Celebrating 10 years! 2007-2017

Wills - Planning for Estate Taxes

I periodically come across wills which unnecessarily create jeffm08/16/18
because most T&E attorneys are morons Generally speaking, dingbat08/16/18
Interesting POV. Any others? jeffm08/16/18
When was it drafted? If some time back then the relatively l alphadog1508/16/18
I see this all the time. Lots of estate plans drafted in the jorgedeclaro08/16/18
"Her rights are limited to invading the corpus for her healt wutwutwut08/16/18
Estate tax avoidance was the express purpose of the plan. T jeffm08/16/18
I've not seen language like you want but I haven't played wi wutwutwut08/16/18
there is so much more to estate planning than the estate tax dingbat08/16/18
That's what I see for the well written trusts we administer. esquirewalletsmatter08/16/18
Both of you - if you can share the language, please do. I'd jeffm08/16/18
hhilhil dingbat08/16/18
Guess I'll have to visit both! Using your language, it se jeffm08/16/18
I want to point out that the language came from the rules fo dingbat08/16/18
The donee is the wife. A general power of appointment is jeffm08/16/18
Limited POA, see above (dingbat). I personally enjoy directe esquirewalletsmatter08/16/18
I'm not reading it correctly, then. I'm sure a brief clarif jeffm08/16/18
In your scenario the wife wouldn’t be the one with the pow dingbat08/16/18
O I C. Thank you! jeffm08/16/18
Let me give you a tip. Instead of trying to make the soluti dingbat08/16/18
Given the ability to decide *after* death whether trusts are jeffm08/16/18
I already answered “most T&E attorneys are morons” Bu dingbat08/16/18
Just give it to someone else for benefit of someone else at esquirewalletsmatter08/16/18
Excellent points. While taxation should be a factor, it shou alphadog1508/17/18
Many attorneys are not estate planning attorneys, and dabble 2tierreality08/16/18
Spoken like a true practitioner. I hate when amateurs da dingbat08/16/18
I know some attorneys who do trust and estate litigation who loblawyer08/16/18
Interesting comments from all of you. Frankly, I have never jeffm08/17/18
what would you say is your typical client? Age and Net Wort dingbat08/17/18
Since the trust terms need to remain in the will, I now have jeffm08/17/18
IMO, if someone has a net worth of around half a million or dingbat08/17/18
TITCR ✅ esquirewalletsmatter08/17/18
dingbat: "I’ll repeat what I said earlier: generally if y jeffm08/17/18
I did use the word "generally". I fully agree with using it dingbat08/17/18
To be fair, it’s hard to account for every possibility. R qdllc08/17/18
That's why you want a professional, independent trustee. Ca esquirewalletsmatter08/17/18
Added bonus: I haven’t seen anything from the Cook Islands dingbat08/17/18
Then the attorney doesn't know as much as he's "respected fo dingbat08/17/18
Exactly. esquirewalletsmatter08/17/18

jeffm (Aug 16, 2018 - 10:54 am)

I periodically come across wills which unnecessarily create bypass trusts to avoid estate taxes. The problem comes when the value of the estate would not have generated a tax liability in the first place. Now that the testator is dead, leaving his estate of $3 million, the widow has to manage a trust for the rest of her life. Her rights are limited to invading the corpus for her health, education, maintenance and support, which can still be generous, but still...

Why don't the scriveners include language to the effect that, "If the value of my estate at the time of my death exceeds my unified estate tax credit at the time of my death, I leave my estate in trust as follows:?"

Or something similar?

There must be reasons why I never seem to encounter language like this.

Reply
dingbat (Aug 16, 2018 - 11:04 am)

because most T&E attorneys are morons

Generally speaking, if you come across a will with a testamentary trust, it's a good indicator that the attorney doesn't know what he or she is doing.

Coupled with that, a lot of attorneys can't be bothered to update their templates, and are still planning as if it's still the 20th century. I consistently come across clauses that were outdated years before the document was drafted/executed

Reply
jeffm (Aug 16, 2018 - 11:36 am)

Interesting POV. Any others?

Reply
alphadog15 (Aug 16, 2018 - 12:56 pm)

When was it drafted? If some time back then the relatively low $1mm exemption could have made a US estate tax a very real threat at the time of drafting.

Does the decedent’s domicile or former domicile have a state estate tax? The by-pass trust could’ve been created to avoid the state tax, which generally has lower thresholds. This was fairly common here in NY which up until 2014 had a relatively low $1mm exemption and no portability between spouses. Not so much the case anymore as exemption is $5.6mm, so only hits the ultra wealthy who end up fleeing to Florida anyway.

Any kids from a previous marriage? That could’ve been a factor.

Regardless, I agree with you that the language in the trust should have contained some sort of funding formula tied to estate tax exemption. Either that or a disclaimer will would’ve done the trick.

Reply
jorgedeclaro (Aug 16, 2018 - 6:27 pm)

I see this all the time. Lots of estate plans drafted in the 1980s which ended up with ultimately unnecessary trusts. Happened a ton with land-rich farmers.

Reply
wutwutwut (Aug 16, 2018 - 2:48 pm)

"Her rights are limited to invading the corpus for her health, education, maintenance and support,"


Just spitballing here, but it sounds less like an attempted estate tax avoidance mechanism and more like he simply wanted to limit her ability to use in life or on death further bequeath his estate.

Who takes or gets the trust after she dies? Does it go to his (their) kids?

Reply
jeffm (Aug 16, 2018 - 3:31 pm)

Estate tax avoidance was the express purpose of the plan. The problem is this: The estate was never large enough to incur an estate tax in the first place.

Maybe it was large enough years ago, as suggested above. In 1993, when I graduated law school, the federal estate tax kicked in at a mere 600,000. Times have definitely changed. We do not have an estate tax in Texas, so state tax avoidance is not an issue.

Anyway, while the bypass trust would have been useful as a tax avoidance device when the will was drafted, what *actually* matters are: (a) the value of the estate at the time of death, and (b) the federal unified estate tax credit. The guy recently died. The exemption is over $5 million. His estate is under $3 million. So, at the time of death, there was no tax advantage to be had. Yet, here we are, having to create and manage the bypass trust, so wife can be trustee and pay herself for HEMS. Remainder is to wife's descendants.

He could have left her everything, and she would not be limited by the terms of trust, and still, there would have been no tax. She could have disposed of as much as she wants, when and how she wants. Now, she can't. She will not have enough to worry about estate taxes when she dies, so the bypass trust was a good idea *if* he died with a much larger estate, but he didn't. What a waste.

It seems a better will would have included all the tax planning with a condition - "If my estate would be taxable at the time of my death, I leave it in a bypass trust... Otherwise, I leave it outright to my wife, free of trust."

Anybody ever see language like this in a will with tax planning?

Reply
wutwutwut (Aug 16, 2018 - 4:25 pm)

I've not seen language like you want but I haven't played with wills in a long time. But I agree generally - I don't see any reason why an if/then conditional trigger wouldn't work. (But again, not an expert)



Still, everything you've said about this makes me think the "express purpose" (tax avoidance) was just a cover for his ulterior motive - he didn't trust the wife not to remarry some gigolo and have the money then end up going to said gigolo, instead of to the kids.

Reply
dingbat (Aug 16, 2018 - 4:34 pm)

there is so much more to estate planning than the estate tax, many of which may be a good reason for such a trust (for example, worrying about the spouse getting remarried). Just to repeat what I said earlier, if someone only created a testamentary trust, my guess is that the attorney sucks donkey balls.

That being said, I provide something somewhat similar to what you're asking for. In the overall estate plan, the "solution" for the estate tax is left to the discretion of a particular party - whether that be the wife, the executor, an independent trustee, the trust protector, his childhood friend bob, or harvey the imaginary bunny. I prefer that over if/then type of sh-t, which would probably fly, but could also invite trouble with the IRS

Reply
esquirewalletsmatter (Aug 16, 2018 - 4:37 pm)

That's what I see for the well written trusts we administer. The TUW's are a crapshoot. Beauty of Delaware is you're free to craft it however one wishes.

Reply
jeffm (Aug 16, 2018 - 4:52 pm)

Both of you - if you can share the language, please do. I'd like to see it.

Reply
dingbat (Aug 16, 2018 - 5:08 pm)

hhilhil

Reply
jeffm (Aug 16, 2018 - 5:15 pm)

Guess I'll have to visit both!

Using your language, it seems that giving the trustee discretion gives the trustee a general power of appointment.

I give my estate to X, who can decide whether it goes directly to X or into Trust for X for life.

Why wouldn't that defeat the aim?

Reply
dingbat (Aug 16, 2018 - 5:33 pm)

I want to point out that the language came from the rules for an A/B/C split, to determine what goes into B and what goes into C.
As such, it's a limited power of appointment, not a general power of appointment.

As long as the recipient cannot be (1) Donee, (2) Donee's Estate, (3) Donee's Creditors, or (4) Creditors of Donee's estate, it's not a General Power of Appointment.

As a matter of drafting, I first make sure that any and all creditors are paid (gets rid of 3 & 4), that the appointment is only made after death (gets rid of 1), and that the options don't include the Estate.

You could even write "Choice A - bypass trust, or Choice B - my three children, larry, curly, and moe, in equal shares", and it's technically not going to the estate.

Reply
jeffm (Aug 16, 2018 - 6:20 pm)

The donee is the wife.

A general power of appointment is defined for federal estate tax purposes in the Internal Revenue Code §2041.[1] A general power of appointment is one which allows the holder of the power to appoint to himself, his estate, his creditors, or the creditors of his or her estate the right to have the beneficial use and enjoyment of certain property covered by the power of appointment. The holder of a general power of appointment is treated for estate tax purposes as if he or she is the owner of the property subject to the power, whether or not the power is exercised. Thus, the property which is subject to the power is includable in the power holder's estate for estate tax purposes.

Reply
esquirewalletsmatter (Aug 16, 2018 - 6:48 pm)

Limited POA, see above (dingbat). I personally enjoy directed trusts, spendthrifts, and/or APTs, but I don’t draft nor practice and those are whole other topics.

Reply
jeffm (Aug 16, 2018 - 7:19 pm)

I'm not reading it correctly, then. I'm sure a brief clarification by one of you will help.

I'm saying H dies. His will would leave everything to Wife to decide whether (1) it goes to herself, or (2) it goes in a bypass trust for her HEMS, with remainder to her descendants. The goal, as expressed above by dingbat, was to let someone decide whether it should go into trust for tax reasons or not.

If wife has discretion to decide whether she gets it outright or in trust, how is that not giving her a general power of appointment? If she has the power to appoint it all to herself, isn't that a general power of appointment? If she elects to put it all into a bypass trust, wouldn't the IRS say, "Nice try, but you had a general power of appointment?"

Reply
dingbat (Aug 16, 2018 - 7:24 pm)

In your scenario the wife wouldn’t be the one with the power to appoint - let a child decide

Reply
jeffm (Aug 16, 2018 - 7:38 pm)

O I C. Thank you!

Reply
dingbat (Aug 16, 2018 - 8:00 pm)

Let me give you a tip.
Instead of trying to make the solution fit your facts, figure out how to have your facts fit the solution.

It’s the difference between an ok attorney and a great attorney.

Reply
jeffm (Aug 16, 2018 - 8:05 pm)

Given the ability to decide *after* death whether trusts are necessary for tax purposes, why wouldn't every will just contain this simple 1-liner to let C decide whether A gets it, or it goes into trust for A, with remainder to B?

Is there a valid reason why they don't? Probably asked and answered, but it seems like language like this could go into every will, even wills for poor people. Why not? They might win the lotto, after all.

Reply
dingbat (Aug 16, 2018 - 9:13 pm)

I already answered “most T&E attorneys are morons”

But trusts aren’t just for tax purposes. I’ll repeat what I said earlier: generally if you see a testamentary trust the attorney who drafted it was a moron

Reply
esquirewalletsmatter (Aug 16, 2018 - 7:52 pm)

Just give it to someone else for benefit of someone else at the discretion of a directing party or a trust protector, but have the aforesaid dingbat considerations in mind to determine whether you want to limit it or be general (within the state statute)

Reply
alphadog15 (Aug 17, 2018 - 12:53 pm)

Excellent points. While taxation should be a factor, it shouldn’t be an overriding factor. I get various HNW clients who are so obsessed with estate tax that they insist on some ridiculous legal acrobatics that will undoubtedly end up placing a huge burden on their heirs to figure out distributions etc. but with some clients there’s such a fervent hatred of taxation that they just don’t care.

Reply
2tierreality (Aug 16, 2018 - 8:10 pm)

Many attorneys are not estate planning attorneys, and dabble in many different practice areas, so all they are doing is digging out their old form, and having their secretary swap names into into it. In short, they don't really know what their doing.

A lot of a attorneys are "will attorneys", and that's what they do. So when a client needs, or may need a testamentary trust for death tax planing reasons, then that's what the client gets.

As a general rule, wills are good for outright distributions, be it in the first or second death.

Testamentary trusts for the benefit of a spouse are generally are inefficient tool to get the job done right. Any attorney who advises using them for death tax planning is offering second or third tier advice, it's that simple. It works, but less efficiently.

Disclaimer trusts sort of accomplish what you are suggesting, but there are reasons not to plan with them.

IMO, good estate plans are "family driven" and not "tax driven". Thus, taking care of the non-tax concerns of family and client should be the focus. When I plan in this fashion, even if the family hits the lotto, and has a taxable estate, I design it so death taxes won't be triggered on the first or even second death. Portability has made this possible.

If there is a continuing trust in place upon the death of the first spouse, it's only there because it addresses a concern of the client, be it tax or non-tax.

Reply
dingbat (Aug 16, 2018 - 9:16 pm)

Spoken like a true practitioner.

I hate when amateurs dabble in my field - it’s often done wrong and cleaning the mess is a major nuisance. (Then again, I think some are banking on the extra work)

Reply
loblawyer (Aug 16, 2018 - 10:41 pm)

I know some attorneys who do trust and estate litigation who love attorneys that dabble on the planning side. Definitely generates some work.

Also, hate to be cynical, but I can see the obvious benefit of attorneys creating more trusts that will need to be administered by them later.

Reply
jeffm (Aug 17, 2018 - 12:34 am)

Interesting comments from all of you. Frankly, I have never had a client rich enough (at the time) to have to draft a will containing tax-planning trusts. By the time I went out on my own, the unified credit had grown enough to make it fairly uncommon to affect anybody I knew. Along the way, the amount kept increasing faster and faster to where it is now - where .2 % of the population is affected. Those are not my circles, unfortunately. :-(

Anyway, I have seen these bypass trust wills here and there and had to deal with them because - you guessed it - the family was of more modest means and would hire me, as opposed to some high-priced boutique which caters to rich folks. So, I get the ones that these scriveners don't get to see again when their client dies and the family is quite inconvenienced by these trusts.

I have had one family just agree to terminate the trust and assign their interests to mom. All's well that ends well, but why have to deal with curve-balls like that? Worse would be when the beneficiaries are not in agreement. Now, you're stuck with a trust.

Anyway, I appreciate the explanation. It's not that I will have the occasion to do any estate tax planning of that nature, but on the other hand, what you are saying is planning of "that nature" is obsolete and worse, destructive. You've indicated to me the magic language is far more simplistic - that, essentially, you don't need to do much of anything but "punt" the issue to a designee to be decided at a later date.

I've never seen a will like this. Can you link to one which is on-line somewhere?

Reply
dingbat (Aug 17, 2018 - 11:02 am)

what would you say is your typical client?
Age and Net Worth?


I do want to point out that with my solution you can't just say "stick it in a bypass trust, and we'll figure out what that means later", you need to actually spell out the terms of such Trust in the will.

Reply
jeffm (Aug 17, 2018 - 11:45 am)

Since the trust terms need to remain in the will, I now have a better idea what it would look like. That's quite a bit of overkill for my clients.

I have/had some clients worth as much as 3 million or so that would have me do wills for them. The few I have/had worth substantially more than that go to the estate-planning boutiques for that stuff. I would handle their normal business operations stuff, such as transactional, contracts, litigation, etc.

Reply
dingbat (Aug 17, 2018 - 1:26 pm)

IMO, if someone has a net worth of around half a million or more*, you should probably be providing a living trust with a pour-over will, and not a will with or without a testamentary trust.


Note: if someone has only responsible adult children and all assets can avoid probate through transfer on death deeds or beneficiary designations, then perhaps you can do a simple will.

Here are some reasons for a living trust:
1) in-built guardianship/conservator provisions
2) pre-nup requirements for when the surviving spouse gets remarried
3) divorce protection provisions for their competent children
4) individualized protections for their minor, incompetent, or morally deficient children
5) built-in "mortgage" for any home, business, farm, or otherwise overpriced asset that they may wish to keep in the family

6 -- Long-Term-Care Protection
This would require an irrevocable trust (or both a revocable and an irrevocable trust) and could cause an uncompensated transfer penalty if the client requires medicaid within 5 years.
Long-Term Care is the greatest driver of legal fees for estate planning today. You tell some little old lady that she won't be able to leave anything to her grandchildren, and she'll be more than happy to cough up a few thousand dollars for you. You find the poorest farmer around and tell him he'll lose his land to the nursing home, and he'll pull a few grand out of his arse to cover your fees.

Reply
esquirewalletsmatter (Aug 17, 2018 - 1:59 pm)

TITCR



Reply
jeffm (Aug 17, 2018 - 12:45 am)

dingbat: "I’ll repeat what I said earlier: generally if you see a testamentary trust the attorney who drafted it was a moron."

Guilty as charged! I'm not too embarrassed to admit it though because the only ones I include are for until a minor reaches 18 or 21.

Just out of curiosity, if you wanted to make a provision in your will for the event that a beneficiary is not an adult, what's it look like? This doesn't seem to be a problem which could be solved by a power of appointment.

Reply
dingbat (Aug 17, 2018 - 10:59 am)

I did use the word "generally". I fully agree with using it for minors or incompetents.

You could add in words along the lines of:

Should any beneficiary be under the age of 25 at the time of my death, then the share of my estate to which such beneficiary shall be entitled shall be held in Trust, and the Trustee for trust shall be DINGBAT, or if DINGBAT is unwilling or unable, the Trustee shall be ESQUIREWALLETSMATTER. The Trustee shall distribute as much of the Trust's principal and income as my Trustee, in my Trustee's sole discretion, shall deem necessary or advisable for such beneficiary's health, education, maintenance and support, until such beneficiary attains the age of 25, upon which time the Trustee shall distribute any remaining principal and income to the beneficiary

But, I would be a lot more inclined to say "Should any beneficiary be under the age of 25 at the time of my death, then the share of my estate to which such beneficiary shall be entitled shall be held in the form of a MINOR TRUST, as attached in Exhibit A.

The more simple you make it, the bigger the chance of you getting into trouble when it becomes an issue.

Reply
qdllc (Aug 17, 2018 - 7:48 am)

To be fair, it’s hard to account for every possibility. Right now, the tax limit is very generous. That can change tomorrow.

I looked into creating a trust. The attorney was respected for knowing his stuff. I wanted asset protection. The problem was that I didn’t want the trustee (my sister) to be able to do many of the things she could do without my approval (e.g., taking out a mortgage). He made it clear that the more control I retained, the greater the chance of the trust’s protections being overcome by creditors.

So, wanting to have a provision that negates the trust’s creation might serve to undo the protection sought by its creation. For tax avoidance, arrangements must be made in life. I’m not an expert on this, but I’d expect a trust created at death would be ripe for challenge since it clearly intends to evade a tax liability created when the person died. Throw in a provision that cancels the trust creation if there is no tax liability and you are blatantly stating your intent to avoid paying taxes.

Reply
esquirewalletsmatter (Aug 17, 2018 - 7:55 am)

That's why you want a professional, independent trustee. Can also do a distribution comm. in APT's or format it in such a way that someone (whom is not your sister) is a directing party. Just make sure one is solvent, does not retain control in an impermissible manner under the statute, although said control does not preclude income distributions at the discretion of a trustee, for instance. There is certain veto power the grantor can hold as well, can't think of it off the top of my head. Really, the world is your oyster in certain states. Just move situs to DE or SD. Want to get super crazy with your APT, the Cook Islands is supposedly the best of the best or the bees knees as the kids say these days.

Reply
dingbat (Aug 17, 2018 - 4:47 pm)

Added bonus: I haven’t seen anything from the Cook Islands appear on the paradise papers

Reply
dingbat (Aug 17, 2018 - 10:51 am)

Then the attorney doesn't know as much as he's "respected for knowing".

or, more likely, goes back to my earlier comment of applying the facts to the solution, rather than changing the facts. Attorneys who know their stuff will know how certain facts react to certain solutions, but good attorneys also "think outside the box" and will try to figure out how to alter the facts to achieve the required outcomes.

For example, while it's true that if you retain certain rights, you may not receive the protections you want, but that doesn't mean there aren't other ways to achieve your goals.

The Trust could have limited the Trustee's rights so that the Trustee can't do certain things (e.g. taking out a mortgage). Or,it could also have a Trust Protector, or a Special co-Trustee (say, your mom), who would need to grant authority for certain powers.

Or, depending on the state, you could pre-build a "Trust Modification", whereby you could step in and change the terms of the Trust to achieve a certain purpose. (this is extremely tricky, and there's a very good chance the attorney will f-k it up)

Reply
esquirewalletsmatter (Aug 17, 2018 - 12:26 pm)

Exactly.

Reply
Post a message in this thread