Trusts and Estates Lawyers: Three Roles
Trusts an estates lawyers can have three roles:
Trusts and Estates Lawyers: Generally
Trusts and estates lawyers do many things, including:
planning for incapacity
business succession planning
asset protection planning
administer a decedent’s estate
litigate matters arising out of the decedent’s estate
Trusts & Estates Field is Changing
As an area of law, trusts and estates changes in response to social mores and challenges raised by technological advances.
Since the 1960, avoiding probate has become increasingly popular. <!– Red Preface: “Since the 1960s, the law of wills has been undergoing a thorough renovation. Initially, the change was brought on by a swelling public demand for cheaper and simpler ways of transferring property at death, avoiding expensive probate.–>
With the increasing use of revocable trusts (and other trusts), the use of trusts is no longer just for high net worth people.
States have been abolishing laws that limit the accumulation of wealth by families by abolishing the Rule Against Perpetuities.
Medical advances have found new ways of creating life, which has raised issues about parentage and about who has the right to reproductive materials.
Medical advances have also prolonged life, which has increased the importance of long-term care planning and raised questions about the right to die instead of being kept alive by life-prolonging machines with a severely diminished quality of life.
There has been increasing malpractice for estate planning attorneys.
Asset protection planning has become increasingly important because our society has become more litigious and divorce rates have skyrocketed.
Wealth transfer taxes have also been changing. In 1986, the generation-skipping transfer tax was enacted. Since 2001, the federal estate tax has been weakened.
With Biden becoming president, the federal estate tax is likely to be increased, which means more people will need tax-based estate planning advice.
Importance of Legal History
Understanding the history of the law is important because it can help to explain the peculiarities in current law.
Read and write to stay informed.
Run “what if” scenarios and model how different possibilities (or changes in the law) will impact the client. See Paul Saganey, Tax Changes Are Coming, Wealth Management, March 3, 2021.
Share what you learn by blogging about it or creating informational pieces.
While working with other professionals is important, it can be dangerous as well because you risk losing control. The other professional might encourage your client to work with someone else.
Initial Client Meeting
Who Is the Client?
Do you represent one spouse or both spouses?
Client Intake Questions
For a person’s relationships, create a family tree. The family tree will help with administering the client’s estate after the client dies because anyone who is entitled to take under the laws of intestacy has the right to object to a will.
For a person’s resources, create a balance sheet.
Talking to Children About Wealth
When should parents start talking to their children about the parents’ money?
What are some common causes of sibling rivalry?
How can advisors help families avoid conflict between siblings?
Disinheriting a Child
New York law allows parents to disinherit children. Children don’t have a right to a forced share.
A Spendthrift Child
A spendthrift child should be given an inheritance in trust, not outright.
Equal Inheritance v. Fair Inheritance
How should parents treat their children? Treating children equally doesn’t always mean treating them fairly; treating them fairly doesn’t always mean equally.
Option 1: Equal Inheritance
When parents intend to treat their children equally, they should be careful:
- Give children similar assets because some assets might perform better or be taxed differently.
- Don’t forget to examine assets that the children might receive outside of a will (such a totten trust or retirement assets that have the child named as a beneficiary).
Option 2: Unequal Inheritance
Reasons parents might decide to leave a child more:
- One child might need more because the child is in a lower-paying career.
- The child provides care for the parent.
- One child has children while the others don’t.
- The child has a disability.
- The parents gave more to one child while they were alive (for example, to pay for college or help buy a house), so the parents want to equalize past gifts. “When the parent ignores past gifts and opts for equal shares, children who received less help during the parent’s life may resent that decision, lawyers say,” writes Susan B. Garland in The Unequal Inheritance: It Can Work, or It Can ‘Destroy Relationships’, NY Times, Feb. 19, 2021.
Downsides of an unequal inheritance:
- It can trigger fights among siblings after the parents die.
- Children who receive less might feel like their parents loved them less.
- Children who receive less might accuse the others of unduly influencing their parents.
“To head off sibling strife, parents should explain their decision to each child individually or as a group, or even seek mediation,” writes Garland.
Did the non-birth parent adopt the child? A step-child who was not adopted has no inheritance rights from a non-birth parent.
If there is a step child, a couple in a second marriage should not leave everything to the surviving spouse.
Outright or in Trust?
Should you give to children outright or in trust?
It many not be prudent to make an outright gift to a child that has a mental illness or an addiction.
Child with Mental Illness
Amanda Koplin, Amy Effman & Martin M. Shenkman, Planning for Beneficiaries With Mental Illness or Addiction, Wealth Management, Sept. 15, 2020 (provides discovery questions estate planners can ask clients).
After someone dies, brokerage accounts might be liquidated to provide the decedent’s estate with money to pay for expenses and make bequests.
Mortgage Interest Tax Deduction
Income Tax Consequences of Selling Your Primary Residence
If you owned your home for more than one year, selling your primary residence could result in a capital gains.
Capital Gain = FMV - (Cost Basis + Capital Improvements)
But the tax isn’t applied on this amount. There is a capital gains tax exclusion:
$250,000 for individuals.
$500,000 for married couples.
You must live in the house as your primary residence for 2 out of the past 5 years.
See Chad Langager, Is It True That You Can Sell Your Home and Not Pay Capital Gains Tax?, Investopedia, Feb. 16, 2020.
Passive Activity Losses
Foreign Ownership of U.S. Real Estate
Like-Kind Exchanges (1031 Exchange)
Regs. T.D. 9935
James G. Blase, The Limits Of Roth IRAs For The Wealthy, FA Mag, Dec. 29, 2020.
Converting Traditional IRA to Roth IRA
Converting traditional IRAs to Roth IRAs causes you to pay taxes sooner.
Planning for Large IRAs
IRA Distribution Rules Under Secure Act
Name Living Trust as Beneficiary of IRA?
Generally, a trust should not be named as the beneficiary of an IRA because the IRA would have to be quickly distributed and taxed.
One exception is the when the trust qualifies as a “look-through” or “see trust,” which typically allows the IRA to be distributed to the trust within 10 years.
Another exception is when the surviving spouse’s revocable living trust is named as the beneficiary of the IRA. The IRS has ruled that the surviving spouse can roll over the IRA into an IRA in the surviving spouse’s name because the surviving spouse was the trustee and sole beneficiary of the revocable trust, and so she was entitled to all of the trust’s income and principal. With the IRA in the surviving spouse’s name, the IRA would get a fresh start without reference to the decedent-spouse’s IRA. The surviving spouse would start RMDs based on the surviving spouse’s beginning date and life expectancy, and the surviving spouse can name beneficiaries of the IRA. (The IRS has allowed a similar result when an IRA is payable to an estate and the surviving spouse is the sole primary beneficiary of the estate.)
See Should A Living Trust Be Beneficiary Of Your IRA?, Wealth Advisor, Dec. 29, 2020.
virtual currency, such as Bitcoin, Ethereum and Litecoin
buying, selling, trading, airdrops, forks and initial coin offering
FinCEN Notice 2020-2 states that virtual currency is not a type of reportable account for purposes of the Report of Foreign Bank and Financial Accounts (FBAR), but that FinCEN intends to amend regulations to change this rule.
Net Worth of Client
Middle Class Client
High Net Worth Client
Ultra High Net Worth Client
Intestacy: The Default Estate “Plan”
Reasons for a Will
Opt Out of Default Intestacy Laws
Default rules might not match your desired goal.
Doesn’t provide for donating to charity or creating a trust for children.
Appoint a Guardian for Children
Creating a Will
It is possible to nominate more than one executor (co-executors) in a will.
An appointed executor has several responsibilites respecting the decedent’s assets:
- safeguard it
- appraise it
- sell it
- distribute it
A specific bequest of real property bests in the devisees immediately without the need to probate the will. But probating the will is necessary so a public record exists on which a title company can rely. And attorneys take an extra step and record a deed from the executor to the devisee to document the new ownership in the chain of title.
When the will contains language that is not coear because the language is ambiguous or the testator’s intent cannot be gleaned from the instrument.
When is a construction proceeding available?
canons of construction that sometimes apply
the use of extrinsic evidence in a construction proceeding
Some attorneys request a the signing of a Receipt and Release in addition to the Stipulation of Settlement.
A Stipulation of Settlement can incorporate the language of a Receipt and Release. Make sure the Stipulation of Settlement has the full release language.
See Jaclene D’Agostino, Stipulations of Settlement.
- Definition of a gift.
- When is a gift complete?
- Basis of a gift in the donee’s hands.
- Interest-free and low-interest loans.
- Gifts of services.
- Gifts by trustees.
- Anti-Clawback Regulations.
Definition of “Gift”
A “gift” has different definitions under common law and tax law.
The Tax Cuts and Jobs Act (TCJA), the tax reform legislation enacted in December 2017, increased the gift and estate tax exclusion amounts from $5 million to $10 million per individual for tax years 2018 through 2025, with both dollar amounts adjusted for inflation. On January 1, 2026, the exclusion amount is scheduled to revert to $5 million as adjusted for inflation.
Taxpayers can take advantage of the increased gift and estate tax exclusion amounts in effect from 2018 to 2025, and they will not be adversely impacted after 2025 if (as currently scheduled) the exclusion amount drops to pre-2018 levels.
The final regulations issued by the IRS provide a special rule that allows an estate to use the higher exclusion amount that applied to gifts that the taxpayer made while alive, rather than the lower exclusion amount on the date of death. “The purpose of the special rule is to ensure that bona fide inter vivos transfers are not subject to inconsistent treatment for estate tax purposes,” state the final regulations. (These regulations are popularly referred to as the “ant-clawback regulations.”)
There are questions that remain open:
(1) In section five, the final regulations state that the impact of higher exemption on the GST tax “is beyond the scope of this rulemaking.”
(2) Section 6 of the final regulations reserve the right to create anti-abuse rules at a later date that would prevent the special rule from being applied to certain gifts:
6. Anti-Abuse Rule
A commenter recommended consideration of an anti-abuse provision to prevent the application of the special rule to transfers made during the increased BEA period that are not true inter vivos transfers, but rather are treated as testamentary transfers for transfer tax purposes. Examples include transfers subject to a retained life estate or other retained powers or interests, and certain transfers within the purview of chapter 14 of subtitle B of the Code. The purpose of the special rule is to ensure that bona fide inter vivos transfers are not subject to inconsistent treatment for estate tax purposes. Arguably, the possibility of inconsistent treatment does not arise with regard to transfers that are treated as part of the gross estate for estate tax purposes, rather than as adjusted taxable gifts. An anti-abuse provision could except from the application of the special rule transfers where value is included in the donor’s gross estate at death. Although the Treasury Department and the IRS agree that such a provision is within the scope of the regulatory authority granted in section 2001(g)(2), such an anti-abuse provision would benefit from prior notice and comment. Accordingly, this issue will be reserved to allow further consideration of this comment.
(3) It is unclear whether the special rule affects gifts made using an exemption amount that the surviving spouse “ported” from a predeceased spouse (i.e., the Deceased Spousal Unused Exclusion).
Proposed Regulations, Federal Register.
Final Regulations, Federal Register.
Final regulations confirm: Making large gifts now won’t harm estates after 2025, IRS, IR-2019-189, Nov. 22, 2019.
Power of Appointment
A Delegation of Authority
A power is a delegation of authority from one person (the donor) to another person (the donee or the power holder) “to do any act in relation to property . . . which the donor of the power might himself do.” EPTL 10-2.1.
Not a Power of Attorney
Even though in both a power of appointment and a power of attorney, one person delegates power over property to someone else, in New York, you cannot refer to a power of attorney as a “power of appointment” because EPTL 10-2.1 explicitly states that a “power” “does not apply to a power of attorney to convey property in the name of the owner.” The reason is because a power of attorney is “regulated by other statutes.”
Uses of Powers of Appointment
A power of appointment adds flexibility to help deal with new circumstances from a change in family, wealth, investment returns, or the law.
A limited power of appointment to appoint among the issue of the donee encourages filial devotion because the donee can threaten to exercise the power and disinherit a troublesome heir.
Power of Appointment Terms
The donor is the person who creates a power of appointment.
The donee is the person who holds the power. The federal gift tax calls the person possessing the power “the possessor.” IRC § 2514(c).
The objects are the persons in whose favor the power of appointment may be exercised.
When the donee exercises the power in favor of an object, that object becomes known as an appointee.
If the donee doesn’t exercise the power, the property goes to the takers in default of appointment. The instrument creating the power can identify the takers in default of appointment. If the donee doesn’t exercise the power and the instrument doesn’t identify takers in default, then property passes back to the donor or the donor’s estate.
Classification of Powers
There are two types of powers of appointment: (1) A general power of appointment, and (2) a special power of appointment.
A power of appointment that can be exercised during life is known as a “lifetime power of appointment.” A power of appointment that can be exercised by will is known as a “testamentary power of appointment.”
Special Power of Appointment
A special power of appointment is any power that is not classified as a general power of appointment. (A special power of appointment is also referred to as a “non-general power of appointment” or a “limited power of appointment.” For example Restatement [Second] of Property: Donative Transfers § 11.4  uses the term “non-general.”)
Trustee of Discretionary Trust Holds Special Power of Appointment
The trustee’s discretion could be an unlimited discretion to pay income or principal to a named beneficiary. It can also be a discretion to spray income to a group of beneficiaries.
General Power of Appointment
Generally, a general power of appointment means a power which is exercisable in favor of the decedent or the possessor, his estate, his creditors, or the creditors of his estate.” IRC §§ 2041(b)(1), 2514(c).
The Internal Revenue Code excludes the following powers from the definition of a general power of appointment:
A power to consume, invade, or appropriate property for the benefit of the decedent which is limited by an ascertainable standard relating to the health, education, support, or maintenance of the decedent or possessor. IRC §§ 2041(b)(1)(A), 2514(c)(1).
A power of appointment created on or before October 21, 1942, which is exercisable by the decedent or possessor only in conjunction with another person. IRC §§ 2041(b)(1)(B), 2514(c)(2).
A power of appointment created after October 21, 1942, which is exercisable by the decedent or possessor only in conjunction with the creator of the power. IRC §§ 2041(b)(1)(C)(i), 2514(c)(3)(A).
A power of appointment created after October 21, 1942, which is exercisable by the decedent or possessor only in conjunction with a person having a substantial interest in the property, subject to the power, which is adverse to exercise of the power in favor of the decedent or possessor. IRC §§ 2041(b)(1)(C)(ii), 2514(c)(3)(B).
3/10/2021 - Continue this summary of the statute.
Beneficiary with Right to Withdraw Principal Has General Power of Appointment
Wording for it?
Exercised during life or at death?
- If a person fails to exercise the power, who pays the taxes?
- Who are the defaults if a person doesn’t exercise?
- When do powers of appointments give a step-up in basis?
- When do you give a power of appointment to impact the basis?
- If you give a special power of appointment to someone, does it impact their Medicaid benefits?
Are they subject to your creditors? When?
|Rule||Special||General: Lifetime||General Testamentary|
|Traditional Rule||No||No, unless donee exercises||No, unless donee exercises|
|Restatement (Second)||No||No, unless donee exercises||No, unless donee exercises|
|Uniform Trust Code (UTC)||No||Yes||[silent]|
|Federal Bankruptcy Law||No||Yes||No|
A special power of appointment is not subject to the creditors of the donee because the donee cannot receive the property as an appointee.
A general power of appointment where the donor is also the donee is reachable by the donor/donee’s creditors. This rule is similar to the one that allows creditors to reach self-settled trusts.
The rule for a general power of appointment where the donor is not the donee is more complicated. On one hand, the property doesn’t vest in the donee until the donee exercises the power. On the other hand, there is very little distinction between the appointive property and the donee’s own property because the donee has power and control over both.
Traditional Rule: Creditors cannot reach the appointive property unless the donee exercises the power. So, if the donee allows the power to lapse, then the donee’s creditors cannot reach those assets.
Restatement (Second): The same as the traditional rule.
Uniform Trust Code (UTC):
New York: Creditors can reach a lifetime general power of appointment, but not a testamentary general power of appointment.
Federal Bankruptcy Law: A lifetime general power of appointment passes to the donee’s bankruptcy trustee. A testamentary general power of appoitnment does not.
Can you give a general power of appointment in a QTIP?
Can more than one person hold a power of appointment over the same property?
Power of Attorney
When do you give an agent the power to gift to himself? Would you put a HEMS standard? Would you limit it so it doesn’t affect Medicaid?
When is a power of attorney a general power of appointment?
Making Trustees Responsible
Trustees are held responsible to beneficiaries in several ways:
The trust instrument may limit the power of a trustee.
As a check-and-balances measure, a trust can have more than one trustee, each with their own scope of powers.
Trustees have owe beneficiaries a fiduciary duty.
A trust protector can overlook the actions of a trustee.
When two witnesses sign the trust, do you need to use an attestation clause stating what the witnesses saw or want the grantor asked of them?
A revocable trust can cost up to $4,000.
Bypass Trusts (Credit Shelter Trusts)
Clayton Election Trusts
Using Trusts for the Marital Deduction
Power of Appointment Trusts
Trusts for Children and Grandchildren
Section 2503(c) Trusts
Life Insurance Trusts (ILITs)
Charitable Remainder Annuity Trusts (CRAT)
Charitable Remainder Unitrusts (CRUT, NICRUT, NIMCRUT)
Charitable Lead Annuity Trusts (CLAT)
Charitable Lead Unitrusts (CLUT)
Grantor Retained Interest Trusts
Grantor Retained Annuity Trusts (GRAT)
Grantor Retained Unitrust (GRUT)
Grantor Retained Interest Trust (GRIT)
Qualified Personal Residence Trust (QPRT)
Intentionally Defective Grantor Trusts (IDGTs)
Beneficiary Controlled Trusts
Spousal Lifetime Access Trusts (SLATs)
Domestic Asset Protection Trusts (DAPTs)
Incomplete Non-Grantor Trusts (INGs)
Qualified Subchapter S Trust (QSST)
Electing Small Business Trust (ESBT)
Special Needs Trusts
Income Taxation of Trusts
A trust is taxed as a separate taxpayer unless the trust is a grantor trust.
When a trust is taxed as a grantor trust, the grantor is treated as the owner of the trust for purposes of the income tax.
Granter trust rules are found in IRC §§ 671 - 679.
IRC 674 - power to control beneficial enjoyment
IRC 675 - administrative powers
IRC 676 - power to revoke
IRC 677 - income for benefit of grantor or spouise
Estate Planning Trends
Execution of Documents
Luke Harriman & Gregg M. Simon, 2020 Year-End Estate Planning: Planning in a Time of Uncertainty, wealthmanagement.com, Dec. 3, 2020.
(1) IRA planning after the SECURE Act
(2) Impact on taxes and estate planning of Biden as President. Will the Democrats’ control of the House and majority in Senate make an impact?
Technology for Estate Planners
Joseph G. Hodges Jr. & Jason E. Havens, Deftly Drafting Estate Planning Documents, Probate & Property, July/Aug. 2004.
Income Tax Planning for Physicians
How can a doctor, who is taxed at a high rate, keep more of the money that they earn?
Taxes are not just a burden. They can be a disincentive from earning more.
“You have to ask yourself: Does chasing an exceptionally high rate of return on an investment portfolio really matter if half of the gains will be lost to taxes while living and half of our clients’ net worth will be lost to estate taxes upon death?” writes Paul Saganey in Tax Changes Are Coming, Wealth Management, March 3, 2021.
Real Estate & Passive Activity Losses
A doctor has real estate investment. What are the tax consequences?
Passive rental losses are suspended when income is over $250,000. They accumulate indefinitely, and the losses will be deductible against ordinary income in years when income is below $250,000.
How much money do you need to retire?
Retirement planning calculator: https://www.nerdwallet.com/investing/retirement-calculator
Proof of Death
You need to prove the death of the person:
Death certificate (from NYC Vital Records)
SCPA provides for alternate proof of death
Generally, probate is a way of transferring property at death. Specifically, it is the process of transferring property at death through a will.
Avoiding probate started becoming popular in the 1960s.
IRS Collection Division
Statute of Limitations
criminal tax fraud
failure to file penalty
failure to pay penalty
Automatic Installment Agreement
Streamlined Installment Agreement
Regular Installment Agreement
Partial-Pay Installment Agreement
Defaulting on an Installment Agreement
The Offer-in-Compromise Program
Short-Term Deferred Offer (Periodic Payment)
outstanding tax liabilities
- Payroll Tax Penalties
representing taxpayers before the IRS (“IRS representation”)
U.S. Department of Justice Tax Division
Purpose of Taxes
The main purpose of taxes is for the government to raise money so it can cover its expenses.
What is a marginal tax rate?
What is a vaoue added tax?
Deductions for Home Owners
Several deductions might be available to home owners:
- Energy efficient upgrades to a home
- Home equity line of credit interest
- Home improvements to age in place
- Home office
- Mortgage interest deduction
- Private mortgage insurance
- Property taxes
See Margaret Heidenry, 7 Tax Benefits of Owning a Home: A Complete Guide for Filing This Year, Realtor.com, Feb. 1, 2021.
IRS Tax Lien
A tax lien is an enforcement tool that the IRS uses. With tax liens, you need to understand several things:
When does an IRS lien arise?
What is the difference between a tax lien and a tax levy?
What options do you have for selling assets out from under a tax lien?
What is transferee liability?
What is a nominee lien?
How do you release a tax levy?
How do you discharge a tax lien?
How do you subordinate a tax lien?
Tax Cuts and Jobs Act (TCJA)
The TCJA went into effect on January 1, 2018.
The TCJA increased the standard deduction, which meant fewer taxpayers itemized their deductions.
Definition of Income
Deduction for Depreciation
Deduction for Energy Efficient Upgrades to a Home
Deduction for Home Equity Line of Credit Interest
Deduction for Home Improvements to Age in Place
Deduction for Home Office
Deduction for Mortgage Interest
The deduction for mortgage interest is an itemized deduction.
Deduction for Private Mortgage Insurance
The deduction for private mortgage insurance is an itemized deduction.
The deduction for private mortgage insurance was reinstated by the SECURE Act. It will expire after 2020 unless Congress extends it in 2021.
Deduction for Property Taxes
The deduction for property taxes is an itemized deduction.
The deduction for property taxes is capped at $10,000 for married couples filing jointly.
3/8/2021 - I wonder: Are local school taxes deducted federally? Mallory said we pay around $6,000 in property taxes and $5,000 in school taxes.
Federal Estate Tax
Federal Estate Tax Has Been Decreasing
Since 2001, the federal estate tax has been weakened.
Unlimited Marital Deduction
The unlimited marital deduction allows married couples to make tax-free gifts and bequests to each other. It is central to estate planning for married couples.
Amount of Exemption
Impact of Higher Exemption on Estate Planning
Federal GST Tax
GST Tax: Enacted 1986
The GST tax was enacted in 1986.
GST Tax: Policy
The policy behind the GST tax is to tax wealth transfers at each generation.
GST Tax and Rule Against Perpetuities
What is the relationship between the GST tax and the Rule against Perpetuities?