Letters of Wishes: An Administrative and Moral Headache in Disguise?

1. LETTERS OF WISHES ARE THEORETICALLY SOUND

Trustees may have difficulties determining whether to make distributions when the grantor’s intentions are unclear. Consider a trust provision that provides for a beneficiary’s support in the form of reasonable medical expenses. The trust’s sole beneficiary approaches the trustee requesting a distribution for a gastric bypass surgery. The surgery can cost upwards of $45,000 and is the preferred method of achieving seventy-five pounds of weight loss. However, the surgery may be unsuccessful, and may result in post-operation complications and side effects that could impact the beneficiary’s health and require further distributions. Is the surgery a reasonable medical expense? Should the trustee make the distribution for the surgery?

Depending on the trustee, and his or her relationship to the grantor, the answer to the above questions is likely different. Scholars suggest that trustees should administer a trust “in [the] state of mind in which it was contemplated by the settlor that [the trustee] would act.”[1] If a spouse is serving as a trustee, he or she seemingly has ample opportunity to determine the grantor’s intent. If the drafting attorney is the trustee, the trustee may have gathered insight into the grantor’s mindset and goals while drafting the trust that could be applied to administration. Consider next a corporate trustee who enters the picture well after the grantor’s death. These trustees may have never met the grantor and are unlikely to have anything more than the trust instrument to guide administration. When contemplating a distribution to a beneficiary, each trustee should rely on the terms of the trust to determine whether the distribution should be made, although it is likely that each trustee’s perspective and relationship with the grantor will impact his or her decision.

A significant challenge many trustees face is that terms like health, education, maintenance, support, and best interests are as common in trust instruments as they are interpretive. Because these terms are interpretive, their application can be challenging even for the most diligent trustee; the interplay between these interpretive words/phrases and social, economic, and legal changes that occur during the administration of a trust can prove difficult to manage. In determining whether to make a discretionary distribution what must, or may the trustee rely on? Just the trust instrument? Extrinsic evidence? Personal opinion?

A. Enter the Letter of Wishes

A letter of wishes is a document that allows a grantor to express his or her goals for the trust. Information included can vary, but they offer information about how the grantor wants the trust to be administered by giving insight into the grantor’s state of mind, opinions on distributions, and issues that may arise with the trust’s beneficiaries.[2] These letters can serve two separate but equally important purposes. First, a letter of wishes can give the grantor the sense that the trustee fully understands their goals for the trust and can administer it in accordance with those goals. Second, letters of wishes can give a trustee something to proverbially hang their hat on when looking for guidance as to whether to make a distribution as the letter can clarify a trust instrument’s general terms.

In the example above, a letter explaining the trustee’s hesitance toward making distributions for cosmetic medical procedures would be valuable. Instead of guesswork, a letter outlining the grantor’s interpretation of the trust’s terms can assist a trustee in choosing to make distributions with greater confidence and flexibility.[3] This is the crux of the argument for many proponents of letters of wishes.[4]

2. LOGISTICS OF INCORPORATING A LETTER OF WISHES INTO AN ESTATE PLAN

Though letters of wishes are thought of as an informal tool[5] drafted by the grantor for the trustee’s benefit, the timing and method of drafting should be considered in relation to state trust laws by any practitioner who recommends its use to a client. Consideration should also be given to whether the letter should be incorporated into the trust as an exhibit or whether the letter should bind the trustee.

A. What is the Ideal Time to Draft a Letter of Wishes?

Practitioners should consider advising clients to draft letters of wishes close to the time the trust is settled in order to avoid disputes over whether the letter is representative of the grantor’s intent.[6] The following is illustrative: in 2017, immediately after selling his business, at his attorney’s advice, Grantor executes a discretionary trust for Grantor’s grandchildren to provide for their college educations. In 2022, the Grantor is now retired and has time to finally read the education trust that his attorney prepared for him.  At that time, the Grantor writes a letter of wishes explaining the grantor’s preference for distributions from the trust that further the pursuit of a STEM college education by Grantor’s grandchildren.  Shortly thereafter, all but one of Grantor’s grandchildren enroll in college to pursue liberal arts degrees.  The golden grandchild enrolls in a STEM program at his grandfather’s alma mater. The letter of wishes, drafted well after a significant passage of time, reflects that perhaps the Grantor’s opinions and relationships with his grandchildren may have changed. The trust does not have sufficient funds to cover the college tuition for all of the grandchildren and so the trustee must determine whether or not to make tuition payments for each grandchild or only certain grandchildren.  What is the trustee to do – follow the terms of the trust or follow the current wishes of the grantor?  Because of the timing as to the execution of the letter of wishes – there is an argument that the letter of wishes should be ignored.

Hugh v. Amalgamated Tr. & Sav. Bank[7] illustrates how timing can impact the effectiveness of a grantor’s extrinsic letters.[8] In Hugh, the Illinois Court of Appeals determined that the grantor did not gift land to a trust for the benefit of his grandchildren in part because letters expressing the grantor’s desire that the land be gifted to the grandchildren’s trust were delivered to the trustee several years after the trust was settled.[9] The court noted that the grantor’s exercise of dominion and control over the land in the time between when the grantor settled the trust and drafted the letters and when the letters were actually delivered to the trustee indicated that the grantor’s intent was to retain the property and not to make a gift.[10] Therefore, given the complications that may arise, the timing of the letter is very important.

B. How Involved Should an Estate Planning Attorney be in Drafting a Letter of Wishes?

Practitioners should consider their own involvement in drafting a letter of wishes and how differing degrees of involvement can impact the trust. Letters of wishes are often personal documents that allow a grantor to express his or her feelings about beneficiaries, philosophy on distributions, and goals for how the grantor’s legacy should be maintained.[11] Though the letter may be of great importance to the grantor, significant attorney involvement can complicate the trust drafting process by risking inclusion of precatory language in the trust instrument and presenting an opportunity for a grantor to incur significant legal fees for something of questionable utility. Executing a letter of wishes in conjunction with a trust instrument may cause a grantor to request that language from the letter be incorporated into the trust. Though many estate planning clients are sophisticated, the risk of creating ambiguity in the trust with emotional, personal, and imprecise language may be lost on them.[12] This risk should not be lost on their attorney. Time constraints and workload may cause estate planning attorneys to devote little thought to the letter of wishes, even though the letter may be important to the client and may risk insertion of precatory language into the trust document.

C. To be Effective, Must a Letter of Wishes be Incorporated into the Trust?

As letters of wishes are not legally binding on the trustee in and of themselves,[13] grantors must rely on a trustee feeling morally and ethically obligated to administer the trust in accordance with the letter. A solution to this problem may be to incorporate the letter of wishes into the trust as an exhibit. Matter of Estate of Kirk suggests that this option may be feasible as the court found a handwritten note attached to a formal trust amendment to be part of the amendment for purposes of administering the trust.[14] However, some scholars counsel against this, as attaching the letter as an exhibit would make the letter discoverable by beneficiaries, who may use the letter as an opportunity to increase the likelihood of getting a distribution or may find the letter hurtful.[15] Practitioners should counsel clients using this option to be sure that the letter does not contradict the trust instrument’s terms. Contradictions of this sort could be used as evidence of ambiguity, subjecting the trust to attacks from dissatisfied beneficiaries.

D. Should the Letter be Binding on the Trustee?

Scholars agree that letters of wishes should be made explicitly non-binding on the trustee, arguing that binding letters would interfere with the trustee’s discretion and hinder administration.[16] This argument is bolstered by the fact that the purpose of using more general language in a trust instrument is to provide the trustee with flexibility so that the trust can adapt to social, legal, and economic changes that impact administration.[17] Although the lack of litigation over letters of wishes may indicate that letters of wishes are often taken into account and used in administering the trust,[18] grantors should understand that the letters are deliberately non-binding in order to reap the benefits of adaptability. Grantors and their counsel should evaluate the risks of making a letter of wishes binding, and consider the benefits of a non-binding instrument.

3. DIGGING DEEPER: ARE LETTERS OF WISHES TRULY A POSITIVE ADDITION TO AN ESTATE PLAN?

Fast forward 10 years in the hypothetical posed in Part 1. Suppose you are approached by the trustee who has just found the letter expressing the grantor’s distaste for cosmetic procedures. Also assume that the trustee just received the gastric bypass distribution request. The trustee asks the attorney whether he or she must rely on the letter, what do you tell them? What if they ask whether they can exercise their discretion? Or what the trustee’s moral obligations are? Could the letter be deemed an amendment? The answers are unclear, but the following section applies scholarly opinion, statutory authority, and case law to explain how these issues can be addressed by practitioners.

A. Does the Trustee Have to Rely on the Letter?

While scholarly opinion is generally favorable toward letters of wishes, issues can complicate the positive purpose for which these letters are drafted. The first issue is whether the trustee has any obligation to rely on a letter of wishes. While trustees have historically abided by letters of wishes,[19] the letters are usually non-binding and often do not need to be disclosed to beneficiaries.[20] This means that the trustee has no legal obligation to make or forego making distributions in accordance with a letter of wishes.[21] Further, as noted by the restatement, letters of wishes are generally considered private correspondence between the grantor and trustee that offer guidance to the trustee, suggesting that the trustee has no duty to consider or abide by the letter in making a discretionary distribution.[22] Practitioners should be sure to discuss this with clients when deciding who to name as trustee to ensure that the client picks a trustee who is capable of managing the trust financially and effectuating the grantor’s intent to the full extent allowed by the law.

B. If the Trustee Wants to Consider a Grantor’s Letter of Wishes, Can They?

Further, a trustee may not be able to consider a grantor’s letter of wishes even if they want to. For example, Illinois common law provides that the general goal in construing a trust is to determine the grantor’s intent and to give effect to that intent if it is not contrary to law or public policy.[23] The grantor’s intent is to be determined solely by reference to the plain language of the trust itself.[24] Extrinsic evidence is only appropriate if the trust is ambiguous and the grantor’s intent cannot be ascertained.[25] When the language of a document is clear and unambiguous, a court should not modify or create new terms.[26] While Illinois courts have not addressed how a letter of wishes should be treated in relation to these rules of interpretation, Illinois’ Court of Appeals in In re Estate of Crooks noted that a decedent’s letter directing parcels of land to be transferred to him individually—which contradicted his previously executed will, trust, and quitclaim deeds directing the parcels to be transferred to a revocable trust—could not be used by a disgruntled heir to create an ambiguity in the decedent’s will, trust, or quitclaim deeds.[27] This suggests that a letter of wishes would be treated similarly unless there was an ambiguity in the four corners of the trust.

Practitioners should ensure that they are familiar with the statutes and common law governing trust interpretation for the state that governs the trusts they administer. While Illinois is fairly restrictive as far as what the trustee can rely on in administering the trust, Florida is more liberal.[28] In Kritchman v. Wolk, Florida’s Court of Appeals found that co-trustees of a revocable trust breached their duties of prudent administration and impartiality by failing to pay a beneficiary’s education expenses as requested in a letter from the grantor to the co-trustees prior to her death.[29] As such, the state where a letter of wishes is executed could impact whether a trustee may refer to it in administering the trust.[30] Further, the trust’s terms should be considered carefully to determine whether a letter of wishes or other written directive from the grantor should have any impact on administering the trust.

C. Moral and Ethical Obligations

While a trustee is unlikely to be required by law to consider a letter of wishes when administering a trust—and may, in fact, be prohibited from considering such a letter—they may feel a moral or ethical obligation to consider the grantor’s wishes when making discretionary distributions. Scholars suggest that trustees should administer trusts “in the state of mind contemplated by the settlor.”[31] Scholars also note that letters of wishes are “[m]oral and emotional accompaniments to a formal distribution scheme, [which]. . . have an important role to play in the planning process.”[32] This suggests that trustees may feel obligated to administer a trust consistently with a grantor’s letter of wishes. However, as shown by Kritchman, trustees without a personal connection to the grantor may feel no obligation to administer trusts in accordance with a grantor’s letter of wishes and may instead rely solely on the terms of the trust.[33] grantors and attorney’s should consider a potential trustee’s moral or ethical disposition towards a letter of wishes because this sense of obligation may depend on the trustee’s relationship with the grantor.[34]

D. Is the Letter an Amendment?

Depending on the circumstances under which a letter is drafted and signed, in addition to the letter’s content, some could argue that a letter of wishes is an amendment to a trust. Though many trust statutes require amendments to be made in accordance with the trust’s terms, a significant number of states allow a trust to be amended “by any other method manifesting clear and convincing evidence of the settlor’s intent.”[35] Arguably, a letter of wishes expressing a grantor’s specific desire as to what distributions should and should not be made could function as an amendment. However, no United States federal or state court has addressed the issue.

In Illinois, a trust can be amended by reserving the right to amend in the trust instrument.[36] If the trust instrument specifically describes the method for amendment then that method alone must be used to amend the trust.[37] Scholars suggest that Illinois trusts should be drafted in such a way that all amendments must be prepared by a lawyer familiar with the trust instrument.[38] Despite this guidance, the status of a letter of wishes as an amendment to an Illinois trust uncertain. While it is possible that a letter of wishes could be drafted in such a way that it meets the trust’s requirements, it is dependent on the trust instrument’s amendment provision(s). If the grantor wants their letter to function as an amendment, the trust instrument would need to be drafted to ensure that the letter meets the trust instrument’s formal requirements. Drafting a trust instrument in this way may not be advisable because of the potential for introducing precatory language and ambiguity into the trust.

An example serves to further illustrate this issue. Consider a marital trust instrument that allows discretionary distributions for either the beneficiary-spouse’s support or best interests. Assume that both terms are defined with substantive differences. Suppose the grantor drafts a subsequent letter of wishes explaining how the grantor would determine what is in his or her spouse’s best interest, but uses language that mirrors the trust instrument’s definition of support. Should the trust be considered amended to reflect a support standard for all discretionary distributions? The answer depends on the letter’s wording, governing state law, and the trust’s terms. In Illinois, such a letter would be unlikely to amend the trust unless the trust instrument’s amendment provision was drafted to allow for such a letter to function as an amendment.[39] However, a letter of wishes may be more likely to amend a trust in states like Wisconsin[40] and Kentucky[41] that follow the UTC’s more lenient provision.[42]

4. CONCLUSION

While letters of wishes may aid a trustee in administering a discretionary trust and provide the grantor with peace of mind, grantors and their counsel should think carefully about whether a letter of wishes is appropriate for the grantor’s situation. The uncertain state of the law as to the effect that a letter of wishes has on trust administration suggests there is more to letters of wishes than meets the eye. Though scholars generally praise letters of wishes as a means for a grantor to “communicate their cultural beliefs, values, and practices”[43] or as “helpful to a trustee in ascertaining the settlor’s state of mind, objectives, and purposes in establishing [a] discretionary trust,”[44] counsel should be aware that a letter may cause problems in administering the trust instead of solving them.[45] Practitioners who recommend a letter of wishes and/or whose clients choose to include them in their estate plan should advise clients as to the uncertain status of letters of wishes as a viable estate planning tool. Further, any decision to include a letter of wishes in an estate plan should only be made with an understanding of state trust statutes and case law and careful consideration of who to name as trustee.


[1] Austin Wakeman Scott & William Franklin Fratcher, The Law of Trusts § 187 (2006).
[2] See Alexander A. Bove, Jr., The Letter of Wishes: Can We Influence Discretion in Discretionary Trusts?, 35 ACTEC J. 38, 39 (2009).
[3] Id.; Edward C. Halbach, Problems of Discretion in Discretionary Trusts, 61 Colum. L. Rev. 1425 (1961) (arguing that the trustee should be given notice of the trust’s purpose and the grantor’s goals and beliefs to administer the trust in the way the grantor intended).
[4] See e.g., Bove, supra note 2, at 43; Henry Christensen III, 100 Years is a Long Time – New Concepts and Practical Planning Ideas, SN025 ALI-ABA 149, 183–84 (2007) (“[A letter of wishes] permits much more flexibility to. . . the trustee, who has more flexibility built into the trust instrument to exercise powers consistently with the intent of the settlor, rather than at the precise direction of the settlor, which was usually expressed in the vacuum of unknown and unanticipated events.”).
[5] Christensen, supra note 4, at 185.
[6] See Wakeman & Fratcher, supra note 1.
[7] 602 N.E.2d 33 (Ill. Ct. App. 1992).
[8] Note that the Hugh court referred to the grantor’s letters as “letters of direction” as opposed to “letters of wishes.” That said, the grantor’s “letter of direction” served essentially the same purpose that a letter of wishes would have.
[9] Id. at 35.
[10] Id. at 35–37.
[11] Bove, supra note 2 at 40; Deborah S. Gordon, Letters Non-Testamentary, 62 U. Kan. L. Rev. 585, 589 (2014).
[12] Both precatory language and ambiguity should be avoided in trust instruments. Trusts with patent or latent ambiguities are subject to having extrinsic evidence used in interpretation. See Koulogeorge v. Campbell, 983 N.E.2d 1066, 1073 (Ill. App. Ct. 2012). Further, including precatory language in a trust runs the risk that the preacatory terms will not be binding on the trustee. See Duvall v. LaSalle Nat. Bank, 523 N.E.2d 974 (Ill. Ct. App. 1988).
[13] See infra § 3(a).
[14] 907 P.2d 794 (Idaho 1995).
[15] See Bove, supra note 2, at 43.
[16] Id. at 43–44 (“Binding instructions on the trustee can interfere with the concept of full discretion and undermine or diminish the opportunity of exercising that judgment. If such instructions are that important and inflexible, they should be included in the body of the trust. . .”); Christensen, supra note 4, at 183–84.
[17] Gordon, supra note 10, at 616.
[18] Christensen, supra note 4, at 183–84. This lack of case law may also be explained by the fact that letters of wishes are likely to be considered non-discoverable trust documents. As such, beneficiaries are unlikely to see letters of wishes unless the trustee voluntarily discloses them.
[19] Id. at 184 (describing how letters of wishes are widely used and that trustees often fulfill their duties as outlined in letters of wishes).
[20] Restatement (Third) of Trusts § 87 cmt. 3 (2007); Bove, supra note 2, at 43–44; Christensen, supra note 4, at 184; Steven M. Fast and Steven G. Margolin, Whose Trust is it Anyway?, SM001 ALI-ABA 187, 199-200 (2006).
[21] Note that some foreign jurisdictions legally require a trustee to consider a letter of wishes in making trust distributions. That said, these jurisdictions do not require the trustee to make discretionary distributions in accordance with the letters nor do the letters create any additional duty for the trustee. Bove, supra note 2, at 41; see also, Anguilla Trusts Ordinance 1994 §13(4); Belize Trusts Act 1992 §13(4); and Niue Trusts Act 1994, §14(4).
[22] Restatement (Third) of Trusts § 87 cmt. 3 (2007); see also Bove, supra note 2 at 42.
[23] Citizens Nat. Bank of Paris v. Kids Hope United, Inc. 922 N.E.2d 1093 (Ill. 2009).
[24] Koulogeorge v. Campbell, 983 N.E.2d 1066 (Ill. App. Ct. 2012).
[25] Stein v. Scott, 625 N.E.2d 713 (Ill. App. Ct. 1993).
[26] Ruby v. Ruby, 973 N.E.2d 36 (Ill. App. Ct. 2012).
[27] 638 N.E.2d 729 (Ill. App. Ct. 1994). However, the court suggested that if the letter, will, trust, and quitclaim deeds had been executed simultaneously, the letter could indicate an ambiguity for which extrinsic evidence could be admitted to determine the decedent’s intent. The Idaho Supreme Court dealt with a similar issue, but decided differently in Matter of Estate of Kirk. 907 P.2d 794 (Idaho 1995). In Kirk, the court allowed a settlor’s handwritten note to be considered for purposes of construing her previously executed trust agreement. Id.
[28] See Fla. Stat. Ann. § 736.0804 (2017) (requiring a trustee to “administer the trust as a prudent person would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust.”) (emphasis added).
[29] 152 So.3d 628, 631–32 (Fla. Dist. Ct. App. 2014). Note, however, that the grantor’s letter differed from a standard letter of wishes as it was delivered to the trustee during the grantor’s lifetime pursuant to the trust instrument’s provision allowing her to direct the trust to make payments as requested. Id. at 629–30.
[30] See e.g., Baker v. Wilburn, 456 N.W.2d 304, 306 (S.D.1990) (“[W]hen two or more instruments are executed at the same time by the same parties, for the same purpose and as part of the same transaction, the court must consider and construe the instruments as one contract.”).
[31] Wakeman & Fratcher, supra note 1; Bove, supra note 2, at 38.
[32] Gordon, supra note 10, at 617.
[33] Kritchman v. Wolk, 152 So.3d 628, 630–31 (Fla. Dist. Ct. App. 2014) (describing trustee/defendant’s position that the terms of the trust nullified all of the grantor’s written directives).
[34] See id. at 615 (“These letters, which in general avoid theatricality for simplicity and performance for connection, reinforce the social relationship between writer and recipient without disrupting the estate plan or manipulating the beneficiaries.”).
[35] Unif. Trust Code § 602; see also, Colo. Rev. Stat. Ann. § 15-16-702; Fla. Stat. Ann. § 736.0602(3)(b)(2); Mich. Comp. Laws Ann. § 700.7602; Mont. Code Ann. § 72-38-602; ; N.H. Rev. Stat. § 564-B:6-602;  Ohio Rev. Code Ann. § 5806.02; S.C. Code Ann § 62-7-602; Wyo. Stat. Ann. § 4-10-602.
[36] Parish v. Parish, 193 N.E.2d 761, 766 (Ill. 1963).
[37] Id.; Northwestern University v. McLoraine, 438 N.E.2d 1369 (Ill. App. Ct. 1982).
[38] Robert S. Hunter, § 213:23. Amending the trust agreement, 19 Ill. Prac., Estate Planning & Admin (4th ed. 2016).
[39] Supra § 3(d).
[40] Wis. Stat. Ann. § 701.0602 (2017).
[41] Ky. Rev. Stat. Ann. § 386A.2-020 (2017).
[42] Unif. Trust Code § 602.
[43] Gordon, supra note 17, at 617.
[44] Bove, supra note 2, at 39.
[45] See e.g., Matter of Estate of Kirk, 907 P.2d 794 (Idaho 1995) (describing a conflict between potential beneficiaries over changes in their interests in the decedent’s trust caused by decedent’s handwritten letter attached to a trust amendment).


© Horwood Marcus & Berk Chartered 2020. All Rights Reserved.

For more on Trusts, Grantors and Beneficiaries, see the National Law Review Estates & Trust law section.

2020 Inflation Adjustments Impacting Individual Taxpayers

Last month, the IRS released the 2020 inflation adjustments for several tax provisions in Rev. Proc. 2019-44. The adjustments apply to tax years beginning in 2020 and transactions or events occurring during the 2020 calendar year.  A select group of key provisions relative to trusts and estates are identified below.

Income Tax of Trusts and Estates

The taxable income thresholds on trusts and estates under Section 1(e) are:

If Taxable Income is: The Tax is:
Not over $2,600 10% of the taxable income
Over $2,600 but not over $9,450 $260 plus 24% of excess over $2,600
Over $9,450 but not over $12,950 $1,904 plus 35% of excess over $9,450
Over $12,950 $3,129 plus 37% of excess over $12,950

The alternative minimum tax exemption amount for estates and trusts under Section 55(d)(1)(D) is:

Filing Status Exemption Amount
Estates and Trusts ((§55(d)(1)(D)) $25,400

The phase-out amounts of alternative minimum tax for estates and trusts under Section 55(d)(3)(C) are:

Filing Status Threshold Phase-out
Estates and Trusts ((§55(d)(3)(C)) $84,800

Estate and Gift Tax

For an estate of a decedent dying in 2020, the basic exclusion amount, for purposes of determining the Section 2010 credit against estate tax, is $11,580,000.

The Section 2503(b) annual gift tax exclusion for gifts made in 2020 is $15,000 per donee.

For an estate of a decedent dying in 2020 that elected to use the Section 2032A special valuation method for qualified property, the aggregate decrease in value must not exceed $1,180,000.

For gifts made to a non-citizen spouse in 2020, the annual gift tax exclusion under Section 2523(i)(2) is $157,000.

Additionally, recipients of gifts from certain foreign persons may be required to report these gifts under Section 6039F if the aggregate value of the gifts received in 2020 exceeds $16,649.

For an estate of a decedent dying in 2020 that elect to extend the payment of estate tax under Section 6166, the 2% portion for determining the interest rate under Section 6601(j) is $1,570,000.

2020 Penalty Amounts

In the case of failure to file a return, the addition to tax under Section 6651(a)(1) is not less than the lesser of $215 or 100% of the amount required to be shown on the return.

The penalties under Section 6652(c) for certain exempt organizations and trusts failing to file returns, disclosures, etc., which are required to be filed in calendar year 2020, are:

Returns Under §6033(a)(1) (Exempt Organizations) or §6012(a)(6) (Political Organizations)
Scenario Daily Penalty Maximum Penalty
Penalty on Organization (§6652(c)(1)(A))  $20 Lesser of (i) $10,500 or (ii) 5% of gross receipts for year
Penalty on Organization with Gross Receipts Greater than $1,049,000(§6652(c)(1)(A))  $105 $54,000
Penalty on Managers (§6652(c)(1)(B)(ii))  $10 $5,000
Public Inspection of Annual Returns and Reports (§6652(c)(1)(C))  $20 $10,500
Public Inspection of Applications for Exemption and Notice of Status (§6652(c)(1)(D))  $20 No limits

Returns Under §6034 (Certain Trust) or §6043(b) (Terminations, etc., of exempt organizations)
Scenario Daily Penalty Maximum Penalty
Penalty on Organization or Trust (§6652(c)(1)(A)) $10 $5,000
Penalty on Managers (§6652(c)(2)(B)) $10 $5,000
Penalty on Split Interest Trust (§6652(c)(2)(C)) $20 $10,500
Split Interest Trust with Gross Income Greater than $262,000 (§6652(c)(2)(C)(ii)) $105 $54,000

Disclosure Under §6033(a)(2)
Scenario Daily Penalty Maximum Penalty
Penalty on Tax-Exempt Entity (§6652(c)(3)(A)) $105 $54,000
Failure to Comply with Demand (6652(c)(3)(B)(ii)) $105 $10,500

 


© 2020 Davis|Kuelthau, s.c. All Rights Reserved

For more IRS Guidance & Regulatory Updates, see the National Law Review Tax Law section.

Five Suggestions for Elder Care If You or Your Elderly Parents Have “One Foot on the Banana Peel”

Shana and I recently had a new client, “Jane,” that came to see us because she was concerned about her elderly parents. Both are in their 90s and although they are still living independently, she is noticing both a physical and cognitive decline in both.  She described them as having “one foot on the banana peel,” recognizing that they are one fall or illness away from no longer being able to maintain their current lifestyle.

As with many of our clients, they are resistant to making any changes and she is worried about what will happen. Jane lives a distance from her parents, works full time, and has her own teenage children. She came to us for assistance in understanding what she can do to help them. Here are five suggestions we made for her:

1. Changes to Powers of Attorney and Health Care Proxy

Jane’s parents’ existing legal documents have each other as primary agents and neither is able to act in that capacity. Jane is handling their bill paying and taking them to MD appointments and it will be easier for her to continue this role with the appropriate legal documents naming her as the primary agent.

2. Financial Planning

Jane’s parents have limited liquid assets and own their home. Their monthly income does not cover their expenses, so they are drawing from those assets every month. This plan will not work long term if either needs to hire a caregiver to help them at home due to the high cost. We helped Jane to understand the realities of paying for care and the limited coverage of Medicare. We also explained the criteria for Medicaid eligibility, the application process and the problem with using Medicaid to pay for home care. We stressed the importance of Jane and her parents exploring alternative living situations that may better meet their needs while they still had funds and ensuring that they found a facility that would allow them to spend down to Medicaid when their funds are exhausted.

3. Home Evaluation

Jane’s parents live in a bi-level home with stairs to enter and Jane is very concerned about their safety. We recommended a home evaluation to determine what modifications can be done to the home to make it safer. These modifications can be simple such as a tub bench, so they don’t have to step over the tub to get into the shower or more complex such as a stairlift or emergency alert system.

4. Medication Management

Jane’s parents have multiple medical conditions and each takes many medications. They often forget to take their medications or take them incorrectly. This is a very serious issue and often leads to unnecessary hospitalization which can precipitate a downward spiral. We discussed a variety of options, including a visiting nurse and an automatic medication dispenser.

5. Take a Deep Breath

As with all our clients, Jane loves her parents and wants what is best for them. However, her vision of what is best for them doesn’t necessarily coincide with their vision. As a caregiver-child myself, I can very much relate to her frustration of having a clear idea of what will improve an elderly parent’s quality and/or quantity of life and having that parent refuse to make a change. Sometimes small changes are acceptable and they can make a difference and prolong stability. But very often the best we can do is to plan for the emergency and know we have done the best we can.


©2020, Norris McLaughlin & Marcus, P.A., All Rights Reserved

For more on caring for elderly relations, see the National Law Review Family Law, Divorce & Custody type-of-law section.

2019 Year-End Estate Planning: The Question Is Not Whether to Gift, But How to Gift

Federal and Illinois tax laws continue to provide opportunities to transfer significant amounts of wealth free of any federal gift, estate and generation-skipping transfer (GST) taxes. However, because certain beneficial provisions “sunset” on January 1, 2026, now is an ideal time to revisit estate plans to ensure you make full use of this opportunity.

Current Exemption Levels

The federal gift, estate and GST exemptions (i.e., the amount an individual can transfer free of any of these taxes) are currently $11,400,000 for each individual, increasing to $11,580,000 in 2020. For married couples, the exemptions are currently $22,800,000, increasing to $23,160,000 in 2020. However, on January 1, 2026, the federal gift, estate and GST exemptions will be cut in half.

Federal and Illinois estate tax laws allow for a marital deduction for assets passing outright to a spouse or to qualifying trusts for the benefit of a surviving spouse. Thereafter, the federal estate tax rate is 40 percent. Illinois imposes a state estate tax based on a $4,000,000 threshold, which is not adjusted for inflation, at effective rates ranging from 8 percent to approximately 29 percent. (The Illinois estate tax paid is allowable as a deduction for federal estate tax purposes.) The only way to take advantage of the increased federal exemptions is to utilize planning strategies such as gifting in advance of the sunset date.

Gifting Options

Lifetime utilization of transfer tax exemption. A simple and effective planning opportunity involves early and full use of the high exemptions. Lifetime gifts utilizing the exemption amounts will almost always result in overall transfer tax savings, unless the assets that have been transferred decline in value. As with any gifting strategy, all income and future appreciation attributable to the gifted assets escapes future gift and estate taxation.

Assuming that assets appreciate, the sooner a planning strategy is implemented, the greater the estate tax savings will be. On November 22, 2019, the IRS issued final “anti-clawback” regulations expressly acknowledging that, when the exemptions are decreased, gifts made using the current high exemption amounts and which are in excess of the future reduced exemption amounts will not be subject to any additional gift or estate taxation. Thus, now is clearly the time for a “use it or lose it” strategy.

Annual exclusion gifts. Making use of annual exclusion gifts remains one of the most powerful estate planning techniques. The “annual exclusion amount” is the amount that any individual may give to any other individual within a tax year without incurring gift tax consequences. This amount, indexed for inflation, is currently $15,000 per donee.

Married couples can combine their annual exclusion amounts when making gifts, meaning that a married couple can give $30,000 per year to a child without using any transfer tax exemption (although filing a gift tax return may be required in some circumstances). When the spouses of children are included in the annual exclusion gifting, the amount that can be gifted is doubled again, meaning that a married couple can give a total of $60,000 per year to a child and the child’s spouse without using any transfer tax exemption.

Annual exclusion gifts can result in substantial transfer tax savings over time, as they allow the donor to remove the gift amount and any income and growth thereon from the donor’s estate without paying any gift tax or using any transfer tax exemption. Annual exclusion gifts also reduce a family’s overall income tax burden when income-producing property is transferred to family members who are in lower income tax brackets and not subject to the “kiddie tax” or the 3.8 percent net investment income tax.

Tuition and medical gifts. Individuals can make unlimited gifts on behalf of others by paying tuition costs directly to the recipient’s school or paying their medical expenses (including the payment of health insurance premiums) directly to a health care provider.

Gifts to spousal lifetime access trusts. Most people consider $11,400,000 to be a very large gift and either cannot, or do not want to, give away that much, as they may need or want it for themselves. A gift to a properly structured “spousal lifetime access trust” lets an individual make a completed gift now, and use the temporarily increased transfer exemption, but allows the individual’s spouse to be a beneficiary of the trust and have access to trust assets if needed. If the spousal lifetime access trust is implemented properly, the assets of trust (and the growth thereon) will not be subject to estate tax at the death of the grantor or at the death of the grantor’s spouse.

Grantor trusts. When planning with trusts, donors have great flexibility in determining who will be responsible for the payment of income taxes attributable to the assets in a trust. As an enhanced planning technique, trusts can be structured as “grantor trusts,” in which the trust is a disregarded income tax entity and the donor—not the trust or the beneficiaries—is responsible for paying tax on the trust’s income. By structuring a trust as a grantor trust, a donor can make tax-free gifts when paying the tax attributable to the trust’s income. This technique promotes appreciation of the trust assets while simultaneously decreasing the size of the donor’s estate, producing additional estate tax savings.

Combining gifting and selling assets to grantor trusts. Additional estate tax benefits can be obtained by combining gifts to grantor trusts with sales to grantor trusts. Because the grantor is treated as the owner of the trust for income tax purposes, no capital gains tax is imposed on the sale of assets to a grantor trust. The trust can finance the sale with a promissory note payable to the grantor, which provides the grantor with cash flow from the trust. The growth on the assets that are sold would then escape estate taxation at the grantor’s death.

Considerations When Making a Gift

Use of trusts when gifting. As with any gifting strategy, assets may be gifted outright so that the recipient directly controls the assets, thereby exposing the assets to the claims of the beneficiary’s creditors. Alternatively, assets may be gifted in trust, which 1) protects the gifted assets from the beneficiary’s creditors, including the spouses of beneficiaries in the event of divorce, 2) determines the future use and control of the gifted assets, and 3) shelters the gifted assets from future gift, estate and GST taxes through the allocation of the GST exemption.

Valuation discounts and leveraging strategies in the family context. “Minority interest,” “lack of marketability,” “lack of control” and “fractional interest” discounts can still be applied under current law to the valuation of interests in family-controlled entities and of real estate and other assets that are transferred to family members. Such discounting provides for estate and gift tax savings by reducing the value of the transferred interests. Leveraging strategies (e.g., family partnerships, sales to grantor trusts and grantor retained annuity trusts) can also be utilized to advantageously pass tremendous amounts of wealth for the benefit of many generations free of federal and Illinois transfer taxes.

State of Illinois estate tax laws. Illinois continues to tax estates in excess of $4,000,000, which is not adjusted for inflation and not allowed to be “ported” to a surviving spouse. Given the disparity between the $11,400,000 federal estate tax exemption and the $4,000,000 Illinois estate tax exemption, married couples domiciled in Illinois should make certain that their estate plans are structured to take advantage of the Illinois estate tax marital deduction. Otherwise, an estate plan that is designed to fully utilize the federal exemption can inadvertently cause an Illinois estate tax in excess of $1,000,000 upon the death of the first spouse.

The obvious and most direct strategy to address the Illinois estate tax is to simply move to one of the many states that do not currently impose an estate tax. In the event that a change of domicile is not possible or is not desired, all of the traditional planning techniques described above (in addition to others) are available to address this state liability. Because Illinois does not impose a gift tax, enacting gifting strategies will reduce future Illinois estate taxes.

Income tax basis changes. We continue to enjoy an income tax basis adjustment for assets received from a decedent upon his or her death (commonly known as the “step-up in basis,” although if values go down it can also be a “step-down” in basis). With the increase in the federal gift, estate and GST exemptions, and even with Illinois’ $4,000,000 exemption, transfer taxes are no longer a concern in many circumstances, and there is increased emphasis on income tax planning (specifically, planning with the goal of obtaining an income tax basis step-up at death). For many clients, it may be advisable, if possible, to “reverse” prior estate planning techniques, including trusts that were established on the death of a first spouse to die, to allow for a step-up in basis.

Traditional Estate Planning Still Matters

There is no time like the present to make certain that estate planning documents accurately reflect current wishes and make beneficial use of the federal and state transfer tax exemptions (to the extent not utilized during lifetime), federal and/or state marital deductions, and federal GST exemptions. Revisions may also be needed if family circumstances have changed since documents were originally executed.

Your estate planning goals may have changed. Many people no longer have taxable estates for federal estate tax purposes and may be able to adjust their estate plans accordingly, while others have existing plans that automatically adjust to the increased exemptions and do not desire more aggressive planning. Still others may want to take prompt action to aggressively utilize the new exemptions.

The above summary is not intended to enumerate all available estate planning techniques. Non-tax reasons to review and implement estate plans include:

  • Planning for probate avoidance
  • Planning for individuals with special needs (or who otherwise require specialized planning)
  • Implementing advance health care directives (such as living wills and health care powers of attorney)
  • Planning for incapacity
  • Planning for business succession
  • Planning for minor children and designating guardians
  • Planning for charitable giving

New Trust Code for 2020

On January 1, 2020, a new Illinois Trust Code will become effective, making many significant changes with regard to the administration of trusts. Of note:

Notice and designated representatives. Under the new law, for trusts that become irrevocable on or after January 1, 2020 (for example, a revocable trust becomes irrevocable upon a settlor’s death), the trustee is required to provide a copy of the trust agreement to all current and presumptive remainder beneficiaries. However, you can name a designated representative to receive such notice on behalf of any current and remainder beneficiaries.

Accountings. Under current law, a trust can be drafted so that accountings only need to be provided annually to current beneficiaries, not presumptive remainder beneficiaries. Under the new Illinois Trust Code, for trusts that become irrevocable on or after January 1, 2020, a trustee will have to provide annual accountings to current and presumptive remainder beneficiaries.

However, a trust agreement can be drafted to forego the requirement of providing the annual accountings to the remainder beneficiaries or potentially to provide that the accountings be provided to a designated representative for a remainder beneficiary rather than the remainder beneficiary himself or herself (although the remainder beneficiaries will be entitled to accountings when the current beneficiary’s interest terminates). This could mean, for example, that children who are remainder beneficiaries of a marital trust created under their father’s estate plan for their mother’s benefit will receive an annual accounting during their mother’s life unless they waive their right to receive it or the trust provides otherwise.

The Secure Act

Finally, pending in Congress is a bill known as the Secure Act. This legislation, if enacted in its current form, would push back the age of required minimum distributions from 70½ to 72 and eliminate the “stretch IRA.” If the Secure Act becomes law, we will send a supplement to this bulletin.


© 2019 Much Shelist, P.C.

More estate planning considerations on the National Law Review Estates & Trusts law page.

Of Passion, Prejudice And Punitive Damages

Addressing an issue of damages, the US Court of Appeals for the Ninth Circuit vacated the district court’s grant of punitive damages in favor of the plaintiff, finding “passion and prejudice” mitigated finding of “malice”Waverly Scott Kaffaga, as Executrix of the Estate of Elaine Anderson Steinbeck v. The Estate of Thomas Steinbeck et al., Case No. 18-55336 (9th Cir. Sept. 9, 2019) (Tallman, J).

The lawsuit related to decades of litigation among the heirs to John Steinbeck’s registered copyrights to his works, including The Grapes of WrathOf Mice and MenEast of Eden and The Pearl. When Steinbeck died in 1968, he left interest in his works to his third wife, Elaine. Steinbeck’s two sons by a previous marriage each received $50,000. In the 1970s, the sons obtained rights in their father’s works when interests in works were renewed pursuant to US Copyright law.

In 1983, changes in the law prompted Elaine and the sons to enter into an agreement that provided each of them with an equal share of the royalties and gave Elaine “complete power and authority to negotiate, authorize and take action with respect to the exploitation and/or termination of rights” in the works. In 2003, Elaine passed away, and her daughter, Waverly Kaffaga, assumed the role of successor under the 1983 agreement. The sons challenged the validity of the 1983 agreement, and the US Court of Appeals for the Second Circuit determined that the agreement was valid and enforceable. Despite losing in court, one of the sons, Thomas Steinbeck, along with his wife Gail and Gail’s media company, filed a lawsuit in California asserting rights to the works that the courts had already told them they did not have. The district court held, and the Ninth Circuit affirmed, that the Steinbecks’ claims were barred by collateral estoppel.

Kaffaga countersued Thomas and Gail for their attempts to assert various rights in the works despite having no rights. Those attempts led to multiple Hollywood producers abandoning negotiations with Kaffaga to develop screenplays for the works. The district court granted Kaffaga summary judgment on her breach of contract and slander of title claims, citing many detailed facts it believed supported those claims. The district court let the jury decide on her claim of tortious interference. The jury unanimously found for Kaffaga and awarded $5.25 million in compensatory damages and $7.9 million in punitive damages, including $6 million against Gail individually.

On appeal, the Ninth Circuit found clear support in the record for the lower court’s decisions, save for one—punitive damages. There, the appellate court noted that although Kaffaga had the better argument, and although there was ample evidence of defendants’ malice in the record to support the jury’s verdict, triggering punitive damages, Kaffaga missed one key piece of evidence.

Under California law, there is a “passion and prejudice” standard that measures the amount of punitive damages against the ratio between damages and the defendant’s net worth. It is the plaintiff’s burden to place into the record “meaningful evidence of the defendant’s financial condition” to support a defendant’s ability to pay.” Thus, for the punitive damage award to stand, the record needed to contain sufficient evidence of Gail’s assets, income, liabilities and expenses. Here, Kaffaga failed. Although Gail testified that she received approximately $120,000 to $200,000 per year from domestic book royalties, Kaffaga introduced no estimate of Gail’s potential income from the four television series and six feature films in development, nor did she introduce an estimate of the total value of Gail’s other intellectual property assets. The Ninth Circuit found that Kaffaga failed to meet her burden of placing into the record “meaningful evidence” of Gail’s financial condition showing that she had the ability to pay any punitive damages award as required by California law. The Ninth Circuit therefore vacated the almost $6 million punitive damages award.

Practice Note: When seeking punitive damages in California, the moving party must place “meaningful evidence” of the non-moving party’s financial condition and ability to pay any punitive damages awarded, including their assets, income, liabilities and expenses. If there are problems obtaining such evidence during discovery, procedures such as a motion to compel or proposing an appropriate adverse inference instruction at trial are in order.


© 2019 McDermott Will & Emery

For more copyright inheritance, see the National Law Review Estates & Trusts or Intellectual Property law pages.

What is a Holographic Will?

When a loved one passes, questions may arise as to who possesses the Decedent’s Last Will and Testament. If a formal document exists that was validly executed and was drafted by an attorney, chances are that the document is a valid Last Will and Testament unless a challenge is levied against it. What may become problematic is when a handwritten document in the testator’s own handwriting is discovered. The question then becomes if this handwritten document is a valid Last Will and Testament of the Decedent. In general, a handwritten instrument of this nature is called a Holographic Will, and may be enforceable provided certain requirements are met.

Typically, Courts often do the best they can to accept as a Last Will and Testament a writing by the Decedent where it is clear that the Decedent intended the instrument to be their Last Will and Testament. That is because the Courts would rather enforce the wishes of the Decedent than to allow the document to be invalidated based upon a mere formality. Perhaps the least formal of all Last Wills and Testaments which may be admitted to Probate is a document called a Holographic Will. These documents are relatively simple and are akin to something that a Decedent wrote on a piece of notebook paper and signed. The requirements of a Holographic Will are set forth below.

In general, pursuant to New Jersey S.A, 3B:3-2B, a Will can be considered a Holographic Will and admitted to Probate if the signature and the material portions of the document are in the Decedent’s handwriting. The Holographic Will must have all material testamentary provisions in the handwriting of the testator and also must be signed by the testator. What this means is that the provisions in the Will which dispose of the Decedent’s property must be in their own handwriting and not the handwriting of another. Further, the Will must be signed by the Decedent and not another party. As noted, this is a very simple instrument and is akin to a piece of notebook paper upon which a Decedent described how to transfer his/her property.

Provided the Will meets the requirements of a Holographic Will, it may be admitted to Probate and the Decedent’s Estate may be distributed in this regard. Different things could occur if not all the Decedent’s property is disposed of pursuant to a Holographic Will, however, that is best left for another blog. The purpose of this blog is to merely highlight one potentially type of valid Last Will and Testament which is informal in nature.


COPYRIGHT © 2019, STARK & STARK

Article by Paul W. Norris of Stark & Stark.
For more on wills & testaments, see the National Law Review Estates & Trusts law page.

Securing Your Pet’s Future with Estate Planning

Have you thought about what would happen to your pet in the event of your death or incapacity? Approximately two-thirds of American households own a pet, and while we have many people in our busy lives, our pets have only us. Pet owners often lament that beloved animal companions don’t live as long as we do, but they still warrant consideration in our estate plans because we don’t know what the future will bring. This is especially true for animals with longer life expectancies or higher costs of care, such as dogs, cats, horses, parrots, turtles and animals with special needs.

Without provisions for your pet in your living trust, in the short term your pet could go days at home without food and water, and could feel panicked, distressed or abandoned. In the long term, your pet could end up with someone you don’t want them to end up with, or at a shelter where he or she could be euthanized. Contrary to popular belief, informal arrangements are generally not legally enforceable and simply adding your pet to your will often isn’t enough. Your pet will need care long before your will is probated, and wills offer no ongoing control or oversight for your pet, the caregiver or funds left for your pet.

Including the following documents in your estate plan can help to ensure that someone has access to your home and authorization to care for your pets in the short term, and can ensure that you decide who will ultimately care for your pets, and how they will be cared for, if you die or become incapacitated.

Pet Trust

A pet trust is a great way to ensure that your pet is cared and provided for after your death. The pet trust may be a part of your existing trust or may be a completely separate trust. It allows you to name the caretaker of your pets and creates a fiduciary obligation on the named caretaker to care for your pet in the manner described in your trust. You will provide money for your pet to be cared for, and the trustee of the trust will disburse funds to the caretaker or directly to a service provider to pay for your pet’s care. The trustee is similarly under a fiduciary obligation to ensure that the trust funds are used only for the purposes described by your pet trust.

A pet trust also allows you to name successive caretakers in case your preferred caretaker becomes unable or unwilling to take care of your pet, for example, if he or she has a change in life circumstances (e.g. medical concerns or new family obligations, among other reasons). Without a pet trust, on the other hand, your pet becomes the legal property of the person who assumes care of the pet, and the new owner may make decisions about the pet’s future that you might disagree with. If the new owner doesn’t make any formal arrangements, your pet’s future could be in limbo if something happens to the new owner. If you want to maintain control over the succession of caregivers for your pet, a pet trust drafted by an experienced estate planning attorney is crucial and affords the best long term protection for your pet.

Durable Power of Attorney for Pet Care

The Durable Power of Attorney for Pet Care allows you to authorize someone else to seek medical care for your pet and specify to what extent the agent may act on your behalf. This document can also be used by a pet caretaker while you are away on business or vacation. Alternatively, if your own Durable Power of Attorney is “effective immediately” rather than “effective upon incapacity” (sometimes called “springing”), provisions for your pet may instead be added to your own Durable Power of Attorney.

Care Instructions

Pet care instructions will accompany the instructions in your pet trust. It is important to have these as a separate document that will be incorporated into your pet trust by reference so that you can change your pet care instructions as your pet’s needs and tastes change without having to update your trust. The pet care instructions should be reviewed and updated frequently to ensure that food requirements, medical information and emergency contacts are up to date. It’s also a good idea to include information about what your pet likes and doesn’t like, any quirks your pet may have, and generally anything else you would want someone caring for your pet to know. This versatile document, like the Durable Power of Attorney for Pet Care, can also be left with someone caring for your pet while you are away on business or vacation.

Importantly, if your pet is ever in a situation where the pet will need to be adopted to a new family, these instructions provide valuable information to the agency that will assist them in making sure a first match is successful, rather than, for example, adopting your pet to a family with young children only to have your pet returned when it becomes apparent that your pet is fearful of children. An owner’s death is stressful for an animal, so ensuring a successful first match with an adopter is imperative.

Wallet Card

This extra protection will immediately notify someone that you have pets at home if you are found to be deceased or incapacitated somewhere other than your home. Similar to adding “in case of emergency” contacts to your phone, having information in your wallet about who should be contacted to quickly provide care to your pets in such a situation can be the difference between your pets being cared for quickly or being home alone for days without food or water.


© 2019 Varnum LLP

Article by Rebecca K. Wrock of Varnum LLP.
For more on estate planning, please see the National Law Review Estates & Trusts page.

California Estate Tax: Gone Today, Here Tomorrow?

California has no estate tax, but that could change in the near future. California State Senator Scott Wiener recently introduced a bill which would impose gift, estate, and generation-skipping transfer tax on transfers during life and at death after December 31, 2020.

California law requires that any law imposing transfer taxes must be approved by the voters. This means that, if the California Legislature approves the California bill, it will be put before the voters at the November 2020 election.

For a time, California imposed a “pick up tax,” which was equal to the credit for state death taxes allowable under federal law; however, federal tax legislation phased this credit out completely in 2005, effectively phasing out any California estate tax. California has not in recent memory, if ever, had a statewide gift or generation-skipping transfer tax.

Under the proposed California bill, like the federal regime, all California transfer taxes will be imposed at a 40% rate. The good news is that the taxpayer will be granted a credit for all transfer taxes paid to the federal government, so there will be no double taxation. The bad news is that, unlike the federal regime where the basic exclusion amount for each type of transfer is $11,400,000 and is adjusted for inflation, the basic exclusion amount for each type of transfer in California will be $3,500,000 and will not be adjusted for inflation. With the federal exclusion rates rising every year, advanced estate planning techniques to minimize such taxes have become something that fewer and fewer people have had to worry about. If the California bill passes, any person who has assets valued in excess of $3,500,000 could be subject to a 40% California transfer tax during life or at death. Moreover, with a full credit for federal transfer taxes, only estates between $3,500,000 and $11,400,000 will be subject to the California tax. Thus, a California resident with an estate of $100,000,000 would pay the same California estate tax as someone with an estate of $11,400,000.

As drafted, the California bill appears to have no marital deduction; however, this is most likely an oversight and should be corrected in future revisions of the California bill. The goal of the California bill is to impose transfer taxes on wealthy Californians equal to what they would have paid prior to the implementation of the increased exemption rates at the end of 2017.  As the marital deduction existed when exemption rates were lower, eliminating the marital deduction at the first death would not be aligned with the purpose of the California bill.

All transfer taxes, interest, and penalties generated by the California bill would fund the proposed Children’s Wealth and Opportunity Building Fund, a separate fund in the State Treasury, which will fund programs to help address socio-economic inequality.

 

© 2019 Mitchell Silberberg & Knupp LLP
This post was written by Joyce Feuille of Mitchell Silberberg & Knupp LLP.
Read more news on the California Estate Tax on our Estate Planning page.

A Cautionary Fairy-Tale – If Only Cinderella’s Father Had An Estate Plan

Ah, the tale of Cinderella, a classic childhood favorite. We all know it as the story of an orphan who is mistreated by her Evil Stepmother and, with the help of her Fairy Godmother, wins over the heart of Prince Charming.

Often overlooked, however, is how the story began. Cinderella’s Mother died when Cinderella was a child. Cinderella’s Father remarried and shortly after, he also died. Cinderella’s Evil Stepmother then stole Cinderella’s inheritance and enslaved Cinderella in her own home. Surely, Cinderella’s parents never planned on this future for their lovely daughter. But, you see, it was the parents’ failure to plan for the future that put Cinderella in this terrible predicament. With a little planning—estate planning, that is—Cinderella never would have endured such suffering.

Avoid the Stepmother Trap 

There are several ways a skilled estate planning attorney could have helped poor Cinderella, as we analyze author Charles Perrault’s beloved fairytale under modern-day Arizona law.

With no estate planning documents in place, Cinderella’s modern-day predicament would look like this: half of Cinderella’s Father’s estate would be distributed to Evil Stepmother, and half of the estate would be distributed to Cinderella, as a child of the father who was not also a child of Evil Stepmother. Being a minor, Cinderella’s half of the estate would be placed in one of two places.

The first place would be a Uniform Transfers to Minors Act (“UTMA”) account. An UTMA account requires a court-appointed custodian – presumably, Evil Stepmother – who should use those funds for Cinderella’s health, education, maintenance, and support. Unfortunately, with little oversight, we doubt Evil Stepmother would have complied with UTMA. Instead, Evil Stepmother likely would have used Cinderella’s share of the estate to benefit herself and her two biological daughters.

The second place the money might have been placed would be in a trust for the benefit of Cinderella. While the second option is the best option, someone (another family member, on Cinderella’s behalf) would have to petition the court to order that outcome, and it is unlikely that Evil Stepmother would do that for Cinderella.

Why Oh Why Didn’t Cinderella’s Father Create a Trust for His Precious Little Girl? 

What Cinderella’s Father should have done was create a Revocable Living Trust Agreement (the “Trust”). He should have created the Trust after marrying Evil Stepmother to ensure there was no pesky “omitted spouse” claim. The Trust should state that (1) certain assets, as set forth on an attached Schedule A, are the separate property of Cinderella’s Father, (2) certain assets, if any, as set forth on an attached Schedule B, are the separate property of Evil Stepmother, and finally (3) that certain assets, as set forth on an attached Schedule C, are the community property of Cinderella’s Father and Evil Stepmother.

To assist with the trust administration after his death, Cinderella’s Father also should have named a neutral successor trustee, such as a friend, fiduciary, corporate trustee, or perhaps the best choice of all, Fairy Godmother. The Trust should state that, at the death of Cinderella’s Father, the Trust will be divided into two subtrusts, commonly referred to as an A/B split trust.

Trust A (the Survivor’s Trust) would be allocated all of Evil Stepmother’s separate property as well as one-half of the value of the community property assets. Trust B (the Decedent’s Trust) would be allocated all of Cinderella’s Father’s separate property as well as one-half of the value of the community property assets. The Trust could provide that Evil Stepmother would be able to use the Survivor’s Trust assets as she pleases and can only access the Decedent’s Trust assets (other than perhaps receiving income, if so stated in the estate documents) if the assets allocated to the Survivor’s Trust were depleted or illiquid. Having a neutral successor trustee to either work with Evil Stepmother or to oversee only the Decedent’s Trust would ensure that Cinderella’s share was not being improperly raided and depleted. Then, at the death of Evil Stepmother, the assets in the Decedent’s Trust would be distributed to Cinderella.

Creative Considerations for Dear “Cinderelly”

Other provisions can be added to such trusts that ensure Cinderella’s interests are protected. For example, a provision could be added that gives Cinderella the ability to request funds from the Decedent’s Trust, as needed, for health, education, maintenance or support (payable on her behalf, as a minor, and to her, once she is of age). Another provision could allow Cinderella to receive a portion of the Decedent’s Trust at a certain age or upon her marriage to Prince Charming, prior to Evil Stepmother’s death. Finally, another provision could allow the successor trustee to create and fund a 529 college savings account using funds from the Decedent’s Trust.

There are other possibilities if Cinderella’s Father did not want to create a trust as described above because he was so utterly and completely in love with Evil Stepmother and wanted everything to be considered community property. In this case, he could have planned in some untraditional ways to still ensure Cinderella was cared for. For example, Cinderella’s Father could take out a million dollar term life insurance policy after his second marriage, naming Cinderella as the sole beneficiary and directing funds to be distributed to an UTMA account with a neutral custodian or to a support trust with a neutral trustee.

Cinderella Ultimately Inherited Litigation 

In our modern-day analysis, the only inheritance Cinderella’s Father left her was likely litigation. Although not ideal, in circumstances like these, litigation affords the child of a parent with no estate plan, or with a poor estate plan, the opportunity to recover all or some of the property the child is rightfully entitled to receive. Assuming Cinderella’s Father died intestate (without a will), half of his estate should have passed to Evil Stepmother and the other half to Cinderella. Assuming Evil Stepmother either adopted Cinderella or was her court-appointed guardian, conservator or custodian, Evil Stepmother would owe Cinderella a fiduciary duty to protect her share of the inheritance and should have prepared an accounting of the assets that existed at the time of Cinderella’s Father’s death.

Of course, in the original story, Evil Stepmother never protected Cinderella’s interests and instead pillaged all of the assets. Cinderella, therefore, would have had a cause of action against Evil Stepmother for breach of fiduciary duty and conversion, among others. Fortunately, children like Cinderella are not without a remedy. An experienced estate litigation attorney can assess each case and determine what causes of action exist, the expected cost, and the likelihood of recovery.

Your Fairy Godmother Equivalent

Luckily, Cinderella had allies in the form of her Fairy Godmother and her many animal friends. If you have questions about estate planning, trust administration, and estate litigation issues, there are many resources available to you. This includes the most powerful resource of all: calling upon an estate planning attorney to help you – and others – learn from the cautionary fairy-tale that is the Cinderella story.

Copyright © 2019 Ryley Carlock & Applewhite. A Professional Association. All Rights Reserved.

ABLE Accounts: What They Are and What They Mean for Your Family

Individuals with disabilities and their families have many options to set aside funds without jeopardizing eligibility for means-tested government benefits. However, until recently most of the available options require the person with a disability to lose control over his or her own money.  With the 2014 enactment of the Stephen J. Beck Achieving a Better Life Experience (ABLE) Act, people with disabilities can once again control some of their own money and retain a sense of autonomy. While ABLE accounts will not replace other forms of planning that are available to and recommended for people with disabilities, there are definite advantages to adding the ABLE account into an overall plan.

The Basics

ABLE accounts are tax-deferred savings accounts that are closely modeled on 529 education savings plans. While ABLE is a federal program, much like 529 education plans, each state is responsible for crafting and administering its own program. Some states only allow residents to enroll, while others welcome out-of-state residents. It’s important to consider not only whether an ABLE account is appropriate, but also which state’s program best suits your situation.

To be eligible for an ABLE account, a person must be diagnosed, before age 26, with a disability that would entitle him or her “to benefits based on blindness or disability under Title II or XVI of the Social Security Act.” Once eligibility is determined, the individual or a third party (e.g., the disabled individual’s parents, siblings, or friends) can establish and fund an ABLE account.

Contributions and Account Limits

In any given year, the aggregate cash contribution from all donors (including the beneficiary him/herself) cannot exceed the annual gift tax exclusion amount ($15,000 for 2018). ABLE accounts accept cash only. Stocks, bonds, investments, and real estate cannot be contributed.

In addition to the annual contribution limits, as of January 1, 2018, the Tax Cuts and Jobs Act of 2017 authorizes an employed ABLE account beneficiary to contribute an amount up to the lesser of (i) his or her compensation or (ii) the poverty line for a one-person household ($12,140 for 2018). In order to be eligible for this additional contribution the individual cannot also contribute to an employer-sponsored defined contribution plan, such as a 401(k). Since the earned income contribution can be made in addition to the aggregate cash contribution, the total possible contribution for 2018 is $27,140.

Starting this year, a new funding option is available that allows individuals to “roll over” assets from a 529 plan into an ABLE account. While this is certainly a boon for families who initially set aside funds in a 529 account for a beneficiary who cannot use it, the funds rolled over cannot exceed the standard annual ABLE account contribution limit, so depending on the value of the 529 account the rollover could take several years to complete.

One of the biggest differences between the various state programs is the maximum amount that may be held in the account. For New York plans, the limit is $100,000. In other states, the limits are significantly higher and are tied to the limits those states have imposed for 529 education plans. For example, Illinois plans have a limit of $400,000. So for people who plan to accumulate larger sums in an ABLE account, it is wise to shop around to different states.

Although ABLE accounts are generally disregarded as a resource when determining eligibility for means-tested benefits, there is an exception. The first $100,000 of assets held in the ABLE account will not count as a resource when determining Supplemental Security Income (SSI) eligibility. However, once the account balance exceeds $100,000, the individual’s SSI will be suspended until the balance is again below that amount. There is no impact on Medicaid eligibility regardless of how much money is in the account.

Growth and Distributions

Income generated on assets held in an ABLE account are not taxed. Disbursements made for qualified expenses of the disabled individual are also not taxed. If a distribution is made that does not constitute a qualified expense, the beneficiary will be responsible for both ordinary income tax and a 10 percent penalty.

Qualified expenses of the disabled individual that can be paid for from the ABLE account without incurring taxes or penalties include, but are not limited to, education, legal fees, financial management and administrative services, health and wellness, housing, transportation, personal support services, and funeral and burial expenses.

As of January 1, 2018, the designated beneficiary is permitted to claim the saver’s credit for contributions made to his or her ABLE account. The saver’s credit is a nonrefundable tax credit for eligible tax payers who make contributions to retirement savings accounts.  The maximum annual contribution eligible for credit is $2,000 per individual, and the amount of the credit depends on the taxpayer’s adjusted annual income.

Benefits Eligibility Tip: An important benefit of the ABLE account is that, unlike when payments are made from a Special Needs Trust, payments for the beneficiary’s housing and food are not viewed as in-kind maintenance support for the purposes of SSI, and the beneficiary will not suffer the usual reduction for payments made by someone other than the SSI recipient for those purposes.

Words of Caution

Although ABLE accounts can be a valuable tool, there are several pitfalls to consider before opening an ABLE account. As with any decision that may affect government benefits, it is always best practice to discuss the situation and your options with your attorney, as there are many issues to consider before adding an ABLE account to a beneficiary’s plan.

For example, an important thing to consider is whether the beneficiary is capable of managing the ABLE account. Since the beneficiary is allowed to manage the funds in the account, families should carefully consider the risks (e.g., making non-qualified distributions or risking abuse and undue influence by an outside person) of the funds being immediately available. While this risk can be mitigated in several different ways beyond the scope of this article, it is certainly a point worthy of consideration.

Additionally, ABLE accounts are similar to first party Special Needs Trusts in that, to the extent the beneficiary receives medical assistance funded by Medicaid after the account is established, any funds remaining in the ABLE account at his or her death will be used to pay back the state for benefits that are paid for the beneficiary. This is the case regardless of whether the funds originally come from the beneficiary or a third party.

Notwithstanding the limitations, ABLE accounts can still be a valuable addition to a carefully crafted special needs plan.

 

© 2018 Schiff Hardin LLP