Articles Posted in Inheritance Trusts

Many people want to avoid involving children in conversations about trusts. This article reviews some ideas that are helpful to consider when people decide whether to establish a quiet (or “silent”) trust or a trust that allows keeping the trust’s existence or details about the trust from beneficiaries as well as for the extent of time that the trust will remain quiet. 

Research reveals that approximately 70% of wealth transfers do not operate properly by the third generation. Not operating properly in this context involves the receiving generation losing control of assets in the trust. Routinely, this is not due to inadequate wealth planning or unwise investing, but instead to an absence of trust, transparency, and lack of planning. Before considering quiet trusts, it’s a good idea to consider the wider picture of family governance as well as preparing children for the assets that they will one day receive. Instead of considering quiet trusts as an alternative to wills, you should also consider involving your beneficiaries directly in discussions about the trust once they reach the appropriate age. What constitutes an appropriate age is influenced by the structure of a family, but in many cases is earlier than a person thinks.

How Wealth Is Transferred

In 2022, the annual exclusion for federal Gift Taxes was increased to $16,000 per individual annually. Even though a near-universal acceptance exists that gift-giving can play an important role in estate planning, a person should consider various issues before making gifts.

The way that gifts are made can have a substantial impact on beneficiaries. This is especially true if the party who receives a gift is below the age of 21. Direct gifts made to young people can have their own challenges which include exposure to creditors and limited control over how gifts are made. Consequently, it’s a wise idea in these situations to consider placing gifts in a trust.

The Danger Behind Direct Gifts

This year’s tax filing season has some hidden advantages. Amidst a backdrop of the Covid-19 pandemic and current tax laws, the Internal Revenue Service has predicted over 160 million Americans could start filing their federal tax returns at the end of January 2022. In regards to gift returns, this does not appear to be as nearly as problematic. The challenges primarily involve individual returns. Among the various tax strategies that clients have been using this year include under-the-radar trusts. 

In 2021, donors could give up to $15,000 to another person like a friend or family member without this amount is subject to taxes. Each spouse in half of a married couple could utilize this limit to pass on assets to beneficiaries. Internal Revenue Service returns for many gifts over the threshold (As well as some under this threshold) are due on April 18, which is the same deadline that individual tax returns are due this year. Additionally, tax-payers can pursue an automatic six-month extension for both of these returns.

The Role of Annual Gifts

In the recent case of Riverside County Public Guardian v. Snukst, a California appellate Court resolved an issue involving the Medi-Cal program, which is California’s version of the federal Medicaid program. The program is overseen by the California Department of Health Services. In Riverside, the Department of Health Services pursued payment from a revocable inter vivos trust for the benefits provided on behalf of a person during his life. After the man’s death, the probate required the assets in the revocable inter vivos trust be passed on to the sole beneficiary instead of the Department of Health. 

The Court of Appeals determined that federal and state law involving revocable inter vivos trusts required the Department of Health receive funds from the trust before any distribution to the beneficiary. Subsequently, the judgment was reversed and remanded.

For trusts to work as a person wants, the trust must avoid future disagreements and disputes among those impacted by the trust’s terms. This article reviews some of the best things that you can do to avoid trust disputes.

TV shows often depict unpleasant estate planning situations that can arise including a deceased person leaving assets to a former spouse. While these situations often do not occur in the way depicted on TV or film including the recent Netflix film I Care A Lot, a former spouse could end up receiving assets from your assets or other undesirable situations can occur if you are not careful. 

For a large number of people in New York as well as the rest of the country, estate planning documents including wills and trusts are a person’s final communication with their loved ones as well as the rest of the world. 

Make Sure to Revise Your Estate Plan

In times of economic uncertainty, estate plans can benefit substantially from flexibility. As the country both continues to recover from the COVID-19 pandemic as well as face the challenges brought on by new strains of COVID-19, it’s a good idea to consider how to make your estate plan flexible. Not to mention, looming changes brought on by changes to tax law also make it a good idea to consider flexibility while creating an estate plan.

What SPA Trusts Do

Special power of appointment (SPA)  trusts (or as they are sometimes called SPAT trusts) is a type of irrevocable trust in which either the creator or settlor of the trust grants appointment power to another person. The person who receives these powers functions in a non-fiduciary role to direct the trustee to make distributions to anyone except for the person who made the appointment of powers.

Elder Law Estate Planning is an area of law that helps us maintain control of our lives and assets in four basic areas.

First, Elder Law is planning for disability which includes naming people who will make decisions for us if we become incapacitated. You choose the people who will act on your behalf and thereby avoid the government taking over your life in a “guardianship proceeding.” Wills do not provide for disability because they are plans for death. Living trusts, on the other hand, name trustees who manage trust affairs during incapacity. Other necessary disability planning documents include a Power of Attorney that names people who make financial and legal decisions, a Health Care Proxy that names people who will make medical decisions and a Living Will that expresses end of life decisions such as resuscitation.

Second, another protection of Elder Law is asset protection planning from the costs of long-term care. Plan A to protect assets from long-term care and nursing home costs is to buy long-term care insurance. If you do not have long-term care insurance, Plan B is the Medicaid Asset Protection Trust (MAPT) that protects trust assets from nursing home costs paid for by Medicaid after the assets are in the trust for five years. The MAPT protects assets from home care costs paid for by Medicaid after the assets are in the trust for two and a half years.

THE PROBLEM AND THE LAWS RESPONSE

Sometimes when a person creates a trust they do not know all of the material facts, indeed cannot know all of the material facts regarding what is in the beneficiary’s best interest. Perhaps the trust expressly states that the beneficiaries cannot receive payment from the trust until they reaches 25. What happens if one of the beneficiaries is diagnosed with a medical condition with treatment that is not covered by his/her health insurance? Surely it would seem appropriate to allow the trustee or the beneficiaries to modify the terms of the trust. Situations such as these have always been an issue since the creation of trusts and Courts have dealt with this issue, with reported opinions going back centuries. One famous case that allowed for the beneficiaries to reform or modify a trust, Saunders v. Vautier, came out of England in 1841.

The principles outlined in the case helped to dictate the common law throughout Anglo-American law, namely that as long as the beneficiaries are all of the age of majority and not under legal disability a Court should allow a party to modify the terms of a trust. But unfortunately life is so much more complicated than that. Look at the tragedy of Bobbi Kristina Houston. Following Whitney Houston’s passing, her daughter (Bobbi) stood to inherit her estate in stages with the first disbursement of approximately eight million dollars at the age of 21. Bobbi’s grandmother Cissy Houston and aunt Marion Houston both sought to reform the terms of the trust granting Bobby Houston such sums, arguing that she, the beneficiary, would be at heightened and unacceptable risk of undue influence of third parties. When there is an allegation of undue influence, it is often the case that the trustor or settlor is alleged to have been under undue influence, not the beneficiary that may fall prey to undue influence. The need to reform a trust may have more mundane reasons such as mistake. Take the not uncommon example of a trust created in a will, called a testamentary trust, of a husband and wife, who, other than their names and other identifying information, have identical wills. At the signing of the wills by the parties, they mistakenly sign each other’s will and not their own.

An intentionally defective grantor trust is an extremely effective tool that accomplishes multiple objectives. First, it helps to minimize gift or transfer tax liability that a person may have to pay if the asset passed through normal probate process or it were gifted to the intended recipient. Second, it helps to step up the cost basis, which can be extremely valuable if the asset grew in value and then stabilized. It is often an effective tool for a small business owner who seeks to pass his/her business on to children or grandchildren. It is even more fitting if the same small business grew in size but then stabilized in value.

But, the question has to be asked. What’s with the reference “defective” in its name? It certainly is not a name conducive to marketing its rather impressive abilities. The term does not refer to something being broken (or busted).  The term defective has a simple explanation, it is defective as to income tax liability. To state it in the inverse may help to explain it better; the trust is effective for estate tax purposes. In other words, the trust does not eliminate all taxes in that the grantor still pays the income taxes generated by the asset that is the corpus of the trust, but it does eliminate estate tax liability. Furthermore, it is a “grantor trust”, as defined at 26 U.S.C. § 675, meaning that it satisfies the legal definition of a grantor trust.

WHAT ABOUT GIFT TAX LIABILITY?

As estate planning attorneys, we spend most of our time talking about how to structure an inheritance: putting the legal framework in place so that one can be confident that their wishes will be carried out. Professionals are eager to give advice about use of wills and trusts to save on taxes while passing on assets.

With so much focus on this aspect of the inheritance, far less guidance is given to the beneficiaries. What should you do after you receive an inheritance?

WMUR News published a helpful article last week that offers a good starting point on that very topic. The story runs through some basic tips about the next steps after receiving an inheritance. It is a worthwhile read both for those who expect an inheritance as well as for those who expect to leave one. After all, it is always possible to have discussions with family members about how you hope they use any assets they receive. In fact, the entire structure of an estate plan may change depending on how one hopes their generosity will be used by the next generation.

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