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Meador: Well, you talked about the minor beneficiaries and trusts and how that worked out. Give us
more detail about that.
Peterson: Yeah, so typically with minor beneficiaries . . . remember before we talked about how
they really can't inherit and shouldn't inherit. If they inherit, you're going to do that in
one of really two ways. You're either going to do that through a guardianship or through
a trust.
If you do it through a guardianship, what a guardianship is, is it's a formal legal
lawsuit where someone is appointed by the court to serve as the guardian over those
children. Now, that could be a guardian of their person who makes decisions about their
person, or it could be a guardian of just their estate which is over their financial
affairs. So usually with minor beneficiaries what we see is they just have a guardian of
the estate, someone to manage their financial affairs.
The problem with guardianship is it is a formal legal process. It's a lawsuit that has to
be litigated. Litigation always involves cost. It always involves fees. So typically for
guardianship, you're not going to get out of there for less than $5,000. So that $5,000
is gone. It's not to the benefit of the minor beneficiary. It's only to the benefit of the
attorneys and judge of the process, right?
So, at all costs I would avoid doing the guardianship. I would always give stuff to minor beneficiaries
in trusts. So, if you know that your client has minor children or grandchildren that they
want to give it to, you want to make sure that there's some kind of trust that provides
for those children inside another trust or inside of the will.
Now there's a few different types of trust that are available for minor beneficiaries.
One of them is the Uniform Transfer Gift to Minors Act. That's really a kind of a trust-based
approach. So it appoints someone to act on behalf of, as the trustee for the kid.
There's also, you'll see in your textbook a 2503(b) trust where it's a trust for minor
beneficiaries where the income each year is distributed out to those beneficiaries. There's
also a 2503(c) trust which accumulates the income instead of distributes the income.
It has the ability to distribute income but it doesn't necessarily have to distribute
income. And so that's really the two distinctions.
So the key thing to remember about minor beneficiaries is what you want to do is don't allow minor
beneficiaries. Always for minor beneficiaries, provide for them some form of trust to hold
their stuff. Don't let it be subject to a guardianship.
Meador: A huge red flag with clients when you're reviewing their beneficiaries. Make
absolutely sure that there are no minor beneficiaries, yes. Three basic methods for minor's trust
length. Tell us about that.
Peterson: So basically with minor's trusts, and this is really something you do need to
know because this is going to come up in your planning. People are going to ask, "Well,
how can I do a trust for my minor? What would that look like and how would they get their
stuff?"
There's basically three approaches that you can use. One is a trust that terminates at
a specific age. You can say, "Okay, well I'm going to put the stuff for my kids into a
trust and it's going to last there until they turn age 25, and until they hit age 25, there's
going to be a trustee in place, and that trustee is going to have a set of ground rules for
what they spend money on and what they don't spend money on that are set out in the trust."
The normal one is what we call the HEMS standard which means that it's a very general standard
that allows the trustee flexibility to pay for anything for the health, education, maintenance,
or support of the child. And so it gives the trustee a lot of discretion.
When the child gets to this certain age, like age 25 in our example, then the trust will
terminate and whatever's left in the trust will be handed over to the child. So that
might be a cashier's check, it might be a deed to property, whatever.
The second kind of basic trust that we usually do for kids is a lifetime trust. Just like
the name implies, it will last for the entire lifetime of the child and at the child's death,
either the person who set up the trust will appoint who it goes to, or you may include
a power of appointment and let the child say who the remainder of the trust goes to.
During the kid's lifetime, that trustee is going to be in place and they're going to
apply whatever standard is in the trust for what they pay for and don't pay for. We use
lifetime trusts a lot in situations where the child is actually a grown child and is
in a high-liability profession, one where they're likely to get sued. Because remember,
trusts are generally [inaudible 06:01] trust. They're protected from creditors.
Oftentimes we use lifetime trusts in situations where the child is not very responsible. Maybe
they're 35 and can't balance a checkbook. Maybe you want the trustee to be in place
for the child's lifetime. We also see lifetime trusts a lot when we hate the spouse. So,
I don't like the daughter-in-law or I don't like the son-in-law, and so we want to again
protect against what we think is the possibility of divorce or misuse of the funds, so we'll
have that lifetime trust in place.
The third basic method for doing trusts for children or minors is what's called a hybrid
approach, or what I call the hybrid approach. Basically what you have is a trust that terminates
at a specific age, like age 35 for example but at increments the child will get an over-sized
portion of their trust in cash. So for my kids, the way that their trust is set up is
for each one of them, until they reach age 35 the money will be in trust, but when each
child hits age 25, they're going to get a third of the trust fund in cash at one time,
a lump sum. Whatever is in that trust at that point, they're going to get a third of when
they hit 25. If they go to Vegas and they bet black and it hits red the very next day,
it's okay because two-thirds of their trust is still in the hands of the trustee. So hopefully
by the time they hit 30, they will have . . .
Meador: They will have learned the red/black lesson. Yeah.
Peterson: And so when they hit 30, they're going to get half of what's left, which is
effectively a third of the trust, second third of the trust. And then the same thing when
they hit 35. The trust is going to terminate and whatever's left goes to them. So from
my vantage point, it's a way for me to sort of have in place a financial parent for the
kid and kind of embed in the trust structure a learning component about how to handle money.
Typically we'll see, especially for minor kids, we'll see one of those three approaches.
Either it terminates at a specific age, it will terminate at the end of their life, or
it will be a hybrid trust where they kind of get chunks of money, and then it still
terminates at a specific age.
Meador: So what other documents would we need? Besides the things that we mentioned, what
other documents are out there that we really should have?
Peterson: So one of the things about estate planning is you really should look at estate
planning as not just death planning. We've spent most of the time that we've been together
talking about what happens when you die. What we haven't talked about is what happens if
you become disabled or incapacitated, and that is part of estate planning. So when you're
talking to your clients you need to talk to them both about what happens if they die but
also what happens if they were to become disabled or incapacitated.
So besides the will or trust that they would need and the beneficiary designations they
would need, what you want them to have is you want them to have a financial power of
attorney, or what's called a statutory general durable power of attorney, but it's a financial
power of attorney. You want them to have a medical power of attorney. You want them to
have a HIPAA release. You want them to have a living will or advanced medical directive.
You want them to have a guardian designation for themselves. You want them to have a designation
of guardian for any of their minor children if they still have minor children.
One of the things that people always ask me about is, "Well don't I also need a do not
resuscitate order?" For your average client, for any client that is not terminally ill,
do not have him sign a do not resuscitate order. That is not something I would normally
include inside of an estate and disability plan. I don't know if you want to go over
what each one of those things are, but those are the documents that you need.
Meador: Yeah. All I'm going to say about that is that some of the documents obviously you
can get online, just like people can go get wills online. The only thing I will tell you
is that from a personal experience is, I had Chris a few years ago, actually, many years
ago set up with my father's permission, him being there obviously, set up my father's
will and of course all these documents were included in that package.
I don't know, maybe four years ago, five years ago my father had an incident where he ended
up in the hospital. He had Alzheimer's at the time, so I went down there and as hospitals
do, they're very closed-mouth about anything and until I showed them . . . I'd taken the
will out of the package, but I showed them the rest of these forms. They looked at it
and it was like the gates of heaven opened after that. Anything I needed or wanted was
immediately taken care of for my father and any demands I made were immediately handled.
All I can say is I'm sure you could go online and probably get a HIPAA release form, but
certainly look at having those things included in the total estate plan if you've got an
attorney, which you should have an attorney drawing those up for your clients, and have
those all included in that. In your situation, you do it automatically anyway.
Peterson: Yeah.
Meador: I don't think it's some sort of discount or whatever. And so that way you know it's
done right. All the i's are dotted, all the t's are crossed and it's taken care of.
Peterson: If all you've done is plan for a client's death, you have done half the job
at best, and any attorney that's worth their salt when talking about this is going to make
sure that you have every single one of those documents that we talked about in addition
to whatever they're doing from a trust and will perspective. If they don't include that
automatically, then that is not who I would send my client to.
Meador: That's a good sign of who not to send your clients to, exactly.