In 15 Seconds, What is a Trust?

A trust is not a separate entity.  Rather, it is a relationship between the trustee and the beneficiaries relative to the property in the trust.  The trustee holds legal title to the trust property for the beneficial interests of the trust beneficiaries.  For most trusts based on a written trust document, this relationship is spelled-out within the trust provisions, affected also by the applicable state law on trusts.

When a trust is a party in litigation, it is the trustee as legal owner of the trust property who is the party, not the trust as an entity.

What is considered the location (or legal situs) of a trust, generally speaking, is the location where the trustee is domiciled, or in some cases where the trust has the greatest level of contacts (e.g., where the trust property is located, where the beneficiaries live, where the creator (called the settlor) of the trust lives, etc.),

This situs is important in determining the jurisdiction and venue (where the court proceeding occurs) when the trust (vis-à-vis the trustee) is a party in a lawsuit.

To help illustrate that a trust is not an entity, the following signature line for a trust is in the trustee’s name, not the trust’s name.  It is, therefore, not an entity signature:

______________________________
John Doe, as Trustee for the
Jane Doe Irrevocable Trust u/a/d
August 3, 2012

By contrast, and as an example, an entity signature is used for a corporation:

Smith Investments, Inc.

By:  ______________________________
Name:   William Doe
Its:  Vice-President

Avoiding Costly and Burdensome Paper Cuts

I harp frequently on not getting into a position where you end up having to deal with time-consuming and potentially expensive hurdles in life – specifically, legal problems stemming from poorly-prepared or mediocre legal documents. These problems can create a costly, litigious death-by-a-thousand-paper-cuts.

This blog deals with a brief (but potentially very important) illustration of how a legal document as simple as a health care power of attorney requires close examination and review (and in this case revisions) so as to prevent these potential problems.

More particularly, this illustration centers on my revisions to the Georgia health care directive (health care power of attorney). The statutory form is under Section 31-32-4 of the Georgia statutes (statutory means this Georgia health care directive was crafted word-for-word by the Georgia legislature and the format of the directive is available under Georgia law for use by Georgia individuals). Most lawyers (including me) use the Georgia legislative version for our clients.

However, I revised the statutory health care directive, as allowable under Section 31-32-5(b) of the Georgia law, so as to avoid what could be a couple of unexpected and potentially burdensome issues:

One, as shown by my redline copy of these revisions (click here), the Georgia statutory version is not clear as to what triggers the effective start of the document. 

The statutory language states the health care agent can make health decisions “when I am unable to communicate any health care decisions” or when “I choose to have my health care agent communicate my health care decision.”    

The above two conditions are not clear in terms of whether some further evidence or action reflecting a triggering of either condition is necessary to authorize my agent to act on my behalf.

For example, John’s wife Jane shows up at John’s cardiologist’s office to discuss a medical problem on John’s behalf.   John is too sick to attend the office visit. The cardiologist reads John’s health care directive and asks Jane what does she have to reflect either that John is unable to communicate on his own behalf or what assurance or document does Jane have to show that John is now choosing to have Jane act on his behalf?  Will the cardiologist require a separate written authorization from John?  What if John is so sick that he can no longer communicate any aspect of his care? Will the cardiologist require John’s internist to examine John and provide a statement for Jane to evidence John is now incapable of communication? Will Jane have to reschedule the meeting?  Also, underlining these hurdles is the additional burden of dealing with the federal HIPAA medical records restrictions. 

I simply do not want any hurdles for my agent. Nor do I wish to spend time and money dealing with a disagreement over the above two conditions. Therefore, for greater clarity my revisions set forth that the health care directive becomes effective at the time I sign it, thus eliminating the need to consider either of the two conditions.

Second, the Georgia statutory version expressly prohibits my health care agent from having authority to deal with my “treatment or involuntary hospitalization for mental or emotional illness, developmental disability, or addictive disease”.   

By contrast, I prefer that my health care agent deal with the above circumstances. Accordingly, I revised the directive to eliminate this prohibition. If this prohibition otherwise remains in place, my family’s option will likely be to obtain a court-managed guardianship for purposes of dealing with these particular situations. This court involvement can be time-consuming, costly, and extremely frustrating.

Have this Discussion with Your Parents

Parents should set up their own estate planning so that after both parents’ deaths the estate property is held in trust for each child, not distributable outright.   Why?  

One, the trust set-up helps prevent the property from later being includible in the children’s own estates when they die for estate tax purposes.  Thus, the children’s own estate tax can be substantially reduced.

Two, the trust can provide asset protection for the trust assets, far superior than if the property is merely distributed to the children outright (think divorce, bankruptcy, penny stocks, internet gambling, bad business decisions, etc.).   

Here is a letter you can print and give your parents on these points.

I know.   Many of you are probably thinking at this point that you simply cannot broach this subject with your parents.  ‘We don’t talk about money in our family.’

And yes, the topic of money and estate planning in many families is often taboo, particularly in wealthier families.  This family silence, unfortunately, can be very costly.

The Practical Essence of What is a QTIP Trust (estate tax planning).

The term QTIP comes from Section 2056(b)(7) of the Internal Revenue Code (the federal tax laws) and is short for “qualified terminable interest property”.    This provision was part of comprehensive tax legislation in 1981.  The QTIP trust provides the greatest level of flexibility, including many post-death income and estate tax planning options.  [There is also a QTIP lifetime gift provision under Section 2523(f) of the Code that I do not cover  in this post.}

This post is limited only to the practical essence of what is a QTIP trust in the estate tax context.

In short a QTIP trust deals with the concept of delaying estate tax for a married couple until the death of the surviving spouse, regardless of the size of the first-to-die-spouse’s estate.   In other words, the first spouse can have, for example, $100 million of assets and no estate tax is payable until the surviving spouse dies, but only under the following conditions:

The first spouse’s property must either (i) pass outright to the surviving spouse or (ii) in trust for the sole benefit of the surviving spouse for her lifetime.

Prior to the 1981 enactment of the QTIP provisions as to the above item (ii) trust option, the only allowable trust for a surviving spouse was a trust that essentially had to give complete control of the trust property to the surviving spouse.  Under this complete-control circumstance the surviving spouse — under the terms of the trust — could end up redirecting the trust property to a new spouse or to her own children from another marriage, etc.

In other words, the first-to-die-spouse had to give over control of the $100 million to the surviving spouse in order to get the benefit of delaying estate tax until the surviving spouse’s death.  This created problems with second marriages, marriages with children form a prior marriage, and so forth.  The 1981 QTIP legislation gave back control to the first spouse, as follows.

Here is the essence of the QTIP.   In the above example, with a QTIP trust the first spouse still gets the benefit of delaying estate tax on the $100 million by having the property pass into a QTIP trust for the sole benefit of the surviving spouse for her lifetime.  But, here is the additional kicker.

The QTIP trust provisions enable the first spouse — under the written terms of the trust document — to limit the surviving spouse’s control over the QTIP trust so that she cannot redirect the trust property to anyone else, such as a new spouse, other children, the  yard man, etc.   As written by the first-to-die-spouse, for example, the QTIP trust can mandate that the property passes only to the first spouse’s children when the surviving spouse dies.

Furthermore, the tax law for QTIPs requires — as a tradeoff for the above estate tax deferral — that the QTIP trust has to give the surviving spouse all income each year from the trust assets. This is typically only the ordinary income from the assets, such as dividends, interest, etc.   In most cases this minimum payout does not include capital gains.

However, the first spouse is not limited in designing the written terms of the QTIP trust to giving the surviving spouse only the ordinary income.   The first spouse may write the QTIP trust provisions so that they are much more liberal, as desired for the design of the trust.

Finally, the QTIP trust law mandates that during the surviving spouse’s lifetime no distributions of any nature from the QTIP trust are allowable to any other persons other than the surviving spouse.

Maybe You Don’t Have to Pay that Penalty? (Georgia law)

Instead of reaching for the checkbook in response to a bill or invoice that includes a penalty charge (for example, a late penalty, termination fee), you might first stop and give thought about whether the penalty amount is unenforceable (in this instance under Georgia law). Maybe you have a good legal argument against paying the penalty.

As a general rule, when a party does not meet all the requirements of a contract that party is said to “breach” the contract.   When the breach occurs the next step typically is for the other party to seek damages resulting from the breach.

If the contract expressly refers to a penalty, such as a late-payment fee for example, that late payment penalty must satisfy the law as an appropriate component of damages.   If the penalty fails to meet the requirement for damages, it is an unenforceable penalty.  In other words, the mere reference in the agreement to a penalty is not sufficient alone to sustain the penalty.

I have used this unenforceable penalty argument successfully in a number of situations for me and for my clients.  [After all, many of us lawyers when it comes to personal business affairs are like cobblers with their shoeless children.]

The term “liquidated damages” means that the damages resulting from a breach are specified in the contract as a specific dollar amount.   This often is included in a contract in an effort to eliminate the need to prove-up evidence of actual damages (that would be called, by contrast, non-liquidated damages).

Under Georgia law, penalties or any other specified damage amounts are not enforceable unless valid as liquidated damages.   See Physician Specialists in Anesthesia, P.C. v. MacNeill, 246 Ga. App. 398, 401 (2000);  Caincare, Inc. v. Ellison, 272 Ga. App. 190 (Ga. App., 2005)

As expressed in the Physicians Specialists opinion all three of the following factors are required for a penalty or other fee to constitute liquidated damages:

(i)  A determination that actual injury or damages otherwise for the party seeking the penalty are difficult or impossible to estimate with accuracy;

(ii)  The parties to the contract mutually intended to provide for liquidated damages;  and

(iii)  Assuming the parties intended to include an express liquidated damages provision in contract, the amount of the specified liquidated damages must be a reasonable pre‑estimate of a probable loss in the event of a breach.


Buying Foreclosures: “Insurable Title”

Buyer beware.  The verdict and key point of this post:

During your due diligence period if you purchase foreclosure property you need to engage your own lawyer to give you a summary of the status of title before you close on foreclosure property.   This will inform you know as to what, if any, lingering liens and other title defects exist for the property.

Here is the background.  If you purchase foreclosure real estate you need to keep in mind the distinction between “marketable title” versus “insurable title”. Most selling banks will require an addendum to the property purchase contract specifying the bank at closing will give the buyer only insurable title (again, not marketable title). Banks will often also include a provision in the addendum to pay and provide the buyer at closing with a policy of title insurance limited, however, to insurable title.  Sounds great, right?

Well, not completely great. This payment of title insurance by the bank for the buyer is not a gratuitous gesture on the bank’s part; but, its payment of this title insurance helps the bank move the sale process along without the buyer seeking out an independent review of the title status.

Keep in mind the status of title deals with whether there are any impediments to the property deed, such as recorded federal or state tax liens, unpaid property taxes, judgments, mechanic’s liens, and so forth.

Here in brief is how the marketable and insurable distinction plays out:

First, if a seller under the contract gives the buyer marketable title at closing (not insurable title), this means the seller must remedy any defects in title prior to closing, such as the seller paying off any liens, or doing all the work necessary to get the liens removed, etc.  Thus, at closing the defects have been cured by the seller.

Second, and by contrast, a seller giving you insurable title does not require the seller to cure title problems at closing.  It means only that these problems are insured post-closing under the terms of your title insurance.  The closing is completed with these title defects unresolved.

Here is the rub. Insurable title means the title insurance will step in after the closing and defend the buyer but only if any of the lien or judgment holders actually step forward and levy the claim against the real property.  Thus, only then will the title insurance company defend and cure these claims. This sounds great, doesn’t it?  Well, yes, but only to some degree. Insurable title enables a smooth closing when you purchase the foreclosure property;  but, it also makes the title defects potential sleeping giants.

And, even if the giants never awaken, when you later sell the property your buyer will most likely require that you convey marketable title (which is typically the case). In order for you to transfer marketable title, you will have to do all the work (including possible negotiation and payment to satisfy the liens, judgments, etc.) so that you can transfer a deed at your closing that is free of title defects.  In other words, you are responsible for the title clean-up when you later sell the foreclosure property.

Finally, in some cases the title defects are so great that the title insurance company will not insure even with this insurable title.

Signing under “(SEAL)” [even many lawyers don’t know what this means]

We all frequently sign documents on a signature line that includes (SEAL) [or L.S.] at the end of the line.  What does this mean?   Here is the answer under Georgia law.   Other state laws may differ.

Under Georgia law at O.C.G.A. § 9‑3‑23, a document you sign under (SEAL) extends the statute of limitations to 20 years. That is, it gives a party 20 years (essentially beginning with the date of the signature) to assert claims against you as to the transaction or contract covered by your signature.  And, on the flip side, it gives you 20 years for you to assert claims against the other party if that party also also signed under seal.  By contrast, contracts under Georgia law not under (SEAL) are generally subject to a 6-year statute of limitations. Thus, the longer 20-year extension that the (SEAL) provides can be good or bad, depending on whether you benefit or are burdened by the extended period.

The second legal effect of a document signed under (SEAL) is a presumption that the parties exchanged the consideration covered by the agreement.  In other words, under (SEAL) one party cannot later assert, without having the burden to overcome the presumption, that the parties failed, or did not, exchange the consideration set forth in the document at the time of signing the document.  See Autrey v. UAP/GA AG Chem. Inc., 230 Ga. App. 767 (1998).

Technically, the effect of signing under (SEAL) is effective only if two requirements are met:  (1) The word ‘seal’ has to be in the body of the document (typically at the end just before the signature blocks), such as “signed under hand and seal, this _____ day of January, 2011”;  and (2) separately, the end of the signature line itself must include “(SEAL)” or “(L.S.)”.  See,  for example, Chastain v. L. Moss Music Co., 83 Ga. App. 570 (1951).

So, does this blog information have any practical benefit?

Yes, this notion of (SEAL) is not merely cosmetic.  It can have real consequences.  Therefore, one needs to think for a moment about whether to sign a document under seal, primarily as to the extension of the statute of limitations to 20 years.   Again, this can be good or bad depending on your position relative to the document.

Two, you can strike-thru the (SEAL) even if it is typed at the end of your signature line, so as to eliminate the effect of the seal for your signature, even though other parties on the same document don’t make the same strike-thru on their signature line. In other words, you might have a choice. Don’t always sign under seal without at least being aware of its effect.  My recommendation is that you make the strike-thru obvious, and place your initials next to the strike-thru.

Three. But there are some instances where the law mandates that a document has to be signed under (SEAL) to be effective.

I repeat the bottom line point:  You should always give a moment’s thought to signing under (SEAL), without blind agreement simply because you are presented with a document bearing (SEAL) on your signature line.