Why Do I Need a Trust?

When people hear the words estate plan, will, trust, or probate, they may have no idea what those concepts actually mean, but they know they deal with death, which is a difficult topic.  No one wants to think about the death of a loved one or their own death.  Often people are years into their retirement before they actually sit down to plan for what happens to their assets when they die.   An estate plan is something everyone needs, no matter what age, medical condition, or net worth.  It is a set of instructions on what their last wishes would be.

Probate–  So just what happens when someone dies?  If the person dies with or without a will, there is a legal process to collect and give the person’s things to their heirs, after paying off their debts.  That legal process is called probate.  In California, there is a special section of the local county courts that only deal with probate cases.  Typically, a case is filed in the courts by an attorney familiar with how the process works and the courts oversee the collection and distribution of assets, along with payment of any liabilities.  The process is just like any court case.  It can take a few months to a few years to finish and close the case.

Costs of Probate–  The current cost of probate just for the attorney to handle the case in California (as of March 2014) are:

Size of Estate                                   Compensation

First $100,000                                      4%

Next $100,000                                     3%

Next $800,000                                     2%

Next $9 million                                      1%

Next $15 million                                    1/2%

Excess over $25 million              “Reasonable amount to be determined by the court”

The size of estate is determined by the gross asset value.  This means that there is no deduction for the debts owed.  For example, someone with a home valued at $200,000 would get an estate value of $200,000 and compensation would automatically be awarded of $7,000, even if the home had a mortgage of $180,000 that would have to be paid off.

These amounts are automatic and set by law.  If there is a personal representative in addition to the attorney, the amount would double.  Also, the out of pocket expenses for any appraisals, filing fees, or other costs would be taken out of the estate as well.

Dying Without a Will–  Someone who dies without a valid will in place is said to die “intestate.”  Since there are no instructions on what to do with their stuff, the laws of the state decide what happens.  They are the default instructions on what to do.  So, if you wanted to give everything to only one son because the other son was foolish with money, you would be out of luck.  You have no say in what happens to your things.  That could mean things like a former spouse getting your money if the divorce was never finalized or some distant relative you hate getting everything when you would rather give your money to charity.  Your case would still go through a probate court to determine what happens to your things, so there is the time and expense of going through the court process.

Dying with a Will–  If you have a will, it must be valid and would be submitted to the court through probate.  The will tells the court what you want done with your assets.  For example, you may want to give a specific gift of some valuable jewelry to your daughter or give 10% of your assets to a local church.  The process and validity of wills is set by state law, but generally, it must be in writing, signed by the deceased, and witnessed in some fashion, sometimes by two or more witnesses and sometimes by a notary.  It also complicates things if there are more than one version of a will and no one knows which is the correct version or if the people signing as witnesses are also getting the bulk of the assets.  It is always best to have independent witnesses so there are no claims that the witness signature is not valid.

Alternatives to Probate– There are a number of ways to avoid probate courts.  The best way to avoid probate is to set out all of your wishes in a trust.  This is a written document similar to a will, but stays private and does not need to go through a probate process.

There are other ways to avoid probate for certain small estates, for transfers of property through joint tenancy or community property laws, or to beneficiaries automatically for things like life insurance.

The key advantages to consider about whether to get a will:

  • State your wishes to avoid assets going to unwanted people
  • Avoid fighting between family members after you die
  • Appoint a personal representative or administrator of your will to keep some level of control outside of the courts
  • Set terms on distributions to those below certain age or appoint trustee to oversee distributions and avoid mismanagement by the person receiving the money

Additional considerations to use a trust over a will:

  • Keep terms of the trust and its distributions private forever (a will goes into probate and gets entered into a court record)
  • Avoid probate process, time, and costs
  • Allows maximum flexibility and can be used with other asset protection

What is Asset Protection?

Asset protection planning is the method of preparing for the possibility of future lawsuits by rearranging the ownership of assets so that they are beyond the reach of potential third party creditors. It can act as a form of supplementary insurance in an overall strategy to protect you from the risks associated with your industry, businesses and professions, however, insurance policies have limits and exclusions.

FAMILY ASSET PROTECTION

  • Simple and complex will creation
  • Establishment of revocable, irrevocable and charitable trusts
  • Structure of family limited partnerships
  • Estate and gift tax review
  • Estate and probate administration
  • Estate and trust litigation
  • Limited liability entities
  • Asset protection trusts
  • Off-shore trusts

INDIVIDUAL ASSET PROTECTION

  • Pre- and post-marital agreements
  • Property ownership, contract drafting and review
  • Retirement planning (pension, profit sharing, employee stock option, 401(k) and individual retirement accounts)
  • Living trusts, special needs trusts, and other disability planning
  • Medical powers of attorney, durable powers of attorney and medical directives
  • Guardianship alternatives

BUSINESS ASSET PROTECTION

We provide businesses of every size with legal advice and assistance in order to help them organize and grow successfully.

Types of Trusts

A trust is basically a written contract that tells people what to do with your things and appoints someone (trustee) to follow those instructions.  There are many different forms of trusts.   They are usually divided into two categories, revocable, and irrevocable.

Revocable Trust–  These are trusts that can be revoked.  In other words, the trust can be changed, modified, terminated, or amended, usually by the people who setup the trust (in some cases referred to as trustor, settlor, or grantor).   This allows the people who are putting assets into a trust to have control to be able to change the trust and who gets those assets during their lifetime if circumstances or their wishes change.

Inter-vivos revocable (living) trust–  This is most commonly referred to as a “family trust.”  It is basically a trust that can be revoked or changed at any time during the life (inter-vivos) of the person or people who set them up.  This is the most common form of trust used in estate planning since it is very flexible and can be changed.  The terms of the trust become certain and require action only upon death of the person or people who set up the trust.  Many times these trusts become irrevocable trusts or create other irrevocable trusts for the beneficiary of the trust.  The most common form would be a couple with a trust for their family assets that puts  all assets into an irrevocable trust if they both died for the benefit of their kids, who may still be minors.  The trustee would oversee distributions of the assets to the minor children to be sure the money isn’t wasted and applied properly.   Although put into the trust, the assets are still controlled by the person who put them into the trust.

Irrevocable Trust–  This is just the general category of trust that cannot be changed, amended, or revoked at any time after it is signed, even by the person who created the trust.  There are some legal ways to revoke or amend a trust of this type, but require many steps to be taken to do this properly.

One of the biggest benefits of irrevocable trusts are their use in tax, gift, and asset protection planning.  They can be used to make gifts during a person’s lifetime of an asset into a trust for a beneficiary to have the gift be effective now, but not be given to the person until a later time.  For example, someone could put a home or large sum of money into an irrevocable trust that would only be distributed to their kids after a certain period of time, like when they reach the age of 25.  Even though the gift would be effective now and could not be taken back, the kids wouldn’t have access to the asset until certain conditions are met.

There are many forms of these trusts and have many different uses, but the main drawback is the fact that once formed and assets are put into them, the trust terms cannot be changed and assets cannot be taken out, except in very limited circumstances.   This makes them inflexible for general estate planning and are usually only for very specific cases or certain assets.  Since they cannot be changed.  you lose control over the assets and they are technically owned by the trust, which becomes a separate legal entity.  This can prove very useful for asset protection purposes because they are then outside of the hands of any creditors.  For example, if you put a rental home into an irrevocable trust for your kids benefit and you later get a judgment against you, the creditor could not come after that rental home since you no longer own it.  It is the property of the trust.

Although there are many different forms, here are some of the other types of specific trusts:

Martial Deduction Trust- QTIP (Qualified Terminable Interest Property)- This trust is used to maximize the martial deduction and avoid estate taxes.

Charitable Remainder Trust

Charitable Lead Trust

Charitable Remainder Annuity Trust (CRAT)

Charitable Remainder Unitrust (CRUT)

Bypass Trust (Credit Shelter Trust)-

Generation-Skipping Trust (Dynasty Trust)-

Intentionally Defective Grantor Trust (IDGT)-

Grantor Retained Annuity Trust (GRAT)-

Grantor Retained Interest Trust (GRIT)-

Qualified Personal Residence Trust (QPRT)- Used to hold someone’s primary residence to protect it from creditors and still allow grantor to live in the house for a period of time, then transfer to beneficiary.

Domestic Asset Protection Trust– Sometimes called “Spendthrift Trust” or classified as discretionary trust, support trust, personal trust, or shifting trust

Offshore Asset Protection Trust- Non-US irrevocable trust

Irrevocable Life Insurance Trust (ILIT)- used to hold life insurance policy and proceeds to distribute upon death for estate, tax, and asset protection purposes.

Testamentary Trust–  This is usually a trust that is created by a will upon death to hold certain assets and distribute them over time.

Booker Bill to Legalize Marijuana Nationwide

Senator Cory Booker introduced legislation in the US Congress to make cannabis / marijuana legal throughout the United States. He introduced the bill, called the Marijuana Justice Act, February 28, 2019 with support from other fellow 2020 candidates for president.

It is entitled Senate Bill 597 – “A bill to amend the Controlled Substances Act to provide for a new rule regarding the application of the Act to marihuana, and for other purposes.” However, the actual text of the bill is not yet available.

It still needs to make its way through Congress and each state could still make its own decisions on how to handle pot. The bill would remove marijuana from the federal list of controlled substances and provide incentives to states that take efforts to legalize or de-criminalize cannabis.

Passing the republican led senate may be a tough task for the bill, but it shows that opinion on marijuana has changed substantially over the last decade. Cannabis based businesses or those trying to break into the cannabis business in states like California where it is now legal still face significant battles to run their grow, cultivation, transportation, distribution, or sales companies. There are still relatively few places those businesses can store their money since most banks are hesitant to take funds from an enterprise still considered illegal under federal law with such banks being subject to federal oversight. They worry that the feds could come in and seize those assets or even shut the bank down.

Banking is just one of the many issues faced by cannabis business entrepreneurs in transitioning the once underground business into a legitimate business. Permits, licensing, dealing with taxes, and complying with regulations is a daunting task and many operations have decided to just stay in the shadows of the underground market to avoid dealing with those headaches; however, removal of cannabis / marijuana as a controlled substance on a federal level would help resolve some of the primary concerns of these businesses and owners that we deal with.

We continue to help marijuana businesses in California deal with these issues and welcome any changes made on the federal level.

Crowdfunding Update- SEC Adopts New Rules for Investments under Reg A+

Crowdfunding is going to continue to explode in the near future. On March 25, 2015, the SEC adopted new rules to implement the provisions of the JOBS Act and Regulation A surrounding raising capital up to $50 million by smaller companies and, most likely, raise that money online on their websites or through social media. (The rules don’t go into effect until 60 days after they are published in the Federal Register and here is a copy of the rules and the SEC Press Release).  The new changes have been called “Regulation A+” and hailed by many as significant improvements in giving smaller companies more access to capital.

There are requirements for certain disclosures and filings with the SEC as well as registration of the websites with the SEC as funding portals like a securities “broker-dealer.”  There are also tiers for the companies that depend upon factors like the amount of money raised and state what the requirements will be for each tier.  The end result is that you are going to see much more investment opportunities on the internet and social media geared towards everyday consumers without the requirement that they be classified by higher wealth or income as “accredited investors”, so caveat emptor and let the buyer beware!

For those who aren’t sure, what exactly is “Crowdfunding”?  Most of the discussion in this area involves securities laws.  When a company needs to raise money, they may offer an investment in the company by way of stock, LLC units, convertible debt, or other investments.  These are all securities covered by US and State law and regulated primarily by the US Securities and Exchange Commission.  The company does not need to be a publicly traded stock like a Facebook or Microsoft to worry about the SEC and state regulators.  Any company or person offering or selling stock or other “security” can be subject to regulation.  When companies want to raise capital without the expense of registering their stock with the SEC, they rely upon exemptions from registration.  Most of those exemptions limit companies to seeking investors who meet the definition of “accredited investors.”  These are basically people with over a $1 million net worth or whose income is over $200,000.  Smaller investors are often kept out of these investments by rules designed to protect them assuming that they don’t have the financial savvy to protect themselves.  Crowdfunding is an effort to raise money for a company or a cause from a large number of investors each investing a small amount of money.  It was difficult to use crowdfunding to seek investors for a company if you were limited to only finding “accredited investors” and fall under an exemption from registration.  The provisions of the JOBS Act and the rules that the SEC is issuing are meant to expand access to capital for smaller companies.  Part of the provisions of the JOBS Act were to allow and expand the use of crowdfunding.  Instead of a company raising $250,000 by seeking $25,000 each from 10 accredited investors, the company will now try to raise $250 each from 1,000 regular investors.

It is hard to know the future impact of crowdfunding and the JOBS Act’s attempts to increase access to capital due to many possible areas for possible fraud or misleading of investors.  It looks like the SEC is going to keep a close eye on this topic and they are taking years to be sure the rules implementing the JOBS Act from 2012 cover all possible problems.  We will have to wait and see the impact, but it seems like many smaller companies will be able to gain access to previously difficult to obtain capital.

Business Start-Up Toolkit- A Guide to Lean Startup Legal & Advisors

I was reading an article in this month’s (June 2012) Entrepreneur magazine by Ann C. Logue entitled “Beyond the Handshake- Having a business partner can be valuable.  Having the wrong-or no-partnership agreements can be disastrous.”  It details the experiences I hear every day by founders, entrepreneurs, and startups.  Most know they need quality legal and business advice in the early stages of their growth, but don’t want to spend the money on it.  With the advent of online document and template sharing, discount legal document prep companies, and companies out there like LegalZoom and RocketLawyer offering low-cost or free legal documents, I very often hear and see the impact that is having.  I have worked both in the trenches of many a cash-poor startup and also as an attorney advising these same type of companies or founders and wanted to give some additional guidance and solutions from both perspectives.

Education and information are some of the most critical areas for any start-up.  They need to know their product, know their market, learn how to commercialize their product or service, and how to go from idea to a functioning business.  I put together a handbook with some of the common areas operationally, administratively, financially, and legally in my Startup Bootcamp 101 e-Book (Click to download free pdf) to provide some basic education on those aspects of business start-ups.  There are web resources that I have tried to compile as well at this Blog, but there are tons of resources in the form of books and online materials.  Some recommended books are Venture Deals by Brad Feld, the Lean Startup by Eric Reis, and the Startup of You by Reid Hoffman.  I will discuss some of the do’s and don’ts when trying to stay within a “lean startup” mentality, but also when you do yourself a disservice by trying to cut corners to save money.

Learn more

“I didn’t realize an email or downloading an app could be an enforceable contract”

With the ever changing technology and world in which we live, practices of how things are done change over time.  This includes things like entering into contracts or modifying those agreements.  Many people try to rely on the “I didn’t sign anything” or “I didn’t know” defense to get out of a contract, especially in the online or electronic context.  These defenses may sound valid, but often people are not able to use them when it comes to things like email or online services.

Several laws were put into place on the federal level and adopted by some of the states that address concerns about online transactions or agreements.  The Electronic Signatures in Global and National Commerce Act (E-sign) and Uniform Electronic Transactions Act (UETA), and Uniform Computer Information Transactions Act (UCITA)(few states adopted this one) are all examples of such laws.  These laws seek to make electronic communication or transmission of information relevant in the modern world to create things like enforceable contracts.  They also put protections in place for consumers to avoid consumers being taken advantage of by things like hiding terms or conditions of use or making it clear that someone is being obligated by clicking on the “I accept” box or button.

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Is it bad if cofounders split a company evenly, but one cofounder provides all the seed capital?

Chris Barsness, Lead experience getting startups off the ground…

Not exactly sure how you mean skew the split, but here are the issues I see:

If you are both putting in something of major value to the company and those values are somewhat similar, that may be okay to split it as you discuss.  It depends upon your business and finance plans to some extent as well, e.g. how much more will be needed in terms of capital and how involved he will be in the business operations.

If he is just supposed to be a passive investor, what are the terms of conversion and when does that occur because when it does and it sounds like he gets 50% equity, how will a voting tie be handled?  You need to look to state law and your bylaws or articles of incorporation to see what voting percentages are needed for certain corporate actions to be taken.  A lot of M&A and funding (i.e. equity issuances) require certain majority voting of shareholders of the corporation (sometimes simply majority over 50%, sometimes more), so you need to understand how voting percentages can affect you down the road.

If you bring a lot of value and leadership to the company, you should probably try to bring the balance to your favor so you won't lose control of majority voting rights.  Also, can you pre-pay the note prior to conversion to buy him out if you bring in further rounds?  These can all be issues to consider in answering your question; however, cash is king and sometimes you can't cover all possible future strategic issues, so just getting the money in the door may be the most important thing right now.

See question on Quora

Once at a startup, how if at all can an employee increase his/her options or total equity ownership?

Chris Barsness, startup, finance, law, and tech nerd

I have put in performance based vesting of restricted stock units, straight stock grants, or stock options, but these equity grants typically need board approval or at least put into a board approved stock option or equity inventive plan.  That is sometimes difficult to draft into a grant since determining if someone hit those performance metrics is not always black and white.  The board and management are typically constrained by the terms of any approved plan, state and federal securities laws, and considering what others in the company will say if one person gets substantially more than someone else.

To answer your question, the typical equity or stock option incentive plans set aside a pool of a certain number of shares and when one person leaves, they usually have a short period of time (often 30 to 90 days post termination) to exercise any option rights they had.  If they don't exercise it, they lose it and that grants goes back into the pool for other employees.  You can ask for performance reviews for possible further equity or option grants if you hit certain performance targets every year, quarter, etc.  That is pretty fair to both the company and employee most of the time.

See question on Quora

Facebook shows lots of cash and revenue, high valuation

In Facebook’s S-1 registration statement, the most recent rounds of funding over the last year or so were sold at a price of $20.85 per share of Series A common stock. This places the valuation used for those raises somewhere in the neighborhood of making Facebook worth $86 billion, without taking into account any convertible preferred shares or option exercises. Some other items of interest are the consolidated financials. Facebook shows that as of 12/31/2011, it has close to $1.5 billion in cash, cash equivalents, and marketable securities. In addition, it also lists net income of $1 billion for 2011. Clearly companies have learned since the dot-com era on how to have real revenue recognition from an online company.We will have to see where the investment community puts for the initial share price, but I have heard rumors of somewhere in the $30 range putting the market cap well over $100 billion. To put that into perspective, that could approach or go beyond the valuations of Google and General Electric. It is funny to see reports on the news about all the “instant millionaires” or billionaires after the IPO. Anyone familiar with securities knows that it is not that easy. There are SEC rules, federal and state laws, as well as contractual restrictions on the ability to sell any stock that someone at Facebook may own. It appears the terms of any lock up and market standoff agreements exempt Mark Zuckerberg, but most executives, officers, directors, and employees will be restricted in when, how, and how much stock can be sold off. In addition, Mr. Zuckerberg still has to comply with securities laws when selling any stock. So, yes, there will be instant millionaires on paper, but someone has to own a large number of shares and be able to sell them to realize the status of a millionaire. That being said, more than likely, some founders, venture capitalists, early investors, and early key employees will do very well off their early involvement in the company.