustee(s). Here are a few factors should be considered when selecting a Trustee or Successor Trustee:
What qualities does the Trustee possess? For people with adult children, selecting the eldest child to act as Trustee is the default. It makes sense to them for the mere fact that the child is the oldest and that the child likely helped care for their younger siblings growing up. However, having seniority is not a prerequisite to being a competent Trustee. For example, the youngest child may be better suited to be the Trustee because of his temperament or perhaps he has an investment or financial background. Instead of merely looking at age of the potential Trustee, think about whether she has the qualities and skills that would allow her to succeed as Trustee. Some of these qualities include being detail-oriented, trustworthy, fair-minded, responsible and having good communication skills,
Will the Trustee have time? An overlooked factor that thwarts Trustees and sometimes gets them into trouble is not having enough free time to administer the Trust. Examine the life situations your potential Trustees are currently in. Is your selection juggling a demanding job and a busy family life? People often equate being Trustee to having a second job. It's not far from the truth. Of course, circumstances change, but it would be wise to consider the Trustee in their current situation and not extrapolate what their lives may be in the future. You can always amend your selections at a later date if a person is no longer suitable to act as Trustee.
Where is the Trustee located? With technological advancements, having a Trustee who is in close proximity to trust assets is not as big of an administrative hurdle as it was in the past, but it certainly makes the Trust easier to administer if your Trustee is nearby. And given our state's isolation, this is especially true for a Trust whose situs is in Hawaii. Consideration should be given to the cost an out-of-state Trustee will incur when employing agents to carry out the administration. This cost will likely be paid for out of trust assets, which will leave less for the beneficiaries. If some of your prospective trustees live on the mainland while others reside in Hawaii, thought should be given to how willing a mainland Trustee may be to administer a Trust located in Hawaii.
How complex and large are the assets in the Trust? If your Trust contains significant assets or is perhaps a legacy Trust that is designed to last multiple generations, you may want to forgo selecting an individual Trustee and opt for a corporate Trustee. While a corporate Trustee's fees will likely exceed those of what an individual may request, a corporate Trustee does have the institutional support and expertise to manage more complex Trusts. However, for Trusts that have assets of less than $100,000, employing a corporate Trustee may not be worthwhile monetarily since a corporate Trustee sometimes charge a minimum fee, which could be a sizable percentage of the trust assets.
How are the relationships between the beneficiaries? If you are aware of conflicts between your beneficiaries, naming one of them as Trustee may not be the wisest move. Other beneficiaries may resent the beneficiary you chose to act as Trustee and those feelings may balloon into costly legal battles. Sometimes beneficiaries will engage in petty bickering, but these distractions will be enough to make cause unnecessary stress for the Trustee, which may lead to additional problems. Therefore, if tension exists between your beneficiaries, whether it is underlying or overt, selecting an impartial, corporate trustee may help reduce the potential for litigation among the beneficiaries. If you're thinking about using a family friend as Trustee, consider the unenviable position he may be placed in when having to act as a mediator or referee to your beneficiaries.
Just ask. Finally, ask your prospective Trustees if they want the responsibility of being Trustee. Explain that administering the Trust and communicating with the beneficiaries will take time away from their own lives and pursuits. Ask if they'd be willing to make that temporary sacrifice for you. Making upfront disclosures to Trustees of their responsibilities will help mentally prepare them for the eventuality of being a Trustee.
It is commonly known that minors cannot own property or validly execute contracts. So what happens if a grandparent wants to gift a significant sum of money to a grandchild? Or perhaps a parent wants her child, who is a minor, to benefit from the proceeds of a life insurance policy on the parent's life? One possibility is to place the property into a Trust, which would allow a trustee to manage and hold the property for the benefit of the minor. However, what if creating a Trust was not an option? This is where the Hawaii Uniform Transfers to Minors Act comes into play. The Hawaii Uniform Transfers to Minors Act was enacted in 1985 and is codified in Hawaii Revised Statutes Chapter 553A.
Naming a custodian. The basic objective of the Hawaii Uniform Transfers to Minors Act is to allow a custodian to control and manage property on the minor's behalf until the minor reaches a certain age. At that point, the minor may legally take control of the property.
Scope of the Uniform Transfer to Minors Act. According to Hawaii Revised Statutes Section 553A-2, if the transferor, minor or custodian is a resident of Hawaii or if the custodial property is located in Hawaii, then the Hawaii Uniform Transfers to Minors Act will govern. Consequently, the custodian is subject to the jurisdiction of Hawaii courts regarding any custodianship matters.
Naming or nominating a custodian. A person may be nominated to act as a custodian via a Will, Trust, deed or an instrument exercising a power of appointment. Multiple successor or substitute custodians should be nominated in the event the initial nominated custodian cannot act. The appointment or nomination of the custodian should be in the following form:
"[name of the proposed custodian] as custodian for
[name of minor] under the Hawaii Uniform Transfers to Minors Act."
Using the Hawaii Uniform Transfer of Minors Act. So when should a person name a custodian for a minor? The answer is anytime there is a possibility a minor may have the opportunity to own or receive property in their individual name. For instance, a minor should never be individually named as a beneficiary of a life insurance policy since the insurance company cannot legally release any proceeds to the minor.
Ramifications of not naming a custodian. If a minor is somehow entitled to property and a custodian has not been named or nominated, then an attorney will have to petition the court to have a conservator appointed to take control of the property for the minor. A conservatorship will provide court oversight for the property, but obtaining a conservatorship will require additional expense and hinder the ability of an adult to take immediate control of the property.
Termination of custodianship. A custodianship will terminate at different times depending on how the property was transferred to the custodian. If a Will or Trust authorizes a custodian to take control of property for the benefit of a minor, then the custodian must hand over the property once the minor reaches 21 years of age. However, if a Will or Trust merely names the individual minor as a beneficiary and does not authorize a custodian to take control of the property for the minor, then the personal representative or trustee may transfer the property to a custodian, but the custodian must transfer the property the minor once the minor reaches 18 years of age.
Accounting. According to Hawaii Revised Statutes Section 553A-19, a minor who is at least 14 years old, the minor's guardian or legal representative, an adult member of the minor's family or a transferor may petition the court for an accounting by the custodian or the custodian's legal representative. A successor custodian may also petition the court for an accounting by prior custodian.
Lack of control. One of the drawbacks of using the Hawaii Uniform Transfer to Minors Act is that the custodian is mandated under Hawaii Revised Statutes Section 553A-20 to release the property to the minor when the minor attains a certain age. At 18 or 21, the minor may lack the maturity or financial skills to properly manage property. Therefore, if a transferror is concerned about a minor possibly handling property at those ages and wish to delay the transfer to a later time, using a Trust should be a primary option. Through a Trust, the transferror would be able to dictate when and how much the minor will take of the property.
Cost efficient. An advantage of naming a custodian is that it costs very little to nominate or name a person to act as custodian. While creating a Trust is the preferable way of transferring property to minor, if a person does not have the financial means to hire an attorney to create a Trust, naming a custodian under the Hawaii Transfers to Minors Act is the transferror's next best option.
Hawaii Probate: Homestead allowance, Exempt property, and Family Allowance in Hawaii - A Brief Overview
When a person dies in Hawaii and probate is commenced, there are certain obligations that have priority over others. The "homestead allowance", " exempt property" and " family allowances" are distributions made to a surviving spouse or reciprocal beneficiary (and any minor or dependent children) that generally have a greater priority over any other claims made against the estate. The money allotted to the surviving spouse and any minor/dependent children is not insubstantial and is meant to supplement and help sustain the decedent's surviving spouse and children during the probate administration in Hawaii.
Provided that the estate has a somewhat cooperative and competent personal representative, these allowances should be easy for the surviving spouse and children to get. All that is required is for an eligible person, such as a surviving spouse, to make a claim to the personal representative. The personal representative may then distribute the allowances without prior court order or approval.
Below is a brief explanation of each allowance. For brevity's and simplicity's sake, "surviving spouse" and "reciprocal beneficiary" are interchangeable.
Homestead allowance: In Hawaii, the "homestead allowance" is codified under Hawaii Revised Statutes Section 560:2-402. For the homestead allowance, the surviving spouse is entitled to a sum of $15,000. Again, not a manini amount. If there is no surviving spouse, the $15,000 would be divided equally between each minor and dependent child of the decedent.
Exempt property: Next in line is "exempt property", which is outlined in Hawaii Revised Statutes Section 560:2-403. Under the exempt property statute in Hawaii, the surviving spouse is entitled to take up to $10,000 worth of "household furniture, automobiles, furnishings, appliances, and personal effects." As with the homestead allowance, if there is no surviving spouse, then the decedent's children can jointly take up to $10,000 worth of property. However, exempt property is usually fulfilled last and is subordinate to the homestead and family allowances.
Family allowance: Last, but not least, is the "family allowance", which is detailed under Hawaii Revised Statutes Section 560:2-404. The statute states that the surviving spouse and any minor children who were being supported by the decedent may take a "reasonable allowance" for the spouse's and children's "maintenance" during the probate administration. The Hawaii Probate Rules limits the total amount of family allowance that may be distributed to no more than $18,000 without a court order. Therefore, the family allowance distribution may exceed $18,000, but only upon court approval. This means the person(s) requesting more money will have to petition the court and justify to the judge why the additional funds are needed.
Some additional family allowance tidbits:
Sometimes a situation arises where a person passes away with multiple Wills and it may be unclear which Will is valid. If there is uncertainty regarding which Will controls and the disposition of the estate varies significantly from one Will to another, the potential for a Will dispute or challenge increases dramatically. Therefore, it is useful to know how to effectively revoke a Will to ensure that there is no confusion about which Will controls upon your death.
In Hawaii, Hawaii Revised Statutes Section 560:2-507 details how a Will may be revoked, whether in whole or in part. The methods a person may use to revoke a Will are as follows:
Method #1: Execute a subsequent Will. Having the most recently executed Will state unequivocally that all prior Wills are revoked is probably the cleanest way of revoking a Will aside from shredding the original and copies of any prior Wills.
Method #2: Performing a physical, revocatory act. Hawaii Revised Statutes Section 560:2-507(a)(2) states that a person may perform an act with the intent and purpose of revoking the Will to effectuate the revocation. This "revocatory act" may include doing the following to the Will:
Method #3: Implied Revocation. If a subsequent Will fails to expressly revoke prior Wills, Hawaii Revised Statutes Section 560:2-507(b) states that the previous Will may still be revoked by way of inconsistency IF the person intended the subsequent Will to replace rather than supplement the prior Will.
According to Hawaii Revised Statutes Section 560:2-507(c), there is a presumption that a subsequent Will replaces a prior Will in its entirety if the latest Will makes a complete disposition of the estate. This presumption may be overcome by "clear and convincing evidence".
HOWEVER, if the subsequent Will did NOT dispose of the entire estate, then the presumption is reversed (Hawaii Revised Statutes Section 560:2-507(d)). As before, the presumption came be overcome by "clear and convincing" evidence. Courts are generally reluctant to consider a subsequent Will as a complete replacement of a prior Will if the subsequent Will does not dispose of the entire estate. In that instance, the court would likely treat the subsequent Will as a "codicil", which is a supplement to a prior Will. The subsequent Will would only replace the prior Will where there are inconsistencies and both Wills would be effective to the extent they are in agreement.
Generally speaking, there are different competency standards for executing Wills and Trusts. For a Will, one needs to have "testamentary capacity" while "contractual capacity" is needed for a Trust. In Hawaii, the case that details the testamentary capacity requirements for a Will is In the Matter of the Estate of Carmen Corrine Herbert. If you have testamentary capacity, the Hawaii Supreme Court stated that you must have the ability to:
On the other hand, to validly execute a Trust in Hawaii, a person must have contractual capacity. Contractual capacity is a higher standard and it basically means having the ability to 1) transact ordinary business and 2) understand and protect your own interests. In other words, the person executing the Trust document must have the ability to understand the rights and duties created by a Trust and appreciate any ramifications (on them and others) that may occur from their decision.
The reason for the higher standard is that a Trust creates legal relationships and, consequently, present duties and responsibilities while a Will is concerned mainly with transferring assets to others at death. Therefore, a person executing a Will need not understand how his or her decision(s) will affect others after they have died in order for the person to have the requisite testamentary capacity.
Being aware of and understanding the differing capacity standards for Wills and Trusts is important because if there is a concern that your estate plan may be challenged in the future, steps can be taken to minimize the chances that your plan would be overturned based on a lack of capacity argument.
Most everyone knows that a Will is a legal document that gives instructions on what happens to your property after you pass away. However, what makes a Will a Will? Fundamentally, it boils down to the testator's intent, but proving intent is sometimes a tricky (and expensive) proposition. Fortunately, Hawaii law provides guidance in the form of elements that should be met if a document or writing is to be considered a Will. If these elements are fulfilled, the court should have an easier time determining the testator's intent and concluding that the document was the testator's Last Will and Testament. Of course, there are exceptions to these requirements, but generally speaking there are four basic elements that should be met:
Requirement #1: A person must be eighteen years or older and be of sound mind. There is no exception to this requirement. (Hawaii Revised Statutes Section 560:2-501)
Requirement #2: The Will must be in writing. (Hawaii Revised Statutes Section 560:2-502(a)(1))
Requirement #3: The Will must be signed by the testator OR by someone else in the testator's conscious presence and as directed by the testator. (Hawaii Revised Statutes Section 560:2-502(a)(2))
Requirement #4: The Will must be signed by at least two other individuals who witnessed the testator sign the Will OR the individuals must have witnessed the testator's acknowledgement of the signature or the acknowledgement of the Will. (Hawaii Revised Statutes Section 560:2-502(a)(3))
What if the testator failed to have two people witness the signing of the Will? Perhaps the testator only had one person serve as a witness. Well, Hawaii Revised Statutes Section 560:2-502(b) states that a Will is still valid as a "holographic will" if the signature and material portions of the Will are in the testator's handwriting. This is true even if no one witnesses the testator writing, signing or acknowledging the Will. For the portions of the Will that are not in the testator's handwriting, extrinsic evidence can be used to establish that it was intended to be part of the Will.
What if one or more of the requirements spelled out under Hawaii Revised Statutes Section 560:2-502(a) aren't met? Say a person just left a piece of paper stating "I leave all my property to Joe the Plumber." In that instance, Hawaii law provides a "catch-all" exception in the form of Hawaii Revised Statutes Section 560:2-503. Hawaii Revised Statutes Section 560:2-503 basically says that a document or writing will be treated as a Will if it can be proven, through clear and convincing evidence, that the decedent intended the document or writing to be a Will. This opens the door for people to bring whatever evidence they have and attempt to convince the court that a document or writing was intended to be a Will. While it may be comforting to know that this "catch-all" exception exists, you don't want to put your intended beneficiaries in that position or situation because such an endeavor would surely be an uphill battle and require additional time and attorneys' fees.
The stress and expense of having to prove that a document or writing is a person's Will can usually be avoided by completing what is a called a "self-proved will". In Hawaii, a "self-proved will" can reduce the time spent in probate by helping the court more easily conclude that the document presented is indeed the decedent's Will. The requirements for a "self-proved will" is outlined in Hawaii Revised Statutes Section 560:2-504(a). For a "self-proved will", all the requirements of Hawaii Revised Statutes Section 560:2-502(a) that were mentioned above should be met including these additional elements:
Requirement #5: The Will must be simultaneously executed, attested to and acknowledged by the testator in front of an officer authorized to administer oaths (such as a notary public).
Requirement #6: The witnesses must attest and acknowledge in the presence and hearing of the testator and before an officer authorized to administer oaths that they witnessed the testator (or someone directed by the testator) sign the Will.
Also, according to Hawaii Revised Statutes Section 560:2-504(b), an attested Will (which is a Will that has been properly witnessed) can be made a "self-proved will" after its execution by having the testator and witnesses sign affidavits in front of an officer authorized to administer oaths and attaching them to the Will.
As you can see, while it can be argued that a document or writing which falls short of the Hawaii statutory requirements for a Will is in fact a person's Will, there are simple steps that can be taken to help the court establish the validity of a Will and to avoid long, protracted delays in probating a Will.
I came across this informative, but heart-wrenching article by ProPublica reporter Charles Ornstein titled "A Mother's Death Tested Reporter's Thinking About End-Of Life Care". We've discussed the importance of having an advance health care directive that memorializes your end-of-life decisions in the event you aren't able to communicate them yourself. But even though your instructions are clear, your healthcare agent still has to make the decision of when to cease life support.
As Mr. Ornstein attests, the correct timing can sometimes be difficult to determine. The agent will likely be relying on physician's opinions about the state of the patient and the chances of recuperation. But doctors are not infallible. There are countless stories of people making improbable recoveries that fly in the face of a doctor's prognosis. Still, additional procedures must be weighed against the likelihood of success and the patient's wishes.
So what is the agent and family members to do? In my opinion, Mr. Ornstein took the right approach. He, his sister and father decided to be thorough and take their time. They sought medical opinions from additional professionals and had other tests done. After all options were explored and discussed, they made their decision. Having an advance health care directive is half the battle. The other half is relying on your healthcare agent to gather and digest as much information as possible to make levelheaded, thoughtful decisions in a situation fraught with emotion. Therefore, choose your healthcare agent wisely and do not be afraid to discuss your end-of-life desires with your agent and successor agents.
Hawaii Revised Statutes Section 572-24 is Hawaii's spousal liability statute and states that a spouse is liable for the debts incurred by the other spouse for all necessaries for themselves, one another or their family during marriage.
The Hawaii Intermediate Court of Appeals affirmed the plain reading of Hawaii Revised Statutes Section 572-24 in Queen's Medical Center v. Kagawa. The ICA stated that "the statute is a legal command that each spouse 'shall be bound to maintain, provide for, and support' the other spouse and 'shall be liable for all debts contracted by one another for necessaries...during marriage'". As a matter of public policy, promoting a definite and clear spousal duty, "best informs husbands and wives of the extent of their obligations...and encourage providers to extend necessaries to needy spouses."
In Kagawa, the husband and wife had separated, but not legally divorced. The husband incurred medical expenses related to a medical emergency and ultimately died. The ICA held that the medical services provided by Queen's Medical Center were necessaries for which he was indebted. Since husband and wife were still legally married at the time the debt was incurred, the wife became responsible for the medical debt upon the husband's passing.
In the context of probate, the surviving spouse is generally not liable for the individual debts of the deceased spouse. However, an exception exists for debts incurred that fall under the category of necessaries. The ICA has made it clear that the medical debt of the deceased spouse is considered a "necessary" and, therefore, is the responsibility of the surviving spouse.
As an aside, the ICA noted that relieving support obligations under Hawaii Revised Statutes Section 572-24 based on the wrongful conduct of a spouse would contradict Hawaii's partnership approach to family law. Therefore, fault or misconduct (such as infidelity) would not eliminate a spouse's obligation of support under Hawaii Revised Statutes Section 572-24.
So the fiscal cliff disaster has been averted and all is well...until the potential calamity brought about by the sequestration scheduled in March. But until we reach the next cliff, let's review several of the important estate planning developments brought to us by the American Taxpayer Relief Act of 2012.
Estate tax exemption. From 2001 to 2012, the estate tax exemption steadily increased from $675,000 to $5.12 million (with the aberration of no estate tax in 2010). However, without a last minute deal, the estate tax exemption would have reverted to the Clinton-era exemption amount of $1 million. Not even the Democrats, who were proposing a $3.5 million exemption, would have wanted that. Chalk up a minor victory for the Republicans who got the estate tax exemption to remain at $5 million. After adjusting for inflation, the amount increases to $5.25 million for 2013. This amount is "permanent", meaning there is no sunset date and the exemption is good for the foreseeable future...until Congress changes it again.
Estate tax rate. No fiscal deal would've resulted in the top estate tax rate going from 35% to 55%. Congress met in the middle and agreed to a 40% top tax rate for amounts in excess of the estate tax exemption.
Portability. Under the Tax Relief, Unemployment Reauthorization and Job Creation Act of 2010, portability was created to give the surviving spouse the ability to use the deceased spouse's unused estate tax exclusion amount. For example, if a husband dies and uses only $1 million of his $5 million exemption, the surviving spouse can elect to take the deceased spouse's remaining $4 million unused exemption and tack it on to her own $5 million exemption for a $9 million estate tax exemption. The fiscal cliff deal makes portability "permanent". In order to make this portability election, the personal representative of the deceased spouse's estate must file an estate tax return, even if no estate tax is due.
Investment income tax. For individuals earning $200,000 or more or couples making $250,000 or more, an additional 3.8% tax on net investment income will be levied. Net investment income includes a) interest, dividends, annuities, royalties and rents, b) gains attributable to the disposition of property and c) income and gains from a trade or business, but only if such trade or business is a passive activity with respect to the taxpayer or involves trading in financial instruments or commodities.
Individuals have to pay the tax on the lesser of the net investment income or the excess of their modified adjusted gross income. For estates and trusts, the tax applies to the lesser of undistributed net investment income or the the excess of adjusted gross income over the highest income tax bracket for estates and trust, which is $11,950 in 2013.
We’ve previously discussed the types of property ownership, but in this post I’d like to talk about how the value of joint property is included (or not) in a person’s estate at death.
Generally speaking, if a decedent owned property as joint tenants, the entire value of the property is included in his estate. There are a couple exceptions to this rule.
Contribution. The amount included is limited by the contribution made by the deceased joint tenant. Thus, if it can be shown that a joint tenant made a contribution to the principal of the property, then only that percentage of the property’s value will be included in the decedent’s estate. For example, if Abel and Cain each contributed $1,000 to buy some property to buy $2,000 worth of stock. The stock appreciates and is worth $5,000 at Abel’s untimely death. Only 50% of the value of that property ($2,500) will be included in Abel’s estate. This concept may be better understood with this equation:
Contribution by decedent/Total contribution by all tenants x value of joint property = Amount included in decedent’s estate
Any consideration by the surviving co-tenant does not include amounts that were originally gifted to the surviving co-tenant by the decedent. For example, Abel gave Cain $5,000 and Cain deposited it into an account and added Abel as a joint tenant. If Abel dies before Cain, the entire $5,000 would be included in Abel’s estate.
Tenancy by the Entirety (husband and wife as joint tenants): When two people are married and hold property either as joint tenants or as tenants by the entirety, exactly one-half of the value of the property is included in the decedent’s estate. The amount contributed by either spouse does not matter.
Samuel K.L. Suen is an attorney based in Honolulu, Hawaii specializing in estate planning, probate, conservatorship and guardianship matters.
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