New York Estate Planning & Elder Law Blog

A trust, in particular an incentive trust, can be a very useful tool for someone who wants to provide for his heirs but is not sure that the heirs can use the inheritance constructively. A trust can encourage personal responsibility and accomplishment for the beneficiaries; however, it can also cause resentment on the part of the beneficiary towards the trustee. This usually occurs because the beneficiary is limited in the amount of funds that he can access, and the third-party trustee is making determinations about whether a distribution should be made.

The best way to minimize friction between the trustee and beneficiary is to make the terms of the trust as explicit as possible, but there will always be some level of interpretation on the part of the trustee. Another way to lessen issues between a beneficiary and a trustee when there is a dispute is to use a trust protector.

Trust Protectors

In an oral ruling last week a probate court judge ruled in favor of Shelly Sterling selling the Los Angeles Clippers against Donald Sterling’s objections. Judge Michael Levanas ruled in a probate Los Angeles Superior Court case that Shelley has the authority to sell the professional basketball team to businessman Steve Ballmer, who has agreed to purchase the team for $2 billion.

Appellate Proof Ruling

The judge’s ruling took the extraordinary step of granting Shelley’s request for an order under section 1310(b) of the California Probate Code. It states that the trial court can direct the powers of a fiduciary to exercise powers as though no appeal was pending. Under this provision, the sale of the Clippers could be completed regardless of an appellate court intervention on the part of Donald Sterling.

Recent studies have shown that talking about inheritance is still a taboo subject for many families, and the avoidance of the subject could lead to many issues down the road. An estimated $40 trillion of wealth will be passed down to heirs as the Baby Boomer generation passes away. According to a survey of thousands of clients done by financial managing giant UBS, over forty-six percent of people who plan on passing down their estate through inheritance have not discussed inheritance plans with their children and other family members.

Reasons for Avoiding the Talk

The reasons why people had not discussed these plans varied. Thirty-two percent of survey takers said that they hadn’t discussed it because they did not want their children counting on the inheritance. Over a quarter, twenty-seven percent, said that they did not want their children thinking that they were entitled to wealth, and around thirty-one percent of people simply did not see the inheritance talk as a pressing issue.

In the recent Tax Court case of Estate of Marie P. Frappolli v. Director, Division of Taxation, a domestic partnership lost estate tax benefits because they did not register as a couple with the state. As an alternative to marriage equality, New Jersey had introduced the option to register as a domestic partnership. Ms. Frappolli and her partner, Ms. Dorothea Angelou, qualified under the requirements for a domestic partnership in New Jersey, but they never filed with the state to make it official.

Marie Frappolli passed away, leaving her estate to Ms. Angelou. In addition, the couple lived in Ms. Frappolli’s home that was transferred to a joint tenancy with the right of survivorship in 1993. The tax division argued that because the couple never registered with the state the entire estate could be taxed. Furthermore, the value of the home could be added to the total value of the estate when determining tax liability. As a result, Ms. Angelou was hit with a transfer tax bill by the state for $178,845.57.

Legal Arguments Over the Estate

It was recently reported that prior to his death, Philip Seymour Hoffman rejected the advice of both his attorneys and accountant when planning his estate. Instead of leaving his estate to his children, Hoffman left his entire $34 million estate to his long-term girlfriend and mother of his kids. He told his accountant that the reason behind this was that he did not want to have “trust fund kids” or the stigma that goes along with it. Sadly, his poor estate planning decisions leave his estate open to a massive tax bill and other potential problems in later years.

Additionally, Sting also made news in the estate planning world recently when he announced that he did not want his six children to have trust funds, either. He told a reporter that he felt like a trust fund would be “an albatross around their necks.” Sting said that if they needed financial help he would give it to them, but he wanted them to have their own work ethic.

While both Hoffman and Sting had good intentions regarding their wealth and children, both superstars perpetrated common myths held about trust funds that simply are not true. There are many different types of trusts, each with their own rules and standards that you can set for them. Here are some of the most common misconceptions that people have about trust funds and estate planning:

A dynasty trust used to be a very popular estate planning tool that has declined in use over the last few years. A dynasty trust ensures that upon the client’s death their assets would still qualify for an estate tax exemption. In the past, if a deceased spouse did not have a trust, their part of the estate would not qualify for the exemption.

However, today’s rules for trusts and estate tax exemptions are different. A deceased spouse’s portion of the estate tax exemption passes automatically to their surviving spouse. Additionally, the tax exemption level has risen from $1 million to $5.3 million per person. As a result, a lot less people need to worry about a part of their estate being taxed upon their death, and dynasty trusts have mostly fallen out of use.

Benefits of Dynasty Trusts

America currently has 72 million people from the Baby Boomer generation, the oldest of which are turning sixty-eight this year. That is also the average age when people decide to create charitable remainder trusts. Estate planning attorneys are expecting a big increase in the number of charitable trusts set up over the next twenty years as the rest of the Baby Boomer generation begins the estate planning process.

Charitable Remainder Trusts

A charitable remainder trust is a trust that provides a distribution, usually annually, to one or more beneficiaries where at least one is not a charity. The distributions can be made over a period of years or for the life of the beneficiaries, but an irrevocable remainder interest is held for the benefit of one or more charitable institutions.