Should Your Home Be Owned by Your Trust?

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1 miller nash graham & dunn llp Spring 2015 brought to you by the trusts & estates practice team Estate Planning Advisor Should Your Home Be Owned by Your Trust? by Lori K. Murphy When we work with a client to design a comprehensive estate plan, we consider the importance of owning a home in a trust. Several factors must be given weight in deciding whether to deed a person s home into his or her trust. First, how the home is currently titled must be reviewed. Homes can be owned by tenants in common, by joint tenants with right of survivorship, and by tenants by the entirety. When property is held by tenants in common and an owner dies, that owner s interest must pass through probate. When property is held by joint tenants with right of survivorship, the property does not pass through probate; it passes automatically to the survivor upon the filing of a death certificate in land records. Couples may own property in the third form of ownership, called tenancy by the entirety. This form of ownership allows the home to pass directly to the spouse upon the filing of a death certificate in land records, and it also allows the couple to enjoy superior creditor protection during their joint lifetimes. Second, incapacity planning must be a consideration. None of the forms of real estate ownership address the capacity of the individual. If the owner becomes incapacitated, the property cannot be sold unless a durable power of attorney was executed before the onset of incapacity or until a conservator is court-appointed for the individual. Additionally, none of these forms of ownership address what happens in case of the death of both owners of a property. For example, if the couple expire simultaneously, then the real property must go through probate in order to pass to the couple s heirs, despite owning the home as tenants by the entirety. Third, probate avoidance must be considered. Probate is the court s oversight of a person s estate to ensure that the property goes where it is supposed to go, whether that be in accordance with a person s last will and testament or in accordance with the intestate heirs as delineated in each state s estate laws. In some cases, probate is an appropriate venue in which to handle a person s estate. In other cases, clients are well advised to avoid the probate process, probate expenses, and time delays. I prefer that clients either transfer a home into a trust to avoid probate and all that it entails or make use of a transfer-on-death deed. Transfer Into Trust The upside of transferring a home into trust is that doing so can be great for an individual. If an individual owns a home solely, then transferring the home into trust will be effective to avoid probate entirely. The additional benefit to the individual is that the trust can include express provisions allowing the home to be maintained, rented, or sold in case of the individual s incapacity. This alone can bring great peace of mind to my clients and is often the guiding decision factor. Also, upon the person s death, the trust could provide that the home be maintained in trust for a particular beneficiary, rented as an income-producing property, distributed directly to particular heirs, or sold and the proceeds earmarked for heirs. inside this issue (continued on page 5) 2 Miller Nash Graham & Dunn s Trusts & Estates Team 3 Ethical Will: An Ancient Tradition Made New Again 4 Why Does It Matter Where I Live for Estate Tax Purposes? millernash.com

2 Miller Nash Graham & Dunn s Trusts & Estates Team 2015 promises to be an exciting year for our Trusts and Estates team. On January 1, the two long-standing Northwest firms of Miller Nash and Graham & Dunn combined to form Miller Nash Graham & Dunn. With nearly 160 attorneys and offices in Washington, Oregon, and California, the combined firm offers our clients broadened capabilities. The combination also resulted in an expanded Trusts & Estates team, allowing us to better serve our estate planning clients. Marcia K. Fujimoto marcia.fujimoto@millernash.com Our Expanded Team I am very pleased to introduce Marcia Fujimoto, a partner from the legacy Graham & Dunn firm. I have known Marcia for a number of years, and in addition to being a terrific person, she is a well-respected and accomplished estate planner. Three paralegals also joined our team: Nicki Brown, who has extensive experience in probate administration; Kim Sandstrom, who assists with drafting documents; and Elizabeth Pitman, who is new to our area of law and focuses primarily on probate administration. Below is a brief biography of Marcia. Marcia has more than 30 years of experience counseling individuals and families about wealth transfer and succession planning, including estate planning and administration, probate, trusts, and related tax matters. She attended the University of Michigan for both undergraduate and law school. She is a fellow in the American College of Trust and Estate Counsel (ACTEC) and has been included in Washington Super Lawyers magazine and listed as one of the top 50 Women Washington Super Lawyers. She is a frequent speaker at professional conferences and is active in the Seattle charitable community. The legacy Miller Nash Trusts & Estates team members all look forward to working with our new colleagues and introducing them to our clients. Sincerely, Adrienne P. Jeffrey, Editor, Estate Planning Advisor adrienne.jeffrey@millernash.com Estate Planning Advisor miller nash graham & dunn llp 2

3 Ethical Will: An Ancient Tradition Made New Again by Kay B. Abramowitz The typical will is a set of instructions to a person charged with the duty of carrying out those instructions. The usual instructions center on paying debts and taxes and distributing the rest of the property of the testator (person who made the will) to various loved ones and charities. This type of will is not designed to share the ethical values of the testator. This has been a problem for many people who want to pass on their ethical values along with their worldly possessions. It seems that this has ever been so, because ethical wills are nothing new. Ethical wills have been known for over 3,000 years. They were a tradition particularly among Jewish men and were initially an oral tradition. Modern practice is to write an ethical will at the intersection of one s life and is certainly not limited to gender or religion. An ethical will may be referred to as a legacy letter and is used in connection with a last will and testament (or a revocable living trust) to give context to the distributions of worldly goods at death or gifts during one s lifetime. An ethical will may also be in the form of a written blessing from the author to the next generation. In concept, ethical wills are documents designed to pass ethical values from one generation to the next. While each ethical will is unique to its author, there are common themes, such as the following: Announcement of personal values and beliefs; Explanation of spiritual values; Articulation of the hopes and blessings for future generations; Sharing life s lessons learned; Declaration of love; Expression of forgiveness of others; and Asking for forgiveness. Ethical wills provide a way for the author to be remembered by future generations; to tell the author s story or the family s story; to identify important values in hopes of continuing these values in the next generation; to become more self-aware; to come to terms with the author s mortality; and to provide a sense of completion. People often write an ethical will upon an engagement to marry of a loved one. An ethical will can be that writing that shares the lessons of marriage learned by a father and passed on to a son, or a mother to a daughter. Think of writing to a new parent upon the birth of a first child to articulate the hopes and blessings for that new generation. Other transitions in life also call for deeper connections and a sharing among the generations, such as upon a divorce in the family, a child s leaving home for college or the military, upon reaching middle age or old age, and finally the last transition at the end of life. The transitions in life provide the context for writing an ethical will, but those transitions do not provide guidance on how to get started. This article will help you navigate the ethical will process. First, identify the audience. One poignant ethical will was written by a father to his 18-year-old son on the eve of the son s departure to France. The father expressed his love for his son and shared his hope that his son pursue his heart s desire upon returning from WWI. Second, consider your intentions. Is the intention to provide guidance or to scold? Is it to explain your personal beliefs and values? Is it to bestow your hopes for the future of a grandchild? What is chosen will set the tone. Some ethical wills that have survived down through the ages are specific instructions from parent to child on how each moment of each day is to be lived. Others are seeking forgiveness for the wounds caused over the years. Still others are expressions of love and statements of personal values. Third, reflect on what to say. In getting started, it is useful to write down ideas a few words or a sentence or two about things such as: Your beliefs and opinions; Things you did to act on your values; Something you learned from grandparents/parents/siblings/ spouse/children; Something that you are grateful for; Your hopes for the future. Fourth, decide when to share the ethical will. An ethical will can be shared at a special moment in the recipient s life, such as a birth, wedding, or milestone birthday. Some, if not most, wait until the end of life. There are no rules except to search your own heart to know the appropriate moment for you to share it. Fifth, do no harm. Take care that the words written or spoken are received as the author intended. Ethical (continued on page 4) Estate Planning Advisor miller nash graham & dunn llp 3

4 Why Does It Matter Where I Live for Estate Tax Purposes? by June M. Wiyrick Flores june.wiyrickflores@millernash.com The estate tax is a transfer tax on the assets you own when you pass away. Currently, a federal estate tax is imposed when the decedent s estate is at least $5,430,000 (the federal exclusion amount). While most states do not have a separate estate or inheritance tax, several states do in addition to the federal estate tax. Even among those states that impose an estate/inheritance tax, the rate and exemptions vary widely. Out here on the West Coast, the difference can be readily seen. Washington imposes an estate tax when the value of the decedent s assets exceeds $2,064,000. Oregon imposes an estate tax when the value of the decedent s assets exceeds $1 million. California does not have an estate tax. If you want to minimize estate tax, where you reside when you die does matter. So should you change your state of residence to a state that does not have an estate tax? Changing residency is not always enough to avoid a state s estate tax. In Washington and Oregon, your residency alone doesn t determine whether or not you are subject to the state estate tax it also depends on what types of assets you own. If you are an Oregon resident, then all of your real estate and tangible personal property (these are things such as art, vehicles, jewelry) located in Oregon and all of your intangible property (stocks, While most states do not have a separate estate or inheritance tax, several states do in addition to the federal estate tax. bonds, etc.) are subject to Oregon estate tax. If you are not an Oregon resident, then only the real estate and tangible property located in Oregon are subject to Oregon estate taxes. For example, if you are a California resident, but own a condo in Portland, then the condo is still subject to Oregon estate taxes. One common misconception is that so long as the value of the property in Oregon or Washington is less than the state s exclusion amount, then the assets are not subject to state estate tax. This is incorrect the determination whether tax is due depends on the decedent s gross estate, not just the assets located in the state. In the example above, if the Portland condo and its contents are valued at $750,000 and the decedent s assets in California are valued at $1 million, then Oregon estate taxes are owing. How can you avoid owing estate tax in Oregon and Washington? If you live part of the year in another state (such as California), consider changing your residency and the character of the property you own in Oregon or Washington to intangible property by creating a limited liability company ( LLC ). An ownership interest in an LLC is intangible property. You create an LLC and transfer ownership of your real property and tangible property to the LLC. So instead of owning real property or tangible property, you own intangible property the LLC. If you are not a resident of Oregon or Washington, then intangible property in Oregon or Washington is not subject to the state s estate tax. There are other issues involved in changing your residency that are beyond the scope of this article. Ethical Will: An Ancient Tradition Made New Again Continued from page 3 wills have the potential to be wielded as a weapon or as an expression of love and gratitude. Once written, review the ethical will as if you were the recipient. Ask yourself how you would respond upon receiving the document. If you want to learn more, here are some resources: Barry K. Baines, M.D., The Ethical Will Resource Kit (Josaba Ltd., 1998) Barry K. Baines, M.D., Putting Your Values on Paper: The Ethical Will Writing Guide Workbook (Josaba Ltd., 2001) Susan B. Turnbull, The Wealth of Your Life: A Step-by-Step Guide for Creating Your Ethical Will (Benedict Press, 2d ed 2007) Estate Planning Advisor miller nash graham & dunn llp 4

5 Should Your Home Be Owned by Your Trust? Continued from page 1 For my couple-clients, transferring a home into trust will be effective to avoid probate whether one of the couple dies or if both expire together. It is also effective to address the same incapacity issues that a sole owner would face. Also, a couple s trust could address how the real property is handled after one of the couple dies and what happens to the real property after the first and second of the couple die. If a home is in trust and the trust addresses whether the home is to be maintained, rented, distributed, or sold, then there is no need to make use of a durable power of attorney or a court-appointed conservator. There are two downsides when transferring a home into trust: First, a risk is taken if the home is mortgaged. Typically, lender consent is required to transfer a home from the client s name into a trust name. Many lenders consider this change to be a refinance action and charge associated costs. Second, if the home was previously owned by tenants by the entirety, there is a risk that a transfer into a trust would destroy the beloved creditor protection associated with such a deed. Although some states have adopted statutes expressly authorizing the continuation of creditor protection when a couple transfers their home into trust for estate planning purposes, Oregon has not yet adopted such an express statute. Transfer-on-Death Deed As an alternative to transferring a home into trust, clients may consider the transfer-on-death deed, which is authorized by Oregon law and that of some other states. Use of this method does not require the home to be deeded into a person s trust. Instead, a deed is drafted to convey the home to a person or persons after the owner s death; it functions much like a last will and testament, but only as to the real property. Upon the owner s death, the home passes by operation of law to the next persons named on the transfer-on-death deed. The benefit to this method is that the home passes outside of probate. This method can be an inexpensive, fast, and easy way to address transfer of real property at death. Furthermore, the owner is not restricted from selling the home before death. But the transfer-on-death-deed method fails to address a client s potential incapacity. For example, if a single For my couple-clients, transferring a home into trust will be effective to avoid probate whether one of the couple dies or if both expire together. client suffers incapacity, the home may need to be sold before death. A transfer-on-death deed has no impact on the ability to sell the property. In fact, a power of attorney or court-appointed conservator must take control of the property. Additionally, the transfer-on-death deed does not work well for couples. Even if a couple made use of a transferon-death deed, it would work well only in case of simultaneous death. If one of the couple died, the original deed and its tenancy would control. For example, if the couple owned property by tenants by the entirety, the property would pass to the survivor solely, despite there being a transfer-on-death deed in land records. That sole survivor could then change the beneficiary of that property on his or her own. Conclusion When considering how to advise clients on how best to address their ownership of real property, my colleagues and I came to a general conclusion that for clients in high-risk professions (ones that are subject to high-risk lawsuits), such as those in the medical profession or home builders, then it is more important to maintain the creditor protection offered by the tenants by the entirety form of ownership instead of focusing solely on incapacity planning or probate avoidance. For our clients who are not in high-risk professions, then probate avoidance and incapacity planning seem to be better goals. For the latter clients, making use of the transfer into trust or the transfer-on-death deed is appropriate. Estate Planning Advisor Estate Planning miller nash Advisor graham miller & dunn nash llp 75

6 Are you aware of your financing options? You might be surprised by the opportunities available to you and your business, including partial buyouts, growth capital, SBA financing, and internal financing. At least two things are common to all these methods awareness and planning. Please join us for this complimentary workshop focused on the different methods of funding business transfers from the current owner to the next generation or, in some cases, to a private equity group or key employees. Tuesday, May 5, 4:15-6:15 p.m. Our Portland Office For more information or to register, please visit Estate Planning Advisor is published by Miller Nash Graham & Dunn LLP. This newsletter should not be construed as legal opinion on any specific facts or circumstances. The articles are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and any specific legal questions you may have. To be added to any of our newsletter or event mailing lists or to submit feedback, questions, address changes, and article ideas, contact Client Services at or at clientservices@millernash.com U.S. Bancorp Tower 111 S.W. Fifth Avenue Portland, Oregon Presorted First-Class Mail US Postage PAID Portland, OR Permit #1891