Reducing the Potential for Conflict and Disputes Regarding Your Estate

While we all would like to believe that our family members will all get along after we are gone, unfortunately estate disputes are all too common. While some lawsuits relating to estates and probate are disputes about large sums of money, many of these lawsuits relate to modest-sized estates or small items of personal property. Even if your family gets along fabulously now, there is always the potential for conflict down the road, however by recognizing a few simple issues you may be able to reduce or completely avoid these situations.

Any estate may be subject to dispute, but there are some specific situations that may create a greater potential for disputes. For example, if you have remarried and have children from a prior marriage your estate may be subject to more scrutiny from your family. In addition, if your children do not get along with each other during your lifetime, it is more likely that they will dispute issues regarding your estate. Whether or not one of the situations mentioned above exist in your family there are some measures you can take to reduce the potential for conflicts between your family members.

Ways to Reduce Potential Disputes Regarding Your Estate

Don’t Put Off Estate Planning

Estate planning is a process that requires careful thought and consideration. Do not wait until you are faced with an illness, traveling out of the country, or dealing with potential capacity issues. Take some time to review and create an estate plan that addresses your unique situation while you still clearly have the capacity and health to make sound decisions.

Perhaps more importantly, clearly communicate your intentions with your family both during your lifetime and in your will or trust. If you talk to your spouse and children about your wishes during your lifetime you may be able to address, or event prevent, potential disputes that may arise with the distribution of your estate. Clear communication and planning can also provide you with the peace of mind that you may spare your family from conflicts or hurt feelings.

Make Sure Your Beneficiary Designations are Up-To-Date

It is also critical to review your beneficiary designations to ensure that the proper beneficiaries are named, and the beneficiary designations fit within your overall estate plan. Remember, a beneficiary designation can take precedent over a will, so keeping your beneficiary designations updated to reflect your current life situation is essential.

Specifically Recognize Any Lifetime Gifts or Loans in Your Will or Trust

If you loan money to one of your children, or give gifts during your lifetime, make sure that you recognize the loan or gift in your will or trust. Be specific about whether the loan is to be forgiven or repaid at your death. Additionally, document any loans or gifts you make during your lifetime, in writing, with the use of promissory notes, contracts, or other document, so that your intent is clear.

Be Specific About Personal Property

While most people may be more focused on the distribution of financial assets and real estate in their will or trust, personal property can often create more problems and disputes than larger assets. With that in mind, include a specific “Personal Property Memorandum” to attach to your will or trust, or include a specific provision directly in your will or trust that sets out the distribution of your personal property. This not only includes personal property with high monetary value, such as jewelry or art, but also any personal property that has family or sentimental value, or simply may cause an argument in your family.

Create a Revocable Living Trust to Avoid Probate

A revocable living trust is an estate planning tool that can eliminate the need for the probate administration process. If you have a trust in place, so long as you properly transfer title of your assets to your trust, probate will not be required for your estate. Probate is a public process, which requires filing an inventory and accounting of your assets. While the purpose of a probate proceeding is intended to be administrative rather than adversarial in nature, probate does provide a forum for heirs to contest terms of your will or dispute with other heirs and beneficiaries. Revocable living trusts are private documents not subject to probate proceedings, so the use of a trust can help to reduce the potential for conflict surrounding your estate.

Appoint a Neutral Trustee or Personal Representative

Instead of appointing your spouse or a child as the trustee or personal representative for your estate, consider appointing an institutional trustee such as your bank’s trust department, or professional fiduciary. A professional or institutional fiduciary is not subject to the same family pressures and can provide neutral management of your estate. While professional fiduciary may not be familiar with your family dynamics and can be a bit more impersonal, this approach can be quite advantageous in providing neutral administration and reducing conflict.

If You Intend to Disinherit Someone Clearly Explain Your Decision in Your Will or Trust

If you want to disinherit a family member, especially if it is a child, very clearly explain in your will or trust your intent to disinherit your child. List the individual by name and give a brief explanation of why you intend to disinherit him or her. However, don’t go overboard in your explanation and make sure that your reason for disinheriting the individual is not easily challenged or against public policy.

Communicate Your Intentions and Seek Professional Advice

These are some of the techniques available to reduce disputes and conflicts regarding your estate. By implementing some of these strategies and discussing an overall plan with your family that addresses any potential disputes or inequity problems, you may be able to avoid a dispute.

Your particular estate may have estate tax or other considerations, so seek the professional advice of your attorney, CPA or financial planner. Your advisers may also have additional ideas to help reduce conflicts based on your personal and family situation.

Estate Planning for the Small Business Owner

Most small business owners barely have time to stop to catch their breath, much less think about their estate plans. However, for a small business owner estate planning can be as important as budgeting, forecasting or any other planning.
Why is estate planning important to small business owners? More than likely, if you own a business a large part of your personal wealth is tied to that business. Without a plan you lose the ability to manage the transition of your business, and your wealth. Estate planning enables you to be in control of what happens to your business interest upon your death or incapacity, rather than leaving it to state law, family members, your partners, or even creditors.

Review Your Will or Trust to Ensure it Addresses Your Business Ownership Interests

If you already have a will or trust in place, review it to make sure it addresses your intentions for your business interests upon your death or incapacity. This may include a specific provision in your will that passes your business interest to your spouse, or other family members, or a specific acknowledgement of your business ownership interests and a statement your intent that your family honor the terms of an existing operating agreement.
If your existing estate plan is silent as to your specific business interests, more than likely that means that your business ownership interests will pass with the remainder of your estate. While you may wish that your family receive your business ownership interests, it is important to specifically address how your heirs or family members may, or may not, be involved with your business and its operations.

If You Do Not Already Have an Estate Plan in Place, Make it a Goal for Your Business

Again, estate planning allows you to be in control of the distribution of your business interests, rather than leaving it to state law, or in the hands of your family members, business partners, or other third parties. Estate planning for business owners includes the traditional estate planning tools, such as wills and trusts, as well as internal business planning documents. At a minimum, your estate plan should include a Last Will and Testament and/or a Revocable Living Trust, as well as Power of Attorney documents for financial and health care decisions, and an operating agreement for the business.
Discuss your business transition goals with an estate planning attorney to ensure that your estate plan reflects intent for your business and your family.

Review or Create an Operating Agreement

If you own your business with another partner, or partners, an operating agreement is an essential estate planning document for you, as an owner, and the business as a whole. (For discussion purposes the term “operating agreement” is used here to generally discuss internal documents for the operation of various business types, but a different term may be used for a different type of entity, such as shareholder agreement for a corporation.) An operating agreement is a contract between the owners, and the company that guides the operation and transfer of a business. In addition to estate planning issues, such as death or incapacity, the operating agreement can also address how to determine the value of the business upon a sale, how individual owners may join or withdrawal from the business, or how to handle a dispute between owners.
While most individuals would prefer not to discuss the issue, planning for an unexpected death or incapacity of an owner or manager, an operating agreement will enable the business to carry on, even if an owner may no longer be able to manage the business. It is important that the members or owners of the business have a discussion as to the important points of the operating agreement. This ensures everyone is on the same page and has discussed these issues from a planning perspective rather than trying to figure out these issues in the event of a disagreement or other unknown circumstance. When discussing how to plan for an unexpected death or incapacity of an owner or manager with other owners or with your family consider the following:
• Ownership Transition and Buy-out: Do you want the business to buy-out the heirs or family?
• Control & Management: If the business does not buy-out the heirs, does it want those heirs to have an active role in managing the day-to-day operations of the business? Or any amount of voting power?
• Financing: What resources are available upon death? If the plan is to buy-out the heirs or family members, how will it be financed? Some options may include installment payments, life insurance, or the creation of a separate fund.
• Price: How do you establish a price to buy out? Price can often be calculated as book value, multiple of annual earnings, by appraisal, or otherwise by agreement of all owners.
These are only a few of the discussion points to consider when creating an operating agreement. A business attorney can advise you on options for your particular business and assist you in drafting an operating agreement that meets you needs.

Create a Separate Entity

If you are a solo proprietor, or a general partnership, the beginning of a new year is the perfect time to start thinking about setting up a separate business entity such as a Limited Liability Company (“LLC”) or corporation. LLCs and corporations protect personal liability by placing liability on a separate entity rather the business owners as individuals. Moreover, a entity that is separate from the individual owner(s), survives the death of an owner, which makes it easier for your business interests to be distributed to your family without the need for probate.
The decision about the legal structure of your business will impact your personal liability, ownership rights, and business operations. Making the right decision about the legal and corporate structure of your business is critical to your long-term success, so discuss your options with a business attorney to determine what is right for your specific business.

Communication is Essential to Successful Estate Planning for your Business

The most critical component of successful estate planning for a small business is communication. Talk to your partners, family members, tax and legal advisers to ensure that your intentions can be met and to facilitate a smooth transition for your business. Estate planning for a business owner does not need to be complex or lengthy, but it needs to be discussed and completed. Communication with those involved, along with some basic planning will enable your family, and business to carry on in the event of an unforeseen circumstance.
Don’t wait for the unexpected to happen and then to try figure out what to do next. Take some time to create an estate plan that addresses your business interests and keep the control of your business in your own hands.

Estate Planning for Parents of Young Children

While parents of young children may be somewhat young as well, and do not consider themselves as having a large enough “estate” to require an estate plan, parents of minor children often have the largest concerns. Even a bit of simple estate planning will allow parents of young children to have some control over the care of their children in the event of untimely death, and the peace of mind that their children will be provided for in the proper manner.

The basic estate planning considerations for parents of minor children include:

-Who will take care of your children?
-Who is responsible for managing assets for your children?
-How to financially provide for your children?

Choosing a Guardian for Minor Children

Undoubtedly the biggest concern of parents of young children is who will take care of their children once they are gone. Determining the best individual(s) to act as a guardian for minor children can be difficult. However, for parents of young children, guardianship is the estate planning decision with the most potential impact. Consequently, every parent of minor children should consider who would raise their children if they were unable to do so

If you do not appoint a guardian for your children, in the event of death of both parents, the court will appoint a guardian for your children. The court is required to follow state law with regard to the priority of appointment of a guardian, rather than the specific individual(s) of your choosing. Most people would prefer to decide the guardian of their children themselves, rather than leave it to the court and state law to dictate this important decision. Therefore, it is important to take some time to consider a guardian for your children.
I recommend starting the decision making process with a list of good potential candidates for the role of guardian. This list may include brothers, sisters, aunts, uncles, grandparents or even family friends, basically anyone you can think of that may act as a guardian.
Then, consider the most important factors for you in raising your children. Factors to consider include: philosophies about child rearing; relationship with your children; age and stamina; geographic location; social, political, religious and moral values; financial responsibility; lifestyle and availability and interest in acting as a guardian for your children.

Once you have considered these factors, prioritize the factors that are the most important to you and determine which of the potential guardians possess the most similar qualities.
Open discussion with your family members, including your spouse, children and potential guardians is a key component in this process. Also, understand that circumstances may change as children get older, so it is a good idea to revisit the appointment of a guardian periodically to determine if it still remains a good fit.

After you  have determined who would raise your children upon the death of both parents, then it is important to consider who is responsible for managing your estate and assets for the benefit of your children.

Choosing a Trustee for Minor Children

Who to appoint to manage assets for your children requires careful consideration of the nature and value of your assets, as well as your plan of distribution and the relationships between your family members.

Family Members or Friends

You may decide that a relative or close friend, or even your chosen guardian, is the appropriate individual to manage assets for your children. Appointing a family member such as one of your siblings or a close friend can be beneficial because they are familiar with your family dynamics, as well as your assets and your intentions. However, family members or friends often lack experience managing estate assets, financial investments, and methods for ongoing accounting of these assets.

Professional Fiduciary or Trustee

As an alternative to your family members or close friends, you may choose to appoint an institutional trustee such as your bank’s trust department, or professional fiduciary, to manage and invest your assets for the benefit of your children. One key advantage of a professional or institutional fiduciary is that they are not subject to the same family pressures and can provide neutral management. A professional fiduciary also has critical professional knowledge in working with wills and trusts, and managing and investing estate assets. However, a bank or trust company will charge a fee for its services, and are not necessarily familiar with your family dynamics. On the other hand, the impersonal aspect may be an advantage when it comes to providing neutral administration, especially with arguing family members.

Ultimately, you want to choose an individual or institution that is responsible, has the ability to follow with large amounts of estate paperwork, an ability to work with all of your beneficiaries, and is willing to seek the advice of qualified professionals.
In addition to choosing a guardian and trustee, also consider how your assets will be managed and distributed to your children; both the mechanism of distribution and the ages or events in which your children will receive a distribution.

Planning the Distribution of your Estate

In planning how and when your estate will be distributed to your children, the first decision is what specific mechanism you will use to manage and distribute your estate. You may decide that a simple will nominating a guardian and leaving all of your assets to your children outright, in equal shares is sufficient, or you may determine that a trust is more appropriate.

Outright Distribution

If you decide to make outright distributions to your children, you must consider the Montana Uniform Transfers to Minors Act (UTMA). Under to the Montana Uniform Transfers to Minors Act (UTMA), the assets are transferred to a custodian who holds and administers the property for the benefit of a minor. UTMA custodianship can be beneficial because any type of property can be transferred and the custodian does not have to post bond, or file accountings unless mandated by the court.

However, under a UTMA custodianship property must be distributed completely at either age twenty-one or age eighteen years, depending on the circumstances. Many parents do not necessarily feel comfortable with their child receiving full control of assets at age eighteen or twenty-one and may want to consider other options.

Outright distributions not only require consideration of the Uniform Transfer to Minors Act, but it provides for less over the distribution of your estate. With that in mind, you may determine that you do not want to leave your estate to your children outright. When providing distributions of your estate for your children, it often makes more sense to create a trust to manage the assets for your children, rather than provide for an outright distribution.

Trusts

A trust is a written agreement wherein a separate entity, the trust, holds title of property and assets and manages those assets on behalf of an individual. A trust is created by a grantor (also known as the “trustor” or “settlor”) and the assets of the trust are managed by a trustee for the benefit of the beneficiary. In general, the most commonly used trusts for children are testamentary trusts or revocable living trusts.

Testamentary Trust through a Will

A testamentary trust is a trust that is set out in a Last Will and Testament. A testamentary trust is only effective upon the death of the grantor through the probate of his or her Last Will and Testament. While testamentary trusts can be a simple and affordable mechanism, a probate of the estate is required before the trust can be funded and your children can receive any distribution from the estate. Not only does this delay the distribution of the assets because the assets must first go through the probate process, but the probate process requires additional fees and expenses, which will reduce the amount of assets available for distribution to your children.

Revocable Living Trust

A Revocable Living Trust is a type of trust that is immediately effective upon creation, but can be amended or terminated at any point by the grantor during his or her lifetime. A Revocable Living Trust offers much more flexibility in the distribution of assets than outright distributions or testamentary trusts.

Revocable Living Trusts do not have to go through the probate process, which permits distributions to begin immediately, in a private manner without the additional costs and fees associated with probate. Moreover, a Revocable Living Trust allows you to control exactly when and how your children receive assets. For example, you may direct that the trustee distribute 1/3 of the trust assets when a child reaches twenty-one; 1/3 when the child reaches thirty; and 1/3 at age thirty-five.
While Revocable Living Trusts can be beneficial estate planning tools, they are not necessarily advantageous for everyone. Revocable Living Trusts typically cost significantly more to create and administer than an estate plan with only a will. Moreover, Revocable Living Trusts require re-titling of assets in the name of the trust, and additional administration by the grantor. Therefore, it is essential to review you assets, family situation, and personal preferences with an estate planning attorney before deciding to create a Revocable Living Trust to benefit your children.

Consider Your Specific Circumstances

While these are the general issues to consider when providing for your young children in your estate, it is important to also consider your specific circumstances. If you have children from a prior marriage, or children with special needs, then you will need to take some additional steps in planning for their future.

If you have young children, even some basic estate planning will provide you with control over the care of your children and the peace of mind that your children will be provided for, both personally and financially, in the manner you see fit.
If you have questions or would like additional information regarding estate planning for minor children contact Kelly O’Brien, Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com

Trust Basics III: Do You Need a Trust?

Who Is a Good Candidate for a Trust?

You do not necessarily need to have a sizable estate for a trust, but it is essential to weigh the advantages and disadvantages of a trust to determine if a trust makes sense for your specific situation. If any of the advantages listed in my previous post seem to apply to your situation, or if you simply want greater control over the distribution of your assets, then a trust may be useful for you. In addition, if any of the following circumstances apply to your situation then you may consider a trust:

  • Federal Estate Tax Concerns: If your estate exceeds the federal estate tax exemption amount, a trust can be helpful in reducing potential taxes. For 2014 the Internal Revenue Service has set out a federal estate tax exemption amount of $5,430,000.00 for an individual, or $10,860,000.00 married couple. If the value of your assets exceeds this amount then a trust may be highly beneficial for you and your family in potentially reducing the amount of taxes paid by your estate.
  • Ownership of Real Property: If you own significant amount of real property or owner property in multiple states a trust can help limit the need for probate, or ancillary probate in multiple states.  Real property is a type of asset that requires additional estate planning to pass to the next generation due to the manner in which it is titled. Unless you own all of your property in joint tenancy with rights of survivorship, a trust is one of the only manners in which to avoid a probate proceeding for the transfer of your real property. Moreover, if you own property in multiple states your estate may have to go through a separate, or “ancillary,” probate proceeding in each state where you own property. With a properly funded trust, the trust holds title to your property so no probate is required regardless of the location of your real property.
  • Probate Avoidance: If you are simply interested in avoiding the cost and time associated with the probate process, you may consider a trust. With a properly funded trust, no probate will be required for your estate. The distributions of your estate can occur more quickly, privately, and without the costs associated with a probate court proceeding.

Seek professional advice
Trusts can be very effective estate planning tools if properly executed and funded. However, trusts do not make sense for everyone. It is important to  review your particular situation with your attorney and tax advisers to determine the type of trust that is right for you and your family.

If you have specific questions about any of the issues discussed in this post or trusts in general contact Kelly O’Brien at Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com

Trust Basics II: Advantages & Disadvantages of Trusts

In my previous entry I set out the definition of a trust and discuss some basic types of trust agreements. Understanding the basic definition and types of trusts is important, but what are the advantages of a trust versus creating a simple will? The focus of this entry is on the advantages and disadvantages of creating a trust in an estate plan as compared to other estate planning tools.

Advantages Creating a Trust in Your Estate Plan

Greater control over distributions: Perhaps one of the most significant benefits of a trust is the ability to have greater control of the distribution of your assets. A trust allows you to set out exactly when, where, and how much each of your beneficiaries will receive from your estate, over time, rather than requiring immediate distribution of your entire estate.
For example, if you wanted to leave your estate equally to your two children, but wanted to ensure that they did not receive all of their inheritance at once you could specify in your trust that each of your children receive a percentage of your estate upon reaching a certain age, or achieving a certain life milestone (such as completing college).
Probate Avoidance: Probate is a court proceeding whereby your personal representative (also called an “executor”) is responsible for gathering your assets, paying debts and expenses, and distributing your property either pursuant to your last will and testament, or by state law if no will is in place. However, if you have a trust in place, so long as you properly transfer title of your assets to your trust, probate will not be required for your estate. In Montana, the probate proceeding takes a minimum of six months before closing and distribution. However, with a trust, distributions can occur more quickly, privately, and without the costs associated with a probate court proceeding.
Privacy: As mentioned above, probate is a public process. Probate requires filing an inventory listing all of your assets with the court as well as filing your original last will and testament which sets out your plan of distribution. This also means that the public could obtain and view copies of this information. A trust, on the other hand, allows for the private distribution of your assets.
Reduce Potential Conflict: Because trusts are private documents not subject to probate proceedings, the use of a trust can help to reduce the potential for conflict surrounding your estate. While the purpose of a probate proceeding is intended to be administrative rather than adversarial in nature, probate does provide a forum for heirs to contest terms of your will or dispute with other heirs and beneficiaries.
Incapacity Planning: A trust is a great mechanism for ensuring/providing that your property will be managed for your benefit during any period of incapacity or prolonged mental or physical illness. The terms of your trust can set out how to determine your incapacity, who is responsible for managing your assets, and how the assets should be managed upon a disability.
Estate Tax Planning: While having a revocable trust does not necessarily mean that you can avoid taxes or estate taxes, they can be helpful vehicles in maximizing the estate tax exemption available to your family upon the distribution of your estate. For example, you may decide to create a “credit shelter trust” (also known as “bypass trust” ) within your trust, whereby you can take advantage of certain tax exemptions upon your death to reduce the overall amount of estate taxes paid.
Caring for a Beneficiary with a Disability: If you have someone in your family with a disability, special needs, or who receives any type of disability benefits, they could risk losing these benefits if they inherit from your estate. A trust can provide for the basic needs of a disabled beneficiary while also maintaining their current benefits and care.

Disadvantages of Trusts

While trusts can be beneficial estate planning tools, they are not necessarily advantageous for everyone. If you have a fairly simple estate, both in the type of assets and value, a trust may not be necessary to accomplish your estate planning goals. The main drawbacks of trusts to consider are the costs associated with creating a trust and the increased administration required for a trust.
Increased cost: Trusts typically cost significantly more to create and administer than an estate plan with only a will. Often a trust will cost three to four times as much as a basic will, depending on the complexity.
Administration: For a trust to be effective the grantor’s assets must be re-titled in the name of the trust, or otherwise transferred to the trust. This means that upon initially executing a trust you would have to execute deeds for any real property to your trust and change bank and other financial accounts. While this often is accomplished upon initial execution of a trust, for some people the administration of a trust is enough to be a deterrent.

Trusts can be very effective estate planning tools if properly executed and funded. Consider your assets, family situation, and personal preferences with your attorney and tax advisers carefully before proceeding with a trust.
If you have additional questions regarding trusts contact Kelly O’Brien, Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373(406) 752-6373/ www.measurelaw.com

Trust Basics I: What is a Trust?

 What Is a Trust ?

I frequently have clients that come into my office with questions regarding trusts. They may have heard something from a friend, or recently watched the latest Suze Orman Show, and are convinced that they need a trust. However, there are a lot of misconceptions about trusts, both good and bad. Trusts can be highly beneficial estate planning tools, but it is important to understand the basics of trusts, how they work, and whether or not a trust makes sense for his or her specific situation.

This is the first entry in a  series of entries on trust basics. This article will focus on on the definition and types of trusts, I go into the  and disadvantages of creating a trust and discuss the criteria and good candidates for a trust agreement in later entries.

What is a Trust?

A trust is written agreement wherein a separate entity, the trust, holds title of property and assets and manages those assets on behalf of an individual. A trust is created by a grantor (also known as the “trustor” or “settlor”) and the assets of the trust are managed by a trustee for the benefit of the beneficiary.
As an initial matter there are two general types of trusts: revocable living trusts (often called simply “Living Trusts”) and irrevocable trusts. Within these types of trusts there are numerous variations in techniques and complexity, but it is important to at least understand the basic distinction between a revocable and irrevocable trust.

Revocable Living Trust

A revocable living trust is a type of trust that can be amended or terminated at any point by the grantor during his or her lifetime. Typically, during the lifetime of the grantor of a revocable trust, the grantor is also the trustee and the beneficiary, so he or she retains complete control over the trust. It is only usually during a period of incapacity or death of the grantor that a successor trustee would step in and act on behalf of the trust.

Irrevocable Trust

An irrevocable living trust is a trust that, once executed, cannot be amended or terminated without court approval or consent of all the beneficiaries. Once the assets are transferred to an irrevocable trust the grantor no longer retains control of those assets. Irrevocable trusts can be important tools for estate tax planning or creditor protection purposes. However because they are irrevocable, the decision to execute an irrevocable trust depends on your specific tax and estate plan and should be discussed carefully with your attorney or tax adviser.
While it is important to understand the difference between revocable and irrevocable trusts, for purposes of this article, the main focus is on revocable trusts as they are more commonly applicable.

Seek Professional Advice

Trust can vary greatly in type, terms and complexity. If you are considering creating any type of trust it is essential that you review your particular situation with your attorney and tax advisers to determine the type of trust that is right for you and your family.

If you have specific questions about any of the issues discussed in this post, Contact Kelly O’Brien at Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com

 

Who is in Charge of Your Estate?

Choosing a Personal Representative or Trustee to Manage Your Estate

Choosing the personal representative of your estate or successor trustee in the event of a trust, is one of the most important estate planning decisions you will make. However, all too often people make this decision rather quickly without considering all of the options and potential long-term issues.

Take the case of Sharon. Sharon was a single woman with four grown children.  She finally decided to get her estate plan in order. Due to the nature of her assets she determined that a revocable living trust was the best option for her. She put considerable time into creating her trust, and appointed all four of her children as co-trustees of the trust. Sharon’s four children were also her main beneficiaries and would receive most of the assets of her trust.

According to the terms of Sharon’s trust agreement all of the trustees were required to agree before they could distribute any assets of the trust. Upon Sharon’s death her four children were unable to agree on anything and make any decisions about the trust distribution.  Consequently it took several years to settle her estate and had a traumatic impact on her four children and their relationship with each other.

This situation is actually quite common; parents nominate all of their children as their personal representative(s) or trustee(s) with the best of intentions, but the children cannot agree on any aspects of the distribution. As a result it can take years for an estate to be settled at the expense of family relationships.

How can you avoid this situation?

Choosing the personal representative of your estate, or successor trustee in the event of a trust, is one of the most important estate planning decisions you will make. It requires careful consideration of both your estate assets and family relationships.

What Does a Personal Representative or Trustee Do?

As an initial matter whether you appoint a personal representative or a trustee depends on your specific estate plan and whether you create a will or trust.

Duties of a Personal Representative

A personal representative (also known as an “executor” or “administrator”) is the individual responsible for the administration of your Last Will and Testament through probate. The personal representative is responsible for gathering up the assets of your estate; evaluating claims against the estate; paying the last debts and expenses of the estate; accounting for assets of the estate; paying taxes; and distributing the assets of your estate according to the terms of your will or trust.

Duties of a Trustee

A trustee is the individual you appoint to carry out the terms of your trust agreement and plan of distribution. You would nominate a trustee, or successor trustee, only if you have executed a trust agreement, most likely a revocable living trust. A trustee is required to collect the assets of the trust, pay bills of the trust, account for trust assets, and distribute those assets. Often a trustee is also required to invest and manage assets for the benefit of your beneficiaries over time. Unlike a personal representative, the duties of a trustee can carry on for many years, sometimes even multiple generations.

Who Should  You Choose to Manage Your Estate?

Once you have created a will or trust, then who should you appoint to manage your estate? Again, who to appoint requires careful consideration of the nature and value of your assets, as well as your plan of distribution and the relationships between your family members.  Typically, a married individual will nominate his or her spouse as a personal representative of their will, or a trustee of a trust. However, it can be difficult to determine who to appoint as an alternate personal representative of a will or alternate trustee of a trust.

Appointing Your Children

After appointing a spouse, people often appoint either one or all of their children as alternate personal representative(s) or alternate trustee(s). If you have a fairly simple will or trust, and a relatively small family with a solid, ongoing relationship, then appointing one or all of your children may be a good option. Your children are familiar with your assets and intentions. Accordingly, appointing your children to manage a simple estate can provide a relatively quick and economical solution.

However, as illustrated above children are also often the primary beneficiaries of an estate which can provide for unintended consequences. Even siblings with the best of relationships do not always agree to the management or distribution of an estate.

Appointing a Relative or Friend

Instead, you may decide to appoint a relative or close friend that is not one of your children and not a beneficiary named in your will or trust. Appointing a family member, such as one of your siblings or a close friend, can be beneficial because they are familiar with your family dynamics, your assets and your intentions. Moreover, an individual that is not named in your will or trust does not have a potential conflict of interest between the duty to manage your estate and the desire to receive certain assets from your estate.

While appointing a non-beneficiary family member or friend may help to reduce disputes between your children, there are drawbacks to consider. One common issue is that family members often lack experience managing estate assets, financial investments and methods for ongoing accounting of these assets. In addition, a relative or friend may not be immune to family disputes. One of your children may simple dislike or not agree with the personal representative or trustee, which makes it difficult for that individual to carry out his or her duties.

Appointing a Professional Fiduciary or Institutional Trustee

As an alternative to your children, relatives or close friends you may choose to appoint an institutional trustee such as your bank’s trust department, or professional fiduciary to act as a personal representative. One key advantage to a professional or institutional fiduciary is that they are not subject to the same family pressures and can provide neutral management. A professional fiduciary also has critical professional knowledge in working with wills and trusts, and managing and investing estate assets.

The use of a neutral professional may help to reduce family conflict, although there are other issues to considering when deciding to appoint a professional fiduciary or institutional trustee. The main consideration for most people is simply the cost of administration. A bank or trust company will charge a fee for its services, and usually have minimum fees that make it unaffordable for a simple estate. Another important consideration is that a professional fiduciary is not familiar with your family dynamics and can be a bit impersonal. However, the impersonal aspect may be an advantage when it comes to providing neutral administration, especially with arguing family members.

Qualities of a Personal Representative or Trustee

Ultimately the choice of who to appoint to manage your estate is personal and depends on your particular estate and family dynamics. It is important to consider the factors mentioned above and choose an individual or institution that is responsible, has the ability to follow with large amounts of estate paperwork, an ability to work with all of your beneficiaries, and is willing to seek the advice of professionals such as estate attorneys and CPAs. Discuss your thoughts and concerns with an estate planning attorney and your family members to ensure you have made the right choice for your family and estate.

If you have specific questions about any of the issues discussed in thispost, Contact Kelly O’Brien at Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com

 

 

Business Operating Agreements & Guidelines

Tools to Help Small Business Owners Protect Themselves

Andrea and Susan were old friends that decided to start a small business together in Montana. For them the process of setting up their business was fairly simple; they found a great downtown location for their little gift shop, each invested a small amount of their own money to purchase inventory, and then they were open for business.

Initially they did not form any separate entity, but within a few months of opening they decided to form a limited liability company, or an “LLC.” Andrea found the “Articles of Organization” form, and filed it with the Montana Secretary of State. Over the coming months, both owners would use personal funds to help purchase inventory, in amounts they agreed upon, but they never formalized any agreement regarding using personal funds for the business.

After several years of being in business, Susan decided that she wanted to spend more time traveling and no longer wanted to be involved in the business. At that point in time the gift shop had become quite successful and Susan believed that her interest in the company had become very valuable. With that in mind, Susan approached Andrea to let her know her intentions for leaving the company and suggested that Andrea buy her out of the business.

However, the amount suggested by Susan was shockingly high to Andrea. According to Andrea, Susan was only entitled to her initial investment, which was less than one-third the amount proposed by Susan. Andrea suggested a lower price and unfortunately the two spent the next year arguing over the value of Susan’s interest.

 This situation is all too common for small businesses; the owners file a form to become a separate entity such as an LLC or corporation in an effort to protect themselves from personal liability, but fail to actually follow the formalities of a separate entity and fail to execute an operating agreement. The operating agreement is key in determining the value of the business, how individual owners may join or withdrawal from the business, and what happens to an owner’s interest in the event of their untimely death, bankruptcy or other life event.

Observe Business Formalities

First, observance of LLC or corporate formalities is an important factor in determining whether it will be actually treated as a separate entity.  If the LLC or corporation is not treated as a separate entity, then the members or shareholders may be held personally liable for the debts and obligations of the company.

Some examples of to how maintain business and personal matters separate include:

·       Refrain from commingling business funds or accounts with personal funds. If you are placing personal funds in the business, make sure it is accounted for as a capital contribution, a loan or a reimbursed expense.

·       Always make clear when you are acting on behalf of the business, rather than acting in a personal capacity. This may include signing documents in a representative capacity or clarifying your role in a business meeting.

·       Do not use funds owned by the business to pay personal debts and obligations. Personal obligations should not be paid directly from business accounts. If you need to make a personal payment, pay yourself first as a member or shareholder of the business, then make a payment from your personal account.

·       Maintain written documentation of actions of Members, Shareholders, Directors or Officers. This includes maintaining minutes of your annual meeting and any special meetings, or written consents, signed by all owners. 

 Create an Operating Agreement (or Shareholder Agreement)

An operating agreement is the document used by the owners or “members” of an LLC. A shareholder agreement is the document used by the owners or “shareholders” of a corporation.  For discussion purposes the term “operating agreement” is used here to generally discuss internal documents for the operation of various business types, but a different term may be used for a different type of entity.

An operating agreement is a contract between the members of the LLC and the LLC as a separate entity. It sets out all of the internal terms for the operation of the LLC. These terms may include valuation, distribution of profits and losses, and the withdrawal or addition of a new member.

While an operating agreement may be drafted by an attorney, it is important that the members or owners of the business have a discussion as to the important points of the operating agreement. This ensures everyone is on the same page and has discussed these issues from the beginning of the business, rather than trying to figure out these issues in a disagreement or other unknown circumstance.

Some important issues to discuss in the creation of an operating agreement include:

·       What limitations to place on transfers of ownership. Some options to consider include: no transfer without consent of all owners; right of first refusal of company and/or members; limitations on forced buy-outs; or right to remove owners for certain unlawful or unethical actions.

·       How to fund a buy-out of an owner. Consider such issues as allowance for installment payments, use of life insurance, or loans.

·       How to calculate the value of an ownership interest in the business. Will the value simply be book value, or assets minus liabilities of the company? Or do you want to use a different formula? Do you want to set a price in advance?

·       What happens in the event of unforeseen life circumstances? What happens to an owner’s interest in the business when that individual owner retires, wants to withdrawal from the business, becomes disabled, gets a divorce or files for bankruptcy? 

Obviously these are just some of the discussion points to consider when creating an operating agreement. A business attorney can advise you on options for your particular business. However, it is important that the business owners discuss these issues prior to starting business, rather than wait until after a dispute arises, like Andrea and Susan.

If only Andrea and Susan had taken some extra time to create an operating agreement when they started their business, they could have spent less time and money arguing back and forth over the value. Instead Andrea could have spent more time focusing on the business and Susan could have spent her time traveling. By taking the time to discuss a potential buy-out in the beginning of their business these women could have saved themselves significant time and money in the long-run.

For advice regarding business formalities, operating agreements or general business law contact Kelly O’Brien at Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373(406) 752-6373/ www.measurelaw.com

 

 

 

 

 

 

 

 

Estate Planning in a New Year

Start 2014 Out Right By Getting Your Estate Plan in Order 

Recently, a friend and client of mine asked me to help her update her will. My friend realized that her will might need a little updating, but she was shocked when she actually retrieved her will from her safe deposit box to see just how much in her life had changed since she executed her will. In my friend’s case she had been divorced and remarried, and instead of having minor children, her children were now grown with children of their own. While my friend was shocked (and a little embarrassed) I reassured her that no time is better than the present to finally update her will.

Organize & Update Your Estate Plan in the New Year

The start of a new year is an excellent time to think about your estate planning. Whether that means a simple review of your existing will or trust to ensure that it still works for your current life situation; or that means finally taking the step to get a will or trust in place, consider the start of a new year a perfect opportunity. Remember estate planning is not only about how your assets are distributed, it also means appointing the individual(s) responsible for carrying out your wishes for your family and health care decisions.

Individuals whom have recently experienced major life changes such as a divorce, or the death of a spouse, are especially susceptible without a plan that reflects their current life situation. In the case of my friend, while she did have a will, it was completely irrelevant to her current situation. Moreover, women without any kind of estate plan in place leave it completely up to state law to dictate matters such as how their assets will be distributed, who will care for their children, or who will manage funds for their children or grandchildren.

If You Don’t Already Have an Estate Plan, Take the Opportunity in the New Year to Finally Get a Plan in Place  

Essentially, estate planning enables you to be in control of what happens to your assets upon your death or incapacity. Estate planning is also the process by which you appoint who you want to be responsible for carrying out your wishes for your assets, family and heath care decisions. At a minimum, your estate plan should include the following elements:

A Will and/or Revocable Living Trust

These are formal documents that describe how and when to divide and distribute your assets upon your death. Whether you need a simple will, or a more complex, revocable living trust, depends on your specific situation. Discuss your situation with an estate planning attorney to determine which makes sense for you and your family.

Durable Power of Attorney for Financial Decisions

A durable power of attorney for finances allows you to appoint another individual to make financial decisions on your behalf in the event that you are unable to make these decisions yourself due to incapacity or disability.

Durable Power of Attorney for Heath Care Decisions

A durable power of attorney for healthcare allows you to appoint another individual to make medical decisions on your behalf including decisions regarding medical consents and life support issues in the event you are unable to make these decisions yourself.

Beneficiary and Payable on Death Designations

If you list an individual as a beneficiary of a financial asset, that individual becomes the legal owner, immediately, upon your death without the need for probate.

 If You Already Have an Estate Plan, Take the Opportunity to Review Your Existing Plan to Ensure it is Still Relevant to Your Life  

As busy individuals today, we all know that life changes fast. Your will may have been drafted during a prior marriage, or when your now grown children were still minors.  After any major life change, such as a divorce, death, or major change in assets, it is important to review your plan and appropriate changes.

When Should You Update Your Estate Plan?

While there are many life circumstances that warrant a change in your estate plan, below is a checklist of some of the life changes that may require an update to your plan:

  •   After a divorce or marriage
  • After the birth or adoption of a new child or grandchild
  • When your children or grandchildren reach the age of 18
  • Death or illness of an individual named as personal representative, trustee, beneficiary or guardian
  •  A change in relationship with an individual, organization or other beneficiary named in will
  • A sale or purchase of a major asset, such as a new home, a  new business, or sale of business or home
  • You move, especially if you move out of state
  • There is a change in the state or federal tax law
  • You experience a significant increase or decrease in the value of your assets, such as receiving an inheritance

Don’t forget to review & update Beneficiary designations

The last thing you want your family to have to deal with is removing a former spouse or other unintended beneficiary after you are gone. Work with your financial planner, or check with your specific financial institution on how to make and update beneficiary changes to reflect changes in your life.

No Time is Better than the Present to Review, Update or Create Your Estate Plan

We all know that it can be difficult to keep up with every little change in life. However, when a major life change occurs, it can sometimes be too overwhelming to think about your estate plan.  Make it a resolution to consider your estate plan in the New Year to ensure that it works for your life.  By taking the time to review your existing estate plan, or to finally execute a will or trust, you take control of what happens to your assets upon your death or incapacity. Review the checklist above and discuss any life changes with estate planning attorney to ensure that your estate plan reflects your current situation and ensures that you and your family are protected and prepared.

 

If you have additional estate planning questions contact Kelly O’Brien, Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373(406) 752-6373/ www.measurelaw.com

 

 

 

Estate Planning After A Divorce

A divorce is an emotionally draining, frustrating and exhausting time. The last thing anyone wants to think about is more legal paperwork. However, a divorce is one of those life changes when an examination of your estate plan is especially important. It is a time that requires either an update or a whole new estate plan to avoid unintended consequences for you and your family.

Discuss Potential Changes to Your Estate Plan with Your Spouse Before Filing for Divorce

 In general, once you file for a divorce you will be bound by a temporary restraining order, which may limit your ability to modify your estate plan or make major financial changes until the divorce is complete. While it may not always be possible to have an open conversation with your spouse about estate planning before you file a divorce, it is still a good idea to have discussion with your spouse, and attorney, about potential changes or modifications to your estate plan, or a revocation of your existing wills before or during your divorce.

Before your Divorce is Finalized

First, it is very important to keep in mind that you are not legally divorced until the judge signs the final decree. The process of actually getting a divorce can take several months or even years before it is finalized. In the meantime, unless you have updated your estate planning documents, your soon to be ex-spouse could still inherit from your estate; or in the event of an accident or a major health issue, your soon to be ex-spouse may able to continue to make financial or health care decisions on your behalf.

Update, or Execute New Health Care Documents

A health care power of attorney allows you to appoint another individual to make your health care decisions in the event that you are unable to do so for yourself. Within the process of your divorce it is important to make sure that your health care power of attorney is updated so that your soon to be ex-spouse no longer has the ability to make health care decisions on your behalf. If you do not already have a health care power of attorney in place consider executing one to make clear you do not want your former spouse to have any input into decisions and that your important health care decisions will be provided for by the person you choose.

Update Your Financial Power of Attorney

If you had executed a Durable Power of Attorney for financial decisions, which appoints your soon to be ex-spouse as your agent you may want to immediately revoke it and execute a new power of attorney. A Durable Power of Attorney for financial decisions gives the individual of your choosing an immediate and present power to sign documents on your behalf, access to bank accounts and all other financial powers. While an automatic temporary restraining order will likely be in place during your divorce, it is still important that your power of attorney is updated or revoked to avoid any unintended consequences.

After Your Divorce is Finalized

If you have already been through the divorce process and are ready to move on with your new life now is the time for a new estate plan. While in Montana any nominations of the former spouse, or distributions to a former spouse, are automatically revoked after a divorce, this default can provide for some odd and unintended consequences. A new estate plan enables you to be in control of what happens to your property upon your death or incapacity. Estate planning is also the process by which you appoint who you want to be responsible for carrying out your wishes for your assets, as well as your family, financial, and heath care decisions.

Create a New Estate Plan

At a minimum your estate plan should include a Last Will & Testament, Power of Attorney for Financial Decisions, Power of Attorney for Health Care Decisions, and a Living Will. Even if you are not quite ready to execute a comprehensive estate plan, it is critical to at least have a minimal will, which appoints your personal representative and sets out your plan of distribution.  In addition, durable powers of attorney for health care and financial decisions allow youto be in control of your life in the event of a disability or incapacity. These documents allow your life to carry on during a disability; your bills will be paid and your care will be provided for by the person you choose.

Review & Update Beneficiary Designations

After a divorce, updating your beneficiaries is especially important. The last thing you want your family to have to deal with is removing a former spouse or other unintended beneficiary after you are gone. Work with your financial planner, or check with your specific financial institution on how to make and update beneficiary changes.

Plan For Your Children

While you may not be able to control all aspects of planning for your children after a divorce, you can decide what assets your children will inherit from your estate and how and when they will receive funds from your estate. For younger children, you may consider setting up a trust for their inheritance wherein a trustee of your choice will manage funds for your children until they reach the age of majority. This allows you to control how your children will receive these funds and provides for financial management of your estate separate from your former spouse.

Don’t Procrastinate

After a divorce you likely feel like you have had enough paperwork and attorneys to last your lifetime, but do not put off updating your estate plan. Discuss your thoughts and concerns with an estate planning attorney to ensure that your estate plan reflects your current situation and ensures that you and your loved ones are protected and prepared.