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GLENLOCH BLOG
The joy that being a fiduciary brings…yeah right!
Posted on December 8, 2018
by Kevin McKannan
The importance of choosing competent fiduciaries for your estate plan cannot be overstated. Fiduciaries are those individuals you choose to play the important roles in executing your estate plan. Specifically, they are the executors, trustees, guardians, and agents. You could have the best drafted estate plan, but if you don’t put the right people in the right roles, your wishes may not get carried out appropriately. This single issue is usually the biggest headache for those individuals who I deal with in building their estate plan.

 
The role of a fiduciary in an estate plan can be quite extensive. The most recognized fiduciary title is an executor (also known as the personal representative). An executor is the individual named in a will that represents the estate in the probate process. They have extremely broad latitude in most cases and often act with minimal court supervision. Acting in the role of an executor can be a lot of work depending on the size and complexity of the estate. A non-inclusive list of duties is as follows:


1. Notifying heirs and creditors
2. Taking possession of inventory in the estate
3. Determining fair market value of estate assets
4. Determining names and locations of heirs
5. Collecting debts owed to the decedent (person who died)
6. Representing the estate in any challenges to the will
7. Completing any pending lawsuits in which the decedent has an interest
8. Preparing tax returns and pay all estate and income taxes
9. Paying the valid claims of creditors
10. Selling property (including real estate)
11. Transferring title to real property and certain personal property
12. Distributing the remaining assets to the designated heirs
13. Completing all necessary accountings and inventories with the court


Lots of power, lots of responsibility.


Another type of fiduciary is a trustee. A trustee plays an incredibly important role in administering trusts, managing investors and assets, distributing income from the trust as appropriate, and preparing and filing necessary legal and tax documents. A trustee can be named in both a revocable living trust or a will containing testamentary trust language. Again, the responsibilities that go along with managing someone’s assets can be extensive and the potential for liability for the mismanagement of funds is enormous. Lots of power, lots of responsibility.


The next fiduciary is a guardian. If you’re a parent, a guardian is probably the single most important fiduciary you can name in your estate plan. A guardian is the individual that will be placed in charge of your minor children. Essentially, the guardian will raise, clothe, feed and educate your minor child or children. Failing to outline a guardian either in a will or by not having a will or estate plan will result in the courts deciding what’s in the best interest for your child or children. With such an important decision, it’s best not to leave it to the courts to decide.


The last type of fiduciary I want to outline is an agent, who is the party appointed in a financial power of attorney or health care power of attorney/medical directive. With a financial power of attorney, the agent typically has the ability and authority to access and manage an individual’s assets and money, including the ability to access bank accounts. With my time in the military, I have had more than a couple of instances when I was approached by the naïve servicemember who had a financial power of attorney prepared for him or her without being educated about the ramifications of their actions and decided to make a boyfriend or girlfriend the agent. That agent proceeded to clean out the servicemember’s bank account when they parted ways. Lots of power, lots of responsibility.


Likewise, with agents appointed by a health care power of attorney/advanced medical directive, the agent is appointed to the position of making health care and medical decisions on behalf of the incapacitated individual who appointed them. This power includes making life and death medical decisions. Again, lots of power, lots of responsibility.


Someone who is creating an estate plan should not feel obligated to appoint a son, daughter, or other family member if they are not the right person for the job. The focus should be selecting the right person or even an institution for the job. Instead of choosing an individual, you can also choose a trust department of a financial institution to act as a fiduciary. There are, however, certain restrictions that may prevent the institution from operating in that role, including the size of an estate. Institutional trustees also cost money to manage your affairs, but it may be worth it in order to preserve family harmony and settle an estate efficiently and effectively. This is their job and what they get paid to do, and they usually do it very well.


On a final note, you must also be aware of issues that can occur as the result of appointing multiple fiduciaries. For example, if you appoint co-executors or co-trustees to act together in your estate plan, then they need to act together to make a decision. If the appointed parties do not get along or if one of the parties in inept and fails to make decisions, it could result in gridlock and no decision is made, which delays settlement of the estate and drags out the process. It is also wise to provide alternate selections for fiduciaries if for some reason the primary fiduciary does not work out (i.e. dies, is incompetent, or just doesn’t want to act in that role).


If you’re in the process of creating and estate plan, you need talk through these issues with your attorney and make him or her aware of any potential issues you see with appointing someone, and then come up with solutions to meet your needs. If you’re a resident of Virginia and you would like to discuss any issues or potential issues you see with your fiduciaries, please reach out to us.
Probate or Pro-frustration
Posted on October 14, 2018
by Kevin McKannan
The term probate sends chills up the spines of both individuals and attorneys alike. Even those individuals that don’t know what probate really is will tell you that they want to avoid it. So, what exactly is probate? Probate is the court ordered legal procedure for settling the affairs of a person who has died (also known as the decedent) and overseeing the distribution of the decedent’s property to the rightful beneficiaries. It’s a process it starts with the court and ends with the court. I talk to many people who mistakenly think that if you have a will then you won’t have to go through the probate process. That couldn’t be farther from the truth. A properly written will acts as an instruction booklet to dictate what happens during the probate process (i.e. who gets your stuff). In almost all instances, it’s better to have a will (to provide the instruction) than not have a will (leaving it up to state).


Probate is initiated in one of two ways. The first way probate is initiated is for those cases when the individual dies testate, meaning that the individual died with a valid will. When there is a valid will, the executor of the will files the will with the Circuit Court Clerk’s Office along with presenting a copy of the death certificate. The second way probate is initiated is for those cases when the individual dies intestate, meaning the individual died without a will (or a valid will). When there is no will, an heir of the estate presents a copy of the death certificate to the Circuit Court Clerk’s Office. The Clerk’s Office where probate is initiated is that jurisdictional office where the decedent resided.


A personal representative is then appointed to the estate. This personal representative is called an executor if there is a will, or an administrator if there is not a will. This individual administers the probate process. The following is a very simplified overview of the process: first, the decedents property is collected and protected, while the beneficiaries and creditors are identified; second, the debts are paid along with any other expenses and taxes; and, finally, the remaining assets/property are distributed to the beneficiaries of the estate. The total time to complete probate is usually a minimum of 18-months, and that is usually for a relatively simple estate. However, with more complex estates, the probate process can take well in excess of 18-months.


There are several documents that are completed, presented, and filed throughout the process, including inventories of assets and personal property, forms for interests in real estate, and accountings of income and distributions to name a few. The Court is actively involved with the probate process for the purpose of resolving disputes, interpreting documents, and/or providing guidance.


A final note about the probate process is that it is a very open and very public process. What I mean by this is that all of the probate documents including the will are on file at the courthouse. This includes documentation outlining the assets of an estate (i.e. jewelry, antiques, coin collections, real estate). This can be a bit unnerving for some families knowing that all of their loved one’s assets are on display to the public if someone knows where to look.


I’m often asked how probate can be avoided. The way to best avoid probate are to have a properly drafted and funded revocable/living trust. Additionally, properly titling assets and ensuring that beneficiaries are named on accounts will enable property to transfer directly to a loved one upon an individual’s death. This has the effect of reducing the number of assets that need to go through the probate process (also known as passing outside of probate). These topics can and should be discussed with your estate planning attorney to ensure you have your estate properly structured. If you’re a resident of Virginia and you would like to learn more about properly structuring your estate plan to reduce the impact of probate, please reach out to us.
Differences Between the Two Primary Start-up Business Entities
Posted on June 23, 2018
by Kevin McKannan
The primary entities that individuals consider in initially establishing their businesses are the Limited Liability Company (the LLC) and the S Chapter Corporation (the S Corp). To a lesser extent is the sole proprietorship of which I’m not a fan, primarily because of personal liability when operating a business as you, the individual, versus operating under a completely separate entity like an LLC or an S Corp, which provide that additional layer of liability protection if set up and operated properly. There are those circumstances when a sole proprietorship may be best, but those situations, in my opinion, are limited and rare.


An LLC and S Corp are entities both considered “pass through” entities, meaning that there are not two layers of taxation. With these entities, the business owner is typically taxed and paid at the individual level and not at the business level, which makes them fairly easy to operate. The LLC and S Corp are both formal structures created according to state law and are separate entities from the owner or owners, who operate the entity. Separate is key. In operating under one of these business entities, there is typically protection against personal liability, at least for the most part, as long as the LLC or S Corp is operated separately from the owner or owners’ personal affairs. This means no co-mingling of funds between the owner and the business, making sure the owner and the entity have separate financial books/records and bank accounts, and ensuring that the owner is not operating the business as if it is a piggy bank for personal expenses. However, there are certain exceptions when an owner could still be held personally liable for business liabilities, including if an owner signs personally, as a guarantor, for a business account or liability.


There are, however, differences between these entities. The Internal Revenue Service restricts S Corp ownership unlike LLCs, which are not as restrictive. For example, S Corps can have no more than 100 shareholders or owners. With an LLC, there is no restriction on the number of members or owners. Additionally, non-U.S. citizens cannot be shareholders or owners of an S Corp, which is not the case with LLCs. Furthermore, an S Corp also cannot be owned by other business entities, such as another S Corp, C Corp, LLC, Trust or Partnership. Alternatively, an LLC is able to be owned by another business entity. The last major difference between S Corps and LLCs is that LLCs can have subsidiaries, whereas an S Corp cannot. This means that if you desire to have a parent business and other businesses under that main parent business (the technicalities which I’m not going to go into in this article), you would want to operate as an LLC.


One final note is that if you initially establish your business as an LLC and your business grows, you may want to convert your LLC to an S Corp at some point in the future since it may provide for more favorable self-employment taxes. Again, this will depend on your individual situation.


This is a very general and high-level look at the two most prevalent business entities for small and family businesses. Every situation is different and each individual situation may favor one entity over another. You should discuss with your legal professional the business entity that may be best for your business needs. I also invite you to contact us, and we can discuss this further with you as well. 
A 50,000 Foot View: The Revocable Trust & Last Will and Testament
Posted on May 29, 2018
by Kevin McKannan
One of the questions I hear from clients looking to start an Estate Plan is “Do I need a Trust?” There are distinct differences between a Revocable Trust, often referred to as a Living Trust, and a Last Will and Testament, which could determine why you may want to utilize one over the other. This is a 50,000-foot view and is by no means comprehensive.

For most individuals and couples, a Will is just fine and serves the purpose intended, which is distribution of assets upon an individual’s passing (i.e. who will get your stuff when you die). In simple terms, a Will permits an individual to provide for loved ones upon their passing according to their wishes as outlined in their Will. The process begins when the Will is probated upon an individual’s passing. There is a misconception among many people that, if they have a Will, the estate will not go through probate. This is not true, at least for the most part. However, there are some exceptions, including how assets are titled that could determine if assets go through probate. This is a topic of another post. Anyway, a Will is probated, which is the public process of settling an individual’s estate. There are fees involved with the probate process, which will vary depending on the size of an estate.

A deceased individual’s assets are distributed during the probate process according to the Will. Unfortunately, a Will does not permit for very flexible distribution of assets from an estate. That is, it may not be very effective if there are complex distributions to beneficiaries (those individuals receiving assets from an estate). Alternatively, if an individual’s distributions are somewhat straight forward and not complex, then a Will should be fine. 


That brings us to the Revocable Trust or Living Trust. A Living Trust is typically more expensive than a Will. In many cases it is at least double the cost. However, it is a private document that does not have to be filed with the court upon an individual’s passing (i.e. it is not probated) and is not public for everyone to see as is the case with a probated Will. Likewise, as long as a Trust is funded properly, an individual’s assets will not go through the probate process, which saves time, costs, and headaches. The emphasis there is funded properly, meaning assets need to be properly titled to the Trust, also referred to as funding the trust. I have run into more than a few occasions when I have been engaged by a new client, who already had a trust, and the trust was never funded. It is a huge waste of money because the client has essentially paid for something they are not using. The individual also runs the risk of not having their assets distributed according to their wishes, and it could ultimately result in the estate going through the probate process anyway if they pass away prior to funding their Trust.


A Living Trust is also very flexible regarding distributions to beneficiaries. With a Living Trust, an individual can have numerous and complex distributions, distributions that outlast immediate heirs and provide for grandchildren, and/or distributions that provide for charities over a period of years. Establishing a Trust can also help to assist in limiting conflicts between heirs that may not get along by appointing a third party institutional trustee (i.e. a bank). The institutional trustee acts in an independent role as trustee and, thus, is not emotionally invested with the parties and any internal conflict family members may have.


Ten to fifteen years ago, one of the reasons many individuals and families desired a Trust was to avoid federal estate taxes since the federal exemption amount was considerably lower than it is today. However, now that is not as much of an issue unless an individual has considerable assets. The current federal exclusion amount for an individual is $11,180,000 for 2018, and double that for a married couple. Unless an individual has assets in excess of the exclusion amount, then that individual will be exempt from paying federal estate taxes. However, the payment of state estate taxes will vary from state to state. In Virginia there are no estate taxes, so zero is paid in estate taxes at the state level regardless of the size of the estate.


That is the 50,000-foot view on the comparison between a Will and a Trust. Again, there are so many unique situations that could tip the scale one way or the other for individuals and families based on their own particular situations. I invite you to discuss it further with us. We'll be happy to answer any specific questions you may have regarding your own situation.  
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